-----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, QpN00NEZM10dcaWc0MTglSIPkPsjp0mas1TM2yxAdh60fenXXKOzeMpX0cctavr6 6L5hAsdpe47q4lko8NzULA== 0000891618-02-002765.txt : 20020611 0000891618-02-002765.hdr.sgml : 20020611 20020610172516 ACCESSION NUMBER: 0000891618-02-002765 CONFORMED SUBMISSION TYPE: T-3 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20020610 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOMAG INC /DE/ CENTRAL INDEX KEY: 0000813347 STANDARD INDUSTRIAL CLASSIFICATION: MAGNETIC & OPTICAL RECORDING MEDIA [3695] IRS NUMBER: 942914864 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: T-3 SEC ACT: 1939 Act SEC FILE NUMBER: 022-28602 FILM NUMBER: 02675618 BUSINESS ADDRESS: STREET 1: 1710 AUTOMATION PWY CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4085762000 MAIL ADDRESS: STREET 1: 1710 AUTOMATION PWY CITY: SAN JOSE STATE: CA ZIP: 95131 T-3 1 f82285ortv3.txt T-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM T-3 FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES UNDER THE TRUST INDENTURE ACT OF 1939 ---------- KOMAG, INCORPORATED (NAME OF APPLICANT) ---------- DELAWARE 94-2914864 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) ---------- 1710 AUTOMATION PARKWAY SAN JOSE, CA 95131-1873 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------- SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED TITLE OF CLASS AMOUNT Junior Secured Notes due 2007 $7,000,000 Approximate date of issuance: JUNE 30, 2002 ---------- THIAN HOO TAN C/O KOMAG, INCORPORATED 1710 AUTOMATION PARKWAY SAN JOSE, CALIFORNIA 95131 (Name and address of agent for service) ---------- With a Copy to: KATHLEEN B. BLOCH, ESQ. WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304 (650) 493-9300 ---------- ================================================================================ GENERAL 1. GENERAL INFORMATION. FURNISH THE FOLLOWING AS TO THE APPLICANT: FORM OF ORGANIZATION A corporation. STATE OR OTHER SOVEREIGN POWER UNDER THE LAWS OF WHICH ORGANIZED. Delaware. 2. SECURITIES ACT EXEMPTION APPLICABLE. STATE BRIEFLY THE FACTS RELIED UPON BY THE APPLICANT AS A BASIS FOR THE CLAIM THAT REGISTRATION OF THE INDENTURE SECURITIES UNDER THE SECURITIES ACT OF 1933 IS NOT REQUIRED. Komag, Incorporated, a Delaware corporation (the "Company"), proposes to issue, as part of the Further Modified First Amended Plan of Reorganization dated May 7, 2002 ("Plan of Reorganization"), its 12% Secured Pay-in-Kind Notes Due 2007 (the "Notes"). Pursuant to the Plan of Reorganization, the creditors of the Company will receive Notes and common stock of the newly reorganized Company, in the amounts specified in the Plan of Reorganization. On November 16, 2001, the United States Bankruptcy Court for the Northern District of California (the "Bankruptcy Court") approved the Company's Disclosure Statement accompanying the Plan of Reorganization (the "Disclosure Statement") as containing "adequate information" for the purposes of soliciting votes of holders of claims against the Company for acceptance or rejection of the Plan of Reorganization (Case Number 01-54143-JRG). A copy of the Disclosure Statement, is attached hereto as Exhibit T3E-1 and a copy of the Plan of Reorganization is attached hereto as Exhibit T3E-2. On May 9, 2002, the Plan of Reorganization was confirmed at a confirmation hearing of the Bankruptcy Court. The Company expects that the Plan of Reorganization shall become effective on or about June 30, 2002 (the "Effective Date"), at which time the Company shall emerge from bankruptcy, with an amended charter, new capitalization and new board of directors. The Notes are to be issued at the Effective Date under an indenture (the "Indenture") between the Company and the Bank One Trust Company, NA, as Trustee, a form of which is attached hereto as Exhibit T3C-1. The Company believes that the issuance of the Notes is exempt from the registration requirements of the Securities Act of 1933 (the "Securities Act") pursuant to Section 1145(a)(1) of the United States Bankruptcy Code (the "Bankruptcy Code"). Generally, Section 1145(a)(1) of the Bankruptcy Code exempts the issuance of securities from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws if the following conditions are satisfied: (i) the securities are issued by a debtor, an affiliate participating in a joint plan of reorganization with the debtor, a successor of the debtor under a plan of reorganization, (ii) the recipients of the securities hold a claim against, an interest in, or a claim for an administrative expense against, the debtor, and (iii) the securities are issued entirely in exchange for the recipient's claim against or interest in the debtor, or are issued "principally" in such exchange and "partly" for cash or property. The Company believes that the issuance of the securities contemplated by the Plan of Reorganization will satisfy the aforementioned requirements. 3. AFFILIATES. FURNISH A LIST OR DIAGRAM OF ALL AFFILIATES OF THE APPLICANT AND INDICATE THE RESPECTIVE PERCENTAGES OF VOTING SECURITIES OR OTHER BASES OF CONTROL. Section 5 of this Form T-3 sets forth the names and addresses of those stockholders who currently hold or are expected to hold 10% or more of the Company's voting securities as of the Effective Date. 1 The following list sets forth the relationship among the Company and all of its principal direct and indirect subsidiaries, indicating the percentage of voting securities owned by the Company in each subsidiary. Indirect subsidiaries are indented and listed under their direct parent corporations and the share of ownership indicated thereof refers to the share of the direct parent corporation as of March 31, 2002.
Percentage of the Company's Ownership Komag Distribution Company 100% Komag Materials Technology, Inc. 100% Chahaya Optronics, Inc. 33.5% Komag (Bermuda) Ltd. 100% Komag Netherlands Antilles N.V. 100% Komag Technology (N) B.V. 100% Komag USA (Malaysia) Sdn. 100% Komag Asia-Pacific, Inc. 100%
4. DIRECTORS AND EXECUTIVE OFFICERS. LIST THE NAMES AND COMPLETE MAILING ADDRESSES OF ALL DIRECTORS AND EXECUTIVE OFFICERS OF THE APPLICANT AND ALL PERSONS CHOSEN TO BECOME DIRECTORS OR EXECUTIVE OFFICERS. INDICATE ALL OFFICES WITH THE APPLICANT HELD OR TO BE HELD BY EACH PERSON NAMED. The following chart sets forth the directors and executive officers of the Company, as of the date hereof. Except as otherwise noted below, the address for each director and executive officer listed below is 1710 Automation Parkway, San Jose, CA 95131-1873.
NAME POSITION/PRINCIPAL OCCUPATION - ----------------------------------------------------------------------------------- Chris A. Eyre Chairman of the Board T.H. Tan Director; Chief Executive Officer Donald P. Beadle Director George A. Neil Director Ronald L. Schauer Director Anthony Sun Director Harry G. Van Wickle Director Michael Russak President and Chief Technology Officer Christopher H. Bajorek Executive Vice President, Advanced Technology Peter S. Norris Executive Vice President, Strategic Business Development Ray L. Martin Executive Vice President, Sales & Quality Kathleen A. Bayless Vice President and Corporate Controller Kamran Honardoost Vice President, New Product Introduction & Product Design Edward H. Siegler Vice President, Chief Financial Officer and Secretary Tsutomu T. Yamashita Vice President, Process Development William Harrick Vice President, Human Resources
The executive officers listed above will continue to be the executive officers of the Company on the Effective Date, and there will be a slate of new directors as of the Effective Date. The following chart sets forth the executive officers and persons currently nominated to be directors of the Company upon the Effective Date. Except as otherwise noted below, the address for each director and executive officer listed below is 1710 Automation Parkway, San Jose, CA 95131-1873. 2
NAME POSITION/PRINCIPAL OCCUPATION - ----------------------------------------------------------------------------------- T. H. Tan Chairman of the Board; Chief Executive Officer Chris A. Eyre Director Neil S. Subin Director Kenneth Swim Director David G. Takata Director Harry G. Van Wickle Director Raymond H. Wechsler Director Michael Lee Workman Director ____________ (1) Director Michael Russak President and Chief Technology Officer Christopher H. Bajorek Executive Vice President, Advanced Technology Peter S. Norris Executive Vice President, Strategic Business Development Ray L. Martin Executive Vice President, Sales & Quality Kathleen A. Bayless Vice President and Corporate Controller Kamran Honardoost Vice President, New Product Introduction & Product Design Edward H. Siegler Vice President, Chief Financial Officer and Secretary Tsutomu T. Yamashita Vice President, Process Development William Harrick Vice President, Human Resources
- ---------- (1) Nominee will be selected by Class 6 pursuant to the Plan of Reorganization. 5. PRINCIPAL OWNERS OF VOTING SECURITIES. FURNISH THE FOLLOWING INFORMATION AS TO EACH PERSON OWNING 10 PERCENT OR MORE OF THE VOTING SECURITIES OF THE APPLICANT. As of March 31, 2002, there was no person owning 10% or more of the voting securities of the Company. Upon the Effective Date, the Company is expected to have the following principal stockholders:
PERCENTAGE OF AMOUNT TO BE VOTING SECURITIES NAME AND COMPLETE MAILING ADDRESS TITLE OF CLASS OWNED ISSUED OWNED - -------------------------------------------------------------------------------------------------------- Cerberus Partners, L. P. 450 Park Avenue, 28th Floor New York, New York 10022-2605 Attention: Mark Neporant, Ron Goldstein Common Stock 9,749,293 39.9% JDS Capital L.P. (1) c/o JDS Capital Management 780 3rd Avenue, 45th Floor New York, New York 10017 Attention: Giora Payes, Barbara Tomasulo Common Stock 4,324,467 17.7%
(1) The JDS Capital L.P. ownership was calculated by aggregating the ownership of the following three funds: JDS Capital L.P., managed by JDS Capital Management, LLC; Dimensional Partners, L.P., managed 3 by JDS Asset Management, LLC; and Dimensional Partners, Ltd., with JDS Capital Management, Inc. as a subadvisor. 6. UNDERWRITERS. GIVE THE NAME AND COMPLETE MAILING ADDRESS OF (a) EACH PERSON WHO, WITHIN THREE YEARS PRIOR TO THE DATE OF FILING THE APPLICATION, ACTED AS AN UNDERWRITER OF ANY SECURITIES OF THE OBLIGOR WHICH WERE OUTSTANDING ON THE DATE OF FILING THE APPLICATION, AND (b) EACH PROPOSED PRINCIPAL UNDERWRITER OF THE SECURITIES PROPOSED TO BE OFFERED. AS TO EACH PERSON SPECIFIED IN (a), GIVE THE TITLE OF EACH CLASS OF SECURITIES UNDERWRITTEN. (a) None. (b) The Company will not retain any underwriters in connection with the proposed issuance of the Notes. 7. CAPITALIZATION. (a) FURNISH THE FOLLOWING INFORMATION AS TO EACH AUTHORIZED CLASS OF SECURITIES OF THE APPLICANT. As of March 31, 2002:
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING -------------- ----------------- ------------------ Common Stock, par value $0.01 per share.................. 250,000,000(1) 111,924,983(1) Preferred Stock.......................................... 1,000,000(1) None Senior Bank Debt......................................... approx. $206,800,000 Subordinated Note Due 2002 .............................. approx. $33,700,000 5 -3/4% Convertible Subordinated Notes Due 2004.......... approx. $238,200,000 8% Convertible Subordinated Notes Due 2005............... approx. $10,200,000 As of the Effective Date:
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING -------------- ----------------- ------------------ Common Stock, par value $0.01 per share.................. 50,000,000(1) 24,451,285(1)(2) Senior Secured Notes Due 2007............................ $128,832,000 $128,832,000 12% Secured PIK Notes.................................... Up to $7,000,000 $ 7,000,000 Credit Facility.......................................... Up to $15,000,000 None(3)
(1) The number means number of shares. (2) This number includes 1,625,000 shares of Common Stock that are to be granted to employees pursuant to the employee retention plan described in the Plan of Reorganization, which shares are subject to vesting periods of 6 to 24 months pursuant to such employee retention plan. The number also includes shares of Common Stock to be distributed to holders of the various claims pursuant to the Plan of Reorganization, which shares will be issued as promptly after the Effective Date as practicable. (3) Currently the Company does not anticipate drawing down the line of credit on the Effective Date. 4 - ---------- (b) GIVE A BRIEF OUTLINE OF THE VOTING RIGHTS OF EACH CLASS OF VOTING SECURITIES REFERRED TO IN PARAGRAPH (a) ABOVE. As of March 31, 2002: (i) Holders of the Common Stock are entitled to cast one vote for each share held of record on all matters submitted to a vote of stockholders and are entitled to cumulate votes for the election of directors. (ii) The Board of Directors of the Company is authorized, without any further action by the stockholders, to determine the voting rights of any series of Preferred Stock. No such series of Preferred Stock has been designated or will be issued on the Effective Date. As of Effective Date: (i) Holders of the Common Stock are entitled to cast one vote for each share held of record on all matters submitted to a vote of stockholders. (iii) Holders of the Notes will not have any voting rights by reason of ownership of those securities. 8. ANALYSIS OF INDENTURE PROVISIONS. INSERT THE ANALYSIS OF INDENTURE PROVISIONS REQUIRED UNDER SECTION 305(a)(2) OF THE ACT. The following analysis of the provisions of the Indenture required under Section 3.5(a)(2) of the Trust Indenture Act of 1939, as amended (the "TIA"), is a summary and is qualified in its entirety by reference to the Indenture, a copy of the form of which is filed as Exhibit T3C-1 hereto and is incorporated herein by reference. Capitalized terms used in this section and not otherwise defined in this application shall have the meanings given to them in the Indenture. (A) EVENT OF DEFAULT; WITHHOLDING OF NOTICE. Event of Default. Any of the following shall constitute an Event of Default under the Indenture: (a) Failure to pay (i) any installment of principal on any Note when due, or (ii) any installment of interest on any Note or other amount payable and such failure under this clause (ii) continues for a period of five (5) consecutive days of the date when due; (b) Failure to perform any term, covenant or agreement in any material respect, or breach of any representation or warranty in any material respect, contained in the Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents or in any document executed in conjunction with or delivered pursuant to any of such documents, which failure continues uncured for more than thirty (30) consecutive days. Notwithstanding the foregoing, any failure of the Company to perform or observe the covenants contained in Sections 4.10 through 4.22, 4.23(b), 4.24 through 4.27, 4.29 and 4.30 of the Indenture constitutes an Event of Default immediately without regard to any lapse of time or cure period; 5 (c) Failure by the Company or any Subsidiary (i) to pay when due (giving effect to any applicable grace period) any amounts owing under the Liquidity Facility or the Senior Notes or any obligation or Indebtedness (except those specifically arising under the Indenture) in excess of $1.0 million in aggregate amount, or (ii) to observe or perform any material term, covenant or agreement contained in any agreement governing the Liquidity Facility or the Senior Notes Indenture or entered into pursuant thereto or any agreement for such obligation or Indebtedness by which it is bound, in each case for such period of time as would permit the holder(s) to accelerate the maturity thereof; (d) (i) the Company or any Subsidiary (other than any Non-Material Subsidiaries) commences any action (A) under any bankruptcy, insolvency, reorganization or relief of debtors laws seeking relief or adjudication of bankruptcy or insolvency, (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any Subsidiary (other than any Non-Material Subsidiaries) makes a general assignment for the benefit of its creditors; or (ii) any action against the Company or any Subsidiary of a nature referred to in clause (i) above which (X) results in the entry of an order for relief or any such adjudication or appointment or (Y) remains undismissed, undischarged or unbonded for a period of thirty (30) days; or (iii) any action against the Company or any Subsidiary for the issuance of a warrant of attachment, execution or distraint against all or any substantial part of its assets which results in an order that is not vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (iv) the Company or any Subsidiary takes any action in furtherance of or consenting any of the acts set forth in clause (i), (ii) and (iii) above; (v) the Company or any Subsidiary is generally not, or shall be unable to, or admits in writing its inability to, pay its debts as they become due; or (vi) the stockholders of the Company shall approve any plan or proposal for the liquidation of the Company or any of its Subsidiaries other than those Non-Material Subsidiaries. (e) any judgment or decree entered against the Company or any Subsidiary involving a liability (not paid or covered by insurance or indemnity), individually equal to or greater than $5.0 million, and in aggregate equal to or greater than $10.0 million that is not vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; (f) (i) failure by the Company or any ERISA Affiliate to make full payment when due of all material amounts required under any Pension Plan or Section 412 of the Internal Revenue Code; (ii) any material accumulated funding deficiency with respect to any Pension Plan; (iii) the excess of the actuarial present value of all benefit liabilities under all material Pension Plans over the fair market value of the assets of such Pension Plans allocable to such benefit liabilities are greater than 5% of Adjusted Tangible Net Worth; (iv) any transaction by the Company or any ERISA Affiliate to evade liability under Subtitle D of Title IV of ERISA; or (v) (A) any termination of any material Pension Plan, (B) appointment of a trustee to administer any material Pension Plan, or (C) the PBGC's institution of any proceedings to terminate any material Pension Plan or to appoint a trustee, or the Company's or any ERISA Affiliate's withdrawal from any material Pension Plan, if as of the date of an event listed in (A) through (C) of this clause (v), or any subsequent dates either the Company or its ERISA Affiliate has any material liability; (g) any proceeding against the Company or any Subsidiary involving a potential penalty of forfeiture (to the extent not paid or covered by insurance or indemnity) of any property equal to or greater than $5.0 million that is not vacated or discharged within thirty (30) days of its institution. Acceleration. Upon (i) the occurrence of any Event of Default described in clause (d) above, or upon the acceleration of the outstanding principal amount of any Senior Notes or of any outstanding principal amount owing under the Liquidity Facility, the Notes, with accrued interest thereon, and all other amounts owing under the Indenture and the Notes shall automatically become due and payable in cash, and (ii) upon 6 the occurrence and continuance of any other Event of Default, the Trustee, or the Holders of at least a majority in outstanding principal amount of the then outstanding Notes may, by notice to the Company, declare the Notes, with accrued interest, and all other amounts owing to be due and payable forthwith, whereupon the same shall immediately become due and payable in cash. Except as expressly provided above in this paragraph, presentment, demand, protest and all other notices of any kind are expressly waived. The Holders of a majority in outstanding principal amount of the then outstanding Notes, by written notice to the Trustee, may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest on the Notes that has become due solely because of the acceleration) have been cured or waived. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest with respect to, the Notes or to enforce the performance of any provision of the Notes or the Indenture. The Trustee may also pursue any remedy available to the Holders of the Notes or the Trustee, whether under the Indenture or under the Notes, any of the other Collateral Documents, the Liquidity Facility Intercreditor Agreement or the Senior Notes Intercreditor Agreement, or otherwise available to any Holders or the Trustee at law or equity. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Waiver of Past Defaults. Holders of not less than a majority in outstanding principal amount of then outstanding Notes, by notice to the Trustee, may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences, except a continuing Default or Event of Default in the payment of the principal of, or interest on the Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in outstanding principal amount of then outstanding Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of the Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Control by Majority. Holders of a majority in outstanding principal amount of then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. Limitation on Suits. Subject to the restrictions contained in the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, a Holder of a Note may pursue a remedy with respect to an Event of Default under the Indenture or any Note only if: (a) the Holder gives to a Responsible Officer of the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in outstanding principal amount of then outstanding Notes make a written request to the Trustee to pursue the remedy; 7 (c) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (e) during such 60-day period the Holders of a majority in outstanding principal amount of then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use the Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder other than as expressly provided in the Indenture. Rights of Holders of Notes to Receive Payment. The right of any Holder to receive payment of principal, premium, if any, or interest with respect to the Note on or after the respective due dates expressed in the Note, or to bring suit to enforce any payment on or after such respective dates shall not be impaired or affected without the consent of such Holder. Priorities. If the Trustee collects any money pursuant to Article 6 of the Indenture, after application to any amounts contemplated by clauses (b) and (c) of the second paragraph of Section 10.15 of the Indenture, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for compensation and indemnity; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, and interest ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. (B) AUTHENTICATION AND DELIVERY; APPLICATION OF PROCEEDS. There will be no cash proceeds from the issuance of the Notes. A Note is valid only when authenticated by the manual signature of the Trustee, and the Trustee's signature is conclusive evidence that the Note has been authenticated under the Indenture. The Trustee shall, upon a written Authentication Order from the Company, authenticate the Notes for original issue up to the initial aggregate principal amount. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Note issued in global form (Global Note) shall represent the aggregate principal amount at maturity (without taking into account increases due to deferred interest) of outstanding Notes from time to time specified therein, and the aggregate principal amount at maturity of outstanding Notes represented thereby shall be increased through the addition of deferred interest, if any, as provided in the Notes and may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Whenever as a result of any optional or mandatory redemption or an exchange for Definitive Notes pursuant to Section 2.6 of the Indenture, a Global Note is redeemed, repurchased or exchanged in part, an endorsement will be made to the Global Note so that the principal amount of the Global Note shall be equal to the portion thereof not so redeemed, repurchased or exchanged. Any endorsement of the Global Note to reflect the amount of any increase or decrease in the 8 aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian in accordance with the terms of the Indenture and the Global Note and otherwise in accordance with instructions given by the Holder. The DTC shall act as Depository of the Global Note, and the Trustee shall act as the Registrar, Paying Agent and Custodian with respect to the Notes. (a) Transfer and Exchange of the Global Note. The Global Note is not transferable as a whole except by and between the Depositary and its nominee or successor. The transfer and exchange of beneficial interests in the Global Note may be effected through the Depositary, subject to securities law restrictions and in compliance with the following: (i) Transfer of Beneficial Interests in the Global Note. Beneficial interests in the Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the Global Note. No written orders or instructions are required to effect the transfers. (ii) All Other Transfers and Exchanges of Beneficial Interests in the Global Note. For all other transfers and exchanges of beneficial interests that are not subject to clause (i) above, the transferor must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary for crediting a beneficial interest in the Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions containing information regarding the Participant account to be credited with such increase; or (B) (1) a written order from a Participant or an Indirect Participant for issuing a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange. Upon satisfaction of all requirements, the Trustee shall adjust the principal amount of the Global Note. (b) Transfer or Exchange of Beneficial Interests for Definitive Notes. If any holder of a beneficial interest in the Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in clause (a)(ii) above, the Trustee shall cause the aggregate principal amount of the Global Note to be reduced, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this paragraph shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. (c) Transfer and Exchange of Definitive Notes for Beneficial Interests. A Holder of a Definitive Note may exchange such Note for a beneficial interest in the Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in the Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Definitive Note and increase or cause to be increased the aggregate principal amount of the Global Note. (d) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this paragraph, the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or 9 accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. A Holder of Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of a Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Definitive Notes pursuant to the instructions from the Holder thereof. (e) Replacement Notes. If any mutilated Note is surrendered to the Trustee or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Note if the Trustee's requirements are met. The Holder must supply an indemnity to protect the Company and the Trustee from any loss, and the Company may charge for its expenses in replacing a Note. (f) Temporary Notes. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of the Indenture. (C) RELEASE OF COLLATERAL. The Company's Obligations under the Notes issued under the Indenture are secured by Collateral. The Trustee, subject to the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, is authorized to release any Lien on any Collateral, subject to Sections 10.11 and 10.12 of the Indenture: (a) upon payment and satisfaction in full by or on behalf of the Company of all Obligations; (b) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if the Company certifies to the Trustee that the sale or disposition is permitted under Section 4.14 (on asset sale) of the Indenture; (c) constituting property in which the Company owned no interest at the time the Lien was granted or at any time thereafter, provided, that such property shall not have been transferred by the Company other than in accordance with the terms and provisions of the Indenture and the other Collateral Documents; or (d) constituting property leased to the Company under a lease that has expired or is terminated in a transaction permitted under the Indenture or the other Collateral Documents. Except as provided above, the Trustee will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or any substantial portion of the Collateral, all of the Holders, or (z) otherwise, the majority in principal amount of the then outstanding Notes. (D) SATISFACTION AND DISCHARGE OF THE INDENTURE. The Indenture will be discharged and cease to be of further effect as to all Notes and the Trustee will execute proper instruments acknowledging satisfaction and discharge of the Indenture, when (a) either (i) all authenticated Notes have been delivered to the Trustee for cancellation; or (ii) all Notes that have not been 10 delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise or will become due and payable within one year and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in amounts sufficient to pay and discharge all amounts owing on the Notes not delivered to the Trustee for cancellation for principal (including any increases in principal due to the addition of deferred interest in accordance with the Notes and the Indenture), accrued interest that has not been paid or provided for, and the maximum amount payable as premium to the date of maturity or redemption; (b) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which the Company is bound; (c) the Company has paid or caused to be paid all sums payable by it under the Indenture; and (d) the Company has delivered irrevocable instructions to the Trustee under the Indenture to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be. In addition, the Company must deliver an Officers' Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. (E) EVIDENCE AS TO COMPLIANCE WITH CONDITIONS AND COVENANTS. (a) The Company will deliver to the Trustee, on a quarterly basis, but in any event within forty-five (45) days after the end of the applicable fiscal quarter for the first three quarters of each fiscal year and within ninety (90) days following the Company's fiscal year end, an Officers' Certificate stating that a review in reasonable detail of the activities of the Company and its Subsidiaries during the preceding fiscal quarter or, in the case of each Officers' Certificate delivered at the Company's fiscal year end, the preceding fiscal year, has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under the Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in the Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of the Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the applicable entity is taking or proposes to take with respect thereto. (b) The Company shall furnish to the Trustee and the Holders all quarterly and annual financial information that would be required for a filing on Forms 10-Q and 10-K, all current reports that would be required for a Form 8-K, and notice of filing or delivery of all reports it sends to security holders and other filings with the SEC or any national securities exchange. So long as not contrary to the then current recommendation of the American Institute of Certified Public Accountants, the year-end financial statements shall be accompanied by a report of the Company's independent public accountants (each of which shall be a firm of established national reputation), addressed to the Company's Board of Directors, that in conjunction with their audit of such consolidated financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Sections 4.1, 4.5, 4.10, 4.12 through 4.20, 4.23, 4.26, 4.30 and 5 of the Indenture (containing covenants and a provision on merger) or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. 11 (c) The Company shall also deliver to the Trustee promptly upon any Officer of the Company obtaining knowledge (A) of any condition or event which constitutes a Default or Event of Default, (B) any notice or action related to a claimed default or event or condition specified in paragraph (d) under (A) -- EVENT OF DEFAULT -- above, (C) of any litigation involving alleged or potential liability equal to or greater than $4,000,000, or (D) of a material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, an Officers' Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person, the nature of such claimed default, Default, Event of Default, event or condition, and what action the Company has taken, is taking and proposes to take with respect thereto. 9. OTHER OBLIGORS. GIVE THE NAME AND COMPLETE MAILING ADDRESS OF ANY PERSON, OTHER THAN THE APPLICANT, WHO IS AN OBLIGOR UPON THE INDENTURE SECURITIES. None. CONTENTS OF APPLICATION FOR QUALIFICATION. THIS APPLICATION FOR QUALIFICATION COMPRISES -- (a) Pages numbered 1 to 14, consecutively. (b) The statement of eligibility and qualification of the trustee under the indenture to be qualified (included as Exhibit T3G hereto.) (c) The following exhibits in addition to those filed as a part of the statement of eligibility and qualification of each trustee. Exhibit T3A-1 Current Amended and Restated Certificate of Incorporation of the Company (incorporated as Exhibit 3.1 to the Company's report on Form 10-K filed by the Company with the Commission for the year ended December 31, 2000 filed on March 26, 2001). Exhibit T3A-2 Form of Amended and Restated Certificate of Incorporation of the Company, effective upon the Effective Date. Exhibit T3B-1 Current Bylaws of the Company (incorporated as Exhibit 3.2 to the Company's report on Form 10-K for the year ended December 31, 2000, which incorporated by reference from Exhibit 3.3 to the Company's report on Form 10-K for the year ended December 30, 1990). Exhibit T3B-2 Form of Amended and Restated By-Laws of the Company, effective upon the Effective Date. Exhibit T3C-1 Form of the Junior Secured Notes due 2007 Indenture between the Company and Bank One Trust Company, NA, with the Form of Junior Secured Note due 2007 attached as Exhibit A thereto. Exhibit T3C-2 Form of the Senior Secured Notes due 2007 Indenture between the Company and The 12 Bank of New York (incorporated by reference as Exhibit T3C-1 to the Company's Form T-3 regarding the Senior Secured Notes due 2002 Indenture filed on June 5, 2002). Exhibit T3D Not applicable. Exhibit T3E-1 Disclosure Statement approved by the United States Bankruptcy Court for the Northern District of California on November 16, 2001. Exhibit T3E-2 Further Modified First Amended Plan of Reorganization dated May 7, 2002. Exhibit T3F A cross reference sheet showing the location of the Senior Secured Notes due 2007 Indenture of the provisions inserted therein pursuant to Sections 310 through 318(a), inclusive, of the Trust Indenture Act of 1939 (included in Exhibit T3C-1). Exhibit T3G Statement of Eligibility and Qualification of Trustee on Form T-1. 13 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the applicant, Komag, Incorporated, a corporation organized and existing under the laws of the State of Delaware, has duly caused this application to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of San Jose, and State of California, on June 10, 2002. By: /s/ Thian Hoo Tan ----------------------------- Name: Thian Hoo Tan Title: Chief Executive Officer Attest: /s/ Edward H. Siegler -------------------------------- Name: Edward H. Siegler Title: Secretary 14 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- Exhibit T3A-1 Current Amended and Restated Certificate of Incorporation of the Company (incorporated as Exhibit 3.1 to the Company's report on Form 10-K filed by the Company with the Commission for the year ended December 31, 2000 filed on March 26, 2001). Exhibit T3A-2 Form of Amended and Restated Certificate of Incorporation of the Company, effective upon the Effective Date. Exhibit T3B-1 Current Bylaws of the Company (incorporated as Exhibit 3.2 to the Company's report on Form 10-K for the year ended December 31, 2000, which incorporated by reference from Exhibit 3.3 to the Company's report on Form 10-K for the year ended December 30, 1990). Exhibit T3B-2 Form of Amended and Restated By-Laws of the Company, effective upon the Effective Date. Exhibit T3C-1 Form of the Junior Secured Notes due 2007 Indenture between the Company and Bank One Trust Company, NA, with the Form of Junior Secured Note due 2007 attached as Exhibit A thereto. Exhibit T3C-2 Form of the Senior Secured Notes due 2007 Indenture between the Company and The
Bank of New York (incorporated by reference as Exhibit T3C-1 to the Company's Form T-3 regarding the Senior Secured Notes due 2002 Indenture filed on June 5, 2002). Exhibit T3D Not applicable. Exhibit T3E-1 Disclosure Statement approved by the United States Bankruptcy Court for the Northern District of California on November 16, 2001. Exhibit T3E-2 Further Modified First Amended Plan of Reorganization dated May 7, 2002. Exhibit T3F A cross reference sheet showing the location of the Senior Secured Notes due 2007 Indenture of the provisions inserted therein pursuant to Sections 310 through 318(a), inclusive, of the Trust Indenture Act of 1939 (included in Exhibit T3C-1). Exhibit T3G Statement of Eligibility and Qualification of Trustee on Form T-1.
EX-99.T3A2 3 f82285orexv99wt3a2.txt EXHIBIT T3 A-2 EXHIBIT T3A-2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF KOMAG, INCORPORATED, A DELAWARE CORPORATION The undersigned, T.H. Tan and Edward H. Siegler, hereby certify that: FIRST: They are the duly elected and acting President and Secretary, respectively, of said corporation. SECOND: The Certificate of Incorporation of said corporation was originally filed with the Secretary of State of Delaware on October 29, 1986 under the name Komag Delaware, Inc. THIRD: Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, the Certificate of Incorporation of said corporation shall be amended and restated to read in full as follows. FOURTH: The Plan of Reorganization, dated September 20, 2001, of the corporation has been confirmed by the United States Bankruptcy Court for the Northern District of California and has become effective in accordance with its terms: ARTICLE I The name of the corporation (herein called the "Corporation") is Komag, Incorporated. ARTICLE II The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, zip code 19801. The name of the registered agent of the Corporation at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The Corporation shall be authorized to issue Fifty Million (50,000,000) shares of capital stock having an aggregate par value of Five Hundred Thousand Dollars ($500,000). This Capital Stock shall consist entirely of Common Stock having a par value. The authorized Common Stock shall be Fifty Million shares (50,000,000) shares having a par value of one cent ($.01) per share for an aggregate class par value of Five Hundred Thousand Dollars ($500,000). The Corporation is also authorized to issue debentures (convertible into the Common Stock or non-convertible, either with or without voting rights) and/or warrants or options to purchase Common Stock. ARTICLE V In the furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the By-Laws of the Corporation. ARTICLE VI The number of directors of the Corporation shall be fixed from time to time by a by-law or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII The Corporation shall not issue any non-voting equity securities. All rights to vote and all voting power shall be vested in the Common Stock. The Board of Directors shall be divided into three classes, the members of each class to serve for a term of three years; provided that the directors shall be elected as follows: at the first annual meeting of the stockholders after the date hereof, the directors in the first class shall be elected for a term of three years, at the second annual meeting after the date hereof, the directors in the second class shall be elected for a term of three years, and at the third annual meeting after the date hereof, the directors in the third class shall be elected for a term of three years. The Board of Directors by resolution shall nominate the directors to be elected for each class. At subsequent annual meetings of stockholders, a number of directors shall be elected equal to the number of directors with terms expiring at that annual meeting. Directors elected at each such subsequent annual meeting shall be elected for a term expiring with the annual meeting of stockholders three years thereafter. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. ARTICLE VIII Elections of directors need not be by written ballot unless the By-laws of the Corporation shall so provide. ARTICLE IX Meetings of stockholders may be held within or without the State of Delaware, as the By-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the Corporation. -2- ARTICLE X A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. ARTICLE XI The Corporation reserves the right to amend, alter, change or repeal any provision contained in this restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statue, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XIII The Corporation shall have perpetual existence. FIFTH: The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by the Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. The foregoing Amended and Restated Certificate of Incorporation has been adopted pursuant to the Plan of Reorganization of the Company dated September 20, 2001. IN WITNESS WHEREOF, the undersigned have executed this certificate on _______, 2002. KOMAG, INCORPORATED By: ------------------------------------- T. H. Han, President Attest: ---------------------------- Edward H. Siegler, Secretary -3- EX-99.T3B2 4 f82285orexv99wt3b2.txt EXHIBIT T3 B-2 EXHIBIT T3B-2 FORM OF AMENDED AND RESTATED BYLAWS OF KOMAG INCORPORATED These Amended and Restated Bylaws of Komag, Incorporated are entered into pursuant to the First Amended Plan of Reorganization of the corporation dated November 7, 2001, which Plan of Reorganization has been confirmed by the United States Bankruptcy Court for the Northern District of California and has become effective in accordance with its terms. ARTICLE I - CORPORATE OFFICES 1.1 REGISTERED OFFICE. The registered office of Komag, Incorporated shall be fixed in the corporation's certificate of incorporation, as the same may be amended from time to time. 1.2 OTHER OFFICES. The corporation's Board of Directors (the "Board") may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II - MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board. The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law (the "DGCL"). In the absence of any such designation or determination, stockholders' meetings shall be held at the corporation's principal executive office. 2.2 ANNUAL MEETING. The annual meeting of stockholders shall be held each year. The Board shall designate the date and time of the annual meeting. In the absence of such designation the annual meeting of stockholders shall be held on or prior to 10:00 a.m. on the last day in May, if not a legal holiday. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding business day. At the annual meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING. A special meeting of the stockholders may be called at any time by the Board, chairperson of the Board, chief executive officer or president (in the absence of a chief executive officer) or by one or more stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. - 1 - If any person(s) other than the Board calls a special meeting, the request shall: (i) be in writing; (ii) specify the time of such meeting and the general nature of the business proposed to be transacted; and (iii) be delivered personally or sent by registered mail or by facsimile transmission to the chairperson of the Board, the chief executive officer, the president (in the absence of a chief executive officer) or the secretary of the corporation. The officer(s) receiving the request shall cause notice to be promptly given to the stockholders entitled to vote at such meeting, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting. No business may be transacted at such special meeting other than the business specified in such notice to stockholders. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings of stockholders shall be sent or otherwise given in accordance with either Section 2.5 or Section 8.1 of these bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of stockholders shall be given: (i) if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the corporation's records; or (ii) if electronically transmitted as provided in Section 8.1 of these bylaws. An affidavit of the secretary or an assistant secretary of the corporation or of the transfer agent or any other agent of the corporation that the notice has been given by mail or by a form of electronic transmission, as applicable, shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairperson of the meeting, or (ii) the stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. - 2 - 2.7 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place if any thereof, and the means of remote communications if any by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the continuation of the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS. The chairperson of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.9 VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to Section 217 (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 (relating to voting trusts and other voting agreements) of the DGCL. Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise provided in the certificate of incorporation, any action required by the DGCL to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the corporation as provided in Section 228 of the DGCL. In the event that the action which is consented to is such as would have required the filing of a certificate under any provision of the DGCL, if such action had been voted on by stockholders at a meeting thereof, the certificate filed under such provision shall state, in lieu of any statement required by such provision concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the DGCL. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or - 3 - allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other such action. If the Board does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. 2.12 PROXIES. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL. 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least 10 days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the corporation's principal executive office. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required - 4 - to access such list shall be provided with the notice of the meeting. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 2.14 REVOCATION OF CONSENT. Any stockholder giving a written consent, or the stockholder's proxyholders, or a transferee of the shares or a personal representative of the stockholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. ARTICLE III - DIRECTORS 3.1 POWERS. Subject to the provisions of the DGCL and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. 3.2 NUMBER OF DIRECTORS. The authorized number of directors shall not be less than four (4) no more than ten (10), the exact number of which shall be fixed within the limits herein specified by approval of the Board of Directors or by approval of stockholders, in the manner provided in these bylaws. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws. The certificate of incorporation or these bylaws may prescribe other qualifications for directors. Each director, including a director elected to fill a vacancy, shall hold office until such director's successor is elected and qualified or until such director's earlier death, resignation or removal. All elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation; if authorized by the Board, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must be either set forth or be submitted with information from which it can be determined that the electronic transmission authorized by the stockholder or proxy holder. 3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each - 5 - director so chosen shall hold office as provided in this section in the filling of other vacancies. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or is convicted of a felony. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the DGCL. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the DGCL as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE; BUSINESS OF MEETINGS. The Board may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Except as otherwise expressly provided in these Bylaws, any and all business may be transacted at any meeting of the Board of Directors; provided, that if so stated in the notice of meeting, the business transacted at a special meeting shall be limited to the purpose or purposes specified in the notice. 3.6 REGULAR MEETINGS; SPECIAL MEETINGS. Regular meetings of the Board may be held at such time and at such place as shall from time to time be determined by the Board. - 6 - Special meetings of the Board for any purpose or purposes may be called at any time by the chairperson of the Board, the chief executive office, the president, any two directors, or, if less than two, the remaining director. 3.7 NOTICE OF MEETINGS; WAIVER OF NOTICE. No notice need be given of any organization or regular meeting of the Board for which the date, hour and place have been fixed by the Board. Notice of the date, hour and place of all other organization and regular meetings, and of all special meetings, shall be given to each director personally, by telephone or telegraph or by mail. If by mail, the notice shall be deposited in the United States mail, postage prepaid, directed to the director at his residence or usual place of business as the same appear on the books of the corporation not later than 2 days before the meeting. If given by telegraph, the notice shall be directed to the director at his residence or usual place of business as the same appear on the books of the corporation not later than at any time during the day before the meeting. If given personally or by telephone, the notice shall be given not later than the day before the meeting. If the address of a director is not shown on the records and is not readily ascertainable, notice shall be addressed to him at the city or place in which the meetings of the directors are regularly held. Anything herein to the contrary notwithstanding, notice of any meeting of the Board need not be given to any director who shall have waived in writing notice of the meeting, either before or after the meeting, or who shall attend such meeting, unless he attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 3.8 QUORUM. At all meetings of the Board, a majority of the authorized number of directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board, except as may be otherwise specifically provided by statute, the certificate of incorporation or these bylaws. If a quorum is not present at any meeting of the Board, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. 3.10 FEES AND COMPENSATION OF DIRECTORS. The Directors shall be paid their expenses, if any, for attendance at each meeting of the Board and any committee thereof. Directors who are not in the regular employment of the corporation shall be paid an annual - 7 - retainer and a per meeting fee according to rates established by the Board from time to time. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.11 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, the certificate of incorporation or these bylaws, any director or the entire Board may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, subject to the following: (1) No director may be removed (unless the entire Board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected; and (2) When by the provisions of the Certificate of Incorporation the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the holders of the shares of that class or series. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV - COMMITTEES 4.1 EXECUTIVE COMMITTEE. By resolution adopted by an affirmative vote of the majority of the whole Board, the Board may appoint an executive committee consisting of three or more other directors and, if deemed desirable, one or more directors as alternate members who may replace any absentee or disqualified member at any meeting of the executive committee. If so appointed, the executive committee shall, when the Board is not in session, have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation not reserved to the Board by the DGCL, including, but not limited to, the power and authority to declare a dividend, to authorize the issuance of stock, to adopt a certificate of ownership and merger under Section 253 of the DGCL. The executive committee shall keep a record of its acts and proceedings and shall report the same from time to time to the Board. 4.2 OTHER COMMITTEES. By resolution adopted by an affirmative vote of the majority of the whole Board, the Board may from time to time appoint such other committees of the Board, consisting of one or more directors and, if deemed desirable, one or more directors who shall act as alternate members and who may replace any absentee or disqualified member at any meeting of the committee, and may delegate to each such committee any of the powers and authority of the Board in the management of the business and affairs of the corporation not reserved to the Board. Each such committee shall keep a record of its acts and proceedings and shall report the same from time to time to the Board. No committee, including the executive committee, shall have the power or authority to (i) approve or adopt, or recommend to shareholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval or (ii) adopt, amend or repeal any bylaw of the corporation. - 8 - 4.3 ELECTION OF COMMITTEE MEMBERS; VACANCIES. So far as practicable, members of the committees of the Board and their alternates (if any) shall be appointed at each organization meeting of the Board and, unless sooner discharged by an affirmative vote of a majority of the Board members present at any meeting at which a quorum is present. Committee members shall hold office until the next organization meeting of the Board and until their respective successors are appointed. Vacancies in committees of the Board created by death, resignation or removal may only be filled by an affirmative vote of a majority of the Board members present at any meeting at which a quorum is present. 4.4 MEETINGS. Each committee of the Board may provide for regular meetings of such committee. Special meetings of each committee may be called by any two members of the committee (or, if there is only one member, by that member in concert with the President) or by the President of the corporation. The provisions of Section 3 regarding the business, time and place, notice and waivers of notice of meetings, attendance at meetings and action without a meeting shall apply to each committee of the Board, except that the references in such provisions to the directors and the Board shall be deemed respectively to be references to the members of the committee and to the committee. Each committee shall keep regular minutes of its proceedings and report the same to the Board when required. 4.5 QUORUM AND MANNER OF ACTING. The majority of the members of any committee of the Board shall constitute a quorum for the transaction of business at meetings of the committee, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee. A majority of the members present at any meeting, regardless of whether or not they constitute a quorum, may adjourn the meeting at another time or place. Any business which might have been transacted at the original meeting may be transacted at any adjourned meeting at which a quorum is present. ARTICLE V - OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a president and a secretary. The corporation may also have, at the discretion of the Board, a chairperson of the Board, a vice chairperson of the Board, a chief executive officer, a chief financial officer or treasurer, one or more vice presidents, one or more assistant vice presidents, one or more assistant treasurers, one or more assistant secretaries, and any such other officers as may be appointed in accordance with the provisions of these bylaws. Any number of offices may be held by the same person. The Board may also appoint, or provide for the appointment of, such other officers and agents as may from time to time appear necessary or advisable in the conduct of the affairs of the corporation. Any number of offices may be held by the same person. Any Vice President, Assistant Financial Officer or Assistant Secretary, respectively, may exercise any of the powers of the President, the Chief Financial Officer, or the Secretary, respectively, as directed by the Board and shall perform such other duties as are imposed upon such officer by the bylaws or the Board. - 9 - 5.2 APPOINTMENT OF OFFICERS. The Board shall appoint the officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 and 5.5 of these bylaws, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. The Board may appoint, or empower the chief executive officer or, in the absence of a chief executive officer, the president, to appoint, such other officers and agents as the business of the corporation may require. Each of such officers and agents shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board at any regular or special meeting of the Board or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the corporation shall be filled by the Board or as provided in Section 5.2. 5.6 CHAIRPERSON OF THE BOARD. The chairperson of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board and exercise and perform such other powers and duties as may from time to time be assigned to him by the Board or as may be prescribed by these bylaws. If there is no chief executive officer or president, then the chairperson of the Board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as the Board may give to the chairperson of the Board, the chief executive officer, if any, shall, subject to the control of the Board, have general supervision, direction, and control of the business and affairs of the corporation and shall report directly to the Board. All other officers, officials, employees and agents shall report directly or indirectly to the chief executive officer. The chief executive officer shall see that all orders and resolutions of the Board are carried into effect. The chief executive officer shall serve as chairperson of and preside at all meetings of the stockholders. In the absence of a chairperson of the Board, the chief executive officer shall preside at all meetings of the Board. - 10 - 5.8 PRESIDENT; PRESIDENT PRO TEM. In the absence or disability of the chief executive officer, the president shall perform all the duties of the chief executive officer. When acting as the chief executive officer, the president shall have all the powers of, and be subject to all the restrictions upon, the chief executive officer. The president shall have such other powers and perform such other duties as from time to time may be prescribed for him by the Board, these bylaws, the chief executive officer or the chairperson of the Board. If neither the Chairman of the Board, the President, nor any Vice President is present at any meeting of the Board, a President pro tem may be chosen to preside and act at such meeting. If neither the President nor any Vice President is present at any meeting of the stockholders, a President pro tem may be chosen to preside at such meeting. 5.9 VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Board or, if not ranked, a vice president designated by the Board, shall perform all the duties of the president. When acting as the president, the appropriate vice president shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board, these bylaws, the chairperson of the Board, the chief executive officer or, in the absence of a chief executive officer, the president. 5.10 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show (i) the time and place of each meeting; (ii) whether regular or special (and, if special, how authorized and the notice given); (iii) the names of those present at directors' meetings or committee meetings; (iv) the number of shares present or represented at stockholders' meetings; (v) and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register showing; (i) the names of all stockholders and their addresses; (ii) the number and classes of shares held by each; (iii) the number and date of certificates evidencing such shares; and (iv) the number and date of cancellation of every certificate surrendered for cancellation. - 11 - The secretary shall keep a supply of certificates for shares of the Corporation, to fill in all certificates issued, and to make a proper record of each such issuance; provided, that so long as the Corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the Corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. The secretary shall transfer upon the share books of the Corporation any and all shares of the Corporation; provided, that so long as the Corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the Corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to which the certificate is presented for transfer, and also, if the Corporation then has one or more duly appointed and acting registrars, to the reasonable regulations of the registrar to which the new certificate is presented for registration; and provided, further, that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in Section 7.3 hereof. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board required to be given by law or by these bylaws. The secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board or by these bylaws. 5.11 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as the Board may designate. The chief financial officer shall disburse the funds of the corporation as may be ordered by the Board, shall render to the chief executive officer or, in the absence of a chief executive officer, the president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board or these bylaws. In the event there is no treasurer appointed by the Board, the chief financial officer shall be the treasurer of the corporation. 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairperson of the Board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. - 12 - 5.13 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board or the stockholders. 5.14 TERM OF OFFICE AND VACANCY. So far as practicable, the elected officers shall be elected at each organization meeting of the Board, and shall hold office until the next organization meeting of the Board and until their respective successors are elected and qualified. If a vacancy shall occur in any elected office, the Board may elect a successor for the remainder of the term. Appointed officers shall hold office at the pleasure of the Board. Any officer may resign by written notice to the corporation. 5.15 REMOVAL OF ELECTED OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, elected officers may be removed at any time, either for or without cause, by the affirmative vote of a majority of the whole Board at a regular meeting or a special meeting called for that purpose. ARTICLE VI - RECORDS AND REPORTS 6.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall, either at its principal executive office or at such place or places as designated by the Board, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal executive office. 6.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. - 13 - ARTICLE VII - GENERAL MATTERS 7.1 CHECKS. From time to time, the Board shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 7.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 7.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of the corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairperson or vice-chairperson of the Board, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 7.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of - 14 - the DGCL, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 7.5 LOST CERTIFICATES. In case any certificate for shares of the corporation shall be lost, stolen or destroyed, the Board, in its discretion, or any transfer agent thereunto duly authorized by the Board, may authorize the issue of a substitute certificate in place of the certificate so lost, stolen or destroyed, and may cause such substitute certificate to be countersigned by the appropriate registrar (if any) and registered by the appropriate registrar (if any); provided that, in each such case, the applicant for a substitute certificate shall furnish to the corporation and to such of its transfer agents and registrars as may require the same, evidence to their satisfaction, in their discretion, of the loss, theft or destruction of such certificate and the ownership thereof, and also such security or indemnity as may by them be required. The Board may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. 7.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the DGCL shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 7.7 DIVIDENDS. The Board, subject to any restrictions contained in either (i) the DGCL, or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The Board may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 7.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board and may be changed by the Board. 7.9 SEAL. The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board. The corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. - 15 - 7.10 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 7.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL. 7.12 REGISTERED STOCKHOLDERS. The corporation: (i) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner; (ii) shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares; and (iii) shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 7.13 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the DGCL, the certificate of incorporation or these bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws. 7.14 TRANSFER AGENTS AND REGISTRARS. The Board may, in its discretion, appoint one or more responsible banks or trust companies as the Board may deem advisable, from time to time, to act as transfer agents and registrars of shares of the corporation; and, when such appointments shall have been made, no certificate for shares of the corporation shall be valid until countersigned by one of such transfer agents and registered by one of such registrars. - 16 - 7.15 STOCKHOLDERS' ADDRESSES. Every stockholder or transferee shall furnish the Secretary or a transfer agent with the address to which notice of meetings and all other notices may be served upon or mailed to said stockholder or transferee, and in default thereof, said stockholder or transferee shall not be entitled to service or mailing of any such notice. 7.16 SHARES HELD BY THE CORPORATION. Shares in other corporations standing in the name of this corporation may be voted or represented and all rights incident thereto may be exercised on behalf of this corporation by the President or by any other officer of this corporation authorized to do so by resolution of the Board of Directors. ARTICLE VIII - NOTICE BY ELECTRONIC TRANSMISSION 8.1 NOTICE BY ELECTRONIC TRANSMISSION. Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the DGCL, the certificate of incorporation or these bylaws, any notice to stockholders given by the corporation under any provision of the DGCL, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if: (i) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent; and (ii) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice. However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. - 17 - Any notice given pursuant to the preceding paragraph shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 8.2 DEFINITION OF ELECTRONIC TRANSMISSION. An "electronic transmission" means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process. 8.3 INAPPLICABILITY. Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the DGCL. ARTICLE IX - INDEMNIFICATION 9.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall indemnify and hold harmless, to the fullest extent permitted by General Corporation Law of Delaware as it presently exists or may hereafter be amended, any director or officer of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding. The corporation shall be required to indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the corporation. - 18 - 9.2 INDEMNIFICATION OF OTHERS The corporation shall have the power to indemnify and hold harmless, to the extent permitted by applicable law as it presently exists or may hereafter be amended, any employee or agent of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was an employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding. 9.3 PREPAYMENT OF EXPENSES The corporation shall pay the expenses incurred by any officer or director of the corporation, and may pay the expenses incurred by any employee or agent of the corporation, in defending any proceeding in advance of its final disposition; provided, however, that the payment of expenses incurred by a person in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person is not entitled to be indemnified under this Article 9 or otherwise. 9.4 DETERMINATION; CLAIM If a claim for indemnification or payment of expenses under this Article 9 is not paid in full within sixty days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. 9.5 NON-EXCLUSIVITY OF RIGHTS The rights conferred on any person by this Article 9 shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these bylaws, agreement, vote of stockholders or disinterested directors or otherwise. 9.6 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 9.7 OTHER INDEMNIFICATION The corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise. - 19 - 9.8 AMENDMENT OR REPEAL Any repeal or modification of the foregoing provisions of this Article 9 shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE X - AMENDMENTS These bylaws may be adopted, amended or repealed by the stockholders entitled to vote. However, the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. - 20 - EX-99.T3C1 5 f82285orexv99wt3c1.txt EXHIBIT T3 C1 EXHIBIT T3C-1 FOR DISCUSSION PURPOSES ONLY THIS IS NOT A COMMITMENT - -------------------------------------------------------------------------------- KOMAG, INCORPORATED $7,000,000 Initial Amount of JUNIOR SECURED NOTES DUE 2007 INDENTURE Dated as of _____, 2002 BANK ONE TRUST COMPANY, NA TRUSTEE CROSS-REFERENCE TABLE*
TRUST INDENTURE --------------- ACT SECTION INDENTURE SECTION ----------- ----------------- 310(a)(1) 7.10 (a)(2) 7.10 (a)(3) N/A (a)(4) N/A (a)(5) 7.10 (b) 7.10 (c) N/A 311(a) 7.11 (b) 7.11 (c) N/A 312(a) 2.5 (b) 13.3 (c) 13.3 313(a) 7.6 (b)(2) 7.6 (c) 7.6 (d) 7.6 314(a) 4.3;4.4 (b) 10.9 (c)(1) 12.4 (c)(2) 12.4 (c)(3) N/A (d) 10.3;10.9; 10.11;10.12 (e) 13.4;13.5 (f) N/A 315(a) 7.1 (b) 7.5 (c) 7.1 (d) 7.1 (e) 6.11 316(a)(last sentence) 2.9 (a)(1)(A) 6.5 (a)(1)(B) 6.4 (b) 6.7 (c) 13.13(d) 317(a)(1) 6.8 (a)(2) 6.9 (b) 2.4 318(a) 13.1
- -------- *This Cross-Reference Table is not part of the Indenture. i
TRUST INDENTURE --------------- ACT SECTION INDENTURE SECTION ----------- ----------------- (b) N/A (c) N/A
TABLE OF CONTENTS
Page ---- Article 1. DEFINITIONS AND INCORPORATION BY REFERENCE................................1 Section 1.1 Definitions................................................................1 Section 1.2 Other Definitions.........................................................21 Section 1.3 Incorporation by Reference of Trust Indenture Act.........................21 Section 1.4 Rules of Construction.....................................................21 Article 2. THE NOTES................................................................22 Section 2.1 Form and Dating...........................................................22 Section 2.2 Execution and Authentication..............................................23 Section 2.3 Registrar and Paying Agent................................................23 Section 2.4 Paying Agent to Hold Money in Trust.......................................24 Section 2.5 Holder Lists..............................................................24 Section 2.6 Transfer and Exchange.....................................................24 Section 2.7 Replacement Notes.........................................................28 Section 2.8 Outstanding Notes.........................................................28 Section 2.9 Treasury Notes............................................................29 Section 2.10 Temporary Notes...........................................................29 Section 2.11 Cancellation..............................................................29 Section 2.12 Payment of Interest; Defaulted Interest...................................29 Section 2.13 CUSIP Numbers.............................................................30 Article 3. REDEMPTION AND PREPAYMENT................................................30 Section 3.1 Notices to Trustee........................................................30 Section 3.2 Selection of Notes to Be Redeemed.........................................30 Section 3.3 Notice of Redemption......................................................31 Section 3.4 Effect of Notice of Redemption............................................31 Section 3.5 Deposit of Redemption Price...............................................31 Section 3.6 Notes Redeemed in Part....................................................32 Section 3.7 Optional Redemption.......................................................32 Section 3.8 Mandatory Redemption......................................................32 Article 4. COVENANTS................................................................33 Section 4.1 Payment of Notes..........................................................33 Section 4.2 Maintenance of Office or Agency...........................................33 Section 4.3 Reports...................................................................34 Section 4.4 Compliance Certificate; Notices and Information...........................34 Section 4.5 Taxes and Claims..........................................................37 Section 4.6 Stay, Extension and Usury Laws............................................37 Section 4.7 Maintenance of Properties; Insurance......................................37 Section 4.8 Compliance with Laws, Etc.................................................37 Section 4.9 Notification..............................................................38 Section 4.10 Dividends, etc............................................................38 Section 4.11 Dividend and Other Payment Restrictions Affecting Subsidiaries............38
Section 4.12 Loans, Indebtedness, Investments, Secondary Liabilities...................39 Section 4.13 Capital Raising Events....................................................41 Section 4.14 Asset Sales...............................................................42 Section 4.15 Liens.....................................................................43 Section 4.16 Adjusted Tangible Net Worth...............................................43 Section 4.17 Minimum Adjusted Net Working Capital......................................44 Section 4.18 Total Cash Debt Service Coverage Ratio....................................45 Section 4.19 Capital Expenditures......................................................45 Section 4.20 Consolidated EBITDAR......................................................45 Section 4.21 Corporate Existence.......................................................46 Section 4.22 Payments for Consent......................................................46 Section 4.23 Advances to Subsidiaries..................................................46 Section 4.24 Amendments to Certain Agreements..........................................47 Section 4.25 Transactions with Affiliates..............................................47 Section 4.26 Restrictions on Senior or Pari Passu Indebtedness.........................48 Section 4.27 Impairment of Rights......................................................48 Section 4.28 Location of Inventory and Equipment.......................................48 Section 4.29 Escrow Account............................................................49 Section 4.30 Komag Bermuda.............................................................49 Section 4.31 Further Assurances........................................................49 Article 5. MERGERS, ETC.............................................................50 Section 5.1 Consolidation, Merger or Acquisition......................................50 Article 6. DEFAULTS AND REMEDIES....................................................50 Section 6.1 Events of Default.........................................................50 Section 6.2 Acceleration..............................................................53 Section 6.3 Other Remedies............................................................53 Section 6.4 Waiver of Past Defaults...................................................53 Section 6.5 Control by Majority.......................................................53 Section 6.6 Limitation on Suits.......................................................54 Section 6.7 Rights of Holders of Notes to Receive Payment.............................54 Section 6.8 Collection Suit by Trustee................................................54 Section 6.9 Trustee May File Proofs of Claim..........................................54 Section 6.10 Priorities................................................................55 Section 6.11 Undertaking for Costs.....................................................55 Section 6.12 Restoration of Rights and Remedies........................................56 Article 7. TRUSTEE..................................................................56 Section 7.1 Duties of Trustee.........................................................56 Section 7.2 Certain Rights of Trustee.................................................57 Section 7.3 Individual Rights of Trustee..............................................58 Section 7.4 Trustee's Disclaimer......................................................58 Section 7.5 Notice of Defaults........................................................58 Section 7.6 Reports by Trustee to Holders of the Notes; Stock Exchange Listing........59 Section 7.7 Compensation and Indemnity................................................59 Section 7.8 Replacement of Trustee....................................................60
Section 7.9 Successor Trustee by Merger, Etc..........................................61 Section 7.10 Eligibility; Disqualification.............................................61 Section 7.11 Preferential Collection of Claims Against Company.........................61 Section 7.12 Authorization of Trustee to Take Other Actions............................61 Section 7.13 Assignment of Rights, Not Assumption of Duties............................62 Section 7.14 Limitation on Duty of Trustee in Respect of Collateral; Indemnification...62 Section 7.15 Appointment of Co-Trustee.................................................62 Section 7.16 No Liability for Clean-up of Hazardous Materials..........................64 Article 8. DEFEASANCE AND COVENANT DEFEASANCE.......................................64 Section 8.1 Option to Effect Legal Defeasance or Covenant Defeasance..................64 Section 8.2 Legal Defeasance and Discharge............................................64 Section 8.3 Covenant Defeasance.......................................................65 Section 8.4 Conditions to Legal or Covenant Defeasance................................65 Section 8.5 Deposited Money and Government Securities to Be Held in Trust; Other Miscellaneous Provisions..................................................66 Section 8.6 Repayment to the Company..................................................67 Section 8.7 Reinstatement.............................................................67 Article 9. AMENDMENT, SUPPLEMENT AND WAIVER.........................................67 Section 9.1 Without Consent of Holders of Notes.......................................67 Section 9.2 With Consent of Holders of Notes..........................................68 Section 9.3 Compliance with Trust Indenture Act.......................................70 Section 9.4 Revocation and Effect of Consents.........................................70 Section 9.5 Notation on or Exchange of Notes..........................................70 Section 9.6 Trustee to Sign Amendments, Etc...........................................70 Article 10. COLLATERAL AND SECURITY..................................................71 Section 10.1 Security..................................................................71 Section 10.2 Grant of a Security Interest..............................................71 Section 10.3 Collateral Matters........................................................71 Section 10.4 Negotiable Collateral.....................................................72 Section 10.5 Collection of Accounts, General Intangibles, and Negotiable Collateral....72 Section 10.6 Power of Attorney.........................................................72 Section 10.7 Grants, Rights and Remedies...............................................73 Section 10.8 Survival..................................................................73 Section 10.9 Recording and Opinions....................................................74 Section 10.10 Protection of the Trust Estate............................................75 Section 10.11 Certificates of the Company...............................................75 Section 10.12 Certificates of the Trustee...............................................75 Section 10.13 Authorization of Actions to Be Taken by the Trustee Under the Collateral Documents, the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement.............................................75 Section 10.14 Trustee's Duties..........................................................76 Section 10.15 Authorization of Receipt of Funds by the Trustee Under the Collateral Documents.................................................................76 Section 10.16 Cooperation of Trustee....................................................77
Section 10.17 Collateral Agent..........................................................77 Section 10.18 Representations and Warranties............................................77 Article 11. SATISFACTION AND DISCHARGE...............................................79 Section 11.1 Satisfaction and Discharge................................................79 Section 11.2 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions..................................................80 Section 11.3 Repayment to Company......................................................80 Article 12. SUBORDINATION OF NOTES...................................................81 Section 12.1 Notes Subordinate to Senior Indebtedness Only.............................81 Section 12.2 [Trustee to Effectuate Subordination......................................81 Section 12.3 Notice to Trustee.........................................................81 Section 12.4 Reliance on Judicial Order or Certificate of Liquidating Agent............82 Section 12.5 Trustee Not Fiduciary for Holders of Senior Indebtedness..................82 Section 12.6 Rights of Trustee.........................................................82 Section 12.7 Article Applicable to Paying Agents.......................................83 Section 12.8 Defeasance of this Article Twelve.........................................83 Section 12.9 This Article Not To Prevent Events of Default.............................83 Section 12.10 Representative of Senior Indebtedness.....................................83 Article 13. MISCELLANEOUS............................................................83 Section 13.1 Trust Indenture Act Controls..............................................83 Section 13.2 Notices...................................................................83 Section 13.3 Communication by Holders of Notes with Other Holders of Notes.............84 Section 13.4 Certificate and Opinion as to Conditions Precedent........................85 Section 13.5 Statements Required in Certificate or Opinion.............................85 Section 13.6 Rules by Trustee and Agents...............................................85 Section 13.7 No Personal Liability of Directors, Officers, Employees and Stockholders..85 Section 13.8 Governing Law.............................................................85 Section 13.9 No Adverse Interpretation of Other Agreements.............................86 Section 13.10 Successors................................................................86 Section 13.11 Severability..............................................................86 Section 13.12 Counterpart Originals.....................................................86 Section 13.13 Acts of Holders...........................................................86 Section 13.14 Benefit of Indenture......................................................87 Section 13.15 Table of Contents, Headings, Etc..........................................87
