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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996*
COMMISSION FILE NUMBER: 0-19512
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READ-RITE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2770690
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code: (408) 262-6700
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE PER SHARE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing price as reported on the Nasdaq National
Market on November 29, 1996) was $1,033,262,280. Shares of voting stock held by
each officer and director and by each stockholder affiliated with a director
have been excluded from this calculation because such persons may be deemed to
be affiliates. This determination of officer or affiliate status is not
necessarily a conclusive determination for other purposes. The number of
outstanding shares of the Registrant's Common Stock as of November 29, 1996 was
46,986,610.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders to be held February 25, 1997 are incorporated by reference into
Part III of this Form 10-K.
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* For purposes of this Form 10-K the Registrant has indicated its fiscal year as
ending on September 30th. The Registrant operates on a fifty-two/fifty-three
week fiscal year cycle ending on the last Sunday of September of each year.
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PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K include
forward-looking information 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 harbor" created by those sections.
These statements include, but are not limited to, the Company's plans to
introduce planar heads, to increase its magnetoresistive ("MR") thin film head
production and to transition its Philippines facilities to planar slider
fabrication and planar and thin film back-end assembly operations, and the
Company's belief that its liquid assets, credit facilities and cash generated
from operations are sufficient to fund its operations in fiscal 1997. Actual
results for future periods could differ materially from those projected in such
forward-looking statements. Some factors which could cause future actual results
to materially differ from the Company's recent results or those projected in the
forward-looking statements are failure by the Company to continue to execute on
planar or MR development, to timely and cost-effectively introduce its initial
planar programs and future inductive and MR programs into manufacturing and to
obtain necessary customer qualifications on those programs, and changes in
business conditions affecting the Company which significantly increase the
Company's working capital needs. See also "Certain Additional Business Risks" on
pages 10 through 14 below and other risk factors discussed elsewhere in this
report.
GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") is the world's leading
independent supplier of magnetic recording heads for rigid disk drives. The
Company supplies magnetic recording heads as head gimbal assemblies ("HGAs"),
and for certain of its customers incorporates multiple HGAs into headstack
assemblies ("HSAs"). The Company's products are sold primarily for use in 3.5"
form factor rigid disk drives. Read-Rite believes it supplies HGAs and HSAs for
a broader range of disk drive products than any other independent supplier.
During fiscal 1996, the Company supplied HGAs in volume for 35 different
disk drive products to 6 customers, and supplied HSAs in volume for 26 different
disk drive products to 4 customers. In fiscal 1996, the Company sold on average
approximately 25.8 million HGAs per quarter (including HGAs incorporated into
HSAs), and approximately 3.3 million HSAs per quarter.
Read-Rite also produces thin film MR tape heads for use in quarter-inch
cartridge ("QIC") tape drives in the 700 megabyte ("MB") to 4 gigabyte ("GB")
range per cartridge. During fiscal 1996, the Company supplied QIC tape heads in
volume for 6 different products to 3 customers. Tape heads accounted for
approximately 1% of the Company's net sales in fiscal 1996.
The Company's primary customers in fiscal 1996 were Western Digital
Corporation ("Western Digital"), Quantum Corporation ("Quantum"), and Maxtor
Corporation ("Maxtor"), representing 43%, 29%, and 12%, respectively, of the
Company's net sales.
The Company's principal wafer manufacturing facilities are located at its
headquarters in Milpitas, California, and in Fremont, California. Read-Rite SMI
Corporation ("Read-Rite SMI"), the Company's joint venture in Japan with
Sumitomo Metal Industries, Ltd. ("Sumitomo"), operates a wafer manufacturing
facility near Osaka, Japan, subcontracts head or "slider" fabrication and HGA
assembly to the Company's Thailand subsidiary and to Read-Rite SMI's own
Thailand subsidiary, Read-Rite SMI (Thailand) Co., Ltd. ("RRST"), and sells
finished HGAs primarily to Japanese customers. The Company has its primary thin
film slider fabrication and HGA assembly facilities in Bangkok, Thailand, and
its primary thin film HSA assembly facilities in Penang, Malaysia and Manila,
the Philippines. The Company also has a sales and customer support office in
Singapore, and a sales support office in Colorado. The Company manufactures
wafers for tape heads at its Milpitas facility; all tape head assembly is
performed in the Philippines.
In response to the continued shift in the marketplace to newer technology
products and the fact that the product programs the Company had been
participating in using metal-in-gap ("MIG") technology reached
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end-of-life, in the third quarter of fiscal 1996 the Company discontinued its
MIG products and related manufacturing activities. MIG programs accounted for
$174 million, or 18%, of the Company's sales for fiscal 1996.
Read-Rite was incorporated in California in 1981 and reincorporated in
Delaware in 1985. The Company's executive offices are located at 345 Los Coches
Street, Milpitas, California 95035, telephone number (408) 262-6700.
For a discussion of certain significant risk factors associated with the
Company's business, see "Certain Additional Business Risks" on pages 10 through
14 below.
COMPANY STRATEGY
Personal computer end-user demand and non-personal computer applications
such as network servers (intranet and Internet), workstations, mainframes, video
on demand, voicemail and multimedia services are driving the computer industry's
demand for greater performance and higher data storage capacity. In fiscal 1994,
the capacity for a single disk, 3.5" drive increased from approximately 270
megabytes ("MB") to approximately 420 MB; this capacity increased to
approximately 635 MB by the end of fiscal 1995, and to greater than 1 gigabyte
("GB") by the end of fiscal 1996. The rapid introduction of new, higher
performance products shortens product life cycles and places significant pricing
pressure on hard disk drives and drive components, including recording heads.
The Company expects this trend to continue for the foreseeable future.
To be competitive in this demanding environment, the Company must
collaborate with its customers as well as media, channel electronics and test
equipment suppliers to ensure critical co-developments proceed in a timely
manner. The Company must also continually design new product platforms to
accommodate a broad range of customer requirements while minimizing engineering
effort and manufacturing costs. In addition, it is critical that the Company
achieve continuous and timely design-in qualifications to become the primary
supplier for customer programs. Although disk drive manufacturers commonly
qualify more than one supplier, early design-in wins are important to become a
primary supplier.
To address these issues, the Company has focused and will continue to focus
on technology advancement, customer satisfaction and cost efficiency. During
fiscal 1996, the Company continued development of improved process technologies,
including ion milling, focused ion beam processes, advanced sputtering
techniques and equipment, slider fabrication processes and implementation of
such technologies as reactive ion etching and new tester technology. The Company
is in its fourth generation of its "Tripad" proximity recording heads and has
continued development of other thin film technological advances necessary for
higher performance rigid disk drives, including additional air bearing designs
such as sub-ambient (or negative) pressure and transverse pressure contour
designs, and the pico slider form factor (approximately 30% of the size of the
original minislider, and approximately 60% of the size of the current generation
nanoslider).
During fiscal 1996, the Company was qualified on two customer programs for
a new generation of thin film heads for rigid disk drive applications utilizing
MR data detection, and reached volume MR production, shipping over 2 million MR
HGAs in the fourth quarter. The Company's products for these programs support
areal densities of approximately 1.3 GB per 3.5" disk; the Company is also
providing samples of its MR head designs at approximately 1.7 GB capacity per
3.5" disk to certain of its customers and is seeking customer qualifications on
additional MR disk drive programs. The Company will continue to place
significant emphasis on MR product development and production processes and
capabilities with a goal of increasing volume production and yields. There can
be no assurance that the Company will be successful in attaining these goals.
Also during fiscal 1996, the Company entered into an agreement to acquire a
non-exclusive license to the intellectual property of Censtor Corporation
("Censtor"), a developer of planar pseudo-contact and contact recording
technology for disk drives. In a planar head, the read-write transducer is in
the horizontal plane, or parallel, to the media; in a conventional thin film
head, the transducer is in the vertical plane, or perpendicular to the media. In
an effort to extend the recording areal densities of its conventional thin film
inductive designs, the Company is combining planar technology with its Tripad
proximity recording technology and existing thin
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film manufacturing processes. The Company is currently in the process of
obtaining qualifications from customers for planar products, with volume
production targeted for the middle of fiscal 1997. However, there can be no
assurance that the Company will be successful in this new technology, that it
will obtain the necessary customer qualifications for planar heads, or that it
will be able to transition planar technology into commercially viable volume
production.
Throughout fiscal 1996, the Company continued its focus on strong customer
support, improved service and quality programs to strengthen its customer
relationships. The Company has implemented, and is continuing to implement, a
series of programs to enhance customer satisfaction. Business units have been
established for major customers to provide dedicated teams that are responsive
to the specific needs of each customer. The teams provide focused improvements
in new product introductions, including design support, prototype production,
and volume manufacturing ramps. Further, to meet its customers' time-to-market
goals, the Company strives to anticipate its customers' requirements through use
of the Company's strategic technology plan to translate customer requirements
into product platform specifications and to develop strategies for achieving
those specifications. This customer focus and close collaboration should help
facilitate early design-in wins and improve the Company's ability to timely
reach volume production.
The Company also continues to focus on improvements for cost efficiencies
through concerted manufacturing engineering efforts, most importantly yield
improvements and increased density in sliders per wafer.
PRODUCTS
An HGA consists of a magnetic recording head attached to a flexure, or
suspension arm, and a wire/tubing assembly. A number of HGAs can be combined
with an actuator for positioning the HGAs, a coil assembly and a flexible
circuit board assembly to form an HSA. The remaining principal components of
rigid disk drives are disks, a motor/spindle assembly for rotating the disk,
control electronics and firmware. The rigid disks, or media, are coated with a
thin layer of magnetic material and attached to the motor/spindle assembly which
rotates the disks at high speed within a sealed enclosure. The heads, attached
to and positioned by the movable actuator, "fly" above both sides of each disk,
or, as in the case of the Company's "Tripad" products, operate in intermittent
contact ("pseudo-contact") with the disk. The position of the heads is
controlled by the drive electronics based on a servo pattern previously written
on the surface of at least one disk. The heads record or retrieve data from
tracks pre-formatted in the magnetic layer of each disk.
The principal elements of QIC tape drives are magnetic read/write heads and
electronics for read/write, motion control, and system interface functions. Data
cartridges contain tape motion and guidance mechanisms.
HEAD GIMBAL ASSEMBLIES
Disk drive manufacturers purchase from the Company either fully assembled
HSAs, or purchase HGAs and assemble, or have assembled, their own HSAs. The
Company supplied HGAs in volume for 35 different disk drive products to 6
customers during fiscal 1996 as HGAs accounted for approximately 41% of the
Company's net sales for the year. The Company presently manufactures in volume
two types of heads for rigid disk drives: thin film inductive and thin film MR.
THIN FILM INDUCTIVE
Inductive thin film heads are produced with manufacturing processes adapted
from semiconductor manufacturing operations. Thin films of highly permeable
magnetic material are deposited on a non-magnetic substrate to form the magnetic
core, and electrical coils are electroplated in a pattern which has been
imprinted through photolithographic techniques. This process facilitates
miniaturization, reduces electrical inductance and enhances manufacturing
precision.
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THIN FILM MR
The Company is now producing in volume MR thin film heads at capacities of
approximately 1.3 GB per 3.5" disk. MR heads consist of a magnetoresistive read
element and an inductive write element. The MR read element incorporates certain
materials whose electrical resistances change in a magnetic field. In the read
mode, as the MR head flies over a previously written region on the disk, the
magnetic field generated by the directionally magnetized region causes a change
in electrical resistance. This change can be sensed or read by the drive's
electronic circuitry. MR heads have the ability to read data at lower media
velocities and narrower track widths than inductive heads. The ability to read
at lower media velocities improves performance as disk drives become smaller,
because the surface velocity of a disk turning at the same number of revolutions
per minute is reduced as the diameter of the disk decreases. Narrower track
widths enable higher density magnetic recording, i.e., greater capacity per
square inch.
HEADSTACK ASSEMBLIES
The Company has been supplying HSAs since fiscal 1992 as part of its
strategy to supply higher value products to its customers. The Company conducts
all of its volume HSA production in its Malaysia and Philippines facilities.
The Company supplied HSAs in volume for 26 different disk drive products to
4 customers during fiscal 1996 as HSAs accounted for approximately 57% of the
Company's net sales for the year. During fiscal 1996, the Company saw a
significant shift from HGAs to HSAs as these products represented 34% and 63%,
respectively, of net sales for the fourth quarter of 1996, compared to 52% and
46% for the fourth quarter of fiscal 1995. The Company expects HSAs to remain at
approximately two-thirds of total net sales for fiscal 1997.
TAPE HEADS
Since fiscal 1994, the Company has been supplying MR tape heads for use in
QIC tape drives as part of its strategy to diversify its product offerings, and
is the leading independent producer of MR tape heads for use in QIC tape drives
in the 700 MB to 4 GB range per cartridge. During fiscal 1996, the Company
supplied QIC tape heads in volume for 6 different products to 3 customers. Tape
heads accounted for approximately 1% of the Company's net sales for the year.
The Company's primary tape head customers in fiscal 1996 were Colorado Memory
Systems (a subsidiary of Hewlett-Packard), Exabyte Corporation and Seagate.
FERRITE METAL-IN-GAP
The Company's MIG programs, which accounted for $174 million, or 18%, of
the Company's net sales for fiscal 1996, reached their end-of-life during the
third quarter and orders are expected to be minimal for future periods. As a
result, the Company incurred charges in fiscal 1996 associated with the
termination of approximately 5,000 employees in the Philippines, the shutdown of
one of its facilities there, and the write-off of related equipment. In
addition, the domestic operations of Sunward Technologies, Inc. ("Sunward"), a
wholly owned subsidiary, were relocated from San Diego, California to Northern
California during fiscal 1996. See Note 4 in "Notes to Consolidated Financial
Statements."
MANUFACTURING
Read-Rite's operating results are highly dependent upon its ability to
produce large volumes of magnetic recording heads at acceptable yields. The
Company's manufacturing process for thin film heads is divided into four main
areas: wafer fabrication, slider fabrication/wafer slicing, HGA assembly and
testing, and HSA assembly and testing. For tape heads, the Company s
manufacturing process consists of wafer fabrication, wafer slicing, and assembly
and testing.
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WAFER FABRICATION
The Company presently fabricates wafers at its Milpitas and Fremont,
California facilities and at Read-Rite SMI's facility near Osaka, Japan. The
Company's Fremont facility produces 6" square wafers (versus 4" wafers currently
produced in its Milpitas facility and at Read-Rite SMI), increasing the
unyielded per wafer slider count from approximately 5,400 to over 12,500
nanosliders, and in fiscal 1996 produced approximately 36% of the Company's
total slider output.
SLIDER FABRICATION/WAFER SLICING
The Company machines or slices wafers (other than for prototypes) primarily
at its and Read-Rite SMI's Thailand facility. The machining process is
accomplished in five phases. First, diamond saws cut the wafer into rows, or
bars, of sliders. Second, the rows are lapped to the proper throat height using
an automated, multi-stage lapping process. Third, the Company employs
photolithography, ion milling, focused ion beam equipment and other processes to
form the final pole geometries of the device. Fourth, the Company uses a variety
of processes to define and shape the air bearing surfaces of the individual
sliders in each row. Finally, the rows are cut into individual sliders.
