8-K

TABLE OF CONTENTS

	Item 3. Bankruptcy or Receivership
	Item 7. Financial Statements and Exhibits.
EXHIBIT INDEX
Exhibit 2.1
Exhibit 2.2
Exhibit 2.3
Exhibit 99.1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

June 30, 2002

Date of Report (date of earliest event reported)

KOMAG, INCORPORATED

(Exact name of Registrant as specified in its charter)

Delaware	0-16852	94-2914864
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

1710 Automation Parkway
San Jose, California 95131

(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 576-2000

N/A

(Former name or former address, if changed since last report)

Item 3. Bankruptcy or Receivership

     As previously reported, on August 24, 2001, Komag, Incorporated (the “Company”) voluntarily filed a petition for creditor protection under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”). The Further Modified First Amended and Restated Plan of Reorganization, dated May 7, 2002 (the “Plan”) was confirmed by the Bankruptcy Court on May 9, 2002 and became effective on June 30, 2002 (the “Effective Date”).

     The Plan is attached as Exhibit 2.1 hereto and is hereby incorporated by reference in its entirety. A copy of the order confirming the Plan is filed herewith as Exhibit 2.2 and is hereby incorporated by reference in its entirety. The press release issued by the Company on July 1, 2002 announcing that the Plan became effective and that the Company had emerged from bankruptcy is attached as Exhibit 99.1 hereto and is hereby incorporated by reference in its entirety.

     As of May 26, 2002, the assets and liabilities of the Company on a historical cost basis were $391.9 million and $555.1 million, respectively.

     Pursuant to the terms and conditions of the Plan, on the Effective Date, all of the Company’s old common stock, of which 111,924,983 shares were issued and outstanding as of June 29, 2002, as well as outstanding warrants and common stock options, were cancelled. All of the Company’s pre-bankruptcy debt and certain other liabilities totaling approximately $522 million were cancelled and satisfied pursuant to the terms and conditions of the Plan through several means, including cash distributions, issuance of shares of new common stock, issuance of warrants to purchase shares of new common stock, and issuance of new notes. In addition, the following actions, among others, have occurred in connection with the effectiveness of the Plan:

• The Company amended and restated its Bylaws and also filed an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware on July 1, 2002 authorizing an aggregate of 50,000,000 shares of its new common stock, par value $0.01 per share (CUSIP No. 500453 20 4). The company’s new common stock trades on the Nasdaq OTC Bulletin Board under the symbol “KOMGV.”

• The Company authorized the issuance of approximately 24.5 million shares of its new common stock in the amounts and to the persons set forth in the Plan, including approximately 1.6 million shares of restricted stock, subject to vesting restrictions, to certain employees as set forth below.

• The Company entered into a Warrant Agreement with Wells Fargo Bank Minnesota, N.A., as Warrant Agent, which provides for the issuance by the Company of warrants to purchase up to an aggregate of 1,000,000 shares of its common stock to former holders of certain subordinated notes of the Company as set forth in the Plan.

• The Company adopted an Employee Retention Bonus Plan to make certain cash payments and restricted stock grants to eligible employees. The Company also adopted a 20O2 Qualified Stock Plan, under which the shares of restricted stock will be issued and the Company may, in the future, grant options to purchase shares of its new common stock.

• The Company entered into a revolving credit facility (the “Exit Facility”) with a maximum availability of $15 million to be used for general corporate and working capital purposes should the Company require additional funds. Borrowings under the Exit Facility bear interest at rate of 12% per annum on outstanding borrowings and are secured by the capital stock of certain subsidiaries of the Company and the Company’s personal and real property.

• The Company issued Senior Secured Notes due 2007 that mature on June 30, 2007 in the aggregate principal amount of $128,832,000. The notes contain a cash pay portion and a pay in kind, or PIK, portion. The cash pay portion of the notes bears interest at the greater of 8% per annum and 3% over the prime rate as published in the Wall Street Journal, Western Edition, payable in arrears on the 15th day of each month beginning July 15, 2002 until maturity. The PIK portion of the notes bears interest at 12% per annum, also payable in arrears on the 15th day of each month beginning July 15, 2002 until maturity. The Senior Secured Notes are secured by the capital stock of certain subsidiaries of the Company and the Company’s personal and real property.

• The Company issued Junior Secured Notes due 2007 maturing on December 31, 2007 in the aggregate principal amount of $7,000,000. The notes bear interest at 12% per annum, payable in arrears on the 15th day of each month beginning July 15, 2002 until maturity. The Junior Secured Notes are secured by the capital stock of certain subsidiaries of the Company and the Company’s personal and real property.

• The Company entered into two Intercreditor Agreements that establish the relationships and priorities of the Company’s various secured creditors.

• The Company entered into a Registration Rights Agreement, whereby it agreed to register certain shares of its new common stock and certain Senior Notes Due 2007 held by persons who are not eligible to take advantage of the resale provisions set forth in Section 1145(b) of the Bankruptcy Code. If the Company does not meet its obligations under this agreement in a timely manner, it will be subject to certain financial penalties.

Item 7. Financial Statements and Exhibits.

     (a)  Not applicable.

     (b)  Not applicable.

     (c)  Exhibits.

2.1	Komag Incorporated’s Further Modified First Amended Plan of Reorganization, dated May 7, 2002.
2.2	Findings of Fact, Conclusions of Law and order Confirming Modified First Amended Plan of Reorganization of Komag, Incorporated, dated May 9, 2002.
2.3	Disclosure Statement approved by the United States Bankruptcy Court for the Northern District of California on November 16, 2001.
99.1	Text of press release dated July 1, 2002.

\

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Komag, Incorporated, a Delaware corporation
Dated: July 11, 2002	By:	/S/ Thian Hoo Tan
		Thian Hoo Tan Chief Executive Officer

EXHIBIT INDEX

Exhibit Number	Description
2.1	Komag Incorporated’s Further Modified First Amended Plan of Reorganization, dated May 7, 2002.
2.2	Findings of Fact, Conclusions of Law and order Confirming Modified First Amended Plan of Reorganization of Komag, Incorporated, dated May 9, 2002.
2.3	Disclosure Statement approved by the United States Bankruptcy Court for the Northern District of California on November 16, 2001.
99.1	Text of press release dated July 1, 2002.