EXHIBITS EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF DEED OF TRUST FOR CALIFORNIA EXHIBIT C FORM OF TRUST DEED FOR OREGON EXHIBIT D FORM OF PLEDGE AGREEMENT EXHIBIT E FORM OF LIQUIDITY FACILITY INTERCREDITOR AGREEMENT EXHIBIT F FORM OF SENIOR NOTES INTERCREDITOR AGREEMENT EXHIBIT G FORM OF ACCOUNT CONTROL AGREEMENT SCHEDULE 1.1 EXISTING LIENS SCHEDULE 4.25 AFFILIATE TRANSACTIONS SCHEDULE 4.28 LOCATION OF INVENTORY AND EQUIPMENT SCHEDULE 10.18(B) EXCEPTED EQUIPMENT SCHEDULE 10.18(G) LIST OF SUBSIDIARIES SCHEDULE 10.18(H)(1) REGISTERED PATENTS AND REGISTERED TRADEMARKS SCHEDULE 10.18(H)(2) INTELLECTUAL PROPERTY CLAIMS SCHEDULE R-1 REAL PROPERTY SCHEDULE A SCHEDULED INCREASES TO PRINCIPAL IN RESPECT OF DEFERRED INTEREST DRAFT INDENTURE dated as of _____, 2002 among Komag, Incorporated, a Delaware corporation (the "COMPANY") and Bank One Trust Company, NA , a national banking association (the "TRUSTEE"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Junior Secured Notes due 2007 (the "NOTES"): RECITALS WHEREAS, HMT Technology Corporation ("HMT") issued certain 5 3/4% Convertible Subordinated Notes due 2004, in an original principal amount of $230,000,000.00 (the "BONDS") pursuant to that certain Indenture dated January 15, 1997 between HMT and State Street Bank and Trust Company of California, as Trustee; WHEREAS, the Company is the successor obligor on the Bonds pursuant to the terms of a First Supplemental Indenture dated October 2, 2000 and a Second Supplemental Indenture dated December 20, 2000. WHEREAS, on or about August 24, 2001, the Company filed a voluntary petition under the Bankruptcy Law (the "PETITION DATE"), thereby commencing Case Number 01-54143-JRG (the "CHAPTER 11 CASE") currently pending before the United States Bankruptcy Court for the Northern District of California (the "BANKRUPTCY COURT"); WHEREAS, the Company's Plan of Reorganization requires that the Company issue certain "Class 6 PIK Notes" to certain holders of the Bonds; WHEREAS, it is anticipated that the Bankruptcy Court will enter its order confirming the Company's Plan of Reorganization; and NOW, THEREFORE, in consideration of the above recitals and in order to induce the Holders to purchase the Notes, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "2 WIRE LEASE" means the sublease, dated January 10, 2000, by 2 Wire, Inc., a Delaware corporation, from the Company of all or a portion of the Real Property located at 1704 Automation Parkway, San Jose, California. "ACCOUNT CONTROL AGREEMENT" means the Securities Account Control Agreement substantially in the form of Exhibit G hereto, delivered under Sections 4.31 and Article 10 and made by Company in favor of the Trustee for the benefit of the Holders, as amended, supplemented or otherwise modified from time to time. "ACCOUNT DEBTOR" means any Person who is or who may become obligated under, with respect to, or on account of, an Account. "ACCOUNTS" means all of the Company's now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the UCC), and any and all supporting obligations in respect thereof. "ADJUSTED CURRENT ASSETS" means, with respect to the Company and its Consolidated Subsidiaries as of any date of determination (i) the Current Assets of the Company and its Consolidated Subsidiaries, minus (ii) the Non-Cash Deferred Tax Assets of the Company and its Consolidated Subsidiaries. "ADJUSTED CURRENT LIABILITIES" means, with respect to the Company and its Consolidated Subsidiaries as of any date of determination (i) the Current Liabilities of the Company and its Consolidated Subsidiaries, minus (ii) Non-Cash Deferred Tax Liabilities of the Company and its Consolidated Subsidiaries, minus (iii) the Current Maturities of Long Term Indebtedness, plus (iv) to the extent not included in clause (i) above, all liabilities of the Company and its Consolidated Subsidiaries under the Liquidity Facility that are appropriately recorded as liabilities under GAAP. "ADJUSTED NET WORKING CAPITAL" means, with respect to the Company and its Consolidated Subsidiaries at any date of determination (i) the Adjusted Current Assets of the Company and its Consolidated Subsidiaries, minus (ii) the Adjusted Current Liabilities of the Company and its Consolidated Subsidiaries (excluding liabilities accrued in respect of the Company's non-cash stock-based deferred compensation program). "ADJUSTED TANGIBLE NET WORTH" means the excess of (a) total assets of the Company and its Consolidated Subsidiaries determined on a consolidated basis over (b) the sum of (without duplication) (x) consolidated liabilities of the Company and its Consolidated Subsidiaries determined on a consolidated basis (excluding liabilities accrued in respect of the Company's non-cash stock-based deferred compensation program), (y) all liabilities appropriately recorded under GAAP under the Liquidity Facility and (z) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence, or amortization of properties and all other reserves or appropriation of retained earnings which, in accordance with GAAP, should be established in connection with the business conducted by the Company and its Consolidated Subsidiaries, excluding, however from the determination of total assets (i) all intangible assets, including, without limitation, Goodwill (whether representing the excess cost over book value of assets acquired or otherwise), patents, trademarks, trade names, copyrights, franchises, and deferred charges (including, without limitation, unamortized debt discount and expense, organization and research and product development costs but excluding deferred income taxes), (ii) treasury stock and (iii) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of capital stock. "AFFILIATE" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "CONTROL," when used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of, the management and policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Securities of a Person shall be deemed to be Control. For purposes of this definition, the terms "CONTROLLING," "CONTROLLED BY" and "UNDER COMMON CONTROL WITH" have correlative meanings. "AGENT" means any Registrar, Paying Agent or co-registrar. "ANNUALIZED" means in respect of any amount with respect to the Company and its Consolidated Subsidiaries: (a) for the fiscal quarter ending June 30, 2002, such amount for such fiscal quarter multiplied by four, (b) for the fiscal quarter ending September 29, 2002, such amount for such fiscal quarter together with the immediately preceding fiscal quarter multiplied by two, (c) for the fiscal quarter ending December 29, 2002, such amount for such fiscal quarter, together with the immediately preceding two fiscal quarters multiplied by four-thirds (4/3), and (d) for each fiscal quarter ending on or after March 30, 2003, such amount for such fiscal quarter, together with the three immediately preceding fiscal quarters. "APPLICABLE PROCEDURES" means, with respect to any transfer or exchange of or for beneficial interests in the Global Note, the rules and procedures of the Depositary that apply to such transfer or exchange. "ASSET SALE" means the sale, lease, conveyance or other disposition of any assets or rights (including but not limited to sale and leaseback transactions); provided, that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, will be governed by Section 5.1 hereof and not by Section 4.14 hereof. Notwithstanding the foregoing, the following items will not be deemed to be Asset Sales: (a) any single transaction or series of related transactions entered into in the ordinary course of business that involves assets having a fair market value of less than $1.0 million; (b) the sale of inventory or obsolete furniture, fixtures, or equipment or other assets (including the licensing of intellectual property) in the ordinary course of business; (c) the sale or other disposition of Cash; (d) any sublease of Real Property with a term, including any period for which such sublease shall be renewable without the prior consent of the Company or relevant Subsidiary, of not greater than one (1) year; and (e) the 2 Wire Lease. "BANKRUPTCY COURT" has the meaning assigned to it in the recitals to this Indenture. "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar Federal or state law for the relief of debtors. "BOOKS" means all of the Company's now owned or hereafter acquired right, title, and interest with respect to the Company's and its Subsidiaries' now owned or hereafter acquired books and records (including all of its or their respective Records indicating, summarizing or evidencing its assets (including the Collateral) or liabilities, all of the Company's or its Subsidiaries' respective Records relating to its or their business operations or financial condition, and all of its or their respective goods or General Intangibles related to such information). "BUSINESS DAY" means any day other than a Saturday, Sunday or a day on which commercial banks in New York are authorized or required by law to close. "CAPITAL EXPENDITURES" means, with respect to any Person, all expenditures (including, among others, by the expenditure of cash or the incurrence of Indebtedness) made in connection with the acquisition of any assets which are required to be capitalized pursuant to GAAP. "CAPITAL LEASE" means as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person. "CAPITAL RAISING EVENT" means any issuance or sale of Equity Interests or Debt Instruments described in clause (a), (b) or (c) of Section 4.13 hereof. "CAPITAL STOCK" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CASH" means cash, cash equivalents or other investments of the type permitted in Section 4.12(a). "CHAPTER 11 CASE" has the meaning assigned to it in the recitals to this Indenture. "COLLATERAL" means all now owned or hereafter acquired assets and property of the Company, including, without limitation, each of the following to the fullest extent that the Company is permitted under applicable law to grant a security interest in such assets and property (in the case of Investment Property, as limited by the proviso in the definition thereof): (a) the Accounts, (b) the Books, (c) the Equipment, (d) the General Intangibles, (e) the Inventory, (f) the Investment Property, (g) the Negotiable Collateral, (h) the Real Property Collateral, (i) any money, or other assets of the Company (including any Intellectual Property of the Company) that now or hereafter come into the possession, custody, or control of the Trustee, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. Notwithstanding anything to the contrary contained in this definition, the term Collateral shall not include any rights or interest in any contract, lease, permit, license, charter or license agreement covering real or personal property of the Company if under the terms of such contract, lease, permit, license, charter or license agreement, or applicable law with respect thereto, the grant of a security interest or lien therein to the Trustee is prohibited as a matter of law or under the terms of such contract, lease, permit, license, charter or license agreement and such prohibition has not been or is not waived or the consent of the other party to such contract, lease, permit, license, charter or license agreement has not been or is not otherwise obtained; provided, that, the foregoing exclusion shall in no way be construed (a) to apply if any such prohibition is unenforceable under Sections 9-406, 9-407, or 9-408 of the UCC or other applicable law, or (b) so as to limit, impair or otherwise affect the Trustee's unconditional continuing security interests in and liens upon any rights or interests of the Company in or to monies due or to become due under any such contract, lease, permit, license, charter or license agreement (including any Accounts), or (c) to limit, impair, or otherwise affect Trustee's continuing security interests in and liens upon any rights or interests of the Company in and to any proceeds from the sale, license, lease, or other dispositions of any such contract, lease, permit, license, charter or license agreement. "COLLATERAL AGENT" means the Trustee or any person appointed by the Trustee as a Collateral Agent hereunder. "COLLATERAL DOCUMENTS" means, collectively, (i) the Deeds of Trust made by the Company as trustor, to the trustee thereunder, for the benefit of the Trustee, as beneficiary, as amended, modified or revised in accordance with its terms; (ii) the Pledge Agreement made by the Company to and for the benefit of the Trustee, as amended, modified or revised in accordance with its respective terms; (iii) the Account Control Agreement; and (iv) this Indenture. "COMPANY" has the meaning assigned to it in the preamble to this Indenture. "CONSOLIDATED CASH INTEREST EXPENSE" means for any period the sum of: (a) the aggregate of the interest expense with respect to Indebtedness of the Company and its Consolidated Subsidiaries (other than non-cash interest) for such period, on a consolidated basis as determined in accordance with GAAP (excluding the amortization of costs relating to original debt issuances and the amortization of debt discount) plus (b) without duplication, that portion of the Capital Leases of the Company and its Consolidated Subsidiaries representing the interest factor for such period as determined in accordance with GAAP plus (c) without duplication, dividends paid in respect of preferred stock of Consolidated Subsidiaries of the Company or Disqualified Stock of the Company to Persons other than the Company or a Wholly Owned Subsidiary. "CONSOLIDATED EBITDAR" means, with respect to the Company and its Consolidated Subsidiaries for any period, the result of, without duplication, (i) the Consolidated Net Income for such period, plus (ii) the consolidated interest expense for such period determined in accordance with GAAP, whether paid or accrued, plus (iii) provision for taxes based on income or profits for such period (to the extent such income or profits were included in computing Consolidated Net Income for such period), plus (iv) consolidated depreciation and amortization, plus (v) losses incurred on the sale of assets not in the ordinary course of business, plus (vi) Restructuring Charges, plus (vii) write-downs and charges required by pronouncements issued by the Financial Accounting Standards Board that do not and will not result in the expenditure of cash (e.g., SFAS 121), plus (viii) non-cash stock-based compensation (to the extent such compensation was included in computing Consolidated Net Income), less (ix) gains incurred on the sale of assets not in the ordinary course of business. Notwithstanding the foregoing, items (i) through (viii) of a Consolidated Subsidiary of the Company shall be added to Consolidated Net Income to compute Consolidated EBITDAR only to the extent (and in the same proportion) that the Net Income of such Consolidated Subsidiary was included in calculating the Consolidated Net Income of the Company. "CONSOLIDATED NET INCOME" means, with respect to the Company and its Consolidated Subsidiaries for any period, the aggregate of the Net Income of the Company and its Consolidated Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, that (i) the Net Income (but not loss) of any Person that is not a Consolidated Subsidiary that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the Company, (ii) the Net Income of any Consolidated Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is prohibited at the date of determination without any prior approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders except to the extent a corresponding amount would not be prohibited at the date of determination to be paid in any other manner to the Company by such Consolidated Subsidiary without any prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Consolidated Subsidiary or its stockholders, as certified by the Company in an Officer's Certificate, provided, however, that Net Income of any Consolidated Subsidiary excluded from Consolidated Net Income pursuant to this clause (ii) as a result of any action taken by the Malaysian government that began during the immediately prior fiscal quarter which action is the subject of negotiations at the time of the determination of Consolidated Net Income shall be included in Consolidated Net Income for such period notwithstanding this clause (ii), (iii) the cumulative effect of a change in accounting principles shall be excluded, (iv) all other extraordinary gains and extraordinary losses determined in accordance with GAAP shall be excluded and (v) the effect of discontinued operations, as determined in accordance with GAAP, shall be excluded. "CONSOLIDATED SUBSIDIARY" or "CONSOLIDATED SUBSIDIARIES" of any Person means any corporation or other Person which, for financial reporting purposes, is required by GAAP to be consolidated into the financial statements of such Person or another Consolidated Subsidiary of such Person. "CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the Trustee specified in Section 13.2 hereof or such other address as to which the Trustee may give notice to the Company. "CURRENT ASSETS" means, with respect to any Person, all current consolidated assets of such Person as of any date of determination calculated in accordance with GAAP, but excluding Indebtedness due from Affiliates. "CURRENT LIABILITIES" means, with respect to any Person, all current consolidated liabilities of such Person as of any date of determination calculated in accordance with GAAP, but excluding Indebtedness owed to Affiliates. "CURRENT MATURITIES OF LONG TERM INDEBTEDNESS" means the current maturities of long term Indebtedness of the Company and its Consolidated Subsidiaries, as determined in accordance with GAAP, but excluding all or any portion of amounts owing under the Liquidity Facility. "CUSTODIAN" means the Trustee, as custodian with respect to the Notes in global form, or any successor entity thereto. "DEEDS OF TRUST" means, collectively, (i) the Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing with respect to the Fremont Properties substantially in the form of Exhibit B hereto, made by the Company in favor of [ ], as trustee for the benefit of the Holders, as amended, supplemented or otherwise modified from time to time and (ii) the Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing with respect to the Eugene Property substantially in the form of Exhibit C hereto, made by the Company in favor of [ ], as trustee for the benefit of the Holders, as amended, supplemented or otherwise modified from time to time. "DEFAULT" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "DEFINITIVE NOTES" means one or more certificated Notes registered in the name of the Holder thereof and issued in accordance with Section 2.6 hereof, substantially in the form of Exhibit A hereto, except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "DELINQUENT TAX LIENS" means Liens on any Real Property Collateral for taxes, assessments or other governmental charges or levies that are at the time delinquent and not subject to a Permitted Protest that effectively suspends enforcement of such Lien. "DEPOSITARY" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.3 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "DISQUALIFIED STOCK" means any Capital Stock, which, by its terms (or by the terms of any security into which it is convertible or exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part on, or prior to, or is exchangeable for debt securities of the Company or its Subsidiaries prior to, the final maturity date of the Notes; provided that only the amount of such Capital Stock that is redeemable prior to the maturity of the Notes shall be deemed to be Disqualified Stock. "ELIGIBLE INSTITUTIONS" means those financial institutions identified as "Anchor Banks" by Bank Negara Malaysia from time to time. "EMPLOYEE BENEFIT PLAN" means any Pension Plan, any employee welfare benefit plan, or any other employee benefit plan which is described in Section 3(3) of ERISA and which is maintained for employees of the Company or any ERISA Affiliate of the Company. "EQUIPMENT" means all of Company's now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA AFFILIATE" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of the Company under Internal Revenue Code Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of the Company under Internal Revenue Code Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the Internal Revenue Code, any organization subject to ERISA that is a member of an affiliated service group of which the Company is a member under Internal Revenue Code Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the Internal Revenue Code, any party subject to ERISA that is a party to an arrangement with the Company and whose employees are aggregated with the employees of the Company under Internal Revenue Code Section 414(o). "ESCROW ACCOUNT" means the Escrow Account with a bank or trust company with not less than $100,000,000 in assets, as escrow agent, set up by the Company in accordance with Sections 4.14 and 4.29, which Escrow Account shall be pledged to the Trustee, for the benefit of the Holders, in accordance with Article 10 hereof. "EUGENE PROPERTY" means the real property, buildings, improvements, and other property located at 3950 W. 3rd Avenue, Eugene, Oregon. "EXCEPTED COMPANY" means Western Digital Corporation and each of the Restructure Lenders. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FOREIGN SUBSIDIARY" means a Subsidiary of Company that is organized under the laws of a country other than the United States of America or any state, province, territory, or possession thereof. "FREMONT PROPERTY" means the real property, buildings, improvements, and other property located at (a) 47700 Kato Road and (b) 1055 Page Road, each in Fremont, California. "GAAP" means generally accepted accounting principles consistently applied set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect from time to time. "GENERAL INTANGIBLES" means all of the Company's now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property, and Negotiable Collateral. "GLOBAL NOTE" means the permanent global Note substantially in the form of Exhibit A hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes. "GLOBAL NOTE LEGEND" means the legend set forth in Section 2.6(f), which is required to be placed on the Global Note issued under this Indenture. "GOODWILL" of any Person means goodwill of such Person and its Consolidated Subsidiaries as determined in accordance with GAAP. "GOVERNMENTAL AUTHORITY" means any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through Capital Stock or capital ownership or otherwise, by any of the foregoing. "GOVERNMENT SECURITIES" means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as a custodian with respect to any such U.S. Government obligation or a specific payment of principal of or interest on any such U.S. Government obligation held by such custodian for the account of the holder of such depository receipt. However, except as required by law, such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government obligation or the specific payment of principal of or interest on the U.S. Government obligation evidenced by such depository receipt. "GUARANTEE" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner, including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "HOLDER" means a Person in whose name a Note is registered. "INDEBTEDNESS" means, with respect to any Person: (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of such Person in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, whether or not representing obligations for borrowed money, (c) all obligations of such Person under Capital Leases, (d) all obligations or liabilities of any other Person secured by a Lien on any property or asset of such Person, irrespective of whether such obligation or liability is assumed, (e) all obligations of such Person for the deferred purchase price of assets (other than trade Indebtedness incurred in the ordinary course of such Person's business and repayable in accordance with customary trade practices), (f) any obligation of such Person guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to such Person) any Indebtedness, lease, dividend, letter of credit, or other obligation of any other Person and (g) any obligation owed for all or any part of the deferred purchase price of property or services which purchase price is (i) due more than six months from the date of incurrence of the obligation in respect thereof, or (ii) evidenced by a note or similar written instrument. "INDENTURE" means this Indenture, as amended or supplemented from time to time. "INDIRECT PARTICIPANT" means a Person who holds a beneficial interest in the Global Note through a Participant. "INTERCOMPANY NOTES" means (a) the Komag Malaysia Intercompany Note, (b) the Komag Bermuda Intercompany Note, and (c) one or more negotiable promissory notes evidencing other Indebtedness owed to the Company by any of its Subsidiaries. "INTERCREDITOR AGREEMENTS" means the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement. "INTEREST PAYMENT DATE" has the meaning specified therefor in the Notes. "INTERNAL REVENUE CODE" means the U.S. Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. "INVENTORY" means all of Company's now owned or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by Company as lessor, goods that are furnished by Company under a contract of service, and raw materials, work in process, or materials used or consumed in Company's business. "INVESTMENT PROPERTY" means all of Company's now owned or hereafter acquired right, title, and interest with respect to "investment property" as that term is defined in the UCC and any supporting obligations in respect thereof; provided, that in the case of the Capital Stock of Foreign Subsidiaries of the Company, Investment Property shall be limited to only 65% of such shares of Stock. "KOMAG BERMUDA" means Komag (Bermuda) Ltd., a corporation organized under the laws of Bermuda. "KOMAG BERMUDA INTERCOMPANY NOTES" means one or more negotiable promissory notes executed and delivered by Komag Bermuda to the order of the Company. "KOMAG MALAYSIA" means Komag USA (Malaysia) Sdn., a corporation organized under the laws of Malaysia. "KOMAG MALAYSIA INTERCOMPANY NOTE" means one or more negotiable promissory notes executed and delivered by Komag Malaysia to the order of the Company. "LEGAL REQUIREMENTS" means all applicable international, foreign, federal, state, and local laws, judgments, decrees, orders, statutes, ordinances, rules, regulations, or Permits. "LIEN" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "LIQUIDITY FACILITY" means the Loan and Security Agreement, dated as of the date hereof, by and among the Company, Foothill Capital Corporation, as arranger and administrative agent, Ableco Finance LLC, as collateral agent, and the lenders party thereto, as such Loan and Security Agreement may be amended, modified or supplemented from time to time, or any Permitted Refinancing Indebtedness with respect thereto permitted pursuant to the terms of this Indenture, in an aggregate amount not to exceed at any one time outstanding (x) $20,000,000 plus interest, fees and expenses minus (y) the aggregate amount of all Delinquent Tax Liens. "LIQUIDITY FACILITY INTERCREDITOR AGREEMENT" means that certain Intercreditor Agreement among the Trustee, the collateral agent under the Liquidity Facility, the Senior Notes Trustee and the Company, substantially in the form attached hereto as Exhibit E, which shall be entered into concurrently with or prior to the issuance of the Notes in accordance with Section 7.12(b) hereof, as amended, supplemented or otherwise modified from time to time. "MANAGEMENT COMMITTEE" means: (1) with respect to a corporation or a limited liability company, the board of directors or the management committee, as applicable; (2) with respect to a partnership, the board of directors or management committee, as applicable, of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of that Person serving a similar function. "MATERIAL ADVERSE CHANGE" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole, (b) the material impairment of Company's ability to perform its obligations under the Collateral Documents to which it is a party or of the Holders to enforce the Obligations or realize upon the Collateral, (c) a material adverse effect on the value of the Collateral or the amount that the Holders would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of the Collateral, or (d) a material impairment of the priority of the Trustee's Liens with respect to the Collateral. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the consolidated financial condition or operations of the Company or which could reasonably be expected to have a material adverse effect on the Company's ability to perform its obligations under this Indenture, any of the Notes or any of the other Collateral Documents, having regard for its other financial obligations. "MULTIEMPLOYER PLAN" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which the Company, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "NEGOTIABLE COLLATERAL" means all of Company's now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter-of-credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "NET INCOME" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP. "NET PROCEEDS" means the aggregate cash proceeds received by the Company or any of its Subsidiaries in respect of any Asset Sale or Capital Raising Event (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale or Capital Raising Event), net of the direct costs relating to such Asset Sale or Capital Raising Event, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof, in each case after taking into account any available tax credits or deductions and any tax sharing arrangements other than, in the case of an Asset Sale, any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "NON-CASH DEFERRED TAX ASSETS" means, with respect to any Person, any non-cash portion of deferred tax assets of such Person and its Consolidated Subsidiaries included in Current Assets, determined in accordance with GAAP. "NON-CASH DEFERRED TAX LIABILITIES" means, with respect to any Person, any non-cash portion of deferred tax liabilities of such Person and its Consolidated Subsidiaries included in Current Liabilities, determined in accordance with GAAP. "NON-MATERIAL SUBSIDIARIES" means Komag FSC (Barbados) Ltd., Komag Technology Partners, Komag Asia Pacific, Inc., and Komag Distribution Company, in each case for so long as the Company or any of its Subsidiaries shall not have, from the date of this Indenture, contributed any amount to the capital of, loaned any money to, transferred any assets to, or entered into any other transaction with, such Subsidiary. "NOTES" has the meaning assigned to it in the preamble to this Indenture. "OBLIGATIONS" means any principal, premium, interest, interest on overdue principal or premium, whether on an interest payment date, at maturity, by acceleration, repurchase, redemption, or otherwise, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable on the Notes or under this Indenture. "OFFICER" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Company by at least two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 13.5 hereof. "OPINION OF COUNSEL" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 13.5 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "PARTICIPANT" means, with respect to the Depositary, a Person who has an account with the Depositary. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "PENSION PLAN" means a "pension plan," as such term is defined in section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 400 1 (a)(3) of ERISA), and to which the Company or any of its ERISA Affiliates, has or within the prior six years has had any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "PERMITTED LIENS" means the following Liens of the Company and its Subsidiaries: (a) (i) Liens covering only the assets acquired with the related Indebtedness granted to secure payment of capitalized lease obligations incurred in connection with Capital Expenditures or with respect to "tooling," (ii) Liens granted to secure mortgage financings with respect to Real Property owned by the Company as of the date hereof, and (iii) Liens granted to secure payment of Permitted Refinancing Indebtedness issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund Indebtedness incurred under clause (i) or (ii) of this paragraph (a), in a maximum aggregate principal amount at any one time not to exceed $15,000,000 for all such Indebtedness incurred under clause (i), (ii) and (iii) of this paragraph (a); (b) Liens for taxes, assessments or other governmental charges or levies, including liens pursuant to Section 107(l) of CERCLA or other similar law, not at the time delinquent or thereafter payable without penalty or subject to a Permitted Protest, provided that such Permitted Protest effectively suspends enforcement of such Lien; (c) Liens of carriers, warehousemen, mechanics, repairmen, materialmen, contractors, laborers and landlords or other like Liens incurred in the ordinary course of business for sums not overdue for a period of more than 30 days or subject to a Permitted Protest, provided that such Permitted Protest effectively suspends enforcement of such Lien; (d) Liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, bids, customs bonds, statutory or regulatory obligations, insurance obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (e) judgment Liens in respect of judgments that do not otherwise constitute an Event of Default in existence less than 30 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full by a bond or (subject to a customary deductible) by insurance maintained with responsible insurance companies; (f) Liens with respect to minor imperfections of title and easements, rights-of-way, restrictions, reservations, permits, servitudes and other similar encumbrances on real property and fixtures (i) existing on the date hereof and set forth in the title report provided to the Trustee, or (ii) which do not materially detract from the value or materially impair the use by the Company and its Subsidiaries in the ordinary course of their business of the property subject thereto; (g) leases, subleases or licenses granted by the Company and its Subsidiaries to any other Person in the ordinary course of business; (h) Liens of sellers of goods to the Company and its Subsidiaries arising under Article 2 of the UCC or similar provisions of applicable law in the ordinary course of business, covering only the goods sold and securing only the unpaid purchase price for such goods and related expenses; (i) deposit arrangements with suppliers, equipment vendors and the like made in the ordinary course of business; (j) Liens taken by the Company on its Subsidiaries; (k) Liens granted by the Company to the Trustee or the Holders pursuant to or in connection with this Indenture and the other Collateral Documents; (l) Liens granted to the lenders or their agent pursuant to or in connection with the Liquidity Facility; (m) Liens existing prior to the date hereof and set forth on Schedule 1.1; and (n) Liens granted to the Senior Notes Trustee pursuant to or in connection with the Senior Notes and the Senior Notes Indenture. "PERMITTED PRIORITY LIENS" means all Permitted Liens other than (i) the Liens described in paragraph (b) of the definition of the term "Permitted Liens" and (ii) the Liens described in paragraphs (a) and (c) of the definition of the term "Permitted Liens" securing the payment of money in an aggregate principal amount at any one time in excess of $2,000,000. "PERMITTED PROTEST" means the right of the Company to protest any Lien (other than any such Lien that secures the Obligations), tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of the Company in an amount equal to such obligation, (b) any such protest is instituted and diligently prosecuted by the Company in good faith, and (c) the Company certifies to the Trustee that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Trustee's Liens in and to the Collateral. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company or of any of its Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or of any of its Subsidiaries (other than intercompany Indebtedness) incurred pursuant to Section 4.12(i) or Section 4.12(k); provided, that: (1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest thereon and the amount of all expenses and premiums incurred in connection therewith); (2) the Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, the Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the holders of the Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (4) the Indebtedness is incurred either by the Company or by the Subsidiary of the Company that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (5) in the case of Permitted Refinancing Indebtedness issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund the Indebtedness incurred pursuant to Section 4.12(k), the Company shall not have consummated an Asset Sale with respect to a material portion of the Real Property Collateral prior to the date of such issuance. "PERMITS" of a Person shall mean all rights, franchises, permits, authorities, licenses, certificates of approval or authorizations, including licenses and other authorizations issuable by a Governmental Authority, which pursuant to applicable Legal Requirements are necessary to permit such Person lawfully to conduct and operate its business as currently conducted and to own and use its assets. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity. "PETITION DATE" has the meaning assigned to it in the recitals to this Indenture. "PLAN OF REORGANIZATION" means the Chapter 11 Modified First Amended Plan of Reorganization of the Company filed in the Chapter 11 Case on April 5, 2002, as amended and as it may be further modified or amended from time to time; provided, that any amendment or modification materially adverse to the Restructure Lenders shall have been consented to by the Restructure Lenders. "PLEDGE AGREEMENT" means the Stock Pledge Agreement substantially in the form of Exhibit D hereto, dated as of the Closing, made by Company in favor of the Trustee for the benefit of the Holders, as amended, supplemented or otherwise modified from time to time. "REAL PROPERTY" means any estates or interests in real property now owned or hereafter acquired by the Company. "REAL PROPERTY COLLATERAL" means all owned real property of the Company and the related improvements thereto identified on Schedule R-1, including without limitation, the Fremont Properties, the Eugene Property, and any Real Property hereafter acquired by the Company. "RECORD" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "RECORD DATE" has the meaning specified therefor in the Notes. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of the date of this Indenture, by and among the Company and the other parties named on the signature pages thereof, as such agreement may be amended, modified or supplemented from time to time. "RESPONSIBLE OFFICER" shall mean when used with respect to the Trustee (a) any officer within the corporate trust department of the Trustee including any vice president, assistant vice president, treasurer, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and (b) who shall have direct responsibility for the administration of this Indenture. "RESTRUCTURING CHARGES" means all expenses incurred by the Company and its Consolidated Subsidiaries, as applicable, related to the Company's Chapter 11 Case, including expenses related to the implementation of the American Institute of Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), and, to the extent not classified as "reorganization items" pursuant to SOP-97, expenses related to bankruptcy claims, expenses related to the write-down of assets and any other expenses incurred by the Company and its Consolidated Subsidiaries, as applicable, in connection with the Company's Chapter 11 Case. "RESTRUCTURE LENDERS" means those lenders under that certain Loan Restructure Agreement dated as of June 1, 2000 with Fleet National Bank f/k/a BankBoston, N.A., a national banking association, as agent for such lenders, and the Company. "S&P" means Standard & Poor's Ratings Group (a division of The McGraw Hill Companies, Inc.), or any successor rating agency. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SENIOR INDEBTEDNESS" means any of the obligations of the Company (i) to pay principal and interest under the Senior Notes; provided, however, that to the extent indebtedness on account of principal of the Company under the Senior Notes exceeds $128,832,000, such obligations shall not be "Senior Indebtedness" under this Indenture, and (ii) to pay principal and interest under the Liquidity Facility; provided, however, that to the extent indebtedness on account of principal of the Company under the Liquidity Facility exceeds $15.0 million, such obligations shall not be "Senior Indebtedness" under the Indenture. "SENIOR NOTES" means the Senior Secured Notes due 2007 issued by the Company pursuant to the Senior Notes Indenture in the aggregate original principal amount of $128,832,000. "SENIOR NOTES ESCROW ACCOUNT" means the escrow account with a bank or trust company with not less than $100,000,000 in assets, as escrow agent, set up by the Company in accordance with the Senior Notes Indenture, which escrow account shall be pledged to the Senior Notes Trustee for the benefit of the holders of the Senior Notes and, subject to the terms of the Senior Notes Intercreditor Agreement, the Holders. "SENIOR NOTES INDENTURE" means that certain Indenture dated as of the date hereof between the Company and the Senior Notes Trustee, relating to the Senior Notes. "SENIOR NOTES INTERCREDITOR AGREEMENT" means that certain agreement among the Trustee, the Senior Notes Trustee and the Company, substantially in the form attached hereto as Exhibit F, which shall be entered into concurrently with or prior to the issuance of the Notes in accordance with Section 7.12(b) hereof, as amended, supplemented or otherwise modified from time to time. "SENIOR NOTES TRUSTEE" means The Bank of New York, as trustee for the holders of the Senior Notes, and any successor trustee under the Senior Notes Indenture. "SUBSIDIARY" means, with respect to any specified Person: (1) any corporation, association or other business entity (including a limited liability company) of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more other subsidiaries of that Person (or a combination thereof); and (2) any partnership (a) the sole general partner or the managing general partner of which is that Person or a Subsidiary of that Person or (b) the only general partners of which are that Person or one or more Subsidiaries of that Person (or a combination thereof). "TERMINATION EVENT" means (a) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder (other than a "Reportable Event" not subject to the provision for 30-day notice to the PBGC under such regulations), or (b) the withdrawal of the Company or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(1)(2) or 4068(f) of ERISA, or (c) the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate a Pension Plan by the PBGC, (e) any other event or condition which might constitute grounds under ERISA for the termination of, or the appointment by the PBGC of a trustee to administer, any Pension Plan, or (f) the imposition of a lien pursuant to Section 412(n) of the Internal Revenue Code. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "TOTAL CASH DEBT SERVICE COVERAGE RATIO" means, with respect to the Company and its Consolidated Subsidiaries, for each fiscal quarter, the ratio of (x) the greater of (i) Annualized Consolidated EBITDAR of the Company and its Consolidated Subsidiaries and (ii) Consolidated EBITDAR of the Company and its Consolidated Subsidiaries for such fiscal quarter, and each of the three immediately preceding fiscal quarters, to (y) the sum of (without duplication) (i) Annualized Consolidated Cash Interest Expense of the Company and its Consolidated Subsidiaries and (ii) scheduled cash payments with respect to the amortization of Indebtedness paid during such fiscal quarter and each of the three immediately preceding fiscal quarters. "TRUSTEE" has the meaning assigned to it in the preamble to this Indenture. "UCC" means the Uniform Commercial Code as the same may, from time to time, be enacted and in effect in the State of New York; provided, that, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, the Trustee's security interest in any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between that date and the making of the payment; by (2) the then outstanding principal amount of that Indebtedness. "WHOLLY OWNED SUBSIDIARY" of any specified Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and by one or more Wholly Owned Subsidiaries of such Person or by one or more Wholly Owned Subsidiaries of such Person. Section 1.2 Other Definitions.
DEFINED IN TERM SECTION "ACT"..................................................... 13.13 "AFFILIATE TRANSACTION"................................... 4.25 "AGGREGATE PROCEEDS"...................................... 3.8 "AUTHENTICATION ORDER".................................... 2.2 "CAPITAL RAISING PROCEEDS"................................ 4.13 "COVENANT DEFEASANCE"..................................... 8.3 "DEBT INSTRUMENT"......................................... 4.12 "DTC"..................................................... 2.3 "EVENT OF DEFAULT"........................................ 6.1 "INCUR"................................................... 4.12 "LEGAL DEFEASANCE"........................................ 8.2 "INTELLECTUAL PROPERTY"................................... 10.18 "MANDATORY REDEMPTION TRIGGERING EVENT"................... 3.8 "PAYING AGENT"............................................ 2.3 "REGISTRAR"............................................... 2.3 "REMAINING ASSET SALE PROCEEDS"........................... 4.14 "REMAINING CAPITAL RAISING PROCEEDS"...................... 4.13 "TRUSTEE'S LIENS"......................................... 10.2
Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.4 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) words in the singular include the plural, and in the plural include the singular; (e) provisions apply to successive events and transactions; (f) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time; (g) references to the outstanding principal amount at any time of any Note shall be to the outstanding principal amount thereof at such time as such amount shall have been increased from any addition of deferred interest in accordance with the terms of such Note and this Indenture; and (h) As used in the definitions relating to Collateral, the terms "accounts", "chattel paper", "consumer goods", "deposit account", "document", "electronic chattel paper", "equipment", "farm products", "goods", "instrument", "inventory", "letter-of-credit rights", "payment intangible", "proceeds", "supporting obligations" and "tangible chattel paper" have the respective meanings ascribed thereto in Article 9 of the UCC. ARTICLE 2. THE NOTES Section 2.1 Form and Dating. (a) General. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be issued only in registered form without coupons. Notes issued on the date of original issuance of Notes hereunder shall be issued only in minimum denominations of $100 and larger integral multiples of $1.00. As to any Note issued thereafter (including on any exchange or transfer or any issuance of Notes in accordance with Section 4.1) there shall be no minimum denomination or integral multiple requirements. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Note. The Note issued in global form shall be substantially in the form of Exhibit A hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Definitive Notes shall be issued substantially in the form of Exhibit A hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). The Global Note shall represent such of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate principal amount at maturity (without taking into account any increases due to deferred interest) of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount at maturity of outstanding Notes represented thereby shall be increased through the addition of deferred interest, if any, as provided in the Notes and may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Whenever as a result of any optional or mandatory redemption or an exchange for Definitive Notes pursuant to Section 2.6 hereof, a Global Note is redeemed, repurchased or exchanged in part, an endorsement will be made to the Global Note so that the principal amount of the Global Note shall be equal to the portion thereof not so redeemed, repurchased or exchanged. Any endorsement of the Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian in accordance with the terms hereof and of the Global Note and otherwise in accordance with instructions given by the Holder thereof as required by Section 2.6 hereof. Section 2.2 Execution and Authentication. One Officer of the Company shall sign the Notes for the Company by manual or facsimile signature. The Company seal shall be reproduced on the Notes and may be in facsimile form. If an Officer of the Company whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. Such signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by one Officer of the Company (an "AUTHENTICATION ORDER"), authenticate the Notes for original issue up to the initial aggregate principal amount stated in paragraph 5 of the Notes. The aggregate principal amount of Notes outstanding at any time (without taking into account any increases due to deferred interest) may not exceed such amount except as provided in Section 2.7 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Company. Section 2.3 Registrar and Paying Agent. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("REGISTRAR") and an office or agency where Notes may be presented for payment ("PAYING AGENT"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such to the extent that it determines that it may do so. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Note. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Custodian with respect to the Notes. Section 2.4 Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders of the Notes or the Trustee all money held by the Paying Agent for the payment of principal, premium or interest on the Notes, and will notify the Trustee in writing of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or one of its Subsidiaries) shall have no further liability for the money. If the Company or one of its Subsidiaries acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent with respect to the Notes. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Notes. Section 2.5 Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders of the Notes and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of the Notes and the Company shall otherwise comply with TIA Section 312(a). Section 2.6 Transfer and Exchange. (a) Transfer and Exchange of the Global Note. The Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary, or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. The Global Note will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee written notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary or (ii) the Company in its sole discretion determines that the Global Note (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee. Upon the occurrence of either of the preceding events in clause (i) or (ii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee. The Global Note also may be exchanged or replaced, in whole or in part, as provided in Sections 2.7 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, the Global Note or any portion thereof, pursuant to this Section 2.6 or Section 2.7 or 2.10 hereof, that is not a Definitive Note shall be authenticated and delivered in the form of, and shall be, the Global Note. The Global Note may not be exchanged for another Note other than as provided in this Section 2.6(a); however, beneficial interests in the Global Note may be transferred and exchanged as provided in Section 2.6(b) or (c) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Note. The transfer and exchange of beneficial interests in the Global Note shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Global Note shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Note also shall require compliance with either clause (i) or (ii) below, as applicable, as well as one or more of the other following clauses, as applicable: (i) Transfer of Beneficial Interests in the Global Note. Beneficial interests in the Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.6(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in the Global Note. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.6(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures causing to be credited a beneficial interest in the Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures causing to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the participant to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in clause (1) above. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in the Global Note contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the Global Note pursuant to Section 2.6(g) hereof. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. If any holder of a beneficial interest in the Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.6(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the Global Note to be reduced accordingly pursuant to Section 2.6(g) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.6(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. A Holder of a Definitive Note may exchange such Note for a beneficial interest in the Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in the Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Definitive Note and increase or cause to be increased the aggregate principal amount of the Global Note, pursuant to Section 2.6(g). (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.6(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. A Holder of Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of a Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Definitive Notes pursuant to the instructions from the Holder thereof. (f) Global Note Legend. The Global Note shall bear a legend in substantially the following form: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. (g) Cancellation or Adjustment of the Global Note. At such time as all beneficial interests in the Global Note have been exchanged for Definitive Notes or the Global Note has been redeemed, repurchased or canceled in whole and not in part, the Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in the Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in the Global Note or for Definitive Notes, the principal amount of Notes represented by the Global Note shall be reduced accordingly, in the case of an exchange for Definitive Notes, and an endorsement shall be made on the Global Note by the Trustee or by the Depositary in accordance with applicable procedures to reflect such exchange or reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in the Global Note, the Global Note shall be increased accordingly and an endorsement shall be made on the Global Note by the Trustee or by the Depositary in accordance with applicable procedures to reflect such increase. (h) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate the Global Note and Definitive Notes upon the Company's order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in the Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.6, 3.8, 4.13, 4.14 and 9.5 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) The Global Note and all Definitive Notes issued upon any registration of transfer or exchange of the Global Note or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Note or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.2 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (C) to register the transfer of or to exchange a Note between a Record Date and the next succeeding interest payment date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate the Global Note and Definitive Notes in accordance with the provisions of Section 2.2 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.6 to effect a registration of transfer or exchange may be submitted by facsimile. (ix) Each Holder of a Note agrees to indemnify the Company and the Trustee to their reasonable satisfaction against any liability that may result from the transfer, exchange or assignment of such Holder's Note in violation of any provision of this Indenture or applicable United States Federal or state securities law. (x) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Depositary participants or beneficial owners of interest in the Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Section 2.7 Replacement Notes. If any mutilated Note is surrendered to the Trustee or the Company and the Trustee receives evidence to its reasonable satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Note if the Trustee's requirements are met. An indemnity bond must be supplied by the Holder that is sufficient in the reasonable judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. Section 2.8 Outstanding Notes. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in the Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section 2.8 as not outstanding. Except as set forth in Section 2.9 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If a Note is replaced pursuant to Section 2.7 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the aggregate principal amount of any Note (taking into account any increases in principal due to deferred interest) is considered paid under Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any of the foregoing) holds, by no later than 12:00 noon Eastern Time on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. Section 2.9 Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Section 2.10 Temporary Notes. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. Section 2.11 Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall dispose of canceled Notes in accordance with its procedures for the disposition of canceled securities in effect as of the date of such disposition (subject to the record retention requirement of the Exchange Act). Certification of the disposition of all canceled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that they have paid or that have been delivered to the Trustee for cancellation. Section 2.12 Payment of Interest; Defaulted Interest. (a) Each of the Notes shall bear interest at 12% per annum from ______________, 2002 or from the most recent date to which interest has been paid or duly provided for in accordance with Section 4.1 hereof until the principal amount thereof is paid. Interest shall be paid to the Person whose name the Note is registered as provided in the Notes. (b) If the Company defaults in a payment of interest on the Notes when due, the Company shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date or, in the case of the payment of non-cash defaulted interest, to the Persons who are Holders on the date of such payment, in each case at the rate provided in the Notes and in Section 4.1 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date; provided, that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such cash interest to be paid. Section 2.13 CUSIP Numbers. The Company in issuing the Notes may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company shall promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE 3. REDEMPTION AND PREPAYMENT Section 3.1 Notices to Trustee. If the Company elects to redeem the Notes pursuant to the optional redemption provisions of Section 3.7 hereof, or is required to redeem the Notes pursuant to the mandatory redemption provisions of Section 3.8, it shall furnish to the Trustee, at least 20 days but not more than 60 days before a redemption date (unless the Trustee agrees to a shorter notice period), an Officers' Certificate setting forth (i) the redemption date, (ii) the principal amount of Notes to be redeemed, (iii) the redemption price and (iv) a revised Schedule A as to (x) the aggregate amount of deferred interest scheduled to be added to principal on all of the Notes on each Interest Payment Date, and (y) the aggregate amount of interest scheduled to be paid in cash together with the principal amount of the Notes at maturity, all based on the same assumptions as those set forth in Schedule A but taking into account the principal amount of the Notes to be so redeemed as well as any prior redemptions or other prepayments of principal of the Notes. Section 3.2 Selection of Notes to Be Redeemed. If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed among the Holders in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed in the United States, or, if the Notes are not listed, on a pro rata basis, or, to the extent that the Trustee shall have determined that selection on a pro rata basis is not feasible, by lot or in accordance with any other method the Trustee considers fair and appropriate. In the event of partial redemption by lot, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 15 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount outstanding to be redeemed. No Notes in amounts of $100 or less shall be redeemed in part. Notes and portions of Notes selected shall be in amounts of $100 or larger integral multiples of $1.00; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of the Notes held by such Holder, even if not a multiple of $1.00, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. Section 3.3 Notice of Redemption. At least 15 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. The notice shall identify the Notes to be redeemed, contain a copy of the revised Schedule A furnished under Section 3.1 in connection with such redemption, and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Note; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on the portion of such Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Notes or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. Section 3.4 Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.3 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. Section 3.5 Deposit of Redemption Price. Prior to the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay in cash the redemption price of and accrued interest in cash on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Notes to be redeemed. If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption. If a Note is redeemed on or after a Record Date but on or prior to the related Interest Payment Date, then any accrued and unpaid cash interest thereon shall be paid to the Person in whose name such Note was registered at the close of business on such Record Date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.1 hereof. Section 3.6 Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered (taking into account any increases in principal due to deferred interest in accordance with the terms of the Notes). No Notes of $1.00 or less shall be redeemed in part. Section 3.7 Optional Redemption. The Company may redeem all or a part of the Notes upon not less than 30 nor more than 60 days' notice, at the principal amount outstanding thereof plus accrued interest thereon that has not been paid or duly provided for, to the applicable redemption date (subject, in the case of a redemption on or after a Record Date but on or prior to the related Interest Payment Date, to the right of Holders of record on the relevant Record Date to receive any cash interest due on the related Interest Payment Date in accordance with Section 3.5). If less than all of the Notes are to be redeemed at any time of redemption, the provisions of this Indenture relating to the redemption of the Notes shall relate to the portion of the aggregate principal amount of the Notes which has been or is to be redeemed. Section 3.8 Mandatory Redemption. At any time the sum (the "AGGREGATE PROCEEDS") of (x) the aggregate amount of all Remaining Capital Raising Proceeds and (y) the aggregate amount of all Remaining Asset Sale Proceeds exceeds $5 million (a "MANDATORY REDEMPTION TRIGGERING EVENT"), the Company shall make a mandatory redemption of Senior Notes to the extent required under the Senior Notes Indenture; provided, however, that if any such Aggregate Proceeds remain after application to any such redemption of Senior Notes, the Company shall, within 60 days of such Mandatory Redemption Triggering Event, redeem the maximum principal amount of the Notes that may be redeemed out of any such remaining Aggregate Proceeds. Such redemption of the Notes shall be made upon not less than 15 nor more than 60 days' notice, at the principal amount outstanding thereof plus accrued interest thereon that has not been paid or duly provided for, to the applicable redemption date (subject, in the case of a redemption on or after a Record Date but on or prior to the related Interest Payment Date, to the right of Holders of record on the relevant Record Date to receive any cash interest due on the related Interest Payment Date in accordance with Section 3.5). Pending the final application of any Remaining Capital Raising Proceeds or Remaining Asset Sale Proceeds, the Company or the applicable Subsidiary, as the case may be, may invest such proceeds in Cash which shall be pledged to the Senior Notes Trustee to the extent required by the Senior Indenture and, to the extent not so required, shall be pledged to the Trustee as security for the Holders of the Notes. The Company shall not be required to make mandatory redemption payments or sinking fund payments with respect to the Notes other than as set forth in this Section 3.8. ARTICLE 4. COVENANTS Section 4.1 Payment of Notes The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided herein and in the Notes. Unless the Company has elected, in its sole discretion, to pay interest in cash in accordance with the following sentence, on each Interest Payment Date the outstanding principal amount of each Note shall be automatically increased by the amount of interest to be paid on such Interest Payment Date in respect of such Note, and upon any such automatic increase the Company shall be deemed to have paid and duly provided for such interest payment on such Interest Payment Date; provided, however, that if the payment of interest by addition to principal in the manner provided in this sentence shall for any reason be prohibited by applicable law on any Interest Payment Date, the Company shall be obligated, instead, to deliver an additional Note, substantially in the form of Exhibit A hereto, to each Holder in an aggregate principal amount equal to the interest due on such Holder's Notes on such Interest Payment Date, and as provided in Section 2.1 no requirements as to minimum denominations shall apply to any such additional Notes. The Company may elect to pay interest due on any Interest Payment Date in cash rather than in kind, provided that the Company has so elected and notified the Trustee and the Paying Agent at least __ Business Days prior to the related Record Date that such payment shall be made in cash, such notice to be accompanied by a revised Schedule A as to (x) the aggregate amount of deferred interest scheduled to be added to the principal on all of the Notes on each Interest Payment Date subsequent to the Interest Payment Date on which the Company has elected to pay interest in cash, and (y) the aggregate amount of interest scheduled to be paid in cash together with the principal amount of the Notes at maturity, all based on the same assumptions as those set forth in Schedule A but taking into account such cash payment of interest on such Interest Payment as well as all prior deferrals of interest, if any. A copy of such Schedule shall be delivered to any Holder by the Company or the Trustee promptly upon such Holder's request to such Person. Except as provided in the second sentence of this Section 4.1, principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or one of its Subsidiaries, holds as of 12:00 noon Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay in cash all principal, premium, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium (if any) at the rate equal to 14% per annum to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. Section 4.2 Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an agent of the Trustee, Registrar or co-registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.3 of this Indenture. Section 4.3 Reports. (a) Whether or not required by the SEC, so long as any Notes are outstanding (unless defeased in a Legal Defeasance), the Company shall furnish to the Trustee and the Holders, within the time periods specified in the SEC's rules and regulations (as though required by the SEC): (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file those Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual consolidated financial statements by KPMG or other independent certified public accountants of recognized national standing; and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports. (b) So long as any Notes are outstanding (unless defeased in a Legal Defeasance), the Company shall furnish to the Trustee and the Holders, in each case as soon as available, notice of filing or delivery of all reports which the Company sends to its security holders generally and copies of all reports and registration statements which the Company or any Subsidiary of the Company files with the SEC or any national securities exchange, to the extent not previously provided to the Holders, including, but not limited to: Form 8-K Current Report, Form 10-K Annual Report, Form 10-Q Quarterly Report, Annual Report to Shareholders, Proxy Statements and Registration Statements. (c) In addition, whether or nor required by the SEC, the Company shall file a copy of all of the information and reports referred to in clauses (a)(i) and (a)(ii) above with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept such filing) and make such information available to securities analysts and prospective investors upon request if not obtainable from the SEC. In addition, the Company agrees that, for so long as any Notes remain outstanding, it shall furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144(d)(4) under the Securities Act if not obtainable from the SEC. Section 4.4 Compliance Certificate; Notices and Information. (a) The Company shall deliver to the Trustee, on a quarterly basis, but in any event within forty-five (45) days after the end of the applicable fiscal quarter for the first three quarters of each fiscal year and within ninety (90) days following the Company's fiscal year end, an Officers' Certificate stating that a review in reasonable detail of the activities of the Company and its Subsidiaries during the preceding fiscal quarter or, in the case of each Officers' Certificate delivered at the Company's fiscal year end, the preceding fiscal year, has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the applicable entity is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end consolidated financial statements delivered pursuant to Section 4.3(a)(i) above shall be accompanied by a report from the Company's independent public accountants (each of which shall be a firm of established national reputation), addressed to the Company's Board of Directors, that in conjunction with their audit of such consolidated financial statements, nothing has come to their attention that would lead them to believe that the Company has failed to comply with the terms, covenants, provisions or conditions of Sections 4.1, 4.5, 4.10, 4.12 through 4.20, 4.23, 4.26, 4.30 and Article 5 hereof or, if any such violation has been identified, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Notes are outstanding, deliver to a Responsible Officer of the Trustee, the following: (i) promptly upon any Officer of the Company obtaining knowledge (A) of any condition or event which constitutes a Default or Event of Default, (B) that any Person has given any notice to the Company or any Consolidated Subsidiary or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 6.1(d), (C) of the institution of any litigation involving an alleged liability (including possible forfeiture of property) of the Company or any of its Subsidiaries equal to or greater than $4,000,000 or any adverse determination in any litigation involving a potential liability of the Company or any of its Subsidiaries equal to or greater than $4,000,000, or (D) of a material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, an Officers' Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person, the nature of such claimed default, Default, Event of Default, event or condition, and what action the Company has taken, is taking and proposes to take with respect thereto; (ii) promptly upon becoming aware of the occurrence of or forthcoming occurrence of any (A) Termination Event, or (B) "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA, in connection with any Employee Benefit Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Company has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor, or the PBGC with respect thereto; (iii) with reasonable promptness copies of (A) all notices received by the Company or any of its ERISA Affiliates of the PBGC's intent to terminate any material Pension Plan or to have a trustee appointed to administer any Pension Plan; (B) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by the Company or any of its ERISA Affiliates with the Internal Revenue Service with respect to each material Pension Plan; and (C) all notices received by the Company or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the material imposition or material amount of withdrawal liability pursuant to Section 4202 of ERISA; (iv) promptly, and in any event within thirty (30) days after receipt thereof, a copy of any notice, summons, citation, directive, letter or other form of communication from any Governmental Authority or court in any way concerning any material action or omission on the part of the Company or any of its Subsidiaries in connection with any substance defined as toxic or hazardous by any applicable Federal, state or local law, rule, regulation, order or directive or any waste or by-product thereof, or concerning the filing of a material lien upon, against or in connection with the Company, its Subsidiaries, or any of their leased or owned real or personal property, in connection with a Hazardous Substance Superfund or a Post-Closure Liability Fund as maintained pursuant to Section 9507 of the Internal Revenue Code; and (v) promptly, and in any event within fifteen (15) days after request, such other information and data with respect to the business affairs and financial condition of the Company or any of its Subsidiaries as from time to time may be reasonably requested by any Holder or the Trustee; provided, however, that such fifteen (15) day period may be extended for a reasonable period at the request of the Company and with the consent of the Trustee (which consent shall not be unreasonably withheld) if the Company determines that such information and data cannot reasonably be provided within such fifteen (15) day period; provided, further, that the Company may condition disclosure of any such information or data on the Company's receipt of a confidentiality agreement on reasonable and customary terms obligating the Person making such request to keep the information furnished to such Person pursuant to this subparagraph (v) confidential. (d) Promptly, and in any event within thirty (30) days after the adjustments described in the provisos to Sections 4.16 and 4.17, the Company shall deliver to the Trustee an Officers' Certificate setting forth such adjustments. Section 4.5 Taxes and Claims. The Company shall pay, and cause each of Subsidiaries to pay, all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided, however, that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. Section 4.6 Stay, Extension and Usury Laws. The Company, on behalf of itself and each of its Subsidiaries, covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives, on its behalf and on behalf of each of its Subsidiaries, all benefit or advantage of any such law, and covenants that it shall not, and shall not permit any of its Subsidiaries to, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. Section 4.7 Maintenance of Properties; Insurance. The Company shall, so long as any Notes are outstanding, maintain or cause to be maintained in good repair, working order and condition all material properties used or useful in the business of the Company and its Subsidiaries, subject to reasonable wear and tear, and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof, subject to the limitations set forth in Section 4.19. The Company will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations and shall deliver to the Trustee no less often than once in each calendar year a certified report from an independent insurance agent evidence of such insurance. Section 4.8 Compliance with Laws, Etc. The Company shall, so long as any Notes are outstanding, exercise, and cause each of its Subsidiaries to exercise, all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, including, without limitation, all environmental laws, rules, regulations and orders, noncompliance with which would have a Material Adverse Effect. Section 4.9 Notification. (a) Notice of Liquidity Facility and Debt Instrument Default. The Company shall promptly give written notification to the Trustee of (i) any default under any Debt Instrument involving in excess of $1,000,000 of Indebtedness outstanding or (ii) any default under the Liquidity Facility and, in each case, specify the nature of such default thereunder. (b) Notice with respect to Limitations on Subsidiaries. The Company shall promptly give written notification to the Trustee of any change in applicable law that has the effect of encumbering or restricting in any way the ability of any Subsidiary to: (i) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any of its Subsidiaries; (ii) make loans or advances to the Company or any of its Subsidiaries; or (iii) transfer any of their respective properties or assets to the Company or any of its Subsidiaries. Section 4.10 Dividends, etc. Except with respect to preferred stock of the Company issued in accordance with Section 4.13, the Company shall not, so long as any Notes are outstanding, declare or pay any dividends, purchase or otherwise acquire for value its Capital Stock now or hereafter outstanding, or make any distribution of assets to its stockholders as such, or permit any of its Subsidiaries to purchase or otherwise acquire for value any Capital Stock of the Company. Section 4.11 Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to: (a) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any of its Subsidiaries; (b) make loans or advances to the Company or any of its Subsidiaries; or (c) transfer any of their respective properties or assets to the Company or any of its Subsidiaries. However, the restrictions above shall not apply to encumbrances or restrictions existing under or by reason of: (i) this Indenture, the Notes, the other Collateral Documents or any of the documents governing the Liquidity Facility or the Senior Notes; (ii) applicable law; (iii) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Subsidiaries as in effect at the time of the acquisition (except to the extent that Indebtedness was incurred in connection with or in contemplation of the acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided, that in the case of Indebtedness, the Indebtedness was permitted by the terms of this Indenture to be incurred; (iv) customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business; (v) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (c) of the preceding paragraph; (vi) any restriction or encumbrance contained in contracts for the sale of assets permitted by this Indenture, provided, that such restrictions or encumbrances relate only to the assets being sold pursuant to these contracts; (vii) Liens securing Indebtedness that limit the right of the debtor to dispose of the assets subject to the Lien; and (viii) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Section 4.12 Loans, Indebtedness, Investments, Secondary Liabilities. Other than as permitted by this Indenture, for so long as any Notes are outstanding, the Company shall not, and shall not permit any of its Subsidiaries to (i) make or permit to remain outstanding, any loan or advance to, (ii) incur, assume, Guarantee, become or be liable in any manner in respect of, suffer to exist, induce or otherwise become contingently liable for, directly or indirectly, any Indebtedness of (each of the foregoing items in this clause (ii) referred to as "INCUR") or (iii) own, purchase or acquire any stock, obligations or securities of or any other interest in, or make any capital contribution to, any Person, except that the Company and its Subsidiaries may: (a) own, purchase or acquire (i) certificates of deposit, time deposits and bankers' acceptances issued by (A) any financial institution organized and existing under the laws of the United States of America or any state thereof, or (B) with respect to any Subsidiary domiciled outside the United States of America, any financial institution located in the same jurisdiction of such Subsidiary, which financial institution is an Eligible Institution or a financial institution that has, together with its parent financial institution, a combined capital and surplus of at least $100,000,000, in an amount consistent with past practices but in no event shall such deposits in all such overseas financial institutions in the aggregate exceed the greater of $12 million or 20% of the Cash of the Company and its Subsidiaries calculated on a consolidated basis, (ii) commercial paper rated Moody's P-2 or better or S&P's A-2 or better, (iii) obligations or instruments issued by or guaranteed by an entity designated as S&P's A-2 or better, or Moody's P-2 or better or the equivalent by a nationally recognized credit agency, (iv) municipal bonds and other governmental and corporate debt obligations rated S&P's A or better or Moody's A-2 or better, (v) direct obligations of the United States of America or its agencies and (vi) obligations guaranteed or insured by the United States of America; (b) acquire and own stock, obligations or securities received in connection with Indebtedness created in the ordinary course of business owing to the Company or a Subsidiary of the Company; (c) continue to own the existing capital stock of the Company's Subsidiaries; (d) endorse negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (e) make loans, advances to or investments in a Subsidiary of the Company in connection with the normal operations of the business of such Subsidiary and allow the Company's Subsidiaries to make or permit to remain outstanding advances from the Company's Subsidiaries to the Company; (f) make or permit to remain outstanding loans or advances to the Company's Subsidiaries or enter into or permit to remain outstanding guarantees in connection with the obligations of the Company's Subsidiaries; (g) make or permit to remain outstanding (A) loans or advances to the Company's or its Subsidiaries' officers, stockholders or employees, which, in the aggregate, would not exceed $3,000,000 during the term of this Indenture, (B) loans to the Company's or its Subsidiaries' vendors, in the ordinary course of the Company's business, which, in the aggregate, do not exceed $500,000, (C) progress payments to the Company's or its Subsidiaries' vendors made in the ordinary course of the Company's or its Subsidiaries' business, and (D) (i) loans or advances for the purpose of purchasing the Company's or its Subsidiaries' shares of stock pursuant to its employee stock purchase or option plans, (ii) advances for salary, travel and other expenses, advances against commission and other similar advances made to officers or employees in the ordinary course of the Company's or its Subsidiaries' business, and (iii) loans or advances to or for the benefit of officers, directors or employees of the Company or its Subsidiaries in connection with litigation and other proceedings involving such persons by virtue of their status as officers, directors or employees of the Company or its Subsidiaries, respectively; provided, that such loans or advances made pursuant to this clause (D), together with all loans and advances made pursuant to clause (A), may not exceed $3,000,000 in the aggregate at any time outstanding, and provided, further, that loans or advances made pursuant to clause (D)(iii) above that the Company was required to make pursuant to any indemnification agreement approved by the Management Committee of the Company or its organizational documents shall not constitute a breach of this clause (g); (h) make investments under the Company's deferred compensation plans for the benefit of the employees of the Company and its Subsidiaries; (i) incur (A) subject to Section 4.13, Indebtedness securities, promissory notes or similar types of instruments related to financing (collectively, "DEBT INSTRUMENTS"), if and only if such Debt Instruments are subordinated and junior to the Notes pursuant to a subordination agreement reasonably acceptable to the Trustee or (B) any Permitted Refinancing Indebtedness with respect to Indebtedness incurred pursuant to this clause (i); (j) incur Indebtedness on account of a Permitted Lien; (k) incur Indebtedness under the Liquidity Facility or under any Permitted Refinancing Indebtedness with respect to Indebtedness incurred pursuant to this clause (k); (l) incur Permitted Refinancing Indebtedness; (m) incur Indebtedness evidenced by the Senior Notes; and (n) incur Indebtedness in the ordinary course of business consisting of standby letters of credit, bank guarantees or similar arrangements in favor of suppliers, equipment vendors and the like in an aggregate principal amount outstanding at any one time not in excess of $5,000,000; provided that such Indebtedness was incurred in lieu of deposit arrangements that would otherwise have been required by such suppliers, equipment vendors and the like. Section 4.13 Capital Raising Events. The Company shall not, and shall not permit any of its Subsidiaries to: (a) issue any Equity Interests in the Company other than to a Wholly Owned Subsidiary of the Company or pursuant to employee benefit plans approved by the Management Committee of the Company, (b) transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Subsidiary of the Company other than to the Company or a Wholly Owned Subsidiary of the Company or pursuant to employee benefit plans approved by the Management Committee of the Company, or (c) issue or sell any Debt Instruments, except that the Company may transfer, convey, sell, lease or otherwise dispose of Equity Interests in the Company or, pursuant to Section 4.12(i) hereof, issue or sell any Debt Instruments of the Company if, no later than the Business Day following the date of receipt of the proceeds thereof, the Company shall use 100% of the Net Proceeds therefrom (or such lesser amount of Net Proceeds as approved by at least a majority in outstanding principal amount of the then outstanding Notes) (the "CAPITAL RAISING PROCEEDS") to prepay the outstanding balance, if any, under the Liquidity Facility and to permanently reduce the loan commitments thereunder by the amount so prepaid. The Company shall use 50% of any remaining Capital Raising Proceeds after application pursuant to the prior sentence (or such lesser amount of Net Proceeds as approved by at least a majority in outstanding principal amount of the then outstanding Notes) (the "REMAINING CAPITAL RAISING PROCEEDS") to redeem the maximum principal amount of the Senior Notes that may be redeemed out of the Remaining Capital Raising Proceeds to the extent required by the Senior Notes Indenture and, if any such Remaining Capital Raising Proceeds remain after application to any such redemption of Senior Notes, the Company shall redeem, in accordance with Section 3.8, the maximum principal amount of the Notes that may be redeemed out of any of such Remaining Capital Raising Proceeds remaining after such redemption of Senior Notes. Pending the final applications of any such Capital Raising Proceeds, the Company or the applicable Subsidiary may invest such Capital Raising Proceeds in Cash which shall be held, to the extent required by the Senior Notes Indenture, in an account in which the Senior Notes Trustee shall have a first priority perfected security interest, subject to Permitted Priority Liens, for the benefit of the Holders of Senior Notes and, subject to the terms of the Senior Notes Intercreditor Agreement, the Notes and, to the extent not so required, shall be held in an account in which the Trustee shall have a first priority perfected security interest, subject to Permitted Priority Liens, for the benefit of the Holders of Notes. Section 4.14 Asset Sales. The Company shall not, and shall not permit any of its Subsidiaries to, consummate an Asset Sale unless: (a) the Company, or the Subsidiary, as the case may be, receives (i) consideration at the time of the Asset Sale at least equal to the fair market value of the assets issued, sold or otherwise disposed of or (ii) in the case of a lease of assets that constitute an Asset Sale, a lease providing for rents or other consideration which are no less favorable to the Company or the Subsidiary, as the case may be, than the prevailing market conditions; (b) Company's Management Committee adopts a resolution evidencing its determination that such consideration constitutes such fair market value, or such lease payments are at prevailing market conditions, as the case may be, as certified in an Officers' Certificate delivered to the Trustee; and (c) at least 75% or, with the approval of the Management Committee of the Company, 50%, of the consideration therefor received by the Company or the Subsidiary is in the form of Cash; provided, that: (i) any liabilities (as shown on the Company's or the Subsidiary's most recent balance sheet) of the Company or the Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes) that are assumed by the transferee of any of those assets under a customary novation agreement that unconditionally releases the Company or the Subsidiary, as the case may be, from further liability will be deemed to be Cash for purposes of this provision; and (ii) any securities, notes or other obligations received by the Company or the Subsidiary from the transferee that are promptly, but in any event within 30 days of receipt, converted by the Company or the Subsidiary into Cash (to the extent of the Cash received in that conversion) will be deemed to be Cash for purposes of this provision. No later than the Business Day following the date of receipt of any Net Proceeds from an Asset Sale, the Company shall apply 100% of such Net Proceeds to (i) repay Indebtedness with respect to Permitted Priority Liens incurred or permitted pursuant to the terms of this Indenture in connection with, and secured by, the asset so sold and pay down the outstanding balance, if any, under the Liquidity Facility (or such lesser amount of the outstanding balance of the Liquidity Facility as approved by at least a majority in outstanding principal amount of the then outstanding Notes) and to permanently reduce the loan commitments thereunder by the amount so prepaid. The Company shall use 50% of any remaining Net Proceeds from any Asset Sale after application pursuant to the prior sentence (or such lesser amount of Net Proceeds as is approved by at least a majority in outstanding principal amount of the then outstanding Notes) as follows: (x) up to $20 million of such amount may be deposited into the Senior Notes Escrow Account to the extent required by the Senior Notes Indenture and, to the extent not so required, into the Escrow Account; and (y) to the extent not deposited into the Senior Notes Escrow Account or the Escrow Account, the Company shall use such amount (the "REMAINING ASSET SALE PROCEEDS") to the extent required by the Senior Notes Indenture to redeem the maximum principal amount of the Senior Notes that may be redeemed out of the Remaining Asset Sale Proceeds in accordance with the Senior Notes Indenture and, if any of such Remaining Asset Sale Proceeds remain after application to any such redemption of Senior Notes, the Company shall use such remaining amount to redeem the maximum principal amount of the Notes that may be redeemed out of such moneys in accordance with Section 3.8. Pending the final applications of any Net Proceeds from Asset Sales governed by the preceding paragraph, the Company or the applicable Subsidiary may invest such Net Proceeds in Cash which (to the extent required by the Senior Notes Indenture) shall be held in an account in which the Senior Notes Trustee shall have a first priority perfected security interest, subject to Permitted Priority Liens, for the benefit of the Holders of Senior Notes and, subject to the terms of the Senior Notes Intercreditor Agreement, the Notes and, to the extent not so required, shall be held in an account in which the Trustee shall have a first priority perfected security interest, subject to Permitted Priority Liens, for the benefit of the Holders of Notes. Section 4.15 Liens. The Company shall not create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, other than Permitted Liens. Section 4.16 Adjusted Tangible Net Worth. The Company shall not permit the Adjusted Tangible Net Worth on a quarterly basis to be less than the amounts set forth below at the end of the applicable fiscal quarter:
Quarters Ending Closest To: Minimum Adjusted Tangible Net Worth: -------------------------- ----------------------------------- September 30, 2002 $88,462,000 December 31, 2002 82,906,000 March 31, 2003 80,386,000 June 30, 2003 76,845,000 September 30, 2003 72,951,000 December 31, 2003 70,775,000 March 31, 2004 70,857,000 June 30, 2004 69,739,000 September 30, 2004 68,033,000 December 31, 2004 68,562,000 March 31, 2005 70,678,000 June 30, 2005 71,564,000 September 30, 2005 72,204,000 December 31, 2005 75,332,000 March 31, 2006 79,897,000 June 30, 2006 84,125,000 September 30, 2006 88,761,000 December 31, 2006 96,261,000 March 31, 2007 107,753,000 June 30, 2007 116,554,000
Section 4.17 Minimum Adjusted Net Working Capital. The Company shall not permit the Company's Adjusted Net Working Capital on a quarterly basis to be less than the amounts set forth below at the end of the applicable fiscal quarter:
Quarters Ending Closest To: Minimum Adjusted Net Working Capital: --------------------------- ------------------------------------ September 30, 2002 $21,017,000 December 31, 2002 20,844,000 March 31, 2003 21,308,000 June 30, 2003 18,693,000 September 30, 2003 20,049,000 December 31, 2003 21,812,000 March 31, 2004 26,857,000 June 30, 2004 24,962,000 September 30, 2004 29,295,000 December 31, 2004 34,468,000 March 31, 2005 42,574,000 June 30, 2005 48,744,000 September 30, 2005 56,210,000 December 31, 2005 59,794,000 March 31, 2006 71,296,000 June 30, 2006 80,799,000 September 30, 2006 91,666,000 December 31, 2006 103,506,000 March 31, 2007 103,506,000 June 30, 2007 103,506,000
Section 4.18 Total Cash Debt Service Coverage Ratio. The Company shall not permit the Total Cash Debt Service Coverage Ratio on a quarterly basis to be less than the amounts set forth below at the end of the applicable fiscal quarter:
Quarters Ending Closest To: Cash Debt Service Ratio: -------------------------- ----------------------- December 31, 2002 2.25 March 31, 2003 2.00 June 30, 2003 1.75 September 30, 2003 1.50 December 31, 2003 1.60 March 30, 2004 1.70 June 30, 2004 1.85 September 30, 2004 1.95 December 31, 2004 2.00 March 31, 2005 2.00 June 30, 2005 2.00 September 30, 2005 2.00 December 31, 2005 2.00 March 31, 2006 2.00 June 30, 2006 2.00 September 30, 2006 2.00 December 31, 2006 2.00 March 31, 2007 2.00 June 30, 2007 2.00
Section 4.19 Capital Expenditures. The Company shall not permit the Capital Expenditures of the Company and its Subsidiaries to exceed $30,000,000 in the aggregate in any fiscal year. Section 4.20 Consolidated EBITDAR. The Company shall not permit, for the applicable quarter, the greater of (i) Annualized Consolidated EBITDAR of the Company and its Consolidated Subsidiaries and (ii) Consolidated EBITDAR of the Company and its Consolidated Subsidiaries for the Company's most recently ended four full quarters to be less than the amount set forth below at the end of the applicable fiscal quarter:
Quarters Ending Closest To: Consolidated EBITDAR: -------------------------- -------------------- December 31, 2002 $30,954,000 March 31, 2003 35,635,000 June 30, 2003 38,540,000 September 30, 2003 40,146,000 December 31, 2003 41,825,000 March 31, 2004 43,852,000 June 30, 2004 45,932,000
September 30, 2004 48,107,000 December 31, 2004 50,676,000 March 31, 2005 52,776,000 June 30, 2005 54,841,000 September 30, 2005 56,889,000 December 31, 2005 59,095,000 March 31, 2006 61,419,000 June 30, 2006 63,661,000 September 30, 2006 65,952,000 December 31, 2006 68,401,000 March 31, 2007 71,674,000 June 30, 2007 74,896,000