HGA ASSEMBLY AND TESTING
The Company presently performs volume thin film HGA assembly and testing at
its Thailand facilities. The Company plans to commence planar slider
fabrication, HGA assembly and HSA assembly at its Philippines facilities during
fiscal 1997, and is thus making the necessary investments in these facilities to
accommodate these new processes. There can be no assurance, however, that the
Company will be successful in reaching volume production of planar heads, or
that the Company will achieve necessary customer qualifications on its planar
designs.
In HGA assembly, wire elements or flexible circuitry are attached to bond
pads on the slider and the slider is then bonded to the stainless steel
flexure/suspension. The Company then tests the head's read/write capability (for
signal strength, pulse shape, over-write and error rate) and the circuit
integrity of the magnetic elements. The Company typically tests its HGAs before
shipment to ensure the HGAs meet customer specifications. Despite such testing,
however, customers may return defective lots if, due to different testing
equipment or procedures, damage in shipment or other factors, they determine
that a previously agreed upon percentage of the HGAs do not meet specifications.
HEADSTACK ASSEMBLY AND TESTING
The Company assembles substantially all of its HSAs (other than prototypes)
at its facilities in Malaysia and the Philippines. HSAs consist of up to 30 or
more total parts. The HGAs, the actuator coil and a flexible printed circuit
cable are mounted on the actuator such that the heads can be positioned within
the disk drive. The HSA also includes a read/write preamplifier and head
selection circuit and may include other miscellaneous parts such as bearings, a
voice coil and a connector, depending on the design of the customer's disk
drive.
The Company has made significant investments in its HSA operations in
Malaysia and the Philippines. The HSA business carries certain risks and demands
in addition to those of the HGA business. Among those risks are lower gross
margins, slower inventory turns, increased exposure to inventory obsolescence
due to the larger number of parts required for an HSA and the fact that each HSA
program requires unique components with long lead-time purchasing cycles, and
varying product life spans between different HSA models. There can be no
assurance that the Company's HSA operations will be successful; the failure of
such operations would have a material adverse effect on the Company's business,
operating results and financial condition.
The cost of purchased components incorporated into the Company's HSAs
represents a substantial percentage of the total cost of manufacturing such
products. Accordingly, the Company's ability to maintain adequate margins in the
face of constant price erosion is principally a function of its ability to
obtain price reductions from its component vendors, to continuously improve
yields and to improve productivity. There can
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be no assurance that the Company will be able to achieve component cost levels,
yields and productivity levels necessary to maintain adequate HSA margins.
TAPE HEAD
After the Company's tape head wafers are fabricated in its Milpitas
facility, they are high-speed probed for their electronic and magnetic
characteristics, and mapped for later sorting. The wafers are sliced into rows
and then individual elements by subcontractors in the Far East; individual units
are then shaped to produce the contoured surface over which the tape media
passes.
After the tape wafers are sliced and shaped into individual MR devices,
they are assembled into a body and carriage mount and a flexible cable is
attached; the final unit is dynamically tested prior to shipping. The Company
now performs all of its tape head assembly operations at its facilities in the
Philippines.
CUSTOMERS, MARKETING AND SALES
The Company's primary customers are Western Digital, Quantum, and Maxtor.
These customers represented 43%, 29%, and 12%, respectively, of the Company's
net sales for fiscal 1996. Given the small number of high performance disk drive
and QIC tape drive manufacturers who require an independent source of HGA or HSA
supply, the Company expects its dependence on a relatively limited number of
customers to continue. The loss of any large customer, or a significant decrease
in orders from one or more large customers, would have a material adverse effect
on the Company's business, financial condition and results of operations. For a
discussion of additional risk factors associated with the Company's customer
base, see "Certain Additional Business Risks" on pages 10 through 14 below.
Disk drive and tape drive manufacturers offer a variety of products with
differing design, performance and cost characteristics. Magnetic recording head
vendors, such as the Company, work with manufacturers to determine the
performance characteristics required for the heads to be used in new designs and
develop customized heads and HSAs for each program. Head vendors seek to have
their heads "designed in" to a particular program and to be qualified as a
primary supplier for new programs. The development and commencement of
production of head products for new programs involve major expenditures for
product design, production engineering and capital equipment. Production
processes must also be adjusted to accommodate the unique specifications of each
new design. As manufacturers introduce new programs, the Company must seek to
qualify its heads in these new programs, requiring continual significant
expenditures of time and resources. Additionally, these new programs typically
require the development of new head technologies or enhancements to existing
platforms to address ever-higher performance criteria. These conditions place a
significant burden on the Company to assess properly the developments in the
industry and to market and sell products successfully to changing or emerging
market leaders.
The Company continues to seek close technical collaboration with its
customers during the design phase of new programs to facilitate integration of
the Company's products into such programs, to improve the Company's ability to
rapidly reach high manufacturing volumes, and to position the Company to be a
primary supplier of HGAs, HSAs and tape heads for new programs. Read-Rite
believes that winning early design-in qualifications is critical, particularly
in light of the rapid migration toward higher capacity disk drives and the
shorter life cycles of such products. Failure by the Company to execute
consistently on product design-ins would have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The disk drive industry is intensely competitive, both at the drive level
and component level, and is characterized by substantial price declines over the
useful life of a product. Accordingly, the Company believes that the most
important competitive factors in its industry are timely delivery of new
technologies and price for a given technology. Other significant factors are
customer support, product quality and the ability to reach volume production
rapidly. Failure to execute in any of these factors can have a material adverse
effect on the Company's revenues and gross margins, as it has affected the
Company in fiscal 1996. See "Certain Additional Business Risks" on pages 10
through 14 below.
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The Company believes that TDK/SAE, Yamaha Corporation ("Yamaha"), and
Applied Magnetics Corporation ("AMC") are currently the Company's primary
competitors among independent magnetic recording head manufacturers, and that
Seagate is currently the Company's primary competitor in the merchant market
among "captive" head manufacturers. The Company's primary MR tape head
competitors are Herald Datanetics and Seagate. Silmag, a France based company,
is the Company's principal competitor in planar technology products. Japanese
competitors, such as TDK/SAE and Yamaha, have been aggressively competing for
business in the United States and in Japan, targeting the MR marketplace in
particular. Other Japanese companies, including Sony, ALPS and Nippon Metal
Mining, have developed or are developing thin film head technology and could
bring this technology to the market in the future.
IBM, Seagate, Quantum and other disk drive manufacturers with "captive" or
internal recording head manufacturing capability such as NEC and Fujitsu
generally have significantly greater financial, technical and marketing
resources than the Company, and have made or may make their products available
in the merchant market. As indicated above, Seagate is the Company's primary
competitor among captive head manufacturers. Further, IBM made a series of
announcements during 1996 regarding its plans to invest $1.32 billion, including
investments in its MR technology, to expand its disk drive and disk drive
components business by selling to original equipment manufacturers ("OEM")
starting in 1997. Historically, IBM has been a vertically integrated company,
producing heads only for internal use, but by entering the OEM market, IBM could
be a substantial competitor for the Company's existing sales base. The Company's
competitive position could be materially and adversely affected if IBM is
successful in marketing its advanced MR products in the merchant market at
competitive pricing.
In its HSA business, the Company must compete against certain of its
customers' internal HSA capacity, as well as against other merchant HSA
manufacturers such as TDK/SAE, MKE, AMC, Tandon, Kabool and Kaifa. The HSA
business is far less capital intensive than the thin film HGA business, thus
making entry into the HSA manufacturing business easier than entry into the thin
film HGA business. Accordingly, there can be no assurance that the Company will
be able to compete successfully with its customers' own HSA capacity, or with
existing or new HSA manufacturers.
Finally, new technologies, including extensions of existing thin film head
technology such as contact, near-contact, pico, planar, MR, or giant MR ("GMR")
heads may compete in the future with the Company's current head technologies and
may support areal density capabilities significantly greater than those of the
Company's thin film heads now in commercial production, and other manufacturers
may already have or may develop, more advanced MR technology or MR production
capability than the Company. Also, certain companies are developing alternative
data storage technologies, such as solid-state (flash or ferroelectric) memory
or optical disk drives which do not utilize the Company's products. The
Company's competitive position may be materially and adversely affected if a
competitor precedes the Company in the successful introduction of improved or
new technologies or products.
PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
The Company's current research and development efforts are principally
directed towards the development of next generation products and technologies
related to the Company's HGA, HSA and tape head businesses, enhancement of
existing products, and manufacturing process developments to improve product
performance and yields.
In addition to the Company's current focus on increasing the performance of
its inductive and "contiguous junction" MR heads, the Company is also pursuing
longer-term development to extend the areal density capabilities of MR heads,
development of spin valve heads, as well as development of GMR heads. In October
1996, the Company was named a 1996 R&D 100 award recipient for a cooperative
development with the Department of Energy for the development and fabrication of
"Ultra-High Density Magnetic Sensors" thin film heads with increased storage
densities using the GMR effect. This technology should allow more information to
be stored on computer hard disks than does current technology.
As part of the Company's strategy to capitalize on its core competencies of
thin film technology, miniaturization, micro-machining, and high volume, low
cost manufacturing while diversifying its product
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offerings and customer base, the Company has recently made investments in three
new technologies. The first, the investment in Censtor planar technology, is
discussed above under "Business -- Company Strategy."
The second investment was in magneto-optical data storage. During fiscal
1996, the Company signed a Memorandum of Understanding with, and made a minority
investment in, Quinta Corporation ("Quinta"), a data storage development
company. Subsequent to year end, the parties signed an agreement to design and
develop a new generation of recording heads and HGAs combining magnetic and
optical data storage technologies. The agreement calls for additional equity
investments in Quinta by the Company and non-recurring engineering payments by
Quinta to the Company, includes cross licenses with royalty provisions and is
intended to lead to a supply arrangement whereby the Company supplies flying
magneto-optical recording heads and HGAs to Quinta for incorporation into
magneto-optical disk drives.
Third, during fiscal 1996, the Company also made a minority equity
investment in, and obtained a limited license from, Tessera, Inc. ("Tessera"), a
developer of advanced electronics packaging for semiconductors. The agreement
grants the Company a royalty-free license to manufacture and sell "TCMT," the
flexible "tape" necessary to the Tessera packaging process. The agreement also
grants the Company the right to obtain, subject to licensee fees and additional
royalties, licenses to Tessera's assembly technology and batch processes.
There can be no assurance that the Company will be successful in developing
any of these new technologies or that if successful, it will be able to obtain
qualifications in customer programs or transition the technologies into
commercially viable volume production.
In fiscal 1996, 1995 and 1994, the Company's research and development
expenses were $52.2 million, (which includes a $9.0 million charge for the
acquisition of planar technology), $41.8 million (including a $2.4 million
investment in Redwood MicroSystems Inc. ("Redwood") and a $4.6 million write-off
associated with certain license rights acquired from Kyushu Matsushita Electric
So., Ltd. ("KME")), and $25.5 million, respectively.
BACKLOG
The Company's sales are generally made pursuant to short-term purchase
orders rather than long-term contracts. In addition, the Company believes it is
common practice for disk drive manufacturers to place orders in excess of
requirements and to change or cancel outstanding purchase orders in response to
rapidly shifting business conditions. Accordingly, the Company does not believe
its backlog is an accurate measure of sales or operating results for any future
period. The Company's backlog of purchase orders requesting delivery within six
months was approximately $194.8 million as of September 30, 1996, compared to
$369.5 million as of September 30, 1995.
STRATEGIC ALLIANCE WITH SUMITOMO
In June 1991, the Company established a strategic alliance with Sumitomo, a
leading Japanese industrial company, including an investment by Sumitomo in the
Company and the establishment by the two companies of a joint venture, Read-Rite
SMI, in Japan. Substantially all of Read-Rite SMI's sales in fiscal 1996 and
1995 were to MKE, a subcontractor to Quantum.
In December 1993, the Company and Sumitomo invested an additional $2.8
million and $9.2 million, respectively, in Read-Rite SMI as part of a series of
agreements pursuant to which Read-Rite SMI licensed from the Company the
Company's MR technology, sublicensed from the Company the technology licensed
from KME in the fourth quarter of fiscal 1993, and agreed to share with the
Company certain ongoing MR technology research and development costs. The
Company and Read-Rite SMI have also agreed to amend and restate their principal
license agreement effective September 1996 to include additional technologies,
including spin valve and GMR, and to eliminate royalty provisions. The Company
and Read-Rite SMI have also agreed to a separate sublicense for planar
technology providing for both a license fee and running royalties. Finally, the
Company and Read-Rite SMI have agreed to an ongoing cost sharing arrangement
allowing the parties to share equitably in their collective research and
development expenditures.
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<PAGE> 10
The Company has retained a majority voting interest in Read-Rite SMI;
however, all material corporate actions require a supermajority of Read-Rite
SMI's Board of Directors, and thus the consent of both the Company and Sumitomo.
Further investments in Read-Rite SMI beyond current amounts are expected to be
borne equally by the Company and Sumitomo.
As a result of the June 1991, December 1993 and November 1996 transactions,
the Company and Read-Rite SMI have cross-licensed all of their respective thin
film inductive, MR, spin valve, GMR and planar technology owned or developed
during the term of the original joint venture agreement relating to the
manufacture of thin film heads for disk drives. Read-Rite SMI has the exclusive
right to distribute products of either Read-Rite SMI or the Company to customers
for integration into disk drives in Japan and to Japanese customers for
integration into rigid disk drives throughout the remainder of the world other
than North America. The Company has the exclusive right to distribute products
of either the Company or Read-Rite SMI for integration into rigid disk drives in
North America and throughout the rest of the world, other than in Japan or by
Japanese customers outside North America.
Although the Company believes Read-Rite SMI provides important advantages
to the Company, there can be no assurance that there will continue to be strong
market demand in Japan for thin film heads manufactured by independent
suppliers, that Read-Rite SMI will continue to be successful in supplying heads
to MKE, or that Read-Rite SMI will be successful in further penetrating the
Japanese market. The failure of Read-Rite SMI to remain a principal supplier to
MKE or to obtain additional customers could have a material adverse effect on
the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Read-Rite regards elements of its manufacturing processes, product designs,
and equipment as proprietary and seeks to protect its proprietary rights through
a combination of employee and third party non-disclosure agreements, internal
procedures and patent protection. The Company has a number of patents with
expiration dates ranging from 2011 to 2015, and additional applications pending.
In addition, Read-Rite has a variety of licenses and cross-licenses with other
companies within the industry for certain uses of the companies' respective
patents.
Read-Rite believes that its success depends on the innovative skills and
technical competence of its employees and upon proper protection of its
intellectual properties. Despite Read-Rite's protective measures, there can be
no assurance that such measures will be adequate to protect its proprietary
rights or that the Company's competitors will not independently develop or
patent technologies that are equivalent or superior to the Company's technology.
The Company has from time to time been notified of claims that it may be
infringing patents owned by others. For example, in response to a claim by the
Company of infringement of certain Company patent rights, a competitor of the
Company has counterclaimed certain of its own patent rights against the Company.