EX-2.1 3 f82869exv2w1.txt EXHIBIT 2.1 HENNIGAN, BENNETT & DORMAN EXHIBIT 2.1 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, ) 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-2.2 4 f82869exv2w2.txt EXHIBIT 2.2 EXHIBIT 2.2 HENNIGAN, BENNETT & DORMAN 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 HMT ) Chapter 11 TECHNOLOGY CORPORATION, ) a Delaware corporation, ) FINDINGS OF FACT, CONCLUSIONS OF ) LAW, AND ORDER CONFIRMING THE Debtor. ) DEBTOR'S FURTHER MODIFIED FIRST ) AMENDED PLAN OF REORGANIZATION, ) DATED MAY 7, 2002 ) ) Continued Confirmation Hearing ) ------------------------------ ) ) Date: May 9, 2002 ) Time: 11:00 a.m. ) Place: Hon. James R. Grube ) 280 South First Street ) Courtroom 3020 ) San Jose, CA 95113-3099 ) ) - --------------------------------------- Komag, Incorporated, f/a/k/a HMT Technology Corporation, the debtor and debtor in possession herein (the "Debtor"), having filed and proposed the "Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" (the "Plan"); and This Court, after notice and a hearing, having approved a Disclosure Statement with respect to the Plan (the "Disclosure Statement") by an Order dated November 16, 2001 [docket # 246] (the "Disclosure Statement Order"), which Order also established and approved, among other things, procedures for the solicitation and tabulation of votes on the Plan, and deadlines for the casting of ballots and the filing of objections to confirmation of the Plan; and Objections, responses, and supporting pleadings regarding confirmation of the Plan having been filed by (a) the "Ad Hoc Committee of Bondholders" (the "Noteholders"); (b) State Street Bank and Trust Company of California, N.A., as indenture trustee (the "Indenture Trustee"); (c) the Office of the United States Trustee (the "UST"); (d) Magnetic Media Development, LLC ("MMD"); (e) the Official Committee of Unsecured Creditors (the "Committee"); (f) the Loan Restructure Agreement Lenders; and (g) Hoya Corporation; and cure payment claims having been filed by (g) Sobrato 1979 Revocable Trust and Sobrato Development Company #960 (together, "Sobrato"); (h) 2Wire, Inc. ("2Wire"); and (i) Lemelson Medical, Education & Research Foundation ("Lemelson"); and The Debtor having filed (a) the "Debtor's Brief In Support Of Confirmation Of Its First Amended Plan Of Reorganization, Dated November 7, 2001, And Reply To Objections To Confirmation" [docket # 403]; (b) the "Debtor's Reply To MMD's Objection To Confirmation Of Modified First Amended Plan Of Reorganization, Dated April 5, 2002; (c) the "Debtor's Reply Regarding Judicial Estoppel And The Reservation Of Rights Set Forth In Section 7.1(b) Of the Plan" [docket # 346]; (d) the "Declaration Of Edward H. Siegler In Support Of Confirmation Of Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 401] and the "Supplemental Declaration Of Edward H. Siegler In Support Of Confirmation Of Debtor's Modified First Amended Plan Of Reorganization, Dated April 5, 2002" (collectively, the "Siegler Declarations"); (e) the "Declaration of Gary L. Diamond In Support Of Confirmation Of Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 400] (the "Diamond Declaration"); (f) the "Declaration Of Ray J. Nicholson In Support Of Confirmation Of Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 399] (the Nicholson Declaration"); (g) the "Submission Of `Plan Documents' Pursuant To The Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 349]; and (h) the "Submission Of Modified And Additional `Plan Documents' Pursuant To The Debtor's Modified First Amended Plan Of Reorganization, Dated April 5, 2002"; and The Debtor having filed its "Motion For Order (A) Approving Non-Adverse Plan Modifications; (B) Determining That Resolicitation Of Votes On The Plan Is Not Necessary; And -2- (C) Authorizing The Change Of Votes By Certain Class 6 Creditors" [docket # 550] (the "Modification Motion"), which, inter alia, seeks approval of the modifications made to the Plan as reflected in the "Debtor's Modified First Amended Plan Of Reorganization, Dated April 5, 2002," which is attached as Exhibit A to the "Submission Of (A) Debtor's Modified First Amended Plan Of Reorganization, Dated April 5, 2002; And (B) Blacklined Version Reflecting Modifications To Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 549]; and MMD having filed an Objection to the Modification Motion and the Debtor, the Committee, and the Loan Restructure Agreement Lenders having filed responses to MMD's Objection; and In response to and in full resolution of MMD's Objections to the Modification Motion and confirmation, the Debtor having filed additional modifications to the Plan, as reflected in the "Debtor's Further Modified First Amended Plan Of Reorganization, Dated May 7, 2002" (the "Modified Plan"), which is attached as Exhibit A to the "Submission Of (A) Debtor's Further Modified First Amended Plan Of Reorganization, Dated May 7, 2002; (B) Blacklined Version Reflecting Modifications To Debtor's Modified First Amended Plan Of Reorganization, Dated April 5, 2002; (C) Settlement Agreement With MMD; And (D) Revised Proposed Confirmation Order" (the "Submission"), and the compromise agreement among the Debtor and MMD which is attached as Exhibit C to the Submission (the "MMD Agreement"); and MMD having withdrawn its Objections to confirmation and to the Modification Motion and having requested that the Court authorize MMD to change its ballot to an acceptance of the Modified Plan; and This Court having entered the "Order (A) Scheduling Date For Hearing On Confirmation Of Debtor's Plan Of Reorganization, As Modified; (B) Re-Establishing Objection And Related Deadlines; And (C) Approving Notice Of Modified Plan" (the "Modified Plan Order") [docket # 556], by which the Court approved the form and scope of notice of the Modified Plan and scheduled a hearing regarding confirmation of the Modified Plan; and The cure payment claim filed by Sobrato having been withdrawn pursuant to the terms of the "Stipulation Regarding Settlement And Agreed Resolution Of (I) Objection To Confirmation Of Plan By The Sobrato Entities; (II) First Amended Objection To Claim Number 362 (Filed By -3- Cupertino Electric, Inc.) And Complaint For Declaration That Attempted Perfection Of Mechanics' Lien Is Null, Void And Ineffective; (III) Claim Numbers 348 and 349 (Filed By The Sobrato Entities); And (IV) Claim Number 362 (Filed By Cupertino Electric, Inc.)" [docket # 581] (the "Sobrato Stipulation"); and The cure payment claim filed by Lemelson having been withdrawn pursuant to the terms of the "Stipulation Regarding Agreed Resolution Of Claim Number 354 (Filed By Lemelson Medical Education And Research Foundation LLP)" (the "Lemelson Stipulation"); and Status conferences regarding confirmation having been held on January 7 and January 10, 2002; and A hearing regarding confirmation of the Modified Plan and the Modification Motion having been held on May 9, 2002 (the "Confirmation Hearing"); and This Court having considered the evidence adduced and proffered and the arguments made at the Confirmation Hearing, along with the declarations, notices, briefs and other documents filed in connection with confirmation of the Modified Plan and the record in the above-captioned case; and After due deliberation and consideration of all of the foregoing, this Court hereby makes the following findings of fact and conclusions of law pursuant to Rule 7052 and 9014 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). All of the following findings of fact shall constitute findings of fact even if stated as conclusions of law, and all of the following conclusions of law shall constitute conclusions of law even if stated as a finding of fact. FINDINGS OF FACT AND CONCLUSIONS OF LAW A. Jurisdiction: This Court has jurisdiction pursuant 28 U.S.C. Sections 157(b) and 1334(a) over the Chapter 11 Case(1) and over entry of this Order. Matters regarding confirmation of the Modified Plan are core proceedings within the meaning of 28 U.S.C.Section 157(b). Venue of these - -------- (1) Capitalized terms not otherwise defined in this Order have the meanings ascribed to them in the Modified Plan. -4- proceedings and the Chapter 11 Case in this District is appropriate pursuant to 28 U.S.C. Section Section 1408 and 1409. B. Notice: As established by the declarations of service and publication filed with respect to confirmation of the Plan [docket ## 256-263 and 404], due, timely, sufficient and adequate notice of the Plan, together with the deadlines for voting on and filing objections to the Plan, has been given to all known holders of Claims and/or Equity Interests and other parties in interest in accordance with the rules and procedures established by the Disclosure Statement Order, title 11 of the United States Code (the "Bankruptcy Code"), the Bankruptcy Rules, the Bankruptcy Local Rules of the United States District Court for the Northern District of California (the "Local Rules"), and all other applicable laws, rules and regulations. By filing and serving the "Notice Of Modifications Of Debtor's First Amended Plan Of Reorganization; Of Hearing On Confirmation Of the Debtor's Modified [Plan]; And Of Deadlines For Objections" on April 8, 2002 [docket # 555], due, timely, sufficient and adequate notice of the Modified Plan and the continued Confirmation Hearing, together with the deadlines for filing objections to the Modified Plan, also has been given in accordance with the rules and procedures established by the Modified Plan Order, the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, and all other applicable laws, rules and regulations. C. Solicitation: The solicitation by the Debtor and its professionals of votes accepting or rejecting the Plan was conducted in good faith and in compliance with the Disclosure Statement Order, sections 1125 and 1126 of the Bankruptcy Code, Bankruptcy Rules 3017 and 3018, and all other applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, and other applicable laws, rules and regulations. D. Modifications: The modifications to the Plan proposed by the Debtor as set forth in the Modified Plan do not adversely change the treatment of the Claims of any creditor, the Equity Interests of any holder of Equity Interests, or any Class of creditors or Equity Interests that has not accepted the Modified Plan in writing. In accordance with section 1127 of the Bankruptcy Code and Bankruptcy Rule 3019, the Modified Plan is deemed accepted by all holders of Claims and Equity -5- Interests who previously have accepted the Plan, and resolicitation of votes on the Modified Plan is not necessary or appropriate under the circumstances. E. Ballot Tabulation: As evidenced by the "Declaration Of Lawrence Merrifield Certifying The Acceptances And Rejections Of The Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 402] (the "Ballot Tabulation Declaration"), the procedures by which Ballots on the Plan were distributed to holders of Claims and Equity Interests and were tabulated were fair and properly conducted in accordance with the Disclosure Statement Order, the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, and all other applicable laws, rules and regulations. F. Class 6 Acceptance of Modified Plan: Pursuant to Bankruptcy Rule 3018(a) and by the Modification Motion and the certifications attached thereto, the following holders of Class 6 Claims, which previously voted to reject the Plan, have changed their votes to accept the Modified Plan: Camden Asset Management LP (on behalf of several claimants), Creedon Capital LLP, WM High Yield Fund, SunAmerica High Yield Fund, SC Fundamental Value Fund LP, SC Fundamental Value BVI, Ltd., JMG Capital Partners, L.P., JMG Triton Offshore Fund, Ltd. and Staro Asset Management LLC (collectively, the "Accepting Noteholders"). Cause exists for the Accepting Noteholders to change their votes because such change is not improperly motivated and is the result of arms' length compromise negotiations among the Debtor, the Accepting Noteholders, and other parties in interest. With the acceptances of the Accepting Noteholders, Class 6 has accepted the Modified Plan within the meaning of section 1126 of the Bankruptcy Code. G. Class 10 Acceptance of Modified Plan: As reflected in its withdrawal of its Objections to confirmation and on the record at the Confirmation Hearing, MMD has changed its prior rejection of the Plan to an acceptance of the Modified Plan. Pursuant to Bankruptcy Rule 3018(a), cause exists for MMD to change its vote because such change is not improperly motivated and is the result of arms' length compromise negotiations among the Debtor, MMD, and other parties in interest. With the acceptance of MMD, Class 10 has accepted the Modified Plan within the meaning of section 1126 of the Bankruptcy Code. -6- H. Objections: The objections to the Plan filed by the Noteholders, the Indenture Trustee, and MMD have been withdrawn. The cure payment claims filed by Sobrato, 2Wire, and Lemelson have been resolved as set forth in the Sobrato Stipulation and the Lemelson Stipulation and on the record at the Confirmation Hearing. Any and all other Objections are overruled for the reasons set forth in this Order and on the record at the Confirmation Hearing. I. Section 1129(a)(1): As required by section 1129(a)(1) of the Bankruptcy Code, the Modified Plan complies with all applicable provisions of the Bankruptcy Code. Among other things: 1. The classification of Claims and Equity Interests under the Modified Plan is reasonable, not discriminatory, and consistent with section 1122(a) of the Bankruptcy Code. Among other things, classification of the MMD Claim into Class 10 is appropriate, is not the product of an attempt by the Debtor to "gerrymander" an affirmative vote on the Modified Plan, and is supported by legitimate business and economic justifications, including the need to distribute different types of property to different classes of claims under the Plan in furtherance of a consensual reorganization and the fact that the MMD Claim is asserted in an amount that is more than double the estimated total amount of all claims classified into Class 7. 2. The inclusion of a convenience class (Class 8) encompassing holders of Allowed Unsecured Claims in an amount of $10,000 or less (along with Allowed Unsecured Claims for which claimants have elected on their Ballots to reduce the Allowed amount of such Claims to $10,000) is reasonable and necessary for administrative convenience. 3. As required by and in compliance with sections 1123(a)(1), (a)(2) and (a)(3) of the Bankruptcy Code, the Modified Plan (a) identifies the Classes of Claims and Equity Interests; (b) specifies the Classes of Claims and Equity Interests that are not impaired under the Modified Plan as well as those that are impaired under the Modified Plan; and (c) specifies the treatment of each Class of Claims and Equity Interests under the Modified Plan. -7- 4. As required by and in compliance with section 1123(a)(4) of the Bankruptcy Code, the Modified Plan provides the same treatment for each Claim or Equity Interest in a particular Class. 5. As required by and in compliance with section 1123(a)(5) of the Bankruptcy Code, the Modified Plan provides adequate means for its execution and implementation including, but not limited to (a) the revesting of all assets and property of the Estate in the Reorganized Debtor, which will be operated and managed by the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers in accordance with applicable non-bankruptcy law; (b) the amendment of the Debtor's certificate of incorporation and bylaws; (c) the issuance of the New Common Stock, the New Notes, the New Subordinated PIK Notes, and the New Warrants for distribution in accordance with the Modified Plan; (d) the cancellation of existing liens, securities and instruments as set forth in the Modified Plan; and (e) the availability of the Exit Financing Facility to provide liquidity for future operations. 6. As required by and in compliance with section 1123(a)(6) of the Bankruptcy Code, the Amended and Restated Articles of Incorporation of the Reorganized Debtor prohibit the issuance of nonvoting equity securities and otherwise comply with section 1123(a)(6). 