Section 4.21 Corporate Existence. Subject to Article Five hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence and the corporate, partnership or other existence, as the case may be, of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of each of the Company and any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of each of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries if the Management Committee of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. Section 4.22 Payments for Consent. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or the other Collateral Documents unless that consideration is offered to be paid and is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame described in the solicitation documents relating to that consent, waiver or agreement, as applicable. Section 4.23 Advances to Subsidiaries. (a) All advances to Subsidiaries made by the Company or any of its Subsidiaries (other than (x) equity contributions and (y) advances to Subsidiaries with a maturity date of less than 90 days from the date of such advance not to exceed $5 million for any one Subsidiary or $8 million in the aggregate for all Subsidiaries) shall be evidenced by intercompany notes in favor of the Company or such Subsidiary. Intercompany notes in favor of the Company shall be pledged pursuant to the Collateral Documents to the Trustee as Collateral to secure the Notes. Each intercompany note shall be payable upon demand and will bear interest at a rate equal to the then current fair market interest rate. (b) If an intercompany advance to a Subsidiary of the Company where assets constitute part of the Collateral is evidenced by an Intercompany Note, and if the applicable Subsidiary of the Company that is the maker of such Intercompany Note proposes to remit monies to the Company, the Company shall cause such Subsidiary to distribute such monies to the Company, directly or indirectly, by means of a dividend or other manner and not as a repayment of the Indebtedness evidenced by the applicable Intercompany Note; provided, however, that monies may be distributed to the Company as repayment of the Indebtedness evidenced by an Intercompany Note so long as, after giving effect thereto, the aggregate amount of Indebtedness evidenced by the Komag Malaysia Intercompany Notes and of the Komag Bermuda Intercompany Notes is not less than $100 million in the aggregate; and provided, further, that on and after ________________ [24 months prior to the maturity date of the Notes], monies may be distributed to the Company as repayment of the Indebtedness evidenced by the Komag Malaysia Intercompany Notes or of the Komag Bermuda Intercompany Notes if, to the extent that such monies result in the aggregate amount of Indebtedness evidenced by such Intercompany Notes to be less than $100 million, such monies are used by the Company in the ordinary course of its business or to repay the Senior Notes in accordance with the terms of the Senior Notes Indenture or to pay the Notes in accordance with the terms of this Indenture. Section 4.24 Amendments to Certain Agreements. Neither the Company nor any of its Subsidiaries may amend, waive or modify, or take or refrain from taking any action that has the effect of amending, waiving or modifying any provision of any of the Collateral Documents, the Liquidity Facility Intercreditor Agreement or the Senior Notes Intercreditor Agreement; provided, however, that any of the Collateral Documents, the Liquidity Facility Intercreditor Agreement or the Senior Notes Intercreditor Agreement may be amended, waived or modified as set forth under Article 9 hereof. Section 4.25 Transactions with Affiliates. Except as set forth on Schedule 4.25, the Company shall not, and shall not permit any of its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend or permit to exist any transaction or series of related transactions, or any contract, agreement, understanding, loan, advance or Guarantee with, or for the benefit of, any Affiliate (each, an "AFFILIATE TRANSACTION"), unless: (a) the Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Company or the Subsidiary with an unrelated Person; (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, the Company delivers to the Trustee a resolution of its Management Committee, approving such Transaction(s) and evidencing the Committee's determination of the compliance of such Transaction(s) with this Section 4.25, and certified in an Officers' Certificate that also certifies as to (x) the compliance of such Affiliate Transaction(s) with this Section 4.25 and (y) the approval of such Affiliate Transaction(s) by a majority of the members of its Management Committee; and (c) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration of $10.0 million or more, the Company delivers to the Trustee the items required by the foregoing clause (b), together with an opinion as to the fairness to the Company or the relevant Subsidiary of that Affiliate Transaction or series of related Affiliate Transactions from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided, however, that the Company shall not be required to deliver such opinion with respect to any Affiliate Transaction or series of related Affiliate Transactions entered into in the ordinary course of the Company's business with any Excepted Company involving aggregate consideration of less than $25 million. The following items will not be deemed to be Affiliate Transactions and will not be subject to the provisions of the prior paragraph: (i) transactions, to the extent not otherwise prohibited under this Indenture, between or among the Company or its Wholly Owned Subsidiaries; (ii) reasonable compensation paid to and indemnities provided on behalf of, officers, directors, employees or, as may be approved by the Management Committee of the Company from time to time, consultants of the Company or any Subsidiary; and (iii) purchases of goods and services in the ordinary course of business. Section 4.26 Restrictions on Senior or Pari Passu Indebtedness. Except as expressly permitted pursuant to the terms of this Indenture, the Company shall not, nor will it permit any of its Subsidiaries to, directly or indirectly, create, issue, assume, Guarantee or otherwise become directly or indirectly liable with respect to or become responsible for any Indebtedness that is senior or pari passu in any respect in right of payment to the Notes. Section 4.27 Impairment of Rights. The Company agrees, on its behalf and on behalf of each of its Subsidiaries, that the Company and its Subsidiaries shall not, directly or indirectly, (a) subject to applicable law, create or permit to exist or become effective any restriction of any kind on the ability of the Company or any of its Subsidiaries, as applicable, to vote the Equity Interests held by the Company or such Subsidiary in any of its Subsidiaries to amend such Subsidiary's organizational documents or remove or replace any member of such Subsidiary's Management Committee or (b) in any way impair the security interest granted pursuant to the Collateral Documents or the ability of the Trustee, or the Holders to exercise their rights and remedies under this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any of the other Collateral Documents. Section 4.28 Location of Inventory and Equipment. (a) The Company agrees that it shall keep the Inventory and Equipment only at the locations identified on Schedule 4.28; provided, however, that the Company may amend Schedule 4.28 so long as such amendment occurs by written notice to the Trustee not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, and so long as, at the time of such written notification, the Company provides any financing statements or fixture filings necessary to perfect and continue perfected the Trustee's Liens on such assets. (b) The Company shall not (i) permit any of its Inventory or Equipment to be transferred between Subsidiaries of the Company unless fair value is paid or provided for by the transferee of such Inventory or Equipment (through an intercompany note, provision of services, equity investment or other valuable consideration), or (ii) permit any of its Inventory or Equipment to be transferred by the Company to a location outside of the continental United States of America unless (A) such transfer is to a direct or indirect Wholly-Owned Subsidiary of the Company, (B) immediately prior to transfer, such Inventory or Equipment was not being used or held for use in the business of the Company in the United States (including the research and development activities conducted by the Company with respect to its or any of its Subsidiaries' manufacturing and operations) and (C) fair value is paid or provided for (through an intercompany note, provision of services, equity investment or other valuable consideration). Section 4.29 Escrow Account. In the event the Company shall have deposited any amounts in the Senior Notes Escrow Account in accordance with the Senior Notes Indenture or in the Escrow Account in accordance with Section 4.14 hereof, the Company: (a) may withdraw all or any portion of such amounts (i) to redeem the Senior Notes in accordance with the Senior Notes Indenture or to redeem the Notes in accordance with Sections 3.8 (in which case, any amounts so withdrawn shall constitute Remaining Asset Sale Proceeds) or (ii) for any other purpose not otherwise prohibited by the terms of this Indenture so long as, at such time, the Company is in compliance with the covenants set forth in this Article 4 and the representations and warranties contained in Sections 5.2, 5.3, 5.4, 5.5, 5.6, 5.7(a), 5.9, 5.10, 5.11, 5.12, 5.13, 5.14 and 5.16 (first sentence) of the Liquidity Facility (as in effect on the date hereof) are true and correct in all respects on and as of the date of such withdrawal as though made on and as of such date, as certified in an Officers' Certificate delivered to the Trustee prior to such withdrawal; and (b) shall be obligated to re-deposit in the Senior Notes Escrow Account (to the extent required by the Senior Notes Indenture) or in the Escrow Account any amounts withdrawn from the Senior Notes Escrow Account or the Escrow Account pursuant to clause (a)(ii) above at the time, and in the amount, that the Company would have been required to pay down the Liquidity Facility as in effect immediately prior to the payment in full of the Liquidity Facility to the extent such amounts shall not have been used to redeem the Senior Notes in accordance with the Senior Notes Indenture or to redeem the Notes in accordance with Section 3.8 (in which case, any amounts so withdrawn shall constitute Remaining Asset Sale Proceeds). Section 4.30 Komag Bermuda. The Company shall not permit the liabilities of Komag Bermuda at any time outstanding to exceed $1,000,000. Section 4.31 Further Assurances. The Company shall execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, as applicable, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments as may be required under applicable law from time to time in order to: (a) carry out more effectively the purposes of this Indenture, the Notes, the other Collateral Documents, the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement; (b) subject to the Liens created by any of the Collateral Documents any of the properties, rights or interests required to be encumbered thereby, subject only to Permitted Priority Liens; (c) perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the Liens intended to be created thereby; and (d) better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Trustee any of the rights granted now or hereafter intended by the parties thereto to be granted to the Trustee under any other instrument executed in connection therewith or granted to the Company under the Collateral Documents or under any other instrument executed in connection therewith. ARTICLE 5. MERGERS, ETC. Section 5.1 Consolidation, Merger or Acquisition. The Company shall not, and shall not permit any of its Subsidiaries to, liquidate or dissolve or enter into any consolidation, merger, acquisition, material partnership, material joint venture, syndication or other combination, except that (i) the Company may consolidate with, merge into or acquire any other corporation or entity; (ii) any corporation or entity may consolidate with or merge into the Company otherwise in accordance with Section 4.12 hereof and the other provisions of this Indenture; and (iii) any Subsidiary of the Company may consolidate with, merge into or acquire any other Subsidiary of the Company; provided, however, that, in the case of clause (i) or (ii), the Company shall be the surviving entity of such merger or consolidation and in the case of clause (iii), a Wholly Owned Subsidiary of the Company shall be the surviving entity in any such merger or consolidation; and provided, further, that immediately after the consummation of such consolidation, merger or acquisition there shall exist no condition or event which constitutes a Default or Event of Default. ARTICLE 6. DEFAULTS AND REMEDIES Section 6.1 Events of Default. Each of the following shall constitute an "EVENT OF DEFAULT": (a) the Company shall fail to pay (i) any installment of the principal of any Note outstanding hereunder when due or (ii) any installment of interest on any Note or other amount payable hereunder or thereunder and such failure under this clause (ii) shall continue for a period of five (5) consecutive days of the date when due; or (b) the Company shall fail to perform or observe any term, covenant or agreement in any material respect, or shall have breached any representation or warranty in any material respect, contained in this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents or in any document executed in conjunction with or delivered pursuant to this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents, which failure continues uncured for more than thirty (30) consecutive days. Notwithstanding the foregoing, any failure of the Company to perform or observe the covenants contained in Sections 4.10 through 4.22, 4.23(b), 4.24 through 4.27, 4.29 and 4.30 shall constitute an Event of Default immediately without regard to or benefit of any lapse of time or cure period; or (c) the Company or any of its Subsidiaries shall (i) fail to pay when due (giving effect to any applicable grace period) any amounts owing under the Liquidity Facility or the Senior Notes or any obligation or Indebtedness (except those specifically arising under this Indenture) in excess of $1.0 million in aggregate amount, or (ii) fail to observe or perform any material term, covenant or agreement contained in any agreement governing the Liquidity Facility or the Senior Notes Indenture or entered into pursuant thereto or any agreement for such obligation or Indebtedness by which it is bound, in each case for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; provided, however, that any default under this Section 6.1(c) with regard to the Liquidity Facility or the Senior Notes Indenture shall be deemed to be cured if such default shall have been cured by the Company or unconditionally waived by the lenders or the holders of the Senior Notes thereunder, as applicable, pursuant to the terms thereof; or (d) (i) the Company or any of its Subsidiaries (other than any Non-Material Subsidiaries) shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debt, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Subsidiaries (other than any Non-Material Subsidiaries) shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (X) results in the entry of an order for relief or any such adjudication or appointment or (Y) remains undismissed, undischarged or unbonded for a period of thirty (30) days; or (iii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (iv) the Company or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) and (iii) above; or (v) the Company or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debt as they become due or (vi) the stockholders of the Company shall approve any plan or proposal for the liquidation of the Company or any of its Subsidiaries (other than any Non-Material Subsidiaries); or (e) one judgment or decree shall be entered against the Company or any of its Subsidiaries involving a liability (to the extent not paid or covered by insurance or the third party indemnity of a solvent indemnitor) equal to or greater than $5.0 million or one or more judgments or decrees shall be entered against the Company or any of its Subsidiaries involving in the aggregate a liability (to the extent not paid or covered by insurance or the third party indemnity of a solvent indemnitor) equal to or greater than $10.0 million and, in all such cases, all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (f) (i) the Company or any of its ERISA Affiliates fails to make full payment when due of all material amounts which, under the provisions of any Pension Plan or Section 412 of the Internal Revenue Code, the Company or any of its ERISA Affiliates is required to pay as contributions thereto; (ii) any material accumulated funding deficiency occurs or exists, whether or not waived, with respect to any Pension Plan; (iii) the excess of the actuarial present value of all benefit liabilities under all material Pension Plans over the fair market value of the assets of such Pension Plans (excluding in such computation Pension Plans with assets greater than benefit liabilities) allocable to such benefit liabilities are greater than five percent of Adjusted Tangible Net Worth; (iv) the Company or any of its ERISA Affiliates enters into any transaction which has as its principal purpose the evasion of liability under Subtitle D of Title IV of ERISA; (v) any material Pension Plan maintained by the Company or any of its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA, or (B) a trustee shall be appointed by an appropriate United States district court to administer any material Pension Plan, or (C) the PBGC (or any successor thereto) shall institute proceedings to terminate any material Pension Plan or to appoint a trustee to administer any Pension Plan, or (D) the Company or any of its ERISA Affiliates shall withdraw (under Section 4063 of ERISA) from any material Pension Plan, if as of the date of the event listed in subclauses (A) through (C) of this paragraph or any subsequent date, either the Company or its ERISA Affiliates has any material liability (such liability to include, without limitation, any material liability to the PBGC, or any successor thereto, or to any other party under Sections 4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or otherwise associated with the events listed in subclauses (A) through (C) of this paragraph; (vi) as used in this Section 6.1(f), the term "accumulated funding deficiency" has the meaning specified in Section 412 of the Internal Revenue Code, and the terms "actuarial present value" and "benefit liabilities" have the meanings specified in Section 4001 of ERISA; or (g) there shall be instituted against the Company, or any of its Subsidiaries, any proceeding for which forfeiture (to the extent not paid or covered by insurance or the third party indemnity of a solvent indemnitor) of any property equal to or greater than $5.0 million is a potential penalty and such proceeding shall not have been vacated or discharged within thirty (30) days of its institution. Section 6.2 Acceleration. Upon (i) the occurrence of any Event of Default described in clause (d) above or upon any acceleration of the outstanding principal amount of any Senior Note or of any outstanding principal amount owing under the Liquidity Facility, the Notes, and each of them, with accrued interest thereon, and all other amounts owing under this Indenture and the Notes shall automatically become due and payable in cash, and (ii) upon the occurrence and continuance of any other Event of Default, the Trustee, or the Holders of at least a majority in outstanding principal amount of the then outstanding Notes may, by notice to the Company, declare the Notes, with accrued interest thereon, and all other amounts owing under this Indenture and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable in cash. Except as expressly provided above in this Section 6.2, presentment, demand, protest and all other notices of any kind are hereby expressly waived. The Holders of a majority in outstanding principal amount of the then outstanding Notes, by written notice to the Trustee, may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest on the Notes that has become due solely because of the acceleration) have been cured or waived. Section 6.3 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest with respect to, the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may also pursue any remedy available to the Holders of the Notes or the Trustee, whether hereunder or under the Notes, any of the other Collateral Documents, the Liquidity Facility Intercreditor Agreement or the Senior Notes Intercreditor Agreement, or otherwise available to any Holders or the Trustee at law or equity. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.4 Waiver of Past Defaults. Holders of not less than a majority in outstanding principal amount of then outstanding Notes, by notice to the Trustee, may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, or interest on, the Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in outstanding principal amount of then outstanding Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.5 Control by Majority. Holders of a majority in outstanding principal amount of then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. Section 6.6 Limitation on Suits. Subject to the restrictions contained in the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, a Holder of a Note may pursue a remedy with respect to an Event of Default under this Indenture or any Note only if: (a) the Holder of a Note gives to a Responsible Officer of the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in outstanding principal amount of then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (e) during such 60-day period the Holders of a majority in outstanding principal amount of then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note other than as expressly provided in this Indenture. Section 6.7 Rights of Holders of Notes to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, or interest with respect to, the Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. Section 6.8 Collection Suit by Trustee. If an Event of Default specified in Section 6.1(a) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal remaining unpaid of, interest remaining unpaid on the Notes and interest on overdue principal and premium, if any, and, to the extent lawful, interest, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9 Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities. If the Trustee collects any money pursuant to this Article 6, after application to any amounts contemplated by clauses (b) and (c) of the second paragraph of Section 10.15, the Trustee shall pay out such money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.7 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, and interest ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.7 hereof, or a suit by Holders of more than ten percent in aggregate amount of the then outstanding Notes. Section 6.12 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted a proceeding to enforce any right or remedy under this Indenture, any of the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any other Collateral Document and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding has been instituted. ARTICLE 7. TRUSTEE Section 7.1 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents and the Trustee need perform only those duties that are specifically set forth in this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, the other Collateral Documents and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents. (c) Notwithstanding any contrary provision of any document or instrument, the Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of clause (b) of this Section 7.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents that in any way relates to the Trustee is subject to clauses (a), (b) and (c) of this Section 7.1. (e) No provision of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any other Collateral Document shall require the Trustee to expend or risk its own funds or incur any liability. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 7.2 Certain Rights of Trustee. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith, without negligence or willful misconduct, that it believes to be authorized or within the rights or powers conferred upon it by this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any other Collateral Document. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of Indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (h) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of such event is sent to the Trustee in accordance with Section 13.2 hereof, and such notice references the Notes; and (i) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each Agent, custodian and co-trustee employed to act hereunder. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may become a creditor of, or otherwise deal with, the Company, or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. Section 7.4 Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, the other Collateral Documents or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. Section 7.5 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, or interest on, any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. Section 7.6 Reports by Trustee to Holders of the Notes; Stock Exchange Listing. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange or any delisting thereof. Section 7.7 Compensation and Indemnity. The Company shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder in accordance with a written schedule provided by the Trustee to the Company. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture or any Note, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any other Collateral Document against the Company or any other party thereto (including this Section 7.7) and defending itself against any claim (whether asserted by the Company or any Holder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or willful misconduct. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable and duly documented fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.7 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 7.7, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(d) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. Section 7.8 Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in outstanding principal amount of then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee; provided, however, that if a Default or Event of Default has occurred and is continuing, or if any Holder shall have given notice to the Trustee under Section 6.6, the Holders of a majority in outstanding principal amount of then outstanding Notes may appoint a successor Trustee or appoint a successor Trustee to replace any successor Trustee appointed by the Company. Within one year after the successor Trustee takes office, the Holders of a majority in outstanding principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least ten percent (10%) in outstanding principal amount of then outstanding Notes may petition any court of competent jurisdiction at the expense of the Company for the appointment of a successor Trustee. If the Trustee, after written request by any Holder who has been a Holder for at least six months, fails to comply with Section 7.10, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided, that all sums owing to the Trustee hereunder have been paid and are subject to the Lien provided for in Section 7.7 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. Section 7.9 Successor Trustee by Merger, Etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another Person, the successor Person without any further act shall be the successor Trustee; provided, however, such Person shall be otherwise eligible and qualified under this Article. Section 7.10 Eligibility; Disqualification. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by Federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). Section 7.11 Preferential Collection of Claims Against Company. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. The Trustee hereby waives any right to set-off any claim that it may have against the Company in any capacity (other than as Trustee, Paying Agent or Trustee hereunder, under the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or under the other Collateral Documents) against any of the assets of the Company held by the Trustee; provided, however, that if the Trustee is or becomes a lender of any other Indebtedness permitted hereunder to be pari passu with the Notes, then such waiver shall not apply to the extent of such Indebtedness. Section 7.12 Authorization of Trustee to Take Other Actions. (a) The Trustee is hereby authorized to enter into and take any actions or deliver such consents required by or requested under each of the Collateral Documents and such other documents as directed by the Holders of a majority of outstanding aggregate principal amount of the Notes. If at any time any action by or the consent of the Trustee is required under any of the Collateral Documents or any other document entered into by the Trustee at the direction of the Holders of a majority of outstanding aggregate principal amount of the Notes, such action or consent shall be taken or given by the Trustee upon the consent to such action by the Holders of a majority of outstanding aggregate principal amount of the Notes. (b) The Trustee is hereby authorized and directed to enter into the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents and to take any actions or deliver such consents required by or requested thereunder. Section 7.13 Assignment of Rights, Not Assumption of Duties. Anything herein contained to the contrary notwithstanding, (a) the Company shall remain liable under each of the Collateral Documents to which it is a party to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Indenture had not been executed, (b) the exercise by the Trustee or any Holder of any of their rights, remedies or powers hereunder shall not release the Company from any of its duties or obligations under each of the Collateral Documents to which it is a party and (c) neither the Holders nor the Trustee shall have any obligation or liability under any of the Collateral Documents to which the Company is a party by reason of or arising out of this Indenture, nor shall any Holder or the Trustee be obligated to perform any of the obligations or duties of the Company thereunder or, except as expressly provided herein with respect to the Trustee, to take any action to collect or enforce any claim for payment assigned hereunder or otherwise. Section 7.14 Limitation on Duty of Trustee in Respect of Collateral; Indemnification. (a) Beyond the exercise of reasonable care in the custody thereof, the Trustee shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon or as to preservation of rights against prior parties or any other rights pertaining thereto and the Trustee shall not be responsible for filing any financing or continuation statements or recording any documents or instruments in any public office at any time or times or otherwise perfecting or maintaining the perfection of any security interest in the Collateral. The Trustee shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property and shall not be liable or responsible for any loss or diminution in the value of any of the Collateral, by reason of the act or omission of any carrier, forwarding agency or other agent or bailee selected by the Trustee in good faith. (b) Subject to Section 7.1, the Trustee shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Liens in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder, except to the extent such action or omission constitutes negligence, or willful misconduct on the part of the Trustee, for the validity or sufficiency of the Collateral or any agreement or assignment contained therein, for the validity of the title of the Company to the Collateral, for insuring the Collateral or for the payment of taxes, charges, assessments or Liens upon the Collateral or otherwise as to the maintenance of the Collateral. Section 7.15 Appointment of Co-Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as Trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture, and in particular in case of the enforcement thereof on default, or in the case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies granted to the Trustee herein or in the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any of the other Collateral Documents or hold title to the properties, in trust, as herein granted or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an individual or institution as a separate or co-trustee. The following provisions of this Section are adopted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture or the Liquidity Facility Intercreditor Agreement or the Senior Notes Intercreditor Agreement or any of the other Collateral Documents to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers. rights and remedies, and only to the extent that the Trustee by the laws of any jurisdiction (including particularly the State of New York) is incapable of exercising such powers, rights and remedies and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them. Should any instrument in writing from the Company be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Company; provided, that if a Default or an Event of Default shall have occurred and be continuing, if the Company does not execute any such instrument within fifteen (15) days after request therefor, the Trustee shall be empowered as an attorney-in-fact for the Company to execute any such instrument in the Company's name and stead. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new trustee or successor to such separate or co-trustee. Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights and powers, conferred or imposed upon the Trustee shall be conferred or imposed upon and may be exercised or performed by such separate trustee or co-trustee; and (ii) No trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder. Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Indenture and the conditions of this Section 7.15. Any separate trustee or co-trustee may at any time appoint the Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any of the other Collateral Documents, on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. Section 7.16 No Liability for Clean-up of Hazardous Materials. In the event that the Trustee is required to acquire title to an asset for any reason, or take any managerial action of any kind in regard thereto, in order to carry out any fiduciary or trust obligation for the benefit of another, which in the Trustee's sole discretion may cause the Trustee to be considered an "owner or operator" under the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. Section 9601, et seq., or otherwise cause the Trustee to incur liability under CERCLA or any other federal, state or local law, the Trustee reserves the right, instead of taking such action, either to resign as Trustee or to arrange for the transfer of the title or control of the asset to a court appointed receiver. The Trustee shall not be liable to the Company or Holders or any other person for any environmental claims or contribution actions under any federal, state or local law, rule or regulation by reason of the Trustee's actions and conduct as authorized, empowered and directed hereunder or relating to the discharge, release or threatened release of hazardous materials into the environment. ARTICLE 8. DEFEASANCE AND COVENANT DEFEASANCE Section 8.1 Option to Effect Legal Defeasance or Covenant Defeasance. The Company may, at the option of the Management Committee of the Company evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. Section 8.2 Legal Defeasance and Discharge. Upon the Company's exercise under Section 8.1 hereof of the option applicable to this Section 8.2, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, "LEGAL DEFEASANCE"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.5 hereof and the other Sections of this Indenture referred to in clauses (a) and (b) below, and to have satisfied all its other obligations under the Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive solely from the trust fund described in Section 8.4 hereof, and as more fully set forth in such Section, payments in respect of the principal of, or interest or premium on such Notes when such payments are due, (b) the Company's obligations with respect to such Notes under Article 2 and Section 4.2 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (d) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option to apply this Section 8.2 notwithstanding the prior exercise of its option to apply Section 8.3 hereof. Section 8.3 Covenant Defeasance. Upon the Company's exercise under Section 8.1 hereof of the option applicable to this Section 8.3, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be released from its obligations under the covenants contained in Sections 4.10 through 4.20, and 4.22 through 4.24 hereof with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.4 are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1 hereof, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.1 hereof of the option applicable to this Section 8.3, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, Sections 6.1(b), (c), (e) and (g) shall not constitute Events of Default. Section 8.4 Conditions to Legal or Covenant Defeasance. The following shall be the conditions to the application of either Section 8.2 or 8.3 hereof to the outstanding Notes: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in United States dollars, noncallable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay in cash the principal of, premium (if any) and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.2 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such Legal Defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.3 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such Covenant Defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing either (a) on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or (b) insofar as Section 6.1(d) hereof is concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (except with respect to the borrowing of funds described in clause (d) above) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries are bound; (f) the Company shall deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company or the Officers signatory thereto with the intent of preferring the Holders of Notes over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; (g) the Company shall deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with; and (h) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that: (i) the trust funds will not be subject to any rights of holders of Indebtedness of the Company other than the Notes, and (ii) assuming no intervening bankruptcy by the Company between the date of deposit and the 91st day following the deposit and assuming that no Holder is an "insider" of the Company under applicable Bankruptcy law, after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. Section 8.5 Deposited Money and Government Securities to Be Held in Trust; Other Miscellaneous Provisions. Subject to Section 8.6 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.5, the "Trustee") pursuant to Section 8.4 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium (if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.4 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Section 8.6 Repayment to the Company. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. Section 8.7 Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of any court or Governmental Authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.2 or 8.3 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.2 or 8.3 hereof, as the case may be; provided, however, that, if the Company makes any cash payment of principal of, or interest on, any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER Section 9.1 Without Consent of Holders of Notes. Notwithstanding Section 9.2 of this Indenture, the Company and the Trustee may amend or supplement this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or the other Collateral Documents without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights hereunder of any Holder of a Note; (d) to enter into additional or supplemental Collateral Documents pursuant to Section 10.16 hereof or additional intercreditor or subordination agreements pursuant to Section 4.12(i); and (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; provided, however, that in the case of a change pursuant to clause (a) or (e) above, the Company shall deliver to the Trustee an Opinion of Counsel stating that the change does not adversely affect the right of any Holder. Upon the request of the Company accompanied by a resolution of the Company's Management Committee authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.2(b) hereof, the Trustee shall join with the Company in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. Section 9.2 With Consent of Holders of Notes. Except as provided below in this Section 9.2, the Company and the Trustee may amend or supplement this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or the other Collateral Documents with the consent of the Holders of at least a majority in outstanding principal amount of the then outstanding Notes voting as a single class (including, without limitation, consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes), and, subject to Sections 6.4 and 6.7 hereof, any existing Default or Event of Default or compliance with any provision of this Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or the other Collateral Documents may be waived with the consent of the Holders of a majority in outstanding principal amount of the then outstanding Notes voting as a single class (including, without limitation, consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes). The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date which is 90 days after such record date, any such consent previously given shall automatically and without further action by any Holder be cancelled and of no further effect. Upon the request of the Company accompanied by a resolution of its Management Committee authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consents of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.2(b) hereof, the Trustee shall join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture directly affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.2 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.2 becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or supplemental Indenture or waiver. Subject to Sections 6.4 and 6.7 hereof, the Holders of a majority in aggregate outstanding principal amount of the then outstanding Notes voting as a single class may waive compliance in a particular instance by the Company with any provision of this Indenture, the other Collateral Documents, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or the Notes. However, without the consent of each Holder affected, an amendment or waiver under this Section 9.2 may not (with respect to any Notes held by a non-consenting Holder): (i) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 4.13 and 4.14 hereof); (iii) reduce the rate of or change the time for payment of interest on any Note; (iv) waive a Default or Event of Default in the payment of principal of, or interest, on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate outstanding principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (v) make any Note payable in money other than that stated in the Notes; (vi) make any change in the provisions of this Indenture relating to waivers of past Defaults or Events of Default or the rights of holders of Notes to receive payments of principal of, or interest or premium on the Notes; (vii) waive a redemption payment with respect to any Note or modify the obligations of the Company to make offers to purchase Notes from the proceeds of one or more Asset Sales or Capital Raising Events; (viii) release all or substantially all of the Collateral from the Lien of this Indenture or the other Collateral Documents (except in accordance with the provisions thereof); or (ix) make any change in the preceding amendment and waiver provisions. Any amendment to, or waiver of, the provisions of any of the Collateral Documents (other than the Indenture), Section 4.15 hereof or the security provisions of this Indenture will require the consent of the holders of not less than a majority in outstanding principal amount of Notes then outstanding. Section 9.3 Compliance with Trust Indenture Act. Every amendment or supplement to this Indenture, the other Collateral Documents or the Notes shall be set forth in an amended or supplemental Indenture that complies with the TIA as then in effect. Section 9.4 Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same Indebtedness as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. Section 9.5 Notation on or Exchange of Notes. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for any Note may issue and the Trustee shall, upon receipt of an Authentication Order, authenticate a new Note that reflects the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. Section 9.6 Trustee to Sign Amendments, Etc. The Trustee may sign any amended or supplemental indenture, Collateral Document, Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, or Note authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplement to the Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, any other Collateral Document or any Note until its Management Committee approves it. In executing any amendment or supplement to this Indenture, any other Collateral Document, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or any Note, the Trustee shall be entitled to receive and (subject to Section 7.1 hereof) shall be fully protected in relying upon, in addition to the documents required by Section 13.4 hereof, an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture. ARTICLE 10. COLLATERAL AND SECURITY Section 10.1 Security. The due and punctual payment of the principal of, premium and interest on the Notes when and as the same shall be due and payable, whether on an interest payment date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of, premium and interest on the Notes and performance of all other obligations of the Company to the Holders of Notes or the Trustee under this Indenture or the Notes, according to the terms hereunder or thereunder, shall be secured by the Collateral as provided in the Collateral Documents. Each Holder of Notes, by its acceptance hereof and thereof, consents and agrees to the terms of the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the Collateral Documents (including, without limitation, the provision providing for foreclosure and release of Collateral as well as any additional intercreditor arrangements entered into by the Trustee pursuant to Section 7.12 hereof) as the same may be in effect or may be amended from time to time in accordance with its terms, and authorizes and directs the Trustee to enter into the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the Collateral Documents and to perform its obligations and exercise its rights thereunder in accordance therewith. The Company shall deliver to the Trustee copies of all documents executed pursuant to this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement and the other Collateral Documents and shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of this Indenture or the other Collateral Documents to assure and confirm to the Trustee the security interest in the Collateral contemplated hereby, by the other Collateral Documents, or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured thereby, according to the intent and purposes herein and therein expressed. The Company shall take, any and all actions reasonably required to cause this Indenture and the other Collateral Documents to create and maintain, as security for the obligations of the Company hereunder, a valid and enforceable perfected Lien on the Collateral, subject only to Permitted Priority Liens. Section 10.2 Grant of a Security Interest. The Company hereby grants to the Trustee, for the benefit of the Holders, continuing Liens on all right, title, and interest of the Company in and to all currently existing and hereafter acquired or arising Collateral (other than Real Property Collateral) in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by the Company of its covenants and duties under this Indenture (the "TRUSTEE'S LIENS"). The Trustee's Liens in and to the Collateral (other than Real Property Collateral) shall attach to all Collateral (other than Real Property Collateral) without further act on the part of Holders or the Company. Anything contained in this Indenture or any other Collateral Document to the contrary notwithstanding, except as permitted by Section 4.14, the Company shall not have authority, express or implied, to dispose of any item or portion of the Collateral. The secured claims of the Holders with respect to the Obligations secured by the Collateral shall be of equal priority, and ratable according to the respective Obligations due each Holder. Section 10.3 Collateral Matters. Subject to Sections 10.11 and 10.12, the Holders hereby irrevocably direct and authorize the Trustee, subject to the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, to release any Lien on any Collateral (i) upon payment and satisfaction in full by or on behalf of the Company of all Obligations in accordance with Article 11; and upon such termination, Trustee shall deliver to the Company, at the Company's sole cost and expense, all documents reasonably requested by the Company to terminate this Indenture and the other Collateral Documents and release the Liens with respect to the Collateral; (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if the Company certifies to the Trustee that the sale or disposition is permitted under Section 4.14 of this Indenture (and, subject to Section 7.1, the Trustee may rely conclusively on any such certificate, without further inquiry); (iii) constituting property in which the Company owned no interest at the time the Lien was granted or at any time thereafter, provided, that such property shall not have been transferred by the Company other than in accordance with the terms and provisions of this Indenture and the other Collateral Documents; or (iv) constituting property leased to the Company under a lease that has expired or is terminated in a transaction permitted under this Indenture or the other Collateral Documents. Except as provided above, the Trustee will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or any substantial portion of the Collateral, all of the Holders, or (z) otherwise, the majority in principal amount of the then outstanding Notes; provided, however, that (1) the Trustee shall not be required to execute any document necessary to evidence such release on terms that, in the Trustee's opinion, would expose the Trustee to liability or create any obligation on the part of the Trustee or the Holders or entail any consequence adverse to the Trustee or the Holders other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of the Company in respect of) all interests retained by the Company, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. The Company shall furnish to the Trustee, prior to each proposed release of Collateral pursuant to the Collateral Documents, all documents required by TIA Section 314(d). Section 10.4 Negotiable Collateral. Subject to the provisions of the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, in the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, the Company promptly shall endorse and deliver physical possession of such Negotiable Collateral to the Senior Notes Trustee to be held for the benefit of the holders of the Senior Notes and, subject to the terms of the Senior Notes Intercreditor Agreement, the Holders of the Notes. Section 10.5 Collection of Accounts, General Intangibles, and Negotiable Collateral. Subject to the provisions of the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, at any time after the occurrence and during the continuance of an Event of Default, the Trustee or the Trustee's designee may (a) notify customers or Account Debtors of the Company that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to the Trustee or that the Trustee for the benefit of the Holders has a security interest therein and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Company. Section 10.6 Power of Attorney. Subject to the provisions of the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, the Company hereby irrevocably makes, constitutes, and appoints the Trustee (and any of the Trustee's officers, employees, or agents designated by the Trustee) as the Company's true and lawful attorney, with power to (a) if the Company refuses to, or fails timely to execute and deliver any of the documents described in Section 10.9, sign the name of the Company on, and file, any of the documents described in Section 10.9, (b) at any time that an Event of Default has occurred and is continuing, sign the Company's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse the Company's name on any checks, notes, instruments, and other items of payment that may come into the Trustee's or the Holders' possession, (e) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of the Company's mail to an address designated by the Trustee, to receive and open all mail addressed to the Company, and to retain all mail relating to the Collateral and forward all other mail to the Company, (f) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under the Company's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (g) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Trustee determines to be reasonable, and the Trustee may cause to be executed and delivered any documents and releases that Trustee determines to be necessary. The appointment of the Trustee as the Company's attorney, and each and every one of the Trustee's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and this Indenture has been discharged in accordance with Article 11. Section 10.7 Grants, Rights and Remedies. The Liens and security interests granted by the Company to the Trustee (for its benefit and for the benefit of the Holders) by and pursuant to Section 10.2 hereof may be independently granted by the Collateral Documents and by other collateral documents hereafter entered into. This Indenture and such other Collateral Documents supplement each other, and the grants, priorities, rights and remedies of the Trustee and the Holders hereunder and thereunder are cumulative. Section 10.8 Survival. To the fullest extent provided under applicable law, the Liens and security interests granted to the Trustee (for its benefit and for the benefit of the Holders), the priority of such Liens and security interests, and other rights and remedies granted to the Trustee and the Holders pursuant to this Indenture and the other Collateral Documents (specifically including but not limited to the existence, perfection and priority of the Liens and security interests provided herein and therein) shall not be modified, altered or impaired in any manner by any other financing or extension of credit or incurrence of Indebtedness by the Company, or by any other act or omission whatsoever. To the fullest extent provided by applicable law, notwithstanding any such order, financing, extension, incurrence, dismissal, conversion, act or omission: (a) subject to the provisions of the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, the Liens and security interests granted by the Company to the Trustee (for its benefit and for the benefit of the Holders) by and pursuant to Section 10.2 hereof shall constitute valid, binding, continuing, enforceable and fully-perfected first priority Liens, subject only to Permitted Priority Liens, to which such Liens and security interests shall be subordinate and junior, and shall be prior to all other Liens and interests, now existing or hereafter arising, in favor of any other creditor or any other Person whatsoever; and (b) the Liens and security interests granted by the Company to the Trustee (for its benefit and for the benefit of the Holders) by and pursuant to Section 10.2 hereof shall continue to be valid, binding, continuing, enforceable and fully-perfected without the necessity for the Trustee to file any financing statements or to otherwise perfect such Liens and security interests under applicable non-bankruptcy law. Section 10.9 Recording and Opinions. The Company will cause this Indenture, the applicable Collateral Documents and any financing statements, and all amendments or supplements to each of the foregoing and any other similar security documents as necessary, to be registered, recorded and filed or re-recorded, re-filed and renewed in such manner and in such place or places, if any, as may be required by law or reasonably requested by the Trustee in order fully to preserve and protect the Liens securing the obligations under the Notes pursuant to this Indenture and the other Collateral Documents, except as otherwise provided herein and therein. For the avoidance of doubt and without limiting the rights of the Trustee under Section 9-509(b) of the UCC, the Company hereby authorizes the Trustee to file financing statements and amendments thereto with respect to the Collateral (including after-acquired Collateral). The Company shall furnish to the Trustee: (a) promptly after the execution and delivery of this Indenture, and promptly after the execution and delivery of any other instrument of further assurance or amendment, an Opinion of Counsel in Bermuda either (i) stating that, subject to customary assumptions and exclusions, in the opinion of such counsel, this Indenture, the applicable Collateral Documents and all other instruments of further assurance or amendment have been properly recorded, registered and filed to the extent necessary to make effective the Liens intended to be created by the Collateral Documents with respect to the Equity Interests of any Foreign Subsidiary of the Company existing under the laws of Bermuda and reciting the details of such action or referring to prior Opinions of Counsel in which such details are given or (ii) stating that, subject to customary assumptions and exclusions, in the opinion of such counsel, no such action is necessary to make such Lien effective as intended by such Collateral Documents; (b) within 30 days after January 1, in each year beginning with the year 2003, an Opinion of Counsel, dated as of such date, either (i) stating that, subject to customary assumptions and exclusions, in the opinion of such counsel, such action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of this Indenture and all supplemental indentures, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain the Liens of this Indenture and the other Collateral Documents with respect to the Equity Interests of any Foreign Subsidiary of the Company existing under the laws of Bermuda until the next Opinion of Counsel is required to be rendered pursuant to this paragraph and reciting the details of such action or referring to prior Opinions of Counsel in which such details are given or (ii) stating that, subject to customary assumptions and exclusions, in the opinion of such counsel, no such action is necessary to maintain such Lien, until the next Opinion of Counsel is required to be rendered pursuant to this paragraph; and (c) the certificates or opinions, as the case may be, required by TIA Section 314(d). Such certificates or opinions will be subject to the terms of TIA Section 314(e). Section 10.10 Protection of the Trust Estate. Subject to the terms of this Indenture, the other Collateral Documents, the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, upon prior written notice to the Company, the Trustee shall have the power (i) to institute and maintain such suits and proceedings as it may deem expedient, to prevent any impairment of the Collateral under this Indenture or any of the other Collateral Documents and in the profits, rents, revenues and other income arising therefrom, including the power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair any Collateral or be prejudicial to the interests of the Holders of Notes or the Trustee, to the extent permitted thereunder; and (ii) to enforce the obligations of the Company or any Subsidiary under this Indenture or the other Collateral Documents. Upon receipt of notice that the Company is not in compliance with any of the requirements of any Deed of Trust, the Trustee may, but shall have no obligation to purchase, at the Company's expense, such insurance coverage necessary to comply with the appropriate section of the Deed of Trust. Section 10.11 Certificates of the Company. The Company shall furnish to the Trustee, prior to each proposed release of Collateral pursuant to this Indenture or the other Collateral Documents, (i) all documents required by TIA Section 314(d) and (ii) an Opinion of Counsel in the United States, which may be rendered by internal counsel to the Company, to the effect that, subject to customary assumptions and exclusions, such accompanying documents constitute all documents required by TIA Section 314(d). The Trustee may, to the extent permitted by Sections 7.1 and 7.2 hereof, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such documents and such Opinion of Counsel. Section 10.12 Certificates of the Trustee. In the event that the Company wishes to release Collateral in accordance with this Indenture or the other Collateral Documents and has delivered the certificates and documents required by this Indenture or the other Collateral Documents and Sections 10.3 and 10.10 hereof, the Trustee shall determine whether it has received all documentation required by TIA Section 314(d) in connection with such release. Section 10.13 Authorization of Actions to Be Taken by the Trustee Under the Collateral Documents, the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement. Subject to the provisions of Sections 7.1, 7.2, 7.3 and 9.2 hereof, the Trustee may and without the consent of the Holders of Notes, on behalf of the Holders of Notes, take all actions it deems necessary or appropriate in order to (a) enforce any of the terms of this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents and (b) collect and receive any and all amounts payable in respect of the Obligations of the Company hereunder, including, but not limited to, the appointment and approval of Collateral Agents and the appointment and approval of an insurance trustee. The Trustee shall have power to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation hereof or of the other Collateral Documents, the Liquidity Facility Intercreditor Agreement or the Senior Notes Intercreditor Agreement, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders of Notes in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or under any of the other Collateral Documents or be prejudicial to the interests of the Holders of Notes or of the Trustee). Section 10.14 Trustee's Duties. The powers and duties conferred upon the Trustee by this Article 10 are solely to protect the Collateral and, subject to Section 7.1, shall not impose any duty upon the Trustee to exercise any such powers and duties except as expressly provided in this Indenture. Neither the Trustee nor any Holder shall be under any duty to the Company whatsoever to make or give any presentment, demand for performance, notice or nonperformance, protest, notice of protest, notice of dishonor, or other notice or demand in connection with any Collateral or to take any steps necessary to preserve this Indenture. Neither the Trustee nor any Holder shall be liable to the Company for failure to collect or realize upon any or all of the Collateral, or for any delay in doing so, nor shall the Trustee or any Holder be under any duty to the Company to take any action whatsoever with regard thereto. Neither the Trustee nor any Holder shall have any duty to the Company to comply with any recording, filing or other legal requirements necessary to establish or maintain the validity, priority or enforceability of the Liens in, or the Trustee's rights in or to, any of the Collateral or to perform on behalf of the Company under this Indenture or any other Collateral Documents or otherwise. Section 10.15 Authorization of Receipt of Funds by the Trustee Under the Collateral Documents. Subject to the provisions of the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement, upon an Event of Default and so long as such Event of Default continues, the Trustee may exercise in respect of the Collateral, in addition to the other rights and remedies provided for in this Indenture, in the Collateral Documents or otherwise available to it, all of the rights and remedies of a secured party under the UCC or other applicable law, and the Trustee may also upon obtaining possession of the Collateral as set forth herein, without notice to the Company, except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Trustee's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable. The Company acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such a sale were a public sale. The Company agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Company of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Trustee shall not be obligated to make any sale regardless of notice of sale having been given. The Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Any cash that is Collateral held by the Trustee and all cash proceeds received by the Trustee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied (unless otherwise provided for in the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or Collateral Documents and after payment of any and all amounts payable to the Trustee pursuant to this Indenture), as the Trustee shall determine or as the Holders of the Notes shall direct pursuant to Section 6.5 hereof, (a) against the obligations for the ratable benefit of the Holders of the Notes, (b) to maintain, repair or otherwise protect the Collateral or (c) to take such other action to protect the other rights of the Holders of the Notes or to take any other appropriate action or remedy for the benefit of the Holders of the Notes. Any surplus of such cash or cash proceeds held by the Trustee and remaining after payment in full of all the Obligations in accordance with Section 6.10 shall be applied in accordance with Section 6.10. Section 10.16 Cooperation of Trustee. In the event the Company or any Subsidiary pledges or grants a security interest in additional Collateral, the Trustee shall cooperate with the Company or such Subsidiary in reasonably and promptly agreeing to the form of, and executing as required, any instruments or documents necessary to make effective the security interest in the Collateral to be so substituted or pledged. To the extent practicable, the terms of any security agreement or other instrument or document necessitated by any such substitution or pledge shall be comparable to the provisions of this Indenture and the existing Collateral Documents. Subject to, and in accordance with, the requirements of this Article 10 and the terms of the Collateral Documents, in the event that the Company engages in any transaction pursuant to Section 10.3 hereof, the Trustee shall cooperate with the Company in order to facilitate such transaction in accordance with any reasonable time schedule proposed by the Company, including by delivering and releasing the Collateral in a prompt and reasonable manner. Section 10.17 Collateral Agent. The Trustee may, from time to time, appoint one or more Collateral Agents hereunder. Each of such Collateral Agents may be delegated any one or more of the duties or rights of the Trustee hereunder or under the other Collateral Documents or which are specified in any Collateral Documents, including without limitation the right to hold any Collateral in the name of, registered to, or in the physical possession of, such Collateral Agent, for the ratable benefit of the Holders of the Notes. Each such Collateral Agent shall have such rights and duties as may be specified in an agreement between the Trustee and such Collateral Agent. Section 10.18 Representations and Warranties. The Company hereby represents and warrants to the Trustee and the Holders as follows: (a) Each of Company and its Subsidiaries has good and valid title to all its assets and properties (other than Collateral or goods sold on a consignment basis), except where the failure to have such title could not reasonably be expected to result in a Material Adverse Change, in each case free and clear of all Liens of any nature whatsoever except the Liens permitted by Section 4.15. With respect to interests in Real Property, each of Company and its Subsidiaries has good and valid title to all Real Property owned by it and the leasehold estates in all of the Real Property leased by it, except where the failure to have such title could not reasonably be expected to result in a Material Adverse Change, in each case free and clear of all Liens, easements, covenants, rights-of-way and other similar restrictions of any nature whatsoever, except (A) the Liens permitted by Section 4.15, (B) easements, covenants, rights-of-way and other similar restrictions of record, (C) any conditions that may be shown by a current, accurate survey or physical inspection of any Real Property owned or leased by it made prior to the date hereof, (D) any immaterial condemnation or eminent domain proceeding affecting any Real Property that does not prevent such Real Property from being utilized by the Company or any of its Subsidiaries substantially for the purposes for which it was being utilized prior to such proceeding, and (E) (i) zoning, building and other similar restrictions, (ii) Liens that have been placed by any developer, landlord or other third party on property over which the Company or any of its Subsidiaries has easement rights or on any Real Property leased by the Company or any of its Subsidiaries and subordination or similar agreements relating thereto, and (iii) unrecorded easements, covenants, rights-of-way or other similar restrictions, none of which items set forth in clauses (i), (ii) and (iii), individually or in the aggregate, materially impair the continued use and operation of the property to which they relate in the business of the Company and its Subsidiaries, taken as a whole, as currently conducted. (b) Except as set forth in Schedule 10.18(b), all of the Equipment is used or held for use in the Company's business and is fit for such purposes. (c) The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party and are located only at the locations identified on Schedule 4.28 or otherwise permitted by Section 4.28. (d) The Company keeps correct and accurate records in all material respects itemizing and describing the kind, type, quality, and quantity of the Inventory, and the Company's cost therefor. (e) The chief executive office of the Company is located at the applicable address indicated in Section 13.2. The Company's Federal Employer Identification Number is 94-2914864. (f) The Company and each of its Subsidiaries, (a) is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to constitute a Material Adverse Change, (b) has full corporate power and authority and possesses all governmental franchises, licenses, permits, authorizations and approvals necessary to enable it to use its corporate name and to own, lease or otherwise hold its properties and assets and to carry on its business as currently conducted other than such franchises, licenses, permits, authorizations and approvals the lack of which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change, and (c) is in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority or instrumentality, domestic or foreign (including, without limitation, those related to asbestos, petroleum and hazardous wastes and substances), except where noncompliance could not reasonably be expected to result in a Material Adverse Change. The Company has not received any written communication from a Governmental Authority that alleges that Company or any of its Subsidiaries is not in compliance, in all material respects, with all material federal, state, local or foreign laws, ordinances, rules and regulations, except where non-compliance could not reasonably be expected to result in a Material Adverse Change. (g) Set forth on Schedule 10.18(g) is a complete and accurate list of the Company's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of Capital Stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by the Company. All of the outstanding Capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (h) To the Company's knowledge, the Company and each of its Subsidiaries owns or possesses adequate licenses or other rights to use all Permits, patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, trade secrets and know-how (collectively, the "INTELLECTUAL PROPERTY") that are necessary for the operation of its business as currently conducted. Set forth on Schedule 10.18(h)(1) is a complete and accurate list of the Company's registered patents and registered trademarks. Except as set forth in Schedule 10.18(h)(2), no claim is pending or, to the knowledge of the Company, threatened to the effect that the Company or its Subsidiaries infringes upon the asserted rights of any other Person under any Intellectual Property, and to the Company's knowledge there is no basis for any such claim (whether pending or threatened). Except as set forth in Schedule 10.18(h)(2), no claim is pending or, to the knowledge of the Company, threatened to the effect that any such Intellectual Property owned or licensed by the Company or its Subsidiaries, or in which the Company or its Subsidiaries otherwise has the right to use, is invalid or unenforceable by the Company, and to the Company's knowledge, there is no basis for any such claim (whether or not pending or threatened). ARTICLE 11. SATISFACTION AND DISCHARGE Section 11.1 Satisfaction and Discharge. This Indenture will be discharged and will cease to be of further effect as to all Notes issued hereunder, and the Trustee, at the request and expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when: (a) either: (i) all Notes that have been authenticated (except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Company) have been delivered to the Trustee for cancellation; or (ii) (A) all Notes that have not been delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise or will become due and payable within one year and (B) the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient without consideration of any reinvestment of interest, to pay and discharge all amounts owing on the Notes not delivered to the Trustee for cancellation for principal (including any increases in principal due to the addition of deferred interest in accordance with the Notes and this Indenture), accrued interest that has not been paid or duly provided for, and the maximum amount payable as premium to the date of maturity or redemption; (b) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which the Company is bound; (c) the Company has paid or caused to be paid all sums payable by it under this Indenture; and (d) the Company has delivered irrevocable instructions to the Trustee under this Indenture to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be. The Company shall deliver an Officers' Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. Section 11.2 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions. Subject to Section 11.3 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 11.2, the "Trustee") pursuant to Section 11.1 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (including increases (in any) in principal from the addition of deferred interest in accordance with the Notes and this Indenture), premium (if any) and interest, but such money, in the case of money held by the Trustee for any Paying Agent other than the Company or any of its Subsidiaries, need not be segregated from other funds except to the extent required by law. Moneys (if any) deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the Notes in accordance with this Article 11 and remaining after all sums due and to become due on the Notes in respect of principal (including increases (if any) in principal from the addition of deferred interest), premium (if any) and interest have been paid in full, and after all amounts due the Trustee hereunder have been paid or duly provided for to the satisfaction of the Trustee, shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust. Section 11.3 Repayment to Company. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium (if any) or interest on any Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times or The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. ARTICLE 12. SUBORDINATION OF NOTES Section 12.1 Notes Subordinate to Senior Indebtedness Only. The Company covenants and agrees, and each Holder of a Note, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner set forth in the Intercreditor Agreements and in this Article 12 (in each case subject to the provisions of Article 8 and Article 11), the payment of the principal of (and premium, if any) and interest (other than increases (if any) in principal from the addition of deferred interest in accordance with the Notes and this Indenture), on the Notes are subordinate in right of payment only to the prior payment in full of all Senior Indebtedness, but not to any other Indebtedness or other liabilities or obligations of the Company or any other Person. Section 12.2 [Trustee to Effectuate Subordination. Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency, receivership, reorganization or similar proceedings or upon an assignment for the benefit of creditors or otherwise), the filing of a claim for the unpaid balance of such Holder's Notes in the form required in those proceedings and the causing of such claim to be approved. Section 12.3 Notice to Trustee. The Company shall give prompt written notice to the Trustee and any Paying Agent of any default or event of default under any Senior Indebtedness or under any agreement pursuant to which any Senior Indebtedness may have been issued or as to any other fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Notes. Notwithstanding the provisions of this Article 12 or any other provision of this Indenture, the Intercreditor Agreements or any other Collateral Documents, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Notes, pursuant to the provisions in this Article or the Intercreditor Agreements, unless and until three Business Days after the Trustee shall have received written notice thereof from the Company or any holder or holders of Senior Indebtedness or from any trustee therefor or representative thereof; and prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 7.1 hereof, shall be entitled in all respects conclusively to assume that no such facts exist, provided that if the Trustee shall not have received the notice provided for in this Section at least three Business Days prior to the date upon which by the terms of this Indenture or any Note any moneys may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Note), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which such moneys were received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. Subject to the provisions of Section 7.1, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee therefor or representative thereof) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor or representative thereof). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness (or a trustee therefor or representative thereof) to participate in any payment or distribution pursuant to this Article or any provision of the Intercreditor Agreements, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment; nor shall the Trustee be charged with knowledge of the curing or waiving of any default with respect to any Senior Indebtedness or that any event or any condition preventing any payment in respect of the Notes shall have ceased to exist, unless any until the Trustee shall have received written notice to such effect. Section 12.4 Reliance on Judicial Order or Certificate of Liquidating Agent. The Trustee, subject to the provisions of Section 7.1, and the Holders of the Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors or of any other Person making any payment or distribution, delivered to the Trustee or to any of the Holders of Notes, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article or any provision of the Intercreditor Agreements. Section 12.5 Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to any holder or holders of any of the Senior Indebtedness and shall not be liable to any of such holders if it shall in good faith mistakenly pay over or distribute to Holders of Notes or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article or any provision of the Intercreditor Agreements or otherwise. Section 12.6 Rights of Trustee Nothing in this Article or the Intercreditor Agreements shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.7. The provisions of this Article shall not be applicable to any cash, properties or securities received by any Holder that are received as a holder of any Senior Indebtedness and nothing in this Indenture shall deprive such Holder of any of its rights as such holder. Section 12.7 Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 12.6 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. Section 12.8 Defeasance of this Article Twelve. The subordination of the Notes provided by this Article 12 and in the Intercreditor Agreements is expressly made subject to the provisions for Legal Defeasance or Covenant Defeasance in Article 8 hereof and, anything herein to the contrary notwithstanding, upon the effectiveness of any such Legal Defeasance or Covenant Defeasance, the Notes then outstanding shall thereupon cease to be subordinated pursuant to this Article Twelve and the Intercreditor Agreements. Section 12.9 This Article Not To Prevent Events of Default. The failure to make a payment on account of the principal of or interest on the Notes by reason of any provision of this Article Twelve or the Intercreditor Agreements will not be construed as preventing the occurrence of an Event of Default under Section 6.1. Section 12.10 Representative of Senior Indebtedness. Subject to Section 12.3, any notices to be given or payments to be made to any holder of Senior Indebtedness pursuant to this Indenture may be made or given to its authorized representative.] ARTICLE 13. MISCELLANEOUS Section 13.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. Section 13.2 Notices. Any notice or communication by the Company or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Komag, Incorporated 1710 Automation Parkway San Jose, California 95131-1873 Facsimile: (408) 944-9234 Attention: Chief Financial Officer With a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94105 Facsimile: (650) 493-6811 Attention: Kathleen Bloch, Esq. If to the Trustee: Bank One Trust Company, NA 1111 Polaris Parkway, Suite 1K Mail Code OH1-0181 Columbus, OH 43240 Telephone : 614 248-5579 Facsimile : 614 248-5195 Attention : Eamon Fahey, Account Executive The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. Section 13.3 Communication by Holders of Notes with Other Holders of Notes. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 13.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.5 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.5 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. Section 13.5 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. Section 13.6 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 13.7 No Personal Liability of Directors, Officers, Employees and Stockholders. No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes, this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, the other Collateral Documents or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under the Federal securities laws. Section 13.8 Governing Law. THE LAW OF THE STATE OF ___________ SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE NOTES WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. Section 13.9 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or any of its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.10 Successors. All agreements of the Company in this Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, each of the other Collateral Documents to which it is a party and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. Section 13.11 Severability. In case any provision in this Indenture or the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 13.12 Counterpart Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Section 13.13 Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by the Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "ACT" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 13.13. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to such witness, notary or officer the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) Notwithstanding anything to the contrary contained in this Section 13.13, the principal amount and serial numbers of Notes held by any Holder, and the date of holding the same, shall be proved by the register of the Notes maintained by the Registrar as provided in Section 2.3 hereof. (d) If the Company shall solicit from the Holders of the Notes any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a resolution of its Management Committee fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), if the Company at its option elects to so fix a record date, such record date shall be the record date specified in or pursuant to such resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith or the date of the most recent list of Holders forwarded to the Trustee prior to such solicitation pursuant to Section 2.5 hereof and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of the then outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the then outstanding Notes shall be computed as of such record date; provided, that no such demand, authorization, direction, notice, consent, waiver or other Act by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after such record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every subsequent Holder of the same Note and the Holder of every Note issued upon the registration or transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Note. (f) Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Note may do so itself with regard to all or any part of the principal amount of such Note or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. Section 13.14 Benefit of Indenture. Nothing, in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Registrar and their successors hereunder, and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 13.15 Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have executed this Indenture as of the dates first above written. KOMAG, INCORPORATED By: -------------------------------------- Name: Title: BANK ONE TRUST COMPANY, NA By: -------------------------------------- Name: Title: EXHIBIT A FORM OF JUNIOR SECURED NOTE DUE 2007 [Face of Note] [INSERT THE GLOBAL NOTE LEGEND, IF APPLICABLE, PURSUANT TO THE PROVISIONS OF SECTION 2.6(f) OF THE INDENTURE] CONTACT THE CHIEF FINANCIAL OFFICER OF THE COMPANY AT ___________________ FOR INFORMATION REGARDING THE ISSUE PRICE, ISSUE DATE AND YIELD TO MATURITY OF THIS NOTE. CUSIP ---------- No. $___________ Initial Principal Amount -------------- KOMAG, INCORPORATED JUNIOR SECURED NOTE DUE 2007 KOMAG, INCORPORATED, a Delaware corporation (the "COMPANY", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to _____________, or its registered assigns, the entire unpaid principal sum of ________________ ($_________) (the "Initial Principal Amount"), as such amount shall be increased through the addition of deferred interest pursuant to the terms of this Note and the Indenture, on _____, 2007 and to pay interest thereon in accordance with this Note and the Indenture. Interest Payment Dates: 15th of each month, beginning on July 15, 2002. THE PRINCIPAL OF THIS NOTE IS PAYABLE AS SET FORTH HEREIN. THE INTEREST ON THIS NOTE IS PAYABLE IN-KIND PROVIDED THAT THE COMPANY MAY, AT ITS SOLE OPTION, PAY INTEREST IN CASH RATHER THAN IN KIND. INTEREST PAID IN KIND WILL INCREASE THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE IN THE MANNER AND AS MORE FULLY PROVIDED IN THE INDENTURE. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN OR GREATER THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE PRINCIPAL, INTEREST, AND OTHER AMOUNTS PAYABLE HEREUNDER OR IN CONNECTION HEREWITH ARE SUBORDINATED IN RIGHT OF PAYMENT ONLY TO THE DEBT OUTSTANDING UNDER THE LIQUIDITY FACILITY (AS DEFINED IN THE INDENTURE) AND UNDER THE SENIOR NOTES DUE 2007 OF THE COMPANY (THE "SENIOR NOTES") PURSUANT TO THE TERMS AND CONDITIONS, RESPECTIVELY, OF AN INTERCREDITOR AGREEMENT (THE "LIQUIDITY FACILITY INTERCREDITOR AGREEMENT"), OF EVEN DATE WITH THE INDENTURE, BETWEEN THE TRUSTEE, THE TRUSTEE FOR THE HOLDERS OF THE SENIOR NOTES AND THE REPRESENTATIVE OF THE LENDERS UNDER THE LIQUIDITY FACILITY AND OF AN INTERCREDITOR AGREEMENT (THE "SENIOR NOTES INTERCREDITOR AGREEMENT"), OF EVEN DATE WITH THE INDENTURE, BETWEEN THE TRUSTEE AND THE TRUSTEE FOR THE HOLDERS OF THE SENIOR NOTES. THE LIENS GRANTED TO THE COLLATERAL AGENT TO SECURE THE PRINCIPAL, INTEREST, AND OTHER AMOUNTS PAYABLE HEREUNDER OR IN CONNECTION HEREWITH ARE SUBORDINATED IN PRIORITY TO THE LIENS GRANTED TO THE REPRESENTATIVE OF THE LENDERS UNDER THE LIQUIDITY FACILITY PURSUANT TO THE TERMS AND CONDITIONS OF THE LIQUIDITY FACILITY INTERCREDITOR AGREEMENT AND TO THE LIENS GRANTED TO THE TRUSTEE FOR THE HOLDERS OF THE SENIOR NOTES PURSUANT TO THE TERMS AND CONDITIONS OF THE SENIOR NOTES INTERCREDITOR AGREEMENT. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officer. KOMAG, INCORPORATED By: -------------------------------------- Name: Title: This is one of the Junior Secured Notes due 2007 described in the within-mentioned Indenture. Dated: _____, 2002 BANK ONE TRUST COMPANY, NA, as Trustee By: ------------------------------------ Authorized Signatory [Reverse Side of Note] KOMAG, INCORPORATED JUNIOR SECURED NOTE DUE 2007 This Note is one of the duly authorized issue of debt securities of the Company designated as its "Junior Secured Notes due 2007" (herein called the "NOTES") issued under the Indenture dated as of _____________, 2002 (as amended, supplemented or otherwise modified from time to time, the "INDENTURE") among the Company, as issuer, and Bank One Trust Company, NA, as trustee (the "TRUSTEE", which term includes any successor trustee under the Indenture). The terms of this Note include those stated in the Indenture and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holder hereof. Capitalized terms used herein shall have the meanings assigned to them in the Indenture unless otherwise indicated. 1. Principal. The Company promises to pay to the Holder hereof on ___________, 2007 the entire unpaid principal amount of the Initial Principal Amount of this Note, as such amount may be increased through the addition of deferred interest pursuant to the immediately succeeding paragraph of this Note and the Indenture. 2. Interest. The Company promises to pay interest on the principal amount of this Note outstanding from time to time (as such amount may be increased through the addition of deferred interest pursuant to the terms of the Indenture) at 12% per annum from _____, 2002 until maturity, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of 14% per annum on any overdue principal and on any overdue installment of interest not duly paid or provided for, until paid. The Company shall pay interest at such rate monthly in arrears on the 15th day of each month, or if any such day is not a Business Day, on the next succeeding Business Day, commencing on July 15, 2002 (each such day, prior to the maturity date of this Note, an "INTEREST PAYMENT DATE"). Interest shall be paid by an increase of the outstanding principal amount hereof in the manner and as more fully provided in the Indenture or, at the sole option of the Company, in cash. Interest on this Note shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the date of original issuance, until the principal amount hereof is paid. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. 3. Method of Payment. (a) The Company shall pay interest on this Note (except default interest) to the Person who is the registered Holder of this Note [at the opening of business on] [at the close of business on the ____ day of the month that includes] the Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to default interest, and provided that if the Company elects to pay interest in cash, such interest shall be paid to the Person who is the registered Holder of this Note [at the opening of business on] [at the close of business on the ____ day of the month that includes] the Interest Payment Date (a "RECORD DATE"), even if this Note is cancelled after such Record Date and on or before such Interest Payment Date. (b) Attached to the Indenture as Schedule A is a schedule setting forth, assuming no interest is paid in cash, (x) the aggregate amount of deferred interest scheduled to be added to the aggregate principal amount of all of the Notes on each Interest Payment Date, and (y) the aggregate amount of interest scheduled to be paid in cash together with the principal amount of the Notes on the maturity date, all based on certain assumptions as to the payment of default interest and as to prepayments of principal are set forth in such Schedule. Such Schedule shall be supplemented by the Company in connection with any cash payment of interest, redemption or other prepayment of the Notes in accordance with Article 3 of the Indenture. The Trustee and Paying Agent shall be entitled to assume that interest due on each Interest Payment Date will be paid in kind, unless the Company notifies the Trustee and Paying Agent at least __ Business Days prior to the relevant Record Date that such payment shall be made in cash. (c) This Note shall be payable as to principal, premium, interest and default interest, if any, paid in cash at the office or agency of the Company maintained for such purpose in the Borough of Manhattan, the City of New York, maintained for such purposes, or, at the option of the Company, payment of interest and default interest, if any, paid in cash may be made by check mailed to the Holder at its address set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds shall be required with respect to principal of and interest and default interest, if any, paid in cash and premium on, this Note if the Holder thereof shall have provided wire transfer instructions to the Company and the Paying Agent 5 days prior to the payment date. Such wire transfer instructions will remain in effect until receipt of written direction changing or rescinding instructions. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 4. Paying Agent and Registrar. Initially, Bank One Trust Company, NA, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 5. Indenture and Collateral Documents. The terms of this Note include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S.C. Sections 77aaa-77bbbb). This Note is subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. The Notes are secured obligations of the Company limited to $7,000,000 in initial aggregate principal amount plus any increases in principal amount of the Notes as a result of the deferred payment of interest. The Notes are secured by the Collateral as set forth in the Collateral Documents. By its acceptance hereof, the Holder acknowledges and agrees that the Trustee has entered into the Liquidity Facility Intercreditor Agreement and the Senior Notes Intercreditor Agreement pursuant to which the liens granted to the Collateral Agent to secure the indebtedness evidenced hereby are subordinated to the liens securing the indebtedness under the Liquidity Facility and under the Senior Notes. 6. Optional Redemption. The Company may redeem all or a part of this Note in accordance with Article 3 of the Indenture upon not less than 30 nor more than 60 days' notice, at the then principal amount outstanding thereof, plus, in each case, accrued interest thereon from the most recent Interest Payment Date to which interest has been paid or duly provided for, to the applicable redemption date (subject, in the case of a redemption on or after a Record Date but on or prior to the related Interest Payment Date, to the right of Holders of record on the relevant Record Date to receive interest, if any, that the Company has elected to pay in cash on the related Interest Payment Date). If less than all of the Notes are to be redeemed at any time of redemption, the Trustee shall select the Notes to be redeemed among the Holders in accordance with the Indenture. 7. Mandatory Redemption. At any time the sum (the "AGGREGATE PROCEEDS") of (x) the aggregate amount of all Remaining Capital Raising Proceeds and (y) the aggregate amount of all Remaining Asset Sale Proceeds exceeds $5 million (each, a "MANDATORY REDEMPTION TRIGGERING EVENT"), the Company shall make a mandatory redemption of Senior Notes to the extent required under the Senior Notes Indenture (as defined in Indenture), and if any such Aggregate Proceeds remain after application to any such redemption of Senior Notes, the Company shall, within 60 days of such Mandatory Redemption Triggering Event, redeem the maximum principal amount of the Notes that may be redeemed out of any such remaining Aggregate Proceeds. Such redemption of the Notes shall be made upon not less than 15 nor more than 60 days' notice, at the principal amount outstanding thereof plus accrued interest thereon that has not been paid or duly provided for, to the applicable redemption date (subject, in the case of a redemption on or after a Record Date but on or prior to the related Interest Payment Date, to the right of Holders of record on the relevant Record Date to receive interest, if any, that the Company has elected to pay in cash on the related Interest Payment Date). If less than all of the Notes are to be redeemed at any time of redemption, the Trustee shall select the Notes to be redeemed among the Holders in accordance with the Indenture. Pending the final application of any Remaining Capital Raising Proceeds or Remaining Asset Sale Proceeds, the Company or the applicable Subsidiary, as the case may be, may invest such proceeds in Cash which shall be pledged to the Trustee for the holders of Senior Notes and, subject to the terms of the Senior Notes Intercreditor Agreement, the Notes, to the extent required by the Senior Notes Indenture, and to the extent not so required, shall be pledged to the Trustee as security for the Holders of the Notes. The outstanding principal amount of this Note shall be reduced by the aggregate amount of any redemption payment in respect of the Notes to be applied to this Note in accordance with Article 3 of the Indenture. The Company shall not be required to make mandatory redemption payments or sinking fund payments with respect to the Notes other than as set forth in this paragraph 7. 8. Notice of Redemption. Notice of redemption shall be mailed by first class mail at least 15 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. No Notes in amounts of $100 or less shall be redeemed in part. If fewer than all Notes are to be redeemed at any time, Notes selected shall be in amounts of $100 or larger integral multiples of $1.00, except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of the Notes held by such Holder, even if not a multiple of $1.00, shall be redeemed. On and after the redemption date, interest shall cease to accrue on this Note or portions thereof called for redemption. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations and integral multiples as provided in Section 2.1 of the Indenture. The transfer of this Note may be registered and this Note may be exchanged as provided in the Indenture. The Registrar and the Trustee may require the Holder of this Note, among other things, to furnish appropriate endorsements and transfer documents and the Company may require such Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of this Note or portion of this Note selected for redemption, except for the unredeemed portion of this Note being redeemed in part. Also, the Company need not exchange or register the transfer of this Note for a period of 15 days before a selection of Notes to be redeemed. 10. Persons Deemed Owners. The registered Holder of this Note may be treated as its owner for all purposes. 11. Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents (as defined in the Indenture) may be amended or supplemented with the consent of the Holders of at least a majority in outstanding principal amount of the then outstanding Notes voting as a single class (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, the Notes), and any existing default or compliance with any provision of the Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents may be waived with the consent of the Holders of a majority in outstanding principal of the then outstanding Notes voting as a single class (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, the Notes). Without the consent of any Holder of a Note, the Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to enter into additional or supplemental Intercreditor Agreements or Collateral Documents or to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. 12. Defaults and Remedies. Events of Default include: (a) default in the payment of (i) any installment of the principal of any Note when due or (ii) any installment of interest on any Note or other amount payable with respect to any Note for a period of 5 consecutive days from the date when due; (b) failure by the Company or any of its Subsidiaries to perform or comply with the provisions described under Sections 4.10 through 4.22, 4.23(b), 4.24 through 4.27, 4.29 and 4.30 of the Indenture; (c) failure by the Company for 30 consecutive days to comply with any other term, covenant or agreement in any material respect, or the Company's breach of any representation or warranty in any material respect contained in, the Indenture, the Notes, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement or the other Collateral Documents; (d) (i) default by the Company or any of its Subsidiaries in the payment when due (giving effect to any applicable grace period) of any amounts owing under the Liquidity Facility (as defined in the Indenture) or the Senior Notes or any obligation or Indebtedness (other than those specifically arising under the Indenture) in excess of $1.0 million in aggregate amount, or (ii) fail to observe or perform any material term, covenant or agreement contained in any agreement governing the Liquidity Facility or the Senior Notes Indenture or entered into pursuant thereto or any agreement for such obligation or Indebtedness by which it is bound, in each case for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder accelerate the maturity thereof; provided, however, that any default under this subsection (d) with respect to the Liquidity Facility or the Senior Notes Indenture shall be deemed cured if such default shall have been cured by the Company or unconditionally waived by the lenders or the holders of the Senior Notes thereunder, as applicable, pursuant to the terms thereof; (e) the entering of one judgment or decree against the Company or any of its Subsidiaries involving a liability (to the extent not paid or covered by insurance or the third party indemnity of a solvent indemnitor) equal to or greater than $5.0 million or the entering of one or more judgments or decrees involving in the aggregate a liability (to the extent not paid or covered by insurance or the third party indemnity of a solvent indemnitor) equal to or greater than $10.0 million and, in all such cases, all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; (f) certain events relating to the Company, its ERISA Affiliates and their respective Pension Plans as more fully described in the Indenture; (g) the institution against the Company, or any of its Subsidiaries, of any proceeding for which forfeiture (to the extent not paid or covered by insurance or the third party indemnity of a solvent indemnitor) of any property equal to or greater than $5.0 million is a potential penalty and such proceeding shall not have been vacated or discharged within thirty (30) days of its institution; and (h) certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries (other than any Non-Material Subsidiaries) as more fully described in the Indenture. In the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries or in the case of the acceleration of the outstanding principal amount of any Senior Note or of any outstanding principal amount owing under the Liquidity Facility, all outstanding Notes will become due and payable without further action or notice. If any other Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in outstanding principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in outstanding principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or Interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate outstanding principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee quarterly a statement regarding compliance with the Indenture. Upon becoming aware of any Default or Event of Default, the Company is required to deliver to the Trustee a statement specifying such Default or Event of Default. 13. Trustee Dealings with Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. 14. Authentication. This Note shall not be valid until authenticated by the manual or facsimile signature of the Trustee or an authenticating agent. 15. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 16. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 17. Governing Law. The Indenture and the Note shall be governed by, and construed in accordance with, the laws of the State of ______ as provided in the Indenture. The Company shall furnish to the Holder of this Note upon written request and without charge a copy of the Indenture, the Liquidity Facility Intercreditor Agreement, the Senior Notes Intercreditor Agreement, any of the other Collateral Documents and/or any schedule delivered under the Indenture supplementing or replacing Schedule A thereto. Requests may be made to: Komag, Incorporated 1710 Automation Parkway San Jose, California 95131-1873 Facsimile: (408) 944-9234 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: ----------------------------------- (Insert assignee's legal name) - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint ________________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: ------------------- Your Signature: --------------------------------- (Sign exactly as your name appears on the face of this Note) Signature Guarantee*: ---------------------- * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Principal Amount at Amount of Decrease in Amount of Increase in Maturity Signature of Principal Amount at Principal Amount at of this Global Note Authorized Officer Maturity Maturity Following such of Trustee or Date of Exchange of this Global Note* of this Global Note* decrease (or increase)* Note Custodian - ---------------- -------------------- -------------------- ----------------------- --------------
- ------------------------ * Without taking into account any increases in the principal amount of this Note attributable to the addition of deferred interest pursuant to the terms of this Note. 1 EX-99.T3E1 6 f82285orexv99wt3e1.txt EXHIBIT T3 E-1 HENNIGAN, BENNETT & DORMAN EXHIBIT T3E-1 BRUCE BENNETT (SBN 105430) JAMES O. JOHNSTON (SBN 167330) JOSHUA D. MORSE (SBN 211050) 601 South Figueroa Street, Suite 3300 Los Angeles, California 90017 Telephone: (213) 694-1200 Fax: (213) 694-1234 Reorganization Counsel for Debtor and Debtor in Possession UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION In re ) Case No. 01-54143-JRG ) KOMAG, INCORPORATED, f/a/k/a ) Chapter 11 HMT TECHNOLOGY CORPORATION, ) a Delaware corporation, ) DISCLOSURE STATEMENT ) WITH RESPECT TO THE Debtor. ) DEBTOR'S FIRST AMENDED ) PLAN OF REORGANIZATION, ) DATED NOVEMBER 7, 2001 ) ) Confirmation Hearing ) ) Date: January 10, 2002 ) Time: 1:30 p.m. ) Place: Courtroom 3020 ) 280 South First Street ) San Jose, California ) 95113-3099 - ---------------------------------------------- CHAPTER 11 SOLICITATION MATERIALS SUMMARY THE FOLLOWING PAGES SUMMARIZE CERTAIN IMPORTANT INFORMATION SET FORTH ELSEWHERE IN THIS DISCLOSURE STATEMENT. CAPITALIZED TERMS ARE DEFINED IN THE TEXT OF THIS DISCLOSURE STATEMENT AND IN THE PLAN. THE DISCLOSURE STATEMENT CONTAINS IMPORTANT INFORMATION THAT IS NOT SUMMARIZED IN THIS SUMMARY AND THAT MAY INFLUENCE YOUR DECISION REGARDING WHETHER TO ACCEPT OR REJECT THE PLAN OR OTHERWISE AFFECT YOUR RIGHTS. PLEASE DO NOT RELY ON THIS SUMMARY STANDING ALONE, AND PLEASE READ ALL OF THIS DOCUMENT AND THE ACCOMPANYING MATERIALS THOROUGHLY.