To date there is no litigation arising out of these claims. The Company is
negotiating with this competitor and believes it is unlikely the outcome of
these claims will have a material adverse effect on the Company's financial
position or results of operations. To the extent the Company receives additional
claims of infringement from others in the future, where necessary or desirable
the Company may seek licenses under patents which it is allegedly infringing.
Although patent holders commonly offer such licenses, no assurance can be given
that licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. Defending a claim of infringement or the failure to
obtain a key patent license from a third party could cause the Company to incur
substantial liabilities and/or to suspend the manufacture of the products
utilizing the patented invention.
EMPLOYEES
As of September 30, 1996, the Company had 19,507 employees, including 1,950
in the United States, 10,318 in Thailand, 3,574 in Malaysia, 3,348 in the
Philippines, 296 at Read-Rite SMI, and 21 at the Company's sales and customer
support offices in Singapore. Read-Rite believes its future success will depend
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<PAGE> 11
in large part upon its ability to continue to attract, retain, train and
motivate highly skilled and dedicated employees. None of the Company's employees
are represented by a labor union.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state, local and foreign
regulations relating to the use, storage, discharge and disposal of hazardous
materials used during its manufacturing process, to the treatment of water used
in manufacturing, and to air quality management. In addition to obtaining
necessary permits for expansion, the Company must also comply with expanded
regulations on its existing operations as they are imposed. Although the Company
has not to date suffered any material adverse effects in complying with
applicable environmental regulations, public attention has increasingly been
focused on the environmental impact of manufacturing operations which use
hazardous materials. The Company's failure to comply with present or future
regulations, or to obtain all necessary permits required under such regulations,
could subject it to significant liability and financial penalties (possibly
resulting in production suspension or delay), restrict the Company's ability to
expand or operate at its locations in California or its locations in Thailand,
Malaysia, Japan and the Philippines, restrict the Company's ability to establish
additional operations in other locations, or require the Company to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. Moreover, while the Company has invested significant
resources in safety procedures, training, treatment equipment and systems and
other measures designed to minimize the possibility of an accidental hazardous
discharge, any such discharge could result in significant liability and clean-up
expenses which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company uses a significant amount of water in its manufacturing
process. As a result of drought conditions in California in several past years,
water use restrictions were imposed on many manufacturers in the state. Although
the Company is currently under no specific water use restrictions, future
drought conditions could cause the state or local authorities to mandate higher
fees and/or reductions in water usage allocations. In such event, any such
reductions could restrict the Company's level of production and adversely affect
the Company's business, financial condition and results of operations.
During fiscal 1996, the Company's subsidiary located in Thailand became the
first company in the disk drive industry worldwide to receive ISO 14001
certification. Certification is made by the International Organization for
Standardization, and looks at environmental management systems and addresses the
needs of a broad range of interested parties and evolving needs of society for
environmental protection. The organization looks at continual improvement of the
company's environmental policy: planning, implementation and operation; checking
and corrective action; and management review. Surveillance audits are conducted
by an independent body on a semi-annual basis for three years; after that period
has passed a re-certification is required.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
The Company is a component supplier dependent upon a limited number of
customers in a volatile industry characterized by rapid technological change,
short product life cycles, intense competition and price erosion. In addition,
as demonstrated late in the quarter ended June 30, 1996 as significant orders
were canceled and/or rescheduled by several customers with little or no advance
warning, demand for the Company's products is highly variable. This variability
was previously demonstrated by the strong demand in the first half of fiscal
1993 and the significant industry contraction in the latter half of fiscal 1993.
In each case, these demand variations materially and adversely affected the
Company's business, financial condition and results of operations.
During fiscal 1996, the Company produced HGAs in volume for 6 customers,
HSAs in volume for 4 customers and tape drive products in volume for 3
customers. Given the small number of high performance
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disk drive and tape manufacturers who require an independent source of HGA, HSA
or tape head supply, the Company expects its dependence on a limited number of
customers to continue. As demonstrated by the significant reduction in the level
of the Company's business late in fiscal 1996 and in the second half of fiscal
1993, the loss of any large customer, or a significant decrease in orders from
one or more large customers, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Given the Company's dependence upon a limited number of customers,
acquisitions and consolidations affecting such customers could also have a
material adverse effect on the Company's business, financial condition and
operating results. For example, Seagate, a competitor of the Company, acquired
the tape head operations of Applied Magnetics Corporation in fiscal 1995, and in
fiscal 1996 completed the acquisition of Conner Peripherals, Inc. ("Conner"), a
major customer of the Company. As a result, Seagate has significantly reduced
its future orders with the Company, and is not expected to account for a
significant percentage of the Company's total sales in the future as Seagate has
significant internal disk and tape head manufacturing capacity. Further, in
fiscal 1996, Singapore Technologies acquired the disk drive operations of
Micropolis, while Hyundai completed its acquisition of Maxtor. While the Company
believes it will remain a supplier to both Micropolis and Maxtor notwithstanding
these changes in ownership, there can be no assurance that these customers will
continue purchasing a significant quantity of their respective head requirements
from the Company.
Vertical integration by the Company's customers, through which a customer
acquires or increases internal HGA or HSA production capability, could also
materially and adversely affect the Company's business, financial condition and
results of operations. In 1994, Quantum, a principal customer of the Company
with no previous magnetic recording head capacity, acquired Digital Equipment
Corporation's ("DEC") recording head and disk drive operations. While this
integration has not had a material adverse effect on the Company's thin film
head operations to date, there can be no assurance that Quantum will continue to
purchase a significant portion of its head requirements from the Company,
particularly as Quantum transitions its drive programs to MR technology, the
primary focus of Quantum's internal head operations. Other acquisitions or
significant transactions by the Company's customers leading to further
consolidation or vertical integration could also materially and adversely affect
the Company's business, financial condition and results of operations.
The Company's primary revenues are derived from thin film inductive
products, which require substantial resources for product development and
manufacturing equipment to effectively extend the performance of these products
to compete with new products supporting higher areal densities. To maintain its
market position, the Company must continually and timely improve its head, HGA
and HSA technologies to meet industry demands, at competitive costs. In
addition, the Company is dependent on a limited number of customers who have an
increasingly limited number of large volume programs conducted at any given
time, and faces strong competition among recording head manufacturers. The
failure by the Company to execute on technologies necessary to consistently
obtain qualification on any of such volume programs will have a material adverse
effect on the Company's business, financial condition and results of operations.
For example, in the second quarter of fiscal 1996, the Company learned that
to participate in certain customer programs, Company products would have to
incorporate a new technical feature which the Company had not yet begun
developing. Though the Company began development of necessary processes for this
feature in the second quarter, thereafter the Company incurred significant
start-up costs without concurrently achieving the volume production necessary to
absorb those costs, thus materially and adversely impacting both the Company's
revenues and gross margins. Though the Company moved rapidly to develop and
qualify these processes, in mid-fiscal 1996 the timing of the introduction of
these processes caused delays in new product introductions and adversely
affected the Company's business, financial condition and results of operations.
The Company was qualified on two MR programs in fiscal 1996 and shipped
over 2 million MR heads in the fourth fiscal quarter. There can be no assurance,
however, that the Company will be successful in timely and cost-effectively
developing and manufacturing at acceptable yields MR heads necessary to achieve
consistent design-in wins or sustained profitability in the future. The Company
has invested, and will continue
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to invest, significant resources in product development and manufacturing
equipment to support the Company's efforts to develop and produce in volume
cost-competitive thin film MR heads.
In March 1996, the Company acquired a nonexclusive license to the
intellectual property of Censtor, including planar technology. The Company
believes that it can extend recording areal densities beyond conventional thin
film inductive designs by combining planar technology with the Company's
proximity recording technology and manufacturing processes. The Company has to
date received positive customer feedback on its planar HGA prototypes and is
making significant investments in facilities and equipment at its Milpitas wafer
fabrication facility and Philippines assembly facility to support volume
production in calendar 1997. However, there can be no assurance that the Company
will be successful in developing this new technology, that it will obtain the
necessary customer qualifications for planar heads, or that it will be able to
transition planar technology into commercially viable volume production. The
Company's failure to commercialize this new technology would have a material
adverse effect on the Company's business, financial condition and results of
operations.
As indicated above, technology changes rapidly in the Company's industry.
These rapid changes require the Company both to anticipate new technologies and
to address obsolescence of old technologies. Failure to execute on new
technologies or to smoothly transition from old technologies can have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, due to the ever-increasing performance requirements for
recording heads, all of the customer programs using the Company's MIG products
reached end-of-life during the third quarter of fiscal 1996. Though MIG products
accounted for $174 million, or 18% of the Company's sales for fiscal 1996, the
Company expects its MIG revenues for fiscal 1997 to be negligible and is no
longer pursuing design-ins with this technology. The rapid decline in MIG sales
in the fourth quarter (from approximately $48 million in the third quarter to
approximately $5 million in the fourth), coupled with the timing of certain new
product introductions in the Company's thin film business and reductions in
certain customer programs in the disk drive industry during the third and fourth
quarters, made it difficult for the Company to transition its MIG facilities to
the production of more advanced products. As a result, during the fourth quarter
of fiscal 1996, the Company reduced its workforce in the Philippines by
approximately 5,000 employees, and incurred charges for related severance costs,
equipment and inventory write-offs and facility-related charges. See also Note 4
in the Notes to Consolidated Financial Statements.
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers needs. For example, as
stated above, the Company is making significant investments in facilities and
equipment to support planar products in advance of obtaining customer
qualifications for this new technology. Accurate capacity planning is
complicated by the pace of technological change, unpredictable demand
variations, the effects of variable manufacturing yields, and the fact that most
of the Company's plant and equipment expenditures have long lead times, thus
requiring major commitments well in advance of actual requirements. The
Company's underestimation or overestimation of its capacity requirements, or
failure to successfully and timely put in place the proper technologies, would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has made substantial capital expenditures and installed
significant production capacity to support new technologies and increased demand
for its products. The Company made capital expenditures in fiscal 1996 of
approximately $265.8 million, compared to approximately $185.1 million for
fiscal 1995, and plans to expend approximately $225 million in fiscal 1997.
There can be no assurance that the Company's net sales will increase
sufficiently to absorb such additional costs, and that there will not be
periods, such as in fiscal 1996 and in the latter half of fiscal 1993, when net
sales decline quarter to quarter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's production process is also labor intensive. As a result, the
Company conducts substantially all of its HGA machining, assembly and test
operations, HSA assembly and tape head assembly
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operations offshore, and is thus subject to the many risks associated with
contracting with foreign vendors and suppliers and with the ownership and
operation of foreign manufacturing facilities, including obtaining requisite
governmental permits and approvals, currency exchange fluctuations and
restrictions, variable or higher tax rates, political instability, changes in
government policies relating to foreign investment and operations, cultural
issues, labor problems, trade restrictions, transportation delays and
interruptions, and changes in tariff and freight rates. The Company has from
time to time experienced labor organization activities at certain of its foreign
operations, most recently in the first quarter of fiscal 1997, but none of the
Company's employees are currently represented by a union. There can be no
assurance, however, that the Company will continue to be successful in avoiding
work stoppages or other labor issues in the future.
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial yield loss, and in some cases, cause production
to be suspended. Yields for new products initially tend to be low as the Company
completes product development and commences volume manufacturing, and thereafter
typically increase as the Company's ramps to full production. The Company's
forward product pricing reflects this assumption of improving yields; as a
result, material variances between projected and actual yields have a direct
effect on the Company's gross margins and profitability. The difficulty of
forecasting yields accurately and maintaining cost competitiveness through
improving yields will continue to be magnified by ever-increasing process
complexity, and by the compression of product life cycles which requires the
Company to bring new products on line faster and for shorter periods while
maintaining acceptable yields and quality, without, in many cases, reaching the
longer-term, high volume manufacturing conducive to higher yields and declining
costs.
As a high technology company in a narrowly defined industry, the Company is
often dependent upon a limited number of suppliers and subcontractors, and in
some cases on single sources, for critical components or supplies. Limitation on
or interruption of the supply of certain components or supplies can severely and
adversely affect the Company's production and results of operations. The Company
has limited alternative sources of certain key materials such as wafer
substrates and photoresist, and frequently must rely on a single equipment
supplier for a given equipment type due to lack of viable alternatives or to
insure process consistency. Accordingly, capacity constraints or production
failures at, or restricted allocations by, the Company's suppliers could have a
material adverse effect on the Company's own production, and its business,
financial condition and results of operations.
The Company manufactures custom products for a limited number of customers.
Because its products are custom, the Company typically cannot shift raw
materials, work-in-process or finished goods from customer to customer, or from
one product program to another for a particular customer. However, to enable its
customers to get their products to market quickly and to address its customers'
demand requirements, the Company must invest substantial resources and make
significant materials commitments, often before obtaining formal customer
qualifications and generally before the market prospects for its customers'
products are clear. Moreover, given the rapid pace of technology advancement in
the disk drive industry, the disk drive products which do succeed have
unpredictable, and typically very short, life cycles. Finally, in response to
rapidly shifting business conditions, the Company's customers have generally
sought to limit their purchase order commitments to the Company, and certain
customers have on occasion canceled or materially modified outstanding purchase
orders with the Company without significant penalties. For example, the Company
experienced significant cancellations during the third quarter of fiscal 1996
and during the third quarter of fiscal 1993.
As a result of the above factors, the Company's inventory is subject to
substantial risk. To address these risks, the Company monitors its inventories
and provides inventory write-downs intended to cover inventory risks. However,
given the Company's dependence on a few customers and a limited number of
product programs for each, the magnitude of the commitments the Company must
make to support its customers' programs and the Company's limited remedies in
the event of program cancellations, if a customer cancels or materially reduces
one or more product programs, or should a customer experience financial
difficulties, the Company may be required to take significant inventory charges
which, in turn, could materially and adversely affect the Company's business,
financial condition and results of operations. While the Company has taken
certain charges and provided inventory reserves, there can be no assurance that
the Company will not be
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required to take additional inventory write-downs due to the Company's inability
to obtain necessary product qualifications or to further cancellations by
customers.
The Company has experienced substantial fluctuations in quarterly operating
results in the past, and the Company's future operating results could vary
substantially from quarter to quarter. The Company's operating results for a
particular quarter or longer periods can be materially and adversely affected by
numerous factors, such as delayed product introductions, capacity constraints on
certain technologies, low product yields, increased material costs or material
or equipment unavailability, disruptions in foreign operations, decreased demand
for or decreased average selling prices of the Company's products, increased
competition leading to a failure by the Company to obtain "design-in wins" on
one or more customer programs, changes in product mix, increased operating costs
associated with the ramp-up of production as capacity is added or under-
utilization of capacity if demand is less than anticipated. The Company's sales
are generally made pursuant to individual purchase orders which may be changed
or canceled by customers on short notice, often without material penalties.
Changes or cancellations of product orders could result in under-utilization of
production capacity and inventory write-offs. For example, in the second half of
fiscal 1996, and in calendar 1993, the Company experienced delays and
cancellation of orders, reduced average selling prices, inventory write-offs,
increased unit costs due to under-utilization of production capacity, and, as a
consequence of the foregoing, significantly reduced revenues and gross margins,
generating operating losses. The Company expects periodic fluctuations will
occur in the future.