7. As required by and in compliance with section 1123(a)(7) of the Bankruptcy Code, the manner of selection of the Reorganized Debtor Board of Directors and the Reorganized Debtor Officers and any successors thereto, as set forth in the Amended and Restated Articles of Incorporation of the Reorganized Debtor, is consistent with the interests of holders of Claims and Equity Interests and public policy. J. Section 1129(a)(2): As required by section 1129(a)(2) of the Bankruptcy Code, the Debtor, as the proponent of the Modified Plan, has complied with all of the applicable provisions of the Bankruptcy Code, including all applicable provisions regarding disclosure and solicitation with respect to the Plan. -8- K. Section 1129(a)(3): As required by section 1129(a)(3) of the Bankruptcy Code, the Debtor has proposed the Modified Plan in good faith and not by any means forbidden by law. The Debtor has proposed the Modified Plan with the legitimate and honest purpose of adjusting the Debtor's debts, reorganizing the Debtor's business, and maximizing the returns to parties in interest in the Chapter 11 Case, while preserving jobs and a valuable international economic enterprise. The good faith of the Debtor was established through the evidence adduced and proffered, including the Siegler Declarations, the Diamond Declaration, and the Nicholson Declaration. Among other things: 1. The Modified Plan is the product of good-faith, arms'-length negotiations among the Debtor, the Committee, the Noteholders, the Loan Restructure Agreement Lenders, the Indenture Trustee, ICX Corporation, MMD, and other parties in interest. 2. The Modified Plan is proposed by the Debtor and supported by the Committee and other parties in interest, including holders of over $400 million in Claims against the Debtor. 3. The fact that the Debtor has modified the Plan is not evidence of bad faith. To the contrary, the modifications to the Plan set forth in the Modified Plan are evidence of the Debtor's good faith and desire to address the concerns of parties in interest in the Chapter 11 Case. 4. The Committee's support of the Modified Plan, as well as the acceptance of the Modified Plan by creditors with Claims classified into all Classes of Unsecured Claims evidences the informed decision of creditors that the Modified Plan is in their best interest and maximizes the distributions available to them. L. Section 1129(a)(4): As required by section 1129(a)(4) of the Bankruptcy Code, all payments made or to be made by the Debtor for services or for costs and expenses in connection with the Chapter 11 Case, or in connection with the Modified Plan and incident to the Chapter 11 Case, have been approved by this Court or are subject under the Modified Plan to the approval by this Court as reasonable. In connection therewith, the payments to be made to professionals employed by the Loan Restructure Agreement Lenders, the Indenture Trustee, and the Noteholders -9- pursuant to Sections 4.3 and 4.6 of the Modified Plan are reasonable and appropriate under the circumstances and shall be paid by the Reorganized Debtor in the amounts provided for in the Modified Plan. M. Section 1129(a)(5): As required by section 1129(a)(5)(A) of the Bankruptcy Code, the Debtor has disclosed the identity, affiliation and proposed compensation of the persons proposed to continue in service as directors and officers of the Reorganized Debtor. The appointment to, or continuance in, office of such individuals is consistent with the interests of creditors and equity security holders and with public policy. Pursuant to the Statement of Reorganized Debtor Directors/Officers, the Debtor has also disclosed the identity of all insiders that will be employed or retained by the Reorganized Debtor under the Modified Plan and the nature of any compensation of such insiders. N. Section 1129(a)(6): The requirements of section 1129(a)(6) are not applicable because the Debtor is not subject to any governmental regulatory commission regarding rates. O. Section 1129(a)(7): As required by section 1129(a)(7) of the Bankruptcy Code, and as established by the Diamond Declaration, with respect to each impaired Class of Claims under the Modified Plan, each holder of a Claim of each such Class has accepted the Modified Plan, or will receive or retain under the Modified Plan on account of such Claim property of a value, as of the Effective Date, that is not less than the amount that such holder would so receive or retain if the Debtor was liquidated under Chapter 7 of the Bankruptcy Code on such date. P. Section 1129(a)(8) and Section 1129(b): As indicated by the Ballot Tabulation Declaration and the Modification Motion and certifications attached thereto, and as established on the record at the Confirmation Hearing, impaired Classes 1, 2, 3, 4-A, 4-B, 5, 6, 7, 8, and 10 have voted to accept the Modified Plan and accordingly, the requirements of section 1129(a)(8) of the Bankruptcy Code have been met with respect to each such Class. Although impaired Class 9 has voted to reject the Plan, the Debtor has requested that the Court confirm the Modified Plan under section 1129(b) of the Bankruptcy Code as to such Class. As set forth in Paragraph U, below, the requirements of section 1129(b) are satisfied with respect to Class 9. -10- Q. Section 1129(a)(9): In satisfaction of section 1129(a)(9)(A) of the Bankruptcy Code, the Modified Plan provides for the payment in full of Allowed Administrative Expense Claims and Allowed Priority Claims on or as soon as practicable after the later of the Effective Date of the Plan and the date on which any such Administrative Expense Claim and Allowed Priority Claim becomes an Allowed Claim. In satisfaction of section 1129(a)(9)(C) of the Bankruptcy Code, the Modified Plan specifies that the Reorganized Debtor shall provide to each holder of an Allowed Priority Tax Claim, in full satisfaction, release and discharge of such Claim, Cash payments 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. R. Section 1129(a)(10): As required by Section 1129(a)(10) of the Bankruptcy Code, at least one impaired Class of Claims has accepted the Plan, determined without including any acceptance of the Modified Plan by any insider. S. Section 1129(a)(11): As required by section 1129(a)(11) of the Bankruptcy Code, and as established by the Siegler Declarations, confirmation of the Modified Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the Reorganized Debtor or any successor to the Debtor under the Modified Plan. T. Section 1129(a)(12): The requirements of section 1129(a)(12) of the Bankruptcy Code are satisfied because the Debtor is current with respect to its payments of the fees imposed by 28 U.S.C. Section 1930, and because the Modified Plan expressly provides for the payment of all such fees. U. Section 1129(a)(13): The requirements of section 1129(a)(13) of the Bankruptcy Code are inapplicable because the Debtor provides no benefits of the type that are subject to that section. V. Section 1129(b): The requirements of section 1129(b) of the Bankruptcy Code are satisfied with respect to Class 9 because, among other things, the Modified Plan does not -11- discriminate unfairly and is fair and equitable with respect to Class 9. The Modified Plan is fair and equitable with respect to Class 9 because the Modified Plan strictly adheres to the absolute priority rule and no class junior to Class 9 is to receive or retain any property or distributions under the Modified Plan. W. Section 1125(e). The Debtor and its employees and professionals solicited acceptances and rejections of the Plan and the Modified Plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code, and such persons therefore are entitled to the protections of section 1125(e) of the Bankruptcy Code and are not liable on account of such solicitation for violation of any applicable law, rule, or regulation governing solicitation of acceptance or rejection of a plan or the offer, issuance, sale or purchase of securities. X. Section 1145: The offer, sale, and issuance of the New Securities (except with respect to New Common Stock to be issued to employees pursuant to the Employee Retention Plan) under the Modified Plan, as well as the offer, sale, and issuance of the New Common Stock upon exercise of the New Warrants, are exempt from section 5 of the Securities Act of 1933, as amended, and from any other registration requirements under federal or state securities laws pursuant to section 1145 of the Bankruptcy Code, because (1) the New Securities will be offered, sold, and issued by the Reorganized Debtor in exchange for Claims against the Debtor; and (2) the New Common Stock offered, sold, and issued upon exercise of the New Warrants will be offered, sold, and issued only pursuant to the New Warrants, which were offered, sold, and issued in exchange for Claims against the Debtor. Y. Section 365: By the Siegler Declarations, the Debtor and the Reorganized Debtor have provided "adequate assurance of future performance" within the meaning of section 365(b)(1)(C) of the Bankruptcy Code under each of the executory contracts or unexpired leases to be assumed pursuant to section 6.1 of the Modified Plan. Z. Settlements: All settlements and compromises provided for in or in connection with the Modified Plan, including the MMD Agreement and the treatment of the MMD Claim under the Modified Plan and the compromises with the Noteholders and the Indenture Trustee and the treatment of the Subordinated Notes Claims under the Modified Plan, were negotiated at arms' -12- length and in good faith, represent an exchange of fair value among the respective parties thereto, and are fair, equitable, reasonable, and in the best interests of the Debtor, the Estate, and all creditors in satisfaction of the standards of Bankruptcy Rule 9019 and applicable law, including In re A & C Properties, 784 F.2d 1377 (9th Cir. 1986). AA. Other Requirements: The Modified Plan satisfies the requirements of section 1129(c) of the Bankruptcy Code because no other plan has been confirmed in the Chapter 11 Case. The Modified Plan satisfies the requirements of section 1129(d) of the Bankruptcy Code because the principal purpose of the Modified Plan is not the avoidance of taxes or the avoidance of the application of section 5 of the Securities Act of 1933. NOW, THEREFORE, IT HEREBY IS ORDERED, ADJUDGED, AND DECREED THAT: APPROVAL OF MODIFICATION MOTION 1. The Modification Motion is hereby granted in its entirety. The modifications to the Plan as set forth in the Modified Plan and explained in the Modification Motion do not adversely change the treatment of the Claims of any creditor, the Equity Interests of any holder of Equity Interests, or any Class of creditors or Equity Interests who has not accepted the Modified Plan in writing and are therefore deemed accepted by all interested parties who have timely voted to accept the Plan. Under Bankruptcy Rule 3019, these modifications do not require additional disclosure under section 1125 of the Bankruptcy Code or resolicitation of acceptances or rejections of the Modified Plan under section 1126 of the Bankruptcy Code. CONFIRMATION OF THE MODIFIED PLAN 2. The Modified Plan, in the form attached to this Order as Exhibit A, hereby is confirmed pursuant to section 1129 of the Bankruptcy Code (except that, as set forth on the record at the Confirmation Hearing, Section 7.1(b) of the Modified Plan is altered as set forth in this Order, and Section 10.5 of the Modified Plan is not deleted from the Modified Plan). To the extent possible, the Modified Plan and this Order shall be interpreted to be consistent; to the extent that -13- there is any inconsistency between the Modified Plan and this Order, the terms of this Order shall control. 3. For the reasons set forth on the record at the Confirmation Hearing and in this Order, each and every objection to confirmation of the Modified Plan, to the extent not withdrawn or resolved pursuant to the terms of this Confirmation Order and/or to the Modified Plan, hereby is overruled. 4. Except as expressly otherwise provided in the Modified Plan or this Order, pursuant to section 1141(d) of the Bankruptcy Code, on the Effective Date, the Debtor hereby is discharged from any debt that arose prior to the Effective Date, and from any debt of a kind specified in sections 502(g), 502(h) and 502(i) of the Bankruptcy Code, whether or not (a) a proof of claim based on such debt is filed or deemed filed; (b) such claim or debt is allowed under section 502 of the Bankruptcy Code; (c) the holder of such claim or debt has accepted the Modified Plan; or (d) such claim or debt is listed in the Debtor's Schedules. 5. Except as expressly provided otherwise in the Modified Plan or this Order, 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. 6. Except as expressly provided otherwise in the Modified Plan or this Order, the Debtor on behalf of itself and the Reorganized Debtor has retained and reserved all rights to commence or pursue, as appropriate, any and all Rights of Action, whether arising prior to or after the Petition Date, in any court or other tribunal, including, without limitation, in an adversary proceeding filed in the Chapter 11 Case. The failure to identify in the Disclosure Statement any potential or existing Right of Action generally or specifically does not limit the rights of the Debtor or the Reorganization Debtor to pursue any such action. Unless a Right of Action is expressly waived, relinquished, released, compromised or settled in the Modified 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 -14- laches, shall apply to such Rights of Action as a result of confirmation of the Modified Plan. 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. The provisions in Articles VIII and IX of the Modified Plan governing distributions, reserves and the procedures for resolving and treating Disputed Claims under the Modified Plan are hereby approved and found to be fair and reasonable. 8. On the Effective Date, the transfers of assets by the Debtor contemplated by the Modified Plan shall (a) be legal, valid and effective transfers of property; (b) vest or will vest in the transferee good title to such property free and clear of all Claims, Liens and Equity Interests, except those provided for in the Modified Plan or this Order; (c) do not or will not constitute fraudulent transfers or fraudulent conveyances under any applicable law; and (d) do not and will not subject the Debtor, Reorganized Debtor or property so transferred to any liability by reason of such transfer under applicable law or any theory of law including, without limitation, any theory of successor or transferee liability. Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange of the New Securities under the Modified Plan, the creation of any mortgage, deed of trust, or other security interest (in respect of the Exit Financing Facility, the New Notes, the New Subordinated PIK Notes or otherwise), 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 the Modified Plan, shall not be subject to any stamp, real estate transfer, mortgage recording or other similar tax. 9. Each holder of an Unsecured Claim classified into Class 7 under the Modified Plan who elected on a Ballot to opt into Class 8 under the Modified Plan shall be deemed irrevocably to have reduced to $10,000 the aggregate amount of the Unsecured Claim with respect to which the Ballot was cast, to have waived any and all rights to treatment of such Claim under Class 7 of the Modified Plan, and to have elected treatment of such Claim under Class 8 of the Modified Plan. Each holder of an Unsecured Claim classified into Class 8 under the Modified Plan who elected on a Ballot to opt out of Class 8 under the Modified Plan shall be deemed irrevocably to have waived any -15- and all rights to treatment of the Unsecured Claim with respect to which the Ballot was cast under Class 8 of the Modified Plan, and to have elected treatment of such Claim under Class 7 of the Modified Plan. RELEASES, EXCULPATIONS, AND INDEMNIFICATION 10. The rights afforded in the Modified Plan and the treatment of all holders of Claims or Equity Interests as provided therein 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 therein, 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 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. 11. Except as otherwise expressly provided in the Modified 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 -16- 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. 