Pg. Ref. DEBTOR Komag, Incorporated 1 BANKRUPTCY COURT United States Bankruptcy Court for the Northern District of 1 California The Honorable James J. Grube, presiding PLAN Debtor's First Amended Plan of Reorganization, Ex. dated November 7, 2001 A PURPOSE OF THE To provide information of a kind, and in sufficient detail, 1-2 DISCLOSURE STATEMENT that would enable a typical holder of claims or interests in a class impaired under the Plan to make an informed judgment with respect to voting on the Plan. BALLOTING INFORMATION Ballots have been provided with this Disclosure Statement to 3 creditors and shareholders known to have Claims or Equity Interests that are impaired under the Plan. Ballots must be returned to and received by the person identified on the instructions to the Ballots by no later than 4:00 p.m., Pacific Time, on December 17, 2001. CONFIRMATION HEARING AND A hearing regarding confirmation of the Plan will be held by 3-4 CONFIRMATION OBJECTIONS the Bankruptcy Court on January 10, 2002, commencing at 1:30 p.m., Pacific Time. Objections to confirmation must be filed and served by no later than December 24, 2001. TREATMENT OF CLAIMS If the Court confirms the Plan and the Plan becomes AND EQUITY INTERESTS effective, Claims and Equity Interests will be treated as follows: Administrative Claims, Paid in full, either on the Effective Date or over time, 24-27 Priority Tax Claims, or unimpaired. See the Disclosure Statement and the Plan Priority Claims, and for specific information. Secured Claims Class 3 Will receive a Pro Rata Share of (a) $82.5 million in New 27-30 Loan Restructure Cash Pay Notes; (b) $32.5 million in New PIK Notes; and Agreement Claims (c) 12,525,000 shares of New Common Stock (which represents approximately 51.4% of the New Common Stock to be issued by the Reorganized Debtor). Also, the Loan Restructure Agreement Agent will receive reimbursement for certain unpaid fees and expenses as permitted under the Loan Restructure Agreement.
Summary 1
Pg. Ref. Class 4 30-32 Western Digital Will receive (a) $11 million in New PIK Notes; and (b) 3,022,127 shares of New Class 4-A Common Stock (which represents approximately 12.4% (claims relating to the of the New Common Stock to be issued by the Western Digital Note) Reorganized Debtor). Class 4-B Will receive 893,723 shares of New Common Stock (which (Western Digital lease represents approximately 3.67% of the New Common Stock to rejection claims) be issued by the Reorganized Debtor). Class 5 The holder of the Nelson Note will receive 500,000 shares 32-33 Convertible Notes Claims of New Common Stock (which represents approximately 2.05% (claims under of the New Common Stock to be issued by the Reorganized the Nelson Note and Debtor); and (b) the holder of the Olympus Note will the Olympus Note) receive 750,000 shares of New Common Stock (which represents approximately 3.08% of the New Common Stock to be issued by the Reorganized Debtor). Class 6 Will receive a Pro Rata Share of (a) 3,744,775 shares of 33 Subordinated Notes Claims New Common Stock (which represents approximately 15.37% (claims relating to the 5 3/4% of the New Common Stock to be issued by the Reorganized Convertible Subordinated Debtor); and (b) in the event that Class 9 votes to Notes due 2004, issued by reject the Plan, an additional 750,000 shares of New HMT Technology Corp.) Common Stock (which represents an additional approximately 3.08% of the New Common Stock to be issued by the Reorganized Debtor). Class 7 Will receive a Pro Rata Share of (a) $1,000,000 in Cash; 33-35 General Unsecured Claims (b) $2.5 million of New Cash Pay Notes; and (c) 558,660 (primarily trade and shares of New Common Stock (which represents lease rejection claims) approximately 2.29% of the New Common Stock to be issued by the Reorganized Debtor). Class 8 Will receive a Pro Rata Share of $650,000 in Cash, up to 35-36 Convenience Claims a maximum of one hundred percent (100%) of the amount of (unsecured claims of the claim. $10,000 or less) Class 9 If Class 9 (the class of shareholders) votes to accept 36-37 Equity Interests the Plan, each shareholder will receive a Pro Rata Share of 750,000 shares of New Common Stock (which represents approximately 3.08% of the New Common Stock to be issued by the Reorganized Debtor). If, however, the Bankruptcy Court determines that such treatment of Equity Interests causes the Plan to violate the requirements of section 1129 of the Bankruptcy Code or otherwise renders the Plan not capable of being confirmed, Class 9 will receive no distributions and retain no interests under the Plan. QUESTIONS: Please contact the Debtor's counsel, James O. Johnston, Hennigan, Bennett & Dorman, 601 South Figueroa Boulevard, Suite 3300, Los Angeles, California 90017 (facsimile: 213-694-1234)
Summary 2 TABLE OF CONTENTS
PAGE ---- I. INTRODUCTION.............................................................................1 A. The Purpose Of This Disclosure Statement.........................................1 B. Summary Of Entities Entitled To Vote On The Plan And Of Certain Requirements Necessary For Confirmation Of The Plan...........................................2 C. Voting Procedures, Balloting Deadline, Confirmation Hearing, And Other Important Dates, Deadlines, And Procedures.................................................3 1. Voting Procedures And Deadlines...........................................3 2. Date Of The Confirmation Hearing And Deadlines For Objection To Confirmation Of The Plan..................................................3 D. Important Notice And Cautionary Statement........................................4 E. Additional Information...........................................................4 II. BACKGROUND INFORMATION...................................................................5 A. The Debtor's Businesses And Operations...........................................5 B. The Western Digital and HMT Transactions.........................................5 C. Changes Within The Industry......................................................6 D. Historical Financial Statements..................................................7 E. Future Prospects.................................................................7 F. The Debtor's Capital Structure And Outstanding Indebtedness......................8 G. Events Precipitating The Chapter 11 Case........................................11 III. THE CHAPTER 11 CASE AND OTHER ISSUES RELEVANT TO CONSIDERATION OF THE PLAN..............13 A. The Chapter 11 Case.............................................................13 B. Claims Against The Debtor.......................................................15 C. Cash On Hand; Remaining Assets; And Available Causes of Action..................15 D. Alleged Claims Regarding HMT Merger Transaction.................................17 IV. SUMMARY OF THE PLAN.....................................................................18 A. Classification And Treatment Of Claims And Interests............................24 1. Unclassified Claims......................................................24 a) Unpaid Administrative Claims......................................25 (1) Treatment..................................................25 (2) Bar Date For Assertion of Requests For Payment Of Administrative Claims Other Than Administrative Tax Claims And Ordinary Course Administrative Claims..................25
-i- (3) Bar Date For The Assertion Of Administrative Tax Claims....26 b) Priority Tax Claims...............................................26 2. Class 1 (Priority Claims)................................................26 3. Class 2 (Secured Claims).................................................27 4. Class 3 (Loan Restructure Agreement Claims)..............................27 a) Allowance.........................................................27 b) Treatment.........................................................27 (1) The New Notes..............................................28 (2) Enforcement and Satisfaction of Subordination Provisions of the Convertible Notes, the Subordinated Notes Indenture, and the Western Digital Note....................29 5. Class 4 (Western Digital Claims).........................................30 a) Class 4-A (Western Digital Note Claim). Allowance................30 b) Class 4-A (Western Digital Note Claim). Treatment................31 c) Class 4-B (Western Digital Rejection Claims). Allowance..........31 d) Class 4-B (Western Digital Rejection Claims). Treatment..........31 6. Class 5 (Convertible Notes Claims).......................................32 a) Allowance.........................................................32 b) Treatment.........................................................32 7. Class 6 (Subordinated Notes Claims)......................................33 a) Allowance.........................................................33 b) Treatment.........................................................33 8. Class 7 (General Unsecured Claims).......................................33 9. Class 8 (Convenience Claims).............................................35 10. Class 9 (Equity Interests)...............................................36 B. Treatment Of Executory Contracts And Unexpired Leases...........................37 1. Generally................................................................37 2. Assumption...............................................................37 a) Cure Payments.....................................................38 b) Bar Date for the Assertion of Claims for Cure Payments............38 3. Rejection................................................................38
-ii- a) Deadline For The Assertion Of Rejection Damage Claims; Treatment Of Rejection Damage Claims..............................39 4. Indemnification Obligations..............................................39 C. Means For Execution And Implementation Of The Plan..............................39 1. Revesting Of Assets, Including Rights Of Action..........................39 2. Management and Operation of the Reorganized Debtor.......................40 3. Reorganized Debtor Directors and Officers................................40 4. Amendment of Certificate of Incorporation................................40 5. Amendment of Bylaws......................................................41 6. Issuance of New Securities...............................................41 7. Employee Retention Plan..................................................41 8. Cancellation of Existing Securities and Instruments......................42 9. Cancellation of Liens....................................................42 10. Corporate Action.........................................................43 11. Exit Financing Facility..................................................43 D. Distributions...................................................................43 1. Undeliverable Distributions..............................................43 2. Fractional Securities....................................................44 3. Compliance with Tax Requirements.........................................44 4. Time Bar to Cash Payments................................................44 5. No De Minimis Distributions..............................................44 6. Surrender of Existing Securities and Instruments.........................44 7. No Distributions on Account of Disputed Claims or Disputed Equity Interests................................................................45 E. Objections To Claims............................................................45 1. Claims Objection Deadline; Prosecution of Objections.....................45 2. Reserves, Payments, and Distributions with Respect to Disputed Claims....45 F. Continuing Jurisdiction Of The Bankruptcy Court.................................45 V. CONFIRMATION AND EFFECTIVENESS OF THE PLAN..............................................46 A. Voting And Right To Be Heard At Confirmation....................................46 1. Who May Support Or Object To Confirmation Of The Plan?...................46 2. Who May Vote To Accept Or Reject The Plan?...............................46 a) What Is An Allowed Claim Or Interest For Voting Purposes?.........46 b) What Is An Impaired Claim Or Interest?............................47
-iii- 3. Who Is Not Entitled To Vote?.............................................47 4. Votes Necessary To Confirm The Plan......................................47 a) Votes Necessary For A Class To Accept The Plan....................47 b) Treatment Of Nonaccepting Classes.................................47 c) Request For Confirmation Despite Nonacceptance By Impaired Classes..................................................48 B. "Best Interests Test"; Liquidation Analysis.....................................48 C. Feasibility.....................................................................49 D. Effective Date..................................................................50 1. Conditions To The Occurrence Of The Effective Date.......................50 2. Non-Occurrence Of Effective Date.........................................50 E. Effect Of Confirmation; Limitation On Liability; Indemnification................51 1. Title to Assets; Discharge of Liabilities; Discharge of the Debtor.......51 2. Injunction...............................................................51 3. Term of Existing Injunctions or Stays....................................52 4. Exculpation..............................................................52 5. Releases of and by Loan Restructure Agreement Lenders....................52 6. Claims and Causes of Action..............................................53 VI. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO THE NEW SECURITIES TO BE DISTRIBUTED UNDER THE PLAN.............................................................53 VII. VALUE OF THE REORGANIZED DEBTOR.........................................................54 VIII. CERTAIN RISK FACTORS TO BE CONSIDERED...................................................56 A. Overall Risks to Recovery by Holders of Claims and Equity Interests.............57 B. Significant Holders.............................................................57 C. Lack of Established Market for New Common Stock.................................57 D. Dividend Policies...............................................................58 E. Projected Financial Information.................................................58 F. Business Factors and Competitive Conditions.....................................58 IX. CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................67 A. Introduction....................................................................67 B. Federal Income Tax Consequences To The Debtor...................................68 1. Reduction of Tax Attributes and Cancellation of Debt.....................68 2. Limitation on NOL Carryforwards and Other Tax Attributes.................68
-iv- C. Federal Income Tax Consequences To Creditors....................................69 1. Holders of Class 1 (Priority) Claims or Class 2 (Secured) Claims.........70 2. Holders of Class 3 (Loan Restructure Agreement) Claims...................70 3. Holders of Class 4 (Western Digital) Claims..............................73 4. Holders of Class 5 (Convertible Note) or Class 6 (Subordinated Notes) Claims...................................................................74 5. Holders of Class 7 (General Unsecured) Claims............................75 6. Holders of Class 8 (Convenience) Claims..................................75 7. Holders of Class 9 Equity Interests......................................75 8. Information Reporting and Withholding....................................75 D. General Disclaimer..............................................................76 X. RECOMMENDATION AND CONCLUSION...........................................................76
EXHIBIT A Plan of Reorganization EXHIBIT B Historical Financial Statements EXHIBIT C Schedule of Payments Made within Ninety Days prior to the Petition Date EXHIBIT D Schedule of Patents EXHIBIT E Schedule of Known Executory Contracts EXHIBIT F Liquidation Analysis EXHIBIT G Projections EXHIBIT H Valuation EXHIBIT I Western Digital Claim Letter -v- I. INTRODUCTION Komag, Incorporated (also known as HMT Technology Corporation prior to a merger with Komag, Incorporated) (the "Debtor") filed a voluntary petition under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") on August 24, 2001 (the "Petition Date"), thereby commencing Case Number 01-54143-JRG (the "Chapter 11 Case") currently pending before the United States Bankruptcy Court for the Northern District of California (the "Bankruptcy Court"). Since the Petition Date, the Debtor has managed its affairs as a debtor and debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. The Debtor is the proponent of the "First Amended Plan Of Reorganization, Dated November 7, 2001" (the "Plan"), a copy of which is attached to this Disclosure Statement as Exhibit A. The Bankruptcy Court has determined that this Disclosure Statement contains "adequate information" within the meaning of section 1125 of the Bankruptcy Code and has authorized the Debtor to transmit it to holders of impaired Claims and Equity Interests in connection with the solicitation of votes with respect to the Plan.(1) The Plan is the product of extensive good-faith, arms'-length negotiations among the Debtor and certain other constituents in the Chapter 11 Case. As described more fully elsewhere in this document, the Debtor believes that the Plan provides the greatest and earliest possible recoveries to holders of Claims and Equity Interests, that acceptance of the Plan is in the best interests of all parties, and that any alternative restructuring, reorganization, or liquidation would result in delay, uncertainty, expense and, ultimately, smaller distributions to stakeholders. * * * PLEASE READ ARTICLE IV OF THIS DISCLOSURE STATEMENT FOR A DESCRIPTION OF THE PLAN, A SUMMARY OF THE DISTRIBUTIONS THAT CREDITORS AND OTHER STAKEHOLDERS WILL RECEIVE UNDER THE PLAN, AND AN EXPLANATION OF CERTAIN ASSUMPTIONS AND PREMISES UPON WHICH THE PLAN IS BASED. * * * A. THE PURPOSE OF THIS DISCLOSURE STATEMENT. The Bankruptcy Code generally requires that the proponent or proponents of a plan of reorganization prepare and file with the Bankruptcy Court a "disclosure statement" that provides information of a kind, and in sufficient detail, that would enable a typical holder of claims or interests in a class impaired under that plan to make an informed judgment with respect to the plan. This Disclosure Statement provides such information, as well as information regarding the deadlines for casting Ballots with respect to the Plan, the deadlines for objecting to confirmation of the Plan, the requirements that must be satisfied in order for the Bankruptcy Court to confirm the Plan, and other relevant information. PARTIES IN INTEREST SHOULD READ THIS DISCLOSURE STATEMENT, THE PLAN, AND ALL OF THE EXHIBITS ACCOMPANYING SUCH DOCUMENTS IN THEIR ENTIRETY IN ORDER TO ASCERTAIN: - ---------- (1) Any capitalized term not otherwise defined in this Disclosure Statement has the meaning ascribed to it in the Plan. Unless otherwise indicated, references in this Disclosure Statement to "Sections" and "Articles" are references to the various enumerated Sections and Articles of this Disclosure Statement. 1. How the Plan will affect their Claims against and Equity Interests in the Debtor; 2. Their rights with respect to voting for or against the Plan; 3. Their rights with respect to objecting to confirmation of the Plan; and 4. How and when to cast a Ballot with respect to the Plan. This Disclosure Statement, however, cannot and does not provide holders of Claims and Equity Interests with legal or other advice or inform such parties of all aspects of their rights. Claimants are advised to consult with their attorneys and/or financial advisors to obtain more specific advice regarding how the Plan will affect them and regarding their best course of action with respect to the Plan. This Disclosure Statement has been prepared in good faith and in compliance with applicable provisions of the Bankruptcy Code. Based upon information currently available, the Debtor believes that the information contained in this Disclosure Statement is correct as of the date of its filing. The Disclosure Statement, however, does not and will not reflect events that occur after November 7, 2001 (and certain earlier dates where indicated herein), and the Debtor assumes no duty and presently does not intend to prepare or distribute any amendments or supplements to reflect such events. B. SUMMARY OF ENTITIES ENTITLED TO VOTE ON THE PLAN AND OF CERTAIN REQUIREMENTS NECESSARY FOR CONFIRMATION OF THE PLAN. Holders of allowed Claims in Class 1 (Priority Claims); Class 2 (Secured Claims); Class 3 (Loan Restructure Agreement Claims), Class 4-A (Western Digital Note Claim), Class 4-B (Western Digital Rejection Claims), Class 5 (Convertible Notes Claims), Class 6 (Subordinated Notes Claims), Class 7 (General Unsecured Claims), and Class 8 (Convenience Claims), as well as holders of allowed Equity Interests in Class 9 (Equity Interests) (collectively, the "Voting Classes"), are entitled to vote on the Plan, because such Classes may be "impaired" under the Plan within the meaning of section 1124 of the Bankruptcy Code. Holders of other Claims, however, may object to confirmation of the Plan. (See Article IV for a description of the various Classes of Claims and Equity Interests and of the treatment of such Claims and Equity Interests under the Plan, and see Section V.A. for an explanation of impairment and of the entities that are entitled to vote on the Plan). The Bankruptcy Court may confirm the Plan only if at least one Class of impaired Claims has voted to accept the Plan (without counting the votes of any insiders whose Claims are classified within that Class) and if certain statutory requirements are met as to both nonconsenting members within a consenting Class and as to dissenting Classes (if any). A Class of Claims has accepted the Plan only when at least one-half in number and at least two-thirds in amount of the allowed Claims actually voting in that Class vote in favor of the Plan. A Class of Equity Interests has accepted the Plan when at least two-thirds in amount of the allowed Equity Interests actually voting in that Class vote in favor of the Plan. In the event of a rejection of the Plan by one or more Voting Classes, the Debtor may request that the Bankruptcy Court confirm the Plan in accordance with section 1129(b) of the Bankruptcy Code, which permits confirmation notwithstanding such rejection if the Bankruptcy Court finds that the Plan "does not discriminate unfairly" and is "fair and equitable" with respect to the rejecting Classes. (See Article V for a more detailed description of the requirements for acceptance and confirmation of the Plan). -2- C. VOTING PROCEDURES, BALLOTING DEADLINE, CONFIRMATION HEARING, AND OTHER IMPORTANT DATES, DEADLINES, AND PROCEDURES. 1. VOTING PROCEDURES AND DEADLINES. The Debtor has provided copies of this Disclosure Statement and Ballots (which include detailed voting instructions) to all known holders of impaired Claims and Equity Interests in the Voting Classes. Those holders of an allowed Claim or Equity Interest in a Voting Class who seek to vote to accept or reject the Plan must complete a Ballot and return it to Poorman-Douglas Corporation, Attention Ballot Tabulator (Komag, Incorporated), 10300 Southwest Allen Boulevard, Beaverton, Oregon, 97005, facsimile: (503) 350-5230 (the "Ballot Tabulator") or, in the case of shareholders and holders of Subordinated Notes, to the person identified on the Ballots sent to them, so that the Ballot actually is received by no later than the Balloting Deadline (as defined below). Ballots do not constitute proofs of Claim or Equity Interests and must not be returned directly to the Debtor or to the Bankruptcy Court. ALL BALLOTS, INCLUDING BALLOTS TRANSMITTED BY FACSIMILE, MUST BE COMPLETED, SIGNED, RETURNED TO, AND ACTUALLY RECEIVED BY THE REQUIRED RECIPIENT BY NOT LATER THAN DECEMBER 17, 2001, AT 4:00 P.M. PACIFIC TIME (THE "BALLOTING DEADLINE"). BALLOTS RECEIVED AFTER THE BALLOTING DEADLINE, AND BALLOTS RETURNED DIRECTLY TO THE DEBTOR OR THE BANKRUPTCY COURT, MAY NOT BE COUNTED IN CONNECTION WITH CONFIRMATION OF THE PLAN. Readers are encouraged to read and review their Ballots carefully. In addition to providing the means by which to accept or reject the Plan, the Ballots also enable qualifying entities to reduce the maximum allowable amount of their Claims to $10,000 and thereby opt into Class 8 (Convenience Claims) under the Plan and to opt out of Class 8 and into Class 7 (General Unsecured Claims) under the Plan (see Section IV.A.9). 2. DATE OF THE CONFIRMATION HEARING AND DEADLINES FOR OBJECTION TO CONFIRMATION OF THE PLAN. The hearing to determine whether the Bankruptcy Court will confirm the Plan (the "Confirmation Hearing") will commence on January 10, 2002, at 1:30 p.m. Pacific Time in the Courtroom of the Honorable James R. Grube, United States Bankruptcy Judge for the Northern District of California, Courtroom 3020, 280 South First Street, San Jose, California 95113-3099. The Confirmation Hearing may be continued from time to time by announcement in open Court without further notice. Any objections to confirmation of the Plan must be filed with the Bankruptcy Court and served on the following entities (collectively, the "Notice Parties") so as to be actually received by no later than December 24, 2001: (a) Komag, Incorporated, 1710 Automation Parkway, San Jose, California 95131, Attention: Mr. Edward H. Siegler; (b) Hennigan, Bennett, & Dorman, 601 South Figueroa Street, Suite 3300, Los Angeles, California 90017, Attention: James O. Johnston, Esq. (counsel to the Debtor); (c) Peitzman, Glassman & Weg LLP, 1801 Avenue of the Stars, Suite 1225, Los Angeles, California 90067, Attention: Lawrence Peitzman, Esq. (counsel to the Official Committee of Unsecured Creditors); (d) Milbank, Tweed, Hadley & McCloy, 601 South Figueroa Street, Suite 3000, Los Angeles, California 90017, Attention: Gregory A. Bray, Esq. (counsel to the Loan Restructure Agreement Lenders); and (e) The Office of the United States Trustee, 280 South First Street, Suite 268, San Jose, California 95113, Attention: Kevin Epstein, Esq. Objections that are not timely filed and served may not be considered by the Bankruptcy Court. PLEASE -3- REFER TO THE ACCOMPANYING NOTICE OF THE CONFIRMATION HEARING FOR SPECIFIC REQUIREMENTS REGARDING THE FORM AND NATURE OF OBJECTIONS TO CONFIRMATION OF THE PLAN. D. IMPORTANT NOTICE AND CAUTIONARY STATEMENT. The historical financial data relied upon in preparing the Plan and this Disclosure Statement is based upon the Debtor's books and records. The liquidation analysis, valuations, estimates, and other financial information referenced in this Disclosure Statement or attached hereto as Exhibits have been developed with the assistance of the professional advisors employed by the Debtor. Although those professional advisors assisted in the preparation of this Disclosure Statement, in doing so such professionals relied upon factual information and assumptions regarding financial, business, and accounting data provided by the Debtor and third parties, much of which has not been audited. The professional advisors of the Debtor have not independently verified such information and, accordingly, make no representations or warranties as to its accuracy. Moreover, although reasonable efforts have been made to provide accurate information, the Debtor cannot warrant or represent that the information in this Disclosure Statement, including any and all financial information and projections, is without inaccuracy or omissions, or that actual values or distributions will comport with the estimates set forth herein. NO ENTITY MAY RELY UPON THE PLAN OR THIS DISCLOSURE STATEMENT OR ANY OF THE ACCOMPANYING EXHIBITS FOR ANY PURPOSE OTHER THAN TO DETERMINE WHETHER TO VOTE IN FAVOR OF OR AGAINST THE PLAN. Nothing contained in such documents constitutes an admission of any fact or liability by any party, and (except in proceedings before the Bankruptcy Court regarding the interpretation or enforcement of the Plan) no such information will be admissible in any proceeding involving the Debtor or any other party, nor will this Disclosure Statement be deemed evidence of the tax or other legal effects of the Plan on holders of Claims or Equity Interests in the Chapter 11 Case. CAUTIONARY STATEMENT Certain information included in this Disclosure Statement and its Exhibits contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "believe", "expect", "anticipate" and similar expressions identify such forward-looking statements. The forward-looking statements are based upon information available when such statements are made, and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. A number of those risks and uncertainties are described in Article VIII. Readers therefore are cautioned not to place undue reliance on the forward-looking statements in this Disclosure Statement. The Debtor undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NEITHER HAS APPROVED NOR DISAPPROVED THIS DISCLOSURE STATEMENT, NOR HAS IT DETERMINED WHETHER THIS DISCLOSURE STATEMENT IS ACCURATE, TRUTHFUL, OR COMPLETE. E. ADDITIONAL INFORMATION. If you have any questions about the procedures for voting on the Plan, desire another copy of a Ballot, or seek further information about the timing and deadlines with respect to confirmation of the Plan, please write to counsel for the Debtor as follows: James O. Johnston, Hennigan, Bennett & Dorman, 601 South Figueroa Street, Suite 3300, Los -4- Angeles, California 90017 (facsimile: 213-694-1234). Please note that counsel for the Debtor cannot and will not provide holders of Claims or Equity Interests with any legal advice, including advice regarding how to vote on the Plan or the effect that confirmation of the Plan will have upon Claims against or Equity Interests in the Debtor. II. BACKGROUND INFORMATION A. THE DEBTOR'S BUSINESSES AND OPERATIONS. The Debtor -- which was incorporated in 1983 -- is the world's largest independent manufacturer of thin-film media, commonly known as "disks," that are incorporated into computer disk drives and are used to record, store and retrieve digital information. Disk drives incorporating thin-film disks are used in applications that require the storage of large amounts of data, including enterprise databases, communications systems, personal computers, internet servers, and consumer appliances (such as peer-to-peer servers, digital video recorders, and game boxes). The Debtor and its non-debtor subsidiaries design, manufacture, and market thin-film disks and are a leading supplier for the computer industry's disk drive manufacturers. The Debtor's disks are manufactured primarily for 3 1/2-inch drives and are sold mainly to independent disk drive manufacturers for incorporation into hard drives that are marketed under the manufacturers' own proprietary labels. The Debtor is on the leading-edge of technology development in the thin-film processing area. For example, the Debtor recently developed and demonstrated media capable of storing sixty-three gigabits of data per square inch, which the Debtor believes to be among the highest storage densities in the industry. The Debtor, together with its subsidiaries, also has significant production advantages, as manufacturing activities now are conducted exclusively outside of the United States. Specifically, in an effort to lower costs and improve productivity, the Debtor recently has consolidated all of its manufacturing operations into facilities in Malaysia, and the Debtor has ceased operations at manufacturing facilities located in Fremont and Santa Rosa, California and in Eugene, Oregon. As a result of this consolidation, the Debtor expects to reduce fixed manufacturing costs (including employee, factory, and equipment expenses) from approximately $52 million per quarter (in the first quarter of 2001) to a target of approximately $35 million per quarter (each as reported on a consolidated basis with the Debtor's non-debtor subsidiaries). The Debtor also recently has consolidated its corporate headquarters and research and development operations into facilities in San Jose and Santa Rosa, California. B. THE WESTERN DIGITAL AND HMT TRANSACTIONS. Prior to the Petition Date, the Debtor engaged in several strategic acquisitions intended to strengthen its leading market position. o WESTERN DIGITAL MEDIA OPERATIONS. In April 1999 the Debtor acquired the internal thin-film media operations of its largest customer -- Western Digital Corporation -- and concurrently executed a valuable agreement by which the Debtor agreed to supply Western Digital with (and Western Digital agreed to purchase from the Debtor) a substantial portion of Western Digital's future thin-film media needs for a three-year period. As consideration for that acquisition and the volume purchase commitment, the Debtor issued to Western Digital 10,783,132 shares of common stock and a three-year promissory note in the amount of $30,077,357. -5- Due to substantial declines in the thin-film media market, as described more fully below, the Debtor ultimately shifted its manufacturing operations to its subsidiary in Malaysia and shut down the production capacity that it acquired from Western Digital. The acquisition nevertheless was important because it provided the Debtor with valuable technology and enabled the Debtor to obtain and lock up a substantial portion of Western Digital's future thin-film media business, while ensuring that Western Digital would not seek to produce disks in house or otherwise remain a competitor in the thin-film media market. The Debtor is aware of no claims against Western Digital arising from this acquisition. In fact, the Debtor's relationship with Western Digital is a strong and extremely valuable one, and Western Digital is the Debtor's largest customer. As described below, Western Digital recently agreed in the context of negotiations regarding the Plan to extend its volume purchase commitments to the Debtor for at least an additional three years, thereby providing a stable, solid source of future business that will serve as the baseline for the Debtor's future operations. o HMT MERGER. In April 2000, the Debtor announced that it had agreed to merge with HMT Technology Corporation ("HMT"), another independent manufacturer of thin-film media. HMT was the only other independent domestic disk manufacturer, and the Debtor and HMT believed that a merger would significantly add to the technological resources of the enterprises, would result in increased market share, and would create major economies of scale to improve the overall cost structure of the business. Following negotiations and due diligence, the parties ultimately closed the merger -- which was in the form of a transaction known as a "reverse triangular merger" -- in October 2000. At closing, KHM, Inc. (a wholly-owned subsidiary of Komag, Incorporated) merged into HMT, and HMT thereby became a wholly-owned subsidiary of Komag. At that time, the assets and liabilities of the merged entities were consolidated. Several months later, in December 2000, the HMT subsidiary was merged into Komag. As with the Western Digital acquisition, due to the declines in the thin-film media market and the Debtor's shift of manufacturing operations to its subsidiaries in Malaysia, the Debtor ultimately shut down the production capacity that it acquired through the HMT merger. The merger nevertheless was beneficial because, among other things, it consolidated the sales volume of the two companies into a single enterprise, significantly lowered combined fixed costs, and created economies of scale and other synergies, thus ultimately reducing overall cost per unit. The Debtor is aware of no viable claims arising from the HMT merger transaction. However, as described in Section III.D., certain holders of Subordinated Notes (which, as described in Section II.F., were issued by HMT prior to the merger) have asserted in an objection to the Disclosure Statement that the merger resulted in a constructively fraudulent transfer because creditors of HMT allegedly did not receive consideration for the merger. As described in Section III.D., the Debtor vigorously disputes that assertion. C. CHANGES WITHIN THE INDUSTRY. Despite its competitive advantages, the Debtor has struggled financially in recent years, in large part as a result of structural changes in the thin-film media industry. From 1990 through approximately 1996, the disk industry experienced rapidly increasing demand, consistent with an overall growth in drive shipments resulting from exploding sales of personal computers. As a result of that increased demand, thin-film media manufacturers -- including the Debtor -- implemented aggressive expansion plans in -6- the mid-1990s. Those expansion efforts -- which typically required one to two years of time for implementation -- resulted in significant new industry-wide production capacity by 1997. At the same time, widespread industry adoption of magneto-resistive technology in 1997 enabled thin-film media producers to advance the rate of improvement in disk area density from a historical rate of thirty to forty percent (30%-40%) per year to a rate of one hundred percent (100%) or more per year. This development resulted in rapidly-increasing data-storage capacity of individual disk platters, which -- when combined with pressure from personal computer manufacturers -- prompted drive manufacturers to reduce the number of disks included in each machine. As a result, disks per drive for desktop personal computers fell from 2.15 disks/drive as recently as 1999 to just 1.3 disks/drive in the current year. In essence, the growth rate for disk shipments decoupled from the rate of growth for sales of personal computers. The lower disk-per-drive ratio resulted in sharply reduced demand for disks from 1997 through 2000 and, when combined with the industry's prior expansion of production facilities, created substantial excess capacity for disk production. The impact of this excess capacity fell disproportionately on independent disk manufacturers such as the Debtor, because drive manufacturers (like Seagate Technology and IBM) opted to utilize their in-house disk production capacities before buying from independent disk manufacturers. The Debtor estimates that such captive, in-house disk manufacturing operations have increased in market share from approximately thirty-three percent (33%) of the market prior 1997 to over fifty percent (50%) in each of the last three years. Moreover, because the disk manufacturing industry is characterized by high fixed costs and capital intensity and because supply is relatively inelastic, when faced with declining demand, disk manufacturers rapidly dropped average selling prices in the hopes of capturing market share in order to raise factory utilization and spread fixed costs over more units. D. HISTORICAL FINANCIAL STATEMENTS. As a result of these factors, the Debtor's sales fell by forty-eight percent (48%), from $632 million in 1997 to $329 million in 1998, and have not recovered materially since that time, despite a recovery in the year 2000 of the Debtor's unit sales. More specific and detailed information regarding the Debtor's recent financial results is set forth in the Debtor's most recent 10-K and 10-Q reports filed with the Securities Exchange Commission, copies of which are attached hereto as Exhibit B. E. FUTURE PROSPECTS. Notwithstanding the financial setbacks described above, the Debtor is optimistic about its future business prospects, and the Debtor forecasts a turnaround in future operating performance for several reasons. First, the Debtor believes that industry supply and demand will soon reach an equilibrium as a result of widespread industry consolidation and reduction in capacity, including the following: (a) Fujitsu's exit from both the hard disk drive and the disk manufacturing business (announced in August 2001); (b) IBM's closure of its production factory in Ireland (2001); (c) AKCL's liquidation (2001); (d) MCI's closure of its production factory in Japan (2000); (e) the Debtor's merger with HMT and subsequent cessation of HMT's manufacturing operations; (f) Seagate's closure of its substrate factories in Anaheim, California and Mexicali, Mexico (2000); (g) Seagate's closure of its media factory in Singapore (1999); (h) the Debtor's acquisition of the thin-film media operations of Western -7- Digital and subsequent cessation of that production capacity (1999); and (i) Stormedia's bankruptcy and liquidation (1998). Second, the Debtor believes that the decline in the average number of disks per drive is reaching its limit and that, as a result, the average number of disks per drive in the desktop personal computer market should remain relatively stable in the near future. With the decrease in industry capacity and the stabilization of disks per drive in the desktop market, the Debtor expects to achieve stabilization in its average per-unit sales price, and thereafter to increase market share and total sales volume as a result of the Debtor's ability to produce disks more efficiently and economically through its unified Malaysian manufacturing operations. The Debtor projects that the lower costs and increased volume ultimately will result in higher margins and a return to profitability. The Debtor also believes that it has significant technological advantages over its competitors that will enable it to increase future market share. For example, the Debtor and its subsidiaries were the first fully qualified merchant source in the industry with the ability to ship disk platters with forty gigabytes of storage per platter (the highest storage density disks currently on the market). The Debtor also is on target in its rigorous program for qualifying the next generation of disks at forty gigabytes per platter, developing sixty- and eighty-gigabytes-per-platter disks for the following generation, and implementing other advancements in its manufacturing process. Finally, the Debtor is in the process of developing advanced anti-ferromagnetically coupled and perpendicular recording media, which may enable the Debtor to increase margins and future profitability. Also highly significant is the fact that, as part of the compromises embodied in the Plan, Western Digital -- the Debtor's largest customer -- now has extended for at least three years its volume purchase commitments to the Debtor and its subsidiaries. This extended volume purchase commitment, which is described in Sections II.G. and IV.A.5, provides for Western Digital to purchase a substantial portion of its annual thin-film media requirements from the Debtor's subsidiaries, and will serve to provide a solid, predictable foundation of business on which the Debtor can continue to build its operations. F. THE DEBTOR'S CAPITAL STRUCTURE, OUTSTANDING INDEBTEDNESS, AND SUBORDINATION AGREEMENTS. As of the Petition Date, the Debtor had approximately $514 million in outstanding unsecured indebtedness, consisting primarily of obligations with respect to the following: o LOAN RESTRUCTURE AGREEMENT. The Debtor owes approximately $206.8 million (as of the Petition Date) in unsecured indebtedness to a consortium of lenders under a "Loan Restructure Agreement," dated as of June 1, 2000 (the "Loan Restructure Agreement"). All principal and accrued interest under the Loan Restructure Agreement became due and payable on July 1, 2001, and the Debtor was unable to make any payment in respect of that indebtedness at that time. As its name implies, the Loan Restructure Agreement is the product of a financial restructuring negotiated by the Debtor prior to the Petition Date. Specifically, prior to June 1, 2000, the Debtor was a party to the following four separate credit facilities that, as of June 1, 2001, had an aggregate amount of approximately $260 million in indebtedness, with maturities beginning in October 2000: (a) a $75 million term loan facility, dated as of February 7, 1997, with Industrial Bank of Japan; (b) a revolving credit facility, dated as of October 7, 1996, with Dai-Ichi Kangyo Bank, under which $35 million was borrowed; (c) a syndicated revolving credit facility, dated as of December 15, 1995, with Industrial Bank of -8- Japan as agent, under which $50 million was borrowed; and (d) a syndicated revolving credit facility, dated as of June 20, 1997, with Bank Boston as agent, under which $100 million was borrowed. In June 1998, the Debtor fell out of compliance with certain financial covenants in some of such facilities (which were cross defaulted with each other), and started the process of negotiating a restructuring with the various lenders. For administrative purposes, both the Debtor and the lenders desired to consolidate all of the existing indebtedness into a single facility, and the negotiations therefore involved the terms and conditions of a consolidated facility. The parties' restructuring negotiations were complicated and prolonged by the Debtor's acquisition of Western Digital's media operations and by the announcement of the HMT merger transactions (each as described in Section II.B.), as well as by the Debtor's decision in August 1999 to cease domestic manufacturing operations. Ultimately, however, the parties agreed upon the comprehensive restructuring embodied in the Loan Restructure Agreement, which provided for consolidated of the four outstanding facilities, elimination of the Debtor's existing defaults under those facilities, and an extension of maturity of the indebtedness until July 2001. The Loan Restructure Agreement was intended to, and did, provide the Debtor with needed breathing space and time to continue its operational reorganization, free of the pressure of being in default under the four restructured financing facilities. As described below, however, the market downturn ultimately left the Debtor with no choice but to commence this Chapter 11 Case in order conclude and consummate its comprehensive financial restructuring. The Debtor is aware that the indebtedness under the Loan Restructure Agreement has traded since its execution. The Debtor is informed by representatives of holders of claims under the Loan Restructure Agreement that the following entities currently hold Loan Restructure Agreement Claims: Bear Stearns & Co., Inc.; Cerberus Partners, L.P.; Citadel Equity Fund, Ltd.; Contadora Capital Management, L.L.C.; Dimensional Partners, L.P.; Dimensional Partners, Ltd.; Loeb Partners Corp.; Mitsubishi Trust and Banking Corporation; Shepard Investments International, Ltd.; and Stark Trading. o CONVERTIBLE NOTES: During the negotiations regarding the Loan Restructure Agreement, two holders of the existing indebtedness expressed a desire to have their debt exchanged for a debt instrument that could be convertible into equity at a later date. Ultimately, the Debtor accommodated those requests by closing a transaction concurrently with the Loan Restructure Agreement that provided for the issuance of unsecured convertible notes in favor of Olympus Securities Ltd. and Nelson Partners Ltd., with principal amounts of $5,606,730.81 and $3,675,000.03, respectively (collectively, the "Convertible Notes"). The notes were issued in exchange for indebtedness under the existing facilities in an amount of approximately $13,259,615, and the Convertible Notes carried a lower interest rate than the rate for the indebtedness in the Loan Restructure Agreement. The Convertible Notes were expressly subordinated to the Debtor's obligations under the Loan Restructure Agreement. As of the Petition Date, the Debtor owed approximately $10.2 million in respect of the Convertible Notes, which mature in June 2005. o WESTERN DIGITAL NOTE: The Debtor owes approximately $33.7 million (as of the Petition Date) in unsecured indebtedness to Western Digital Corporation pursuant to a Promissory Note dated April 8, 1999 (the "Western Digital Note"), issued as consideration for the Debtor's acquisition of Western Digital's media operations. See Section II.B. The -9- Western Digital Note becomes due and payable on April 8, 2002, and is subordinated to the Debtor's obligations under the Loan Restructure Agreement. o HMT SUBORDINATED NOTES: In January 1997, HMT issued $230 million in 5 3/4% Convertible Subordinated Notes due 2004 (the "Subordinated Notes") pursuant to an Indenture dated as of January 15, 1997. The Debtor believes that the merger transaction described in Section II.B. between Komag, Incorporated, and HMT was permitted by the terms of the Indenture relating to the Subordinated Notes, and that HMT and Komag satisfied all documentation and procedural requirements set forth in the Indenture. Among other things, upon HMT becoming a subsidiary of Komag in the first step of the merger, Komag and the Indenture Trustee for the Subordinated Notes executed a First Supplemental Indenture that provided for Komag to guarantee all obligations in respect of the Subordinated Notes. Subsequently, upon the merger of HMT into Komag, Komag and the Indenture Trustee executed a Second Supplemental Indenture that expressly provided for the merged entity to assume all such obligations. As of the Petition Date, the Debtor owed approximately $238.2 million in respect of the Subordinated Notes. Pursuant to the Indenture, the Subordinated Notes are subordinated to the prior payment in full of all existing and future "Senior Debt." The Indenture defines "Senior Debt" as follows: "Senior Debt" means the principal of, interest on, fees costs and expenses in connection with and other amounts due on Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or Guaranteed by the Company, unless, in the instrument creating or evidencing or pursuant to which Indebtedness is outstanding, it is expressly provided that such Indebtedness is not senior in right of payment to the [Subordinated Notes]. Senior Debt includes, with respect to the obligations described above, interest accruing, pursuant to the terms of such Senior Debt, on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, whether or not post-filing interest is allowed in such proceeding, at the rate specified in the instrument governing the relevant obligation. The Indenture in turn defines "Indebtedness" to include obligations "for borrowed money" and obligations "evidenced by a note, debenture, bond or other written instrument." Based upon those provisions, the Debtor believes that the Debtor's obligations in respect of the Loan Restructure Agreement, the Western Digital Note, and the Convertible Notes constitute "Senior Debt" and therefore are senior in right of payment to the Subordinated Notes. As described in Section IV, the Plan is premised upon that subordination. However, as described in Section III.D., certain holders of Subordinated Notes have alleged that the Subordinated Notes are not fully subordinated to such other indebtedness, and have indicated that they intend to challenge the Plan's enforcement of the subordination provisions. o TRADE/LEASE OBLIGATIONS: The Debtor estimates that its obligations in respect of trade and equipment/real property leases approximated $25 million as of the -10- Petition Date. A large majority of the Debtor's obligations in this regard relate to personal property leases for equipment that the Debtor no longer uses and real property leases for facilities that the Debtor no longer uses. As explained above, the Debtor conducts its manufacturing operations through non-debtor foreign subsidiaries in Malaysia. The Debtor also conducts much of its research and development through non-debtor domestic and foreign subsidiaries. As a result, with respect to the assets of the subsidiaries, all of the Debtor's indebtedness is structurally subordinated to the liabilities of the subsidiaries. G. EVENTS PRECIPITATING THE CHAPTER 11 CASE. The changes in the Debtor's business and industry have made it impossible for the Debtor to service and sustain anywhere near the level of indebtedness that the Debtor currently carries on its books. Thus, as noted above, $205.5 million ($201.7 million plus accrued interest) in indebtedness under the Loan Restructure Agreement became due and payable on July 1, 2001, and the Debtor was unable to make any payment at that time. Thereafter, the Debtor also missed a regularly-scheduled interest payment on the Subordinated Notes in July 2001. While the Debtor is optimistic about its future business prospects as a result of the operational reorganization and technology initiatives described above, together with the overall industry-wide reduction in capacity and exit of competitors from the marketplace, the Debtor concluded that a financial restructuring is necessary to enable the Debtor to proceed with a more realistic capital structure and more manageable debt service obligations. As a result, the Debtor engaged in negotiations with holders of the indebtedness issued under the Loan Restructure Agreement regarding a consensual financial restructuring. Those negotiations were arduous and contentious, as the Debtor insisted that any restructuring be based upon a fair allocation of the Debtor's going concern value. Ultimately, however, the Debtor and the lenders under the Loan Restructure Agreement did agree upon certain terms and conditions for a plan of reorganization. Moreover, the Loan Restructure Agreement lenders also agreed to provide the Debtor with certain debtor in possession financing during the Chapter 11 Case, if needed, as well as with working capital financing for the post-chapter 11 period. Following the Petition Date, the Debtor continued its negotiations with other major creditor constituencies -- including Western Digital, the Debtor's largest customer and the holder of approximately $45 million in claims (approximately $34 million of which are claims under the Western Digital Note, which is contractually subordinated to claims under the Loan Restructure Agreement but contractually senior to the Subordinated Notes); and holders of the $10.2 million in Convertible Notes (which, like the Western Digital Note, are contractually subordinated to claims under the Loan Restructure Agreement but contractually senior to the Subordinated Notes). Those discussions also proved fruitful. Specifically, following negotiations that included other holders of the Loan Restructure Agreement claims, holders of the Convertible Notes agreed to the treatment of the Loan Restructure Agreement Claims previously negotiated by the Debtor and also to the treatment of the Convertible Notes claims embodied in the Plan. With respect to Western Digital, one of the Debtor's key objectives was to obtain Western Digital's agreement to extend its volume purchase commitments to the Debtor and its subsidiaries, which commitments were set to expire in April, 2002. Western Digital, -11- however, indicated that it would not agree to any such extension unless it could "monetize" and receive an immediate cash payment for its claims. When the Debtor indicated that it could not make any distributions prior to confirmation of a plan of reorganization, certain holders of the Loan Restructure Agreement claims negotiated with Western Digital to purchase Western Digital's claims and thus provide Western Digital with its desired liquidity. Ultimately, Western Digital agreed to sell its claims to those holders, and the Debtor agreed to provide the treatment of the Western Digital claims that is now set forth in the Plan. Critically, at the time of the assignment, Western Digital agreed to extend its volume purchase commitments to the Debtor and its subsidiaries for at least three (3) years, through at least April, 2005. Finally, the Debtor also negotiated with ICX Corporation and Analytical Services Group, both of which hold General Unsecured Claims and are members of the Official Committee of Unsecured Creditors (the "Committee"), who were negotiating on their own behalf and not on behalf of the Committee or as representatives of trade creditors generally. Based upon those negotiations, the Debtor altered the Plan's treatment of Class 7 (General Unsecured Claims) (as described below). As described more fully elsewhere in this Disclosure Statement, the Debtor believes that the agreement reached with the Loan Restructure Agreement lenders, Western Digital, holders of the Convertible Notes, ICX, and Analytical Services, as embodied in the Plan, provides all stakeholders with a fair allocation of the Debtor's going concern value and enables them to receive more than they would in the event of a liquidation of the Debtor. Even more importantly, the Debtor believes that the negotiated compromise embodied in the Plan maximizes the value to be delivered to creditors and other stakeholders who hold Claims that are junior to the Claims asserted under the Loan Restructure Agreement, the Western Digital Note, and the Convertible Notes, particularly after accounting for the litigation risk that would be associated with a contested hearing regarding valuation and confirmation of the Plan. Moreover, the Plan has resulted in Western Digital extending its volume purchase commitments, thus providing a stable baseline of future business from which value will be realized for all creditors. The Loan Restructure Agreement lenders have asserted to the Debtor that they believe that, after accounting for the various contractual subordination agreements described above, the Plan provides more value to junior classes of creditors than that which would be distributed if the contractual priorities were strictly enforced. Those lenders have indicated to the Debtor that they have agreed to the Plan and the restructuring described in this Disclosure Statement in the spirit of compromise and in order to achieve for the Debtor a rapid, efficient, and cost-effective reorganization and exit from the Chapter 11 Case. In summary, as described more fully below, the Debtor believes that the Plan will enable it to proceed through the Chapter 11 Case as rapidly as possible, to fairly allocate value to all stakeholders, and to emerge from chapter 11 with a restructured balance sheet and favorable prospects for future success, while avoiding the harm to the business and the litigation risk to junior creditors and stakeholders that would accompany contested litigation regarding confirmation of a non-consensual plan of reorganization. -12- III. THE CHAPTER 11 CASE AND OTHER ISSUES RELEVANT TO CONSIDERATION OF THE PLAN A. THE CHAPTER 11 CASE. The Debtor initiated the Chapter 11 Case by filing a voluntary petition under chapter 11 of the Bankruptcy Code on the Petition Date. The Chapter 11 Case has been assigned to the Honorable James R. Grube, United States Bankruptcy Judge for the Northern District of California. The following developments regarding administration of the Estate and operations of the Debtor's business have occurred in the Chapter 11 Case since the Petition Date: SCHEDULES OF ASSETS AND LIABILITIES AND STATEMENT OF FINANCIAL AFFAIRS: Pursuant to Rule 1007 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), the Debtor filed its Schedule of Assets and Liabilities (as amended, the "Schedules") and Statement of Financial Affairs on the Petition Date. Copies of the Schedules are available upon written request to counsel for the Debtor at the address set forth in Section I.C. and payment of applicable photocopying expenses. PAYMENT OF EMPLOYEE WAGES AND CONTINUATION OF EMPLOYEE BENEFITS: On the Petition Date, the Debtor filed a "Motion For Order Authorizing: (I) Honoring Of Outstanding Payroll And Expense Reimbursement Checks; (II) Payments Of Accrued Prepetition Wages; (III) Use Of Existing Payroll And Employee Benefit Bank Accounts; (IV) Continued Contributions To Employee Benefit Plans And Honoring Of Employee Programs; (V) Honoring Of Prepetition Severance Obligations; And (VI) Payment Of Prepetition Workers' Compensation Insurance Premium," by which it requested that the Bankruptcy Court authorize it (a) to honor any outstanding payroll and expense reimbursement checks written to employees and independent contractors that remained uncashed for payroll periods which ended prior to the Petition Date; (b) to pay accrued prepetition wages and salaries of employees and independent contractors for the payroll period ending shortly after the Petition Date; (c) to continue to honor employee benefit plans and programs; (d) to pay accrued and continuing employee severance obligations; and (e) to provide other employment-related benefits. The Bankruptcy Court subsequently granted that Motion in all respects except with respect to accrued severance obligations. As a result, the Debtor has been able to retain and preserve its most valuable asset -- a highly-qualified workforce. Indeed, employee attrition since the Petition Date has not been materially greater than the period prior to the Petition Date -- a very significant achievement given the competitive Silicon Valley job marketplace in which the Debtor's employees reside. REJECTION OF REAL PROPERTY AND PERSONAL PROPERTY LEASES: On the Petition Date, the Debtor also filed a "Motion For Order Authorizing Rejection Of (I) Designated Unexpired Leases Of Nonresidential Real Property And (II) Designated Unexpired Leases Of Personal Property," by which it requested that the Bankruptcy Court authorize it to reject immediately four leases of real property (plus applicable subleases) and seven leases of personal property (including all applicable equipment schedules). The Bankruptcy Court subsequently granted that Motion, which enabled the Debtor to relieve itself of ongoing obligations with respect to costly leases relating to property for which it had no further use (which primarily had been assumed in the Debtor's prior acquisitions and rendered unnecessary by the Debtor's transition of manufacturing operations to overseas facilities). EMPLOYEE RETENTION PROGRAM. Shortly after the Petition Date, as part of its ongoing effort to retain its qualified workforce, the Debtor filed a "Motion For Order Approving Employee Retention And Severance Program," by which the Debtor requested authority to -13- continue and implement a severance and retention program intended to ensure that the Debtor's employees would remain incentivized to continue their employment throughout the Chapter 11 Case. The Bankruptcy Court subsequently granted that Motion, and the Debtor implemented a retention program generally providing for (a) payments to nine senior officers, in the event of termination without cause or a change in control without an offer of comparable employment (excluding changes in control resulting from conversion of the Chapter 11 Case to a case under chapter 7 of the Bankruptcy Code or from the appointment of a chapter 11 trustee), equal to 2.99 times annual compensation (including salary, bonus, benefits, etc.) in place at the time of severance; (b) payments to up to fifty-three (53) key employees, plus senior officers, of retention payments equal to two weeks salary per quarter; and (c) for all other employees, terms and conditions substantially similar to the terms and conditions of the Debtor's existing prepetition severance and retention program. APPOINTMENT OF THE COMMITTEE: On September 10, 2001, the United States Trustee formed an Official Committee of Unsecured Creditors for the Chapter 11 Case, which currently consists of the following members: Analytical Services Group, Cerberus Capital Management LP; Dimensional Partners, Ltd.; ICX Corporation; Mitsubishi Trust & Banking Corp.; and State Street Bank & Trust Co. Since that time, the Committee has been active in all aspects of the Chapter 11 Case. RETENTION OF PROFESSIONALS: Following the Petition Date, pursuant to sections 327 and 328 of the Bankruptcy Code, the Bankruptcy Court approved the employment of the following counsel, financial advisors, and other professionals by the Debtor and the Committee:
RETENTION PROFESSIONAL NATURE OF REPRESENTATION DATE ----------------------------------- ----------------------------------------- -------------- Hennigan, Bennett, & Dorman Reorganization Counsel to Debtor 9/18/01 ----------------------------------- ----------------------------------------- -------------- Wilson, Sonsini, Goodrich & Corporate Counsel to Debtor 9/18/01 Rosati ----------------------------------- ----------------------------------------- -------------- KPMG Consulting, Inc. Special Financial Consultant To Debtor 9/18/01 For Enterprise Valuation Purposes ----------------------------------- ----------------------------------------- -------------- KPMG, LLP Special Restructuring and Financial application Advisor and Property Tax Consultant To pending Debtor ----------------------------------- ----------------------------------------- -------------- Peitzman, Glassman & Weg LLP Counsel to the Committee 10/3/01 ----------------------------------- ----------------------------------------- --------------
As of the date of this Disclosure Statement, applications for the employment of other professionals of the Debtor were pending. Also, during the Chapter 11 Case the Debtor obtained the authority of the Bankruptcy Court to employ and retain on specified terms and conditions, without further notice or opportunity for a hearing, various professional firms that provide services in the ordinary course of the Debtor's business that are unrelated to the Debtor's reorganization or the administration of the Chapter 11 Case. Pursuant to sections 330 and 331 of the Bankruptcy Code, the fees and expenses of all professionals are subject to the interim and final review and approval of the Bankruptcy Court. (See Section IV.A.1. for a description of provisions of the Plan regarding the deadlines for the filing of final fee applications by Professionals in the Chapter 11 Case). -14- DEBTOR IN POSSESSION FINANCING: As explained in Section II.G., as part of the Debtor's negotiations with the Loan Restructure Agreement lenders prior to the Petition Date, certain Loan Restructure Agreement lenders agreed to provide the Debtor with a debtor in possession working capital financing facility, if needed, during the course of the Chapter 11 Case. The commitment is for a $20 million facility, at an interest rate of 12% per annum, to be secured by all of the Debtor's assets (with the exception of the Debtor's ownership interests in its foreign subsidiaries, sixty-five percent (65%) of which will be subject to a security interest to secure the facility). As of the date of this Disclosure Statement, the Debtor was negotiating documentation for the facility, and the Debtor had not sought or obtained the approval of the Bankruptcy Court to incur indebtedness under the facility. The Debtor anticipates that it will do so in the near future. B. CLAIMS AGAINST THE DEBTOR. On a motion by the Debtor, the Bankruptcy Court established November 21, 2001, as the deadline for the filing of proofs of Claim and Equity Interests against the Debtor. As noted above, the Debtor is aware of approximately $514 million in unsecured indebtedness. As the claims bar date has not yet elapsed, however, the Debtor is not able to estimate with accuracy the amount of claims that will be asserted against the Estate. Given that fact and the inherent uncertainties in any litigation regarding Claims, no assurance can be given regarding the successful outcome of any litigation which may be initiated in objection to such Claims or regarding the ultimate amount of unsecured claims that will be allowed against the Estate. Accordingly, the total amount of the Allowed Claims against the Debtor, and hence the distributions to be made to holders of Allowed Claims, is likely to vary materially depending upon the results of the process of negotiating, objecting to, and litigating over Disputed Claims. The Debtor can make no assurances in this regard. As described in Section IV.E., the Plan enables the Reorganized Debtor to file objections to Claims and Equity Interests at any time within one hundred and eighty (180) days after the Effective Date. The Plan also provides for the Reorganized Debtor to retain any and all defenses, offset and recoupment rights, and counterclaims that may exist with respect to any Disputed Claim or Equity Interest, whether under sections 502, 553, or 558 of the Bankruptcy Code or otherwise. Given the anticipated number and complexity of the asserted Claims and Equity Interests, and the fact that the bar date has not yet elapsed, the Debtor has not yet completed its review and analysis of such Claims and Equity Interests. Accordingly, the Debtor reserves all rights with respect to the allowance and disallowance of any and all Claims and Equity Interests. The Debtor asserts and will request that the Bankruptcy Court order that, IN VOTING ON THE PLAN, CREDITORS AND SHAREHOLDERS MAY NOT RELY ON THE ABSENCE OF A REFERENCE IN THIS DISCLOSURE STATEMENT OR THE PLAN OR THE ABSENCE OF AN OBJECTION TO THEIR PROOFS OF CLAIM OR EQUITY INTEREST AS ANY INDICATION THAT THE DEBTOR, THE REORGANIZED DEBTOR, OR ANY OTHER PARTY IN INTEREST ULTIMATELY WILL NOT OBJECT TO THE AMOUNT, PRIORITY, SECURITY, OR ALLOWABILITY OF THEIR CLAIMS OR EQUITY INTERESTS. MOREOVER, ANY HOLDER OF A CLAIM THAT IS ASSERTED IN AN AMOUNT GREATER THAN THE AMOUNT LISTED BY THE DEBTOR IN THE SCHEDULES AS LIQUIDATED, UNDISPUTED, AND NOT CONTINGENT SHOULD EXPECT AND BE ON NOTICE THAT THE DEBTOR WILL OBJECT TO THAT CLAIM. C. CASH ON HAND; REMAINING ASSETS; AND AVAILABLE CAUSES OF ACTION. CASH: As reflected in its bank statements, the Debtor had on hand on September 30, 2001, liquid funds in the amount of approximately $12,145,000. -15- REAL PROPERTY: In addition to such liquid assets, several unliquidated assets were available to the Debtor's Estate, including real property offered for sale at a price of approximately $50 million. AVOIDANCE ACTIONS: The Debtor currently is investigating whether any meritorious claims and causes of action exist for the recovery of preferential transfers, fraudulent transfers, or other actions commenced pursuant to the avoiding powers of the Bankruptcy Code, including sections 544 through 551 of the Bankruptcy Code (collectively, the "Avoidance Actions"). Among other things, the Debtor believes that meritorious claims for the recovery of preferential transfers under section 547 of the Bankruptcy Code may exist against the entities identified on the schedule attached to this Disclosure Statement as Exhibit C, which identifies the recipients of payments made by the Debtor during the ninety days prior to the Petition Date. Moreover, section 547 provides for the avoidance of preferential payments to "insiders" (including affiliates) of the Debtor made within the year prior to the Petition Date, so there may be additional recipients of potentially avoidable preferences not identified on Exhibit C. However, the investigation regarding the Avoidance Actions is in its early stages, and the Debtor has not ascertained whether any potential Avoidance Actions could result in material recoveries. In considering alternatives to the Plan, creditors should take into account the fact that proceeds from Avoidance Actions may be available for the repayment of Claims and the fact that the Debtor has not determined whether there may be material recoveries available. The Debtor asserts and will request that the Bankruptcy Court order that the fact that a complaint or demand has not yet been made with respect to any particular transfer or transaction is not and must not be deemed to be any admission, concession, or other evidence that a meritorious cause of action does not exist. In particular, ALL RECIPIENTS OF PAYMENTS OR OTHER TRANSFERS FROM THE DEBTOR DURING THE NINETY DAYS PRIOR TO THE PETITION DATE (AND, IN THE CASE OF "INSIDERS" WITHIN THE MEANING OF SECTION 101(31) OF THE BANKRUPTCY CODE, DURING ONE YEAR PRIOR TO THE PETITION DATE) SHOULD EXPECT TO RECEIVE A DEMAND OR COMPLAINT FOR THE RETURN OF SUCH PAYMENTS OR TRANSFERS. OTHER CAUSES OF ACTION: As described in Section IV.C.1., the Plan vests in the Reorganized Debtor, for pursuit following the Effective Date, any and all claims and causes of action that are property of the Estate. Among the claims and causes of action that the Reorganized Debtor will retain the right to pursue following the Effective Date are claims arising from the Debtor's portfolio of patents and other intellectual property rights. Specifically, the Debtor has approximately 129 patents, and more than 150 additional pending patent applications, that generally cover data-storage media and related apparatus (e.g., disk drives and components thereof); methods for making and/or testing data storage media; apparatus and components of apparatus for making and/or testing data storage media; and components and materials used to make data storage media. The schedule attached hereto as Exhibit D identifies those patents. The Debtor and the Reorganized Debtor intend to vigorously assert those patents and other intellectually property rights against any persons or entities who may now infringe or in the future may start to infringe any of such rights. The Reorganized Debtor also will retain the Debtor's rights against Telecommunications Corporation ("MCI") with respect to the Special Customer Arrangement, dated November 25, 1996, among MCI and Hitachi Metals America, Ltd. ("Hitachi"). The Special Customer Arrangement, which provides for discounts and rate adjustments, governed the relationship between MCI and HMT, which was acquired by the Debtor in October 2000. Under the Arrangement, HMT was entitled to receive certain -16- discounts, rate adjustments and refund in connection with installment of certain T-1 circuits from November 1996. Over the past few years, first HMT and then the Debtor made repeated requests to MCI for discounts and credits, each time without success. By a letter dated February 28, 2001, the Debtor demanded payment from MCI in the amount of $411,723.22, representing the discounts, rate adjustments and refunds owed to HMT over the course of this three year agreement. To date, MCI has not paid the amounts that the Debtor believes to be due to it, and the Debtor intends to enforce its rights to the fullest extent possible. Notwithstanding the foregoing discussion, however, the Debtor's investigations regarding its potential claims and causes of action (including claims against MCI and claims relating to intellectual property rights) are ongoing and not yet completed. As a result, and because the Debtor's prepetition transactions and operations were complex, varied, numerous, and involved multiple entities with operations throughout the world, the Debtor asserts and will request that the Bankruptcy Court order that PARTIES IN INTEREST MAY NOT RELY ON THE ABSENCE OF A REFERENCE IN THIS DISCLOSURE STATEMENT OR PLAN AS ANY INDICATION THAT THE DEBTOR, THE REORGANIZED DEBTOR, OR ANY OTHER PARTY ULTIMATELY WILL NOT PURSUE ANY AND ALL AVAILABLE CLAIMS AND CAUSES OF ACTION AGAINST THEM. ALL PARTIES WHO PREVIOUSLY DEALT WITH THE DEBTOR OR WHO MAY IN ANY WAY BE INFRINGING THE DEBTOR'S INTELLECTUAL PROPERTY RIGHTS HEREBY ARE ON NOTICE THAT THE PLAN PRESERVES ALL OF THE DEBTOR'S AND THE ESTATE'S RIGHTS, ACTIONS, CLAIMS, AND CAUSES OF ACTION. THE DEBTOR EXPECTS THAT ANY AND ALL MERITORIOUS CLAIMS WILL BE PURSUED AND LITIGATED BY THE REORGANIZED DEBTOR. D. ALLEGED CLAIMS REGARDING HMT MERGER TRANSACTION. In an Objection to the adequacy of the information in the Disclosure Statement, certain purported holders of Subordinated Notes alleged that the Komag-HMT merger transaction (which is described in Section II.B.) resulted in a "constructively fraudulent transfer," from the perspective of holders of the Subordinated Notes, that is avoidable under sections 3439.04 and 3436.05 of the California Civil Code. The theory of the noteholders apparently is that HMT and its creditors received no consideration for the "transfer" of assets from HMT to Komag that allegedly occurred in the context of the merger. The noteholders also claim that the merger transaction was unfair to the noteholders because, prior to the merger, there was little or no indebtedness that was senior to the Subordinated Notes, but that after the merger there was approximately $250 million that was senior to the Subordinated Notes. As a result, the noteholders claim that all or some portion of their claims in respect of the Subordinated Notes is not subordinated to the Loan Restructure Agreement Claims, the Convertible Notes, or the Western Digital Note. There has been no complaint or other litigation commenced in respect of the noteholders' claims, which the Debtor disputes in their entirety. In the event that litigation is commenced, the Debtor believes that it will be able to establish that the merger transaction was consummated in strict compliance with all applicable laws and contractual agreements. In that context, the Debtor believes that it will be able to establish the following, among other things: (a) the Indenture for the Subordinated Notes expressly contemplated and permitted a merger transaction such as the one consummated by HMT and Komag; (b) the Indenture Trustee for the Subordinated Notes executed two Supplemental Indentures that effectuated and affirmed the validity of the merger, and that expressly provided that the Subordinated Notes were to be subordinated to obligations under the Loan Restructure Agreement; (c) as a result of the Indenture Trustee's affirmation of the merger, noteholders are estopped from challenging the transaction at this late date; (d) the Indenture for the Subordinated Notes -17- placed absolutely no limit upon the amount of "Senior Debt" that could be incurred and be senior in right of payment to the Subordinated Notes; (e) investment bankers for both HMT and Komag issued "fairness opinions" in connection with the merger, in which the investment bankers opined that the exchange ratio that determined the number of Komag shares to be exchanged for HMT shares in connection with the merger was fair and reasonable as to both Komag and HMT; and (f) to the extent that there was a "transfer" of assets, former creditors of HMT received fair value for such transfer (including value in the form of a vastly expanded pool of assets to which to look for recovery of their claims and the synergy and enhanced business prospects of the merged enterprise). The foregoing is not in any way a definitive list of defenses to the claims alleged by the noteholders, and the Debtor reserves all rights to assert any and all available defenses, counterclaims, and other rights in the event that the noteholders actually commence litigation in respect of their claims. IV. SUMMARY OF THE PLAN THE DISCUSSION OF THE PLAN SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED PROVISIONS SET FORTH IN THE PLAN AND ITS EXHIBITS, THE TERMS OF WHICH ARE CONTROLLING. HOLDERS OF CLAIMS AND EQUITY INTERESTS AND OTHER INTERESTED PARTIES ARE URGED TO READ THE PLAN AND THE EXHIBITS THERETO, COPIES OF WHICH ARE ATTACHED TO THIS DISCLOSURE STATEMENT AS EXHIBIT A, IN THEIR ENTIRETY SO THAT THEY MAY MAKE AN INFORMED JUDGMENT REGARDING THE PLAN. The Plan generally provides for a complete financial restructuring of the Debtor, and will substantially reduce the level of the Debtor's indebtedness to a level that can be serviced with projected future revenues. Among other things, upon effectiveness of the Plan, the Debtor's indebtedness will be reduced from approximately $514 million to $128.5 million, plus up to $20 million borrowed under a revolving credit exit financing agreement. The Plan is based upon three essential premises -- - First, as described elsewhere, the value of the Debtor's estate is worth far more as an operating, "going concern" business than it would be if the Debtor were to stop operating and to liquidate its assets. In fact, as described in Section V.B., the Debtor estimates that the value of its assets in a liquidation would be approximately $48 million to $85 million. In contrast, as described in Article VII, the Debtor's financial advisors have estimated that the Debtor's value as an ongoing business is somewhere in the likely range of $288 million to $313 million. The Plan therefore provides for the Debtor to continue its business operations in order to maximize the value available to creditors and all stakeholders of the bankruptcy estate. - Second, the Debtor does not have a substantial cash reserve, and in order to achieve the goal of reducing the Debtor's ongoing debt-service obligations to realistic and manageable levels that can be serviced in the future, the Plan must provide for the Debtor's going concern value to be distributed to creditors and stakeholders primarily in the form of stock in the Reorganized Debtor (which is the term for the Debtor after the Effective Date of the Plan). Although the Plan does provide for the Reorganized Debtor to have some new indebtedness -- in the form of the $128.5 million in New Notes distributed to certain classes of creditors under the Plan and in the form of the $20 million working capital Exit Financing Facility -- the Debtor believes that the Reorganized Debtor will be able to service such new indebtedness at that greatly reduced level. See Section V.C. -18- - Third, as described in Section II.E., the Debtor believes that intercreditor subordination agreements exist with respect to the vast majority of the Debtor's outstanding indebtedness. Specifically, the Debtor has a three-tiered capital structure, summarized as follows: First tier: The $206.9 million in Loan Restructure Agreement Claims, which are contractually senior to the Western Digital Note Claim, the Convertible Notes Claims, and the Subordinated Notes Claims. Second tier: The $10.2 million in Convertible Notes Claims and the $33.7 million Western Digital Note Claim, which are of equal priority to each other, and contractually senior to the Subordinated Notes Claims. Third tier: The $238.2 million in Subordinated Notes Claims, which are contractually subordinated to Loan Restructure Agreement Claims, the Western Digital Note Claim, and the Convertible Notes Claims. Trade, etc. None of the three tranches of indebtedness described above are senior to, or subordinated to, general unsecured claims, which consist of general trade claims, lease rejection claims, and other unsecured indebtedness. As a result, except where otherwise agreed by the holders of senior claims, the Plan must account for and enforce the contractual subordination by distributing to holders of senior claims property of a value sufficient to provide for the payment in full of such Claims, including all accrued pre- and postpetition interest, and by deducting such property from the distributions that otherwise would be made on account of the junior claims. As explained in Section III.D., certain holders of Subordinated Notes dispute the Debtor's belief that the Subordinated Notes in fact are subordinated to other claims, and they have indicated to the Debtor that they intend to object to the Plan on that basis. * * * The Debtor negotiated the terms and conditions of the Plan with holders of the Loan Restructure Agreement Claims, the Convertible Notes, and the Western Digital Claims, as well as with ICX Corporation and Analytic Services Group (holders of General Unsecured Claims classified into Class 7 and members of the Committee, who were negotiating on their own behalf and not on behalf of the Committee or as representatives of trade creditors generally). One primary issue in those negotiations was the going concern value for the Debtor, from which the allocation and nature of distributions then could be determined. As indicated by the range of values set forth by the Debtor's financial advisors, the valuation of a complex, ongoing, operating enterprise like the Debtor is not an exact science. In fact, as described more fully in Article VII, the financial advisors to the Loan Restructure Agreement lenders (holders of the Debtor's senior indebtedness) have asserted that the Debtor's going concern value is much lower than the value estimated by the Debtor's financial advisors, and is somewhere in the range of $170 million to $240 million. The Debtor strongly believed that such values were too low and, consistent with the Debtor's goal of delivering the maximum possible value to creditors and stakeholders in as efficient and rapid manner as possible, the Debtor insisted that the Plan be based upon a substantially higher going concern value for the enterprise. -19- Ultimately, the Debtor and representatives of holders of the Loan Restructure Agreement Claims, the Convertible Notes, and the Western Digital Claims (a total of approximately $250 million in claims) agreed on the terms and conditions set forth in the Plan, which includes an implied "going concern," enterprise value for the Reorganized Debtor of approximately $310 million. The Debtor believes that this compromise value is well within the range of reasonable and probable outcomes in the event of a trial regarding valuation and represents a fair determination of the value of the Debtor's bankruptcy estate on a going concern basis. Moreover, through that compromise, holders of the Loan Restructure Agreement Claims, the Convertible Notes Claims, and the Western Digital Note Claim -- all of which the Debtor believes to be contractually senior to the Subordinated Notes Claims -- have agreed to forego and to allocate to holders a portion of the distributions to which they otherwise would be entitled by enforcing the contractual subordination agreements in an effort to achieve a consensual restructuring. At a going concern value of approximately $310 million, assuming approximately $5 million in administrative and other priority expenses and $514 million in unsecured claims, a ratable, proportionate distribution to unsecured creditors (before accounting for the contractual inter-creditor subordination agreements described above) would yield distributions of approximately sixty percent (60%) of the allowed amount of each unsecured claim. The distributions to be made under the Plan are premised first upon that approximate proportionate amount, and then upon the reallocation of a portion of the distributions as required by the intercreditor agreements. Thus, as described below, the Plan provides for: - Holders of the Western Digital Rejection Claims to receive distributions with a value of approximately fifty-seven percent (57%) of the amount of their claims. - Holders of General Unsecured Claims to receive distributions with a value of approximately fifty-four percent (54%) of the amount of their claims. The fifty-four percent figure is a figure negotiated and agreed upon by ICX and Analytical Services as holders of General Unsecured Claims, each of whom agreed to a slightly lower than pro rata distribution in exchange for the treatment accorded under the Plan to Class 7, which includes a substantial distribution of cash and New Cash Pay Notes. - Holders of Loan Restructure Agreement Claims (the most senior of claims asserted against the Debtor) to receive distributions with a value of slightly less than the amount of their claims (before accounting for postpetition interest, fees, and charges), with the portion over and above sixty percent (60%) being reallocated from the distributions to be made in respect of subordinated classes of classes (i.e., the Western Digital Note, the Convertible Notes, and the Subordinated Notes), and with the balance voluntarily left for distributions on account of the Subordinated Notes Claims. - Holders of the Convertible Notes Claims to receive distributions with a value of approximately eighty-seven percent (87%) and eighty-eight percent (88%) of the amount of their claims (before accounting for postpetition interest, fees, and charges), with the portion over and above sixty percent (60%), plus the portions reallocated to the senior Loan Restructure Agreement Claims, being reallocated from the distributions to be made in respect of the junior Subordinated Notes Claims (and with the balance voluntarily left for distributions on account of the Subordinated Notes Claims). -20- - Holders of the Western Digital Note Claim to receive distributions with a value of approximately ninety-seven percent (97%) of the amount of the claim (before accounting for postpetition interest, fees, and charges), with the portion over and above sixty percent (60%), plus the portions reallocated to the senior Loan Restructure Agreement Claims, being reallocated from the distributions to be made in respect of the junior Subordinated Notes Claims (and with the balance voluntarily left for distributions on account of the Subordinated Notes Claims). - Finally, holders of Subordinated Notes Claims to receive distributions with a value of approximately eleven percent (11%) of the amount of their claims (or fourteen percent (14%) of the allowed amount of their claims in the event that Class 9 votes to reject the Plan). Including postpetition interest through December 31, 2001, on the Loan Restructure Agreement Claims, the Convertible Notes Claims, and the Western Digital Note Claim in an amount of approximately $7.23 million, the distributions to be made on account of the Subordinated Notes are significantly greater than Subordinated Notes Claims otherwise would receive absent the consensual sharing agreed upon by holders of the Loan Restructure Agreement Claims, the Convertible Notes Claims, and the Western Digital Note Claim. Holders of the Loan Restructure Agreement Claims and the Western Digital Note Claim insisted that a portion of the distributions to be made in respect of such Claims consist of new indebtedness rather than equity in the Reorganized Debtor. Due to the senior position of such claims in the Debtor's capital structure, as well as the value added to the Debtor's reorganization in the form of commitments provided to extend debtor in possession financing and exit financing, and the procurement of a critical three-year extension of Western Digital's volume purchase commitments to the Debtor and its subsidiaries, the Debtor agreed that it was appropriate to issue some new indebtedness in partial satisfaction of those Claims. That new indebtedness, the terms of which are summarized in Section IV.A.4(b)(1), consists of (a) $82.5 million in New Cash Pay Notes, which provide for current monthly payments of principal and interest starting on the first anniversary of the Plan Effective Date; and (b) $43.5 million in New PIK Notes, which provide for interest to be paid in cash or in new notes. Each New Cash Pay Note and New PIK Note will be issued under a single indenture as one instrument having both a "Cash Pay Portion" and a "PIK Portion," and the New Cash Pay Notes and New PIK Notes will not trade independently of each other. In order to achieve a lower interest rate and other more favorable terms, the Debtor also agreed that such indebtedness would be secured by substantially all of its assets. As explained below, the Debtor projects that it will have sufficient resources available to satisfy the new indebtedness as it comes due. Finally, ICX and Analytical Services Group, the two members of the Committee who hold "trade" claims, also negotiated (on their own behalf and not on behalf of the Committee or as representatives of trade creditors generally) to receive New Cash Pay Notes and cash as part of the distributions to be made in respect of General Unsecured Claims classified into Class 7. The Debtor ultimately agreed with those creditors to provide $2.5 million in New Cash Pay Notes and $1 million in cash as part of the distributions to Class 7 in exchange for a reduction in the aggregate consideration to be distributed to Class 7 from $8.5 million to $7.5 million. * * * The provisions of the Plan are explained in detail below. In general, the Plan provides for the distribution of (a) Cash on or about the Effective Date to satisfy in full Allowed Administrative Claims, Allowed Priority Claims, and Allowed Convenience Claims; -21- (b) $115 million principal amount of New Notes (consisting of $82.5 million principal amount of New Cash Pay Notes and $32.5 million principal amount of New PIK Notes) to holders of Allowed Loan Restructure Agreement Claims; (c) $11 million principal amount of New PIK Notes to holders of Allowed Western Digital Note Claim; (d) $2.5 million in New Cash Pay Notes and $1 million in cash to holders of Allowed General Unsecured Claims; and (e) 24,369,285 shares of New Common Stock in the Reorganized Debtor, to be distributed as follows:
APPROX. PERCENTAGE CLASS SHARES OF SHARES ----- ---------- ---------- 3 (Loan Restructure Agreement Claims) 12,525,000 51.4% 4 (Western Digital) Western Digital Note Claim 3,022,127 12.4% Western Digital Rejection Claim 893,723 3.67% 5 (Convertible Notes Claims) Nelson Note Claim 500,000 2.05% Olympus Note Claim 750,000 3.08% 6 (Subordinated Notes Claims) If Class 9 votes to accept the Plan 3,744,775 15.37% If Class 9 votes to reject the Plan 4,494,775 18.45% 7 (General Unsecured Claims) 558,660 2.29% 9 (Equity Interests) If Class 9 votes to accept the Plan (and 750,000 3.08% the Plan otherwise can be confirmed) If Class 9 votes to reject the Plan (or 0 0% the Plan otherwise cannot be confirmed) Beneficiaries of Employee Retention Plan 1,625,000 6.66%
Note, however, that the percentages set forth above for all Classes other than Class 9 would increase in the event that the Debtor elects to cancel the distribution to be made to Class 9 in accordance with Section 4.9 of the Plan. See Section IV.A.10. for a discussion of that possibility. The following table summarizes the classification and treatment of Claims and Equity Interests under the Plan. Classification and treatment issues are discussed more fully in the subsequent sections of this Disclosure Statement and are qualified by the terms and conditions of the Plan itself, which controls over any description set forth in this Disclosure Statement. The projected recoveries set forth below are merely estimated recoveries based upon various assumptions, and do not account for postpetition interest, charges, and fees. The estimated recoveries assume, among other things, that 24,369,285 shares of New Common Stock will be issued under the Plan. For a discussion of the valuation of the New Common Stock, see Article VII. There is no assurance that the New Common Stock will actually have the projected value described herein or that, if there ever is a trading market in the New Common Stock, such values would be sustained. For a complete description of the risks associated with the recoveries provided under the Plan, see Article VIII. -22-
ESTIMATED CLASS TYPE TREATMENT RECOVERY - ----- --- --------- --------- -- Administrative Paid in full, in Cash (or, in the case of Ordinary 100% Claims Course Administrative Claims, paid in full and honored in accordance with the terms and conditions of the particular transactions relating thereto). -- Priority Tax Each holder of an Allowed Priority Tax Claim will 100% Claims receive the following, at the option of the Debtor: either (a) full Cash payment; or (b) Cash payments made in accordance with section 1129(a)(9)(c) of the Bankruptcy Code, in up to twelve (12) equal installments made over a period not to exceed six (6) years from the date of assessment, commencing within six (6) months after the Effective Date, in an amount equal to the amount of the Claim together with interest at the Plan Rate accruing from the date of assessment. 1 Priority Claims Impaired; paid in full, in Cash. 100% 2 Secured Claims Impaired; each holder of an Allowed Secured Claim 100% will receive the following, at the option of the Debtor: either (a) reinstatement of the legal, equitable or contractual rights to which the Claim entitles the holder thereof; (b) surrender of the property securing such Claim; or (c) a promissory note and lien providing for deferred cash payments satisfying the requirements of section 1129(b)(2)(A)(i) of the Bankruptcy Code. 3 Loan Impaired; each holder of an Allowed Loan Restructure 99.7% Restructure Agreement Claim will receive a Pro Rata Share of Agreement Claims (a) $82.5 million in New Cash Pay Notes; (b) $32.5 million in New PIK Notes; and (c) 12,525,000 shares of New Common Stock. Loan Restructure Agreement Agent will receive reimbursement for unpaid fees and expenses as permitted under the Loan Restructure Agreement. 4 Western Digital Class 4-A Impaired; will receive (a) $11 million in New PIK 97% (Western Digital Notes; and (b) 3,022,127 shares of New Common Note Claim) Stock. Class 4-B Impaired; will receive 893,723 shares of New 57% (Western Digital Common Stock. Rejection Claim) 5 Convertible Impaired; (a) the holder of the Nelson Note Claim 87% for Notes Claims will receive 500,000 shares of New Common Stock; and Olymp.; (b) the holder of the Olympus Note Claim will 88% for receive 750,000 shares of New Common Stock. Nelson 6 Subordinated Impaired; each holder of an Allowed Subordinated 11% if Notes Claims Notes Claim will receive a Pro Rata Share of Class 9 (a) 3,744,775 shares of New Common Stock; and (b) in accepts the event that Class 9 votes to reject the Plan, an 14% if additional 750,000 shares of New Common Stock. Class 9 rejects
-23-
ESTIMATED CLASS TYPE TREATMENT RECOVERY - ----- --- --------- --------- 7 General Impaired; each holder of an Allowed General 54% Unsecured Unsecured Claim will receive a Pro Rata Share of Claims (a) $1,000,000 in Cash; (b) $2.5 million of New Cash Pay Notes; and (c) 558,660 shares of New Common Stock. 8 Convenience Impaired; each holder of an Allowed Convenience 100% Claims Claim will receive a Pro Rata Share of $650,000 in Cash, up to a maximum of one hundred percent (100%) of the amount of such Allowed Claim. 9 Equity Interests Impaired; if and only if Class 9 votes to accept the Plan, each holder of an Allowed Equity Interest will receive a Pro Rata Share of 750,000 shares of New Common Stock; if Class 9 votes to reject the Plan, Class 9 will receive no distributions under the Plan. If the Bankruptcy Court determines that such treatment of Equity Interests causes the Plan to violate the requirements of section 1129 of the Bankruptcy Code or otherwise renders the Plan not capable of being confirmed, Class 9 will receive no distributions and retain no interests under the Plan.