The trading price of the Company's Common Stock is expected to continue to
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, general conditions in the disk drive and
computer industries, and other events or factors. In addition, stock markets
have experienced extreme price volatility in recent years. This volatility has
had a substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's Common Stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's Common Stock.
EXECUTIVE OFFICERS
The Company's executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Cyril J. Yansouni............. 54 Chairman of the Board of Directors and Chief Executive Officer
Frederic Schwettmann.......... 56 President, Chief Operating Officer and Director
Peter G. Bischoff............. 56 Executive Vice President
Michael A. Klyszeiko.......... 57 Executive Vice President, Operations
Alan S. Lowe.................. 34 Senior Vice President, Customer Business Units
Ralph Patterson............... 51 Senior Vice President, Research and Development
John T. Kurtzweil............. 40 Vice President, Finance and Chief Financial Officer
Sherry F. McVicar............. 44 Vice President, Human Resources
Rex S. Jackson................ 36 Vice President, General Counsel and Secretary
</TABLE>
There are no family relationships among directors or executive officers of
the Company.
Mr. Yansouni has served as Chief Executive Officer and Chairman of the
Board of Directors of the Company since March 1991. Prior to joining the
Company, Mr. Yansouni was with Unisys Corporation, a manufacturer of computer
systems, from December 1988 to February 1991, where he served in various senior
management capacities, most recently as an Executive Vice President. From
October 1986 to December 1988, Mr. Yansouni was President of Convergent
Technologies, a manufacturer of computer systems, which was acquired by Unisys
in December 1988. From 1967 to 1986, Mr. Yansouni was at Hewlett-Packard
Company. During that time, he served in a variety of technical and management
positions, most recently as Vice President and General Manager of the Personal
Computer Group. Mr. Yansouni received his M.S. degree in
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<PAGE> 16
electrical engineering from Stanford University and his B.S. degree in
electrical engineering and mechanical engineering from the University of
Louvain, Belgium. Mr. Yansouni is also a director of Informix Software, Inc. and
PeopleSoft, Inc., both software companies, and of Raychem Corporation, a
material sciences manufacturing company. Subsequent to year end, Mr. Yansouni
became a director of ActiveCard, Inc., a manufacturer of network access security
systems.
Dr. Schwettmann joined the Company in May 1993 as President, Chief
Operating Officer and director. Dr. Schwettmann joined the Company after 17
years at Hewlett-Packard Company, where he served in a variety of technical and
management positions, most recently as Vice President and General Manager of the
Circuit Technology Group. Dr. Schwettmann is a member of the Board of Directors
of Actel Corporation, a supplier of field programmable gate arrays. Dr.
Schwettmann is also a Director of SDL, Inc., a supplier of customized
semiconductor based opto-electronic and laser products. Dr. Schwettmann received
his B.Ch.E. degree from City College of New York, his M.Ch.E. degree from New
York University and his Ph.D.Ch.E. degree from the City University of New York.
Mr. Bischoff, a co-founder of the Company, has served as Executive Vice
President since March 1996. He has also served as Executive Vice President,
Research and Development, from February 1994 to March 1996, and Senior Vice
President, Research and Development, from February 1983 to February 1994. Since
July 1991, he has also served as Executive Vice President of Read-Rite SMI. He
served an apprenticeship in electrochemistry in Pforzheim, Germany and received
his B.A. degree in management from Saint Mary's College.
Mr. Klyszeiko has been Executive Vice President, Operations, since November
1995. He joined Read-Rite in 1988 as Vice President, Planning and Logistics and
also served as Vice President, Manufacturing from January 1990 to October 1992,
Senior Vice President of Customer Programs from October 1992 to September 1994,
and Senior Vice President, Read-Rite International from September 1994 to
November 1995. Prior to joining the Company, he served at Advanced Micro Devices
as Director of Materials and Systems Planning. He was with VLSI Technology
during 1983 and 1984 as Director of Materials and served in various positions at
Fairchild Camera and Instrument from 1966 to 1983. Mr. Klyszeiko holds a B.A.
degree in business from the University of Vermont.
Mr. Lowe has been Senior Vice President, Customer Business Units, since
October 1996. He joined Read-Rite in 1989 in a sales position and also served as
Vice President, Sales from November 1991 to August 1994, as Vice President of
Customer Programs from August 1994 to November 1995, and as Senior Vice
President, Customer Programs from November 1995 to October 1996. Prior to
joining the Company, he was sales manager for Microcom Corporation, a data
communications hardware and software company, in 1989, and held various sales
positions at IBM from 1985 to 1989. Mr. Lowe holds a B.A. degree in Computer
Science and Business Economics from the University of California, Santa Barbara.
Dr. Patterson joined the Company as Senior Vice President, Research and
Development in March 1996. Prior to joining Read-Rite, Dr. Patterson served as
President and Chief Executive Officer of Headway Technologies, Inc. from 1994 to
1996. He held a variety of technical managerial positions at Hewlett-Packard
Company from 1978 through 1994, including Director of the Computer Peripherals
Laboratory, and was with Westinghouse R&D Center from 1972 to 1978. Mr.
Patterson holds a B.S. degree, M.S. degree in Electrical Engineering and a D.Sc.
degree also in Electrical Engineering, all from Washington University in St.
Louis.
Mr. Kurtzweil joined the Company in August 1995 as Corporate Controller,
and became the Company's Vice President of Finance and Chief Financial Officer
in November 1995. Mr. Kurtzweil came to the Company from Maxtor Corporation
where he held a number of finance positions including Finance Director, Director
of Far East Finance based in Singapore, and Corporate Controller of a
wholly-owned subsidiary. He was with Maxtor Corporation from July 1988 to August
1995. He also held finance positions with Honeywell Incorporated from May 1978
to July 1988. Mr. Kurtzweil received his B.A. degree in Accounting from Arizona
State University and an M.B.A. from the University of St. Thomas in St. Paul,
Minnesota. Mr. Kurtzweil is a Certified Public Accountant and also a Certified
Management Accountant.
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Ms. McVicar joined the Company in April 1991 as Vice President, Human
Resources. Prior to joining the Company, she was Vice President, Human Resources
at Unisys from January 1989 to April 1991 and held the same position at
Convergent Technologies from December 1987 until its merger into Unisys in
December 1988. Ms. McVicar was also Vice President, Human Resources at Qume, a
manufacturer of computer products, from 1976 to December 1987. She received her
B.A. degree in education and labor relations from Hofstra University and her
M.S. degree in education and labor relations from Queens College.
Mr. Jackson joined the Company in September 1992 as Vice President, General
Counsel and Secretary. Prior to joining the Company, he was Senior Vice
President at Kennedy-Wilson, Inc., a real estate marketing, acquisition and
development company, from August 1988 to August 1992, and General Counsel from
August 1988 to February 1991. Mr. Jackson also practiced with the Los Angeles
law firm of Riordan & McKinzie from October 1985 to August 1988. Mr. Jackson
received his A.B. degree in political science at Duke University and his J.D.
degree at Stanford University.
ITEM 2. PROPERTIES
The Company leases approximately 190,000 square feet at its campus in
Milpitas, California, which serves as the Company's corporate headquarters and
also houses wafer fabrication, prototype manufacturing and research and
development facilities. The primary leases for these properties expire at
various times from June 2000 to July 2001. The Company presently sublets
approximately 23,000 square feet of such space to an equipment and tooling
manufacturer pursuant to a sublease which expires in 2001, but anticipates
taking such space over in mid-fiscal 1997.
In November 1995, the Company purchased an approximately 18,000 square foot
facility adjacent to its Milpitas facilities, which houses certain technical and
corporate operations. The Company also leases an approximately 189,000 square
foot facility in Fremont, California which primarily houses wafer fabrication
and research and development facilities. The initial lease for this facility
expires in March 2004, with three 5-year renewal options. In April 1996, the
Company signed a three-year operating lease for a 23.5-acre parcel of
undeveloped land next to its Fremont facility, on which additional office,
manufacturing and support facilities may be constructed over the next several
years. The Company leases a 40,000 square foot facility in San Jose, California
which houses research and development facilities, including prototype wafer
fabrication and manufacturing. This lease expires in July 1998 and contains one
three-year option to renew.
The Company owns a seven-acre site near Bangkok, Thailand with two
facilities totaling 353,000 square feet used for slider fabrication and HGA
manufacturing. These properties and certain additional collateral owned by the
Company's wholly-owned subsidiary, Read-Rite (Thailand) Co., Ltd. ("RRT"),
secure $20 million and $15 million loans obtained by RRT from the Industrial
Finance Corporation of Thailand in fiscal 1993. During fiscal 1996, RRST
acquired an approximately 97,000 square foot facility adjacent to RRT's existing
facilities. In addition, the Company leases a 20,000 square foot facility in
Thailand; the lease for this facility expires in October 1997.
The Company has a long-term land lease on a 13-acre site near Penang,
Malaysia, and owns a 136,000 square foot HSA manufacturing facility on that
site. The Company also leases a 66,000 square foot building in Penang which
houses office and manufacturing facilities. The lease expires in September 1997.
The Company's manufacturing facilities in the Philippines consist of two
leased facilities of approximately 108,000 and 24,000 square feet, in Manila;
these leases expire in 1999 and 1997, respectively. As a result of MIG products
reaching end-of-life, the larger facility was effectively shut down during the
fourth quarter of fiscal 1996, and is currently used only for office space. The
Company has an option to purchase this facility at the lease expiration in 1999.
In addition, the Company owns a 6.5 acre site near Manila upon which it
constructed a 150,000 square foot manufacturing facility during fiscal 1995.
This property and certain additional collateral secure a $12 million loan
obtained from a bank in the Philippines.
Read-Rite SMI leases from Sumitomo an approximately 92,000 square foot
facility near Osaka, Japan. This lease expires in 2001.
16
<PAGE> 18
The Company leases an office in Singapore totaling approximately 4,200
square feet for sales and customer support. The lease expires in 1998. The
Company also leases an office of 1,600 square feet in Colorado for sales
support. This lease expires in April 1997.
Domestic operations of Sunward Technologies, Inc. ("Sunward"), a
wholly-owned subsidiary acquired in August 1994, were relocated from San Diego,
California to Northern California in the second quarter of fiscal 1996,
resulting in a charge to cost of goods sold of $6.0 million. The Company still
leases approximately 54,000 square feet in a single building in San Diego, all
of which is sub-leased to two tenants. The lease and subleases expire in
September 1997.
As part of the Sunward acquisition in 1994, the Company assumed a lease of
a 60,000 square foot property located in Santa Barbara, California. The lease
expires in 2015 and has a purchase option in 2001. This property is currently
fully subleased to several tenants under leases which expire between 1999 and
2001.
ITEM 3. LEGAL PROCEEDINGS
On December 11, 1996, a class action complaint (the "Complaint") was filed
in the Superior Court of the State of California, Santa Clara County, against
the Company and certain of its officers and directors. The Complaint alleges
violations of certain California securities laws, fraud, unlawful, unfair or
fraudulent business practices, and false and misleading advertising. The Company
is accepting service of the Complaint, but has not yet had the opportunity to
investigate the claims made in such Complaint. However, based on its preliminary
review of the Complaint, the Company believes it has meritorious defenses and
intends to defend this action vigorously. Failure by the Company to obtain a
favorable resolution of the claims set forth in the Complaint could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Except as so noted, the Company is not a party, nor is its property
subject, to any material pending legal proceedings other than ordinary routine
litigation incidental to the Company's business. The Company does not believe
such routine litigation, taken individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "RDRT" since the Company's initial public offering on October
18, 1991. The following table sets forth for the periods indicated the high and
low closing sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal year ending September 30, 1994
First Quarter.................................................... $14 1/8 $ 8 3/4
Second Quarter................................................... 15 1/4 11 5/8
Third Quarter.................................................... 14 1/8 11
Fourth Quarter................................................... 19 1/16 11 7/8
Fiscal year ending September 30, 1995
First Quarter.................................................... 19 1/16 15 1/2
Second Quarter................................................... 19 7/16 14 7/8
Third Quarter.................................................... 29 19
Fourth Quarter................................................... 48 26 1/4
Fiscal year ending September 30, 1996
First Quarter.................................................... 39 1/8 21 3/4
Second Quarter................................................... 25 1/8 16 3/4
Third Quarter.................................................... 26 1/8 12 15/16
Fourth Quarter................................................... 15 3/4 9 7/8
</TABLE>
At September 30, 1996, there were approximately 39,000 record holders of
the Company's Common Stock.
The Company has never paid cash dividends on its capital stock. In
addition, The Company's bank line of credit prohibits payment of dividends
without prior bank approval. The Company currently intends to retain any
earnings for use in its business and does not anticipate paying cash dividends
in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR 1996(1) 1995 1994(2) 1993(3) 1992
--------------------------- -------- ---------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Sales.................. $991,118 $1,003,040 $638,589 $587,647 $482,586
Gross margin............... 103,654 264,040 93,193 87,888 109,641
Operating income........... 7,789 177,846 31,836 3,156 66,309
Net income (loss).......... (42,986) 123,565 19,694 6,283 56,193
Net income (loss) per
share.................... (.92) 2.60 .43 .14 1.48
Total assets............... $908,672 $ 939,457 $630,592 $553,010 $374,889
Long-term obligations...... 172,037 137,406 52,414 52,065 35,496
</TABLE>
- ---------------
(1) Fiscal 1996 includes severance, relocation and other charges of
approximately $11,200, research and development charges for the acquisition
of planar technology of approximately $9,000, approximately
18
<PAGE> 20
$24,100 for the write-down of capital assets, approximately $7,000
associated with end-of-life inventory and approximately $700 in other
charges, for a total of $52,000 for the year.
(2) Fiscal 1994 includes merger costs of $2,384.
(3) Fiscal 1993 includes a restructuring charge of $29,472.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Annual Report on Form 10-K include
forward-looking information 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 harbor" created by those sections.
These statements include, but are not limited to, the Company's plans to
introduce planar heads, to increase its MR thin film head production and to
transition its Philippines facilities to planar slider fabrication and planar
and thin film back-end assembly operations, and the Company's belief that its
liquid assets, credit facilities and cash generated from operations are
sufficient to fund its operations in fiscal 1997. Actual results for future
periods could differ materially from those projected in such forward-looking
statements. Some factors which could cause future actual results to materially
differ from the Company's recent results or those projected in the
forward-looking statements are failure by the Company to continue to execute on
planar or MR development, to timely and cost-effectively introduce its initial
planar programs and future inductive and MR programs into manufacturing and to
obtain necessary customer qualifications on those programs, and changes in
business conditions affecting the Company which significantly increase the
Company's working capital needs. See also "Certain Additional Business Risks" on
pages 10 through 14 above and other risk factors discussed elsewhere in this
report.