12. 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. 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 Modified Plan and satisfied in full by the treatment of Claims under the Modified Plan and the rights and distributions provided in the Modified Plan. 13. [intentionally deleted] 14. 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 of the Modified Plan. -17- 15. Unless otherwise provided in the Modified Plan or this Order, 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. EXECUTORY CONTRACTS AND UNEXPIRED LEASES 16. Pursuant to section 1123(b)(2) of the Bankruptcy Code and Section 6.1 of the Modified Plan, 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 this 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 and are hereby 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 this Order hereby approves and authorizes the assumption of such executory contracts and unexpired leases pursuant to section 365(a) of the Bankruptcy Code and constitutes a finding by this 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. 17. 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. The Modified Plan is hereby deemed to 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 the Modified Plan. Subject to the occurrence of the Effective Date, entry of this Order hereby approves and authorizes the rejection of such executory contracts and unexpired leases pursuant to section 365(a) of the Bankruptcy Code and constitutes a finding by the this Court that each such rejection is in the best interest of the Debtor and the Estate. 18. On the Effective Date, the Reorganized Debtor shall pay the following amounts as cure payment claims pursuant to section 365 of the Bankruptcy Code: (a) $82,498.41 to Sobrato pursuant to the terms of the Sobrato Stipulation; (b) $85,050 to Lemelson pursuant to the terms of -18- the Lemelson Stipulation; and (c) $28,870.96 to 2Wire pursuant to its cure payment claim filed in this Chapter 11 Case. As no other cure payment claims having been filed at or prior to the Confirmation Hearing, no other amounts exist that need to be paid under Section 365(b) of the Bankruptcy Code in order to assume the executory contracts and unexpired leases pursuant to Section 6.1 of the Modified Plan. 19. All of the Debtor's right, title and interest in any contracts, leases or agreements entered into by the Debtor after the Petition Date, and/or not subject to assumption or rejection under Bankruptcy Code section 365, shall revest in the Reorganized Debtor, without further action. AUTHORITY TO IMPLEMENT PLAN 20. On the Effective Date, all actions contemplated by the Modified Plan and the Plan Documents are hereby 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; (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, including the Exit Financing Facility; and (g) the execution and delivery of the MMD Agreement. 21. On the Effective Date, the Reorganized Debtor shall issue, without need for registration pursuant to section 1145 of the Bankruptcy Code, the New Common Stock, the New Notes, the New Subordinated PIK Notes, and the New Warrants for distribution in accordance with the Modified Plan. When so issued, all shares of New Common Stock shall be deemed validly issued, fully paid, and non assessable. 22. The offering, issuance, sale, and distribution by the Reorganized Debtor of the New Securities (except with respect to new Common Stock to be issued to employees pursuant to the Employee Retention Plan) in accordance with the Modified Plan, as well as the offering, issuance, -19- sale, and distribution of the New Common Stock upon exercise of the New Warrants, hereby is found to be exempt from the provisions of section 5 of the Securities act of 1933, as amended, and any state or local law requiring registration for the offer, issuance, distribution or sale of a security by reason of section 1145(a) of the Bankruptcy Code. The New Securities (except with respect to New Common Stock to be issued to employees pursuant to the Employee Retention Plan) will be freely tradable by the recipients thereof subject only to the provisions of Section 1145(b)(1) of the Bankruptcy Code relating to the definition of an underwriter in Section 2(11) of the Securities Act of 1933, as amended, and in compliance with any applicable rules and regulations of the Securities Exchange Commission. 23. In accordance with section 1142 of the Bankruptcy Code, the Debtor, the Reorganized Debtor and any other person designated pursuant to the Modified Plan (including without limitation the New Notes Trustee, the New Subordinated PIK Notes Trustee, and the Subordinated Notes Trustee) is authorized, empowered and directed to execute, deliver, acknowledge, adopt, ratify, certify, file and record any document (including, without limitation, all documents, agreements and instruments described in Paragraph 20 above), and to take any other action necessary or appropriate to implement, consummate and otherwise effect the Modified Plan in accordance with its terms in all material respects, whereupon such documents, agreements, and instruments (including without limitation all terms and provisions of the Modified Plan, the New Notes, the New Notes Indenture, the New Subordinated PIK Notes, and the New Subordinated PIK Notes Indenture pertaining to the payment of the principal and interest on the New Notes and the New Subordinated PIK Notes) shall be legal, valid, and binding obligations of the Reorganized Debtor and the other parties thereto and enforceable in accordance with their terms notwithstanding any applicable law to the contrary. 24. No party in interest shall be required to file or record financing statements, mortgages, notices of lien or similar instruments in any jurisdiction or take any other action in order to validate and perfect the security interests and liens granted to it pursuant to the Modified Plan or the Plan Documents. If a party in interest shall, in its sole discretion, choose to file such financing statements, mortgages, notices of lien or similar instruments or otherwise confirm perfection of such -20- security interests and liens, all such documents shall be deemed to have been filed or recorded at the time and on the date of entry of this Order. 25. All persons holding Claims against and Equity Interests in the Debtor that are dealt with under the Modified Plan are hereby directed to execute, deliver, file and record any document, and to take any action necessary or appropriate to implement, consummate and otherwise effect the Modified Plan in accordance with its terms in all material respects, and all such persons shall be bound by the terms and provisions of all documents executed and delivered by them in connection with the Modified Plan. DEADLINES AND CLAIMS 26. Deadlines For Administrative Expense Claims: a. Administrative Expense 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 requests for payment of Professional Claims but excluding requests for Administrative Tax Claims and Ordinary Course Administrative Claims, must be filed with this Court and served upon the Reorganized Debtor and the UST no later than thirty (30) days after the date on which the Notice of Effective Date is mailed. Requests 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. b. 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 this Court and served upon the Reorganized Debtor and the UST 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 -21- 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. 27. Deadline For Rejection Damage Claims: Proofs of Claims arising from the rejection of executory contracts or unexpired leases pursuant to Section 6.3 of the Modified Plan must be filed with this 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 this Court, all such Claims that are timely filed as provided herein shall be treated as General Unsecured Claims and be classified into Class 7 or Class 8, as appropriate. 28. Deadlines For Objection To Claims: The Reorganized Debtor shall have the right to object to the allowance of Claims or Equity Interests filed with this Court with respect to which liability or allowance is disputed in whole or in part. Unless otherwise ordered by this 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). EXIT FINANCING FACILITY AND NEW NOTES 29. Notwithstanding any term or condition of the Modified Plan or this Order to the contrary, the obligations and duties of the Reorganized Debtor, and the rights, liens, security interest, claims and remedies of the lenders party to any of the Exit Financing Facility Documents against the Reorganized Debtor and the property of either, arising under, in connection with, or with respect to the Exit Financing Facility Documents, the New Notes and the New Notes Indenture, and the New Subordinated PIK Notes and the New Subordinated PIK Notes Indenture, shall be unaffected, unaltered and unimpaired by the Modified Plan and this Order and shall instead be determined exclusively by the terms of such documents and by applicable non-bankruptcy law. -22- MISCELLANEOUS 30. On or before ten (10) Business Days after the Effective Date, the Reorganized Debtor or its agent shall mail or cause to be mailed to all holders of record of Claims and Equity Interests a Notice that informs such holders of (a) entry of this 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 the Modified Plan, as well as the deadline for the filing of Claims arising from such rejection; (d) the deadline established under the Modified Plan for the filing of Administrative Claims; (e) the procedures for changing an address of record pursuant to Section 8.2 of the Modified Plan; and (f) such other matters as the Reorganized Debtor deems to be appropriate. Such Notice shall constitute due and sufficient notice of all of such matters in compliance with Bankruptcy Rule 2002(f). 31. Notwithstanding the entry of this Order or the occurrence of the Effective Date, this Court will retain jurisdiction of the Chapter 11 Case and all matters arising in, or related to, the Chapter 11 Case (but not matters related to the Exit Financing Facility) as provided for in the Modified Plan and in this Order, and to the fullest extent permitted by law, including sections 1127 and 1142 of the Bankruptcy Code, including without limitation jurisdiction over all of the matters set forth in Section XI of the Modified Plan. 32. The failure to reference or discuss any particular provision of the Modified Plan in this Order shall not have any effect on the validity, binding effect and enforceability of such provision, and such provision shall have the same validity, binding effect and enforceability as every other provision of the Modified Plan. 33. 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 -23- connection with any applications by such professionals or committee members for allowance of Professional Claims timely filed after the Effective Date as provided in the Modified Plan. 34. The provisions of the Modified Plan and this Order shall be, and hereby now are and forever afterwards will be, binding on the Debtor, the Committee, all holders of Claims and Equity Interests (whether or not impaired under the Modified Plan and whether or not, if impaired, such entities accepted the Modified Plan), any other party in interest, any other party making an appearance in the Chapter 11 Case, and any other person or entity affected thereby, as well as their respective heirs, predecessors, successors, assigns, trustees, subsidiaries, affiliates, officers, directors, agents, employees, representatives, attorneys, beneficiaries, guardians, and similar officers, or any Person claiming through or in the right of any such persons or entities. DATED: _______________________ ________________________________________ HONORABLE JAMES R. GRUBE UNITED STATES BANKRUPTCY JUDGE -24- EX-2.3 5 f82869exv2w3.txt EXHIBIT 2.3 HENNIGAN, BENNETT & DORMAN EXHIBIT 2.3 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-99.1 6 f82869exv99w1.txt EXHIBIT 99.1 EX-99.1 PRESS RELEASE KOMAG EMERGES FROM CHAPTER 11 FOR IMMEDIATE RELEASE SAN JOSE, Calif., July 1, 2002 -- Komag, Incorporated (OTC Bulletin Board: KOMG), the largest independent producer of media for disk drives, today announced that the company's Plan of Reorganization, as confirmed by the bankruptcy court on May 9, 2002, became effective on June 30, 2002 and the company has emerged from chapter 11. Through its reorganization the company has discharged over $520 million of unsecured obligations and cancelled its existing common stock and warrants. In the near future the company will make distributions of approximately $3.8 million in cash, $135.8 million of new debt, 22.8 million shares of new common stock and 1.0 million warrants to holders of unsecured claims in accordance with the plan. Currently the company expects that its new stock will be traded on the OTC Bulletin Board beginning on or around July 8, 2002. Komag's emergence from chapter 11 occurred approximately 10 months after its filing date and its Plan of Reorganization enjoys the support of all classes of creditors. At $135.8 million, the company's new long-term debt is less than 30% of its long-term debt burden prior to the chapter 11 filing. T.H. Tan, Komag's chief executive officer, stated, "Emerging from chapter 11 is a critical event as we work to rebuild the company's profitability and value. Throughout our chapter 11 case we have enjoyed considerable support from our customers, suppliers and employees. With their continued support and our greatly improved balance sheet, we believe we are in a good position to achieve our goal of making Komag a solid, valuable company once again." The company also announced that Donald P. Beadle, George A. Neil, Ronald L. Schauer and Anthony Sun tendered their resignations as directors of the company. Mr. Tan added, "I would like to thank our retiring directors for their dedication. I have placed great reliance on their counsel during my tenure as CEO." Paul Brahe, Neil S. Subin, Kenneth Swimm, David G. Takata, Raymond H. Wechsler and Michael Lee Workman will join continuing members: T.H. Tan, Chris A Eyre and Harry B Van Wickle, as the company's new board of directors. ABOUT KOMAG Founded in 1983, Komag is the world's largest independent supplier of thin-film disks, the primary high-capacity storage medium for digital data. Komag leverages the combination of its U.S. R&D centers with its world-class Malaysian manufacturing operations to produce disks that meet the high-volume, stringent quality, low cost and demanding technology needs of its customers. By enabling rapidly improving storage density at ever-lower cost per gigabyte, Komag creates extraordinary value for consumers of computers, enterprise storage systems and electronic appliances such as peer-to-peer servers, digital video recorders and game boxes. For more information about Komag, visit Komag's Internet home page at http://www.komag.com or call Komag's Investor Relations 24-hour Hot Line at 888-66-KOMAG or 408-576-2901. FORWARD LOOKING STATEMENTS This press release contains certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements represent the company's current judgment and include, but are not limited to the timing of distributions to creditors, the start of public trading of the company's new stock, and the return to profitability and creation of value. The company's actual results for future periods could differ materially from those projected in such forward-looking information. Factors that could cause actual results to differ include, but are not limited to, market acceptance of the company's new stock, variability in demand for and average selling price of disks, the impact of demand variation on factory utilization, the company's ability to achieve its operating yield, cost and profitability targets, the company's ability to satisfy customer qualification requirements, the company's ability to comply with the covenants of its new debt, and the other factors described in the company's reports filed with the Securities and Exchange Commission, including, but not limited to, its most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Komag undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements. -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.1