Note that the percentage recoveries set forth above do not include postpetition interest, charges, and fees. Due to contractual subordination provisions, holders of the Loan Restructure Agreement Claims, the Western Digital Note Claim, and the Convertible Notes Claims are entitled to receive such amounts (the Debtor estimates an aggregate of approximately $7.23 million in postpetition interest alone through December 31, 2001) prior to distributions in respect of the Subordinated Notes. Also, the percentage recoveries set forth above for all Classes other than Class 9 would increase in the event that the Debtor elects to cancel the distribution to be made to Class 9 in accordance with Section 4.9 of the Plan. See Section IV.A.10 for a discussion of that possibility. Upon the Effective Date, the Reorganized Debtor will not be a publicly-traded company, although the Reorganized Debtor likely will continue to make public financial reports. However, the Plan does provide for the Reorganized Debtor to use its commercially reasonable best efforts to list the New Common Stock (a) on a national securities exchange or the NASDAQ Stock Market; or (b) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on a national securities exchange or the NASDAQ Stock Market, on the NASDAQ Small Cap Market; or (c) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on the NASDAQ Small Cap Market, on another qualifying inter-dealer quotation system on a national securities exchange. There can be no assurance that the Reorganized Debtor will succeed in doing so. See Article VIII for an additional discussion regarding the risks associated with the New Common Stock. A. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS. 1. UNCLASSIFIED CLAIMS. Article II of the Plan governs the treatment of certain Claims that are not classified into Classes under the Plan. -24- a) UNPAID ADMINISTRATIVE CLAIMS. Administrative Claims are (a) Claims for an administrative expense of the kind described in sections 503(b), 507(a)(1), 507(b), or 1114(e)(2) of the Bankruptcy Code; and (b) any fees or charges lawfully assessed against the estate of the Debtor under section 1930 of title 28 of the United States Code. (1) Treatment. Section 2.1 of the Plan provides that, except as provided in Section 2.1(b) of the Plan with respect to Professional Claims or to the extent that the holder of an Allowed Administrative Claim agrees to a different treatment, the Reorganized Debtor or its agent will pay to each holder of an Allowed Administrative Claim, in full satisfaction, release and discharge of such Claim, Cash in an amount equal to such Allowed Administrative Claim on the later of the Effective Date and the date on which such Claim becomes an Allowed Administrative Claim, or as soon thereafter as is practicable; provided, however, that Administrative Claims (other than Professional Claims or Administrative Tax Claims) that represent obligations incurred in the ordinary course of business of the Debtor (defined as "Ordinary Course Administrative Claims") will be paid in full and performed by the Reorganized Debtor in the ordinary course of business in accordance with the terms and conditions of the particular transactions and any agreements relating thereto. Throughout the course of the Chapter 11 Case, the Debtor has endeavored to satisfy the administrative expenses of the Estate as they became due. Accordingly, the Debtor believes that most Claims that otherwise would constitute Allowed Administrative Claims previously have been or will be satisfied in the ordinary course of business prior to the Effective Date. Nevertheless, because of delays in invoicing and the necessary approval process regarding Professional Claims (which are the Claims by Professionals for compensation and/or reimbursement of expenses pursuant to sections 326, 327, 328, 330, 331, 503(b) or 1103 of the Bankruptcy Code), as well as the necessary tax return preparation and filing, not all of such Claims will have been paid by the Effective Date. Thus, the Debtor anticipates that it will have to pay some Administrative Claims on or after the Effective Date. (2) Bar Date For Assertion of Requests For Payment Of Administrative Claims Other Than Administrative Tax Claims And Ordinary Course Administrative Claims. Section 2.1(c) of the Plan provides that all requests for payment or any other means of preserving and obtaining payment of Administrative Claims that have not been paid, released, or otherwise settled, including all requests for payment of Professional Claims but excluding requests for Administrative Tax Claims and Ordinary Course Administrative Claims, must be filed with the Bankruptcy Court and served upon the Reorganized Debtor and the United States Trustee no later than thirty (30) days after the date on which the Notice of Effective Date is mailed pursuant to Section 14.10 of the Plan. ANY REQUEST FOR PAYMENT OF AN ADMINISTRATIVE CLAIM (OTHER THAN AN ADMINISTRATIVE TAX CLAIM OR AN ORDINARY COURSE ADMINISTRATIVE CLAIM) THAT IS NOT TIMELY FILED BY THAT DEADLINE WILL BE FOREVER BARRED, AND HOLDERS OF SUCH CLAIMS WILL BE BARRED FROM ASSERTING SUCH CLAIMS IN ANY MANNER AGAINST THE DEBTOR, THE ESTATE, OR THE REORGANIZED DEBTOR. -25- (3) Bar Date For The Assertion Of Administrative Tax Claims. Administrative Tax Claims are Administrative Claims asserted by a governmental unit for taxes (and for interest and/or penalties related to such taxes) for any tax year or period, all or any portion of which occurs or falls within the period from and including the Petition Date through and including the Effective Date. Section 2.1(d) of the Plan provides that all requests for payment or any other means of preserving and obtaining payment of Administrative Tax Claims that have not been paid, released, or otherwise settled must be filed with the Bankruptcy Court and served upon the Reorganized Debtor and the United States Trustee on or before the later of (a) thirty (30) days after the date on which the Notice of Effective Date is mailed pursuant to Section 14.10 of the Plan; and (b) one hundred and twenty (120) days after the filing of the tax return for such taxes with the applicable governmental unit. ANY REQUEST FOR PAYMENT OF AN ADMINISTRATIVE TAX CLAIM THAT IS NOT TIMELY FILED AS SET FORTH ABOVE WILL BE FOREVER BARRED, AND HOLDERS OF SUCH CLAIMS WILL BE BARRED FROM ASSERTING SUCH CLAIMS IN ANY MANNER AGAINST THE DEBTOR, THE ESTATE, OR THE REORGANIZED DEBTOR. b) PRIORITY TAX CLAIMS. Priority Tax Claims are Claims for prepetition taxes entitled to priority in payment under section 507(a)(8) of the Bankruptcy Code. Section 2.2 of the Plan provides that the Reorganized Debtor will provide to each holder of an Allowed Priority Tax Claim, in full satisfaction, release and discharge of such Claim, the following treatment, to be selected by the Debtor in its sole discretion through a designation filed with the Bankruptcy Court prior to the Effective Date: either (a) Cash in an amount equal to such Allowed Priority Tax Claim paid on the later of the Effective Date and the date on which such Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is practicable; or (b) Cash payments made in accordance with section 1129(a)(9)(c) of the Bankruptcy Code, in up to twelve (12) equal installments made over a period not to exceed six (6) years from the date of assessment of such Allowed Priority Tax Claim, commencing within six (6) months after the Effective Date (or, if such Claim has not become an Allowed Priority Tax Claim by that time, as soon as practicable after the date of allowance of the Claim), in an amount equal to the amount of the Allowed Priority Tax Claim together with interest at the "Plan Rate" (the rate available for U.S. Treasury Bills that are issued on the Effective Date with a ninety-day maturity, or such other rate determined by the Bankruptcy Court in connection with confirmation of this Plan to be an appropriate rate to be applied to Priority Tax Claims) accruing from the date of assessment of the Allowed Priority Tax Claim. Absent a timely designation as set forth above, an Allowed Priority Claim will be treated in accordance with option (b), above. Based upon a review of its books and records, the Debtor believes that it is likely that the aggregate amount of the Allowed Priority Tax Claims ultimately may range from $2 million to $3.5 million. 2. CLASS 1 (PRIORITY CLAIMS). Priority Claims are Claims entitled to priority in payment under section 507(a) of the Bankruptcy Code, excluding any Claim that is an Administrative Claim or a Priority Tax Claim. Section 4.1 of the Plan provides that the Reorganized Debtor or its agent will provide to each holder of an Allowed Priority Claim, in full satisfaction, release and discharge of such Claim, Cash in an amount equal to its Allowed Priority Claim, paid on the later of the -26- Effective Date and the date on which such Claim becomes an Allowed Priority Claim, or as soon thereafter as is practicable. Based upon a review of its books and records, the Debtor believes that it is likely that the aggregate amount of the Allowed Priority Claims is not likely to be material. 3. CLASS 2 (SECURED CLAIMS). Secured Claims are Claims that are alleged to be secured, in whole or in part, (a) by a Lien that is not subject to avoidance or subordination under the Bankruptcy Code or applicable non-bankruptcy law; or (b) as a result of rights of setoff under section 553 of the Bankruptcy Code; but in any event only to the extent of the value, determined in accordance with section 506(a) of the Bankruptcy Code, of the holder's interest in the Estate's interest in property or to the extent of the amount subject to such setoff, as the case may be. Each Allowed Secured Claim is deemed to be classified within a separate subclass for purposes of voting on and confirmation of the Plan. Section 4.2 of the Plan provides that, on the later of the Effective Date and the date on which a Secured Claim becomes an Allowed Secured Claim, or as soon thereafter as is practicable, the Reorganized Debtor or its agent will provide to each holder of an Allowed Secured Claim, in full satisfaction, release and discharge of such Claim, the following treatment, to be selected by the Debtor in its sole discretion through a designation filed with the Bankruptcy Court prior to the Effective Date: either (a) the Plan will leave unaltered the legal, equitable or contractual rights to which such Claim entitles the holder thereof or otherwise render such Claim unimpaired pursuant to section 1124 of the Bankruptcy Code; (b) the Reorganized Debtor will surrender to the holder of such Claim the property securing such Claim; or (c) the Reorganized Debtor will issue to the holder of such Claim a promissory note providing for deferred cash payments satisfying the requirements of section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code and a lien satisfying the requirements of section 1129(b)(2)(A)(i)(I). Absent a timely designation as set forth above, each Allowed Secured Claim will be treated in accordance with option (b), above. Based upon a review of its books and records, the Debtor believes that it is likely that the aggregate amount of the Allowed Secured Claims is not likely to be material. 4. CLASS 3 (LOAN RESTRUCTURE AGREEMENT CLAIMS). Loan Restructure Agreement Claims are Claims arising under or related to the Loan Restructure Agreement, except for and excluding the Convertible Notes Claims. a) ALLOWANCE. Section 4.3 of the Plan provides that the Loan Restructure Agreement Claims will be deemed to be Allowed Unsecured Claims in the aggregate amount of $206,879,586.60 (subject to an accounting of actual prepetition fees and expenses incurred under Section 12.5 of the Loan Restructure Agreement). This amount is equal to the principal amount of the amount of indebtedness under the Loan Restructure Agreement, plus all interest accrued through the Petition Date and fees and expenses accrued through the Petition Date as provided in the Loan Restructure Agreement. b) TREATMENT. Section 4.3 of the Plan provides that, on the Effective Date, the Reorganized Debtor or its agent will provide to the Loan Restructure Agreement Agent, for distribution of Pro Rata Shares to holders of Allowed Loan Restructure Agreement Claims and in full satisfaction, release and discharge of the Loan Restructure Agreement Claims, the following -27- consideration: (a) $82.5 million principal amount in New Cash Pay Notes; (b) $32.5 million principal amount of the New PIK Notes; and (c) 12,525,000 shares of New Common Stock, which will consist of approximately 51.4% of the issued and outstanding shares of New Common Stock as of the Effective Date. Each New Cash Pay Note and New PIK Note will be issued under a single indenture as one instrument having both a "Cash Pay Portion" and a "PIK Portion," and the New Cash Pay Notes and New PIK Notes will not trade independently of each other. Additionally, on the Effective Date, the Reorganized Debtor or its agent also will distribute to the Loan Restructure Agreement Agent for the benefit of the Loan Restructure Agreement Lenders a payment, not to exceed $1.5 million, in an amount equal to the prepetition and postpetition fees and expenses not previously paid or reimbursed by the Debtor incurred under Section 12.5 of the Loan Restructure Agreement by, or on behalf of, the Loan Restructure Agreement Lenders to Crossroads LLC, PricewaterhouseCoopers LLC, Stroock Stroock & Lavan LLP, and Milbank Tweed Hadley & McCloy LLP. Approximately $815,000 of such unpaid fees were incurred prior to the Petition Date; also, in the year and a half prior to the Petition Date, the Debtor made payments of approximately $204,000 in respect of additional professional fees and expenses due with respect to the Loan Restructure Agreement. As described in the summary section set above, the Debtor values the New Notes and the shares of New Common Stock to be distributed on account of the Allowed Loan Restructure Agreement Claims at an amount sufficient to provide for slightly less than the payment in full of such Claims (before accounting for postpetition interest, charges, and fees, all of which otherwise would be subject to the contractual subordination described below). See Article VII for a discussion of the Debtor's valuation analysis. Specifically, assuming a par value for the New Notes ($115 million) and a value of $89.7 million for the New Common Stock, the total value of the consideration to be distributed on account of the Loan Restructure Agreement Claims is approximately $206.2 million ($115 million in New Notes plus $89.7 million in New Common Stock plus $1.5 million in cash). The Debtor estimates that an additional $6.31 million in postpetition interest would accrue with respect to the Loan Restructure Agreement Claims through December 31, 2001. (1) The New Notes. The New Notes to be distributed on account of Allowed Loan Restructure Agreement Claims consist of $82.5 million principal amount of the New Cash Pay Notes and $32.5 million principal amount of the New PIK Notes. Each New Cash Pay Note and New PIK Note will be issued under a single indenture as one instrument having both a "Cash Pay Portion" and a "PIK Portion," and the New Cash Pay Notes and New PIK Notes will not trade independently of each other. In the event only a New Cash Pay Note is to be issued to a particular holder, the "PIK Portion" of the new senior secured note issued will be zero and in the event only a New PIK Note is to be issued to a particular holder, the "Cash Pay Portion" of the new senior secured note issued will be zero. The New Cash Pay Notes will be senior secured notes to be issued by the Reorganized Debtor pursuant to the New Notes Indenture, in the aggregate principal amount of $85,000,000 (with $2,500,000 principal amount being distributed to holders of Claims classified into Class 7 under the Plan), with the following material terms: (a) due on the fifth anniversary of the Effective Date; (b) amortizing over a four-year period on a straight line basis beginning on the first anniversary of the Effective Date; (c) interest payable monthly in arrears in cash at a rate equal to the prime rate of interest plus three hundred basis points (with such rate not to be less than 8% per annum); and (d) secured (on a pari passu basis with the New PIK Notes) by a first priority security interest in all -28- assets of the Reorganized Debtor (except in the case of the Reorganized Debtor's ownership interest in its foreign Subsidiaries, which shall be subject to a pledge of not more than sixty-five percent (65%) of the Reorganized Debtor's interest therein). The New Cash Pay Notes, however, will be subject to the $20 million Exit Financing Facility, which will provide for senior liens and a priority in payment over the New Cash Pay Notes. The New PIK Notes will be new senior secured notes to be issued by the Reorganized Debtor pursuant to the New Notes Indenture, in the aggregate principal amount of $43,500,000 (with an aggregate principal amount of $32,500,000 to be distributed on account of the Allowed Loan Restructure Agreement Claims), with the following material terms: (a) due on the fifth anniversary of the Effective Date; (b) interest payable in kind monthly in arrears at a rate of 12% per annum; and (c) secured (on a pari passu basis with the New Cash Pay Notes) by a first priority security interest in all assets of the Reorganized Debtor (except in the case of the Reorganized Debtor's ownership interest in its foreign Subsidiaries, which shall be subject to a pledge of not more than sixty-five percent (65%) of the Reorganized Debtor's interest therein). Like the New Cash Pay Notes, the New PIK Notes also will be subject to the $20 million Exit Financing Facility, which will provide for senior liens and a priority in payment over the New PIK Notes. A draft of the New Notes Indenture will be filed with the Bankruptcy Court by no later than twenty-one (21) calendar days prior to the commencement of the Confirmation Hearing, or on such other date as the Bankruptcy Court may establish. (2) Enforcement and Satisfaction of Subordination Provisions of the Convertible Notes, the Subordinated Notes Indenture, and the Western Digital Note. As noted above, Class 3 provides for a distribution in respect of the Allowed Loan Restructure Agreement Claims with an approximate value that is nearly sufficient to pay such claims in full, before accounting for postpetition interest, charges, and fees. The Loan Restructure Agreement Claims are entitled to be paid in full (including postpetition interest, charges, and fees) because the Subordinated Notes Claims, the Convertible Notes Claims, and the Western Digital Note Claim are subordinated by contract to the prior payment in full of the Loan Restructure Agreement Claims. Thus, the Plan accounts for and enforces such contractual subordination (a) by distributing to holders of Allowed Loan Restructure Agreement Claims property of a value sufficient to provide for the payment in full of such Claims, including all accrued interest (less certain amounts that the holders of such Claims have agreed to leave for distribution to junior classes of creditors); and (b) by deducting such property from the distributions that otherwise would be made on account of the Subordinated Notes Claims. Accordingly, Section 7.8 of the Plan provides that, upon the Effective Date, any and all asserted claims, counterclaims, demands, defenses, rights, actions or causes of action that arise out of or relate to the subordination provisions under the Loan Restructure Agreement, the Western Digital Note, the Convertible Notes, the Subordinated Notes, or the Subordinated Notes Indenture between or among holders of Claims under such instruments will and will be deemed to be satisfied, terminated, void, and of no further force or effect such that, notwithstanding any such claimed rights, actions or causes of action, the treatment of Claims under the Plan will be deemed to satisfy in full all rights in respect of the subordination provisions under the Loan Restructure Agreement, the Western Digital Note, the Convertible Notes, the Subordinated Notes, and the Subordinated Notes Indenture. Holders of the Loan Restructure Agreement Claims have asserted to the Debtor that, based upon their assessment of the value of the Debtor's Estate, they believe that the Plan -29- does not provide for the payment in full of the Loan Restructure Agreement Claims and that, as a result, their rights under contractual subordination provisions described above are not being fully enforced under the Plan. Nevertheless, those holders have indicated to the Debtor that they have agreed to the Plan and the discharge of their contractual subordination rights in the spirit of compromise and in order to achieve for the Debtor a rapid, efficient, and cost-effective reorganization and exit from the Chapter 11 Case. 5. CLASS 4 (WESTERN DIGITAL CLAIMS). There are two sub-classes within Class 4. Class 4-A -- Western Digital Note Claim, which consists of Claims arising under or related to the Western Digital Note; and Class 4-B -- Western Digital Rejection Claims, which consists of all claims (other than the Western Digital Note Claim) held by Western Digital as of the Petition Date, including without limitation Claims arising from the Debtor's rejection of the Western Digital Leases and any other Claims assigned by Western Digital to one or more Loan Restructure Agreement Lenders after the Petition Date. As described in Section III.A., the Debtor rejected a number of leases of personal property as of the Petition Date. The Debtor had acquired four of those leases (defined as the "Western Digital Leases" in the Plan) from Western Digital as part of the Debtor's prepetition acquisition of Western Digital's thin-film media operations (as described in Section II.A). Because Western Digital remained obligated to the lessors under the Western Digital Leases, Western Digital was forced to satisfy the Debtor's obligations under the rejected leases, thereby giving rise to a claim under the Asset Sale Agreement previously executed by the Debtor and Western Digital of approximately $11.3 million, in addition to the $34 million claim under the Western Digital Note (which was given as partial consideration for the Debtor's acquisition of Western Digital's thin-film media operations). Following the Petition Date, as part of the overall compromise negotiations described in Section II.G., the Debtor, Western Digital, and certain holders of the Loan Restructure Agreement Claims reached an agreement regarding the treatment of the Western Digital Claims, which agreement is embodied in the Plan and described in Section II.G. and below. That agreement also provided for Western Digital to extend for at least three years its existing volume purchase commitments to the Debtor and its subsidiaries (which commitments were scheduled to expire in April 2002). This extended volume purchase commitment provides for Western Digital to continue to purchase a substantial portion of its annual thin-film media requirements from the Debtor's subsidiaries, and also provides for automatic two-year renewals of the term of the Volume Purchase Agreement in the absence of twelve-months prior written notice of intent not to renew. The commitment therefore provides a solid, predictable foundation of business on which the Debtor can continue to build its operations, and represents substantial new value that will be distributed to creditors through the Plan. As described in Section II.G., as part of the negotiations, certain holders of the Loan Restructure Agreement Claims agreed to purchase the Western Digital Claims for cash, thereby providing Western Digital with desired liquidity, and the Debtor in turn agreed to the treatment of the Western Digital Claims set forth in the Plan. Accordingly, the Western Digital Claims have now been assigned to certain holders of the Loan Restructure Agreement Claims, who will receive all distributions with respect to such claims. a) CLASS 4-A (WESTERN DIGITAL NOTE CLAIM). ALLOWANCE. Section 4.4 of the Plan provides that the Western Digital Note Claim will be deemed to be Allowed Unsecured Claims in the aggregate amount of $33,675,357 (equal to the -30- principal amount of the Western Digital Note plus all interest accrued through the Petition Date). b) CLASS 4-A (WESTERN DIGITAL NOTE CLAIM). TREATMENT. Section 4.4 of the Plan provides that, on the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent will provide to each holder of the Allowed Western Digital Note Claim, in full satisfaction, release and discharge of such Claim, its Pro Rata Share of (a) $11,000,000 principal amount of the New PIK Notes; and (b) 3,022,127 shares of New Common Stock, which consists of approximately 12.4% of the issued and outstanding shares of New Common Stock as of the Effective Date. The Debtor values the New PIK Notes and the shares of New Common Stock to be distributed on account of the Allowed Western Digital Note Claim at approximately $32.64 million (equal to $11 million in New PIK Notes plus stock valued at approximately $21.64 million). See Section IV.A.4.(b).(1) for a description of the New PIK Notes; and see Article VII for a discussion of the Debtor's valuation analysis. This amount is sufficient to provide for payment of approximately ninety-seven percent (97%) (before accounting for postpetition interest, charges, and fees which otherwise would be subject to the contractual subordination provisions described below) of the Western Digital Note Claim. The Debtor estimates postpetition interest on the Western Digital Note Claim through December 31, 2001, to be approximately $0.58 million. The Western Digital Note Claim is entitled to be paid in full (including postpetition interest, charges, and fees) because the Subordinated Notes Claims are subordinated by contract to the prior payment in full of the Loan Restructure Agreement Claims. As explained in Section IV.A.4.b., the Plan enforces the contractual subordination provisions of the Loan Restructure Agreement, the Western Digital Note, the Convertible Notes, the Subordinated Notes, and the Subordinated Notes Indenture, and in turn provides for the termination of any and all asserted rights, actions or causes of action based upon any claimed right to contractual subordination. c) CLASS 4-B (WESTERN DIGITAL REJECTION CLAIM). ALLOWANCE. Section 4.4 of the Plan provides that the Western Digital Rejection Claims will be deemed to be Allowed Unsecured Claims in the aggregate amount of $11,261,760 (equal to the estimated amount of Western Digital's damages arising from rejection of the Western Digital Leases). A letter from Western Digital to the Debtor that sets forth the calculation of Western Digital's estimated damages is attached hereto as Exhibit I. So long as Western Digital makes the payments indicated in the letter, the Debtor is not aware of any defenses to the alleged damage claims, and the Debtor has agreed that it has no defenses or offsets with respect to such claims so long as Western Digital makes such payments. d) CLASS 4-B (WESTERN DIGITAL REJECTION CLAIM). TREATMENT. Unlike the Western Digital Note Claim, the Western Digital Rejection claims are general unsecured claims that are entitled to share ratably in the assets distributed to other creditors, without the benefit or burden of any subordination agreements. Section 4.4 of the Plan therefore provides that, on the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent will provide to each holder of the Allowed Western Digital Rejection Claims, in full satisfaction, release and discharge of such Claims, its Pro Rata Share of 893,723 shares of New Common Stock, which shall consist of approximately 3.67% of the issued and outstanding shares of New Common Stock as of the Effective Date. -31- The Debtor values the New Common Stock to be distributed on account of the Allowed Western Digital Rejection Claims at approximately $6.4 million. See Article VII for a discussion of the Debtor's valuation analysis. This amount is sufficient to provide for a recovery of approximately fifty-seven percent (57%) of the amount of the Western Digital lease rejection claims and thus is equivalent to the distributions to be made in respect of General Unsecured Claims classified into Class 7 under the Plan. 6. CLASS 5 (CONVERTIBLE NOTES CLAIMS). The Convertible Notes Claims are, collectively, Claims arising under or related to the Nelson Note and the Olympus Note. a) ALLOWANCE. Section 4.5 of the Plan provides that the Convertible Notes Claims will be deemed to be Allowed Unsecured Claims as follows: (i) the Nelson Note Claim will be deemed to be an Allowed Unsecured Claim in the amount of $4,034,618 (equal to the principal amount of the Nelson Note plus all interest accrued through the Petition Date); and (ii) the Olympus Note Claim will be deemed to be an Allowed Unsecured Claim in the amount of $6,155,382 (equal to the principal amount of the Olympus Note plus all interest accrued through the Petition Date). b) TREATMENT. Section 4.5 of the Plan provides that, on the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent will provide to the holders of the Convertible Notes Claims, in full satisfaction, release and discharge of such Claims, the following treatment: (i) The holder of the Allowed Nelson Note Claim shall receive 500,000 shares of New Common Stock, which will consist of approximately 2.05% of the issued and outstanding shares of New Common Stock as of the Effective Date. (ii) The holder of the Allowed Olympus Note Claim shall receive shall receive 750,000 shares of New Common Stock, which will consist of approximately 3.08% of the issued and outstanding shares of New Common Stock as of the Effective Date. The Debtor values the shares of New Common Stock to be distributed on account of the Allowed Convertible Note Claims at approximately $8.95 million, or $3.58 million on account of the Allowed Nelson Note Claim and $5.37 million on account of the Allowed Olympus Note Claim. See Article VII for a discussion of the Debtor's valuation analysis. Thus, the holder of the Nelson Note Claim will receive a distribution of approximately 88% percent of the allowed amount of its claim, and the holder of the Olympus Note Claim will receive a distribution of approximately 87% percent of the allowed amount of its claim, in each case before accounting for postpetition interest, charges, and fees which otherwise would be subject to the contractual subordination provisions described below. The Debtor estimates postpetition interest on the Convertible Notes Claims through December 31, 2001, to be approximately $0.34 million. As explained in Section IV.A.4.b., the Convertible Note Claims are contractually senior to the Subordinated Notes Claims and thus are entitled to be paid in full (including postpetition interest, charges, and fees) prior to any distributions made in respect of the Subordinated Notes Claims. Holders of the Convertible Note Claims, however, have agreed to forego a portion of the distributions to which they otherwise would be entitled so as to assist the Debtor in its efforts to achieve a consensual restructuring. The Plan otherwise -32- enforces the contractual subordination provisions of the Loan Restructure Agreement, the Western Digital Note, the Convertible Notes, the Subordinated Notes, and the Subordinated Notes Indenture, and in turn provides for the termination of any and all asserted rights, actions or causes of action based upon any claimed right to contractual subordination. 7. CLASS 6 (SUBORDINATED NOTES CLAIMS). The Subordinated Notes Claims are Claims or Equity Interests arising under or related to the Subordinated Notes or the Subordinated Notes Indenture. a) ALLOWANCE. Section 4.6 of the Plan provides that the Subordinated Notes Claims will be deemed to be Allowed Unsecured Claims in the aggregate amount of $238,195,000 (equal to the principal amount of the Subordinated Notes plus all interest accrued through the Petition Date). b) TREATMENT. Section 4.6 of the Plan provides that, on the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent will provide to the Subordinated Notes Trustee, for distribution of Pro Rata Shares to holders of Allowed Subordinated Notes Claims and in full satisfaction, release and discharge of the Subordinated Notes Claims, (i) 3,744,775 shares of New Common Stock (approximately 15.37% of the issued and outstanding shares of New Common Stock as of the Effective Date); and (ii) in the event that Class 9 votes to reject the Plan, an additional 750,000 shares of New Common Stock, which will consist approximately 3.08% of the issued and outstanding shares of New Common Stock as of the Effective Date. The Debtor values the shares of New Common Stock to be distributed on account of the Allowed Subordinated Notes Claims at approximately $26.8 million, assuming that Class 9 votes to accept the Plan. The Debtor values the additional shares to be distributed on account of the Allowed Subordinated Notes Claims in the event that Class 9 votes to reject the Plan at approximately $5.37 million. See Article VII for a discussion of the Debtor's valuation analysis. As explained in Section IV.A.4.b., this distribution is approximately equal to a Pro Rata Share of the consideration to be distributed on account of Allowed Unsecured Claims, less the amounts allocable to holders of Allowed Loan Restructure Agreement Claims and Claims allowed in respect of the Western Digital Note and the Convertible Notes pursuant to contractual subordination provisions (after accounting for amounts that the holders of such senior claims have agreed to leave for distributions in respect of the Subordinated Notes Claims, including claims for postpetition interest, charges, and fees). As a consequence of the enforcement of those subordination provisions and the consensual allocation of value to subordinated creditors by senior creditors, the Plan provides for the termination of any and all asserted rights, actions, causes of action, counterclaims, demands, and defenses that arise out of or relate to the subordination provisions in the instruments described above. 8. CLASS 7 (GENERAL UNSECURED CLAIMS). General Unsecured Claims are Unsecured Claims other than the Loan Restructure Agreement Claims, the Western Digital Claims, the Convertible Notes Claims, the Subordinated Notes Claims, the Convenience Claims, and the Subordinated Claims. Section 4.7 of the Plan provides that, on the later of the Effective Date and the date on which a General Unsecured Claim becomes an Allowed General Unsecured Claim, or as -33- soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed General Unsecured Claim, in full satisfaction, release and discharge of such Claim, its Pro Rata Share of (a) $1,000,000 in Cash; (b) $2,500,000 principal amount of the New Cash Pay Notes; and (c) 558,660 shares of New Common Stock, which will consist of approximately 2.29% of the issued and outstanding shares of New Common Stock as of the Effective Date. The Debtor values the shares of New Common Stock to be distributed on account of the Allowed General Unsecured Claims at approximately $4 million, and the Debtor values the New Cash Pay Notes and the cash at their stated value. See Section IV.A.4.(b).(1) for a description of the New Cash Pay Notes, and see Article VII for a discussion of the Debtor's valuation analysis. Thus, the Debtor values the total consideration to be distributed to Class at $7.5 million ($1 million in cash, $2.5 million in New Cash Pay Notes, and $4 million in New Common Stock). As described more fully in Article VII, the value attributed to the shares of stock in this Disclosure Statement was based upon a valuation analysis (attached as Exhibit H) prepared by KPMG Consulting, Inc. As described in detail in Exhibit H, KPMG attempted to determine an "enterprise value" for the Reorganized Debtor. In that regard, KPMG concluded that "the enterprise value of Komag is in a likely range of: $288 million to $313 million," noting: "Because of the uncertainty in the current economy and computer industry, we have estimated a broad range of value for Komag, which results in a range of possible values between $227 million and $383 million." As discussed in Sections II.G. and IV, the Plan is premised upon a compromise reached with the holders of the Loan Restructure Agreement Claims, holders of the Convertible Notes Claims, and holders of the Western Digital Claims -- i.e., an enterprise value for the Reorganized Debtor of approximately $310 million. As discussed in Article VII, this compromised enterprise values assume no debt. To determine the value of shareholder equity in the Reorganized Debtor, you need to subtract from the $310 million valuation the amount of debt being incurred by the Reorganized Debtor under the Plan. With an enterprise value of $310 million, assuming (a) Allowed Administrative Claims, Priority Claims, and cash distributions to Classes 3, 7, and 8 in an aggregate amount of approximately $7 million; and (b) the issuance of the New Notes in the amount of $128.5 million, the assumed equity value of the Reorganized Debtor is $174.5 million. Based upon a distribution of 24,369,285 million shares of New Common Stock in connection with the Plan, the value of each share of New Common Stock as of the Effective Date would be approximately $7.16. This share price based upon enterprise value is not intended to reflect trading value -- that is, the price at which the stock would actually trade on a public market. There is no assurance that the stock can or will be listed (although every effort will be made to do so), and even if it is listed for sale on a public exchange, the actual trading value of the stock cannot be determined at this time. It could ultimately be higher or lower than the enterprise value depending on market conditions and forces and upon the performance of the Reorganized Debtor and sector performance at the time the stock is available to be traded. Creditors are urged to read carefully the KPMG report attached as Exhibit H, including its "Appendix A -- Limiting Conditions and Assumptions." The actual number of shares to be distributed on account of each Allowed General Unsecured Claim will depend upon the total pool of General Unsecured Claims that ultimately become Allowed. The Debtor estimates that the aggregate amount of Allowed General Unsecured Claims will approximate $14 million or less. Of that amount, the Debtor -34- estimates that approximately $6 million is attributable to general trade and accounts payable existing as of the Petition Date, approximately $5.8 million is attributable to damage claims relating to the Debtor's rejection of certain leases of personal property at the inception of the Chapter 11 Case, and approximately $2.2 million is attributable to a reserve for claims that currently are unknown and unasserted. Thus, the Plan is premised upon an approximate fifty-four percent (54%) distribution in respect of Allowed General Unsecured Claims, which represents a ratable share of the value of bankruptcy estate prior to accounting for the various contractual subordination agreements described elsewhere in this Disclosure Statement, less a discount amount negotiated with ICX and Analytical Services (holders of General Unsecured Claims and members of the Committee, who were negotiating on their own behalf and not on behalf of the Committee or as representatives of trade creditors generally) in exchange for the cash consideration and notes provided under the Plan. However, as explained in Section IV.E., the deadline for the filing of proofs of Claim has not yet elapsed, and the Debtor therefore can make no assurance that the final amount of Allowed General Unsecured Claims will not materially exceed or be lower than the Debtor's estimates. If the amount of Allowed General Unsecured Claims exceeds the Debtor's estimate of $14 million, distributions in respect of Allowed General Unsecured Claims under the Plan ultimately will be less than the amounts that the Debtor currently projects; if the amount of Allowed General Unsecured Claims is less than the Debtor's estimate of $14 million, distributions in respect of Allowed General Unsecured Claims under the Plan will be greater than the amounts that the Debtor currently projects. 9. CLASS 8 (CONVENIENCE CLAIMS). Convenience Claims are Claims that otherwise would be General Unsecured Claims and that (a) are in an allowed amount of $10,000 or less, or (b) are in an allowed amount of more than $10,000 but are the subject of an irrevocable written election, as made on a validly executed and timely delivered Ballot, to reduce the amount of the Claim to $10,000; provided, however, that holders of Claims that otherwise would be Convenience Claims may, on a validly executed and timely delivered Ballot, opt out of Class 8 and into Class 7 under the Plan. Section 4.8 of the Plan provides that, on the later of the Effective Date and the date on which a Convenience Claim becomes an Allowed Convenience Claim, or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Convenience Claim, in full satisfaction, release and discharge of such Claim, a Cash payment in an amount equal to its Pro Rata Share of $650,000; provided, however, that the distribution on account of each Allowed Convenience Claim may not exceed one hundred percent (100%) of the amount of such Allowed Convenience Claim. Based upon a review of its books and records, the Debtor believes that there exist an aggregate amount of approximately $650,000 in Claims, that, if allowed, will constitute Convenience Claims. However, the actual amount of Allowed Convenience Claims cannot be estimated precisely at this time because, among other things, it cannot now be determined how many claimants ultimately will reduce their Claims and "opt in" to treatment under Class 8 or, conversely, "opt out" of treatment under Class 8 and into treatment under Class 7. As a result, it cannot be determined at this time whether holders of Allowed Convenience Claims will receive a full one-hundred percent (100%) payment on account of such Claims. If the pool of Allowed Convenience Claims is greater than $650,000, holders of such Claims will receive less than full payment in respect of their claims. -35- The Debtor submits that the creation of a separate class of Convenience Claims is appropriate under the circumstances and under section 1122(b) of the Bankruptcy Code because, among other things, such a class will reduce or eliminate the significant administrative expenses that otherwise would be associated with the making of distributions of equity securities on account of the relatively small Convenience Claims. Holders of Convenience Claims, however, should be aware that, by receiving distributions of Cash as treatment through Class 8, they will not receive any of the New Common Stock to be distributed to holders of General Unsecured Claims. It is possible that the value of such New Common Stock ultimately could exceed the value of the Cash distributed on account of Convenience Claims. Accordingly, holders of Allowed General Unsecured Claims in amounts of $10,000 or less that wish to participate in distributions of New Common Stock should elect, on a timely submitted Ballot, to opt out of Class 8 and into Class 7 under the Plan. HOLDERS OF ALLOWED GENERAL UNSECURED CLAIMS ARE ADVISED TO CAREFULLY REVIEW THEIR BALLOTS AND THE INSTRUCTIONS THAT ACCOMPANYING SUCH BALLOTS. AS INDICATED THEREIN, A CLAIMANT'S ELECTION TO OPT OUT OF CLASS 8 AND INTO CLASS 7, AS WELL AS A CLAIMANT'S ELECTION TO OPT OUT OF CLASS 7 AND INTO CLASS 8 BY REDUCING THE AMOUNT OF THE CLAIMANT'S CLAIM TO $10,000, IS IRREVOCABLE AND MUST BE MADE IN THE MANNER DESCRIBED IN THE BALLOTS AND THE ACCOMPANYING INSTRUCTIONS. 10. CLASS 9 (EQUITY INTERESTS). Equity Interests include all common stock of the Debtor, as well as all options and warrants issued prior to the Petition Date. Section 4.9 of the Plan provides that, IF AND ONLY IF CLASS 9 VOTES TO ACCEPT THE PLAN within the meaning of section 1126 of the Bankruptcy Code, then on the later of the Effective Date and the date on which an Equity Interest becomes an Allowed Equity Interest, or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Equity Interest, in full satisfaction, release and discharge of such Equity Interest, its Pro Rata Share of 750,000 shares of New Common Stock, which will consist of approximately 3.08% of the issued and outstanding shares of New Common Stock as of the Effective Date. IF CLASS 9 VOTES TO REJECT THE PLAN WITHIN THE MEANING OF SECTION 1126 OF THE BANKRUPTCY CODE, CLASS 9 WILL RECEIVE NO DISTRIBUTIONS AND RETAIN NO INTERESTS UNDER THE PLAN. ALSO, IN THE EVENT THAT THE BANKRUPTCY COURT DETERMINES THAT THE TREATMENT OF EQUITY INTERESTS AS SET FORTH ABOVE CAUSES THE PLAN TO VIOLATE THE REQUIREMENTS OF SECTION 1129 OF THE BANKRUPTCY CODE OR OTHERWISE RENDERS THE PLAN NOT CAPABLE OF BEING CONFIRMED, CLASS 9 WILL RECEIVE NO DISTRIBUTIONS AND RETAIN NO INTERESTS UNDER THE PLAN, AND THE DEBTOR, IN ITS DISCRETION, EITHER WILL CANCEL OR REDISTRIBUTE TO OTHER CLASSES OF CLAIMS THE 750,000 SHARES OF NEW COMMON STOCK THAT OTHERWISE WOULD BE DISTRIBUTED IN RESPECT OF EQUITY INTERESTS IN SUCH A MANNER AS TO SATISFY THE REQUIREMENTS OF THE BANKRUPTCY CODE. Based upon a total of 111,924,983 issued and outstanding common shares of the Debtor, if Class 9 votes to accept the Plan and if the Plan otherwise satisfies the requirements of section 1129 of the Bankruptcy Code and may be confirmed, shareholders will receive one share of New Common Stock for every 149.23 shares of common stock that they currently hold. The Debtor values the shares of New Common Stock that may be distributed on account of the Allowed Equity Interests at approximately $5.37 million. See Article VII for a discussion of the Debtor's valuation analysis. -36- As explained in Article VII, the Debtor believes that the overall value of its business as a going concern is not sufficient to satisfy the claims of all creditors. Accordingly, under the priorities established by the Bankruptcy Code, holders of Equity Interests are not entitled to participate in distributions from the Debtor's Estate. See Article V. However, in an attempt to achieve a consensual reorganization and deliver some consideration to all stakeholders, the Debtor proposes to deliver the New Common Stock to holders of Equity Interests, but only if Class 9 votes to accept the Plan and only if the Plan otherwise satisfies the requirements of the Bankruptcy Code. If Class 9 votes to reject the Plan, the Debtor's goal of achieving a consensual restructuring will not have been achieved and the Debtor believes that, in such an event, it is appropriate to make no distributions to shareholders. If Class 9 votes to reject the Plan or if the proposed distribution to Class 9 causes the Plan to be unconfirmable, Class 9 will receive no distributions and the Debtor will request that the Bankruptcy Court confirm the Plan pursuant to the Bankruptcy Code's "cram down" provisions, as described in Article V. SHAREHOLDERS SHOULD BE ADVISED THAT, IF ANY OF THE OTHER CLASSES OF CLAIMS UNDER THE PLAN VOTES TO REJECT THE PLAN, IT IS HIGHLY LIKELY THAT THE PLAN WILL NOT SATISFY THE CONFIRMATION REQUIREMENTS OF THE BANKRUPTCY CODE AND THEREFORE THAT THE PROPOSED DISTRIBUTION WILL NOT BE MADE. SHAREHOLDERS FURTHER SHOULD BE AWARE THAT CERTAIN HOLDERS OF SUBORDINATED NOTES CLAIMS HAVE INFORMED THE DEBTOR THAT THEY INTEND TO VOTE TO REJECT THE PLAN. THOSE HOLDERS CLAIM TO HOLD A SUFFICIENT AMOUNT OF CLAIMS TO CAUSE CLASS 6 TO REJECT THE PLAN. THUS, IT IS POSSIBLE, AND PERHAPS LIKELY, THAT CLASS 6 (OR SOME OTHER CLASS OF CLAIMS) WILL VOTE TO REJECT THE PLAN AND THAT, AS A RESULT, NO DISTRIBUTIONS WILL BE MADE TO SHAREHOLDERS. B. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. 1. GENERALLY. The Bankruptcy Code empowers debtors in possession, subject to the approval of the Bankruptcy Court, to assume or reject the debtors' executory contracts and unexpired leases. An "executory contract" generally means a contract under which material performance other than the payment of money is due by the parties. If an executory contract or unexpired lease is rejected by the debtor in possession, the rejection operates as a prepetition breach of such agreement. If an executory contract or unexpired lease is assumed by the debtor in possession, the assumption obligates the debtor in possession to perform under the agreement, and damages arising for any subsequent breach of the agreement are treated as administrative expenses of the Estate. As explained in Section III.A., the Debtor rejected a number of burdensome unexpired leases and potentially executory contracts shortly after the Petition Date (with such rejection effective as of the Petition Date). As of the date of this Disclosure Statement, the Debtor believes that most of its remaining executory contracts probably are beneficial to the Estate. The Schedule attached hereto as Exhibit E sets forth the remaining executory contracts of which the Debtor currently is aware. The Debtor currently is reviewing that Schedule to determine which remaining executory contracts should be assumed and which should be rejected pursuant to the Plan, each in the manner described below. 2. ASSUMPTION. Section 6.1 of the Plan provides that any executory contracts or unexpired leases that (a) are not identified on the Schedule of Rejected Agreements (to be filed no later than twenty-one (21) calendar days prior to the commencement of the Confirmation Hearing, or -37- on such other date as the Bankruptcy Court may establish); (b) have not expired by their own terms on or prior to the Effective Date; (c) have not been assumed, assumed and assigned, or rejected with the approval of the Bankruptcy Court as of the Effective Date; and (d) are not the subject of a motion for rejection pending as of the Effective Date, will be deemed to have been assumed by the Reorganized Debtor effective as of the Effective Date. Subject to the occurrence of the Effective Date, entry of the Confirmation Order by the Bankruptcy Court will constitute approval of and authorization for the assumption of such executory contracts and unexpired leases pursuant to section 365(a) of the Bankruptcy Code and a finding by the Bankruptcy Court that each such assumption is in the best interest of the Debtor, its estate, and all parties in interest in the Chapter 11 Case. a) CURE PAYMENTS. Section 6.2 of the Plan provides that, as soon as practicable after and in no event later than thirty (30) days after the Effective Date, the Reorganized Debtor will pay to each party to an executory contract or unexpired lease assumed pursuant to Section 6.1 of the Plan any monetary amounts required to be paid under section 365(b) of the Bankruptcy Code as a condition to assumption, unless the Reorganized Debtor and such party agree to different arrangements for the satisfaction of obligations under section 365(b). The Bankruptcy Court will retain jurisdiction to and, after the provision of notice and the opportunity for a hearing in accord with the Bankruptcy Rules, will resolve all disputes regarding (i) the amount of any cure payment to be made pursuant to the Plan; (ii) the ability of the Debtor or the Reorganized Debtor to provide "adequate assurance of future performance" within the meaning of section 365 of the Bankruptcy Code under the contract or lease to be assumed; and (iii) any other matter pertaining to such assumption. b) BAR DATE FOR THE ASSERTION OF CLAIMS FOR CURE PAYMENTS. The Debtor does not believe that any amounts are necessary to be paid in order to cure any existing defaults or arrearages under the executory contracts and unexpired leases to be assumed pursuant to Section 6.1 of the Plan. ANY PARTY TO SUCH AN EXECUTORY CONTRACT OR UNEXPIRED LEASE THAT ASSERTS THAT ANY PAYMENT OR OTHER PERFORMANCE IS DUE IN CONNECTION WITH THE PROPOSED ASSUMPTION OF SUCH AGREEMENT IN ACCORDANCE WITH THE PLAN MUST FILE WITH THE BANKRUPTCY COURT AND SERVE UPON THE DEBTOR A WRITTEN STATEMENT AND ACCOMPANYING DECLARATION IN SUPPORT THEREOF SPECIFYING THE BASIS FOR ITS CLAIM WITHIN THE SAME DEADLINE AND IN THE MANNER ESTABLISHED FOR FILING OBJECTIONS TO CONFIRMATION OF THE PLAN. (SEE SECTION I.C.). THE FAILURE TO TIMELY FILE AND SERVE SUCH A STATEMENT WILL WAIVE ANY AND ALL OBJECTIONS TO THE PROPOSED ASSUMPTION AND ANY CLAIM FOR CURE AMOUNTS OF THE AGREEMENT AT ISSUE. 3. REJECTION. Section 6.3 of the Plan provides that any executory contracts or unexpired leases of the Debtor identified on the Schedule of Rejected Agreements or in any motion for rejection pending as of the Effective Date will be deemed to have been rejected by the Debtor as of the Effective Date, and the Reorganized Debtor shall have no liability under such executory contracts and unexpired leases except specifically provided in the Plan. Subject to the occurrence of the Effective Date, entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of and authorization for the rejection of such executory contracts and unexpired leases pursuant to section 365(a) of the Bankruptcy Code and a finding by the Bankruptcy Court that each such rejection is in the best interest of the Debtor and its estate. -38- a) DEADLINE FOR THE ASSERTION OF REJECTION DAMAGE CLAIMS; TREATMENT OF REJECTION DAMAGE CLAIMS. Section 6.4 of the Plan provides that ALL PROOFS OF CLAIMS ARISING FROM THE REJECTION OF EXECUTORY CONTRACTS OR UNEXPIRED LEASES PURSUANT TO SECTION 6.3 OF THE PLAN MUST BE FILED WITH THE BANKRUPTCY COURT AND SERVED ON THE REORGANIZED DEBTOR NO LATER THAN THIRTY (30) DAYS AFTER THE DATE ON WHICH THE NOTICE OF EFFECTIVE DATE IS MAILED. ANY CLAIM FOR WHICH A PROOF OF CLAIM IS NOT FILED AND SERVED WITHIN SUCH TIME WILL BE FOREVER BARRED AND WILL NOT BE ENFORCEABLE AGAINST THE DEBTOR OR ITS ESTATE, ASSETS, PROPERTIES, OR INTERESTS IN PROPERTY, OR AGAINST THE REORGANIZED DEBTOR OR ITS ESTATE, ASSETS, PROPERTIES, OR INTERESTS IN PROPERTY. Unless otherwise ordered by the Bankruptcy Court, all such Claims that are timely filed as provided herein will be treated as General Unsecured Claims and be classified into Class 7 under the Plan. 4. INDEMNIFICATION OBLIGATIONS. Section 6.5 of the Plan provides that, for purposes of the Plan and effective on the Effective Date, the obligations of the Debtor to indemnify, reimburse, or limit the liability of its present and any former directors, officers or employees, in their capacity as such, against or for any obligations, whether pursuant to the certificate of incorporation of the Debtor, the bylaws of the Debtor, applicable state law or specific agreement, or any combination of the foregoing, will be assumed by the Reorganized Debtor, survive and remain unaffected by confirmation of the Plan and the occurrence of the Effective Date, and not be discharged irrespective of whether such indemnification, reimbursement or limitation is owed in connection with an event occurring before, on, or after the Petition Date. The Debtor is not currently aware of any claims for indemnification that would fall within the scope of Section 6.5 of the Plan and, as a result, the Debtor does not anticipate that obligations under the Section will prove to be material. C. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN. 1. REVESTING OF ASSETS, INCLUDING RIGHTS OF ACTION. Except as otherwise expressly provided by the Plan, on the Effective Date title to all assets and property of the Estate, including without limitation the Debtor's ownership interests in the Subsidiaries and all Rights of Action (defined in the Plan as any rights, claims, or causes of action owned by or accruing to the Debtor (including as a debtor in possession) or the Estate pursuant to the Bankruptcy Code or pursuant to any statute or legal theory, including, without limitation, section 541 of the Bankruptcy Code, and any avoidance or recovery actions under sections 544, 545, 547, 548, 549, 550, 551, and 553 of the Bankruptcy Code, and any rights to, claims, or causes of action for recovery under any policies of insurance issued to or on behalf of the Debtor or the Estate), will vest in the Reorganized Debtor in accordance with section 1141 of the Bankruptcy Code, free and clear of all Claims, Liens, and Equity Interests. PROSECUTION OF RIGHTS OF ACTION. On the Effective Date, the Rights of Action shall be deemed retained by or transferred to the Reorganized Debtor. The Reorganized Debtor will be deemed the appointed representative to, and may, pursue, litigate, and compromise and settle any and all Rights of Action, as appropriate, without further notice, the opportunity for a hearing, or Court approval. NO WAIVER OR LIMITATION OF RIGHTS OF ACTION. Section 7.1(b) of the Plan provides that the failure to identify in this Disclosure Statement any potential or existing Rights of Action generally or specifically is not intended to and will not limit the rights of the Debtor or -39- the Reorganized Debtor to pursue any such action. Section 7.1(b) of the Plan further provides that, unless a Right of Action is expressly waived, relinquished, released, compromised or settled in the Plan, the Debtor on behalf of itself and the Reorganized Debtor expressly reserves all Rights of Action for later adjudication and, as a result, no preclusion doctrine, including without limitation the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, estoppel (judicial, equitable or otherwise) or laches, will apply to such Rights of Action upon or after the confirmation or consummation of the Plan or the Effective Date. In addition, the Debtor on behalf of itself and the Reorganized Debtor expressly reserves the right to pursue or adopt against any other entity any claims alleged in any lawsuit in which the Debtor is a defendant or an interested party. The Debtor believes that Section 7.1(b) is consistent with applicable law. If, however, the Bankruptcy Court determines in connection with confirmation of the Plan that Section 7.1(b) is not a permissible provision, the Debtor will modify the Plan to amend or delete Section 7.1(b). The Debtor submits that any such modification will not adversely change the treatment of the claim of any creditor or equity security holder under the Plan. 2. MANAGEMENT AND OPERATION OF THE REORGANIZED DEBTOR. Section 7.2 of the Plan provides that, from and after the Effective Date, the management, control and operation of the Reorganized Debtor will become the general responsibility of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers, and the Reorganized Debtor may operate its business in accordance with the Amended and Restated Certificate of Incorporation, the Amended and Restated Bylaws, and applicable corporate law. Drafts of the Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws, as well as disclosure of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers, will be filed with the Clerk of the Bankruptcy Court no later than twenty-one (21) calendar days prior to the commencement of the Confirmation Hearing to consider confirmation of this Plan, or on such other date as the Bankruptcy Court may establish. The Plan provides that, from and after the Effective Date the Reorganized Debtor may operate its business, use, acquire or dispose of its assets, and compromise and settle Claims and Rights of Action, free of any restrictions imposed by the Bankruptcy Code, the Bankruptcy Rules, or the Bankruptcy Court, and without further notice or the opportunity for a hearing. 3. REORGANIZED DEBTOR DIRECTORS AND OFFICERS. On the Effective Date, the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers will consist of the persons identified in the Statement of Reorganized Debtor Directors/Officers (to be filed with the Clerk of the Bankruptcy Court no later than twenty-one (21) calendar days prior to the commencement of the Confirmation Hearing, or on such other date as the Bankruptcy Court may establish), and all officers of the Debtor and members of the Debtor's Board of Directors who do not continue in service as members of the Reorganized Debtor Board of Directors and/or Reorganized Debtor Officers will be deemed relieved of all further duties in such capacity. After the Effective Date, the terms and manner of selection of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers will be as provided in the Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws. 4. AMENDMENT OF CERTIFICATE OF INCORPORATION. The certificate of incorporation of the Debtor will be amended and restated as of the Effective Date in substantially the form of the Amended and Restated Certificate of -40- Incorporation and, among other things, (a) will prohibit the issuance of nonvoting equity securities as required by section 1123(a)(6) of the Bankruptcy Code, and (b) will authorize the issuance of 50,000,000 shares of New Common Stock, of which up to 24,369,285 shares shall be issued and distributed in accordance with the terms and conditions of the Plan to (i) holders of Allowed Claims and Equity Interests, and (ii) beneficiaries of the Employee Retention Plan. See Section IV.C.7. for a description of the Employee Retention Plan. 5. AMENDMENT OF BYLAWS. The bylaws of the Debtor will be amended and restated as of the Effective Date in substantially the form of the Amended and Restated Bylaws. 6. ISSUANCE OF NEW SECURITIES. On the Effective Date, the Reorganized Debtor will issue the New Common Stock and the New Notes for distribution in accordance with the Plan. When so issued, all shares of New Common Stock will be deemed valid issued, fully paid, and non assessable. SECTION 1145 EXEMPTION. The Reorganized Debtor will issue to holders of Claims the New Securities (i.e., the New Common Stock and the New Notes) without registration under federal or state securities laws. The New Securities will be issued in reliance upon the exemption set forth in section 1145 of the Bankruptcy Code, except in the case of a holder of the New Securities who may be regarded as an "underwriter" with respect to such securities, as that term is defined in section 1145(b) of the Bankruptcy Code (a "Statutory Underwriter"). See Article VI for a discussion of the section 1145 exemption. LISTING AND REPORTING. Commencing on the Effective Date, the Reorganized Debtor will use its commercially reasonable best efforts to list the New Common Stock (a) on a national securities exchange or the NASDAQ Stock Market; or (b) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on a national securities exchange or the NASDAQ Stock Market, on the NASDAQ Small Cap Market; or (c) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on the NASDAQ Small Cap Market, on another qualifying inter-dealer quotation system. Prior to such listing, the Reorganized Debtor will file such periodic and current reports as if it were a reporting company under the Securities Exchange Act of 1934. REGISTRATION RIGHTS. The Reorganized Debtor will execute the Registration Rights Agreement for the benefit of those holders of New Securities as of the Effective Date who may be regarded as underwriters within the meaning ascribed to such term in section 1145 of the Bankruptcy Code. See Article VI for a discussion of the section 1145 exemption. 7. EMPLOYEE RETENTION PLAN. On the Effective Date, without further action of the holders of New Common Stock or the Reorganized Debtor Directors or Reorganized Debtor Officers, the Employee Retention Plan will be deemed adopted and implemented. The Employee Retention Plan is a program for compensation, retention, and severance for employees of the Reorganized Debtor on substantially the terms and conditions set forth in the Employee Retention Plan Supplement to be filed with the Clerk of the Bankruptcy Court no later than twenty-one (21) calendar days prior to the commencement of the Confirmation Hearing. The Employee Retention Plan generally will provide for the following: (a) the provision for grants of up to 1,625,000 shares of New Common Stock; (b) three-year employment contracts for senior officers of the Debtor, providing for compensation at least equal to compensation levels as of the Petition Date (with annual adjustments based upon market data for comparable companies) -41- and payments in the event of termination without cause or a change in control without an offer of comparable employment equal to 2.99 times annual compensation (including salary, bonus, and benefits) in place at the time of termination or change in control; and (c) assumption of any existing employee severance and retention plan approved and implemented during the Chapter 11 Case (provided that such plan has terms no more favorable to the Debtor or its employees than the terms described in the Debtor's "Motion For Order Approving Employee Retention And Severance Program," filed with the Bankruptcy Court on or about September 6, 2001). The Employee Retention Plan is a critical component of the ongoing value that the Debtor will preserve through its reorganization process. Without an appropriate means to retain its employees, the going concern value of the Debtor would evaporate rapidly. Thus, the values described elsewhere in this Disclosure Statement are premised upon implementation of the Employee Retention Program, which is consistent with the Debtor's past practices and, in the opinion of the Debtor, necessary to retain and provide incentives for the Debtor's workforce on a going forward basis. Following the Effective Date, the Reorganized Debtor intends to file a registration statement on Form S-8 (the "S-8 Registration Statement") under the federal securities laws to register the New Common Stock to be issued to employees under the Employee Retention Plan. The Reorganized Debtor does not intend to issue the New Common Stock under the Employee Retention Plan until the S-8 Registration Statement has become effective under the federal securities laws. Once the S-8 Registration Statement has become effective, the New Common Stock issued under the Employee Retention Plan and registered under the S-8 Registration Statement will be freely tradable. 8. CANCELLATION OF EXISTING SECURITIES AND INSTRUMENTS. On the Effective Date, all promissory notes, indentures, share certificates and other instruments evidencing any Claim or Equity Interest (including without limitation the Loan Restructure Agreement, the Convertible Notes, the Western Digital Note, the Subordinated Notes, the Subordinated Notes Indenture, and the Equity Interests) will be deemed cancelled and null and void without further act or action under any applicable agreement, law, regulation, order, or rule, and the obligations of the Debtor under the agreements and certificates of designations governing such Claims and Equity Interests, as the case may be, shall be discharged. All such instruments must be surrendered as described in Section IV.D.6. Also, as described elsewhere in this Disclosure Statement, any and all asserted rights, actions or causes of action based upon any claimed right to contractual subordination under the Loan Restructure Agreement, the Western Digital Note, the Convertible Notes, the Subordinated Notes, or the Subordinated Notes Indenture between or among holders of Claims under such instruments will and will be deemed to be satisfied, terminated, void, and of no further force or effect. 9. CANCELLATION OF LIENS. Except as otherwise provided in the Plan, on the Effective Date any Lien securing any Secured Claim will be deemed released, and the entity holding such Secured Claim will be authorized and directed to release any collateral or other property of the Debtor or the Estate (including without limitation any cash collateral) held by such entity and to take such actions as may be requested by the Reorganized Debtor to evidence the release of such Lien, including without limitation the execution, delivery and filing or recording of such -42- releases as may be requested by the Reorganized Debtor (at the expense of the Reorganized Debtor). 10. CORPORATE ACTION. On the Effective Date, all actions contemplated by the Plan and the Plan Documents will be and will be deemed to be authorized and approved in all respects, in each case without further action under applicable law, regulation, order, or rule or by the stockholders of the Debtor or the Reorganized Debtor, including without limitation (a) the adoption of the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; (b) the designation of members of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers; (c) the cancellation of all Equity Interests; (d) the authorization and issuance of the New Securities; (e) the adoption and implementation of the Employee Retention Plan; and (f) the execution and delivery of, and the performance under, each of the other Plan Documents and all documents and agreements contemplated by or relating to any of the foregoing. 11. EXIT FINANCING FACILITY. The Debtor's working capital needs following the Effective Date will be satisfied from the $20 million Exit Financing Facility. The providers of the Debtor's proposed debtor in possession financing facility, which is described in Section III.A., have agreed to provide the Exit Financing Facility on the same terms and conditions as the debtor in possession facility, without additional fees or charges. D. DISTRIBUTIONS. All distributions to any holder of an Allowed Claim or Allowed Equity Interest will be made at the address of such holder as set forth in the Schedules or in the books and records of the Debtor or its agents, unless the Debtor or the Reorganized Debtor has been notified in writing of a change of address, including without limitation by the filing of a proof of Claim by such holder that contains an address for such holder different from the address reflected in such Schedules for such holder. 1. UNDELIVERABLE DISTRIBUTIONS. Holding of Undeliverable Distributions. If any distribution to any holder is returned to the Reorganized Debtor as undeliverable, no further distributions will be made to such holder unless and until the Reorganized Debtor is notified in writing of such holder's then-current address. Unless and until the Reorganized Debtor is so notified, such distribution will be deemed to be "Unclaimed Property." Unclaimed Property. If any entity entitled to receive Cash or New Securities pursuant to the Plan does not present itself on the Effective Date or on such other date on which such Person becomes eligible for distribution of such Cash or New Securities, such Cash or New Securities will be deemed to be "Unclaimed Property." Unclaimed Property will be set aside and (in the case of Cash) held in a segregated interest-bearing account to be maintained by the Reorganized Debtor pursuant to the terms of the Plan. On the first anniversary of the Effective Date, the Reorganized Debtor will file with the Bankruptcy Court a list of Unclaimed Property, together with a schedule that identifies the name and last-known address of holders of the Unclaimed Property; the Reorganized Debtor otherwise will not be required to attempt to locate any such entity. On the second anniversary of the Effective Date, all remaining Unclaimed Property and accrued interest or dividends earned thereon will be remitted to and vest in the Reorganized Debtor. -43- 2. FRACTIONAL SECURITIES. No fractional shares of New Common Stock (or Cash in lieu thereof) will be distributed. For purposes of distribution, fractional shares of New Common Stock will be rounded down to the next whole number, and the total number of shares of New Common Stock to be distributed under this Plan will be adjusted to account for such rounding. The New Notes issued pursuant to this Plan will be issued in denominations of $100 and integral multiples thereof, and no Cash payment in lieu thereof shall be made. 3. COMPLIANCE WITH TAX REQUIREMENTS. The Reorganized Debtor will comply with all tax withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to this Plan will be subject to such withholding and reporting requirements. In connection with each distribution with respect to which the filing of an information return (such as Internal Revenue Service Form 1099 or 1042) or withholding is required, the Reorganized Debtor will file such information return with the Internal Revenue Service and provide any required statements in connection therewith to the recipients of such distribution, or effect any such withholding and deposit all moneys so withheld to the extent required by law. With respect to any entity from whom a tax identification number, certified tax identification number, or other tax information required by law to avoid withholding has not been received by the Reorganized Debtor, the Reorganized Debtor, at its sole option, may withhold the amount required and distribute the balance to such entity or decline to make such distribution until the information is received. 4. TIME BAR TO CASH PAYMENTS. Checks issued by the Reorganized Debtor on account of Allowed Claims will be null and void if not negotiated within ninety (90) days from and after the date of issuance thereof. Requests for reissuance of any check shall be made directly to the Reorganized Debtor by the holder of the Allowed Claim with respect to which such check originally was issued. Any claim in respect of such a voided check must be made on or before the second anniversary of the Effective Date. After such date, all Claims in respect of voided checks will be discharged and forever barred and the Reorganized Debtor shall retain all moneys related thereto. 5. NO DE MINIMIS DISTRIBUTIONS. No Cash payment of less than ten dollars ($10.00) will be made by the Reorganized Debtor on account of any Allowed Claim. 6. SURRENDER OF EXISTING SECURITIES AND INSTRUMENTS. Except as otherwise provided in the Plan or as the Reorganized Debtor otherwise may agree, each holder of a promissory note or other instrument evidencing a Claim must surrender such promissory note or instrument to the Reorganized Debtor upon request. No distribution under the Plan will be made to or on behalf of any such holders unless and until such promissory note or instrument is received by the Reorganized Debtor or the unavailability of such promissory note or instrument is established to the reasonable satisfaction of the Reorganized Debtor. In accordance with section 1143 of the Bankruptcy Code, any holder that fails to (a) surrender or cause to be surrendered such promissory note or instrument or to execute and deliver an affidavit of loss and indemnity reasonably satisfactory to the Reorganized Debtor and (b) if requested by the Reorganized Debtor, furnish a bond in form and substance (including amount) reasonably satisfactory to the Reorganized Debtor within two years after the Effective Date will be deemed to have -44- forfeited all rights, Claims, and Equity Interests and shall not participate in any distribution under this Plan. 7. NO DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS OR DISPUTED EQUITY INTERESTS. No distributions will be made on account of any Disputed Claim or Disputed Equity Interests until such Claim or Equity Interest becomes Allowed (and then only to the extent so Allowed). Distributions made after the Effective Date in respect of Claims or Equity Interests that were not Allowed Claims or Allowed Equity Interests as of the Effective Date (but which later became Allowed) will be deemed to have been made as of the Effective Date. E. OBJECTIONS TO CLAIMS. 1. CLAIMS OBJECTION DEADLINE; PROSECUTION OF OBJECTIONS. The Reorganized Debtor will have the right to object to the allowance of Claims or Equity Interests filed with the Bankruptcy Court with respect to which liability or allowance is disputed in whole or in part. Unless otherwise ordered by the Bankruptcy Court, the Reorganized Debtor will file and serve any such objections to Claims or Equity Interests by not later than one hundred and eighty (180) days after the Effective Date (or, in the case of Claims filed after the Effective Date, by not later than one hundred and eighty (180) days after the date of filing of such Claims). 2. RESERVES, PAYMENTS, AND DISTRIBUTIONS WITH RESPECT TO DISPUTED CLAIMS. All Disputed Claims will be treated as Allowed Claims for purpose of calculating distributions to be made to the holders of Allowed Claims on the Effective Date, but no distributions will be made on account of any Disputed Claims until they become Allowed Claims. Rather, the Reorganized Debtor will reserve the distributions that otherwise would have been made in respect of such Disputed Claims if they had been Allowed Claims. At such time as a Disputed Claim becomes an Allowed Claim, in whole or in part, the Reorganized Debtor or its agent will distribute to the holder thereof the distributions, if any, to which such holder is then entitled under this Plan. Such distributions, if any, will be made as soon as practicable after the date that the order or judgment of the Bankruptcy Court allowing such Disputed Claim becomes a Final Order (or such other date as the Claim becomes an Allowed Claim), but in no event more than thirty (30) days thereafter. No interest will be paid on Disputed Claims that later become Allowed Claims. In the event that dividend distributions or regular principal/interest payments have been made with respect to the New Common Stock or New Notes distributable to a holder of a Disputed Claim that later becomes an Allowed Claim, such holder will be entitled to receive such previously-distributed dividends or principal/interest payments, as the case may be, without any additional interest with respect to thereto. All property reserved on account of Disputed Claims that ultimately become Disallowed Claims will be distributed to all holders of Allowed Claims in the Class into which such Disputed Claims have been classified, not less frequently than every six (6) months. F. CONTINUING JURISDICTION OF THE BANKRUPTCY COURT. Article XI of the Plan provides for the Bankruptcy Court to retain jurisdiction over a broad range of matters relating to the Chapter 11 Case, the Plan, and other related items. Readers are encouraged to review Article XI to ascertain the nature of the Bankruptcy Court's post-Effective Date jurisdiction. -45- V. CONFIRMATION AND EFFECTIVENESS OF THE PLAN BECAUSE THE LAW WITH RESPECT TO CONFIRMATION OF A PLAN OF REORGANIZATION IS VERY COMPLEX, CREDITORS CONCERNED WITH ISSUES REGARDING CONFIRMATION OF THE PLAN SHOULD CONSULT WITH THEIR OWN ATTORNEYS AND FINANCIAL ADVISORS. The following discussion is intended solely for the purpose of providing basic information concerning certain confirmation issues. The Debtor cannot and does not represent that the discussion contained below is a complete summary of the law on this topic. Many requirements must be met before the Bankruptcy Court may confirm the Plan. Some of the requirements discussed in this Disclosure Statement include acceptance of the Plan by the requisite number of holders of Claims and Equity Interests, and whether the Plan pays such holders at least as much as they would receive in a liquidation of the Debtor under chapter 7 of the Bankruptcy Code. These requirements, however, are not the only requirements for confirmation, and the Bankruptcy Court will not confirm the Plan unless and until it determines that the Plan satisfies all applicable requirements, including requirements not referenced in this Disclosure Statement. A. VOTING AND RIGHT TO BE HEARD AT CONFIRMATION. 