The following table sets forth certain financial data for the Company as a
percentage of net sales for the last three fiscal years.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 89.5 73.7 85.4
----- ----- -----
Gross margin................................................ 10.5 26.3 14.6
----- ----- -----
Operating Expenses:
Research and development.................................. 5.3 4.2 4.0
Selling, general and administrative....................... 4.4 4.4 5.2
Merger costs.............................................. -- -- 0.4
----- ----- -----
Total operating expenses.................................. 9.7 8.6 9.6
----- ----- -----
Operating income............................................ 0.8 17.7 5.0
Interest expense............................................ 1.3 0.5 0.8
Interest income and other, net.............................. 0.9 0.5 0.3
----- ----- -----
Income before income taxes and minority interest............ 0.4 17.7 4.5
Provision for income taxes.................................. 3.5 4.2 0.7
----- ----- -----
Income (loss) before minority interest...................... (3.1) 13.5 3.8
Minority interest in net income of consolidated
subsidiary................................................ 1.2 1.2 0.7
----- ----- -----
Net income (loss)........................................... (4.3) 12.3 3.1
===== ===== =====
</TABLE>
NET SALES
The Company's net sales were $991.1 million in fiscal 1996, a 1% decrease
over net sales of $1,003.0 million in fiscal 1995. The decrease in net sales was
due to decreases in average selling prices,
19
<PAGE> 21
partially offset by higher overall unit sales. Further, in the second quarter of
fiscal 1996, the Company learned that to participate in certain customer
programs, Company products would have to incorporate a new technical feature
which the Company had not yet begun developing. Though the Company began
development of necessary processes for this feature in the second quarter, the
need to develop these processes caused delays in new product introductions,
adversely impacting the Company's revenues. In addition, MIG products, which
accounted for $174.0 million of the Company's net sales during fiscal 1996,
reached end-of-life during the third quarter of fiscal 1996. Due to these
factors as well as reductions in certain customer programs, the Company's net
sales declined for the last three consecutive quarters of fiscal 1996.
The Company's net sales were $1,003.0 million in fiscal 1995, a 57%
increase over net sales of $638.6 million in fiscal 1994. This increase in net
sales was due to a significant increase in HGA and HSA unit sales, particularly
in the Company's thin film products, and to an increase in average selling
prices for HSAs reflecting an 18% increase in the average number of HGAs per HSA
from fiscal 1994 to fiscal 1995.
PRINCIPAL CUSTOMERS
(As a percentage of net sales)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer:
Western Digital............................................. 43% 37% 34%
Quantum..................................................... 29% 29% 23%
Maxtor...................................................... 12% 11% 13%
Seagate (formerly Conner Peripherals)....................... 8% 13% 15%
All Others.................................................. 8% 10% 15%
</TABLE>
The Company's sales are primarily focused in the 3.5-inch form factor
market, which accounted for 90% of the Company's net sales for fiscal 1996,
compared to 91% in fiscal 1995 and 87% in fiscal 1994. Nanosliders accounted for
95% of the Company's net sales for the year. HGAs and HSAs accounted for
approximately 41% and 57% of net sales, respectively, for fiscal 1996 compared
to 50% and 48%, respectively, for fiscal 1995. The Company anticipates that the
shift in product mix towards HSAs will continue as HSAs accounted for
approximately 63% of net sales for the fourth quarter of fiscal 1996, and are
expected to remain at approximately two-thirds of total net sales for fiscal
1997.
For a discussion of certain risks associated with the Company's sales, see
"Certain Additional Business Risks" on pages 10 through 14 above.
GROSS MARGIN
The Company's gross margins are primarily influenced by average sales
prices, the level of revenues in relation to fixed costs, process yields,
product mix (newer products and HGAs typically generate higher gross margins
than older products and HSAs) and material costs. Periodically, the Company's
gross margins also reflect charges for obsolescence of inventory, fixed assets
and severance related to products or technologies that have reached their
end-of-life.
HSAs typically have lower gross margins than HGAs. HSAs consist of two or
more HGAs and a variety of purchased components which the Company assembles into
a single unit. The cost of the purchased components is a significant percentage
of the total cost of the HSA; the margin on such purchased components is
substantially lower than the margin on HGAs produced by the Company. The
combination of the respective margins on HGAs and non-HGA components and
associated labor and overhead included in HSAs thus typically produces a
significantly lower aggregate gross margin on HSA sales.
Gross margin for fiscal 1996 was 10.5% compared to 26.3% for fiscal 1995.
Operating factors attributable to the decrease in gross margin in fiscal 1996
were primarily decreases in average selling prices, the level of net sales in
relation to fixed costs, an unfavorable product mix heavily weighted toward
older products and HSAs
20
<PAGE> 22
and significant start-up costs and lower yields associated with new programs and
processes. In addition to these operating factors, the Company incurred
significant special charges during fiscal 1996 as discussed in Note 4 to the
Consolidated Financial Statements, of which approximately $42.3 million was
charged to cost of goods sold.
Special charges to cost of goods sold in fiscal 1996 included approximately
$6.0 million in severance, relocation and other expenses incurred during the
second quarter of fiscal 1996 associated with the consolidation of its San Diego
operations to Northern California. In response to sudden reductions in certain
customer programs during the second half of fiscal 1996, the rapid shift in the
marketplace to newer technology products and the fact that the programs the
Company had been participating in using MIG technology reached end-of-life, the
Company also incurred approximately $37.0 million of charges, primarily to cost
of goods sold, during the third and fourth quarters of fiscal 1996. These
charges included approximately $5.2 million associated with the termination of
approximately 5,000 employees primarily at the Company's Philippines operations,
approximately $24.1 million for the write-down of capital assets, approximately
$7.0 million of inventory and approximately $.7 million in other expenses. The
Company does not anticipate that there will be significant future savings as a
result of these actions in that additional employees and capital equipment will
be needed to ramp up advanced thin film manufacturing, offsetting future
potential cost reductions.
Gross margin for fiscal 1995 was 26.3%, compared to 14.6% for fiscal 1994.
This increase in gross margin in fiscal 1995 was due primarily to increased net
sales in relation to fixed costs, favorable product mix (which was weighted
towards newer products, especially in the third and fourth quarters) and
favorable yields.
For a discussion of certain risks associated with the Company's business,
see "Certain Additional Business Risks" on pages 10 through 14 above.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were approximately $52.2 million
in fiscal 1996, $41.8 million in fiscal 1995, and $25.5 million in fiscal 1994.
These expenses represented 5.3%, 4.2% and 4.0% of net sales, respectively, for
such periods.
The absolute dollar and percentage increases from fiscal 1995 to 1996 were
due primarily to the acquisition of planar technology from Censtor and its
continued development. The largest component of the purchase price, technology
in the development stage and a related license, was approximately $9.0 million
and was expensed in March 1996 as acquired in-process research and development.
In addition to this one-time charge were the ongoing expenses of pursuing this
technology, including costs associated with the employees hired upon the
acquisition from Censtor.
The absolute dollar and percentage increases from fiscal 1994 to 1995 were
due to increased depreciation, labor and overhead to support development of next
generation products and technologies related to the Company's existing business,
the write-off of $4.6 million for a license from KME for KME's MR technology and
industrial property rights (due to changes in the technology which significantly
reduced the future value of those property rights), and the expense of $2.4
million in connection with the Company's equity investment in, and development
agreement with, Redwood.
The Company intends to continue increasing its R&D expenditures on an
absolute dollar basis in future periods. However, the level of R&D expenditures
as a percentage of net sales will vary from period to period depending on the
level of net sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were approximately
$43.6 million in fiscal 1996, $44.4 million in fiscal 1995, and $33.4 million in
fiscal 1994. These expenses represented 4.4%, 4.4% and 5.2% of net sales,
respectively, for such periods.
21
<PAGE> 23
The absolute dollar decrease in SG&A expenses in fiscal 1996 compared to
fiscal 1995 was due primarily to cost reduction programs implemented by the
Company during the second half of fiscal 1996 in response to declining net sales
levels, offset by increases in staffing and overhead to support higher net sales
and volume during the first half of the current fiscal year over previous year
levels.
The absolute dollar increase in SG&A expenses in fiscal 1995 compared to
fiscal 1994 was primarily due to increased staffing, overhead, and bad-debt
expense to support the increased level of net sales and volume. The percentage
decrease from period to period was due to the increased level of net sales in
fiscal 1995.
The Company expects that SG&A expenses as a percent of net sales will vary
from period to period depending on the level of net sales.
INTEREST EXPENSE
Interest expense for fiscal years 1996, 1995 and 1994 was $12.9 million,
$5.6 million and $4.8 million, respectively. The increased interest expense in
fiscal 1996 is primarily due to significantly higher debt levels compared to the
previous years. The increased interest expense in fiscal 1995 is primarily due
to higher average interest rates.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, was $9.0 million in fiscal 1996, $5.3
million in fiscal 1995, and $1.7 million in fiscal 1994. The increase from
fiscal 1995 to fiscal 1996 was primarily due to an increase in interest income
due to higher average cash balances and interest rates in fiscal 1996. The
increase from fiscal 1994 to fiscal 1995 was primarily due to an increase in
interest income due to higher average cash balances and interest rates in fiscal
1995, and to a decrease of approximately $1.6 million in foreign currency
exchange losses primarily at Read-Rite SMI.
PROVISION FOR INCOME TAXES
The Company's combined federal, state and foreign tax rate was 883.0% in
fiscal 1996, 23.5% for fiscal 1995, and 16.0% for fiscal 1994. The Company does
not provide for U.S. federal income taxes on undistributed earnings of foreign
subsidiaries which it intends to permanently reinvest in those operations. See
also Note 9 in "Notes to Consolidated Financial Statements."
Due to higher net tax from certain foreign operations with no benefit
provided on net operating losses generated from other operations, the Company's
combined federal, state and foreign tax rate increased from 23.5% in fiscal 1995
to 883% in fiscal 1996.
The fiscal 1995 income tax rate increased from fiscal 1994 primarily due to
a portion of foreign earnings taxed at a higher rate and less net operating loss
carryforwards available for use. The combined tax rate differed from the federal
statutory rate primarily due to net foreign earnings taxed at lower rates and
utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash, cash equivalents and
short-term investments of $147.9 million, total assets of $908.7 million and
total long-term debt and capital lease obligations, including the current
portion, of $187.7 million. The Company's cash generated by operating activities
was approximately $170.4 million for fiscal 1996, including non-cash charges of
$127.0 million from depreciation and amortization, despite a net loss of $43.0
million. In June 1996, the Company obtained an unsecured $50.0 million term loan
from a financial institution. Also during fiscal 1996, the Company repurchased
1.5 million shares of its common stock on the open market at an aggregate
purchase price of $43.0 million.
The Company's business is highly capital intensive. During fiscal 1996, the
Company incurred capital expenditures of approximately $265.8 million. Capital
expenditures have primarily been made to expand production capacity in Thailand
and Malaysia, to expand wafer production in Milpitas, Fremont and Japan, and to
support new manufacturing processes and new technologies, such as MR and planar
technology. The
22
<PAGE> 24
Company plans total capital expenditures of approximately $225 million in fiscal
1997; however, to the extent yields for the Company's products are lower than
expected, and/or that demand for such products exceeds Company expectations,
such expenditures may increase. Conversely, if demand is less than anticipated,
or if the Company is unable to obtain adequate financing for such capital
purchases, the planned expenditures may decrease. As of September 30, 1996,
total commitments for construction or purchase of plant and equipment totaled
approximately $60 million. The Company expects to fund such commitments from
available cash and cash equivalents, cash flow from operations and, if
necessary, from available borrowings.
In September 1995, the Company completed the sale of $100 million in 7.53%
Senior Notes ("Notes") to a group of four insurance companies. Interest is paid
semi-annually in March and September. Principal is payable in three equal
installments on each of September 15, 1998, September 15, 1999 and September 15,
2000. Effective September 1996, the Company and its lenders agreed to certain
revisions of the Note Purchase Agreement ("Purchase Agreement") due to
anticipated non-compliance with the fixed charges coverage ratio covenant. As
amended, the Purchase Agreement requires the Company to maintain certain
financial ratios and observe a series of additional covenants, and prohibits the
Company from paying dividends or repurchasing stock through March 1998. As of
September 30, 1996, the entire $100 million represented by the Notes was
outstanding, and the Company was in compliance with the covenants under the
Purchase Agreement.
In June 1996, the Company entered into an agreement with a financial
institution for an unsecured term loan ("Term Loan") in the amount of $50
million. The Term Loan bears interest at the LIBOR rate plus 1.5%; interest is
payable based on the LIBOR term, which was on a monthly basis at September 30,
1996. Principal payments of $12.5 million are required on both June 30, 1999 and
June 30, 2000, with the balance payable on June 30, 2001. In September 1996, the
Company and its lenders amended the Term Loan to modify certain financial
covenants due to anticipated non-compliance with the consolidated net income
covenant. The Term Loan, as amended, requires the Company to maintain certain
financial ratios and comply with several other covenants. As of September 30,
1996, the Company was in compliance with the requirements of the loan.
In December 1994, the Company and its lenders amended and restated its $65
million revolving credit facility ("Revolving Facility") to modify certain
covenants and to extend the maturity date to October 1997. The Revolving
Facility was amended in September 1995 to remove the security interest
previously held by the banks. The Revolving Facility was amended further in
September 1996 to modify certain financial covenants due to anticipated
non-compliance with the fixed charges coverage and consolidated net income
covenants. The terms of the Revolving Facility require the Company to maintain
certain financial ratios and observe a series of additional covenants, and
prohibit the Company from paying dividends without prior bank approval. The
interest rate on borrowings under the Revolving Facility depend on the
utilization of the Revolving Facility and are based, at the option of the
Company, on interest rates based upon the base rate or LIBOR plus a margin. As
of June 30, 1996, the Company was out of compliance with three of the financial
covenants, but received a waiver of this non-compliance for that quarter. Given
the amendments to the covenants obtained in September 1996, the Company was in
compliance with the covenants thereunder as of September 30, 1996, and had no
borrowings against this line.
In December 1993, the Company and Sumitomo invested an additional $2.8
million and $9.2 million, respectively, in Read-Rite SMI to support Read-Rite
SMI's development of MR technology. Read-Rite SMI's business may require
additional capital in the future. Sumitomo has agreed to use reasonable efforts
to make financing available to Read-Rite SMI for such purposes as it may
reasonably require. However, there can be no assurance that such financing will
be available, or that the terms of such financing will be acceptable. Further,
if such financing requires a guarantee, the Company and Sumitomo are each
obligated to guarantee one-half of the aggregate financing. If no such financing
is available, the Company may need to fund a portion of Read-Rite SMI's working
capital needs. Any loan guarantee or capital infusion required by Read-Rite SMI
from the Company will increase the Company's overall capital requirements. The
Company's balance sheet at September 30, 1996, includes cash, cash equivalents
and short-term investments of $50.2 million, and total assets of $180.5 million
at Read-Rite SMI.
23
<PAGE> 25
In January 1995, the Company's board of directors approved a stock
repurchase program authorizing the Company to repurchase up to 1,000,000 shares
of its common stock on the open market, subject to certain conditions. The Board
increased such authorization by 1,000,000 shares in October 1995. As of March
31, 1996, the Company had repurchased all of the 2,000,000 shares authorized
under this program. Of the total shares, 500,000 shares were repurchased during
fiscal 1995 at an aggregate price of $7.9 million, an additional 1,000,000
shares were repurchased during the first quarter of fiscal 1996 at a purchase
price of $32.8 million, and the final 500,000 shares were repurchased during the
second quarter of fiscal 1996 for $10.2 million. In February 1996, the Board
authorized the repurchase of an additional 2,000,000 shares of common stock on
the open market, subject to certain conditions. None of the shares have been
repurchased to date under the last authorization and repurchases are not
presently permitted under certain of the Company's credit facilities.