HENNIGAN, BENNETT & DORMAN                                         EXHIBIT 2.1
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,       )  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-2.2

                                                                     EXHIBIT 2.2

HENNIGAN, BENNETT & DORMAN
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 HMT      )  Chapter 11
TECHNOLOGY CORPORATION,               )
a Delaware corporation,               )  FINDINGS OF FACT, CONCLUSIONS OF
                                      )  LAW, AND ORDER CONFIRMING THE
               Debtor.                )  DEBTOR'S FURTHER MODIFIED FIRST
                                      )  AMENDED PLAN OF REORGANIZATION,
                                      )  DATED MAY 7, 2002
                                      )
                                      )          Continued Confirmation Hearing
                                      )          ------------------------------
                                      )
                                      )  Date:   May 9, 2002
                                      )  Time:   11:00 a.m.
                                      )  Place:  Hon. James R. Grube
                                      )          280 South First Street
                                      )          Courtroom 3020
                                      )          San Jose, CA 95113-3099
                                      )
                                      )
- ---------------------------------------

        Komag, Incorporated, f/a/k/a HMT Technology Corporation, the debtor and
debtor in possession herein (the "Debtor"), having filed and proposed the
"Debtor's First Amended Plan Of Reorganization, Dated November 7, 2001" (the
"Plan"); and

        This Court, after notice and a hearing, having approved a Disclosure
Statement with respect to the Plan (the "Disclosure Statement") by an Order
dated November 16, 2001 [docket # 246] (the "Disclosure Statement Order"), which
Order also established and approved, among other things, procedures for the
solicitation and tabulation of votes on the Plan, and deadlines for the casting
of ballots and the filing of objections to confirmation of the Plan; and



        Objections, responses, and supporting pleadings regarding confirmation
of the Plan having been filed by (a) the "Ad Hoc Committee of Bondholders" (the
"Noteholders"); (b) State Street Bank and Trust Company of California, N.A., as
indenture trustee (the "Indenture Trustee"); (c) the Office of the United States
Trustee (the "UST"); (d) Magnetic Media Development, LLC ("MMD"); (e) the
Official Committee of Unsecured Creditors (the "Committee"); (f) the Loan
Restructure Agreement Lenders; and (g) Hoya Corporation; and cure payment claims
having been filed by (g) Sobrato 1979 Revocable Trust and Sobrato Development
Company #960 (together, "Sobrato"); (h) 2Wire, Inc. ("2Wire"); and (i) Lemelson
Medical, Education & Research Foundation ("Lemelson"); and

        The Debtor having filed (a) the "Debtor's Brief In Support Of
Confirmation Of Its First Amended Plan Of Reorganization, Dated November 7,
2001, And Reply To Objections To Confirmation" [docket # 403]; (b) the "Debtor's
Reply To MMD's Objection To Confirmation Of Modified First Amended Plan Of
Reorganization, Dated April 5, 2002; (c) the "Debtor's Reply Regarding Judicial
Estoppel And The Reservation Of Rights Set Forth In Section 7.1(b) Of the Plan"
[docket # 346]; (d) the "Declaration Of Edward H. Siegler In Support Of
Confirmation Of Debtor's First Amended Plan Of Reorganization, Dated November 7,
2001" [docket # 401] and the "Supplemental Declaration Of Edward H. Siegler In
Support Of Confirmation Of Debtor's Modified First Amended Plan Of
Reorganization, Dated April 5, 2002" (collectively, the "Siegler Declarations");
(e) the "Declaration of Gary L. Diamond In Support Of Confirmation Of Debtor's
First Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 400]
(the "Diamond Declaration"); (f) the "Declaration Of Ray J. Nicholson In Support
Of Confirmation Of Debtor's First Amended Plan Of Reorganization, Dated November
7, 2001" [docket # 399] (the Nicholson Declaration"); (g) the "Submission Of
`Plan Documents' Pursuant To The Debtor's First Amended Plan Of Reorganization,
Dated November 7, 2001" [docket # 349]; and (h) the "Submission Of Modified And
Additional `Plan Documents' Pursuant To The Debtor's Modified First Amended Plan
Of Reorganization, Dated April 5, 2002"; and

        The Debtor having filed its "Motion For Order (A) Approving Non-Adverse
Plan Modifications; (B) Determining That Resolicitation Of Votes On The Plan Is
Not Necessary; And


                                      -2-


(C) Authorizing The Change Of Votes By Certain Class 6 Creditors" [docket # 550]
(the "Modification Motion"), which, inter alia, seeks approval of the
modifications made to the Plan as reflected in the "Debtor's Modified First
Amended Plan Of Reorganization, Dated April 5, 2002," which is attached as
Exhibit A to the "Submission Of (A) Debtor's Modified First Amended Plan Of
Reorganization, Dated April 5, 2002; And (B) Blacklined Version Reflecting
Modifications To Debtor's First Amended Plan Of Reorganization, Dated November
7, 2001" [docket # 549]; and

        MMD having filed an Objection to the Modification Motion and the Debtor,
the Committee, and the Loan Restructure Agreement Lenders having filed responses
to MMD's Objection; and

        In response to and in full resolution of MMD's Objections to the
Modification Motion and confirmation, the Debtor having filed additional
modifications to the Plan, as reflected in the "Debtor's Further Modified First
Amended Plan Of Reorganization, Dated May 7, 2002" (the "Modified Plan"), which
is attached as Exhibit A to the "Submission Of (A) Debtor's Further Modified
First Amended Plan Of Reorganization, Dated May 7, 2002; (B) Blacklined Version
Reflecting Modifications To Debtor's Modified First Amended Plan Of
Reorganization, Dated April 5, 2002; (C) Settlement Agreement With MMD; And (D)
Revised Proposed Confirmation Order" (the "Submission"), and the compromise
agreement among the Debtor and MMD which is attached as Exhibit C to the
Submission (the "MMD Agreement"); and

        MMD having withdrawn its Objections to confirmation and to the
Modification Motion and having requested that the Court authorize MMD to change
its ballot to an acceptance of the Modified Plan; and

        This Court having entered the "Order (A) Scheduling Date For Hearing On
Confirmation Of Debtor's Plan Of Reorganization, As Modified; (B)
Re-Establishing Objection And Related Deadlines; And (C) Approving Notice Of
Modified Plan" (the "Modified Plan Order") [docket # 556], by which the Court
approved the form and scope of notice of the Modified Plan and scheduled a
hearing regarding confirmation of the Modified Plan; and

        The cure payment claim filed by Sobrato having been withdrawn pursuant
to the terms of the "Stipulation Regarding Settlement And Agreed Resolution Of
(I) Objection To Confirmation Of Plan By The Sobrato Entities; (II) First
Amended Objection To Claim Number 362 (Filed By


                                      -3-


Cupertino Electric, Inc.) And Complaint For Declaration That Attempted
Perfection Of Mechanics' Lien Is Null, Void And Ineffective; (III) Claim Numbers
348 and 349 (Filed By The Sobrato Entities); And (IV) Claim Number 362 (Filed By
Cupertino Electric, Inc.)" [docket # 581] (the "Sobrato Stipulation"); and

        The cure payment claim filed by Lemelson having been withdrawn pursuant
to the terms of the "Stipulation Regarding Agreed Resolution Of Claim Number 354
(Filed By Lemelson Medical Education And Research Foundation LLP)" (the
"Lemelson Stipulation"); and

        Status conferences regarding confirmation having been held on January 7
and January 10, 2002; and

        A hearing regarding confirmation of the Modified Plan and the
Modification Motion having been held on May 9, 2002 (the "Confirmation
Hearing"); and

        This Court having considered the evidence adduced and proffered and the
arguments made at the Confirmation Hearing, along with the declarations,
notices, briefs and other documents filed in connection with confirmation of the
Modified Plan and the record in the above-captioned case; and

        After due deliberation and consideration of all of the foregoing, this
Court hereby makes the following findings of fact and conclusions of law
pursuant to Rule 7052 and 9014 of the Federal Rules of Bankruptcy Procedure (the
"Bankruptcy Rules"). All of the following findings of fact shall constitute
findings of fact even if stated as conclusions of law, and all of the following
conclusions of law shall constitute conclusions of law even if stated as a
finding of fact.

                     FINDINGS OF FACT AND CONCLUSIONS OF LAW

        A. Jurisdiction: This Court has jurisdiction pursuant 28 U.S.C. Sections
157(b) and 1334(a) over the Chapter 11 Case(1) and over entry of this Order.
Matters regarding confirmation of the Modified Plan are core proceedings within
the meaning of 28 U.S.C.Section 157(b). Venue of these


- --------
(1)  Capitalized terms not otherwise defined in this Order have the meanings
     ascribed to them in the Modified Plan.


                                      -4-



proceedings and the Chapter 11 Case in this District is appropriate pursuant to
28 U.S.C. Section Section 1408 and 1409.

        B. Notice: As established by the declarations of service and publication
filed with respect to confirmation of the Plan [docket ## 256-263 and 404], due,
timely, sufficient and adequate notice of the Plan, together with the deadlines
for voting on and filing objections to the Plan, has been given to all known
holders of Claims and/or Equity Interests and other parties in interest in
accordance with the rules and procedures established by the Disclosure Statement
Order, title 11 of the United States Code (the "Bankruptcy Code"), the
Bankruptcy Rules, the Bankruptcy Local Rules of the United States District Court
for the Northern District of California (the "Local Rules"), and all other
applicable laws, rules and regulations.

        By filing and serving the "Notice Of Modifications Of Debtor's First
Amended Plan Of Reorganization; Of Hearing On Confirmation Of the Debtor's
Modified [Plan]; And Of Deadlines For Objections" on April 8, 2002 [docket #
555], due, timely, sufficient and adequate notice of the Modified Plan and the
continued Confirmation Hearing, together with the deadlines for filing
objections to the Modified Plan, also has been given in accordance with the
rules and procedures established by the Modified Plan Order, the Bankruptcy
Code, the Bankruptcy Rules, the Local Rules, and all other applicable laws,
rules and regulations.