1. WHO MAY SUPPORT OR OBJECT TO CONFIRMATION OF THE PLAN? Any party in interest may support or object to the confirmation of the Plan. Even entities who may not have a right to vote (e.g., entities whose Claims are classified into an unimpaired Class) may still have a right to support or object to confirmation of the Plan. (See Section I.C. for information regarding the applicable deadlines for objecting to confirmation of the Plan). 2. WHO MAY VOTE TO ACCEPT OR REJECT THE PLAN? A holder of a Claim or Equity Interest generally has a right to vote for or against the Plan if their Claim or Equity Interest is both "allowed" for purposes of voting and classified into an impaired Class. a) WHAT IS AN ALLOWED CLAIM OR INTEREST FOR VOTING PURPOSES? As noted above, a creditor's Claim or shareholder's Equity Interest must be "allowed" for purposes of voting in order for such claim or interest to have the right to vote on the Plan. Generally, for voting purposes, a Claim or Equity Interest is deemed "allowed" for voting purposes if (i) a proof of Claim or Equity Interest was timely filed, or (ii) if no proof of Claim or Equity Interest was filed, the holder of the Claim or Equity Interest is identified in the Schedules as other than "disputed," "contingent," or "unliquidated." In either case, when an objection to a Claim or Equity Interest has been filed, the claim or interest holder cannot vote unless the Bankruptcy Court, after notice and hearing, either overrules the objection or allows the claim or interest for voting purposes. THE DEFINITIONS OF "ALLOWED CLAIM" AND "ALLOWED EQUITY INTEREST" USED IN THE PLAN FOR PURPOSES OF DETERMINING WHETHER CLAIM OR EQUITY INTEREST HOLDERS ARE ENTITLED TO RECEIVE DISTRIBUTIONS THEREUNDER MAY DIFFER FROM THOSE USED BY THE BANKRUPTCY COURT TO DETERMINE WHETHER A PARTICULAR CLAIM OR EQUITY INTEREST IS "ALLOWED" FOR PURPOSES OF VOTING. HOLDERS OF CLAIMS AND EQUITY INTERESTS ARE ADVISED TO REVIEW THE DEFINITIONS OF "ALLOWED," "CLAIM," "DISPUTED," AND "EQUITY INTEREST" SET FORTH IN ARTICLE I OF THE PLAN TO DETERMINE WHETHER THEY MAY BE ENTITLED TO RECEIVE DISTRIBUTIONS UNDER THE PLAN. -46- b) WHAT IS AN IMPAIRED CLAIM OR INTEREST? As noted above, the holder of a Claim or Equity Interest has the right to vote on the Plan if that Claim or Equity Interest is allowed and classified into a Class that is impaired under the Plan. A Class is impaired if the Plan alters the legal, equitable, or contractual rights of the members of that Class with respect to their claims or interests. The Debtor believes that Classes 1 through 9 are impaired under the Plan. Any party that disputes such characterization, however, may request that the Bankruptcy Court find that its Claim or Equity Interest is impaired in order to obtain the right to vote on the Plan. 3. WHO IS NOT ENTITLED TO VOTE? The holders of the following four types of Claims or Equity Interests are not entitled to vote on the Plan: (a) Claims or Equity Interests that have been disallowed; (b) Claims or Equity Interests that are subject to a pending objection and which have not been allowed for voting purposes; and (c) Claims entitled to priority pursuant to sections 507(a)(1), (a)(2), and (a)(7) of the Bankruptcy Code (defined as "Administrative Claims" and "Priority Tax Claims" in the Plan). Holders of Administrative Claims and Priority Tax Claims are not entitled to vote because such Claims are not placed in Classes and are required to receive certain treatment specified by the Bankruptcy Code. Holders of Claims or Equity Interests of the type described above, however, nevertheless may have the right to support or object to the confirmation of the Plan. 4. VOTES NECESSARY TO CONFIRM THE PLAN. The Bankruptcy Court cannot confirm the Plan unless, among other things, (a) at least one impaired Class has accepted the Plan without counting the votes of any insiders within that Class; and (b) either all impaired Classes have voted to accept the Plan, or the Plan is eligible to be confirmed by "cramdown" with respect to any dissenting impaired Class, as discussed below. a) VOTES NECESSARY FOR A CLASS TO ACCEPT THE PLAN. A Class of Claims is considered to have accepted the Plan when more than one-half in number and at least two-thirds in dollar amount of the claims that actually voted in that Class have voted in favor of the Plan. A Class of Equity Interests is considered to have accepted the Plan when at least two-thirds in amount of the Equity Interests that actually voted in such Class have voted to accept the Plan. b) TREATMENT OF NONACCEPTING CLASSES. As noted above, even if certain impaired Classes do not accept the proposed Plan, the Bankruptcy Court may nonetheless confirm the Plan if the nonaccepting Classes are treated in the manner required by the Bankruptcy Code. The process by which nonaccepting Classes are forced to be bound by the terms of a plan is commonly referred to as a "cramdown." Specifically, the Bankruptcy Code allows the Plan to be "crammed down" on nonaccepting Classes of Claims or Equity Interests if the Plan meets the requirements of section 1129(a)(1) through (a)(7) and 1129(a)(9) through (a)(13) of the Bankruptcy Code and if the Plan does not "discriminate unfairly" and is "fair and equitable" as those terms are defined in section 1129(b) of the Bankruptcy Code. -47- c) REQUEST FOR CONFIRMATION DESPITE NONACCEPTANCE BY IMPAIRED CLASSES. If circumstances warrant, the Debtor may request that the Bankruptcy Court confirm the Plan by cramdown on any impaired Class that does not vote to accept the Plan. B. "BEST INTERESTS TEST"; LIQUIDATION ANALYSIS. Another confirmation requirement is the so-called "Best Interests Test" created by section 1129(a)(7) of the Bankruptcy Code. The Best Interests Test requires that, if a holder of a Claim or Equity Interest is in an impaired Class and does not vote to accept the Plan, such holder receive or retain an amount under the Plan not less than the amount that such holder would receive or retain if the Debtor was to be liquidated under chapter 7 of the Bankruptcy Code. In a chapter 7 case, a trustee or trustees would be elected or appointed to liquidate the Debtor's assets for distribution to creditors in accordance with the priorities set forth in the Bankruptcy Code. Under those priorities, secured creditors generally are paid first from the sales proceeds of properties securing their liens. Administrative expenses generally are next to receive payment. Unsecured creditors then are paid from any remaining sales proceeds, according to their statutory and contractual rights to priority. Unsecured creditors with the same priority share in proportion to the amount of their allowed claim in relationship to the amount of total allowed unsecured claims. Finally, shareholders receive the balance, if any, that remains after all creditors are paid. Thus, in order for the Bankruptcy Court to be able to confirm the Plan, it must find that holders of Claims and Equity Interests who do not accept the Plan will receive at least as much under the Plan as such holders would receive under a hypothetical chapter 7 liquidation with respect to the Debtor. The Debtor submits that this requirement is met here because, among other things, the Plan provides for the continued operation of the Debtor's business with the enhancement of an extended volume purchase commitment from Western Digital, thus maximizing "going concern" value and avoiding a forced liquidation of the Debtor's assets at depressed values and with accompanying chapter 7 trustee fees. That increased value in turn is delivered to holders of Allowed Claims and Equity Interests in the form of the property distributed under the Plan, including the New Common Stock (which represents an ownership interest in the ongoing business of the Debtor). Specifically, after considering the effects that a chapter 7 liquidation would have on the ultimate proceeds available for distribution to creditors in a chapter 11 case, including (a) the increased costs and expenses of a liquidation under chapter 7 arising from fees payable to a trustee in bankruptcy and professional advisors to and brokers retained by such trustee; (b) the erosion in value of assets in a chapter 7 case in the context of the expeditious liquidation required under chapter 7 and the "forced sale" atmosphere that would prevail; and (c) the substantial increases in Claims which would be satisfied on a priority basis or on parity with creditors in the Chapter 11 Case (due to rejection of executory contracts assumed during the Chapter 11 Case and breach of other postpetition obligations), the Debtor has determined that confirmation of the Plan will provide each holder of an Allowed Claim or Equity Interest with a recovery that is significantly greater than such holder would receive pursuant to liquidation of the Debtor's assets under chapter 7 of the Bankruptcy Code. Moreover, the Debtor also believes that the value of the distributions (if any) to each Class of Allowed Claims in a chapter 7 case would be less than the value of distributions under the Plan because such distributions in a chapter 7 case would not occur for a -48- substantial period of time. It is likely that distribution of the proceeds of the liquidation could be delayed for at least one year after the completion of such liquidation in order to resolve claims and prepare for distributions. In the likely event that litigation was necessary to resolve claims asserted in the chapter 7 case, the delay could be prolonged. In contrast, the Debtor has scheduled a hearing regarding confirmation of the Plan for December 2001 and, if the Plan is confirmed and becomes effective shortly thereafter, the Debtor could be in a position to make distributions to stakeholders as soon as January 2002. The difference in the value delivered under the Plan when compared to the value that would achieved in the event of a chapter 7 liquidation is illustrated in the "liquidation analysis" attached hereto as Exhibit F (the "Liquidation Analysis"), which was prepared by the Debtor with the assistance of its former proposed financial advisors (Ernst & Young Corporate Finance LLC). The Liquidation Analysis discloses that the net liquidation proceeds available for distribution to holders of Unsecured Claims in the context of a chapter 7 liquidation likely would be within a range of $48 million to $85 million (net present value) and that, as a result, holders of Loan Restructure Agreement Claims likely would receive distributions ranging from 21.5% to 38% of the allowed amount of their claims, and holders of General Unsecured Claims likely would receive distributions ranging from 9% to 16% of the allowed amount of their claims. Moreover, after giving effect to the contractual subordination agreements, holders of Convertible Notes Claims, Subordinated Notes Claims, the Western Digital Note Claim, and Equity Interests would not receive any distribution whatsoever from the Estate. In contrast, the Plan provides for all of such holders to receive substantial distributions of property under the Plan. Please note, however, that underlying the Liquidation Analysis are a number of estimates and assumptions that, although considered reasonable by the Debtor, are inherently subject to significant economic and competitive uncertainties and contingencies beyond the Debtor's control. The Liquidation Analyses also is based upon assumptions with regard to liquidation decisions that are subject to change. Accordingly, the precise values reflected may not be realized if the Debtor in fact was to undergo such a liquidation. Please also note that, in response to concerns raised by the Bankruptcy Court, at the request of Ernst & Young Corporate Finance LLC ("EYCF"), the Debtor has withdrawn its application for authority to employ EYCF as financial advisors. As noted above, the Debtor prepared the Liquidation Analysis with the assistance of EYCF. Due to the withdrawal of EYCF's employment application, the conclusions drawn in the Liquidation Analysis should be considered to be the Debtor's conclusions, EYCF has not reviewed the Liquidation Analysis since it was originally prepared for continuing reasonableness or otherwise, EYCF will not be available to testify to the Liquidation Analysis at the hearing regarding confirmation of the Plan or otherwise, EYCF has not consented to the use of or any reliance upon its work product in connection with the Chapter 11 Case, and EYCF has not been paid for preparing the Liquidation Analysis. The Debtor has applied to the Bankruptcy Court for authority to retain KPMG, LLP, as financial advisors. Upon approval of KPMG's engagement, the Debtor will have KPMG perform a liquidation analysis, and KPMG will provide any needed support regarding confirmation. C. FEASIBILITY. The Bankruptcy Code also provides that confirmation of a plan must not likely be followed by liquidation or the need for further financial reorganization of the debtor. For purposes of determining whether the Plan meets this requirement, the Debtor has analyzed the Reorganized Debtor's ability to meet its obligations under the Plan. As part of that -49- analysis, the Debtor prepared financial projections (the "Projections") that span the five year period from 2001 through 2006 (the "Projection Period"). The Projections, and the significant assumptions on which they are based, are attached hereto as Exhibit G. Based upon the Projections and the fact that a substantial portion of prepetition obligations of the Debtor are to be converted to equity under the Plan, the Debtor believes that the Reorganized Debtor will be able to make all payments required pursuant to the Plan and, therefore, that confirmation of the Plan is not likely to be followed by liquidation or the need for further financial reorganization. The Projections include the following: - Balance Sheets of the Debtor and the Reorganized Debtor through the Projection Period; - Statements of Operations of the Debtor and the Reorganized Debtor through the Projection Period; and - Statements of Cash Flows of the Debtor and the Reorganized Debtor through the Projection Period. The Projections are based on the assumption that the Plan will be confirmed by the Bankruptcy Court and, for analysis purposes, that the Effective Date will take place as of December 31, 2001. THE DEBTOR AND ITS ADVISORS MAKE NO REPRESENTATION AS TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY OF THE REORGANIZED DEBTOR TO ACHIEVE THE PROJECTED RESULTS. Many of the assumptions on which Debtor's Projections are based are subject to significant uncertainties. Inevitably, some assumptions will not materialize and unanticipated events and circumstances may affect the actual financial results. Therefore, the actual results achieved throughout the Projection Period may vary from the projected results and the variations may be material. All holders of Allowed Claims and Equity Interests that are entitled to vote to accept or reject the Plan are urged to examine carefully and independently evaluate all of the assumptions on which the Projections are based in evaluating the Plan. D. EFFECTIVE DATE. 1. CONDITIONS TO THE OCCURRENCE OF THE EFFECTIVE DATE. The Plan will not become effective and operative unless and until the Effective Date occurs. Section 13.2 of the Plan sets forth certain conditions to the occurrence of the Effective Date, which conditions are waivable by the Debtor in its sole discretion without further notice of approval of the Bankruptcy Court, except as set forth below. The Effective Date will occur on the first Business Day after which the conditions set forth in Sections 13.2(a) and 13.2 (b) of the Plan are satisfied; provided, however, that the Effective Date must occur by no later than one hundred and eighty days (180) days after the Confirmation Date. The Debtor may waive the condition regarding occurrence of the Effective Date within one hundred and eighty days (180) days after the Confirmation Date only upon order of the Bankruptcy Court. 2. NON-OCCURRENCE OF EFFECTIVE DATE. The Plan provides that, if confirmation occurs but the Effective Date does not occur within the time period authorized by the Plan (one hundred and eighty days after the Confirmation Date), unless otherwise ordered by the Bankruptcy Court, (a) the Confirmation -50- Order will be deemed vacated; (b) all bar dates and deadlines established by the Plan or the Confirmation Order will be deemed vacated; (c) the Chapter 11 Case will continue as if confirmation had not occurred; and (d) the Plan will be of no further force and effect, with the result that the Debtor and other parties in interest will be returned to the same position as if confirmation had not occurred. The failure of the Effective Date to occur, however, will not affect the validity of any order entered in the Chapter 11 Case other than the Confirmation Order. E. EFFECT OF CONFIRMATION; LIMITATION ON LIABILITY; INDEMNIFICATION. Article X of the Plan provides that confirmation of the Plan and the occurrence of the Effective Date will have a number of important and binding effects, some of which are summarized below. Readers are encouraged to review Article X of the Plan carefully and in its entirety to assess the various consequences of confirmation of the Plan. 1. TITLE TO ASSETS; DISCHARGE OF LIABILITIES; DISCHARGE OF THE DEBTOR. On the Effective Date, title to all assets and properties of the Debtor and the Estate or otherwise dealt with by the Plan will vest in the Reorganized Debtor in accordance with section 1141 of the Bankruptcy Code, and the Confirmation Order will be a judicial determination of discharge of the Debtor's liabilities, except as provided in this Plan. The rights afforded in the Plan and the treatment of all holders of Claims or Equity Interests as provided herein are in exchange for and in complete satisfaction, discharge and release of all Claims and Equity Interests of any nature whatsoever arising on or before the Effective Date, known or unknown, including any interest accrued or expenses incurred thereon from and after the Petition Date against the Debtor (including as debtor in possession), the Estate, or any of their properties, assets or interests in property. Thus, upon the Effective Date, all Claims and Liens against and Equity Interests in the Debtor (including as debtor in possession) will be satisfied, discharged and released in full. All entities will be precluded from asserting against the Debtor (including as debtor in possession) and the Estate and their successors or assigns, including without limitation the Reorganized Debtor, or their respective assets, properties or interests in property, any other or further Claims based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Effective Date, whether or not the facts or legal bases therefor were known or existed prior to the Effective Date. 2. INJUNCTION. All entities who have held, hold or may hold pre-Effective Date Claims or pre-Effective Date Equity Interests will be permanently enjoined, from and after the Effective Date, from (a) commencing or continuing in any manner any action or other proceeding of any kind with respect to any such pre-Effective Date Claim or pre-Effective Date Equity Interest against the Debtor, the Estate, or the Reorganized Debtor; (b) the enforcement, attachment, collection or recovery by any manner or means of any judgment, award, decree or order against the Debtor, the Estate, or the Reorganized Debtor; (c) creating, perfecting, or enforcing any Lien or encumbrance of any kind against the Debtor, the Estate, or the Reorganized Debtor or against the property or interests in property of the Debtor, the Estate, or the Reorganized Debtor; and (d) asserting any right of setoff, subrogation or recoupment of any kind against any obligation due to the Debtor, the Estate, or the Reorganized Debtor or against the property or interests in property of the Debtor, the Estate, or the Reorganized Debtor, with respect to any such pre-Effective Date Claim or pre-Effective Date Equity Interest, except as otherwise permitted by section 553 of the Bankruptcy Code. -51- 3. TERM OF EXISTING INJUNCTIONS OR STAYS. All injunctions or stays provided for in the Chapter 11 Case pursuant to sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, will remain in full force and effect until the Effective Date. 4. EXCULPATION. Section 10.5 of the Plan operates to exculpate certain parties from liability in connection with the Chapter 11 Case. Specifically, the Plan and the Confirmation Order will provide that, upon the Effective Date, neither the Debtor, the Reorganized Debtor, the Loan Restructure Agreement Lenders, the Committee, nor any of their respective directors, officers, employees, members, attorneys, consultants, advisors and agents (acting in such capacity), will have or incur any liability to any entity or any person for any act taken or omitted to be taken in connection with or related to administration of the Chapter 11 Case, including without limitation the formulation, preparation, dissemination, implementation, confirmation or consummation of this Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document created or entered into, or any other act taken or omitted to be taken in connection with this Plan (including the Plan Documents); provided, however, that the foregoing will not affect the liability of any entity or any person that otherwise would result from any such act or omission to the extent that such act or omission is determined by a Final Order to have constituted gross negligence, or willful misconduct. The Debtor believes that Section 10.5 is consistent with applicable law. The United States Trustee, however, has informed the Debtor that it objects to this provision on the grounds that it is not permissible under the Bankruptcy Code. If the Bankruptcy Court determines in connection with confirmation of the Plan that Section 10.5 is not a permissible provision, the Debtor will modify the Plan to amend or delete Section 10.5. The Debtor submits that any such modification will not adversely change the treatment of the claim of any creditor or equity security holder under the Plan. 5. RELEASES OF AND BY LOAN RESTRUCTURE AGREEMENT LENDERS. RELEASE OF LOAN RESTRUCTURE AGREEMENT LENDERS. Except as specifically provided in the Plan or the Plan Documents, as of the Effective Date the Debtor, its subsidiaries, their respective directors, officers, agents, successors, and assigns, and the Estate, and any other entity that claims by, through, or under any of them, will and will be deemed to have released, remised, and forever discharged the Loan Restructure Agreement Lenders, the Loan Restructure Agreement Agent, and their respective present and former shareholders, directors, officers, agents, employees, attorneys, professionals, successors, and assigns of and from all debts, demands, actions, claims, causes of action, contracts, agreements, covenants, promises, damages, and liabilities whatsoever, whether known or unknown, based upon, relating to, or arising from any act, fact, transaction, agreement, or omission occurring or existing on or prior to the Effective Date. The Debtor is not aware of any viable claims that otherwise might exist and be asserted but for this release, and the Debtor believes that it is appropriate to grant such a release in the context of confirmation of the Plan given the contributions made by the Loan Restructure Agreement Lenders to the Chapter 11 Case, including the negotiations that led to the restructuring upon which the Plan is based, the procurement of Western Digital's three-year extension of the volume purchase commitment to the Debtor and its subsidiaries, and the commitment to provide debtor in possession and exit financing. -52- RELEASE BY LOAN RESTRUCTURE AGREEMENT LENDERS. Except as specifically provided in the Plan or the Plan Documents, as of the Effective Date the Loan Restructure Agreement Lenders, the Loan Restructure Agreement Agent, and their respective directors, officers, agents, successors, and assigns, and any other entity that claims by, through, or under any of them, will and will be deemed to have released, remised, and forever discharged the Debtor, its subsidiaries, the Estate, and their respective present and former shareholders, directors, officers, agents, employees, attorneys, professionals, successors, and assigns of and from all debts, demands, actions, claims, causes of action, contracts, agreements, covenants, promises, damages, and liabilities whatsoever, whether known or unknown, based upon, relating to, or arising from any act, fact, transaction, agreement, or omission occurring or existing on or prior to the Effective Date. By casting a Ballot in favor of the Plan, each Loan Restructure Agreement Lender and the Loan Restructure Agreement Agent will and will be deemed to have consented to and affirmatively elected to grant the foregoing releases. 6. CLAIMS AND CAUSES OF ACTION. As of the Effective Date, all non-Debtor entities will be permanently enjoined from commencing or continuing in any manner any action or proceeding, whether directly, derivatively, on account of or respecting, any claim, debt, right or cause of action of the Debtor or the Reorganized Debtor which the Debtor or the Reorganized Debtor, as the case may be, retains authority to pursue in accordance with Section 7.1 of the Plan. VI. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO THE NEW SECURITIES TO BE DISTRIBUTED UNDER THE PLAN The Reorganized Debtor will issue the New Cash Pay Notes, the New PIK Notes, and the New Common Stock (collectively, the "New Securities") without registration in reliance upon an exemption afforded by section 1145 of the Bankruptcy Code from the registration requirements of the Securities Act of 1933, as amended (the "1933 Act"), and state securities and "blue sky" laws, except for (a) New Securities issued to a Statutory Underwriter, and (b) the New Common Stock to be issued to employees of the Reorganized Debtor under the Employee Retention Plan. As a consequence, the New Securities may be resold by any holder without registration under the 1933 Act or other federal securities laws pursuant to the exemption provided by section 4(1) of the 1933 Act, unless the holder is a Statutory Underwriter or unless the New Securities are New Common Stock issued to an employee under the Employee Retention Plan. In addition, the New Securities generally may be resold by the recipients thereof without registration under state law pursuant to various exemptions provided by the respective laws of the several states. However, RECIPIENTS OF SECURITIES ISSUED UNDER THE PLAN ARE ADVISED TO CONSULT WITH THEIR OWN COUNSEL AS TO THE AVAILABILITY OF ANY SUCH EXEMPTION FROM REGISTRATION UNDER FEDERAL OR STATE LAW IN ANY GIVEN INSTANCE AND AS TO ANY APPLICABLE REQUIREMENTS OR CONDITIONS TO THE AVAILABILITY THEREOF. Section 1145(b) of the Bankruptcy Code defines a Statutory Underwriter for purposes of the 1933 Act as one who (a) purchases a claim with a view to distribution of any security to be received in exchange for the claim, (b) offers to sell securities issued under a plan for the holders of such securities, (c) offers to buy securities issued under a plan from persons receiving such securities, if the offer to buy is made with a view to distribution of such securities, or (d) is a controlling person of the issuer of the securities (in this case, the Reorganized Debtor). Holders of at least five percent of the outstanding New Common Stock may be deemed to be Statutory Underwriters and therefore will be afforded -53- registration rights under the Registration Rights Agreement pursuant to Section 7.6(c) of the Plan. Entities deemed to be Statutory Underwriters may be able to sell securities without registration pursuant to the provisions of Rule 144 under the 1933 Act which, in effect, permits the public sale of securities received pursuant to the Plan by Statutory Underwriters subject to the availability of public information concerning the Reorganized Debtor, as well as volume limitations and certain other conditions. Moreover, as set forth in Section 7.6 of the Plan, the Reorganized Debtor will execute the Registration Rights Agreement for the benefit of those holders of New Securities as of the Effective Date who may be regarded as Statutory Underwriters. Nevertheless, entities who believe they may be Statutory Underwriters under the definition contained in section 1145 of the Bankruptcy Code are advised to consult their own counsel with respect to the various restrictions on the re-sale of New Securities distributed under the Plan. Pursuant to the Plan, certificates evidencing shares of New Common Stock received by the beneficiaries of registration rights pursuant to the Registration Rights Agreement will bear a legend substantially in the form below: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED. Following the Effective Date, the Reorganized Debtor intends to file the S-8 Registration Statement to register the New Common Stock to be issued to employees under the Employee Retention Plan. The Reorganized Debtor does not intend to issue the New Common Stock under the Employee Retention Plan until the S-8 Registration Statement has become effective under the federal securities laws. Once the S-8 Registration Statement has become effective, the New Common Stock issued under the Employee Retention Plan and registered under the S-8 Registration Statement will be freely tradable. VII. VALUE OF THE REORGANIZED DEBTOR The Plan is based upon a "going concern," enterprise value for the Reorganized Debtor of approximately $310 million, which represents a negotiated compromise among the Debtor, holders of the Loan Restructure Agreement Claims, holders of the Convertible Notes, and Western Digital. As noted above, prior to the Petition Date the Debtor and representatives of holders of the Loan Restructure Agreement Claims engaged in extensive negotiations regarding the terms and conditions of a financial restructuring for the Debtor. Given the nature of the Debtor's business and the level of revenues reflected in the Debtor's financial projections, the parties generally acknowledged that the Debtor would be unable to make significant distributions of cash to satisfy Claims and that, as a result, equity in the reorganized enterprise necessarily would serve as a substantial component of the property distributed under a plan of reorganization. -54- During the negotiations, the fundamental disagreement among the parties referenced above was regarding the Debtor's enterprise value -- from which the allocation (and value) of shares in the reorganized company would be determined. From the outset, representatives of the holders of the Loan Restructure Agreement Claims asserted that, based upon the analysis of their financial advisors (PricewaterhouseCoopers LLP), the Debtor's enterprise value was somewhere in the range of $170 million to $240 million. The Debtor believed that its going concern value was substantially greater than that proposed by holders of the Loan Restructure Agreement Claims and, as a result, retained the firm of KPMG Consulting, Inc., to prepare a comprehensive valuation analysis. KPMG preliminarily reported that it believed the Debtor to have a going concern value with a midpoint of approximately $405 million. KPMG, however, subsequently reviewed the Debtor's updated financial projections and ultimately issued a revised report that established a likely range of going-concern values for the Debtor of $288 million to $313 million. A copy of KPMG's final valuation analysis is attached hereto as Exhibit H. The holders of the Loan Restructure Agreement Claims have asserted that KPMG's analysis is flawed because, among other things, it was based upon unrealistic projections of the Debtor's future performance and unrealistic multiples of earnings and other valuation mechanisms. Both constituencies, however, realized that significant risk existed that the other constituency would be able to establish its proffered value after lengthy litigation -- which itself likely would create uncertainty and reduce the value of the enterprise -- and that it made sense to reach a compromise valuation. The Plan is premised upon that compromise ultimately reached among the parties -- i.e., a value for the Reorganized Debtor of approximately $310 million. The Debtor believes that this value is well within the range of reasonable and probable outcomes in the event of a trial regarding valuation. With a reorganization value of $310 million, assuming (a) Allowed Administrative Claims, Priority Claims, Convenience Claims, and cash distributions to Classes 3 and 7 in an aggregate amount of approximately $7 million; and (b) the issuance of the New Notes in the amount of $128.5 million, the assumed equity value for the Reorganized Debtor is approximately $174.5 million. Based upon a distribution of 24,369,285 shares of New Common Stock to be issued in connection the Plan, the value of each share of New Common Stock as of the Effective Date is approximately $7.16 (an equity value of $174.5 million divided by 24,369,285 shares). (In the event that, in accordance with Section 4.9 of the Plan, the Debtor elects to not issue the 750,000 shares proposed to be distributed to Class 9, the estimated value per share would increase to approximately $7.39). Of course, the foregoing valuations are based on a number of assumptions, including a successful reorganization of the Debtor's business and finances in a timely manner, the achievement of the forecasts reflected in the financial projections, the amount of available cash at the Effective Date, the continuation of current market conditions through the Effective Date, and the Plan becoming effective in accordance with its terms. Estimates of value do not purport to be appraisals or necessarily reflect the values which may be realized if assets are sold as a going concern, in liquidation, or otherwise. Rather, the valuation estimate represents a hypothetical value of the Reorganized Debtor as the continuing owner and operator of its business and assets. The estimate reflects a computation of the estimated value of the Reorganized Debtor through the application of various valuation techniques and does not purport to -55- reflect or constitute an appraisal, a liquidation value, or an estimate of the actual market value that may be realized through the sale of any securities to be issued pursuant to the Plan, which may be significantly different than the amounts set forth in this Disclosure Statement. The value of an operating business such as the Debtor's business is subject to uncertainties and contingencies which are difficult to predict and will fluctuate with changes in factors affecting the financial conditions and prospects of such a business. AS A RESULT, THE ESTIMATE OF THE VALUE FOR THE REORGANIZED DEBTOR SET FORTH IN THIS DISCLOSURE STATEMENT IS NOT NECESSARILY INDICATIVE OF ACTUAL OUTCOMES, WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN THOSE SET FORTH THEREIN. BECAUSE SUCH ESTIMATE IS INHERENTLY SUBJECT TO UNCERTAINTIES, NEITHER THE DEBTOR, ITS RESPECTIVE PROFESSIONALS AND ADVISORS, NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR ITS ACCURACY. IN ADDITION, THE VALUATION OF NEWLY-ISSUED SECURITIES SUCH AS THE NEW COMMON STOCK IS SUBJECT TO ADDITIONAL UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO PREDICT. Actual market prices of such securities at issuance will depend upon, among other things, prevailing interest rates, conditions in the financial markets, the anticipated initial holdings of prepetition creditors, some of which may prefer to liquidate their investment rather than hold it on a long-term basis, and other factors which generally influence the prices of securities. It should be noted that there is presently no trading market for the New Common Stock and there can be no assurance that a trading market will develop. The valuation analysis was performed for purposes of determining the value available to distribute pursuant to the Plan and analyzing relative recoveries to creditors and holders of equity interests thereunder. The analysis is based on the Projections as well as current market conditions and statistics. To the extent that the valuation analysis is dependent upon the Reorganized Debtor achieving the results set forth in the Projections, the analysis must be considered speculative. The analysis contemplates a successful reorganization of the Debtor's business and finances in accordance with the terms of the Plan, the Debtor closing on the Exit Financing Facility, and many other transactions and conditions as set forth in Debtor's Projections, including but not limited to the continuity of the present senior management and employee base of the Debtor following the Effective Date and the assumption that general financial and market conditions as of the expected Effective Date will not differ materially from those conditions prevailing as of the date of this Disclosure Statement. Therefore, no assurance can be given that the projected results will be achieved. THE VALUATION REPRESENTS ESTIMATED VALUES OF THE REORGANIZED DEBTOR AND DOES NOT NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE MARKETS. THE EQUITY VALUE ASCRIBED IN THE ANALYSIS DOES NOT PURPORT TO BE AN ESTIMATE OF THE POST-REORGANIZATION MARKET TRADING VALUE. SUCH TRADING VALUE, IF ANY, MAY BE MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY VALUE ASSOCIATED WITH THE VALUATION ANALYSIS. VIII. CERTAIN RISK FACTORS TO BE CONSIDERED HOLDERS OF CLAIMS AGAINST AND EQUITY INTERESTS IN THE DEBTOR SHOULD READ AND CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS DISCLOSURE STATEMENT -56- (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 BY HOLDERS OF CLAIMS AND EQUITY INTERESTS. The ultimate recoveries under the Plan to holders of Claims and Equity Interests (other than recoveries in the form of Cash and/or New Notes) depend upon the value of the New Common Stock. The value of the New Common Stock is subject to a number of material risks, including, but not limited to, those specified in Article VII and those described below. B. SIGNIFICANT HOLDERS. Upon the consummation of the Plan, certain holders of Claims will receive distributions of shares of the New Common Stock representing in excess of five percent (5%) of the outstanding shares of the New Common Stock. Moreover, holders of Allowed Loan Restructure Agreement Claims collectively will receive a majority of the shares of New Common Stock (and some of such holders will receive additional New Common Stock as assignees of the Western Digital Claims). If holders of significant numbers of shares of New Common Stock were to act as a group, such holders may be in a position to control the outcome of actions requiring stockholder approval, including the election of directors and approval of significant corporate transactions, as well as to influence the management and affairs of the Reorganized Debtor. This concentration of ownership could also facilitate or hinder a negotiated change of control of the Reorganized Debtor and, consequently, impact upon the value of the New Common Stock. Further, the possibility that one or more of the holders of significant numbers of shares of New Common Stock may determine to sell all or a large portion of their shares of New Common Stock in a short period of time may adversely affect the market price of the New Common Stock. C. LACK OF ESTABLISHED MARKET FOR NEW COMMON STOCK. The New Common Stock will be issued to certain holders of Allowed Claims, some of who may prefer to liquidate their investment rather than to hold it on a long-term basis. As of the Effective Date, the New Common Stock will not be listed or traded on a national stock exchange or included for quotation in the NASDAQ National Market System. Although the Reorganized Debtor will use its commercially reasonable best efforts to list the New Common Stock (a) on a national securities exchange or the NASDAQ Stock Market; or (b) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on a national securities exchange or the NASDAQ Stock Market, on the NASDAQ Small Cap Market; or (c) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on the NASDAQ Small Cap Market, on another qualifying inter-dealer quotation system, there can be no assurance that the Reorganized Debtor will succeed in doing so. Thus, there currently is no trading market for the New Common Stock and it cannot be known whether or when one would develop. There can be no assurance that an active market ever will develop. Moreover, there can be no assurance as to the degree of price volatility in any such particular market. While the Plan was developed based on an assumed value of $7.16 per share of the New Common Stock, such valuation is not an estimate of the price at which the -57- New Common Stock may trade in the market. No assurance can be given as to the market prices, if any, that will prevail following the Effective Date. D. DIVIDEND POLICIES. The Debtor does not anticipate that the Reorganized Debtor will pay any dividends on the New Common Stock in the foreseeable future. In addition, the covenants in the Exit Financing Facility, the New Notes, or other debt instruments to which the Reorganized Debtor may be a party may limit the ability of the Reorganized Debtor to pay dividends. 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 New Common Stock, and, therefore, impact adversely the market and/or the market price for such stock. E. PROJECTED FINANCIAL INFORMATION. The projected financial information prepared by the Debtor and included in this Disclosure Statement is dependent upon the successful implementation of the Debtor's business plan and the validity of the other assumptions contained therein. The Debtor's Projections reflect numerous assumptions, including the anticipated future performance of the Reorganized Debtor, industry performance, assumptions with respect to competitors, general business and economic conditions and other matters, many of which are beyond the control of the Debtor or the Reorganized Debtor. In addition, unanticipated events and circumstances occurring subsequent to the preparation of the Projections may affect the actual financial results of the Reorganized Debtor. Some or all of the estimates contained in the Projections will vary and variations between the actual financial results and those projected may be material. F. BUSINESS FACTORS AND COMPETITIVE CONDITIONS. A majority of the property distributed to creditors and shareholders under the Plan consists of New Common Stock, the value of which ultimately will depend upon the future business success of the Reorganized Debtor. Moreover, the Reorganized Debtor's ability to make the required payments with respect to the New Notes also will depend upon its ability to continue to achieve certain levels of success in its operations. As explained above, the Debtor believes that the Reorganized Debtor will be able to service the New Notes and deliver substantial value in the form of the New Common Stock. The Reorganized Debtor's future operations, however, are subject to a number of inherent risks, all of which may impact the value of the New Common Stock and the New Notes. Some of those risks are explained below. 1. FLUCTUATIONS IN AND REDUCED DEMAND FOR PERSONAL COMPUTERS MAY RESULT IN CANCELLATIONS OR REDUCTIONS IN DEMAND FOR PRODUCT. Trend Focus estimates that seventy four percent (74%) of the disks consumed during 2000 were incorporated into disk drives for the desktop personal computer market. Because of this concentration in a single market, the Debtor's business is tightly linked to the success of the personal computer market. Historically, demand for personal computers has been seasonal and cyclical. During the first half of 2001, personal computer manufacturers generally announced lower expectations for sales. Due to the high fixed costs of the Debtor's business, fluctuations in demand resulting from this seasonality and cyclicality can lead to disproportionate changes in the results of its operations. If -58- cancellations or reductions in demand for the Debtor's products occur in the future, the Debtor's business, financial condition, and results of operations could be seriously harmed. 2. DELAYS AND CANCELLATIONS OF CUSTOMER ORDERS MAY CAUSE THE DEBTOR TO UNDERUTILIZE ITS PRODUCTION CAPACITY, WHICH COULD SIGNIFICANTLY REDUCE GROSS MARGINS AND RESULT IN SIGNIFICANT LOSSES. The Debtor's business has a large amount of fixed costs, as it is highly capital-intensive. If there is a decrease in demand for the Debtor's products, the Debtor's production capacity could be underutilized, and, as a result, the Debtor may experience equipment write-offs, restructuring charges, reduced average selling prices, increased unit costs, and/or employee layoffs. 3. OPERATIONS WILL BE IMPACTED IF THE DEBTOR IS NOT ABLE TO ATTRACT AND RETAIN KEY PERSONNEL. The Debtor's future success depends on the continued service of its executive officers, its highly-skilled research, development, and engineering team, its manufacturing team, and its key administrative, sales, and marketing and support personnel. Competition for skilled personnel is intense. In particular, the Debtor's recent financial troubles have increased the difficulty of attracting and retaining skilled scientists and other knowledge workers. In the Debtor's Silicon Valley headquarters location, there are many employment opportunities for high-caliber employees. Recently, the Debtor has experienced higher rates of turnover in the last year than at other times in its history, and the Debtor may not be able to attract, assimilate, or retain highly-qualified personnel to maintain the capabilities that are necessary to compete effectively. As a result, as described in Section III.A., during the Chapter 11 Case the Debtor implemented a program intended to retain and attract key employees, and the Reorganized Debtor will continue that program through the Employee Retention Plan, as described in Section IV.C.7. If the retention program proves unsuccessful and the Debtor and Reorganized Debtor are unable to retain existing or hire key personnel, its business, financial condition, and operating results could be harmed. 4. THE DEBTOR RECEIVES A LARGE PERCENTAGE OF REVENUES FROM ONLY A FEW CUSTOMERS, THE LOSS OF ANY OF WHICH WOULD ADVERSELY AFFECT SALES. The Debtor's customers consist of disk drive manufacturers. Given the relatively small number of disk drive manufacturers, the Debtor's expect that it and the Reorganized Debtor will continue to depend upon a limited number of customers. This high customer concentration is due to the following factors: - The high-volume requirements of the dominant disk drive manufacturers; - A tendency to rely on a few suppliers because of the close interrelationship between media performance and disk drive performance; and the complexity of integrating components from a variety of suppliers; and - The increases in storage densities, which have led to decreases in the platter count per drive. With lower platter counts, captive disk drive manufacturers have excess internal media capacity and they rely less on independent sources of media. During the second quarter of 2001, forty-six percent (46%) of the Debtor's sales were to Western Digital, thirty-two percent (32%) were to Maxtor Corporation, and ten percent -59- (10%) were to Seagate Technology. In fiscal year 2000, fifty percent (50%) of the Debtor's sales were to Western Digital, twenty-eight percent (28%) were to Maxtor, and seventeen percent (17%) were to Seagate. If the Debtor's customers reduce their media requirements or develop capacity to produce thin-film disks for internal use, sales will be reduced. For example, as part of the Debtor's purchase of Western Digital's media operations in April 1999, the Debtor entered into a volume purchase agreement with Western Digital whereby Western Digital was obligated, over the three years following the acquisition date, to purchase a significant majority of its media requirements from us. As explained above, one key component of the compromises embodied in the Plan is Western Digital's extension of that volume purchase agreement for at least three additional years. As a result, the Debtor's sales are significantly connected to Western Digital's performance. In addition, the Debtor's customers are headquartered in the United States. Should U.S.-based drive companies lose market share to foreign competitors, it could have a negative impact on the Debtor's sales. As a result, the Debtor's business, financial condition and operating results could suffer. 5. IF THE REORGANIZED DEBTOR IS NOT ABLE TO GENERATE OR RAISE FUTURE CAPITAL FOR THE SUBSTANTIAL CAPITAL EXPENDITURES NEEDED TO OPERATE THE BUSINESS COMPETITIVELY, THE REORGANIZED DEBTOR MAY BE FORCED TO REDUCE OR SUSPEND OPERATIONS. The disk media business is capital-intensive, and the Debtor believes that in order to remain competitive, it and the Reorganized Debtor will require substantial funds for over the next several years for capital expenditures, working capital, and research and development. If the Reorganized Debtor cannot generate or raise adequate funds for capital expenditures, it may be forced to reduce or suspend operations. 6. BECAUSE THE DEBTOR'S PRODUCTS REQUIRE A LENGTHY SALES CYCLE WITH NO ASSURANCE OF A SALE OR HIGH VOLUME PRODUCTION, IT MAY EXPEND FINANCIAL AND OTHER RESOURCES WITHOUT MAKING A SALE. With short product life cycles and rapid technological change, the Debtor must qualify new products frequently and also must achieve high volume production rapidly. Hard disk drive programs have increasingly become "bimodal," in that a few programs are high-volume and the remaining programs are relatively small in terms of volume. Supply and demand balance can change quickly from customer to customer and from program to program. Further, qualifying thin-film disks for incorporation into a new disk drive product requires the Debtor to work extensively with the customer and the customer's other suppliers to meet product specifications. Therefore, customers often require a significant number of product presentations and demonstrations, as well as substantial interaction with senior management, before making a purchasing decision. Accordingly, the Debtor's products typically have a lengthy sales cycle, which can range from six to twelve months, during which time the Debtor may expend substantial financial resources and management time and effort, while not being sure that a sale will result, or that its share of the program ultimately will result in high-volume production. 7. IF CUSTOMERS CANCEL ORDERS, THEY MAY NOT BE REQUIRED TO PAY ANY PENALTIES AND THE DEBTOR'S SALES COULD SUFFER. The Debtor's sales generally are made pursuant to purchase orders that are subject to cancellation, modification, or rescheduling without significant penalties. If the Debtor's current customers do not continue to place orders with it, if orders by existing customers do -60- not recover to the levels of earlier periods, or if the Debtor is unable to obtain orders from new customers, the Debtor's sales and operating results will suffer. 8. THE DEBTOR'S CUSTOMERS' INTERNAL DISK OPERATIONS MAY LIMIT THE DEBTOR'S ABILITY TO SELL ITS PRODUCT. During the year 2000, IBM and Seagate Technology produced more than eighty-five percent (85%) of their media requirements internally, and MMC Technology supplied approximately half of Maxtor's requirement for media. Recently, Maxtor agreed to purchase MMC Technology. To date, MMC Technology and the captive media operations of IBM and Seagate Technology have sold minimal quantities of disks in the merchant market. Disk drive manufacturers such as Seagate Technology and IBM have large internal media manufacturing operations. The Debtor competes with these internal operations directly, when it markets products to these disk drive companies, and indirectly, when it sells disks to customers who must compete with vertically-integrated disk drive manufacturers. Vertically-integrated companies have the ability to keep their disk- making operations fully utilized, thus lowering their costs of production. This cost advantage contributes to the pressure on the Debtor and other independent media manufacturers to sell disks at prices so low that it becomes unprofitable, and the Debtor cannot be sure when, if ever, it can achieve a low enough cost structure to return to profitability. Vertically-integrated companies are also able to achieve a large scale that supports the development resources necessary to advance technology rapidly. As a result, the Debtor may not have sufficient resources to be able to compete effectively with these companies. Therefore, the Debtor's and the Reorganized Debtor's business, financial condition, and operations could suffer. 9. IF THE DEBTOR'S SUPPLIERS EXPERIENCE CAPACITY CONSTRAINTS OR PRODUCTION FAILURES, PRODUCTION AND OPERATING RESULTS COULD BE HARMED. The Debtor relies upon a limited number of suppliers for some of the materials and equipment used in its manufacturing processes, including aluminum substrates, nickel plating solutions, polishing and texturing supplies, and sputtering target materials. For instance, Kobe is the Debtor's sole supplier of aluminum blanks. Further, the Debtor's supplier base has been weakened by the poor financial condition of the industry, and some suppliers have either exited the business or failed. Additionally, several suppliers have expressed concern about continuing to supply to the Debtor because of the Debtor's financial condition. The Debtor's production capacity would be limited if one or more of these materials were to become unavailable or available in reduced quantities, or if the Debtor were unable to find alternative suppliers. If the Debtor's source of materials and supplies were unavailable for a significant period of time, the Debtor's production and operating results could be adversely affected. 10. IF THE DEBTOR IS UNABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE THIN-FILM MEDIA INDUSTRY, THE DEBTOR MAY NOT BE ABLE TO GAIN ADDITIONAL MARKET SHARE AND MAY LOSE EXISTING MARKET SHARE. The market for the Debtor's products is highly competitive, and the Debtor expects competition to continue in the future. Competitors in the thin-film disk industry fall into two groups: Asian-based manufacturers and U.S. captive manufacturers. The Debtor's Asian-based competitors include Fuji, Mitsubishi, Trace, Showa Denko, and Hoya. The U.S. captive manufacturers include the disk media operations of Seagate Technology, IBM, and for all intents and purposes, MMC Technology. Many of these competitors have greater -61- financial resources than does the Debtor. If the Debtor is not able to compete successfully in the future, the Debtor would not be able to gain additional market share for its products, and the Debtor may lose its existing market share, thus harming operating results. In 2000 and the first half of 2001, as in 1999, media supply exceeded media demand. As independent suppliers struggled to utilize their capacity, the excess media supply caused average selling prices for disk products to decline. Pricing pressure on component suppliers has also been compounded by high consumer demand for sub-$1,000 personal computers. Further, structural change in the disk media industry, including combinations, failures, and joint venture arrangements, may be required before media supply and demand are in balance. However, structural changes would intensify the competition in the industry. 11. DISK DRIVE PROGRAM LIFE CYCLES ARE SHORT, AND DISK DRIVE PROGRAMS ARE HIGHLY CUSTOMIZED. The Debtor's industry experiences rapid technological change, and the Debtor's inability to timely anticipate and develop products and production technologies could harm its competitive position. In general, the life cycles of recent disk drive programs have been shortening. Additionally, media must be more customized to each disk drive program. Short program life cycles and customization have increased the risk of product obsolescence. Supply chain management, including just-in-time delivery, has become a standard industry practice. In order to sustain customer relationships and achieve profitability, the Debtor must be able to develop in a timely fashion new products and technologies that can help customers reduce their time-to-market performance, and continue to maintain operational excellence that supports high-volume manufacturing ramps and tight inventory management throughout the supply chain. If the Debtor cannot respond to this rapidly changing environment or fail to meet our customers' demanding product and qualification requirements, it will not be able to compete effectively. As a result, the Debtor would not be able to maximize the use of our production facilities and minimize our inventory losses. 12. IF THE DEBTOR DOES NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND DOES NOT CONTINUE TO IMPROVE THE QUALITY OF ITS MANUFACTURING PROCESSES, IT WILL NOT BE ABLE TO COMPETE EFFECTIVELY. The Debtor's thin-film disk products primarily serve the 3 1/2-inch hard disk drive market, where product performance, consistent quality, price, and availability are of great competitive importance. To succeed in an industry characterized by rapid technological developments, the Debtor must continuously advance its thin-film technology at a pace consistent with, or faster than, its competitors. Advances in hard disk drive technology demand continually lower glide heights and higher storage densities. Over the last several years, storage density has roughly doubled each year, requiring significant improvement in every aspect of disk design. These advances require substantial on-going process and technology development. New process technologies must support cost-effective, high-volume production of thin-film disks that meet these ever-advancing customer requirements for enhanced magnetic recording performance. The Debtor may not be able to develop and implement such technologies in a timely manner in order to compete effectively against its competitors' products and/or entirely new data storage technologies. In addition, the Debtor must transfer technology from its U.S. research and development center to its Malaysian manufacturing operations. If the Debtor cannot advance its process technologies or does not successfully implement -62- those advanced technologies in its Malaysian operations, or if technologies that the Debtor has chosen not to develop prove to be viable competitive alternatives, the Debtor would not be able to compete effectively. As a result, the Debtor would lose its market share and face increased price competition from other manufacturers, and the Debtor's operating results would suffer. The manufacture of the Debtor's high-performance, thin-film disks requires a tightly controlled multi-stage process, and the use of high-quality materials. Efficient production of the Debtor's products requires utilization of advanced manufacturing techniques and clean room facilities. Disk fabrication occurs in a highly controlled, clean environment to minimize dust and other yield- and quality-limiting contaminants. In spite of stringent manufacturing controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of the disks in a lot to be defective. The success of the Debtor's manufacturing operations depends in part upon its ability to maintain process control and minimize such impurities in order to maximize yield of acceptable high-quality disks. Minor variations from specifications could have a disproportionately adverse impact on manufacturing yields. If the Debtor is not able to continue to improve upon its manufacturing processes, operating results would be harmed. 13. IF THE DEBTOR DOES NOT PROTECT ITS PATENTS AND INFORMATION RIGHTS, ITS REVENUES WILL SUFFER. Protection of technology through patents and other forms of intellectual property rights in technically sophisticated fields is commonplace. In the disk drive industry, it is common for companies and individuals to initiate actions against others in the industry to enforce intellectual property rights. Although the Debtor attempts to protect its intellectual property rights through patents, copyrights, trade secrets, and other measures, the Debtor may not be able to protect its technology adequately. Competitors may be able to develop similar technology and also may have or may develop intellectual property rights and enforce those rights to prevent the Debtor from using such technologies, or demand royalty payments from the Debtor in return for using such technologies. Either of these actions may affect the Debtor's production, which would materially reduce revenues and harm results of operations. 14. THE DEBTOR MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH ARE COSTLY TO RESOLVE, AND WHICH MAY DIVERT MANAGEMENT'S ATTENTION. The Debtor occasionally has received, and may receive in the future, communications from third parties which assert violation of intellectual rights alleged to cover certain of the Debtor's products or manufacturing processes or equipment. The Debtor evaluates whether it would be necessary to defend against the claims or to seek licenses to the rights referred to in such communications. In those cases, the Debtor may not be able to negotiate necessary licenses on commercially reasonable terms. Also, if the Debtor has to defend those claims, the Debtor could incur significant expenses and its management's attention could be diverted from other business. Any litigation resulting from such claims could have a material adverse effect on the Debtor's business and financial results. The Debtor or the Reorganized Debtor may not be able to anticipate claims by others regarding infringement of alleged intellectual property rights, and ultimately may not be able to defend successfully against such claims. Similarly, the Debtor or the Reorganized Debtor -63- may not be able to discover significant infringements of their technology or successfully enforce their rights to technology upon discovery of infringing uses by others. 15. HISTORICAL FINANCIAL RESULTS MAY NOT ACCURATELY PREDICT FUTURE PERFORMANCE, WHICH IS SUBJECT TO FLUCTUATION DUE TO MANY UNCERTAINTIES. The Debtor's operating results historically have fluctuated significantly on both a quarterly and annual basis. As a result, operating results in any quarter may not reflect our future performance. The Debtor believes that future operating results will continue to be subject to quarterly variations based on a wide variety of factors, including: - Timing of significant orders, order cancellations, modifications, and quantity adjustments and rescheduled shipments; - Availability of media versus demand; - The cyclical nature of the hard disk drive industry; - Ability to develop and implement new manufacturing process technologies; - Increases in production and engineering costs associated with initial design and production of new product programs; - The extensibility of process equipment to meet more stringent future product requirements; - Ability to introduce new products that achieve cost-effective high-volume production in a timely manner, timing of product announcements, and market acceptance of new products; - Changes in product mix and average selling prices; - The availability of production capacity, and the extent to which the Debtor can use that capacity; - Changes in manufacturing efficiencies, in particular product yields and input costs for direct materials, operating supplies and other running costs; - Prolonged disruptions of operations at any facilities for any reason; - Changes in the cost of or limitations on availability of labor; and - Structural changes within the disk media industry, including combinations, failures, and joint venture arrangements. The Debtor cannot forecast with certainty the impact of these and other factors on revenues and operating results in any future period. The Debtor's expense levels are based, in part, on expectations as to future revenues. If the Debtor's revenue levels are below expectations, operating results are likely to suffer. Because thin-film disk manufacturing requires a high level of fixed costs, the Debtor's gross margins are extremely sensitive to changes in volume. At constant average selling prices, reductions in the Debtor's manufacturing efficiency cause declines in its gross margins. Additionally, decreasing market demand for the Debtor's products generally results in reduced average selling prices and/or low capacity utilization that, in turn, adversely affect gross margins and operating results. -64- 16. DEPENDENCE UPON MALAYSIAN OPERATIONS EXPOSES THE DEBTOR TO UNAVOIDABLE RISKS IN TRANSMITTING TECHNOLOGY FROM U.S. FACILITIES TO MALAYSIAN FACILITIES. During the third quarter of 1999, the Debtor announced that all media production would be consolidated into its Malaysian factories. In the fourth quarter of 2000, the Debtor decided to end the manufacture of aluminum substrates in Santa Rosa, California, and to end production of polished disks in its Eugene, Oregon, facility. Currently, all aluminum substrates are manufactured by the Debtor's Malaysian factory and a Malaysian vendor. In addition, all polished disks are manufactured by the Debtor's Malaysian factories. Further, the Debtor recently transferred the manufacturing capacity of its Fremont, California, facility to Malaysia, and closed all of its U.S. media manufacturing operations, leaving the Debtor fully dependent upon its Malaysian manufacturing operations. Technology developed at the Debtor's U.S. research and development center must now be first implemented at its Malaysian facilities without the benefit of being implemented at a U.S. factory. Therefore, the Debtor's relies heavily upon electronic communications between the U.S. facilities and Malaysia to transfer technology, diagnose operational issues, and meet customer requirements. If operations in Malaysia or overseas communications are disrupted for a prolonged period for any reason, shipments of products would be delayed, and the Debtor's results of operations would suffer. 17. THE DEBTOR'S FOREIGN OPERATIONS AND INTERNATIONAL SALES SUBJECT IT TO ADDITIONAL RISKS INHERENT IN DOING BUSINESS ON AN INTERNATIONAL LEVEL THAT MAKE IT MORE COSTLY OR DIFFICULT TO CONDUCT ITS BUSINESS. The Debtor is subject to a number of risks of conducting business outside of the United States. The Debtor's sales to customers in Asia, including the foreign subsidiaries of domestic disk drive companies, account for substantially all of its net sales from its U.S. and Malaysian facilities. The Debtor's customers assemble a substantial portion of their disk drives in the Far East and subsequently sell those products throughout the world. Therefore, the Debtor's high concentration of Far East sales does not accurately reflect the eventual point of consumption of the assembled disk drives. The Debtor anticipates that international sales will continue to represent the majority of its net sales. The Debtor is subject to these risks to a greater extent than most companies because, in addition to selling products outside the U.S., the Debtor's Malaysian operations will account for a large majority of its sales in 2001. Accordingly, the Debtor's operating results are subject to the risks inherent with international operations, including, but not limited to: - Compliance with changing legal and regulatory requirements of foreign jurisdictions; - Fluctuations in tariffs or other trade barriers; - Foreign currency exchange rate fluctuations since certain costs of foreign manufacturing and marketing operations are incurred in foreign currency, including purchase of certain operating supplies and production equipment from Japanese suppliers in yen-denominated transactions; - Difficulties in staffing and managing foreign operations; - Political, social and economic instability; -65- - Exposure to taxes in multiple jurisdictions; - Local infrastructure problems or failures; and - Transportation delays and interruptions. In addition, the Debtor's ability to transfer funds from Malaysian operations to the United States is subject to Malaysian rules and regulations. In 1999, the Malaysian government repealed a regulation that restricted the amount of dividends that a Malaysian company may pay to its stockholders. If not repealed, this regulation would have potentially limited the ability of the Debtor's subsidiaries to transfer funds to the U.S. from Malaysian operations. If similar regulations are enacted in the future, the cost of the Debtor's Malaysian operations would increase, and the Debtor's operating margin would be significantly reduced. 18. IF THE DEBTOR IS UNABLE TO CONTROL CONTAMINATION IN MANUFACTURING PROCESSES, IT MAY HAVE TO SUSPEND OR REDUCE MANUFACTURING OPERATIONS. It is possible that the Debtor will experience manufacturing problems from contamination or other causes in the future. For example, if the Debtor's disks are contaminated by microscopic particles, they might not be fit for use by customers. If contamination problems arise, the Debtor would have to suspend or reduce manufacturing operations, and operations could suffer. 19. THE NATURE OF THE DEBTOR'S OPERATIONS MAKES IT SUSCEPTIBLE TO MATERIAL ENVIRONMENTAL LIABILITIES, WHICH COULD RESULT IN SIGNIFICANT CLEAN-UP EXPENSES AND ADVERSELY AFFECT ITS FINANCIAL CONDITION. The Debtor is subject to a variety of federal, state, local, and foreign regulations relating to (a) the use, storage, discharge, and disposal of hazardous materials used during the manufacturing process; (b) the treatment of water used in the manufacturing process; and (c) air quality management. The Debtor is required to obtain necessary permits for expanding its facilities. It also must comply with new regulations on existing operations. Public attention has increasingly been focused on the environmental impact of manufacturing operations that use hazardous materials. If the Debtor fails to comply with environmental regulations or fails to obtain the necessary permits, (a) the Debtor could be subject to significant penalties; (b) the Debtor's ability to expand or operate at locations in California or locations in Malaysia could be restricted; (c) the Debtor's ability to establish additional operations in other locations could be restricted; and/or (d) the Debtor could be required to obtain costly equipment or incur significant expenses to comply with environmental regulations. Moreover, any accidental hazardous discharge could result in significant liability and clean-up expenses, which could harm the business, financial condition, and results of operations. 20. THE DEBTOR RELIES UPON A CONTINUOUS POWER SUPPLY TO CONDUCT ITS BUSINESS, AND CALIFORNIA'S ENERGY CRISIS COULD DISRUPT OPERATIONS AND INCREASE EXPENSES. The State of California is in the midst of an energy crisis that could disrupt the Debtor's research and development activities and increase its expenses. In the event of an acute power shortage, which may occur when power reserves for the State of California fall -66- below 1.5%, California has, on occasion, implemented, and may in the future continue to implement, rolling blackouts throughout the State. The Debtor currently does not have back-up generators or alternate sources of power in the event of a blackout, and the Debtor's insurance does not provide coverage for any damages that it or its customers may suffer as a result of any interruption in our power supply. If blackouts interrupt power supply, the Debtor would be temporarily unable to continue operations at its California-based facilities. This could damage the Debtor's reputation, harm its ability to retain existing customers and to obtain new customers, and result in lost revenue, any of which could substantially harm the business and results of operations. Furthermore, the regulatory changes affecting the energy industry instituted in 1996 by the California government have caused power prices to increase. Under the revised regulatory scheme, utilities were encouraged to sell their plants, which had traditionally produced most of California's power, to independent energy companies that were expected to compete aggressively on price. Instead, due in part to a shortage of supply, wholesale prices have increased dramatically over the past year. If wholesale prices continue to increase, the Debtor's operating expenses will likely increase, as the Debtor's headquarters and certain facilities are in California. 