In April, 1996, the Company entered into a three-year operating lease ("the
Lease") for a 23.5-acre parcel of undeveloped land across from its wafer
fabrication facility in Fremont, California on which additional office and
support facilities may be constructed over the next several years. The Lease
provides for monthly payments which vary based on the London interbank offering
rate (LIBOR) plus a margin, and requires the Company to comply with certain
minimum financial covenants similar to those in the Company's revolving credit
facility. The Company was not in compliance with one of the financial covenants
as of June 30, 1996 but received a waiver of this non-compliance for the quarter
ended June 30, 1996. In September 1996, the Company was granted a waiver of
compliance for certain financial covenants through March 1997 due to anticipated
non-compliance with the consolidated net income covenant; it is reasonably
possible that the Company will need to obtain additional waivers thereafter for
the tangible net worth covenant, however, the Company believes it will be able
to obtain those waivers at the appropriate time should they become necessary.
The Lease provides the Company the option to purchase the subject property at
its original cost or arrange for the property to be acquired. The Company is
liable under the Lease for approximately $10.7 million over the three-year term,
including the purchase option.
The Company believes that its current level of liquid assets, credit
facilities, and cash generated from operations will be sufficient to fund its
operations in fiscal 1997. However, if industry conditions unexpectedly worsen,
thus negatively affecting profits and cash flows from operations, the Company's
working capital and other capital needs will increase. Conversely, if industry
demand increases significantly such that the Company's capital requirements
exceed management's current estimates, the Company may again need to raise
additional capital. The Company may seek such capital through additional bank
facilities, debt or equity offerings, or other sources. Further, the Company may
elect from time to time to seek additional financing to the extent available.
There can be no assurance, however, that any such required financing will be
available when needed on terms and conditions acceptable or favorable to the
Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. Certain of the
Company's credit facilities currently prohibit payment of dividends.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 82,291 $ 168,860
Short-term investments.......................................... 65,655 93,293
Accounts receivable, net of allowance of $2,586 in 1996
($3,017 in 1995)............................................. 90,142 147,277
Inventories..................................................... 58,005 53,814
Prepaid expenses and other current assets....................... 13,962 12,442
-------- --------
Total current assets.................................... 310,055 475,686
Property, plant and equipment, net................................ 567,294 428,134
Intangible and other assets....................................... 31,323 35,637
-------- --------
Total assets............................................ $ 908,672 $ 939,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 88,434 $ 72,667
Accrued compensation and benefits............................... 27,099 33,740
Income taxes payable............................................ 27,754 42,222
Other accrued liabilities....................................... 37,196 17,951
Current portion of long-term debt and capital lease
obligations.................................................. 15,613 22,204
-------- --------
Total current liabilities............................... 196,096 188,784
Long-term debt and capital lease obligations...................... 172,037 137,406
Other long-term liabilities....................................... 15,458 17,004
-------- --------
Total liabilities....................................... 383,591 343,194
-------- --------
Minority interest in consolidated subsidiary...................... 71,282 58,286
-------- --------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.0001 par value; 4,000 shares
authorized, none issued...................................... -- --
Common stock, $.0001 par value; 160,000 shares authorized in
1996 (100,000 in 1995); 46,771 shares issued and outstanding
in 1996 (47,556 in 1995)..................................... 5 5
Additional paid-in capital...................................... 336,113 370,623
Retained earnings............................................... 114,979 157,962
Cumulative translation adjustment............................... 2,702 9,387
-------- --------
Total stockholders' equity................................... 453,799 537,977
-------- --------
Total liabilities and stockholders' equity.............. $ 908,672 $ 939,457
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE> 27
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
-------- ---------- --------
<S> <C> <C> <C>
Net sales................................................. $991,118 $1,003,040 $638,589
Cost of sales............................................. 887,464 739,000 545,396
-------- ---------- --------
Gross margin.............................................. 103,654 264,040 93,193
-------- ---------- --------
Operating expenses:
Research and development................................ 52,221 41,788 25,524
Selling, general and administrative..................... 43,644 44,406 33,449
Merger costs............................................ -- -- 2,384
-------- ---------- --------
Total operating expenses........................ 95,865 86,194 61,357
-------- ---------- --------
Operating income.......................................... 7,789 177,846 31,836
Interest expense.......................................... 12,897 5,589 4,759
Interest income and other, net............................ 9,024 5,257 1,690
-------- ---------- --------
Income before provision for income taxes and minority
interest................................................ 3,916 177,514 28,767
Provision for income taxes................................ 34,582 41,715 4,595
-------- ---------- --------
Income (loss) before minority interest.................... (30,666) 135,799 24,172
Minority interest in net income of consolidated
subsidiary.............................................. 12,320 12,234 4,478
-------- ---------- --------
Net income (loss)......................................... $(42,986) $ 123,565 $ 19,694
======== ========== ========
Net income (loss) per share............................... $ (0.92) $ 2.60 $ 0.43
======== ========== ========
Shares used in per share calculations..................... 46,755 47,616 46,125
======== ========== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
26
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (42,986) $ 123,565 $ 19,694
Adjustments required to reconcile net income to cash
provided by operations:
Depreciation and amortization.......................... 127,014 73,488 48,188
Loss on disposal of fixed assets....................... 23 10,925 --
Deferred income taxes.................................. (405) 8,140 2,003
Minority interest in net income of consolidated
subsidiary........................................... 12,320 12,234 4,478
Other non-cash expenses................................ 2,709 1,864 3,052
Changes in assets and liabilities:
Accounts receivable.................................. 54,084 (54,911) (25,653)
Inventories.......................................... (5,128) (10,966) 819
Prepaid expenses and other current assets............ (1,520) (2,202) 252
Accounts payable, accrued liabilities and income
taxes payable..................................... 24,311 53,063 28,066
--------- -------- ---------
Net cash provided by operating activities................... 170,422 215,200 80,899
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures, net................................. (265,847) (185,053) (102,695)
Maturities of available-for-sale investments.............. 839,623 -- --
Maturities of held-to-maturity investments................ 168,093 72,119 62,674
Purchase of available-for-sale investments................ (980,075) (77,000) --
Purchase of held-to-maturity investments.................. -- (43,925) (89,954)
Proceeds from sale and leaseback of fixed assets.......... -- -- 13,154
Other assets and liabilities, net......................... (3,766) 4,798 (11,597)
--------- -------- ---------
Net cash used in investing activities....................... (241,972) (229,061) (128,418)
--------- -------- ---------
Cash flows from financing activities:
Short-term borrowing, net................................. -- -- (4,477)
Proceeds from long-term debt.............................. 50,000 110,123 3,405
Payments of principal on long-term debt and capital lease
obligations............................................ (22,960) (17,688) (11,076)
Proceeds from joint venture partner....................... -- -- 9,167
Repurchase of common stock................................ (43,046) (7,879) --
Proceeds from issuance of common stock, net of issuance
costs.................................................. 5,827 27,762 4,602
--------- -------- ---------
Net cash provided by (used in) financing activities......... (10,179) 112,318 1,621
--------- -------- ---------
Effect of exchange rate changes on cash..................... (4,840) 4,926 291
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ (86,569) 103,383 (45,607)
Cash and cash equivalents at beginning of period............ 168,860 65,477 111,084
--------- -------- ---------
Cash and cash equivalents at end of period.................. $ 82,291 $ 168,860 $ 65,477
========= ======== =========
Supplemental disclosures:
Other non-cash items:
Capital asset additions under capital leases........... $ 1,018 $ -- $ 2,284
Issuances of common stock under 401K plan.............. 2,702 1,864 2,573
Cash paid during the year for:
Interest............................................... 11,669 5,537 5,073
Income taxes (refund).................................. 42,542 1,956 (630)
</TABLE>
See accompanying notes to the consolidated financial statements.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE TOTAL
--------------- PAID-IN RETAINED STOCK TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION ADJUSTMENT EQUITY
------ ------ ---------- -------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993.......... 43,603 $ 4 $341,702 $14,703 $ (479) $ 10,780 $ 366,710
Issuance of Common Stock under stock
option plans....................... 858 1 2,891 -- -- -- 2,892
Issuance of Common Stock under
Employee Stock Purchase Plan....... 189 -- 1,710 -- -- -- 1,710
Issuance of Common Stock under 401K
Plan............................... 216 -- 2,573 -- -- -- 2,573
Issuance of Common Stock upon
exercise of warrants............... 207 -- -- -- -- -- --
Amortization of deferred
compensation....................... -- -- -- -- 479 -- 479
Translation adjustments, net of
deferred tax of $2,003............. -- -- -- -- -- 3,230 3,230
Net income........................... -- -- -- 19,694 -- -- 19,694
------ --- -------- -------- ------ ------- --------
Balance at September 30, 1994.......... 45,073 5 348,876 34,397 -- 14,010 397,288
Issuance of Common Stock under stock
option plans....................... 2,497 -- 24,297 -- -- -- 24,297
Issuance of Common Stock under
Employee Stock Purchase Plan....... 230 -- 3,306 -- -- -- 3,306
Issuance of Common Stock under 401K
Plan............................... 93 -- 1,864 -- -- -- 1,864
Issuance of Common Stock upon
exercise of warrants............... 163 -- 159 -- -- -- 159
Repurchase of Common Stock........... (500 ) -- (7,879) -- -- -- (7,879)
Translation adjustments, net of
reduction of deferred tax of
$773............................... -- -- -- -- -- (4,623) (4,623)
Net income........................... -- -- -- 123,565 -- -- 123,565
------ --- -------- -------- ------ ------- --------
Balance at September 30, 1995.......... 47,556 5 370,623 157,962 -- 9,387 537,977
Issuance of Common Stock under stock
option plans....................... 466 -- 4,099 -- -- -- 4,099
Issuance of Common Stock under
Employee Stock Purchase Plan....... 109 -- 1,735 -- -- -- 1,735
Issuance of Common Stock under 401K
Plan............................... 140 -- 2,702 -- -- -- 2,702
Repurchase of Common Stock........... (1,500) -- (43,046) -- -- -- (43,046)
Translation adjustments, net of
reduction of deferred tax of
$5,473............................. -- -- -- -- -- (6,685) (6,685)
Unrealized gain on available-for-sale
investments, net................... -- -- -- 3 -- -- 3
Net loss............................. -- -- -- (42,986 ) -- -- (42,986)
------ --- -------- -------- ------ ------- --------
Balance at September 30, 1996.......... 46,771 $ 5 $336,113 $114,979 $ -- $ 2,702 $ 453,799
====== === ======== ======== ====== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company, which operates in a single industry segment, designs,
manufactures and sells magnetic recording heads and HSAs for rigid disk drives.
The Company also supplies MR heads for QIC tape drives. The substantial majority
of the Company's sales in fiscal 1996 were to six major storage device
manufacturers in the U.S., or their foreign based subsidiaries.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, including Read-Rite SMI, the Company's joint
venture in Japan with Sumitomo. All material intercompany accounts and
transactions have been eliminated in consolidation. Minority interest represents
the minority stockholder's proportionate share (49.99%) of the equity in the
income of Read-Rite SMI.
Certain amounts for 1995 and 1994 have been reclassified to conform to the
1996 financial statement presentation.
FISCAL YEAR
The Company maintains a fifty-two/fifty-three week fiscal year cycle ending
on a Sunday. Fiscal years 1996, 1995 and 1994 ended on September 29, October 1
and September 25, respectively. To conform the Company's fiscal year ends, the
Company must add a fifty-third week to every sixth or seventh fiscal year.
Accordingly, fiscal 1995 was a fifty-three week fiscal year. For convenience,
the accompanying financial statements have been shown as ending on the last day
of the calendar month.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company is a component supplier dependent on a limited number of
customers in a single, volatile industry characterized by rapid technological
change and obsolescence of inventory and related production equipment.
Management develops sales forecasts based upon the expected production
requirements of its primary customers; however such forecasts are subject to
modifications, cancellations and rescheduling. The Company has provided
write-downs for potentially excess or obsolete inventories and production
equipment. The Company believes these write-downs are adequate to cover any
losses incurred upon disposition, however, it is reasonably possible that actual
sales may differ materially from the sales forecast in the near term, which
could impact the Company's results of operations.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Highly liquid investments with insignificant interest rate risk and with
original maturities of three months or less are classified as cash and cash
equivalents. Investments with maturities greater than three months and less than
one year are classified as short-term investments. The Company does not
currently hold any investments with maturities greater than one year.
Investments consist primarily of A1 and P1, or better, rated financial
instruments.
The Company accounts for investments in accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities," effective as
of the beginning of fiscal year 1995. Management determines the appropriate
classification of investments at the time of purchase. Investments in debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities until maturity. Held-to-maturity
securities are stated at amortized cost. Amortization of premiums and
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accretions of discounts to maturity is included in interest income and other,
net. Investments not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
based on quoted market prices, with the unrealized gains and losses, net of tax,
reported as a component of stockholders equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income and other, net.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories consisted of the following at September
30:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.................................................... $13,591 $17,588
Work-in-process.................................................. 34,157 26,406
Finished goods................................................... 10,257 9,820
------- -------
Total inventories...................................... $58,005 $53,814
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT, NET
Depreciation and amortization for assets of the Company and its
subsidiaries are provided on a straight-line basis over the estimated useful
lives of the assets, which range from two to ten years for equipment and
furniture and fixtures, and primarily twenty years for buildings. Leasehold
improvements are amortized over the useful lives of the improvements or the
remaining lease term, whichever is shorter. Amortization of assets recorded
under capital leases is included with depreciation expense. Property, plant and
equipment, at cost, consisted of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................... $ 7,702 $ 5,476
Building....................................................... 68,160 59,461
Equipment...................................................... 692,566 466,587
Furniture and fixtures......................................... 12,780 12,060
Leasehold improvements......................................... 53,644 43,042
-------- --------
Total property, plant and equipment.......................... 834,852 586,626
Less: Accumulated depreciation and amortization.............. 267,558 158,492
-------- --------
Property, plant and equipment, net............................. $567,294 $428,134
======== ========
</TABLE>
INTANGIBLE AND OTHER ASSETS
The excess of the purchase price over the fair market value of identifiable
assets of businesses acquired, net of accumulated amortization, was
approximately $11,154,000 and $13,385,000 at September 30, 1996 and 1995,
respectively, and is being amortized on a straight-line basis over a period of
10 years.
During fiscal 1995, the Company wrote off $4,600,000 for a license from KME
for KME's MR technology and industrial property rights due to changes in the
technology which significantly reduced the future value of those property
rights.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated at year-end exchange rates, and statements
of operations are translated at the average exchange
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rates during the year. Exchange gains or losses arising from translation of
foreign currency denominated assets and liabilities are included as a component
of stockholders' equity.
For foreign operations with the U.S. dollar as the functional currency,
monetary assets and liabilities are remeasured at the year-end exchange rates.