        C. Solicitation: The solicitation by the Debtor and its professionals of
votes accepting or rejecting the Plan was conducted in good faith and in
compliance with the Disclosure Statement Order, sections 1125 and 1126 of the
Bankruptcy Code, Bankruptcy Rules 3017 and 3018, and all other applicable
provisions of the Bankruptcy Code, the Bankruptcy Rules, and other applicable
laws, rules and regulations.

        D. Modifications: The modifications to the Plan proposed by the Debtor
as set forth in the Modified Plan do not adversely change the treatment of the
Claims of any creditor, the Equity Interests of any holder of Equity Interests,
or any Class of creditors or Equity Interests that has not accepted the Modified
Plan in writing. In accordance with section 1127 of the Bankruptcy Code and
Bankruptcy Rule 3019, the Modified Plan is deemed accepted by all holders of
Claims and Equity


                                      -5-


Interests who previously have accepted the Plan, and resolicitation of votes on
the Modified Plan is not necessary or appropriate under the circumstances.

        E. Ballot Tabulation: As evidenced by the "Declaration Of Lawrence
Merrifield Certifying The Acceptances And Rejections Of The Debtor's First
Amended Plan Of Reorganization, Dated November 7, 2001" [docket # 402] (the
"Ballot Tabulation Declaration"), the procedures by which Ballots on the Plan
were distributed to holders of Claims and Equity Interests and were tabulated
were fair and properly conducted in accordance with the Disclosure Statement
Order, the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, and all other
applicable laws, rules and regulations.

        F. Class 6 Acceptance of Modified Plan: Pursuant to Bankruptcy Rule
3018(a) and by the Modification Motion and the certifications attached thereto,
the following holders of Class 6 Claims, which previously voted to reject the
Plan, have changed their votes to accept the Modified Plan: Camden Asset
Management LP (on behalf of several claimants), Creedon Capital LLP, WM High
Yield Fund, SunAmerica High Yield Fund, SC Fundamental Value Fund LP, SC
Fundamental Value BVI, Ltd., JMG Capital Partners, L.P., JMG Triton Offshore
Fund, Ltd. and Staro Asset Management LLC (collectively, the "Accepting
Noteholders"). Cause exists for the Accepting Noteholders to change their votes
because such change is not improperly motivated and is the result of arms'
length compromise negotiations among the Debtor, the Accepting Noteholders, and
other parties in interest. With the acceptances of the Accepting Noteholders,
Class 6 has accepted the Modified Plan within the meaning of section 1126 of the
Bankruptcy Code.

        G. Class 10 Acceptance of Modified Plan: As reflected in its withdrawal
of its Objections to confirmation and on the record at the Confirmation Hearing,
MMD has changed its prior rejection of the Plan to an acceptance of the Modified
Plan. Pursuant to Bankruptcy Rule 3018(a), cause exists for MMD to change its
vote because such change is not improperly motivated and is the result of arms'
length compromise negotiations among the Debtor, MMD, and other parties in
interest. With the acceptance of MMD, Class 10 has accepted the Modified Plan
within the meaning of section 1126 of the Bankruptcy Code.


                                      -6-


        H. Objections: The objections to the Plan filed by the Noteholders, the
Indenture Trustee, and MMD have been withdrawn. The cure payment claims filed by
Sobrato, 2Wire, and Lemelson have been resolved as set forth in the Sobrato
Stipulation and the Lemelson Stipulation and on the record at the Confirmation
Hearing. Any and all other Objections are overruled for the reasons set forth in
this Order and on the record at the Confirmation Hearing.

        I. Section 1129(a)(1): As required by section 1129(a)(1) of the
Bankruptcy Code, the Modified Plan complies with all applicable provisions of
the Bankruptcy Code. Among other things:

               1. The classification of Claims and Equity Interests under the
        Modified Plan is reasonable, not discriminatory, and consistent with
        section 1122(a) of the Bankruptcy Code. Among other things,
        classification of the MMD Claim into Class 10 is appropriate, is not the
        product of an attempt by the Debtor to "gerrymander" an affirmative vote
        on the Modified Plan, and is supported by legitimate business and
        economic justifications, including the need to distribute different
        types of property to different classes of claims under the Plan in
        furtherance of a consensual reorganization and the fact that the MMD
        Claim is asserted in an amount that is more than double the estimated
        total amount of all claims classified into Class 7.

               2. The inclusion of a convenience class (Class 8) encompassing
        holders of Allowed Unsecured Claims in an amount of $10,000 or less
        (along with Allowed Unsecured Claims for which claimants have elected on
        their Ballots to reduce the Allowed amount of such Claims to $10,000) is
        reasonable and necessary for administrative convenience.

               3. As required by and in compliance with sections 1123(a)(1),
        (a)(2) and (a)(3) of the Bankruptcy Code, the Modified Plan (a)
        identifies the Classes of Claims and Equity Interests; (b) specifies the
        Classes of Claims and Equity Interests that are not impaired under the
        Modified Plan as well as those that are impaired under the Modified
        Plan; and (c) specifies the treatment of each Class of Claims and Equity
        Interests under the Modified Plan.


                                      -7-


               4. As required by and in compliance with section 1123(a)(4) of
        the Bankruptcy Code, the Modified Plan provides the same treatment for
        each Claim or Equity Interest in a particular Class.

               5. As required by and in compliance with section 1123(a)(5) of
        the Bankruptcy Code, the Modified Plan provides adequate means for its
        execution and implementation including, but not limited to (a) the
        revesting of all assets and property of the Estate in the Reorganized
        Debtor, which will be operated and managed by the Reorganized Debtor
        Board of Directors and the Reorganized Debtor Officers in accordance
        with applicable non-bankruptcy law; (b) the amendment of the Debtor's
        certificate of incorporation and bylaws; (c) the issuance of the New
        Common Stock, the New Notes, the New Subordinated PIK Notes, and the New
        Warrants for distribution in accordance with the Modified Plan; (d) the
        cancellation of existing liens, securities and instruments as set forth
        in the Modified Plan; and (e) the availability of the Exit Financing
        Facility to provide liquidity for future operations.

               6. As required by and in compliance with section 1123(a)(6) of
        the Bankruptcy Code, the Amended and Restated Articles of Incorporation
        of the Reorganized Debtor prohibit the issuance of nonvoting equity
        securities and otherwise comply with section 1123(a)(6).

               7. As required by and in compliance with section 1123(a)(7) of
        the Bankruptcy Code, the manner of selection of the Reorganized Debtor
        Board of Directors and the Reorganized Debtor Officers and any
        successors thereto, as set forth in the Amended and Restated Articles of
        Incorporation of the Reorganized Debtor, is consistent with the
        interests of holders of Claims and Equity Interests and public policy.

        J. Section 1129(a)(2): As required by section 1129(a)(2) of the
Bankruptcy Code, the Debtor, as the proponent of the Modified Plan, has complied
with all of the applicable provisions of the Bankruptcy Code, including all
applicable provisions regarding disclosure and solicitation with respect to the
Plan.


                                      -8-

        K. Section 1129(a)(3): As required by section 1129(a)(3) of the
Bankruptcy Code, the Debtor has proposed the Modified Plan in good faith and not
by any means forbidden by law. The Debtor has proposed the Modified Plan with
the legitimate and honest purpose of adjusting the Debtor's debts, reorganizing
the Debtor's business, and maximizing the returns to parties in interest in the
Chapter 11 Case, while preserving jobs and a valuable international economic
enterprise. The good faith of the Debtor was established through the evidence
adduced and proffered, including the Siegler Declarations, the Diamond
Declaration, and the Nicholson Declaration. Among other things:

               1. The Modified Plan is the product of good-faith, arms'-length
        negotiations among the Debtor, the Committee, the Noteholders, the Loan
        Restructure Agreement Lenders, the Indenture Trustee, ICX Corporation,
        MMD, and other parties in interest.

               2. The Modified Plan is proposed by the Debtor and supported by
        the Committee and other parties in interest, including holders of over
        $400 million in Claims against the Debtor.

               3. The fact that the Debtor has modified the Plan is not evidence
        of bad faith. To the contrary, the modifications to the Plan set forth
        in the Modified Plan are evidence of the Debtor's good faith and desire
        to address the concerns of parties in interest in the Chapter 11 Case.

               4. The Committee's support of the Modified Plan, as well as the
        acceptance of the Modified Plan by creditors with Claims classified into
        all Classes of Unsecured Claims evidences the informed decision of
        creditors that the Modified Plan is in their best interest and maximizes
        the distributions available to them.

        L. Section 1129(a)(4): As required by section 1129(a)(4) of the
Bankruptcy Code, all payments made or to be made by the Debtor for services or
for costs and expenses in connection with the Chapter 11 Case, or in connection
with the Modified Plan and incident to the Chapter 11 Case, have been approved
by this Court or are subject under the Modified Plan to the approval by this
Court as reasonable. In connection therewith, the payments to be made to
professionals employed by the Loan Restructure Agreement Lenders, the Indenture
Trustee, and the Noteholders


                                      -9-


pursuant to Sections 4.3 and 4.6 of the Modified Plan are reasonable and
appropriate under the circumstances and shall be paid by the Reorganized Debtor
in the amounts provided for in the Modified Plan.

        M. Section 1129(a)(5): As required by section 1129(a)(5)(A) of the
Bankruptcy Code, the Debtor has disclosed the identity, affiliation and proposed
compensation of the persons proposed to continue in service as directors and
officers of the Reorganized Debtor. The appointment to, or continuance in,
office of such individuals is consistent with the interests of creditors and
equity security holders and with public policy. Pursuant to the Statement of
Reorganized Debtor Directors/Officers, the Debtor has also disclosed the
identity of all insiders that will be employed or retained by the Reorganized
Debtor under the Modified Plan and the nature of any compensation of such
insiders.

        N. Section 1129(a)(6): The requirements of section 1129(a)(6) are not
applicable because the Debtor is not subject to any governmental regulatory
commission regarding rates.

        O. Section 1129(a)(7): As required by section 1129(a)(7) of the
Bankruptcy Code, and as established by the Diamond Declaration, with respect to
each impaired Class of Claims under the Modified Plan, each holder of a Claim of
each such Class has accepted the Modified Plan, or will receive or retain under
the Modified Plan on account of such Claim property of a value, as of the
Effective Date, that is not less than the amount that such holder would so
receive or retain if the Debtor was liquidated under Chapter 7 of the Bankruptcy
Code on such date.

        P. Section 1129(a)(8) and Section 1129(b): As indicated by the Ballot
Tabulation Declaration and the Modification Motion and certifications attached
thereto, and as established on the record at the Confirmation Hearing, impaired
Classes 1, 2, 3, 4-A, 4-B, 5, 6, 7, 8, and 10 have voted to accept the Modified
Plan and accordingly, the requirements of section 1129(a)(8) of the Bankruptcy
Code have been met with respect to each such Class. Although impaired Class 9
has voted to reject the Plan, the Debtor has requested that the Court confirm
the Modified Plan under section 1129(b) of the Bankruptcy Code as to such Class.
As set forth in Paragraph U, below, the requirements of section 1129(b) are
satisfied with respect to Class 9.


                                      -10-


        Q. Section 1129(a)(9): In satisfaction of section 1129(a)(9)(A) of the
Bankruptcy Code, the Modified Plan provides for the payment in full of Allowed
Administrative Expense Claims and Allowed Priority Claims on or as soon as
practicable after the later of the Effective Date of the Plan and the date on
which any such Administrative Expense Claim and Allowed Priority Claim becomes
an Allowed Claim. In satisfaction of section 1129(a)(9)(C) of the Bankruptcy
Code, the Modified Plan specifies that the Reorganized Debtor shall provide to
each holder of an Allowed Priority Tax Claim, in full satisfaction, release and
discharge of such Claim, Cash payments 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.