21. EARTHQUAKES OR OTHER NATURAL OR MAN-MADE DISASTERS COULD DISRUPT THE DEBTOR'S OPERATIONS. The Debtor's U.S. facilities are located in San Jose and Santa Rosa in California. In addition, Kobe and other Japanese suppliers of key manufacturing supplies and sputtering machines are located in areas with seismic activity. The Debtor's Malaysian operations have been subject to temporary production interruptions due to localized flooding, disruptions in the delivery of electrical power, and, on one occasion in 1997, by smoke generated by large, widespread fires in Indonesia. If any natural or man-made disasters do occur, operations could be disrupted for prolonged periods, and the Debtor's business would suffer. IX. CERTAIN FEDERAL INCOME TAX CONSEQUENCES A. INTRODUCTION. This section summarizes some of the federal income tax consequences that confirmation and implementation of the Plan are likely to have for the Debtor, its creditors and its shareholders. This disclosure is provided for informational purposes only: it is not intended to constitute tax advice to any person. The disclosure does not take into account those facts and circumstances specific to individual creditors or shareholders that may affect the federal income tax consequences to them of implementation and confirmation of the Plan. The information provided below is based on existing authorities. These authorities may change, or the Internal Revenue Service might interpret the existing authorities differently. In either case, the tax consequences of confirmation and implementation of the Plan could differ from those described below. CREDITORS AND SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO THEM AND THE DEBTOR OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN. -67- B. FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTOR. 1. REDUCTION OF TAX ATTRIBUTES AND CANCELLATION OF DEBT. Taxpayers are generally required to recognize taxable income as a result of cancellation of debt. The receipt of borrowed funds is not subject to tax, on the premise that the debtor will repay them. If the debt is cancelled without repayment, the recognition of income takes into account the debtor's receipt of the borrowed funds. Special rules, however, apply to the cancellation of debt in a bankruptcy proceeding. Generally, a debtor in a bankruptcy case is not required to recognize income from the cancellation of debt. However, the debtor has to pay for this exclusion by reducing specified tax attributes, such as any net operating loss ("NOL") incurred by the taxpayer in the year that the debt discharge occurs, any NOL carryovers to that year, and tax credit and capital loss carryforwards. Based on the assumed reorganization value of the Debtor (see Article VII), it is anticipated that the Debtor will recognize approximately $230 million of cancellation of indebtedness income. Because the discharge of indebtedness will occur in bankruptcy, the Debtor will not be subject to tax on this income, but it will be required to reduce its tax attributes by the amount excluded from its income. The Debtor had approximately $600 million of NOL carryforwards as of December 31, 2000, and expects to incur an NOL of approximately $50 million during its current taxable year. Thus, after reduction for the excluded cancellation of indebtedness income, the Debtor expects to have approximately $420 million of NOL carryforwards remaining. Many of these NOL carryforwards are subject to limitation as a result of prior changes in ownership of the stock of the Debtor (and its predecessor HMT Technology Corp.) under the rules described in the following section. The change in ownership of the Debtor's stock that would result from confirmation of the Plan would impose an additional limitation under those rules on the Debtor's ability to use these NOL carryforwards to offset income earned after confirmation of the Plan. 2. LIMITATION ON NOL CARRYFORWARDS AND OTHER TAX ATTRIBUTES. To deter "trafficking" in NOL carryforwards, section 382 of the Internal Revenue Code limits a corporation's ability to use losses incurred before an "ownership change" to offset income earned thereafter. A similar limitation applies to tax credits. In general, an ownership change occurs if more than fifty percent (50%) of the stock of a corporation changes hands within a three-year period. If an ownership change occurs, the corporation can use pre-change NOL carryforwards to offset only an amount of income each year equal to the value of the stock of the corporation immediately before the ownership change multiplied by a prescribed interest rate. The limitation is intended to estimate the earning power of the corporation's pool of capital at the time of the ownership change. The limitation thus prevents the use of pre-change NOL carryforwards to offset income from new capital contributed by the new owners. Special rules apply, however, in the case of ownership changes that occur in a bankruptcy proceeding. Under the general rules, the annual limitation usually would be quite low, because the corporation's stock immediately before the ownership change often has little or no value. Essentially eliminating the NOL carryforwards of a corporation in bankruptcy could hinder the corporation's ability to reorganize successfully, contrary to the goals of the federal bankruptcy laws. Therefore, Congress provided special bankruptcy rules in section 382. If an ownership change occurs in bankruptcy, section 382(l)(6) allows -68- the corporation, in computing the annual limitation on the use of NOL carryforwards, to increase its value to reflect the cancellation of claims in the bankruptcy reorganization. The regulations provide for this result by using as the value of corporation the lesser of the value of its gross assets immediately before the ownership change or the value of its stock immediately thereafter. This amount is multiplied by the prescribed interest rate to arrive at the annual limitation on the amount of income that can be offset by pre-change NOL carryforwards. Another special rule, provided in section 382(l)(5), applies if at least fifty percent (50%) of the corporation's stock immediately after the ownership change is owned by persons who were shareholders or creditors of the corporation immediately before the ownership change. For purposes of computing the fifty-percent threshold, however, stock issued to creditors who own at least five percent (5%) of the corporation's stock after the ownership change is taken into account only if the creditor held its claim for at least eighteen months before filing of the bankruptcy petition or if the claim arose in the ordinary course of the corporation's business and was owned at all times by the same person. When the conditions of section 382(l)(5) are met, the annual limitation on NOL carryovers does not apply. Instead, the corporation is required to reduce its NOL carryforwards by the amount of deductions claimed in the prior three years for interest on debt that is exchanged for stock in the bankruptcy reorganization. The corporation can then use its remaining NOL carryforwards to offset future income without limitation. Even if the corporation qualifies for the special rule of section 382(l)(5), it can still elect to apply instead the general bankruptcy rule of section 382(l)(6), under which an annual limitation applies, but is computed under special rules taking into account the effect of the cancellation of claims on the value of the corporation. Because the Plan contemplates the issuance of more than fifty percent (50%) of the Reorganized Debtor's stock to creditors, confirmation and implementation of the Plan will result in an ownership change. This ownership change will either impose a new limitation on the Debtor's ability to use its NOL carryforwards or, if the special rules of section 382(l)(5) apply, will further reduce the Debtor's NOL carryforwards beyond the reduction required because of the cancellation of indebtedness of the Debtor. Any limitation on NOL carryforwards that results from the ownership change will probably also apply to "built-in" losses and deductions that accrued economically before the ownership change but are not taken into account under tax accounting rules until after the ownership change. C. FEDERAL INCOME TAX CONSEQUENCES TO CREDITORS. Pursuant to the Plan, holders of the Allowed Loan Restructure Agreement Claims (Class 3) will be entitled to receive, in satisfaction of their Claims, New Notes and New Common Stock. Holders of the Allowed Western Digital Claims (Class 4) will receive New PIK Notes and New Common Stock. Holders of the Allowed Convertible Notes Claims (Class 5), the Allowed Subordinated Notes Claims (Class 6), as well as Allowed Equity Interests if Class 9 votes to accept the Plan, will be entitled to receive New Common Stock in satisfaction of their Claims. Holders of Allowed General Unsecured Claims (Class 7) will receive Cash, New Cash Pay Notes, and New Common Stock. Finally, holders of Convenience Claims (Class 8) will be entitled to receive Cash in full or partial satisfaction of their Claims. Distributions of Cash, New Common Stock, and New Notes generally will be made on or as soon as practicable after the Effective Date. -69- 1. HOLDERS OF CLASS 1 (PRIORITY) CLAIMS OR CLASS 2 (SECURED) CLAIMS. Under the Plan, claims in Classes 1 (Priority Claims) and 2 (Secured Claims) will be satisfied in full. The payment of these claims will have the same federal income tax consequences to the holders that it would have had if the Plan were not confirmed. 2. HOLDERS OF CLASS 3 (LOAN RESTRUCTURE AGREEMENT) CLAIMS. The federal income tax consequences to the holders of Class 3 (Loan Restructure Agreement) Claims on their receipt of New Cash Pay Notes, New PIK Notes and New Common Stock in exchange for their existing claims will depend on whether the new notes and the existing claims are "securities" for federal income tax purposes. In general, the classification of a debt instrument as a security depends on the extent to which the instrument represents an investment in the issuer's business. At one extreme, short-term notes backed by adequate security are not securities because the fortunes of the issuer's business will have relatively little effect on the holder's return. At the other extreme, unsecured, long-term notes issued by a corporation to enable it to fund the development or expansion of its business are securities, because the holder's return does depend significantly on the fortunes of the issuer's business. Existing authorities do not draw a clear line along this continuum. Each case turns on an evaluation of the overall facts and circumstances, and no reported case involves facts comparable to those involved in the exchanges contemplated by the Plan. Consequently, the determination of whether the Loan Restructure Claims, New Cash Pay Notes, and New PIK Notes are securities is inherently uncertain. Although, for the reasons described above, the matter is not free from doubt, the Debtor believes that the Loan Restructure Claims, the New Cash Pay Notes, and the New PIK Notes are all properly classified as securities for federal income tax purposes. In that case, the holders generally will not recognize any gain or loss on the exchange. To the extent that the new notes or stock is treated as the payment of interest on the existing claims, however, the holders will recognize ordinary income if they have not previously recognized the interest under their method of tax accounting. Each holder's basis in its existing claims would be allocated among the new notes and stock received in exchange for those claims on the basis of the relative fair market values of the new notes and stock. The holder's holding period for the new notes and stock would include the period during which the holder held its existing claims. That portion of any new notes or stock treated as having been received in payment of interest, however, would have a basis equal to its fair market value and a holding period beginning on the date of receipt. If the Loan Restructure Claims are classified as securities, but the New PIK Notes and New Cash Pay Notes are not, then the holders would not be entitled to deduct any loss incurred on the exchange, but would recognize all or part of any gain realized on the exchange. The holder's realized gain or loss on the exchange will be measured by the difference between (i) the holder's "amount realized," and (ii) the holder's basis in its existing claims. The holder's "amount realized" will equal the sum of the value of the new stock and the "issue price" of the new notes (which should equal their stated principal amount). The amount of gain that a holder would have to recognize would be limited by the value of the new notes. Any gain recognized would generally be capital gain if the holder held its existing claims as capital assets. If the holder acquired its existing claims at a discount to their face amount, however, and did not elect to include the discount in income as it accrued, then any gain recognized by the holder upon its exchange of its existing claims for new stock and notes would be treated as ordinary income to the extent of the accrued -70- discount on its existing claims. In addition, if the holder previously claimed a deduction on the grounds that the holder's existing claims were worthless, any gain recognized on the current exchange would be ordinary income to the extent of the prior deduction. Any capital gain recognized by a holder would be long-term if the holder held its existing claims for more than one year. If the new notes are not securities, their tax bases will equal their fair market value. The tax basis of the stock received by the holder would equal the holder's basis in its existing claims, reduced by the value of the new notes but increased by the amount of gain recognized on the exchange. The holder's holding period for the stock would include the period during which the holder held its existing claims, but the holding period of the holder's new notes would begin upon receipt. If the Loan Restructure Claims are not classified as securities, then the holders will recognize in full any gain or loss realized on their exchange of those claims for New Cash Pay Notes, New PIK Notes and New Common Stock. In that case, the holders' tax bases in their new stock would equal the fair market value of the stock, the holders' tax bases in the new notes would equal their "issue price," and the holders' holding periods for the new stock and notes would begin upon receipt. The character of the any gain recognized (i.e., capital or ordinary) would be determined as described in the prior paragraph. Thus, the gain would generally be capital if the holder holds its existing claims as a capital assets, but all or a portion of the gain could be reclassified as ordinary income if the holder acquired its existing claims at a discount or previously claimed a bad debt deduction in respect of its claims. The holders of Loan Restructure Claims will be required to recognize as ordinary income any interest paid or accrued on the New Cash Pay Notes in accordance with their regular method of accounting. Because interest on the New PIK Notes will not be paid in cash at a fixed rate at periodic intervals throughout their term, the computation of interest income on the New PIK Notes will be determined under the "original issue discount" rules. These rules are designed to ensure that the holders of debt instruments recognize interest income throughout the term of the notes at a rate that reflects their economic yield. Holders will thus be required to report interest income as it accrues economically, thereby recognizing income attributable to interest before they receive payment of the interest in cash. Because the New PIK Notes will be issued for property (i.e., Loan Restructure Claims) rather than cash, and because neither the Loan Restructure Claims nor the New PIK Notes are or will be publicly traded, the manner in which interest should be computed on the New PIK Notes is unclear. The Debtor plans to treat the New PIK Notes as having been issued at a price equal to their stated principal amount, so that interest on the notes will accrue at their stated coupon rate of twelve percent (12%). Under alternative readings of the regulations, the New PIK Notes could be treated as having been issued at a price in excess of their stated principal amount, with interest accruing at the applicable federal rate (essentially, a risk-free rate based on the cost of funds to the federal government). If the New PIK Notes and the Loan Restructure Agreement Claims both qualified as securities, the difference between the twelve percent (12%)coupon rate and the applicable federal rate probably would be treated as "market discount," in which case the difference generally would be reported as ordinary income only upon the holder's disposition of the New PIK Notes, under the rules described below. If either the New PIK Notes or the Loan Restructure Agreement Claims do not qualify as securities, however, the alternative reading of the regulations that would treat the New PIK Notes as having an issue price in excess of their stated principal amount would increase the gain (or reduce the loss) realized by the holder on the exchange. Because the Debtor believes that these results are inconsistent with the economic substance of the holder's investment in New PIK Notes, the Debtor does not plan to adopt the alternative readings of the regulations that produce these results. -71- As described above, if the Loan Restructure Claims, New Cash Pay Notes, and New PIK Notes are all properly classified as securities, then the new notes would essentially be treated as a continuation of the holder's existing investment. In that case, the holder's tax basis of the new notes would be determined by reference to its basis in its existing claims. Consequently, the holder's basis in the new notes could differ from their principal amount. Because the amount that the holder would receive at maturity would be more or less than the holder's investment in the new notes, as measured by its tax basis, the holder's return on the notes would not equal the coupon rate of the notes. If the holder has a discount in the new notes, because the holder's investment is less than the principal amount of the notes, then a portion of the principal amount that the holder will receive on maturity will in substance be additional interest, increasing the yield realized by the holder. Conversely, if the holder has a premium in the new notes, because its investment is more than the principal amount, then a portion of the periodic interest payments will in substance be returns of the holder's deemed investment. The tax law generally treats any discount or premium in accordance with its substance, as increases or reductions in the holder's interest income. The holder can take any premium into account over the term of the note as reductions in interest income, so that the holder's reported income equals its economic yield. By contrast, while the holder can elect to treat the discount as additional interest over the term of the notes, it is not required to do so. If it does not elect to report accrued discount as additional interest income, however, then, upon a disposition of the notes, the holder is required to recognize ordinary income equal to any accrued discount that has not previously been reported as income. (The rules providing for this result refer to the discount as "market discount," because the rules generally apply to cases in which the holder acquires notes at a discount in the market, rather than upon original issue. In certain cases, however, such as the exchange contemplated by the Plan, the market discount rules can apply to notes received upon original issuance.) The holder's basis in its new notes would be adjusted to reflect the amount of any premium or discount that increases or decreases the holder's periodic interest income. If the New Cash Pay Notes and New PIK Notes are not classified as securities, the new notes will probably not have discount or premium. In that case, the holder's tax basis in the new notes should equal their stated principal amount. Nonetheless, the new notes could be treated as having discount if the Loan Restructure Agreement Claims were treated as securities, the holder acquired its Loan Restructure Claims at a discount, and the holder did not recognize the full amount of that discount as income upon receipt of the new notes. In that case, any remaining discount in the existing claims would carry forward to the new notes and would be recaptured as ordinary income upon the holder's disposition of the new notes. Upon a sale or other disposition of the New Cash Pay Notes or New PIK Notes, the holder would recognize gain or loss equal to the difference between the amount received by the holder and the holder's tax basis in the notes. While the gain or loss would generally be capital gain or loss if the holder holds its new notes as capital assets, all or a portion of any gain could be treated as ordinary income under the market discount rules, as described above. In addition, if the holder claimed a deduction on the grounds that its Loan Restructure Claims were worthless, the amount of the deduction, to the extent not recaptured as ordinary income upon the exchange contemplated by the Plan, would be recaptured upon the holder's disposition of its new notes. A distribution on New Common Stock will be treated as a dividend, taxable as ordinary income, to the extent it is paid from the Debtor's current or accumulated earnings and profits. If the distribution exceeds the Debtor's current and accumulated earnings and -72- profits, the excess will be treated first as a tax-free return of the holder's investment, up to the holder's basis in its stock. Any remaining excess will be treated as gain, as though the holder had sold a portion of its stock. If the holder is a U.S. corporation, it would generally be able to claim a deduction equal to a portion of any dividends received. A holder of New Common Stock will generally recognize gain or loss on a sale or exchange of that stock. The gain or loss would generally be capital gain or loss if the holder holds the stock as a capital asset. All or a portion of any gain recognized could be treated as ordinary income, however, because of market discount carried over from the holder's Loan Restructure Claims or because of the recapture of a prior bad debt deduction claimed in respect of those claims. The holder's gain or loss upon a disposition of stock will equal the difference between the proceeds received by the holder and the holder's tax basis in the stock. Any capital gain or loss recognized upon the disposition would be long-term capital gain or loss if the holder's holding period for the stock is more than one year. As described above, the holder's holding period for its stock will probably include the period during which the holder held its existing claims. 3. HOLDERS OF CLASS 4 (WESTERN DIGITAL) CLAIMS. The federal income tax consequences to the holders of Class 4 (Western Digital) Claims of their receipt of New PIK Notes and New Common Stock in exchange for their existing claims also depends on whether the existing claims and new notes constitute securities. Although the matter is not free from doubt, for the reasons explained in the prior section, the Debtor believes that the Western Digital Notes and the New PIK Notes are properly classified as securities. In that case, the holders generally will not recognize any gain or loss on the exchange. To the extent that the new notes or stock is treated as the payment of interest on the existing claims, however, the holders will recognize ordinary income if they have not previously recognized the interest under their method of tax accounting. Each holder's basis in its existing claims would be allocated among the new notes and stock received in exchange for those claims on the basis of the relative fair market values of the new notes and stock. The holder's holding period for the new notes and stock would include the period during which the holder held its existing claims. That portion of any new notes or stock treated as having been received in payment of interest, however, would have a basis equal to its fair market value and a holding period beginning on the date of receipt. If the Western Digital Notes are classified as securities, but the New PIK Notes are not, then the holders would not be entitled to deduct any loss incurred on the exchange, but would recognize all or part of any gain realized on the exchange. The holder's realized gain or loss on the exchange will be measured by the difference between (i) the holder's "amount realized," and (ii) the holder's basis in its existing claims. The holder's "amount realized" will equal the sum of the value of the new stock and the issue price of the new notes (which should equal their stated principal amount). The amount of gain that a holder would have to recognize would be limited by the value of the new notes. Any gain recognized would generally be capital gain if the holder held its existing claims as capital assets. If the holder acquired its existing claims at a discount to their face amount, however, and did not elect to include the discount in income as it accrued, then any gain recognized by the holder upon its exchange of its existing claims for new stock and notes would be treated as ordinary income to the extent of the accrued discount on its existing claims. In addition, if the holder previously claimed a deduction on the grounds that the holder's existing claims were worthless, any gain recognized on the current exchange would be ordinary income to the extent of the prior deduction. Any capital gain recognized by a holder would be long-term if -73- the holder held its existing claims for more than one year. If the new notes are not securities, their tax bases will equal their fair market value. The tax basis of the stock received by the holder would equal the holder's basis in its existing claims, reduced by the value of the new notes but increased by the amount of gain recognized on the exchange. The holder's holding period for the stock would include the period during which the holder held its existing claims, but the holding period of the holder's new notes would begin upon receipt. If the Western Digital Notes are not classified as securities, then the holders will recognize in full any gain or loss realized on their exchange of those claims for New PIK Notes and New Common Stock. In that case, the holders' tax bases in their new stock would equal the fair market value of the stock, their tax bases in their new notes would equal their issue price, and the holding periods for the new stock and notes would begin upon receipt. The character of the any gain recognized (i.e., capital or ordinary) would be determined as described in the prior paragraph. Thus, the gain would generally be capital if the holder holds its existing claims as a capital assets, but all or a portion of the gain could be reclassified as ordinary income if the holder acquired its existing claims at a discount or previously claimed a bad debt deduction in respect of its claims. The prior section describes the federal income tax consequences of distributions on New Common Stock and sales and exchanges of that stock. 4. HOLDERS OF CLASS 5 (CONVERTIBLE NOTE) OR CLASS 6 (SUBORDINATED NOTES) CLAIMS. The federal income tax consequences to the holders of Class 5 (Convertible Note) and Class 6 (Subordinated Notes) Claims of their receipt of New Common Stock in exchange for their existing claims also depends on whether the existing claims constitute securities. Although the matter is not free from doubt, for the reasons explained in the prior section, the Debtor believes that the Convertible Notes and Subordinated Notes are all properly classified as securities. In that case, the holders of claims in respect of those notes generally will not recognize any gain or loss on the exchange, the holder's basis in the new stock received in exchange for its existing claims will equal its basis in its existing claims, and the holder's holding period for the stock will include the period that the holder held its existing claims. If a portion of the new stock were treated as the payment of interest, however, a holder could be required to recognize ordinary income if it had not previously recognized the interest under its method of tax accounting. Any stock treated as the payment of interest would have a tax basis equal to its fair market value on receipt and a holding period beginning upon receipt. If a holder's existing claims are not classified as securities, the holder will recognize any gain or loss realized on the exchange, measured by the difference between the value of the New Common Stock received and the tax basis of the holder's existing claims. Any gain or loss would generally be capital gain or loss if the holder held its existing claims as capital assets, but all or a portion of the gain could be treated as ordinary income if a portion of the new stock were treated as the payment of interest not previously recognized as income by the holder, if the holder acquired its existing claims at a discount, or if the holder had previously claimed a deduction on the grounds that its existing claims were worthless. These possibilities are described in more detail in the prior section. Section IX.C.2. describes the federal income tax consequences of distributions on New Common Stock and sales and exchanges of that stock. -74- 5. HOLDERS OF CLASS 7 (GENERAL UNSECURED) CLAIMS. The federal income tax consequences to the holders of Class 7 (General Unsecured) Claims of their receipt of Cash, New Cash Pay Notes and New Common Stock in exchange for their existing claims also depends on whether the existing claims are classified as securities for federal income tax purposes. While the classification of each claim will depend on the relevant circumstances, the Debtor believes that most General Unsecured Claims are not properly classified as securities. Consequently, the holders of these claims will probably recognize any gain or loss realized on the exchange, measured by the difference between (a) the sum of the amount of Cash, the issue price of the New Cash Pay Notes (which should equal their stated principal amount) and the value of the New Common Stock, and (b) the tax basis of the holder's existing claims. The character of the gain or loss as ordinary or capital would depend on the circumstances, including whether the holder held its claims as capital assets, whether it acquired its claims at a discount, whether a portion of the new stock is treated as the payment of interest not previously recognized as income by the holder, and whether the holder had previously claimed a deduction on the grounds that its existing claims were worthless. Section IX(C)(2) above describes the federal income tax consequences of the ownership or disposition of New Cash Pay Notes, the receipt of distributions on New Common Stock, and sales or exchanges of that stock. 6. HOLDERS OF CLASS 8 (CONVENIENCE) CLAIMS. Under the Plan, Class 8 (Convenience) Claims will be satisfied in whole or in part through cash payments. If these claims are satisfied in full, payment of the claims will have the same federal income tax consequences to the holders that they would have had if the Plan were not confirmed. To the extent that a claim is not satisfied in full, the holder of the claim will be entitled to deduct a loss for federal income tax purposes. 7. HOLDERS OF CLASS 9 EQUITY INTERESTS If the stockholders of the Debtor receive new stock in exchange for their existing stock, they would generally not recognize any gain or loss on the exchange. If, however, the stockholder properly deducted a loss in a prior period on the ground that the stockholder's existing stock had become worthless, the stockholder could be required to recognize income upon receipt of the new stock in an amount equal to the lesser of the prior deduction or the value of the new stock. The character of the gain (i.e., ordinary or capital) would be the same as the prior loss. If the stockholders of the Debtor do not approve the Plan but the Plan is nonetheless confirmed, so that the stockholders do not receive any new stock or other consideration for their existing stock, they would be entitled to claim a loss equal to their tax basis in their stock if they have not already done so. The loss would be a capital loss if the holder held the stock as a capital asset, and would be a long-term capital loss if the holder held the stock for more than one year. 8. INFORMATION REPORTING AND WITHHOLDING. All distributions to holders of Allowed Claims under the Plan are subject to any applicable withholding (including employment tax withholding). Under federal income tax law, interest, dividends, and other reportable payments may, under certain circumstances, be subject to "backup withholding." The backup withholding rate currently is 30.5%, but will be reduced to 30% beginning on January 1, 2002, and will be reduced further in stages down to 28% in 2006. Backup withholding generally applies if the holder (a) fails to furnish its social security number or other taxpayer identification number ("TIN"), (b) furnishes an -75- incorrect TIN, (c) under certain circumstances, fails properly to report interest or dividends, or (d) under certain circumstances, fails to provide a certified statement, signed under penalty of perjury, that the TIN provided is its correct number and that it is not subject to backup withholding. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax. Certain persons are exempt from backup withholding, including, in certain circumstances, corporations and financial institutions. D. GENERAL DISCLAIMER. PERSONS CONCERNED WITH THE TAX CONSEQUENCES OF THE PLAN SHOULD CONSULT THEIR OWN ACCOUNTANTS, ATTORNEYS AND/OR ADVISORS. THE DEBTOR MAKES THE ABOVE-NOTED DISCLOSURE OF POSSIBLE TAX CONSEQUENCES FOR THE SOLE PURPOSE OF ALERTING READERS TO TAX ISSUES THEY MAY WISH TO CONSIDER. THE DEBTOR CANNOT AND DOES NOT REPRESENT THAT THE TAX CONSEQUENCES MENTIONED ABOVE ARE COMPLETELY ACCURATE BECAUSE, AMONG OTHER THINGS, THE TAX LAW EMBODIES MANY COMPLICATED RULES THAT MAKE IT DIFFICULT TO STATE ACCURATELY WHAT THE TAX IMPLICATIONS OF ANY ACTION MIGHT BE. X. RECOMMENDATION AND CONCLUSION The Debtor believes that confirmation and implementation of the Plan is preferable to all other available and feasible alternatives because the Plan will provide substantially greater recoveries for holders of Allowed Claims and Equity Interests. Accordingly, THE DEBTOR URGES HOLDERS OF IMPAIRED CLAIMS AND INTERESTS TO VOTE TO ACCEPT THE PLAN BY SO INDICATING ON THEIR BALLOTS AND RETURNING THEM AS SPECIFIED IN THIS DISCLOSURE STATEMENT AND ON THEIR BALLOTS. KOMAG, INCORPORATED By: /s/ ----------------------------- Name: Edward H. Siegler Its: Chief Financial Officer PRESENTED BY: /s/ - ----------------------------- James O. Johnston Hennigan, Bennett & Dorman Reorganization Counsel to Komag, Incorporated -76- EXHIBITS EXHIBIT A Plan of Reorganization EXHIBIT B Historical Financial Statements EXHIBIT C Schedule of Payments Made within Ninety Days prior to the Petition Date EXHIBIT D Schedule of Patents EXHIBIT E Schedule of Known Executory Contracts EXHIBIT F Liquidation Analysis EXHIBIT G Projections EXHIBIT H Valuation EXHIBIT I Western Digital Claim Letter -77- EX-99.T3E2 7 f82285orexv99wt3e2.txt EXHIBIT T3 E-2 HENNIGAN, BENNETT & DORMAN EXHIBIT T3E-2 BRUCE BENNETT (SBN 105430) JAMES O. JOHNSTON (SBN 167330) JOSHUA D. MORSE (SBN 211050) 601 South Figueroa Street, Suite 3300 Los Angeles, California 90017 Telephone: (213) 694-1200 Fax: (213) 694-1234 Reorganization Counsel for Debtor and Debtor in Possession UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION In re ) Case No. 01-54143-JRG ) KOMAG, INCORPORATED, f/a/k/a ) Chapter 11 HMT TECHNOLOGY CORPORATION, ) a Delaware corporation, ) DEBTOR'S FURTHER MODIFIED FIRST AMENDED PLAN OF ) REORGANIZATION, Debtor. ) DATED MAY 7, 2002 ) ) Continued Confirmation Hearing ------------------------------ ) ) Date: May 9, 2002 ) Time: 11:00 a.m. ) Place: Courtroom 3020 ) 280 South First Street ) San Jose, California 95113-3099 ) - ------------------------------ TABLE OF CONTENTS ARTICLE I DEFINITIONS AND CONSTRUCTION OF TERMS...............................1 1.1 ADMINISTRATIVE CLAIM.................................................1 1.2 ADMINISTRATIVE TAX CLAIM.............................................1 1.3 ALLOWED..............................................................1 1.4 AMENDED AND RESTATED BYLAWS..........................................2 1.5 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION....................2 1.6 BALLOT...............................................................2 1.7 BALLOT DATE..........................................................2 1.8 BANKRUPTCY CODE......................................................2 1.9 BANKRUPTCY COURT.....................................................2 1.10 BANKRUPTCY RULES.....................................................2 1.11 BAR DATE.............................................................2 1.12 BUSINESS DAY.........................................................2 1.13 CASH.................................................................2 1.14 CHAPTER 11 CASE......................................................2 1.15 CLAIM................................................................2 1.16 CLASS................................................................2 1.17 COMMITTEE............................................................3 1.18 CONFIRMATION DATE....................................................3 1.19 CONFIRMATION ORDER...................................................3 1.20 CONVENIENCE CLAIM....................................................3 1.21 CONVERTIBLE NOTES CLAIMS.............................................3 1.22 DEBTOR...............................................................3 1.23 DISALLOWED...........................................................3 1.24 DISCLOSURE STATEMENT.................................................3 1.25 DISPUTED.............................................................3 1.26 EFFECTIVE DATE.......................................................4 1.27 EMPLOYEE RETENTION PLAN..............................................4 1.28 EMPLOYEE RETENTION PLAN SUPPLEMENT...................................4 1.29 EQUITY INTEREST......................................................4 1.30 ESTATE...............................................................4 1.31 EXIT FINANCING FACILITY..............................................4 1.32 EXIT FINANCING FACILITY DOCUMENTS....................................4 1.33 FINAL ORDER..........................................................4 1.34 GENERAL UNSECURED CLAIM..............................................4 1.35 LIEN.................................................................4 1.36 LOAN RESTRUCTURE AGREEMENT...........................................4 1.37 LOAN RESTRUCTURE AGREEMENT AGENT.....................................5 1.38 LOAN RESTRUCTURE AGREEMENT CLAIM.....................................5 1.39 LOAN RESTRUCTURE AGREEMENT LENDERS...................................5 1.40 MMD..................................................................5 1.41 MMD CLAIM............................................................5 1.42 MMD PATENTS..........................................................5 1.43 NELSON NOTE..........................................................5 1.44 NELSON NOTE CLAIM....................................................5 1.45 NEW CASH PAY NOTES...................................................5 1.46 NEW COMMON STOCK.....................................................5 1.47 NEW NOTES............................................................6 1.48 NEW NOTES INDENTURE..................................................6 1.49 NEW NOTES TRUSTEE....................................................6 1.50 NEW PIK NOTES........................................................6 1.51 NEW SECURITIES.......................................................6 1.52 NEW SUBORDINATED PIK NOTES...........................................6
i 1.53 NEW SUBORDINATED PIK NOTES INDENTURE.................................6 1.54 NEW SUBORDINATED PIK NOTES TRUSTEE...................................6 1.55 NEW WARRANTS.........................................................6 1.56 NOTICE OF EFFECTIVE DATE.............................................6 1.57 OLYMPUS NOTE.........................................................7 1.58 OLYMPUS NOTE CLAIM...................................................7 1.59 ORDINARY COURSE ADMINISTRATIVE CLAIM.................................7 1.60 PETITION DATE........................................................7 1.61 PLAN.................................................................7 1.62 PLAN DOCUMENTS.......................................................7 1.63 PLAN RATE............................................................7 1.64 PLAN RELEASE.........................................................7 1.65 PLAN SOLICITATION ORDER..............................................7 1.66 PLAN SUPPLEMENT......................................................8 1.67 PRIORITY CLAIM.......................................................8 1.68 PRIORITY TAX CLAIM...................................................8 1.69 PROFESSIONAL.........................................................8 1.70 PROFESSIONAL CLAIM...................................................8 1.71 PRO RATA SHARE.......................................................8 1.72 REGISTRATION RIGHTS AGREEMENT........................................8 1.73 REORGANIZED DEBTOR...................................................8 1.74 REORGANIZED DEBTOR BOARD OF DIRECTORS................................8 1.75 REORGANIZED DEBTOR OFFICERS..........................................8 1.76 RIGHTS OF ACTION.....................................................8 1.77 SCHEDULE OF REJECTED AGREEMENTS......................................8 1.78 SCHEDULES............................................................9 1.79 SECURED CLAIM........................................................9 1.80 STATEMENT OF REORGANIZED DEBTOR DIRECTORS/OFFICERS...................9 1.81 SUBORDINATED NOTES...................................................9 1.82 SUBORDINATED NOTES CLAIM.............................................9 1.83 SUBORDINATED NOTES COMMITTEE.........................................9 1.84 SUBORDINATED NOTES INDENTURE.........................................9 1.85 SUBORDINATED NOTES TRUSTEE...........................................9 1.86 SUBSIDIARIES.........................................................9 1.87 UNSECURED CLAIM......................................................9 1.88 WESTERN DIGITAL......................................................9 1.89 WESTERN DIGITAL LEASES..............................................10 1.90 WESTERN DIGITAL NOTE................................................10 1.91 WESTERN DIGITAL NOTE CLAIM..........................................10 1.92 WESTERN DIGITAL REJECTION CLAIMS....................................10 ARTICLE II TREATMENT REGARDING AND DEADLINE FOR THE ASSERTION OF ADMINISTRATIVE CLAIMS AND PRIORITY TAX CLAIMS......................10 2.1 ADMINISTRATIVE CLAIMS..............................................10 (a) Treatment of Administrative Claims.........................10 (b) Treatment of Professional Claims...........................10 (c) Deadline for the Filing and Assertion of Administrative Claims other than Administrative Tax Claims and Ordinary Course Administrative Claims...............................11 (d) Deadline for the Filing and Assertion of Administrative Tax Claims.................................................11 2.2 PRIORITY TAX CLAIMS................................................11
ii ARTICLE III CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS......................11 ARTICLE IV TREATMENT OF CLAIMS AND EQUITY INTERESTS...........................12 4.1 CLASS 1 - PRIORITY CLAIMS..........................................12 (a) Impairment and Voting......................................12 (b) Treatment..................................................12 4.2 CLASS 2 - SECURED CLAIMS...........................................12 (a) Impairment and Voting......................................12 (b) Treatment..................................................12 4.3 CLASS 3 - LOAN RESTRUCTURE AGREEMENT CLAIMS........................13 (a) Impairment and Voting......................................13 (b) Allowance..................................................13 (c) Treatment..................................................13 4.4 CLASS 4 - WESTERN DIGITAL..........................................13 Class 4-A (Western Digital Note Claim) (a) Impairment and Voting......................................13 (b) Allowance..................................................13 (c) Treatment..................................................13 Class 4-B (Western Digital Rejection Claims) (a) Impairment and Voting......................................13 (b) Allowance..................................................13 (c) Treatment..................................................14 4.5 CLASS 5 - CONVERTIBLE NOTES CLAIMS.................................14 (a) Impairment and Voting......................................14 (b) Allowance..................................................14 (c) Treatment..................................................14 4.6 CLASS 6 - SUBORDINATED NOTES CLAIMS................................14 (a) Impairment and Voting......................................14 (b) Allowance..................................................14 (c) Treatment..................................................14 4.7 CLASS 7 - GENERAL UNSECURED CLAIMS.................................15 (a) Impairment and Voting......................................15 (b) Treatment..................................................15 4.8 CLASS 8 - CONVENIENCE CLAIMS.......................................15 (a) Impairment and Voting......................................15 (b) Treatment..................................................15 4.9 CLASS 9 - EQUITY INTERESTS.........................................15 (a) Impairment and Voting......................................15 (b) Treatment..................................................15 4.10 CLASS 10 - MMD CLAIM...............................................16 (a) Impairment and Voting......................................16 (b) Allowance..................................................16 (c) Treatment..................................................16
iii ARTICLE V ACCEPTANCE OR REJECTION OF THE PLAN................................16 5.1 VOTING OF CLAIMS...................................................16 5.2 NONCONSENSUAL CONFIRMATION.........................................16 ARTICLE VI EXECUTORY CONTRACTS AND UNEXPIRED LEASES...........................16 6.1 ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES.............16 6.2 CURE PAYMENTS......................................................16 (a) Bar Date for the Assertion of Claims for Cure Payments.....17 6.3 REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES..............17 6.4 CLAIMS ARISING FROM REJECTION......................................17 6.5 INDEMNIFICATION OBLIGATIONS........................................17 ARTICLE VII IMPLEMENTATION AND MEANS OF CONSUMMATION OF THE PLAN...............18 7.1 REVESTING OF ASSETS, INCLUDING RIGHTS OF ACTION....................18 (a) Prosecution of Rights of Action............................18 (b) No Waiver or Limitation of Rights of Action................18 7.2 MANAGEMENT AND OPERATION OF THE REORGANIZED DEBTOR.................18 7.3 REORGANIZED DEBTOR DIRECTORS AND OFFICERS..........................18 7.4 AMENDMENT OF CERTIFICATE OF INCORPORATION..........................19 7.5 AMENDMENT OF BYLAWS................................................19 7.6 ISSUANCE OF NEW SECURITIES.........................................19 (a) Section 1145 Exemption.....................................19 (b) Listing and Reporting......................................19 (c) Registration Rights........................................19 (d) Trust Indenture Act........................................19 7.7 EMPLOYEE RETENTION PLAN............................................20 7.8 CANCELLATION OF EXISTING SECURITIES AND INSTRUMENTS................20 (a) Termination of Claims for Subordination and Other Matters....................................................20 7.9 CANCELLATION OF LIENS..............................................20 7.10 CORPORATE ACTION...................................................20 ARTICLE VIII DISTRIBUTIONS......................................................20 8.1 DISTRIBUTION AGENT.................................................20 8.2 DELIVERY OF DISTRIBUTIONS..........................................21 8.3 UNDELIVERABLE DISTRIBUTIONS........................................21 (a) Holding of Undeliverable Distributions.....................21 (b) Unclaimed Property.........................................21 (c) Notification and Forfeiture of Unclaimed Property..........21 8.4 DISTRIBUTIONS OF CASH..............................................21 8.5 TIMELINESS OF PAYMENTS.............................................21 8.6 FRACTIONAL SECURITIES..............................................21 8.7 COMPLIANCE WITH TAX REQUIREMENTS...................................21 8.8 TIME BAR TO CASH PAYMENTS..........................................22 8.9 NO DE MINIMIS DISTRIBUTIONS........................................22 8.10 SURRENDER OF EXISTING SECURITIES AND INSTRUMENTS...................22 8.11 NO DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS OR DISPUTED EQUITY INTERESTS...................................................22 ARTICLE IX DISPUTED CLAIMS....................................................22 9.1 OBJECTIONS TO CLAIMS; PROSECUTION OF DISPUTED CLAIMS...............22 9.2 PAYMENTS AND DISTRIBUTIONS WITH RESPECT TO DISPUTED CLAIMS.........23
iv ARTICLE X EFFECT OF CONFIRMATION.............................................23 10.1 TITLE TO ASSETS; DISCHARGE OF LIABILITIES..........................23 10.2 DISCHARGE OF DEBTOR................................................23 10.3 INJUNCTION.........................................................24 10.4 TERM OF EXISTING INJUNCTIONS OR STAYS..............................24 10.5 EXCULPATION........................................................24 10.6 CLAIMS AND CAUSES OF ACTION........................................24 10.7 MUTUAL RELEASES OF AND BY THE DEBTOR, THE LOAN RESTRUCTURE AGREEMENT LENDERS, THE SUBORDINATED NOTES TRUSTEE, AND MEMBERS OF THE SUBORDINATED NOTES COMMITTEE................................24 ARTICLE XI RETENTION OF JURISDICTION..........................................25 11.1 RETENTION OF JURISDICTION..........................................25 ARTICLE XII MODIFICATION, REVOCATION, OR WITHDRAWAL OF THE PLAN................26 12.1 MODIFICATION OF PLAN...............................................26 12.2 REVOCATION OR WITHDRAWAL...........................................26 ARTICLE XIII CONDITIONS PRECEDENT...............................................26 13.1 CONDITION PRECEDENT TO CONFIRMATION................................26 13.2 CONDITIONS PRECEDENT TO EFFECTIVE DATE.............................26 13.3 WAIVER OF CONDITIONS TO EFFECTIVE DATE.............................27 13.4 EFFECT OF FAILURE OF CONDITIONS....................................27 ARTICLE XIV MISCELLANEOUS PROVISIONS...........................................27 14.1 PAYMENT OF STATUTORY FEES..........................................27 14.2 RETIREE BENEFITS...................................................27 14.3 COMMITTEE..........................................................28 14.4 POST-EFFECTIVE DATE FEES AND EXPENSES..............................28 14.5 SEVERABILITY.......................................................28 14.6 GOVERNING LAW......................................................28 14.7 CLOSING OF CASE....................................................28 14.8 EXEMPTION FROM TRANSFER TAXES......................................28 14.9 EFFECTUATING DOCUMENTS AND FURTHER TRANSACTIONS....................28 14.10 NOTICE OF EFFECTIVE DATE...........................................29 14.11 POSTCONFIRMATION UNITED STATES TRUSTEE QUARTERLY FEES..............29 14.12 CHAPTER 11 POSTCONFIRMATION REPORTS AND FINAL DECREE...............29
v Komag, Incorporated, proposes the following plan of reorganization pursuant to section 1121 of the Bankruptcy Code: ARTICLE I DEFINITIONS AND CONSTRUCTION OF TERMS RULES OF CONSTRUCTION. The following rules of construction apply to this Plan: (a) unless otherwise specified, all references in this Plan to Articles, Sections, and Exhibits are to the respective Article of, Section in, or Exhibit to this Plan, as the same may be amended or modified from time to time; (b) the headings in this Plan are for convenience of reference only and do not limit or otherwise affect the provisions of this Plan; (c) words denoting the singular number include the plural number and vice versa; (d) the rules of construction set forth in section 102 of the Bankruptcy Code apply; (e) in computing any period of time prescribed or allowed by this Plan, the provisions of Bankruptcy Rule 9006(a) apply; and (f) the words "herein," "hereof," "hereto," "hereunder," and others of similar import refer to this Plan as a whole and not to any particular Article, Section, subsection, or clause contained in this Plan. DEFINITIONS. Terms used in this Plan that are not otherwise defined in Article I have the meanings assigned to them in the Bankruptcy Code and in the Bankruptcy Rules. As used in this Plan, the following terms have the respective meanings specified below: 1.1 ADMINISTRATIVE CLAIM means any of the following: (a) a Claim for an administrative expense of the kind described in sections 503(b), 507(a)(1), 507(b), or 1114(e)(2) of the Bankruptcy Code; and (b) any fees or charges lawfully assessed against the estate of the Debtor under section 1930 of title 28 of the United States Code. 1.2 ADMINISTRATIVE TAX CLAIM means an Administrative Claim asserted by a governmental unit for taxes (and for interest and/or penalties related to such taxes) for any tax year or period, all or any portion of which occurs or falls within the period from and including the Petition Date through and including the Effective Date. 1.3 ALLOWED means: a. As it relates to Claims, a Claim that: i. Has been deemed filed within the meaning of section 1111(a) of the Bankruptcy Code, and as to which (x) no proof of Claim has been filed in compliance with section 501 of the Bankruptcy Code, and (y) no objection has been filed within the deadline established pursuant to Section 9.1; ii. Is asserted in a proof of Claim filed in compliance with section 501 of the Bankruptcy Code (and any applicable orders of the Bankruptcy Court) and as to which (x) no objection has been filed within the deadline established pursuant to Section 9.1; (y) the Bankruptcy Court has entered a Final Order allowing all or a portion of such Claim (but only in the amount so allowed); or (z) the Bankruptcy Court has entered a Final Order under section 502(c) of the Bankruptcy Code estimating the amount of the Claim for purposes of allowance; iii. Is expressly allowed under Article IV of this Plan; iv. Is designated as "allowed" in a pleading entitled "Designation of Allowed Claims" (or a similar title of the same import) filed with the Bankruptcy Court by the Reorganized Debtor on or after the Effective Date; or 1 v. Is an Administrative Claim as to which the Bankruptcy Court has entered a Final Order allowing all or a portion of such Claim (but only in the amount so allowed). b. As it relates to Equity Interests, an Equity Interest that is (i) identified in the stock register maintained by or on behalf of the Debtor as of the Effective Date and as to which no objection has been filed within the deadline established pursuant to Section 9.1; or (ii) allowed by a Final Order of the Bankruptcy Court. 1.4 AMENDED AND RESTATED BYLAWS means the amended and restated Bylaws of the Reorganized Debtor in substantially the form included in the Plan Supplement. 1.5 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION means the amended and restated Certificate of Incorporation of the Reorganized Debtor in substantially the form included in the Plan Supplement. 1.6 BALLOT means the ballot(s), in the form(s) approved by the Bankruptcy Court in the Plan Solicitation Order, accompanying the Disclosure Statement and provided to each holder of a Claim or Equity Interest entitled to vote to accept or reject this Plan, on which such holders may vote to accept or reject this Plan and, if applicable, make an election to have such holder's Claim treated as a Convenience Claim or not treated as a Convenience Claim under this Plan. 1.7 BALLOT DATE means the date set by the Bankruptcy Court in the Plan Solicitation Order by which a Ballot must be received in order to be counted. 1.8 BANKRUPTCY CODE means title 11 of the United States Code, as amended from time to time, as applicable to the Chapter 11 Case. 1.9 BANKRUPTCY COURT means the United States Bankruptcy Court for the Northern District of California, San Jose Division, or such other court that lawfully exercises jurisdiction over the Chapter 11 Case. 1.10 BANKRUPTCY RULES means the Federal Rules of Bankruptcy Procedure, as amended from time to time, as applicable to the Chapter 11 Case, together with the local rules of the Bankruptcy Court applicable to the Chapter 11 Case. Unless otherwise indicated, references in this Plan to "Bankruptcy Rule _____" are to the specifically identified rule of the Federal Rules of Bankruptcy Procedure. 1.11 BAR DATE means November 21, 2001, the date established by the Bankruptcy Court as the last day for filing of proofs of Claim in the Chapter 11 Case. 1.12 BUSINESS DAY means any day other than a Saturday, a Sunday, or another "legal holiday" as defined in Bankruptcy Rule 9006(a). 1.13 CASH means cash or cash equivalents. 1.14 CHAPTER 11 CASE means the case under chapter 11 of the Bankruptcy Code commenced by the Debtor, styled In re Komag, Incorporated, Case No. 01-54143-JRG, currently pending in the Bankruptcy Court. 1.15 CLAIM means a claim against the Debtor or its property within the meaning of section 101(5) of the Bankruptcy Code. 1.16 CLASS means one of the classes of Claims or Equity Interests established under Article III pursuant to section 1122 of the Bankruptcy Code. 2 1.17 COMMITTEE means the statutory committee of unsecured creditors appointed by the United States Trustee in the Chapter 11 Case pursuant to section 1102 of the Bankruptcy Code. 1.18 CONFIRMATION DATE means the date on which the Clerk of the Bankruptcy Court enters the Confirmation Order on the docket of the Bankruptcy Court. 1.19 CONFIRMATION ORDER means the order entered by the Bankruptcy Court confirming this Plan pursuant to section 1129 of the Bankruptcy Code. 1.20 CONVENIENCE CLAIM means a Claim that otherwise would be a General Unsecured Claim and that (a) is Allowed in an amount of $10,000 or less, or (b) is the subject of an irrevocable written election by the holder of such Claim, as made on a validly executed and timely delivered Ballot, to reduce the maximum amount of the Claim to $10,000; provided, however, that Convenience Claim excludes any Claim that is the subject of an irrevocable written election by the holder of such Claim, as made on a validly executed and timely delivered Ballot, to opt out of Class 8 under this Plan and into Class 7 under this Plan. 1.21 CONVERTIBLE NOTES CLAIMS mean, collectively, the Nelson Note Claim and the Olympus Note Claim. 1.22 DEBTOR means Komag, Incorporated, a Delaware corporation, f/a/k/a HMT Technology Corporation. 1.23 DISALLOWED means: a. As it relates to Claims, a Claim or portion thereof that (i) has been disallowed by a Final Order; (ii) is identified in the Schedules in an amount of zero dollars or as contingent, unliquidated, or disputed and as to which no proof of Claim was filed on or before the Bar Date (or such other applicable deadline established by the Bankruptcy Court with respect to such Claim); or (iii) is not listed in the Schedules and as to which no proof of Claim has been filed or deemed filed on or before the Bar Date (or such other applicable deadline established by the Bankruptcy Court with respect to such Claim). b. As it relates to Equity Interests, an Equity Interest that (i) is not identified in the stock register maintained by or on behalf of the Debtor as of the Effective Date; or (ii) has been disallowed by a Final Order. 1.24 DISCLOSURE STATEMENT means the Disclosure Statement with respect to this Plan, approved by the Bankruptcy Court in the Plan Solicitation Order as containing adequate information for the purpose of dissemination and solicitation of votes on and confirmation of this Plan, as it may be altered, amended or modified from time to time in accordance with the provisions of the Bankruptcy Code and the Bankruptcy Rules. 1.25 DISPUTED means any Claim, Equity Interest, or any portion thereof that has not become Allowed and that is not Disallowed. In the event that any part of a Claim or Equity Interest is Disputed, such Claim or Equity Interest shall be deemed Disputed in its entirety for purposes of distribution under this Plan unless the Reorganized Debtor agrees otherwise in its sole discretion. Without limiting any of the foregoing, a Claim or Equity Interest that is the subject of a pending application, motion, complaint, objection, or any other legal proceeding seeking to disallow, limit, subordinate, or estimate such Claim or Equity Interest shall be deemed to be Disputed. 3 1.26 EFFECTIVE DATE means the first Business Day after the date on which the conditions specified in Section 13.2 have been satisfied or waived. 1.27 EMPLOYEE RETENTION PLAN means a program for compensation, retention, and severance for employees of the Reorganized Debtor on substantially the terms and conditions set forth in the Employee Retention Plan Supplement, including without limitation (a) the provision for grants of up to 1,625,000 shares of New Common Stock; (b) three-year employment contracts for senior officers of the Debtor, providing for compensation at least equal to compensation levels as of the Petition Date (with annual adjustments based upon market data for comparable companies) and payments in the event of termination without cause or a change in control without an offer of comparable employment equal to 2.99 times annual compensation (including salary, bonus, and benefits) in place at the time of termination or change in control; and (c) assumption of any existing employee severance and retention plan approved and implemented during the Chapter 11 Case (provided that such plan has terms no more favorable to the Debtor or its employees than the terms described in the Debtor's "Motion For Order Approving Employee Retention And Severance Program," filed with the Bankruptcy Court on or about September 6, 2001). 1.28 EMPLOYEE RETENTION PLAN SUPPLEMENT means the Supplement describing the terms and conditions of the Employee Retention Plan. 1.29 EQUITY INTEREST means an equity security of the Debtor within the meaning of section 101(16) of the Bankruptcy Code. 1.30 ESTATE means the estate created pursuant to section 541 of the Bankruptcy Code upon commencement of the Chapter 11 Case. 1.31 EXIT FINANCING FACILITY means a working capital or revolving credit facility in an amount of up to $20,000,000, to be effective as of the Effective Date, with terms and conditions acceptable to the Debtor and otherwise permissible under the New Notes Indenture, subject to the right of first refusal granted by the Debtor to certain Loan Restructure Agreement Lenders prior to the Petition Date. 1.32 EXIT FINANCING FACILITY DOCUMENTS means the loan, security, and pledge agreements governing the Exit Financing Facility. 1.33 FINAL ORDER means a judgment, order, ruling, or other decree issued and entered by the Bankruptcy Court or by any state or other federal court or other tribunal having jurisdiction over the subject matter thereof which judgment, order, ruling, or other decree has not been reversed, stayed, modified, or amended and as to which (a) the time to appeal or petition for review, rehearing or certiorari has expired and no appeal or petition for review, rehearing or certiorari is then pending; or (b) any appeal or petition for review, rehearing or certiorari has been finally decided and no further appeal or petition for review, rehearing or certiorari can be taken or granted. 1.34 GENERAL UNSECURED CLAIM means an Unsecured Claim other than a Loan Restructure Agreement Claim, a Western Digital Claim, a Convertible Notes Claim, a Subordinated Notes Claim, a Convenience Claim, or an MMD Claim. 1.35 LIEN means any charge against or interest in property within the meaning of section 101(37) of the Bankruptcy Code. 1.36 LOAN RESTRUCTURE AGREEMENT means that certain Loan Restructure Agreement, dated as of June 1, 2000, among the Debtor, Fleet National Bank as Restructure Agent, and the lenders named therein, and all of the "Loan Documents" (as 4 such term is defined therein) and instruments relating thereto, as all of the foregoing may have been amended, supplemented or modified. 1.37 LOAN RESTRUCTURE AGREEMENT AGENT means the "Restructure Agent" appointed pursuant to and as defined in the Loan Restructure Agreement. 1.38 LOAN RESTRUCTURE AGREEMENT CLAIM means a Claim arising under or related to the Loan Restructure Agreement, except for and excluding the Convertible Notes Claims. 1.39 LOAN RESTRUCTURE AGREEMENT LENDERS means holders of the Loan Restructure Agreement Claims. 1.40 MMD means Magnetic Media Development, L.L.C. 1.41 MMD CLAIM means the proof of Claim filed by MMD in an amount of $33,360,000, identified as Claim Number 239 on the Official Claims Register in the Chapter 11 Case, by which MMD alleges Claims for infringement of the MMD Patents, and any and all other Claims against the Debtor or the Estate with respect to the MMD Patents or otherwise asserted or held by MMD. 1.42 MMD PATENTS means United States Letters Patent Nos. 4,735,840, 5,082,747, 5,316,864, 5,626,970, and 6,036,824 and any other patents or intellectual property rights owned or asserted by MMD or in which MMD claims an interest. 1.43 NELSON NOTE means that certain Convertible Note, dated June 2, 2000, issued by the Debtor in favor of Nelson Partners Ltd. in the principal amount of $3,675,000.00, and all of the documents and instruments relating thereto, as all of the foregoing may have been amended, supplemented or modified. 1.44 NELSON NOTE CLAIM means a Claim arising under or related to the Nelson Note. 1.45 NEW CASH PAY NOTES means the "Cash Pay Portions" of the New Notes to be issued by the Reorganized Debtor pursuant to the New Notes Indenture, in the aggregate principal amount of $85,332,000, with the following material terms: (a) due on the fifth anniversary of the Effective Date; (b) amortizing quarterly over a four-year period on a straight line basis beginning on the first anniversary of the Effective Date; (c) interest payable monthly in arrears in cash at a rate equal to the prime rate of interest plus three hundred basis points (with such rate not to be less than 8% per annum); and (d) secured by a first priority security interest in all assets of the Reorganized Debtor (except in the case of the Reorganized Debtor's ownership interest in its foreign Subsidiaries, which shall be subject to a pledge of not more than sixty-five percent (65%) of the Reorganized Debtor's interest therein) (on a pari passu basis with the New PIK Notes), subject to the Exit Financing Facility. Each New Cash Pay Note and New PIK Note will be issued under the New Notes Indenture as one instrument having both a "Cash Pay portion" and a "PIK Portion," and the New Cash Pay Notes and New PIK Notes will not trade independently of each other. 1.46 NEW COMMON STOCK means the common stock, with a par value of $.01 per share, of the Reorganized Debtor from and after the Effective Date, issued pursuant to this Plan and the Amended and Restated Certificate of Incorporation. 50,000,000 shares of New Common Stock shall be authorized as of the Effective Date, of which 24,451,285 shares shall be issued and distributed in accordance with the terms and conditions of this Plan to (a) holders of Allowed Claims and Equity Interests, and (b) beneficiaries of the Employee Retention Plan. 5 1.47 NEW NOTES means the new senior secured notes to be issued by the Reorganized Debtor pursuant to the New Notes Indenture, each of which will have both a "Cash Pay Portion" and a "PIK Portion." In the event only a New Cash Pay Note is to be issued to a particular holder, the "PIK Portion" of the New Note issued will be zero, and in the event only a New PIK Note is to be issued to a particular holder, the "Cash Pay Portion" of the New Note issued will be zero. 1.48 NEW NOTES INDENTURE means the indenture, dated as of the Effective Date, governing the New Cash Pay Notes and the New PIK Notes, among the Reorganized Debtor, as issuer, and the New Notes Trustee, together with all ancillary security, guaranty, and pledge agreements. 1.49 NEW NOTES TRUSTEE means the trustee under the New Notes Indenture. 1.50 NEW PIK NOTES means the "PIK Portions" of the New Notes to be issued by the Reorganized Debtor pursuant to the New Notes Indenture, in the aggregate principal amount of $43,500,000, with the following material terms: (a) due on the fifth anniversary of the Effective Date; (b) interest payable in kind monthly in arrears at a rate of 12% per annum; and (c) secured by a first priority security interest in all assets of the Reorganized Debtor (except in the case of the Reorganized Debtor's ownership interest in its foreign Subsidiaries, which shall be subject to a pledge of not more than sixty-five percent (65%) of the Reorganized Debtor's interest therein) (on a pari passu basis with the New Cash Pay Notes), subject to the Exit Financing Facility. Each New Cash Pay Note and New PIK Note will be issued under the New Notes Indenture as one instrument having both a "Cash Pay portion" and a "PIK Portion," and the New Cash Pay Notes and New PIK Notes will not trade independently of each other. 1.51 NEW SECURITIES means, collectively, the New Common Stock, the New Notes, the New Subordinated PIK Notes, and the New Warrants. 1.52 NEW SUBORDINATED PIK NOTES means the new subordinated secured notes to be issued by the Reorganized Debtor pursuant to the New Subordinated PIK Notes Indenture, in the aggregate principal amount of $7,000,000, with the following material terms: (a) fully subordinated to the New Notes and the Exit Facility; (b) a maturity date of six months following the maturity date of the New Notes, (c) secured by a junior security interest in the collateral pledged to secure the New Notes, which security interest will be fully subordinated to the security interest granted in respect of the New Notes and the Exit Facility; (d) cross-acceleration provisions to the New Notes; and (e) otherwise substantially similar terms and conditions as the New Notes. 1.53 NEW SUBORDINATED PIK NOTES INDENTURE means the indenture, dated as of the Effective Date, governing the New Subordinated PIK Notes, among the Reorganized Debtor, as issuer, and the New Subordinated PIK Notes Trustee, together with all ancillary security, guaranty, and pledge agreements. 1.54 NEW SUBORDINATED PIK NOTES TRUSTEE means the trustee under the New Subordinated PIK Notes Indenture. 1.55 NEW WARRANTS means warrants to purchase up to 1,000,000 shares of New Common Stock, at an exercise price of $9.00 per share, exercisable for a period of three (3) years after the Effective Date. 1.56 NOTICE OF EFFECTIVE DATE means the Notice prepared and mailed pursuant to Section 14.10. 6 1.57 OLYMPUS NOTE means that certain Convertible Note, dated June 2, 2000, issued by the Debtor in favor of Olympus Securities Ltd. in the principal amount of $5,606,730.81, and all of the documents and instruments relating thereto, as all of the foregoing may have been amended, supplemented or modified. 1.58 OLYMPUS NOTE CLAIM means a Claim arising under or related to the Olympus Note. 1.59 ORDINARY COURSE ADMINISTRATIVE CLAIM means an Administrative Claim, other than a Professional Claim or an Administrative Tax Claim, that represents an obligation incurred in the ordinary course of business of the Debtor (as determined by the Debtor or the Reorganized Debtor in their sole discretion). 1.60 PETITION DATE means August 24, 2001, the date on which the Debtor commenced the Chapter 11 Case. 1.61 PLAN means this chapter 11 plan of reorganization, together with any and all Exhibits thereto and the Plan Documents, each in their present form or as they may be altered, amended or modified from time to time in accordance with the provisions of this Plan, the Confirmation Order, the Bankruptcy Code, and the Bankruptcy Rules. 1.62 PLAN DOCUMENTS means the Amended and Restated Certificate of Incorporation, the Amended and Restated Bylaws, the Employee Retention Plan Supplement, the Exit Financing Facility Documents, the New Cash Pay Notes, the New PIK Notes, the New Notes Indenture, the New Subordinated PIK Notes, the New Subordinated PIK Notes Indenture, the Registration Rights Agreement, the New Warrants, the Schedule of Rejected Agreements, the Plan Release, and the Statement of Reorganized Debtor Directors/Officers, drafts of which will be included in the Plan Supplement. 1.63 PLAN RATE means (a) the rate available for U.S. Treasury Bills that are issued on the Effective Date with a ninety-day maturity; or (b) any such other rate determined by the Bankruptcy Court in connection with confirmation of this Plan to be an appropriate rate to be applied to Priority Tax Claims in accordance with section 1129(a)(9)(C) of the Bankruptcy Code. 1.64 PLAN RELEASE means a mutual release in substantially the form included with the Plan Supplement, providing for consensual mutual releases between and among the Debtor, the Estate, the Loan Restructure Agreement Lenders, the Subordinated Notes Trustee, members of the Subordinated Notes Committee, and each of their respective affiliates, subsidiaries, directors, officers, agents, employees, attorneys, professionals, successors, assigns, and any other entity that claims by, through, or under any of them, with respect to all debts, demands, actions, claims, causes of action, contracts, agreements, covenants, promises, damages, and liabilities whatsoever, whether known or unknown, based upon, relating to, or arising from any act, fact, transaction, agreement, or omission occurring or existing on or prior to the Effective Date, excluding obligations under the Plan and the Plan Documents. 1.65 PLAN SOLICITATION ORDER means the Order Approving (I) Adequacy Of Information In Disclosure Statement With Respect To The Debtor's Plan Of Reorganization; (II) Form, Scope And Nature Of Solicitation, Balloting, Tabulation And Notices With Respect Thereto; And (III) Related Confirmation Procedures, Deadlines And Notices, by which the Bankruptcy Court approved the Disclosure Statement as containing adequate information for the purpose of dissemination and solicitation of votes on and confirmation of this Plan 7 and established certain rules, deadlines, and procedures for the solicitation of votes with respect to and the balloting on this Plan. 1.66 PLAN SUPPLEMENT means a separate volume to be filed with the Clerk of the Bankruptcy Court, containing working drafts of the Plan Documents. The Plan Supplement shall be filed with the Clerk of the Bankruptcy Court no later than seven calendar days prior to the commencement of the continued hearing to consider confirmation of this Plan, or on such other date as the Bankruptcy Court may establish. 1.67 PRIORITY CLAIM means a Claim entitled to priority in payment under section 507(a) of the Bankruptcy Code, excluding any Claim that is an Administrative Claim or a Priority Tax Claim. 1.68 PRIORITY TAX CLAIM means a Claim entitled to priority in payment under section 507(a)(8) of the Bankruptcy Code. 1.69 PROFESSIONAL means any person employed or to be compensated pursuant to sections 326, 327, 328, 330, 331, 503(b), or 1103 of the Bankruptcy Code. 1.70 PROFESSIONAL CLAIM means a Claim by a Professional for compensation and/or reimbursement of expenses pursuant to sections 326, 327, 328, 330, 331, 503(b) or 1103 of the Bankruptcy Code. 1.71 PRO RATA SHARE means, with respect to any distribution to a Class under this Plan, as of any particular date of distribution, proportionate sharing pursuant to which the ratio of the cumulative amount of all property distributed on account of an Allowed Claim (or Allowed Equity Interest) to the amount of such Allowed Claim (or Allowed Equity Interest) is the same as the ratio of the cumulative amount distributed to such Class to the total amount of all Allowed Claims and Disputed Claims (or Allowed Equity Interests and Disputed Equity Interests) classified into such Class. 1.72 REGISTRATION RIGHTS AGREEMENT means the agreement governing registration of the New Notes and New Common Stock for the benefit of those holders of New Notes and New Common Stock as of the Effective Date who may be regarded as underwriters within the meaning ascribed to such term in section 1145 of the Bankruptcy Code. 1.73 REORGANIZED DEBTOR means the Debtor on and after the Effective Date. 1.74 REORGANIZED DEBTOR BOARD OF DIRECTORS means the Board of Directors of the Reorganized Debtor on the Effective Date. 1.75 REORGANIZED DEBTOR OFFICERS means the officers of the Reorganized Debtor on the Effective Date. 1.76 RIGHTS OF ACTION means any rights, claims, or causes of action owned by or accruing to the Debtor (including as a debtor in possession) or the Estate pursuant to the Bankruptcy Code or pursuant to any statute or legal theory, including, without limitation, section 541 of the Bankruptcy Code, and any avoidance or recovery actions under sections 544, 545, 547, 548, 549, 550, 551, and 553 of the Bankruptcy Code, and any rights to, claims, or causes of action for recovery under any policies of insurance issued to or on behalf of the Debtor or the Estate. 1.77 SCHEDULE OF REJECTED AGREEMENTS means the Schedule of executory contracts and unexpired leases to be rejected pursuant to Section 6.3. 8 1.78 SCHEDULES means the Schedules of Assets and Liabilities filed by the Debtor pursuant to Bankruptcy Rule 1007, as they have been or may be amended or supplemented from time to time in accordance with Bankruptcy Rule 1009. 1.79 SECURED CLAIM means a Claim that is alleged to be secured, in whole or in part, (a) by a Lien that is not subject to avoidance or subordination under the Bankruptcy Code or applicable non-bankruptcy law; or (b) as a result of rights of setoff under section 553 of the Bankruptcy Code; but in any event only to the extent of the value, determined in accordance with section 506(a) of the Bankruptcy Code, of the holder's interest in the Estate's interest in property or to the extent of the amount subject to such setoff, as the case may be. 1.80 STATEMENT OF REORGANIZED DEBTOR DIRECTORS/OFFICERS means the Statement identifying the members of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers and any insiders who will be employed or retained by the Reorganized Debtor as of the Effective Date, and providing any other information required by section 1129(a)(5) of the Bankruptcy Code. 1.81 SUBORDINATED NOTES mean, collectively, the 5 3/4% Convertible Subordinated Notes due 2004 issued by HMT Technology Corporation in a principal amount of $230,000,000.00 pursuant to the Subordinated Notes Indenture, and all of the documents and instruments relating thereto, as all of the foregoing may have been amended, supplemented or modified. 1.82 SUBORDINATED NOTES CLAIM means a Claim or Equity Interest arising under or related to the Subordinated Notes or the Subordinated Notes Indenture, including without limitation the fraudulent transfer, equitable and/or contractual subordination, and other Claims alleged in the proof of Claim filed by the Subordinated Notes Committee (identified as Claim Number 398 on the Official Claims Register in the Chapter 11 Case), in the proof of Claim filed by the Subordinated Notes Trustee (identified as Claim Number 322 on the Official Claims Register in the Chapter 11 Case), and in the other pleadings filed by the Subordinated Notes Committee and by the Subordinated Notes Trustee in the Chapter 11 Case. 1.83 SUBORDINATED NOTES COMMITTEE means the informal committee of holders of Subordinated Notes consisting of Camden Asset Management LP, Creedon Capital LLP, WM High Yield Fund, SunAmerica High Yield Fund, SC Fundamental Value Fund LP, and JMG Convertible Investment SCR. 1.84 SUBORDINATED NOTES INDENTURE means the Indenture, dated as of January 15, 1997, among HMT Technology Corporation and State Street Bank and Trust Company of California, N.A., providing for the issuance of the Subordinated Notes, and all of the documents and instruments relating thereto, as all of the foregoing may have been amended, supplemented or modified. 1.85 SUBORDINATED NOTES TRUSTEE means the "Trustee" appointed pursuant to and as defined in the Subordinated Notes Indenture. 1.86 SUBSIDIARIES means the subsidiaries and affiliates in which the Debtor directly or indirectly owns an interest. 1.87 UNSECURED CLAIM means any Claim that is not a Secured Claim, an Administrative Claim, a Priority Claim, a Priority Tax Claim, or a Convenience Claim. 