Certain non-monetary assets and liabilities are remeasured using historical
rates. Statements of operations are translated at the average exchange rates
during the year. Gains and losses from foreign currency remeasurement are
included in interest income and other, net.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to reduce financial
market risks. These instruments are used to hedge foreign currency market
exposures of underlying assets, liabilities and other obligations. The Company
enters into foreign currency forward and swap contracts to minimize the impact
of exchange rate fluctuations on the value of foreign currency denominated
operations. The Company does not utilize derivative financial instruments for
speculative or trading purposes.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment and provides currently
for the estimated costs to rework products that may be returned for not meeting
customer specifications.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which becomes effective for the Company's fiscal 1997
year. The new standard allows companies to continue to follow APB Opinion 25,
"Accounting for Stock Issued to Employees" (APBO 25), but requires additional
disclosures. The Company plans to account for its employee stock plans in
accordance with APBO 25 while providing the additional disclosures required by
SFAS 123. Accordingly, SFAS 123 is not expected to have a material impact on the
Company's financial statements or results of operations.
NET INCOME (LOSS) PER SHARE
Net loss per share is based upon the weighted average number of shares of
common stock outstanding during fiscal 1996. Net income per share for fiscal
years 1995 and 1994 is based upon the weighted average number of shares
outstanding and common stock equivalent shares from stock options.
NOTE 2. ACQUISITIONS
CENSTOR CORPORATION
In March 1996, the Company signed a definitive agreement to purchase
certain assets, assume certain liabilities and acquire a non-exclusive license
to intellectual property from Censtor, a developer of planar pseudo-contact and
contact recording technology for disk drives. The purchase price includes a
series of cash payments totaling approximately $10,000,000 with final payments
totaling $2,500,000 due in fiscal 1997. The purchase price was allocated based
on the estimated fair values of the license, equipment and assembled workforce
acquired, and the liabilities of approximately $1,000,000 assumed.
In determining the value of the technology in development and the related
license, the Company considered, among other factors, the stage of development
of the technology and the inherent difficulties and uncertainties in completing
the technology and converting it to a commercially viable product, and the non-
exclusivity of the license. Therefore, in accordance with generally accepted
accounting principles, the allocation of the purchase price related to
technology in the development stage was approximately $9,000,000 and was
expensed in fiscal 1996 as acquired in-process research and development. An
intangible asset
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
representing the assembled workforce was valued at $825,000 and is being
amortized on a straight-line basis over its estimated useful life of two years.
SUNWARD TECHNOLOGIES
In August 1994, the Company issued approximately 9,069,000 shares of its
Common Stock in exchange for all of the outstanding preferred and common stock
of Sunward, a manufacturer of MIG recording heads and HSAs for rigid disk
drives. The acquisition has been accounted for as a pooling-of-interests. In
connection with the Sunward acquisition, in the fourth quarter of fiscal 1994
the Company recorded a charge for $2,384,000 consisting primarily of legal and
audit fees, financial advisory fees and miscellaneous other expenses.
Separate unaudited results of operations were as follows:
<TABLE>
<CAPTION>
MERGER
READ-RITE SUNWARD EXPENSES COMBINED
--------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended September 30, 1994:
Net sales..................................... $ 479,978 $158,611 $ -- $638,589
Net income.................................... 8,302 13,776 (2,384) 19,694
</TABLE>
NOTE 3. JOINT VENTURE AGREEMENT
The Company owns 50% plus two shares of the voting stock of Read-Rite SMI,
a joint venture in Japan with Sumitomo, to develop, manufacture and sell thin
film recording heads in Japan. The joint venture and the Company each have the
exclusive right to distribute products in their respective territories, as well
as rights to use certain of each other's technologies to support their
respective operations in their respective territories under a variety of
cross-licenses and cost-sharing agreements.
NOTE 4. SPECIAL CHARGES
During fiscal 1996, due to a variety of factors, the Company incurred
several special charges. The Company incurred charges to cost of goods sold of
approximately $6,000,000 in severance, relocation and other expenses during the
second quarter of fiscal 1996 associated with the consolidation of its San Diego
operations to Northern California. Also during the second quarter, the Company
made an investment in planar technology as discussed in Note 2 above, incurring
charges to research and development expense of approximately $9,000,000 related
to the purchase of technology. In response to sudden reductions in certain
customer programs in the disk drive industry during the second half of fiscal
1996, the rapid shift in the marketplace to newer technology products and the
fact that the programs the Company had been participating in using MIG
technology reached end-of-life, the Company incurred approximately $37,000,000
of charges, primarily to cost of goods sold, during the third and fourth
quarters of fiscal 1996. These charges included approximately $5,200,000
associated with the termination of approximately 5,000 employees primarily at
the Company s Philippines operations, approximately $24,100,000 for the
write-down of capital assets, approximately $7,000,000 associated with
end-of-life inventory and approximately $700,000 in other expenses. The Company
does not expect any significant cash outlays in future quarters associated with
these charges.
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Investments in cash equivalents and short-term investments as of September
30 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Money market funds............................................. $ 36,109 $ 74,658
Commercial paper............................................... 8,757 53,080
Certificates of deposit........................................ 56,080 37,355
Medium term notes.............................................. -- 3,000
Auction rate preferred products................................ 47,000 77,000
-------- --------
147,946 245,093
Less amounts classified as cash equivalents.................... 82,291 151,800
-------- --------
Amounts included in short-term investments..................... $ 65,655 $ 93,293
======== ========
</TABLE>
As of September 30, 1996, all investments were classified as
available-for-sale. As of September 30, 1995, all investments were classified as
held-to-maturity, other than the auction rate preferred products, which were
classified as available-for-sale. There were no material gross realized or
unrealized gains or losses in any category of investment in fiscal 1996 or 1995.
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments at
September 30 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Foreign currency forward contracts to purchase foreign
currencies................................................... $ 82,000 $134,000
Foreign currency forward contracts to sell foreign
currencies................................................... 38,000 6,000
Currency swap agreement........................................ 30,000 --
-------- --------
$150,000 $140,000
======== ========
</TABLE>
Foreign currencies that the Company currently manages exposure for are
Japanese yen, Malaysian ringgit, Thai baht, and Philippine peso. Realized and
unrealized gains and losses on foreign currency forward contracts are not
deferred and are recorded in interest income and other, net. Interest income and
other, net, included a net foreign exchange gain of $408,000 in fiscal 1996 and
net foreign exchange losses of $240,000 and $1,833,000 in 1995 and 1994,
respectively.
Read-Rite SMI, the Company s joint venture in Japan with Sumitomo, has
entered into a currency swap agreement to hedge the accounting exposure related
to the translation of an intercompany loan. The currency swap agreement
exchanges the U.S. dollar currency exposure of the underlying intercompany loan
to Japanese yen.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies using current market rates. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. Fair
values of cash and cash equivalents and short-term investments approximate
amortized cost due to the short period of time to maturity. Fair values of
long-term debt approximate recorded values due to floating interest rates on
such debt and the determination that the interest rate on the $100 million notes
approximate the current market rate.
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated fair values of financial instruments outstanding at September 30
were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $ 82,291 $ 82,291 $168,860 $ 168,860
Short-term investments...................... 65,655 65,655 93,293 93,293
Long-term debt.............................. 182,193 182,193 145,695 145,695
Currency swap agreement..................... -- (288) -- --
Foreign currency forward contracts.......... 80 80 201 201
</TABLE>
NOTE 8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at September 30, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior unsecured notes at 7.53%, semi-annual interest payments,
annual principal payments beginning September 1998, through
September 2000............................................... $100,000 $100,000
Unsecured term loan at LIBOR plus 1.5% (currently set at a rate
of 7.0%), quarterly interest payments with annual principal
payments beginning in June 1999 through 2001................. 50,000 --
Seven-year secured loan from a Thailand-based financing company
at LIBOR plus 2.5% (currently set at a rate of 8.2%),
semi-annual interest only payments with principal payments
which began in August 1995, due August 1999.................. 13,333 17,778
Five-year secured loan from a Thailand-based financing company
at LIBOR plus 2.5% (currently set at a rate of 8.4%),
semi-annual interest only payments with principal payments
which began in September 1995, due September 1998............ 8,571 12,857
Four-year secured equipment financing at 6.7%, monthly
principal and interest payments through September 1997....... 2,004 2,666
Five-year secured construction loan agreement with a
Philippine-based bank at SIBOR plus 3% (8.3% at September 30,
1996), monthly interest payments, and quarterly principal
payments which began in May 1995 through May 1999............ 8,168 11,138
Capital lease obligations...................................... 5,457 13,915
Other.......................................................... 117 1,256
-------- --------
Total debt................................................ 187,650 159,610
Less current portion........................................... 15,613 22,204
-------- --------
Long-term debt, non-current portion............................ $172,037 $137,406
======== ========
</TABLE>
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future aggregate maturities of long-term debt and capital lease obligations
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal Year Ended September 30,
1997................................................................. $ 15,613
1998................................................................. 46,811
1999................................................................. 54,012
2000................................................................. 46,214
2001................................................................. 25,000
--------
Total maturities of long-term debt and capital lease
obligations................................................ $187,650
========
</TABLE>
The above loans, exclusive of the unsecured senior notes and the unsecured
term loan, are secured by certain equipment and facilities.
Obligations under capital leases represent the present value of future
minimum lease payments under various lease arrangements. The Company typically
has an option to purchase the leased assets at the end of the lease term for the
fair market value. Obligations under the lease agreements are collateralized by
the assets leased. Total assets under lease were approximately $8,395,000 and
$21,286,000 at September 30, 1996 and 1995, respectively. Accumulated
depreciation of these leased assets was approximately $1,987,000 and $3,710,000
at September 30, 1996 and 1995, respectively.
LINE OF CREDIT
As of September 30, 1996, the Company had $65,000,000 available under the
Revolving Facility. The terms of the Revolving Facility require the Company to
maintain certain financial ratios and observe a series of additional covenants,
and prohibit the Company from paying dividends without prior bank approval.
COVENANTS
While the Company was in compliance with the covenants associated with the
Notes and the Term Loan during fiscal 1996, it was not in compliance with three
of the covenants under the Revolving Facility and one of the covenants under an
operating lease for land ("the Lease") at the end of the third quarter of fiscal
1996. The Company was able to obtain the appropriate waivers for the third
quarter. Based on projections, the Company anticipated that it would not be in
compliance with the fixed charges coverage ratio covenants under the Notes and
Revolving Facility, and the consolidated net income covenants under the Term
Loan, Revolving Facility and Lease as of the end of the fourth quarter of fiscal
1996. Consequently, the Company negotiated with the financial institutions and
subsequently amended the covenants or obtained the appropriate waivers. The
Company was in compliance with all of its covenants as of September 30, 1996, as
amended.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ 2,010 $3,713
State................................................ 161 160 563
Foreign.............................................. 29,353 30,632 319
------- ------- ------
29,514 32,802 4,595
Deferred:
Federal.............................................. 4,322 7,600 --
State................................................ 746 1,313 --
------- ------- ------
5,068 8,913 --
------- ------- ------
Provision for income taxes............................. $34,582 $41,715 $4,595
======= ======= ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company s deferred tax assets and liabilities are as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Tax Assets:
Inventory............................................ $ 1,419 $ 122 $ 882
Accrued compensation and other benefits.............. 4,186 4,051 3,531
Basis difference in fixed assets..................... -- -- 4,632
Net operating loss carryforwards..................... 40,248 34,950 12,683
Deferred rental payments............................. 640 759 846
Allowance for doubtful accounts...................... 263 151 226
Charitable contribution carryforwards................ 431 -- --
Investment valuation................................. 902 -- --
Other................................................ 427 230 404
-------- -------- --------
Total deferred tax assets......................... 48,516 40,263 23,204
Valuation allowance for deferred tax assets............ (44,653) (33,893) (17,965)
-------- -------- --------
Net deferred tax assets................................ 3,863 6,370 5,239
-------- -------- --------
Deferred Tax Liabilities:
Taxes on foreign operations including translation
gain.............................................. 10,205 15,849 7,709
Basis difference in fixed assets..................... 3,863 1,131 --
-------- -------- --------
Total deferred tax liabilities.................... 14,068 16,980 7,709
-------- -------- --------
Total net deferred tax liabilities........... $ 10,205 $ 10,610 $ 2,470
======== ======== ========
</TABLE>
The Company's valuation allowance for deferred tax assets increased by
$10,760,000 and $15,928,000 in fiscal 1996 and 1995, respectively, and decreased
by $655,000 in fiscal 1994. Approximately $29,687,000 of the Company's valuation
allowance for deferred assets at September 30, 1996 is related to income tax
benefits for stock option deductions, which will be credited to stockholders'
equity when realized.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of the provision for income taxes, with the amount computed
by applying the statutory federal income tax rate, is as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense computed at federal statutory
rate.............................................. $ 1,371 $ 62,130 $ 10,068
State income tax, net of federal benefit............ 485 957 366
Net earnings subject to foreign taxes at lower
rates............................................. (1,299) (18,222) (6,638)
Losses for which no current year benefit is
available......................................... 34,025 -- 2,923
Tax benefit of net operating loss carryforward...... -- (3,150) (2,124)
-------- -------- --------
Provision for income taxes.......................... $34,582 $ 41,715 $ 4,595
======== ======== ========
</TABLE>
Pretax income from foreign operations was approximately $25,507,000,
$164,500,000 and $9,600,000 in fiscal 1996, 1995 and 1994, respectively. The
Company enjoys tax holidays with respect to its two operations in Thailand which
will expire in fiscal 1998 and 2002 and in Carmel Rey of the Philippines which
will expire in fiscal 2001. The impact of these holidays was to decrease the net
loss by approximately $11,000,000 ($0.24 per share) in fiscal 1996, and increase
net income by approximately $7,100,000 ($0.15 per share) in fiscal 1995 and
$3,400,000 ($0.07 per share) in fiscal 1994. At September 30, 1996, accumulated
pretax earnings of approximately $144,257,000 are intended to be permanently
reinvested outside the United States and no federal tax has been provided on
these earnings. A foreign tax credit of approximately $29,587,000 would be
available to offset federal tax upon repatriation of foreign earnings.
At September 30, 1996, the Company had a federal net operating loss
carryforward of approximately $115,000,000 for United States federal tax return
purposes, expiring in fiscal years 1999 through 2011.
NOTE 10. COMMITMENTS
PURCHASE COMMITMENTS
Commitments for construction or purchase of plant and equipment for the
Company totaled approximately $60 million at September 30, 1996.
OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2015
and contain various provisions for rental adjustments including, in certain
cases, a provision based on increases in the consumer price index. Rental
expense under these leases and other cancelable operating leases was
approximately $8,415,000, $11,306,000 and $10,884,000 for fiscal years 1996,
1995 and 1994, respectively.