        R. Section 1129(a)(10): As required by Section 1129(a)(10) of the
Bankruptcy Code, at least one impaired Class of Claims has accepted the Plan,
determined without including any acceptance of the Modified Plan by any insider.

        S. Section 1129(a)(11): As required by section 1129(a)(11) of the
Bankruptcy Code, and as established by the Siegler Declarations, confirmation of
the Modified Plan is not likely to be followed by the liquidation, or the need
for further financial reorganization, of the Reorganized Debtor or any successor
to the Debtor under the Modified Plan.

        T. Section 1129(a)(12): The requirements of section 1129(a)(12) of the
Bankruptcy Code are satisfied because the Debtor is current with respect to its
payments of the fees imposed by 28 U.S.C. Section 1930, and because the Modified
Plan expressly provides for the payment of all such fees.

        U. Section 1129(a)(13): The requirements of section 1129(a)(13) of the
Bankruptcy Code are inapplicable because the Debtor provides no benefits of the
type that are subject to that section.

        V. Section 1129(b): The requirements of section 1129(b) of the
Bankruptcy Code are satisfied with respect to Class 9 because, among other
things, the Modified Plan does not


                                      -11-


discriminate unfairly and is fair and equitable with respect to Class 9. The
Modified Plan is fair and equitable with respect to Class 9 because the Modified
Plan strictly adheres to the absolute priority rule and no class junior to Class
9 is to receive or retain any property or distributions under the Modified Plan.

        W. Section 1125(e). The Debtor and its employees and professionals
solicited acceptances and rejections of the Plan and the Modified Plan in good
faith and in compliance with the applicable provisions of the Bankruptcy Code,
and such persons therefore are entitled to the protections of section 1125(e) of
the Bankruptcy Code and are not liable on account of such solicitation for
violation of any applicable law, rule, or regulation governing solicitation of
acceptance or rejection of a plan or the offer, issuance, sale or purchase of
securities.

        X. Section 1145: The offer, sale, and issuance of the New Securities
(except with respect to New Common Stock to be issued to employees pursuant to
the Employee Retention Plan) under the Modified Plan, as well as the offer,
sale, and issuance of the New Common Stock upon exercise of the New Warrants,
are exempt from section 5 of the Securities Act of 1933, as amended, and from
any other registration requirements under federal or state securities laws
pursuant to section 1145 of the Bankruptcy Code, because (1) the New Securities
will be offered, sold, and issued by the Reorganized Debtor in exchange for
Claims against the Debtor; and (2) the New Common Stock offered, sold, and
issued upon exercise of the New Warrants will be offered, sold, and issued only
pursuant to the New Warrants, which were offered, sold, and issued in exchange
for Claims against the Debtor.

        Y. Section 365: By the Siegler Declarations, the Debtor and the
Reorganized Debtor have provided "adequate assurance of future performance"
within the meaning of section 365(b)(1)(C) of the Bankruptcy Code under each of
the executory contracts or unexpired leases to be assumed pursuant to section
6.1 of the Modified Plan.

        Z. Settlements: All settlements and compromises provided for in or in
connection with the Modified Plan, including the MMD Agreement and the treatment
of the MMD Claim under the Modified Plan and the compromises with the
Noteholders and the Indenture Trustee and the treatment of the Subordinated
Notes Claims under the Modified Plan, were negotiated at arms'


                                      -12-


length and in good faith, represent an exchange of fair value among the
respective parties thereto, and are fair, equitable, reasonable, and in the best
interests of the Debtor, the Estate, and all creditors in satisfaction of the
standards of Bankruptcy Rule 9019 and applicable law, including In re A & C
Properties, 784 F.2d 1377 (9th Cir. 1986).

        AA. Other Requirements: The Modified Plan satisfies the requirements of
section 1129(c) of the Bankruptcy Code because no other plan has been confirmed
in the Chapter 11 Case. The Modified Plan satisfies the requirements of section
1129(d) of the Bankruptcy Code because the principal purpose of the Modified
Plan is not the avoidance of taxes or the avoidance of the application of
section 5 of the Securities Act of 1933.

        NOW, THEREFORE, IT HEREBY IS ORDERED, ADJUDGED, AND DECREED THAT:

                        APPROVAL OF MODIFICATION MOTION

        1. The Modification Motion is hereby granted in its entirety. The
modifications to the Plan as set forth in the Modified Plan and explained in the
Modification Motion do not adversely change the treatment of the Claims of any
creditor, the Equity Interests of any holder of Equity Interests, or any Class
of creditors or Equity Interests who has not accepted the Modified Plan in
writing and are therefore deemed accepted by all interested parties who have
timely voted to accept the Plan. Under Bankruptcy Rule 3019, these modifications
do not require additional disclosure under section 1125 of the Bankruptcy Code
or resolicitation of acceptances or rejections of the Modified Plan under
section 1126 of the Bankruptcy Code.

                        CONFIRMATION OF THE MODIFIED PLAN

        2. The Modified Plan, in the form attached to this Order as Exhibit A,
hereby is confirmed pursuant to section 1129 of the Bankruptcy Code (except
that, as set forth on the record at the Confirmation Hearing, Section 7.1(b) of
the Modified Plan is altered as set forth in this Order, and Section 10.5 of the
Modified Plan is not deleted from the Modified Plan). To the extent possible,
the Modified Plan and this Order shall be interpreted to be consistent; to the
extent that


                                      -13-


there is any inconsistency between the Modified Plan and this Order, the terms
of this Order shall control.

        3. For the reasons set forth on the record at the Confirmation Hearing
and in this Order, each and every objection to confirmation of the Modified
Plan, to the extent not withdrawn or resolved pursuant to the terms of this
Confirmation Order and/or to the Modified Plan, hereby is overruled.

        4. Except as expressly otherwise provided in the Modified Plan or this
Order, pursuant to section 1141(d) of the Bankruptcy Code, on the Effective
Date, the Debtor hereby is discharged from any debt that arose prior to the
Effective Date, and from any debt of a kind specified in sections 502(g), 502(h)
and 502(i) of the Bankruptcy Code, whether or not (a) a proof of claim based on
such debt is filed or deemed filed; (b) such claim or debt is allowed under
section 502 of the Bankruptcy Code; (c) the holder of such claim or debt has
accepted the Modified Plan; or (d) such claim or debt is listed in the Debtor's
Schedules.

        5. Except as expressly provided otherwise in the Modified Plan or this
Order, 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.

        6. Except as expressly provided otherwise in the Modified Plan or this
Order, the Debtor on behalf of itself and the Reorganized Debtor has retained
and reserved all rights to commence or pursue, as appropriate, any and all
Rights of Action, whether arising prior to or after the Petition Date, in any
court or other tribunal, including, without limitation, in an adversary
proceeding filed in the Chapter 11 Case. The failure to identify in the
Disclosure Statement any potential or existing Right of Action generally or
specifically does not limit the rights of the Debtor or the Reorganization
Debtor to pursue any such action. Unless a Right of Action is expressly waived,
relinquished, released, compromised or settled in the Modified 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


                                      -14-


laches, shall apply to such Rights of Action as a result of confirmation of the
Modified Plan. 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. The provisions in Articles VIII and IX of the Modified Plan governing
distributions, reserves and the procedures for resolving and treating Disputed
Claims under the Modified Plan are hereby approved and found to be fair and
reasonable.

        8. On the Effective Date, the transfers of assets by the Debtor
contemplated by the Modified Plan shall (a) be legal, valid and effective
transfers of property; (b) vest or will vest in the transferee good title to
such property free and clear of all Claims, Liens and Equity Interests, except
those provided for in the Modified Plan or this Order; (c) do not or will not
constitute fraudulent transfers or fraudulent conveyances under any applicable
law; and (d) do not and will not subject the Debtor, Reorganized Debtor or
property so transferred to any liability by reason of such transfer under
applicable law or any theory of law including, without limitation, any theory of
successor or transferee liability. Pursuant to section 1146(c) of the Bankruptcy
Code, the issuance, transfer or exchange of the New Securities under the
Modified Plan, the creation of any mortgage, deed of trust, or other security
interest (in respect of the Exit Financing Facility, the New Notes, the New
Subordinated PIK Notes or otherwise), 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 the Modified Plan, shall not be
subject to any stamp, real estate transfer, mortgage recording or other similar
tax.

        9. Each holder of an Unsecured Claim classified into Class 7 under the
Modified Plan who elected on a Ballot to opt into Class 8 under the Modified
Plan shall be deemed irrevocably to have reduced to $10,000 the aggregate amount
of the Unsecured Claim with respect to which the Ballot was cast, to have waived
any and all rights to treatment of such Claim under Class 7 of the Modified
Plan, and to have elected treatment of such Claim under Class 8 of the Modified
Plan. Each holder of an Unsecured Claim classified into Class 8 under the
Modified Plan who elected on a Ballot to opt out of Class 8 under the Modified
Plan shall be deemed irrevocably to have waived any


                                      -15-


and all rights to treatment of the Unsecured Claim with respect to which the
Ballot was cast under Class 8 of the Modified Plan, and to have elected
treatment of such Claim under Class 7 of the Modified Plan.

                   RELEASES, EXCULPATIONS, AND INDEMNIFICATION

        10. The rights afforded in the Modified Plan and the treatment of all
holders of Claims or Equity Interests as provided therein 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 therein, 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 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.

        11. Except as otherwise expressly provided in the Modified 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


                                      -16-


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.

        12. 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. 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
Modified Plan and satisfied in full by the treatment of Claims under the
Modified Plan and the rights and distributions provided in the Modified Plan.

        13. [intentionally deleted]

        14. 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 of the Modified
Plan.


                                      -17-


        15. Unless otherwise provided in the Modified Plan or this Order, 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.

                    EXECUTORY CONTRACTS AND UNEXPIRED LEASES

        16. Pursuant to section 1123(b)(2) of the Bankruptcy Code and Section
6.1 of the Modified Plan, 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 this 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 and are hereby 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 this Order hereby approves and
authorizes the assumption of such executory contracts and unexpired leases
pursuant to section 365(a) of the Bankruptcy Code and constitutes a finding by
this 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.

        17. 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. The Modified Plan is hereby deemed to 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 the Modified Plan. Subject to the
occurrence of the Effective Date, entry of this Order hereby approves and
authorizes the rejection of such executory contracts and unexpired leases
pursuant to section 365(a) of the Bankruptcy Code and constitutes a finding by
the this Court that each such rejection is in the best interest of the Debtor
and the Estate.

        18. On the Effective Date, the Reorganized Debtor shall pay the
following amounts as cure payment claims pursuant to section 365 of the
Bankruptcy Code: (a) $82,498.41 to Sobrato pursuant to the terms of the Sobrato
Stipulation; (b) $85,050 to Lemelson pursuant to the terms of


                                      -18-


the Lemelson Stipulation; and (c) $28,870.96 to 2Wire pursuant to its cure
payment claim filed in this Chapter 11 Case. As no other cure payment claims
having been filed at or prior to the Confirmation Hearing, no other amounts
exist that need to be paid under Section 365(b) of the Bankruptcy Code in order
to assume the executory contracts and unexpired leases pursuant to Section 6.1
of the Modified Plan.