1.88 WESTERN DIGITAL means Western Digital Corporation, a Delaware corporation. 9 1.89 WESTERN DIGITAL LEASES mean, collectively, the following agreements, which were rejected under section 365 of the Bankruptcy Code pursuant to an Order of the Bankruptcy Court dated August 28, 2001: (a) the "Lease Agreement (Real Property)," among Western Digital and JRC Trust I, dated June 1, 1998 (including all subleases); (b) the "Master Lease Agreement (Personal Property)," among Western Digital and CIT Technologies Corporation d/b/a CIT Systems Leasing (as successor in interest to, inter alia, Encore International, Inc.), dated December 1, 1989 (including all equipment schedules); (c) the "Global Master Rental Agreement (Personal Property)," among Western Digital and Comdisco, Inc., dated September 30, 1992 (including all equipment schedules); and (d) the "Master Lease Agreement (Personal Property)," among Western Digital and Leasing Solutions, Inc., dated September 2, 1992. 1.90 WESTERN DIGITAL NOTE means that certain Promissory Note, dated April 8, 1999, issued by the Debtor in favor of Western Digital in the principal amount of $30,077,357.00, and all of the documents and instruments relating thereto, as all of the foregoing may have been amended, supplemented or modified. 1.91 WESTERN DIGITAL NOTE CLAIM means a Claim arising under or related to the Western Digital Note. 1.92 WESTERN DIGITAL REJECTION CLAIMS mean, collectively, all Claims other than the Western Digital Note Claim in favor of or held as of the Petition Date by Western Digital (including without limitation Claims arising from the Debtor's rejection of the Western Digital Leases and any such Claims assigned by Western Digital to one or more Loan Restructure Agreement Lenders after the Petition Date). ARTICLE II TREATMENT REGARDING AND DEADLINE FOR THE ASSERTION OF ADMINISTRATIVE CLAIMS AND PRIORITY TAX CLAIMS 2.1 ADMINISTRATIVE CLAIMS. (a) TREATMENT OF ADMINISTRATIVE CLAIMS. Except as provided in Section 2.1(b) below with respect to Professional Claims or to the extent that the holder of an Allowed Administrative Claim agrees to a different treatment, the Reorganized Debtor or its agent shall pay to each holder of an Allowed Administrative Claim, in full satisfaction, release and discharge of such Claim, Cash in an amount equal to such Allowed Administrative Claim on the later of the Effective Date and the date on which such Claim becomes an Allowed Administrative Claim, or as soon thereafter as is practicable; provided, however, that Ordinary Course Administrative Claims shall be paid in full and honored by the Reorganized Debtor in the ordinary course of business in accordance with the terms and conditions of the particular transactions and any agreements relating thereto. (b) TREATMENT OF PROFESSIONAL CLAIMS. Except to the extent that the holder of an Allowed Professional Claim agrees to a different treatment, the Reorganized Debtor or its agent shall pay to each holder of an Allowed Professional Claim, in full satisfaction, release and discharge of such Claim, Cash in an amount equal to such Allowed Professional Claim on or as soon as reasonably practicable following the date on which the Bankruptcy Court order allowing such Professional Claim becomes a Final Order. (c) DEADLINE FOR THE FILING AND ASSERTION OF ADMINISTRATIVE CLAIMS OTHER THAN ADMINISTRATIVE TAX CLAIMS AND ORDINARY COURSE ADMINISTRATIVE CLAIMS. All requests for payment or any other means of preserving and obtaining payment of Administrative Claims that have not been paid, released, or otherwise settled, including all 10 requests for payment of Professional Claims but excluding requests for Administrative Tax Claims and Ordinary Course Administrative Claims, must be filed with the Bankruptcy Court and served upon the Reorganized Debtor and the United States Trustee no later than thirty (30) days after the date on which the Notice of Effective Date is mailed. Any request for payment of an Administrative Claim other than an Administrative Tax Claim or an Ordinary Course Administrative Claim that is not timely filed by such date will be forever barred, and holders of such Claims will be barred from asserting such Claims in any manner against the Debtor, the Estate, or the Reorganized Debtor. (d) DEADLINE FOR THE FILING AND ASSERTION OF ADMINISTRATIVE TAX CLAIMS. All requests for payment or any other means of preserving and obtaining payment of Administrative Tax Claims that have not been paid, released, or otherwise settled must be filed with the Bankruptcy Court and served upon the Reorganized Debtor and the United States Trustee on or before the later of (a) thirty (30) days after the date on which the Notice of Effective Date is mailed; and (b) one hundred and twenty (120) days after the filing of the tax return for such taxes with the applicable governmental unit. Any request for payment of an Administrative Tax Claim that is not timely filed as set forth above will be forever barred, and holders of such Claims will be barred from asserting such Claims in any manner against the Debtor, the Estate, or the Reorganized Debtor. 2.2 PRIORITY TAX CLAIMS. Except to the extent that the holder of an Allowed Priority Tax Claim agrees to a different treatment, the Reorganized Debtor shall provide to each holder of an Allowed Priority Tax Claim, in full satisfaction, release and discharge of such Claim, the following treatment, to be selected by the Debtor in its sole discretion through a designation filed with the Bankruptcy Court prior to the Effective Date: either (a) Cash in an amount equal to such Allowed Priority Tax Claim paid on the later of the Effective Date and the date on which such Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is practicable; or (b) Cash payments made in accordance with section 1129(a)(9)(c) of the Bankruptcy Code, in up to twelve (12) equal installments made over a period not to exceed six (6) years from the date of assessment of such Allowed Priority Tax Claim, commencing within six (6) months after the Effective Date (or, if such Claim has not become an Allowed Priority Tax Claim by that time, as soon as practicable after the date of allowance of the Claim), in an amount equal to the amount of the Allowed Priority Tax Claim together with interest at the Plan Rate accruing from the Effective Date. Absent a timely designation as set forth above, an Allowed Priority Claim shall be treated in accordance with option (b), above. ARTICLE III CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS Pursuant to section 1122 of the Bankruptcy Code, all Claims other than Administrative Claims and Priority Tax Claims, and all Equity Interests, are classified for all purposes, including voting, confirmation, and distribution pursuant to this Plan, as follows: Class 1 - Priority Claims Class 2 - Secured Claims (each Allowed Secured Claim shall be deemed to be classified within a separate subclass for purposes of voting on and confirmation of this Plan) Class 3 - Loan Restructure Agreement Claims Class 4 - Western Digital 11 Class 4-A Western Digital Note Claim Class 4-B Western Digital Rejection Claims Class 5 - Convertible Notes Claims Class 6 - Subordinated Notes Claims Class 7 - General Unsecured Claims Class 8 - Convenience Claims Class 9 - Equity Interests Class 10 - MMD Claim ARTICLE IV TREATMENT OF CLAIMS AND EQUITY INTERESTS 4.1 CLASS 1 - PRIORITY CLAIMS. (a) IMPAIRMENT AND VOTING. Class 1 is impaired by this Plan. The holders of Claims classified into Class 1 are entitled to vote their Priority Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) TREATMENT. Except to the extent that the holder of an Allowed Priority Claim agrees to a different treatment, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Priority Claim, in full satisfaction, release and discharge of such Claim, Cash in an amount equal to its Allowed Priority Claim, paid on the later of the Effective Date and the date on which such Claim becomes an Allowed Priority Claim, or as soon thereafter as is practicable. 4.2 CLASS 2 - SECURED CLAIMS. (a) IMPAIRMENT AND VOTING. Class 2 is impaired by this Plan. The holders of Claims classified into Class 2 are entitled to vote their Secured Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) TREATMENT. Except to the extent that the holder of an Allowed Secured Claim agrees to a different treatment, on the later of the Effective Date and the date on which a Secured Claim becomes an Allowed Secured Claim, or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Secured Claim, in full satisfaction, release and discharge of such Claim, one of the following treatments, to be selected by the Debtor in its sole discretion through a designation filed with the Bankruptcy Court prior to the Effective Date: (i) the Plan shall leave unaltered the legal, equitable or contractual rights to which such Claim entitles the holder thereof or otherwise render such Claim unimpaired pursuant to section 1124 of the Bankruptcy Code; (ii) the Reorganized Debtor will surrender to the holder of such Claim the property securing such Claim; or (iii) the Reorganized Debtor will issue to the holder of such Claim a promissory note providing for deferred cash payments satisfying the requirements of section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code and a lien satisfying the requirements of section 1129(b)(2)(A)(i)(I). Absent a timely designation as set forth above, each Allowed Secured Claim shall be treated in accordance with option (ii), above. 12 4.3 CLASS 3 - LOAN RESTRUCTURE AGREEMENT CLAIMS. (a) IMPAIRMENT AND VOTING. Class 3 is impaired by this Plan. The holders of Claims classified into Class 3 are entitled to vote their Loan Restructure Agreement Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) ALLOWANCE. As of the Effective Date, the Loan Restructure Agreement Claims shall be deemed to be Allowed Unsecured Claims in the aggregate amount of $206,879,586.60 (subject to an accounting of actual prepetition fees and expenses incurred under Section 12.5 of the Loan Restructure Agreement). (c) TREATMENT. On the Effective Date, the Reorganized Debtor or its agent shall provide to the Loan Restructure Agreement Agent, for distribution of Pro Rata Shares to holders of Allowed Loan Restructure Agreement Claims and in full satisfaction, release and discharge of the Loan Restructure Agreement Claims, the following consideration: (i) $82,500,000 principal amount of the New Cash Pay Notes; (ii) $32,500,000 principal amount of the New PIK Notes; and (iii) 12,525,000 shares of New Common Stock. Additionally, on the Effective Date, the Reorganized Debtor or its agent also shall distribute to the Loan Restructure Agreement Agent for the benefit of the Loan Restructure Agreement Lenders a payment, not to exceed $1,500,000, in an amount equal to the prepetition and postpetition fees and expenses not previously paid or reimbursed by the Debtor incurred under Section 12.5 of the Loan Restructure Agreement by, or on behalf of, the Loan Restructure Agreement Lenders to Crossroads LLC, PricewaterhouseCoopers LLC, Stroock Stroock & Lavan LLP, and Milbank Tweed Hadley & McCloy LLP. 4.4 CLASS 4 - WESTERN DIGITAL. There are two sub-classes within Class 4 - Class 4-A (Western Digital Note Claim) and Class 4-B (Western Digital Rejection Claims). CLASS 4-A (WESTERN DIGITAL NOTE CLAIM) (a) IMPAIRMENT AND VOTING. Class 4-A is impaired by this Plan. The holders of the Western Digital Note Claim classified into Class 4-A are entitled to vote their Western Digital Note Claim to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) ALLOWANCE. As of the Effective Date, the Western Digital Note Claim shall be deemed to be an Allowed Unsecured Claim in the amount of $33,675,357. (c) TREATMENT. On the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Western Digital Note Claim, in full satisfaction, release and discharge of such Claim, its Pro Rata Share of (i) $11,000,000 principal amount of the New PIK Notes; and (ii) 3,022,127 shares of New Common Stock. CLASS 4-B (WESTERN DIGITAL REJECTION CLAIMS) (a) IMPAIRMENT AND VOTING. Class 4-B is impaired by this Plan. The holders of the Western Digital Rejection Claims classified into Class 4-B are entitled to vote their Western Digital Rejection Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) ALLOWANCE. As of the Effective Date, the Western Digital Rejection Claims shall be deemed to be Allowed Unsecured Claims in the aggregate amount of $11,261,760. 13 (c) TREATMENT. On the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Western Digital Rejection Claims, in full satisfaction, release and discharge of such Claim, its Pro Rata Share of 893,723 shares of New Common Stock. 4.5 CLASS 5 - CONVERTIBLE NOTES CLAIMS. (a) IMPAIRMENT AND VOTING. Class 5 is impaired by this Plan. The holders of Claims classified into Class 5 are entitled to vote their Convertible Notes Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) ALLOWANCE. As of the Effective Date, the Convertible Notes Claims shall be deemed to be Allowed Unsecured Claims as follows: (i) the Nelson Note Claim shall be deemed to be an Allowed Unsecured Claim in the amount of $4,034,618.00; and (ii) the Olympus Note Claim shall be deemed to be an Allowed Unsecured Claim in the amount of $6,155,382.00. (c) TREATMENT. On the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to the holders of the Convertible Notes Claims, in full satisfaction, release and discharge of such Claims, the following treatment: (i) The holder of the Allowed Nelson Note Claim shall receive 500,000 shares of New Common Stock. (ii) The holder of the Allowed Olympus Note Claim shall receive shall receive 750,000 shares of New Common Stock. 4.6 CLASS 6 - SUBORDINATED NOTES CLAIMS. (a) IMPAIRMENT AND VOTING. Class 6 is impaired by this Plan. The holders of Claims classified into Class 6 are entitled to vote their Subordinated Notes Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) ALLOWANCE. As of the Effective Date, the Subordinated Notes Claims shall be deemed to be Allowed Unsecured Claims in the aggregate amount of $238,195,000. (c) TREATMENT. On the later of the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to the Subordinated Notes Trustee, for distribution of Pro Rata Shares to holders of Allowed Subordinated Notes Claims and in full satisfaction, release and discharge of the Allowed Subordinated Notes Claims, (i) 3,744,775 shares of New Common Stock; (ii) in the event that Class 9 votes to reject the Plan, an additional 750,000 shares of New Common Stock; (iii) $7,000,000 principal amount of the New Subordinated PIK Notes; and (iv) the New Warrants. Additionally, the Reorganized Debtor or its agent shall distribute cash in an aggregate amount not to exceed $500,000, first to the firm of Paul, Hastings, Janofsky & Walker LLP as counsel for the Subordinated Notes Trustee, and then (up to the aggregate limit of $500,000) to the firm of Andrews & Kurth, L.L.P. as counsel for the Subordinated Notes Committee, for the benefit of holders of Allowed Subordinated Notes Claims, in full satisfaction of and reimbursement for the reasonable attorneys' fees and expenses incurred by such counsel in connection with the Chapter 11 Case from and after the Petition Date. 14 4.7 CLASS 7 - GENERAL UNSECURED CLAIMS. (a) IMPAIRMENT AND VOTING. Class 7 is impaired by this Plan. The holders of Claims classified into Class 7 are entitled to vote their General Unsecured Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) TREATMENT. On the later of the Effective Date and the date on which a General Unsecured Claim becomes an Allowed General Unsecured Claim, or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed General Unsecured Claim, in full satisfaction, release and discharge of such Claim, its Pro Rata Share of (a) $1,000,000 in Cash; (b) $2,500,000 principal amount of the New Cash Pay Notes; and (c) 558,660 shares of New Common Stock. 4.8 CLASS 8 - CONVENIENCE CLAIMS. (a) IMPAIRMENT AND VOTING. Class 8 is impaired by this Plan. The holders of Claims classified into Class 8 are entitled to vote their Convenience Claims to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) TREATMENT. On the later of the Effective Date and the date on which a Convenience Claim becomes an Allowed Convenience Claim, or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Convenience Claim, in full satisfaction, release and discharge of such Claim, a Cash payment in an amount equal to its Pro Rata Share of $650,000; provided, however, that the distribution on account of each Allowed Convenience Claim shall not exceed one hundred percent (100%) of the amount of such Allowed Convenience Claim. 4.9 CLASS 9 - EQUITY INTERESTS. (a) IMPAIRMENT AND VOTING. Class 9 is impaired by this Plan. The holders of Equity Interests classified into Class 9 are entitled to vote their Equity Interests to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) TREATMENT. IF AND ONLY IF CLASS 9 VOTES TO ACCEPT THE PLAN within the meaning of section 1126 of the Bankruptcy Code and the Plan otherwise may be confirmed in accordance with section 1129 of the Bankruptcy Code, then on the later of the Effective Date and the date on which an Equity Interest becomes an Allowed Equity Interest, or as soon thereafter as is practicable, the Reorganized Debtor or its agent shall provide to each holder of an Allowed Equity Interest, in full satisfaction, release and discharge of such Equity Interest, its Pro Rata Share of 750,000 shares of New Common Stock. IF CLASS 9 VOTES TO REJECT THE PLAN WITHIN THE MEANING OF SECTION 1126 OF THE BANKRUPTCY CODE, CLASS 9 WILL RECEIVE NO DISTRIBUTIONS AND RETAIN NO INTERESTS UNDER THE PLAN. ALSO, IN THE EVENT THAT THE BANKRUPTCY COURT DETERMINES THAT THE TREATMENT OF EQUITY INTERESTS AS SET FORTH ABOVE CAUSES THE PLAN TO VIOLATE THE REQUIREMENTS OF SECTION 1129 OF THE BANKRUPTCY CODE OR OTHERWISE RENDERS THE PLAN NOT CAPABLE OF BEING CONFIRMED, CLASS 9 WILL RECEIVE NO DISTRIBUTIONS AND RETAIN NO INTERESTS UNDER THE PLAN, AND THE DEBTOR, IN ITS DISCRETION, EITHER WILL CANCEL OR REDISTRIBUTE TO OTHER CLASSES OF CLAIMS THE 750,000 SHARES OF NEW COMMON STOCK THAT OTHERWISE WOULD BE DISTRIBUTED IN RESPECT OF EQUITY INTERESTS IN SUCH A MANNER AS TO SATISFY THE REQUIREMENTS OF THE BANKRUPTCY CODE. 15 4.10 CLASS 10 - MMD CLAIM. (a) IMPAIRMENT AND VOTING. Class 10 is impaired by this Plan. The holder of the MMD Claim classified into Class 10 is entitled to vote the MMD Claim to accept or reject this Plan in accordance with the Plan Solicitation Order. (b) ALLOWANCE. As of the Effective Date, the MMD Claim shall be deemed to be an Allowed Unsecured Claim in the aggregate amount of $6,000,000. (c) TREATMENT. On the Effective Date or as soon thereafter as is practicable (as and when payments and distributions of similar property are made to other Classes of Claims), the Reorganized Debtor or its agent shall distribute to the holder of the MMD Claim, in full satisfaction, release and discharge of such Claim, the following: (i) $155,000 in Cash; (ii) $332,000 principal amount of the New Cash Pay Notes; and (c) 82,000 shares of New Common Stock. ARTICLE V ACCEPTANCE OR REJECTION OF THE PLAN 5.1 VOTING OF CLAIMS. Each holder of a Claim classified into Classes 1 through 8, and each holder of an Equity Interest classified into Class 9, shall be entitled to vote each such Claim or Equity Interest separately to accept or reject this Plan. 5.2 NONCONSENSUAL CONFIRMATION. If the applicable requirements for confirmation of this Plan as set forth in sections 1129(a)(1) through (7) and sections 1129(a)(9) through 1129(a)(13) of the Bankruptcy Code are satisfied, the Debtor will request that the Bankruptcy Court confirm this Plan in accordance with Section 1129(b) of the Bankruptcy Code notwithstanding the fact that the requirements of section 1129(a)(8) are not satisfied, so long as at least one impaired Class of Claims has accepted this Plan, on the basis that this Plan is fair and equitable and does not discriminate unfairly with respect to any non-accepting impaired Class. ARTICLE VI EXECUTORY CONTRACTS AND UNEXPIRED LEASES 6.1 ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. Any executory contracts or unexpired leases that (a) are not identified on the Schedule of Rejected Agreements; (b) have not expired by their own terms on or prior to the Effective Date; (c) have not been assumed, assumed and assigned, or rejected with the approval of the Bankruptcy Court as of the Effective Date; and (d) are not the subject of a motion for rejection pending as of the Effective Date, shall be deemed to have been assumed by the Reorganized Debtor effective as of the Effective Date, and this Plan shall constitute a motion to assume such executory contracts and unexpired leases. Subject to the occurrence of the Effective Date, entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of and authorization for the assumption of such executory contracts and unexpired leases pursuant to section 365(a) of the Bankruptcy Code and a finding by the Bankruptcy Court that each such assumption is in the best interest of the Debtor, the Estate, and all parties in interest in the Chapter 11 Case. 6.2 CURE PAYMENTS. As soon as practicable after and in no event later than thirty (30) days after the Effective Date, the Reorganized Debtor shall pay to each party to an executory contract or unexpired lease assumed pursuant to Section 6.1 any monetary amounts required to be paid under section 365(b) of the Bankruptcy Code as a condition to assumption, unless the Reorganized Debtor and such party agree to different arrangements 16 for the satisfaction of obligations under section 365(b). The Bankruptcy Court shall retain jurisdiction to and, after the provision of notice and the opportunity for a hearing in accord with the Bankruptcy Rules, shall resolve all disputes regarding (a) the amount of any cure payment to be made pursuant to this Section; (b) the ability of the Debtor or the Reorganized Debtor to provide "adequate assurance of future performance" within the meaning of section 365 of the Bankruptcy Code under the contract or lease to be assumed; and (c) any other matter pertaining to such assumption. (a) BAR DATE FOR THE ASSERTION OF CLAIMS FOR CURE PAYMENTS. The Debtor does not believe that any amounts are necessary to be paid in order to cure any existing defaults or arrearages under the executory contracts and unexpired leases to be assumed pursuant to Section 6.1. ANY PARTY TO SUCH AN EXECUTORY CONTRACT OR UNEXPIRED LEASE THAT ASSERTS THAT ANY PAYMENT OR OTHER PERFORMANCE IS DUE IN CONNECTION WITH THE PROPOSED ASSUMPTION OF SUCH AGREEMENT IN ACCORDANCE WITH THE PLAN MUST FILE WITH THE BANKRUPTCY COURT AND SERVE UPON THE DEBTOR A WRITTEN STATEMENT AND ACCOMPANYING DECLARATION IN SUPPORT THEREOF SPECIFYING THE BASIS FOR ITS CLAIM WITHIN THE SAME DEADLINE AND IN THE MANNER ESTABLISHED FOR FILING OBJECTIONS TO CONFIRMATION OF THE PLAN. THE FAILURE TO TIMELY FILE AND SERVE SUCH A STATEMENT WILL WAIVE ANY AND ALL OBJECTIONS TO THE PROPOSED ASSUMPTION AND ANY CLAIM FOR CURE AMOUNTS OF THE AGREEMENT AT ISSUE. 6.3 REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. Any executory contracts or unexpired leases of the Debtor identified on the Schedule of Rejected Agreements or in any motion for rejection pending as of the Effective Date shall be deemed to have been rejected by the Debtor as of the Effective Date. This Plan shall constitute a motion to reject such executory contracts and unexpired leases, and the Reorganized Debtor shall have no liability under such executory contracts and unexpired leases except as otherwise specifically provided in this Plan. Subject to the occurrence of the Effective Date, entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of and authorization for the rejection of such executory contracts and unexpired leases pursuant to section 365(a) of the Bankruptcy Code and a finding by the Bankruptcy Court that each such rejection is in the best interest of the Debtor and the Estate. 6.4 CLAIMS ARISING FROM REJECTION. Proofs of Claims arising from the rejection of executory contracts or unexpired leases pursuant to Section 6.3 must be filed with the Bankruptcy Court and served on the Reorganized Debtor no later than thirty (30) days after the date on which the Notice of Effective Date is mailed. Any Claim for which a proof of Claim is not filed and served within such time will be forever barred and shall not be enforceable against the Debtor or its Estate, assets, properties, or interests in property, or against the Reorganized Debtor or its estate, assets, properties, or interests in property. Unless otherwise ordered by the Bankruptcy Court, all such Claims that are timely filed as provided herein shall be treated as General Unsecured Claims and be classified into Class 7. 6.5 INDEMNIFICATION OBLIGATIONS. For purposes of this Plan and effective on the Effective Date, the obligations of the Debtor to indemnify, reimburse, or limit the liability of its present and any former directors, officers or employees, in their capacity as such, against or for any obligations, whether pursuant to the certificate of incorporation of the Debtor, the bylaws of the Debtor, applicable state law or specific agreement, or any combination of the foregoing, shall be assumed by the Reorganized Debtor, survive and remain unaffected by confirmation of this Plan and the occurrence of the Effective Date, and not be discharged 17 irrespective of whether such indemnification, reimbursement or limitation is owed in connection with an event occurring before, on, or after the Petition Date. ARTICLE VII IMPLEMENTATION AND MEANS OF CONSUMMATION OF THE PLAN 7.1 REVESTING OF ASSETS, INCLUDING RIGHTS OF ACTION. Except as otherwise expressly provided by this Plan, on the Effective Date title to all assets and property of the Estate, including without limitation the Debtor's ownership interests in the Subsidiaries and all Rights of Action, shall vest in the Reorganized Debtor in accordance with section 1141 of the Bankruptcy Code, free and clear of all Claims, Liens, and Equity Interests. (a) PROSECUTION OF RIGHTS OF ACTION. On the Effective Date, the Rights of Action shall be deemed retained by or transferred to the Reorganized Debtor. The Reorganized Debtor shall be deemed the appointed representative to, and may, pursue, litigate, and compromise and settle any and all Rights of Action, as appropriate, without further notice, the opportunity for a hearing, or Court approval. (b) NO WAIVER OR LIMITATION OF RIGHTS OF ACTION. While the Debtor has attempted to identify in the Disclosure Statement the Rights of Action available to it, the failure to list therein any potential or existing Right of Action generally or specifically is not intended to and shall not limit the rights of the Debtor or the Reorganized Debtor to pursue any such action. Unless a Right of Action is expressly waived, relinquished, released, compromised or settled in this Plan, the Debtor on behalf of itself and the Reorganized Debtor expressly reserves all Rights of Action for later adjudication and, as a result, no preclusion doctrine, including without limitation the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, estoppel (judicial, equitable or otherwise) or laches, shall apply to such Rights of Action upon or after the confirmation or consummation of the Plan or the Effective Date. In addition, the Debtor on behalf of itself and the Reorganized Debtor expressly reserves the right to pursue or adopt against any other entity any claims alleged in any lawsuit in which the Debtor is a defendant or an interested party. 7.2 MANAGEMENT AND OPERATION OF THE REORGANIZED DEBTOR. From and after the Effective Date, the management, control and operation of the Reorganized Debtor shall become the general responsibility of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers, and the Reorganized Debtor may operate its business in accordance with the Amended and Restated Certificate of Incorporation, the Amended and Restated Bylaws, and applicable corporate law. Except as otherwise provided in this Plan, from and after the Effective Date the Reorganized Debtor may operate its business, use, acquire or dispose of its assets, and compromise and settle Claims and Rights of Action, free of any restrictions imposed by the Bankruptcy Code, the Bankruptcy Rules, or the Bankruptcy Court, and without further notice or the opportunity for a hearing. 7.3 REORGANIZED DEBTOR DIRECTORS AND OFFICERS. On the Effective Date, the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers shall consist of the persons identified in the Statement of Reorganized Debtor Directors/Officers, and all officers of the Debtor and members of the Debtor's Board of Directors who do not continue in service as members of the Reorganized Debtor Board of Directors and/or Reorganized Debtor Officers shall be deemed relieved of all further duties in such capacity; provided, however, that prior to the Effective Date the Subordinated Notes Committee may designate one individual, who must be acceptable to the Debtor in its reasonable discretion, to serve on the Reorganized Debtor Board of Directors in the class of directors that initially will serve for a two-year term. After the Effective Date, the terms and manner of selection of the 18 Reorganized Debtor Board of Directors and the Reorganized Debtor Officers shall be as provided in the Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws. 7.4 AMENDMENT OF CERTIFICATE OF INCORPORATION. The certificate of incorporation of the Debtor shall be amended and restated as of the Effective Date in substantially the form of the Amended and Restated Certificate of Incorporation and, among other things, (a) shall prohibit the issuance of nonvoting equity securities as required by section 1123(a)(6) of the Bankruptcy Code; (b) shall authorize the issuance of 50,000,000 shares of New Common Stock, of which 24,451,285 shares shall be issued and distributed in accordance with the terms and conditions of this Plan to (i) holders of Allowed Claims and Equity Interests, and (ii) beneficiaries of the Employee Retention Plan; and (c) shall provide for a board of nine directors, divided into three classes of three directors each, with the members of each class to serve for a term of three years; provided that the directors shall be elected as follows: at the first annual meeting of the stockholders after January 1, 2003, the directors in the first class shall be elected for a term of three years; at the second annual meeting after January 1, 2003, the directors in the second class shall be elected for a term of three years; and at the third annual meeting after January 1, 2003, the directors in the third class shall be elected for a term of three years. 7.5 AMENDMENT OF BYLAWS. The bylaws of the Debtor shall be amended and restated as of the Effective Date in substantially the form of the Amended and Restated Bylaws. 7.6 ISSUANCE OF NEW SECURITIES. On the Effective Date, the Reorganized Debtor shall issue the New Common Stock, the New Notes, the New Subordinated PIK Notes, and the New Warrants for distribution in accordance with this Plan. When so issued, all shares of New Common Stock shall be deemed validly issued, fully paid, and non assessable. (a) SECTION 1145 EXEMPTION. Except with respect to New Common Stock to be issued to employees pursuant to the Employee Retention Plan, the Reorganized Debtor shall issue the New Securities without registration under federal or state securities laws in reliance upon the exemption set forth in section 1145 of the Bankruptcy Code. (b) LISTING AND REPORTING. Commencing on the Effective Date, the Reorganized Debtor shall use its commercially reasonable best efforts to list the New Common Stock (i) on a national securities exchange or the NASDAQ Stock Market; or (ii) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on a national securities exchange or the NASDAQ Stock Market, on the NASDAQ Small Cap Market; or (iii) if the Reorganized Debtor cannot satisfy the applicable requirements for listing on the NASDAQ Small Cap Market, on another qualifying inter-dealer quotation system. Prior to such listing, the Reorganized Debtor shall file such periodic and current reports as if it were a reporting company under the Securities Exchange Act of 1934. (c) REGISTRATION RIGHTS. The Reorganized Debtor shall execute the Registration Rights Agreement for the benefit of those holders of New Notes and New Common Stock as of the Effective Date who may be regarded as underwriters within the meaning ascribed to such term in section 1145 of the Bankruptcy Code. (d) TRUST INDENTURE ACT. Commencing on or before the Effective Date, the Reorganized Debtor shall use its commercially reasonable best efforts to qualify the New Notes Indenture under the Trust Indenture Act of 1939 unless the New Notes Indenture otherwise is exempt from the requirements of the Trust Indenture Act under section 1145 of the Bankruptcy Code or another applicable exemption. 19 7.7 EMPLOYEE RETENTION PLAN. On the Effective Date, without further action of the holders of New Common Stock or the Reorganized Debtor Directors or Reorganized Debtor Officers, the Employee Retention Plan shall be deemed adopted and implemented. 7.8 CANCELLATION OF EXISTING SECURITIES AND INSTRUMENTS. On the Effective Date, all promissory notes, indentures, share certificates, options, warrants, and other instruments evidencing any Claim or Equity Interest (including without limitation the Loan Restructure Agreement, the Convertible Notes, the Western Digital Note, the Subordinated Notes, the Subordinated Notes Indenture, and the Equity Interests) shall be deemed cancelled and null and void without further act or action under any applicable agreement, law, regulation, order, or rule, and the obligations of the Debtor under the agreements and certificates of designations governing such Claims and Equity Interests, as the case may be, shall be discharged. All such instruments shall be surrendered in accordance with Section 8.10. (a) TERMINATION OF CLAIMS FOR SUBORDINATION AND OTHER MATTERS. Upon the Effective Date, any and all asserted claims, counterclaims, demands, defenses, rights, actions or causes of action that arise out of or relate to the Loan Restructure Agreement, the Western Digital Note, the Convertible Notes, the Subordinated Notes, or the Subordinated Notes Indenture between or among holders of claims under such instruments, including but not limited to claims, counterclaims, demands, defenses, rights, actions or causes of action for contractual or equitable subordination, seeking recovery of a fraudulent conveyance, or challenging the corporate merger of Komag, Incorporated and HMT Technology Corporation, shall and shall be deemed to be resolved for all purposes by the Plan and satisfied in full by the treatment of Claims under this Plan and the rights and distributions provided in this Plan. 7.9 CANCELLATION OF LIENS. Except as otherwise provided in this Plan, on the Effective Date any Lien securing any Secured Claim shall be deemed released, and the entity holding such Secured Claim shall be authorized and directed to release any collateral or other property of the Debtor or the Estate (including without limitation any cash collateral) held by such entity and to take such actions as may be requested by the Reorganized Debtor to evidence the release of such Lien, including without limitation the execution, delivery and filing or recording of such releases as may be requested by the Reorganized Debtor (at the expense of the Reorganized Debtor). 7.10 CORPORATE ACTION. On the Effective Date, all actions contemplated by the Plan and the Plan Documents shall be and shall be deemed to be authorized and approved in all respects, in each case without further action under applicable law, regulation, order, or rule or by the stockholders of the Debtor or the Reorganized Debtor, including without limitation (a) the adoption of the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; (b) the designation of members of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers; (c) the cancellation of all Equity Interests; (d) the authorization and issuance of the New Securities; (e) the adoption and implementation of the Employee Retention Plan; and (f) the execution and delivery of, and the performance under, each of the other Plan Documents and all documents and agreements contemplated by or relating to any of the foregoing. ARTICLE VIII DISTRIBUTIONS 8.1 DISTRIBUTION AGENT. On or after the Effective Date, the Reorganized Debtor may retain one or more agents to perform or assist it in performing the distributions to be 20 made pursuant to this Plan. The Reorganized Debtor may provide reasonable compensation to any such agent(s) without further notice or Court approval. 8.2 DELIVERY OF DISTRIBUTIONS. All distributions to any holder of an Allowed Claim or Allowed Equity Interest shall be made at the address of such holder as set forth in the Schedules or in the books and records of the Debtor or its agents, unless the Debtor or the Reorganized Debtor has been notified by such holder in a writing, including without limitation the filing of a proof of Claim, that contains an address for such holder different from the address reflected in such Schedules for such holder. 8.3 UNDELIVERABLE DISTRIBUTIONS. (a) HOLDING OF UNDELIVERABLE DISTRIBUTIONS. If any distribution to any holder is returned to the Reorganized Debtor as undeliverable, no further distributions shall be made to such holder unless and until the Reorganized Debtor is notified in writing of such holder's then-current address. Unless and until the Reorganized Debtor is so notified, such distribution shall be deemed to be "Unclaimed Property" and shall be dealt with in accordance with Section 8.3(b). (b) UNCLAIMED PROPERTY. If any entity entitled to receive Cash or New Securities pursuant to the Plan does not present itself on the Effective Date or on such other date on which such entity becomes eligible for distribution of such Cash or New Securities, such Cash or New Securities shall be deemed to be "Unclaimed Property." Unclaimed Property shall be set aside and (in the case of Cash) held in a segregated account to be maintained by the Reorganized Debtor pursuant to the terms of this Plan. (c) NOTIFICATION AND FORFEITURE OF UNCLAIMED PROPERTY. On the first anniversary of the Effective Date, the Reorganized Debtor shall file with the Bankruptcy Court a list of Unclaimed Property, together with a schedule that identifies the name and last-known address of holders of the Unclaimed Property; the Reorganized Debtor otherwise shall not be required to attempt to locate any such entity. On the second anniversary of the Effective Date, all remaining Unclaimed Property and accrued interest or dividends earned thereon shall be remitted to and vest in the Reorganized Debtor. 8.4 DISTRIBUTIONS OF CASH. Any payment of Cash to be made by the Reorganized Debtor or its agent pursuant to this Plan shall be made by check drawn on a domestic bank or by wire transfer, at the sole option of the Reorganized Debtor. 8.5 TIMELINESS OF PAYMENTS. Any payments or distributions to be made pursuant to this Plan shall be deemed to be timely made if made within fourteen (14) days after the dates specified in the Plan. Whenever any distribution to be made under this Plan shall be due on a day other than a Business Day, such distribution instead shall be made, without interest, on the immediately succeeding Business Day, but shall be deemed to have been made on the date due. 8.6 FRACTIONAL SECURITIES. No fractional shares of New Common Stock (or Cash in lieu thereof) shall be distributed. For purposes of distribution, fractional shares of New Common Stock shall be rounded down to the next whole number, and the total number of shares of New Common Stock to be distributed under this Plan shall be adjusted to account for such rounding. The New Notes issued pursuant to this Plan will be issued in denominations of $100 and integral multiples thereof, and no Cash payment in lieu thereof shall be made. 8.7 COMPLIANCE WITH TAX REQUIREMENTS. The Reorganized Debtor shall comply with all tax withholding and reporting requirements imposed on it by any governmental unit, 21 and all distributions pursuant to this Plan shall be subject to such withholding and reporting requirements. In connection with each distribution with respect to which the filing of an information return (such as Internal Revenue Service Form 1099 or 1042) or withholding is required, the Reorganized Debtor shall file such information return with the Internal Revenue Service and provide any required statements in connection therewith to the recipients of such distribution, or effect any such withholding and deposit all moneys so withheld to the extent required by law. With respect to any entity from whom a tax identification number, certified tax identification number, or other tax information required by law to avoid withholding has not been received by the Reorganized Debtor, the Reorganized Debtor, at its sole option, may withhold the amount required and distribute the balance to such entity or decline to make such distribution until the information is received. 8.8 TIME BAR TO CASH PAYMENTS. Checks issued by the Reorganized Debtor on account of Allowed Claims shall be null and void if not negotiated within ninety (90) days from and after the date of issuance thereof. Requests for reissuance of any check shall be made directly to the Reorganized Debtor by the holder of the Allowed Claim with respect to which such check originally was issued. Any claim in respect of such a voided check shall be made on or before the second anniversary of the Effective Date. After such date, all Claims in respect of voided checks shall be discharged and forever barred and the Reorganized Debtor shall retain all moneys related thereto. 8.9 NO DE MINIMIS DISTRIBUTIONS. Notwithstanding any other provision of this Plan, no Cash payment of less than ten dollars ($10.00) shall be made by the Reorganized Debtor on account of any Allowed Claim. 8.10 SURRENDER OF EXISTING SECURITIES AND INSTRUMENTS. Except as otherwise provided in this Plan or as the Reorganized Debtor otherwise may agree, each holder of a promissory note or other instrument evidencing a Claim shall surrender such promissory note or instrument to the Reorganized Debtor upon request. No distribution under this Plan shall be made to or on behalf of any such holders unless and until such promissory note or instrument is received by the Reorganized Debtor or the unavailability of such promissory note or instrument is established to the reasonable satisfaction of the Reorganized Debtor. In accordance with section 1143 of the Bankruptcy Code, any holder that fails to (a) surrender or cause to be surrendered such promissory note or instrument or to execute and deliver an affidavit of loss and indemnity reasonably satisfactory to the Reorganized Debtor and (b) if requested by the Reorganized Debtor, furnish a bond in form and substance (including amount) reasonably satisfactory to the Reorganized Debtor within two years after the Effective Date shall be deemed to have forfeited all rights, Claims, and Equity Interests and shall not participate in any distribution under this Plan. 8.11 NO DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS OR DISPUTED EQUITY INTERESTS. Notwithstanding anything to the contrary in this Plan, no distributions shall be made on account of any Disputed Claim or Disputed Equity Interests until such Claim or Equity Interest becomes Allowed (and then only to the extent so Allowed). Distributions made after the Effective Date in respect of Claims or Equity Interests that were not Allowed Claims or Allowed Equity Interests as of the Effective Date (but which later became Allowed) shall be deemed to have been made as of the Effective Date. ARTICLE IX DISPUTED CLAIMS 9.1 OBJECTIONS TO CLAIMS; PROSECUTION OF DISPUTED CLAIMS. The Reorganized Debtor shall have the right to object to the allowance of Claims or Equity Interests filed with 22 the Bankruptcy Court with respect to which liability or allowance is disputed in whole or in part. Unless otherwise ordered by the Bankruptcy Court, the Reorganized Debtor shall file and serve any such objections to Claims or Equity Interests by not later than one hundred and eighty (180) days after the Effective Date (or, in the case of Claims lawfully filed after the Effective Date, by not later than one hundred and eighty (180) days after the date of filing of such Claims). 9.2 PAYMENTS AND DISTRIBUTIONS WITH RESPECT TO DISPUTED CLAIMS. All Disputed Claims shall be treated as Allowed Claims for the purpose of calculating distributions to be made to the holders of Allowed Claims on the Effective Date, but no distributions will be made on account of any Disputed Claims until they become Allowed Claims. Rather, the Reorganized Debtor shall reserve the distributions that otherwise would have been made in respect of such Disputed Claims if they had been Allowed Claims. At such time as a Disputed Claim becomes an Allowed Claim, in whole or in part, the Reorganized Debtor or its agent shall distribute to the holder thereof the distributions, if any, to which such holder is then entitled under this Plan. Such distributions, if any, shall be made as soon as practicable after the date that the order or judgment of the Bankruptcy Court allowing such Disputed Claim becomes a Final Order (or such other date as the Claim becomes an Allowed Claim), but in no event more than thirty (30) days thereafter. No interest shall be paid on Disputed Claims that later become Allowed Claims. In the event that dividend distributions or regular principal/interest payments have been made with respect to the New Common Stock or New Notes distributable to a holder of a Disputed Claim that later becomes an Allowed Claim, such holder shall be entitled to receive such previously-distributed dividends or principal/interest payments, as the case may be, without any additional interest with respect to thereto. All property reserved on account of Disputed Claims that ultimately become Disallowed Claims shall be distributed to all holders of Allowed Claims in the Class into which such Disputed Claims have been classified in the manner provided in Article IV, not less frequently than every six (6) months. ARTICLE X EFFECT OF CONFIRMATION 10.1 TITLE TO ASSETS; DISCHARGE OF LIABILITIES. Except as otherwise specifically provided by this Plan, on the Effective Date, title to all assets and properties of the Debtor and the Estate or otherwise dealt with by this Plan shall vest in the Reorganized Debtor in accordance with section 1141 of the Bankruptcy Code, and the Confirmation Order shall be a judicial determination of discharge of the Debtor's liabilities. 10.2 DISCHARGE OF DEBTOR. The rights afforded in this Plan and the treatment of all holders of Claims or Equity Interests as provided herein shall be in exchange for and in complete satisfaction, discharge and release of all Claims and Equity Interests of any nature whatsoever arising on or before the Effective Date, known or unknown, including any interest accrued or expenses incurred thereon from and after the Petition Date, whether against the Debtor (including as debtor in possession), the Estate, or any of their properties, assets or interests in property. Except as otherwise provided herein, upon the Effective Date, all Claims and Liens against and Equity Interests in the Debtor (including as debtor in possession) shall be and shall be deemed to be satisfied, discharged and released in full. All entities shall be precluded from asserting against the Debtor (including as debtor in possession) and the Estate and their successors or assigns, including without limitation the Reorganized Debtor, or their respective assets, properties or interests in property, any other or further Claims based upon any act or omission, transaction or other activity of any kind or 23 nature that occurred prior to the Effective Date, whether or not the facts or legal bases therefor were known or existed prior to the Effective Date. 10.3 INJUNCTION. Except as otherwise expressly provided in this Plan, all entities who have held, hold or may hold pre-Effective Date Claims or pre-Effective Date Equity Interests are permanently enjoined, from and after the Effective Date, from (a) commencing or continuing in any manner any action or other proceeding of any kind with respect to any such pre-Effective Date Claim or pre-Effective Date Equity Interest against the Debtor, the Estate, or the Reorganized Debtor; (b) enforcing, attaching, collecting, or recovering by any manner or means any judgment, award, decree or order against the Debtor, the Estate, or the Reorganized Debtor with respect to such pre-Effective Date Claims or pre-Effective Date Equity Interests; (c) creating, perfecting, or enforcing any Lien or encumbrance of any kind against the Debtor, the Estate, or the Reorganized Debtor or against the property or interests in property of the Debtor, the Estate, or the Reorganized Debtor; and (d) asserting any right of setoff, subrogation or recoupment of any kind against any obligation due to the Debtor, the Estate, or the Reorganized Debtor or against the property or interests in property of the Debtor, the Estate, or the Reorganized Debtor, with respect to any such pre-Effective Date Claim or pre-Effective Date Equity Interest, except as otherwise permitted by section 553 of the Bankruptcy Code. 10.4 TERM OF EXISTING INJUNCTIONS OR STAYS. Unless otherwise provided, all injunctions or stays provided for in the Chapter 11 Case pursuant to sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date. 10.5 EXCULPATION. Neither the Debtor, the Reorganized Debtor, the Loan Restructure Agreement Lenders, the Committee, nor any of their respective predecessors, successors, directors, officers, employees, members, attorneys, consultants, advisors and agents (acting in such capacity), shall have or incur any liability to any entity or any person for any act taken or omitted to be taken in connection with or related to administration of the Chapter 11 Case, including without limitation the formulation, preparation, dissemination, implementation, confirmation or consummation of this Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document created or entered into, or any other act taken or omitted to be taken in connection with this Plan (including the Plan Documents); provided, however, that the foregoing shall not affect the liability of any entity or any person that otherwise would result from any such act or omission to the extent that such act or omission is determined by a Final Order to have constituted gross negligence, or willful misconduct. 10.6 CLAIMS AND CAUSES OF ACTION. As of the Effective Date, all non-Debtor entities are permanently enjoined from commencing or continuing in any manner any action or proceeding, whether directly, derivatively, on account of or respecting, any claim, debt, right or cause of action of the Debtor or the Reorganized Debtor (including the Rights of Action) which the Debtor or the Reorganized Debtor, as the case may be, retains authority to pursue in accordance with Section 7.1. 10.7 MUTUAL RELEASES OF AND BY THE DEBTOR, THE LOAN RESTRUCTURE AGREEMENT LENDERS, THE SUBORDINATED NOTES TRUSTEE, AND MEMBERS OF THE SUBORDINATED NOTES COMMITTEE. On the Effective Date, the Plan Release shall become effective. 24 ARTICLE XI RETENTION OF JURISDICTION 11.1 RETENTION OF JURISDICTION. Following the Effective Date, the Bankruptcy Court shall retain and have exclusive jurisdiction over any matter (x) arising under the Bankruptcy Code and relating to the Debtor or the Bankruptcy Estate, (y) arising in or related to the Chapter 11 Case or this Plan or the Plan Documents, and (z) otherwise for the following: (a) to resolve any matters related to the assumption, assumption and assignment, or rejection of any executory contract or unexpired lease to which the Debtor is a party or with respect to which the Debtor may be liable, and to hear, determine and, if necessary, liquidate, any Claims arising therefrom, including those matters related to the amendment after the Effective Date of this Plan to add any executory contracts or unexpired leases to the Schedule of Rejected Agreements; (b) to enter such orders as may be necessary or appropriate to implement or consummate the provisions of this Plan, the Plan Documents, and all other contracts, instruments, releases, and other agreements or documents related to this Plan; (c) to determine any and all motions, adversary proceedings, applications and contested or litigated matters that may be pending on the Effective Date or that, pursuant to this Plan, may be instituted by the Reorganized Debtor after the Effective Date or that are instituted by any holder of a Claim or Equity Interest before or after the Effective Date concerning any matter based upon, arising out of, or relating to the Chapter 11 Case, whether or not such action is initially filed in the Bankruptcy Court or any other court; (d) to ensure that distributions to holders of Allowed Claims and Allowed Equity Interests are accomplished as provided herein; (e) to hear and determine any objections to Claims or Equity Interests or to proofs of Claim filed, both before and after the Effective Date, including any objections to the classification of any Claim or Equity Interest, and to allow, disallow, determine, liquidate, classify, estimate or establish the priority of or secured or unsecured status of any Claim, in whole or in part; (f) to enter and implement such orders as may be appropriate in the event the Confirmation Order is for any reason stayed, revoked, modified, reversed or vacated; (g) to issue such orders in aid of execution of this Plan, to the extent authorized by section 1142 of the Bankruptcy Code; (h) to consider any modifications of this Plan, to cure any defect or omission, or reconcile any inconsistency in any order of the Bankruptcy Court, including the Confirmation Order; (i) to hear and determine all applications for awards of compensation for services rendered and reimbursement of expenses incurred prior to the Effective Date; (j) to hear and determine all disputes or controversies arising in connection with or relating to this Plan or the Confirmation Order or the interpretation, implementation, or enforcement of this Plan or the Confirmation Order or the extent of any entity's obligations incurred in connection with or released under this Plan or the Confirmation Order; 25 (k) to issue injunctions, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any entity with consummation or enforcement of this Plan; (l) to determine any other matters that may arise in connection with or are related to this Plan, the Disclosure Statement, the Confirmation Order or any contract, instrument, release or other agreement or document related to this Plan or the Disclosure Statement (including the Plan Documents); (m) to hear and determine matters concerning local, state, and federal taxes in accordance with sections 346, 505, and 1146 of the Bankruptcy Code; (n) to hear any other matter or for any purpose specified in the Confirmation Order that is not inconsistent with the Bankruptcy Code; (o) to hear and determine any rights, claims, or causes of action held by or accruing to the Debtor (including as debtor in possession) pursuant to the Bankruptcy Code or pursuant to any federal or state statute or legal theory; and (p) to enter a final decree closing the Chapter 11 Case. ARTICLE XII MODIFICATION, REVOCATION, OR WITHDRAWAL OF THE PLAN 12.1 MODIFICATION OF PLAN. The Debtor reserves the right, in accordance with the Bankruptcy Code and the Bankruptcy Rules, to amend or modify this Plan at any time prior to the entry of the Confirmation Order. After the entry of the Confirmation Order, the Debtor or the Reorganized Debtor, upon order of the Bankruptcy Court, may amend or modify this Plan in accordance with section 1127(b) of the Bankruptcy Code, or remedy any defect or omission or reconcile any inconsistency in this Plan in such manner as may be necessary to carry out the purpose and intent of this Plan. A holder of a Claim or Equity Interest that has accepted this Plan shall be deemed to have accepted this Plan as modified if the proposed modification does not materially and adversely change the treatment of the Claim or Equity Interest of such holder. 12.2 REVOCATION OR WITHDRAWAL. (a) This Plan may be revoked or withdrawn prior to the Confirmation Date by the Debtor for any reason whatsoever. (b) If revoked or withdrawn prior to the Confirmation Date, this Plan shall be deemed null and void, and nothing contained herein shall be deemed to constitute a waiver or release of any claims by the Debtor or any other entity or to prejudice in any manner the rights of the Debtor or any other entity in any further proceedings involving the Debtor. ARTICLE XIII CONDITIONS PRECEDENT 13.1 CONDITION PRECEDENT TO CONFIRMATION. The entry of the Confirmation Order, which shall be in form and substance satisfactory to the Debtor in its sole discretion, shall be a condition precedent to confirmation of this Plan. 13.2 CONDITIONS PRECEDENT TO EFFECTIVE DATE. The "effective date of the plan," as used in section 1129 of the Bankruptcy Code, shall not occur, and this Plan shall be of no 26 force and effect, until the Effective Date. The occurrence of the Effective Date is subject to the satisfaction (or waiver as set forth in Section 13.3) of the following conditions precedent: (a) CONFIRMATION ORDER. The Confirmation Order shall be a Final Order and be in full force and effect. (b) PLAN DOCUMENTS. All agreements and instruments contemplated by, or to be entered into pursuant to, the Plan, including without limitation the Plan Documents, shall be in form and substance acceptable to the Debtor in its sole discretion, shall be in substantially the form submitted with the Plan Supplement unless a different form is otherwise approved by the Bankruptcy Court, and shall have been duly and validly executed and delivered, or deemed executed by the parties thereto, and all conditions to their effectiveness shall have been satisfied or waived. (c) TIMING. The Effective Date shall occur on the first Business Day after which the conditions set forth in Sections 13.2(a) and 13.2(b) are satisfied or waived; provided, however, that the Effective Date must occur by no later than one hundred and eighty days (180) days after the Confirmation Date. 13.3 WAIVER OF CONDITIONS TO EFFECTIVE DATE. The Debtor, in its sole discretion, may waive, in whole or in part, any of the conditions to effectiveness of this Plan. Except with respect to the non-occurrence of the Effective Date within one hundred and eighty days (180) days after the Confirmation Date, any such waiver of a condition may be effected at any time, without notice or leave or order of the Bankruptcy Court and without any formal action, other than the filing of a notice of such waiver with the Bankruptcy Court. The Debtor may waive the condition regarding occurrence of the Effective Date within one hundred and eighty days (180) days after the Confirmation Date only upon order of the Bankruptcy Court after notice to the Committee and parties who have requested special notice in the Chapter 11 Case. 13.4 EFFECT OF FAILURE OF CONDITIONS. In the event that the conditions to effectiveness of this Plan have not been timely satisfied or waived, and upon notification submitted by the Debtor to the Bankruptcy Court, (a) the Confirmation Order shall be vacated, (b) no distributions under this Plan shall be made, (c) the Debtor and all holders of Claims and Equity Interests shall be restored to the status quo ante as of the day immediately preceding the Confirmation Date as though the Confirmation Date never occurred, and (d) all the Debtor's obligations with respect to the Claims and Equity Interests shall remain unchanged and nothing contained herein shall be deemed to constitute a waiver or release of any claims by or against the Debtor or any other Entity or to prejudice in any manner the rights of the Debtor or any entity in any further proceedings involving the Debtor. ARTICLE XIV MISCELLANEOUS PROVISIONS 14.1 PAYMENT OF STATUTORY FEES. All fees payable pursuant to section 1930 of title 28 of the United States Code shall be paid on the Effective Date and thereafter, to the extent required by applicable law, as and when due until the Chapter 11 Case is closed. 14.2 RETIREE BENEFITS. From and after the Effective Date, pursuant to section 1129(a)(13) of the Bankruptcy Code, the Reorganized Debtor shall continue to pay all retiree benefits (within the meaning of section 1114 of the Bankruptcy Code), at the level established at any time prior to the Confirmation Date in accordance with subsection 27 (e)(1)(B) or (g) of section 1114 of the Bankruptcy Code, and for the duration of the period during which the Debtor has obligated itself to provide such benefits. 14.3 COMMITTEE. On the Effective Date, the Committee shall be released and discharged of and from all further authority, duties, responsibilities and obligations relating to and arising from and in connection with the Chapter 11 Case and the Committee shall be deemed dissolved and its appointment terminated. The professionals retained by the Committee and the members thereof shall not be entitled to compensation or reimbursement of expenses for any services rendered or expenses incurred after the Effective Date, except for services rendered and expenses incurred in connection with any applications by such professionals or committee members for allowance of Professional Claims timely filed after the Effective Date as provided in this Plan. 14.4 POST-EFFECTIVE DATE FEES AND EXPENSES. From and after the Effective Date, the Reorganized Debtor, in the ordinary course of business and without the necessity for any approval by the Bankruptcy Court, shall pay the reasonable professional fees and expenses incurred by the Reorganized Debtor and its professionals related to the implementation and consummation of this Plan. 14.5 SEVERABILITY. If, prior to the Confirmation Date, any term or provision of this Plan is held by the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court, with the consent of the Debtor, shall have the power to alter and interpret such term or provision to make it valid or enforceable to the maximum extent practicable, consistent with the original purpose of the term or provision held to be invalid, void or unenforceable, and such term or provision shall then be applicable as altered or interpreted. Notwithstanding any such holding, alteration or interpretation, the remainder of the terms and provisions of this Plan shall remain in full force and effect and shall in no way be affected, impaired or invalidated by such holding, alteration or interpretation. The Confirmation Order shall constitute a judicial determination and shall provide that each term and provision of the Plan, as it may have been altered or interpreted in accordance with the foregoing, is valid and enforceable pursuant to its terms. 14.6 GOVERNING LAW. Except to the extent that the Bankruptcy Code or other federal law is applicable, or to the extent that an Exhibit hereto or Plan Document provides otherwise, the rights, duties and obligations arising under this Plan shall be governed by, and construed and enforced in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. 14.7 CLOSING OF CASE. Promptly upon the full administration of the Chapter 11 Case, the Reorganized Debtor shall file with the Bankruptcy Court all documents required by Bankruptcy Rule 3022 and any applicable order of the Bankruptcy Court. 14.8 EXEMPTION FROM TRANSFER TAXES. Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange of notes or equity securities under this Plan, the creation of any mortgage, deed of trust, or other security interest, the making or assignment of any lease or sublease, or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with this Plan, shall not be subject to any stamp, real estate transfer, mortgage recording or other similar tax. 14.9 EFFECTUATING DOCUMENTS AND FURTHER TRANSACTIONS. Each of the officers of the Debtor and the Reorganized Debtor is authorized to execute, deliver, file, or record such contracts, instruments, releases, indentures, and other agreements or documents and take such actions as may be necessary or appropriate to effectuate and further evidence the terms and provisions of this Plan. 28 14.10 NOTICE OF EFFECTIVE DATE: On or before ten (10) Business Days after occurrence of the Effective Date, the Reorganized Debtor or its agent shall mail or cause to be mailed to all holders of Claims and Equity Interest a Notice that informs such holders of (a) entry of the Confirmation Order; (b) the occurrence of the Effective Date; (c) the assumption and rejection of the Debtor's executory contracts and unexpired leases pursuant to this Plan, as well as the deadline for the filing of Claims arising from such rejection; (d) the deadline established under this Plan for the filing of Administrative Claims; (e) the procedures for changing an address of record pursuant to Section 8.2; and (f) such other matters as the Reorganized Debtor deems to be appropriate. 14.11 POSTCONFIRMATION UNITED STATES TRUSTEE QUARTERLY FEES: To the extent required by 28 U.S.C. Section 1930(a)(6), a quarterly fee shall be paid by the Reorganized Debtor to the United States Trustee, for deposit into the Treasury, for each quarter (including any fraction thereof) until the Chapter 11 Case is converted, dismissed, or closed pursuant to a final decree. 14.12 CHAPTER 11 POSTCONFIRMATION REPORTS AND FINAL DECREE: (a) POSTCONFIRMATION REPORTS. Not later than ninety (90) days after entry of the Confirmation Order, the Reorganized Debtor shall file a postconfirmation status report, the purpose of which is to explain the progress made toward substantial consummation of the confirmed plan of reorganization. The report shall include a statement of receipts and disbursements, with the ending cash balance, for the entire ninety (90) day period. The report also shall include information sufficiently comprehensive to enable the court to determine: (i) whether the Confirmation Order has become final; (ii) whether deposits, if any, required by the Plan have been distributed; (iii) whether any property proposed by the Plan to be transferred has been transferred; (iv) whether the Reorganized Debtor has assumed the business or the management of the property dealt with by the Plan; (v) whether payments under the Plan have commenced; (vi) whether accrued fees due to the United States Trustee under 28 U.S.C. Section 1930(a)(6) have been paid; and (vii) whether all motions, contested matters and adversary proceedings have been finally resolved. Further reports must be filed every ninety (90) days thereafter until entry of a final decree, unless otherwise ordered by the court. (b) SERVICE OF REPORTS. A copy of each postconfirmation report shall be served, no later than the day upon which it is filed with the Bankruptcy Court, upon the United States Trustee and such other persons or entities as may request such reports in writing by special notice filed with the court. (c) FINAL DECREE. After the Estate is fully administered, the Reorganized Debtor shall file an application for a final decree, and shall serve the application on the United States Trustee, together with a proposed final decree. Dated: May ___, 2002 KOMAG, INCORPORATED By: ------------------------------------- Name: Edward H. Siegler Its: Chief Financial Officer 29 PRESENTED BY: - ---------------------------------------------- James O. Johnston Hennigan, Bennett & Dorman Reorganization Counsel to Komag, Incorporated 30 EX-99.T3G 8 f82285orexv99wt3g.txt EXHIBIT T3 G EXHIBIT T3-G SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ---------------------------- BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION (EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER) A NATIONAL BANKING ASSOCIATION 31-0838515 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 100 EAST BROAD STREET, COLUMBUS, OHIO 43271-0181 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) BANK ONE TRUST COMPANY, N.A. 1111 POLARIS PARKWAY, SUITE 1K MAIL CODE: OH1-0181 COLUMBUS, OHIO 43240 ATTN: EAMON FAHEY, VICE PRESIDENT, (614) 248-5579 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ----------------------------- KOMAG, INCORPORATED (EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2914864 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1710 AUTOMATION PARKWAY SAN JOSE, CALIFORNIA 95131 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) DEBT SECURITIES (TITLE OF INDENTURE SECURITIES) ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Comptroller of Currency, Washington, D.C.; Federal Deposit Insurance Corporation, Washington, D.C.; The Board of Governors of the Federal Reserve System, Washington D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. No such affiliation exists with the trustee. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY. 1. A copy of the articles of association of the trustee now in effect.* 2. A copy of the certificate of authority of the trustee to commence business.* 3. A copy of the authorization of the trustee to exercise corporate trust powers.* 4. A copy of the existing by-laws of the trustee.* 5. Not Applicable. 6. The consent of the trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. 8. Not Applicable. 9. Not Applicable. Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Bank One Trust Company, National Association, a national banking association organized and existing under the laws of the United States of America, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Columbus and State of Ohio, on the 7th day of June, 2002. BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION, TRUSTEE BY /S/EAMON FAHEY EAMON FAHEY VICE PRESIDENT * Exhibits 1, 2, 3, and 4 are herein incorporated by reference to Exhibits bearing identical numbers in Item 16 of the Form T-1 of Bank One Trust Company, National Association, filed as Exhibit 25 to the Registration Statement on Form S-3 of Burlington Northern Santa Fe Corporation, filed with the Securities and Exchange Commission on May 10, 2000 (Registration No. 333-36718). EXHIBIT 6 THE CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(b) OF THE ACT June 7, 2002 Securities and Exchange Commission Washington, D.C. 20549 Ladies and Gentlemen: In connection with the qualification of an indenture between Komag, Incorporated and Bank One Trust Company, National Association, as Trustee, the undersigned, in accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, hereby consents that the reports of examinations of the undersigned, made by Federal or State authorities authorized to make such examinations, may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Very truly yours, BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION BY: /S/EAMON FAHEY EAMON FAHEY VICE PRESIDENT BANK ONE TRUST COMPANY, N.A. FFIEC 041 - ---------------------------- RC-1 Legal Title of Bank COLUMBUS -------- - ---------------------------- 10 City -------- OH 43271 - ---------------------------- State Zip Code FDIC Certificate Number - 21377 CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR MARCH 31, 2002 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. SCHEDULE RC -- BALANCE SHEET
Dollar Amounts in Thousands RCON Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------------ ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A): a. Noninterest-bearing balances and currency and coin (1) ..................................... 0081 112,173 1.a b. Interest-bearing balances (2) .............................................................. 0071 0 1.b 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A) ................................. 1754 0 2.a b. Available-for-sale securities (from Schedule RC-B, column D) ............................... 1773 333 2.b 3. Federal funds sold and securities purchased under agreements to resell: A. FEDERAL FUNDS SOLD ......................................................................... B987 737,966 3.A B. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (3) ........................................ B989 1,325,933 3.B 4. Loans and lease financing receivables (from Schedule RC-C): a. Loans and leases held for sale ............................................................. 5369 0 4.a b. Loans and leases, net of unearned income .................................... B528 296,256 4.b c. LESS: Allowance for loan and lease losses ................................... 3123 298 4.c d. Loans and leases, net of unearned income and allowance (item 4.b minus 4.c) ................ B529 295,958 4.d 5. Trading assets (from Schedule RC-D) ........................................................... 3545 0 5 6. Premises and fixed assets (including capitalized leases) ...................................... 2145 11,689 6 7. Other real estate owned (from Schedule RC-M) .................................................. 2150 0 7 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) ...... 2130 0 8 9. Customers' liability to this bank on acceptances outstanding .................................. 2155 0 9 10. Intangible assets a. Goodwill ................................................................................... 3163 0 10.a b. Other intangible assets (from Schedule RC-M) ............................................... 0426 8,480 10.b 11. Other assets (from Schedule RC-F) ............................................................. 2160 175,020 11 12. Total assets (sum of items 1 through 11) ...................................................... 2170 2,667,552 12
- ------------- (1) Includes cash items in process of collection and unposted debts. (2) Includes time certificates of deposit not held for trading. (3) INCLUDES ALL SECURITIES RESALE AGREEMENTS, REGARDLESS OF MATURITY. BANK ONE TRUST COMPANY, N.A. FFIEC 041 Legal Title of Bank RC-2 FDIC Certificate Number - 21377 11 SCHEDULE RC - CONTINUED
Dollar in Amounts in Thousands RCON Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------------- Liabilities 13. Deposits: a. In domestic offices (sum of totals of columns A and C from Schedule RC-E)................. 2200 2,410,163 13.a (1) Noninterest-bearing (1) ............................................ 6631 1,664,385 13.a.1 (2) Interest-bearing ................................................... 6636 745,773 13.a.2 b. Not applicable 14. Federal funds purchased and securities sold under agreements to repurchase a. FEDERAL FUNDS PURCHASED (2) .............................................................. B993 0 14.a b. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (3) ....................................... B995 0 14.b 15. Trading liabilities (from Schedule RC-D) .................................................... 3548 0 15 16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases) (from Schedule RC-M): ................................................... 3190 0 16 17. Not applicable 18. Bank's liability on acceptances executed and outstanding .................................... 2920 0 18 19. Subordinated notes and debentures (4) ....................................................... 3200 0 19 20. Other liabilities (from Schedule RC-G) ...................................................... 2930 54,822 20 21. Total liabilities (sum of Items 13 through 20) .............................................. 2948 2,464,985 21 22. Minority interest in consolidated subsidiaries .............................................. 3000 0 22 EQUITY CAPITAL 23. Perpetual preferred stock and related surplus ............................................... 3838 0 23 24. Common stock ................................................................................ 3230 800 24 25. Surplus (exclude all surplus related to preferred stock) .................................... 3839 45,157 25 26. a. Retained earnings ........................................................................ 3632 156,608 26,a b. Accumulated other comprehensive income (5) ............................................... B530 2 26.b 27. Other equity capital components (6) ......................................................... A130 0 27 28. Total equity capital (sum of Items 23 through 27) ........................................... 3210 202,567 28 --------- 29. Total liabilities, minority interest, and equity capital (sum of Items 21, 22, and 28) ...... 3300 2,667,552 29 ========= Memorandum TO BE REPORTED WITH THE MARCH REPORT OF CONDITION. 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external RCON Number auditors as of any date during 2001 .......................................................... 6724 2 M.
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3 = Attestation on bank management's assertion on the effectiveness of the bank's internal control over financial reporting by a certified public accounting firm 4 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 5 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 6 = Review of the bank's financial statements by external auditors 7 = Compilation of the bank's financial statements by external auditors 8 = Other audit procedures (excluding tax preparation work) 9 = No external audit work - ---------- (1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) REPORT OVERNIGHT FEDERAL HOME LOAN BANK ADVANCES IN SCHEDULE RC, ITEM 16, "OTHER BORROWED MONEY." (3) INCLUDES ALL SECURITIES REPURCHASE AGREEMENTS, REGARDLESS OF MATURITY. (4) Includes limited-life preferred stock and related surplus. (5) Includes net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, and minimum pension liability adjustments. (6) Includes treasury stock and unearned Employee Stock Ownership Plan shares. -----END PRIVACY-ENHANCED MESSAGE-----