        19. All of the Debtor's right, title and interest in any contracts,
leases or agreements entered into by the Debtor after the Petition Date, and/or
not subject to assumption or rejection under Bankruptcy Code section 365, shall
revest in the Reorganized Debtor, without further action.

                           AUTHORITY TO IMPLEMENT PLAN

        20. On the Effective Date, all actions contemplated by the Modified Plan
and the Plan Documents are hereby 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; (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, including the Exit Financing Facility;
and (g) the execution and delivery of the MMD Agreement.

        21. On the Effective Date, the Reorganized Debtor shall issue, without
need for registration pursuant to section 1145 of the Bankruptcy Code, the New
Common Stock, the New Notes, the New Subordinated PIK Notes, and the New
Warrants for distribution in accordance with the Modified Plan. When so issued,
all shares of New Common Stock shall be deemed validly issued, fully paid, and
non assessable.

        22. The offering, issuance, sale, and distribution by the Reorganized
Debtor of the New Securities (except with respect to new Common Stock to be
issued to employees pursuant to the Employee Retention Plan) in accordance with
the Modified Plan, as well as the offering, issuance,


                                      -19-


sale, and distribution of the New Common Stock upon exercise of the New
Warrants, hereby is found to be exempt from the provisions of section 5 of the
Securities act of 1933, as amended, and any state or local law requiring
registration for the offer, issuance, distribution or sale of a security by
reason of section 1145(a) of the Bankruptcy Code. The New Securities (except
with respect to New Common Stock to be issued to employees pursuant to the
Employee Retention Plan) will be freely tradable by the recipients thereof
subject only to the provisions of Section 1145(b)(1) of the Bankruptcy Code
relating to the definition of an underwriter in Section 2(11) of the Securities
Act of 1933, as amended, and in compliance with any applicable rules and
regulations of the Securities Exchange Commission.

        23. In accordance with section 1142 of the Bankruptcy Code, the Debtor,
the Reorganized Debtor and any other person designated pursuant to the Modified
Plan (including without limitation the New Notes Trustee, the New Subordinated
PIK Notes Trustee, and the Subordinated Notes Trustee) is authorized, empowered
and directed to execute, deliver, acknowledge, adopt, ratify, certify, file and
record any document (including, without limitation, all documents, agreements
and instruments described in Paragraph 20 above), and to take any other action
necessary or appropriate to implement, consummate and otherwise effect the
Modified Plan in accordance with its terms in all material respects, whereupon
such documents, agreements, and instruments (including without limitation all
terms and provisions of the Modified Plan, the New Notes, the New Notes
Indenture, the New Subordinated PIK Notes, and the New Subordinated PIK Notes
Indenture pertaining to the payment of the principal and interest on the New
Notes and the New Subordinated PIK Notes) shall be legal, valid, and binding
obligations of the Reorganized Debtor and the other parties thereto and
enforceable in accordance with their terms notwithstanding any applicable law to
the contrary.

        24. No party in interest shall be required to file or record financing
statements, mortgages, notices of lien or similar instruments in any
jurisdiction or take any other action in order to validate and perfect the
security interests and liens granted to it pursuant to the Modified Plan or the
Plan Documents. If a party in interest shall, in its sole discretion, choose to
file such financing statements, mortgages, notices of lien or similar
instruments or otherwise confirm perfection of such


                                      -20-


security interests and liens, all such documents shall be deemed to have been
filed or recorded at the time and on the date of entry of this Order.

        25. All persons holding Claims against and Equity Interests in the
Debtor that are dealt with under the Modified Plan are hereby directed to
execute, deliver, file and record any document, and to take any action necessary
or appropriate to implement, consummate and otherwise effect the Modified Plan
in accordance with its terms in all material respects, and all such persons
shall be bound by the terms and provisions of all documents executed and
delivered by them in connection with the Modified Plan.

                              DEADLINES AND CLAIMS

26.     Deadlines For Administrative Expense Claims:

               a. Administrative Expense 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
        requests for payment of Professional Claims but excluding requests for
        Administrative Tax Claims and Ordinary Course Administrative Claims,
        must be filed with this Court and served upon the Reorganized Debtor and
        the UST no later than thirty (30) days after the date on which the
        Notice of Effective Date is mailed. Requests 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.

               b. 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 this Court and served upon the Reorganized Debtor and the UST
        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


                                      -21-


        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.

        27. Deadline For Rejection Damage Claims: Proofs of Claims arising from
the rejection of executory contracts or unexpired leases pursuant to Section 6.3
of the Modified Plan must be filed with this 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 this Court, all such Claims
that are timely filed as provided herein shall be treated as General Unsecured
Claims and be classified into Class 7 or Class 8, as appropriate.

        28. Deadlines For Objection To Claims: The Reorganized Debtor shall have
the right to object to the allowance of Claims or Equity Interests filed with
this Court with respect to which liability or allowance is disputed in whole or
in part. Unless otherwise ordered by this 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).

                      EXIT FINANCING FACILITY AND NEW NOTES

        29. Notwithstanding any term or condition of the Modified Plan or this
Order to the contrary, the obligations and duties of the Reorganized Debtor, and
the rights, liens, security interest, claims and remedies of the lenders party
to any of the Exit Financing Facility Documents against the Reorganized Debtor
and the property of either, arising under, in connection with, or with respect
to the Exit Financing Facility Documents, the New Notes and the New Notes
Indenture, and the New Subordinated PIK Notes and the New Subordinated PIK Notes
Indenture, shall be unaffected, unaltered and unimpaired by the Modified Plan
and this Order and shall instead be determined exclusively by the terms of such
documents and by applicable non-bankruptcy law.


                                      -22-


                                  MISCELLANEOUS

        30. On or before ten (10) Business Days after the Effective Date, the
Reorganized Debtor or its agent shall mail or cause to be mailed to all holders
of record of Claims and Equity Interests a Notice that informs such holders of
(a) entry of this 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 the Modified Plan, as well as the deadline for the
filing of Claims arising from such rejection; (d) the deadline established under
the Modified Plan for the filing of Administrative Claims; (e) the procedures
for changing an address of record pursuant to Section 8.2 of the Modified Plan;
and (f) such other matters as the Reorganized Debtor deems to be appropriate.
Such Notice shall constitute due and sufficient notice of all of such matters in
compliance with Bankruptcy Rule 2002(f).

        31. Notwithstanding the entry of this Order or the occurrence of the
Effective Date, this Court will retain jurisdiction of the Chapter 11 Case and
all matters arising in, or related to, the Chapter 11 Case (but not matters
related to the Exit Financing Facility) as provided for in the Modified Plan and
in this Order, and to the fullest extent permitted by law, including sections
1127 and 1142 of the Bankruptcy Code, including without limitation jurisdiction
over all of the matters set forth in Section XI of the Modified Plan.

        32. The failure to reference or discuss any particular provision of the
Modified Plan in this Order shall not have any effect on the validity, binding
effect and enforceability of such provision, and such provision shall have the
same validity, binding effect and enforceability as every other provision of the
Modified Plan.

        33. 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


                                      -23-


connection with any applications by such professionals or committee members for
allowance of Professional Claims timely filed after the Effective Date as
provided in the Modified Plan.

        34. The provisions of the Modified Plan and this Order shall be, and
hereby now are and forever afterwards will be, binding on the Debtor, the
Committee, all holders of Claims and Equity Interests (whether or not impaired
under the Modified Plan and whether or not, if impaired, such entities accepted
the Modified Plan), any other party in interest, any other party making an
appearance in the Chapter 11 Case, and any other person or entity affected
thereby, as well as their respective heirs, predecessors, successors, assigns,
trustees, subsidiaries, affiliates, officers, directors, agents, employees,
representatives, attorneys, beneficiaries, guardians, and similar officers, or
any Person claiming through or in the right of any such persons or entities.

DATED:  _______________________


                                        ________________________________________
                                        HONORABLE JAMES R. GRUBE
                                        UNITED STATES BANKRUPTCY JUDGE



                                      -24-

EX-2.3

HENNIGAN, BENNETT & DORMAN                                         EXHIBIT 2.3
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-99.1

                                     EX-99.1
                                  PRESS RELEASE


                          KOMAG EMERGES FROM CHAPTER 11

FOR IMMEDIATE RELEASE

SAN JOSE, Calif., July 1, 2002 -- Komag, Incorporated (OTC Bulletin Board:
KOMG), the largest independent producer of media for disk drives, today
announced that the company's Plan of Reorganization, as confirmed by the
bankruptcy court on May 9, 2002, became effective on June 30, 2002 and the
company has emerged from chapter 11.

Through its reorganization the company has discharged over $520 million of
unsecured obligations and cancelled its existing common stock and warrants. In
the near future the company will make distributions of approximately $3.8
million in cash, $135.8 million of new debt, 22.8 million shares of new common
stock and 1.0 million warrants to holders of unsecured claims in accordance with
the plan. Currently the company expects that its new stock will be traded on the
OTC Bulletin Board beginning on or around July 8, 2002.

Komag's emergence from chapter 11 occurred approximately 10 months after its
filing date and its Plan of Reorganization enjoys the support of all classes of
creditors. At $135.8 million, the company's new long-term debt is less than 30%
of its long-term debt burden prior to the chapter 11 filing.

T.H. Tan, Komag's chief executive officer, stated, "Emerging from chapter 11 is
a critical event as we work to rebuild the company's profitability and value.
Throughout our chapter 11 case we have enjoyed considerable support from our
customers, suppliers and employees. With their continued support and our greatly
improved balance sheet, we believe we are in a good position to achieve our goal
of making Komag a solid, valuable company once again."

The company also announced that Donald P. Beadle, George A. Neil, Ronald L.
Schauer and Anthony Sun tendered their resignations as directors of the company.
Mr. Tan added, "I would like to thank our retiring directors for their
dedication. I have placed great reliance on their counsel during my tenure as
CEO." Paul Brahe, Neil S. Subin, Kenneth Swimm, David G. Takata, Raymond H.
Wechsler and Michael Lee Workman will join continuing members: T.H. Tan, Chris A
Eyre and Harry B Van Wickle, as the company's new board of directors.

ABOUT KOMAG

Founded in 1983, Komag is the world's largest independent supplier of thin-film
disks, the primary high-capacity storage medium for digital data. Komag
leverages the combination of its U.S. R&D centers with its world-class Malaysian
manufacturing operations to produce disks that meet the high-volume, stringent
quality, low cost and demanding technology needs of its customers. By enabling
rapidly improving storage density at ever-lower cost per gigabyte, Komag creates
extraordinary value for consumers of computers, enterprise storage systems and
electronic appliances such as peer-to-peer servers, digital video recorders and
game boxes.

For more information about Komag, visit Komag's Internet home page at
http://www.komag.com or call Komag's Investor Relations 24-hour Hot Line at
888-66-KOMAG or 408-576-2901.

FORWARD LOOKING STATEMENTS

This press release contains certain "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
safe harbors created thereby. These statements represent the company's current
judgment and include, but are not limited to the timing of distributions to
creditors, the start of public trading of the company's new stock, and the
return to profitability and creation of value. The company's actual results for
future periods could differ materially from those projected in such
forward-looking information. Factors that



could cause actual results to differ include, but are not limited to, market
acceptance of the company's new stock, variability in demand for and average
selling price of disks, the impact of demand variation on factory utilization,
the company's ability to achieve its operating yield, cost and profitability
targets, the company's ability to satisfy customer qualification requirements,
the company's ability to comply with the covenants of its new debt, and the
other factors described in the company's reports filed with the Securities and
Exchange Commission, including, but not limited to, its most recent Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q. Komag undertakes no
obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of such statements.