Future minimum rental payments under operating leases at September 30 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................... $ 9,729
1998........................................................... 8,830
1999........................................................... 8,330
2000........................................................... 7,492
2001........................................................... 6,621
Thereafter..................................................... 11,593
-------
Total future minimum lease payments.................. $ 52,595
=======
</TABLE>
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. LITIGATION
On December 11, 1996, a class action complaint (the "Complaint") was filed
in the Superior Court of the State of California, Santa Clara County, against
the Company and certain of its officers and directors. The Complaint alleges
violations of certain California securities laws, fraud, unlawful, unfair or
fraudulent business practices, and false and misleading advertising. The Company
is accepting service of the Complaint, but has not yet had the opportunity to
investigate the claims made in such Complaint. However, based on its preliminary
review of the Complaint, the Company believes it has meritorious defenses and
intends to defend this action vigorously. Failure by the Company to obtain a
favorable resolution of the claims set forth in the Complaint could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Except as so noted, the Company is not a party, nor is its property
subject, to any material pending legal proceedings other than ordinary routine
litigation incidental to the Company's business. The Company does not believe
such routine litigation, taken individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition or
results of operations.
NOTE 12. EMPLOYEE STOCK AND BENEFIT PLANS
The Company has granted stock options to purchase its Common Stock to key
employees under two option plans, the Amended and Restated 1987 Stock Option
Plan (the "1987 Plan") and the 1995 Stock Option Plan (the "1995 Plan"). Options
granted have exercise prices equal to the fair market value as of the date of
grant; under either plan, however, the Company's Board of Directors has
authority to grant options at not less than 100% of the fair market value as of
the date of grant with respect to incentive stock options and at not less than
85% of the fair market value as of the date of grant with respect to
nonstatutory stock options. To date, the Board of Directors has exercised this
authority on a single grant under the 1987 Plan; all grants under the 1995 Plan
have been at 100% of the fair market value on the date of grant. Effective
November 1995, options granted under these plans vest over four years, such that
vesting occurs at the rate of 25% per year, starting one year from the date of
grant. Options granted under the 1987 Plan prior to such date vested over three
years at the rate of 25%, 25% and 50% annually, starting one year from the date
of grant. The 1995 Plan was approved by the Company's stockholders at its 1996
Annual Meeting of Stockholders, with 3,000,000 shares of Common Stock reserved
for issuance thereunder; the 1995 Plan also provides that all shares authorized
for issuance under the 1987 Plan but not subject to grant at February 1996, and
all shares returned to the 1987 Plan thereafter due to option cancellations or
expiration, be rolled over into the 1995 Plan. In accordance with the Agreement
and Plan of Reorganization dated as of June 9, 1994 among the Company, Sunward
and Read-Rite Acquisition Corporation, the Company assumed all outstanding
options under Sunward's 1991 Incentive Stock Option Plan. The options generally
vest over a four-year period.
In May 1991, the Company's Board of Directors approved a Director Option
Plan (the "Director Plan") and reserved 150,000 shares of Common Stock for
issuance pursuant to the Director Plan. The Director Plan provides for the
granting of stock options to non-employee directors of the Company. Under the
Director Plan, upon joining the Board and on each July 1 thereafter, each
non-employee director automatically receives an option to purchase 6,000 shares
of the Company's Common Stock at an exercise price equal to fair market value on
the date of grant. The options granted under the 1991 plan vest over a
three-year period at the rate of 25%, 25% and 50% annually, starting one year
from the date of grant, and have a term of ten years. Effective December 1995,
the Company changed vesting for new grants to four years, such that vesting will
occur at the rate of 25% annually, starting one year from the date of grant.
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity under these employee and director option plans was as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
OPTION PRICE NUMBER OF AVAILABLE
PER SHARE SHARES FOR GRANT
--------------- ---------- ----------
<S> <C> <C> <C>
Balance at September 30, 1993............... $ 0.07 - 31.25 5,339,691 4,367,331
Grants.................................... $ 6.55 - 17.63 1,815,943 (1,815,943)
Exercised................................. $ 0.07 - 14.25 (857,828) --
Canceled.................................. $ 0.33 - 31.25 (556,789) 556,789
---------- ----------
Balance at September 30, 1994............... $ 0.33 - 31.25 5,741,017 3,108,177
Grants.................................... $ 15.13 - 41.25 1,883,458 (1,883,458)
Exercised................................. $ 0.33 - 31.25 (2,296,855) --
Canceled.................................. $ 0.60 - 41.25 (336,496) 326,144
---------- ----------
Balance at September 30, 1995............... $ 0.33 - 41.25 4,991,124 1,550,863
Additional shares reserved................ -- 3,000,000
Grants.................................... $ 9.94 - 37.13 1,322,799 (1,322,799)
Exercised................................. $ 0.33 - 28.75 (366,065) --
Canceled.................................. $ 0.60 - 41.25 (612,008) 577,403
---------- ----------
Balance at September 30, 1996............... $ 0.60 - 41.25 5,335,850 3,805,467
========== ==========
</TABLE>
At September 30, 1996, 1995 and 1994, there were exercisable options
outstanding under the above mentioned option plans to purchase an aggregate of
approximately 2,009,000, 1,003,000 and 2,079,000 shares, respectively.
In fiscal 1991, the Company granted to the Chief Executive Officer an
option, independent of an option plan, to purchase 1,188,037 shares of Common
Stock at $0.33 per share. As of September 30, 1996, 708,760 options have been
exercised, and 479,277 options were exercisable.
The Board of Directors has adopted an Employee Stock Purchase Plan (the
"Purchase Plan") under which all eligible employees may acquire Common Stock at
the lesser of 85% of the closing sales price of the stock at the beginning or at
the end of each offering period. Offering periods each have a six-month duration
commencing on April 1 and October 1 of each year. The Board of Directors has
reserved 1,000,000 shares under this plan and, at September 30, 1996, there were
390,218 shares available for purchase.
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") under
which eligible employees may contribute, on a pre-tax basis, between 2% and 15%
of their total annual income from the Company, excluding certain year-end
bonuses and subject to a maximum aggregate annual contribution imposed by the
Internal Revenue Code. The Company sponsors a "stock match" program pursuant to
which the Company contributes shares of the Company's Common Stock to the 401(k)
Plan. Each participating employee receives shares with a market value equal to
$1.50 for each $1.00 contributed by such employee up to the lesser of (i) $1,500
in Common Stock, or (ii) 100 shares of Common Stock per participant per year. Of
the shares contributed to each employee's account, 25% vests immediately, and
the balance vests 25% for each year of service to the Company, with full credit
given for prior service. The Board of Directors has reserved 500,000 shares
under the 401(k) Plan and, at September 30, 1996, there were 50,723 shares
available for issuance. Subsequent to year end the Board of Directors reserved
an additional 500,000 shares of Common Stock for issuance under the 401(k) Plan.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable and investments.
The Company performs credit evaluations of its customers' financial condition
and generally requires no collateral from its customers. Principal customers for
years ended September 30 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AS A PERCENTAGE OF NET
SALES)
<S> <C> <C> <C>
Western Digital............................................. 43 % 37 % 34 %
Quantum..................................................... 29 % 29 % 23 %
Maxtor...................................................... 12 % 11 % 13 %
Seagate (formerly Conner Peripherals)....................... 8 % 13 % 15 %
All Others.................................................. 8 % 10 % 15 %
--- --- ---
Total............................................. 100 % 100 % 100 %
=== === ===
</TABLE>
NOTE 14. GEOGRAPHIC INFORMATION
The following table summarizes the Company's operations in different
geographic areas:
<TABLE>
<CAPTION>
UNITED
STATES FAR EAST ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Sales to unaffiliated customers.......... $ 30,830 $ 960,288 $ -- $ 991,118
Transfers between geographic areas....... 152,905 337,991 (490,896) --
-------- ---------- --------- ----------
Total net sales................ $183,735 $1,298,279 $ (490,896) $ 991,118
======== ========== ========= ==========
Operating income (loss).................. $(17,867) $ 25,656 $ -- $ 7,789
======== ========== ========= ==========
Identifiable assets...................... $694,993 $ 722,346 $ (508,667) $ 908,672
======== ========== ========= ==========
YEAR ENDED SEPTEMBER 30, 1995
Sales to unaffiliated customers.......... $181,631 $ 821,409 $ -- $ 1,003,040
Transfers between geographic areas....... 85,877 335,208 (421,085) --
-------- ---------- --------- ----------
Total net sales................ $267,508 $1,156,617 $ (421,085) $ 1,003,040
======== ========== ========= ==========
Operating income......................... $ 12,234 $ 167,436 $ (1,824) $ 177,846
======== ========== ========= ==========
Identifiable assets...................... $870,900 $ 954,427 $ (885,870) $ 939,457
======== ========== ========= ==========
YEAR ENDED SEPTEMBER 30, 1994
Sales to unaffiliated customers.......... $207,964 $ 430,625 $ -- $ 638,589
Transfers between geographic areas....... 60,150 273,469 (333,619) --
-------- ---------- --------- ----------
Total net sales................ $268,114 $ 704,094 $ (333,619) $ 638,589
======== ========== ========= ==========
Operating income......................... $ 5,573 $ 26,260 $ 3 $ 31,836
======== ========== ========= ==========
Identifiable assets...................... $400,900 $ 473,045 $ (243,353) $ 630,592
======== ========== ========= ==========
</TABLE>
The Company records sales and transfers between geographic areas under two
methods (1) at prices which, in general, provide a profit after coverage of all
manufacturing costs and (2) on a consignment basis, in which case the sales
recorded reflect only service revenue. Operating income (loss) is total net
sales less cost of sales and operating expenses. Identifiable assets by
geographic area are those assets used in the Company's operations in each area.
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Export sales represent sales to foreign-based subsidiaries of predominantly
United States headquartered companies and to customers of Read-Rite SMI in
Japan. These export sales were primarily to the Far East and were approximately
$945,679,000, $972,060,000, and $591,423,000 for fiscal years 1996, 1995 and
1994, respectively.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996(1),(2),(3)
Net sales................................... $299,211 $258,219 $238,281 $195,407
Gross margin................................ $ 83,402 $ 42,709 $ 11,369 $(33,826)
Net income (loss)........................... $ 42,571 $ 1,287 $(22,910) $(63,934)
Net income (loss) per share................. $ 0.88 $ 0.03 $ (0.49) $ (1.37)
1995(4),(5)
Net sales................................... $219,483 $241,799 $253,081 $288,677
Gross margin................................ $ 46,695 $ 56,782 $ 66,055 $ 94,508
Net income.................................. $ 19,575 $ 24,999 $ 32,295 $ 46,696
Net income per share........................ $ 0.42 $ 0.53 $ 0.68 $ 0.95
</TABLE>
- ---------------
(1) The second quarter results include a $9 million charge to research and
development expenditures for the acquisition of planar technology, and a $6
million charge to cost of goods sold for the consolidation of San Diego
operations to Northern California. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Research and Development
Expenses and Gross Margin" and Notes 2 and 4.
(2) The third quarter results include $10 million in charges to cost of goods
sold related to obsolete fixed assets and excess inventory related to
end-of-life products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Gross Margin."
(3) The fourth quarter results include charges of approximately $27 million,
primarily to cost of goods sold for severance charges, fixed assets
obsolescence issues and excess inventory related to end-of-life products.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Gross Margin" and Note 4.
(4) The fourth quarter results include a $4.6 million write-off to research and
development relating to MR technology purchased from KME. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Research and Development Expenses" and Note 1 -- Intangible
and Other Assets.
(5) The fourth quarter results include a $2.4 million expense of an investment
in Redwood MicroSystems. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Research and Development
Expenses."
41
<PAGE> 43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Read-Rite Corporation
We have audited the accompanying consolidated balance sheets of Read-Rite
Corporation as of September 30, 1996 and 1995, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years in the period ended September 30, 1996. Our audits also included the
financial statement schedule listed in the index at item 14(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Read-Rite
Corporation at September 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
October 21, 1996, except for Note 11,
for which the date is December 11, 1996
42
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file its definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on February 25, 1997 pursuant to Regulation
14A of the Securities Exchange Act of 1934 (the "Proxy Statement") not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
sections entitled "Record Date and Principal Ownership" and "Security Ownership
of Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
43
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the Company for the
fiscal year ended September 30, 1996 are included herewith:
Consolidated Balance Sheets,
Consolidated Statements of Operations,
Consolidated Statements of Cash Flows,
Consolidated Statements of Stockholders' Equity,
Notes to Consolidated Financial Statements, and
Report of Ernst & Young LLP, Independent Auditors
(2) Supplemental Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements or
notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------
<S> <C>
3.1(16) Restated Certificate of Incorporation, as amended
3.2(16) Bylaws, as amended
4.1(16) Article X of Restated Certificate of Incorporation (See Exhibit 3.1)
4.2(1) Amended Registration Rights Agreement, dated as of June 27, 1991 and amended
August 12, 1991
4.3(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement
10.2(6)* Amended and Restated 1987 Stock Option Plan and form of Stock Option Agreement
10.3(16)* Amended and Restated 1995 Director Option Plan and form of Option Agreement
10.4* Amended and Restated 401(k) Retirement Savings Plan and Summary Plan
Description
10.5(4)* Employee Stock Purchase Plan
10.6(1)* Stock Option Agreement dated February 4, 1991 between the Company and Cyril J.
Yansouni, as amended May 16, 1991
10.7(6)* Offer of employment dated April 7, 1993 from the Company to Dr. Frederic
Schwettmann
10.8(1) Series CC Preferred Stock and Convertible Subordinated Note Purchase Agreement
between the Company and Sumitomo, dated as of June 14, 1991
10.9(9) Joint Venture Agreement dated as of June 14, 1991 between the Company and
Sumitomo Metal Industries, Ltd. ("Sumitomo")
10.10(7) First Addendum dated as of December 14, 1993 to Joint Venture Agreement dated
as of June 14, 1991 between the Company and Sumitomo (See Exhibit 10.11)
10.11(1) License Agreement between the Company and Read-Rite SMI Corporation ("Read-Rite
SMI") dated July 18, 1991
10.12(1) Distribution Agreement between the Company and Read-Rite SMI dated July 18,
1991
10.13(1) Distribution Agreement between Read-Rite SMI and the Company dated July 18,
1991
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------
<S> <C>
10.14(7) First Addendum dated as of December 14, 1993 to the License and Distribution
Agreements between the Company and Read-Rite SMI (See Exhibits 10.13, 10.14 and
10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI and Sumitomo dated
July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and between Company and
Sunward Technologies, Inc.
10.18(1)(4) Asset Purchase Agreement between Conner Peripherals, Inc., Conner Peripherals
Malaysia, Sdn Bhd and the Company, dated as of August 30, 1991, as amended
October 26, 1991(Confidential treatment granted as to certain portions of this
exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of November 14, 1991, by
and among the Company, Read-Rite International, Maxtor Singapore Limited and
Maxtor Corporation, as amended December 20, 1991
10.20(1) License Agreement between International Business Machines Corporation and the
Company dated as of October 1, 1986
10.21(6) License Agreement dated September 14, 1993 between the Company and Kyushu
Matsushita Electric Co., Ltd. (Confidential treatment requested for certain
portions of this exhibit)
10.22(10) Cross-License Agreement dated December 31, 1994 between the Company and Seagate
Technology Inc.
10.23(1) Lease between Greenville Dallas Delaware, Inc. and the Company dated July 1,
1991
10.24(1) Lease between Kim Camp No. VII and the Company dated April 21, 1991
10.25(12) First Amendment to Lease Agreement dated October 30, 1995 between Kim Camp No.
VII and the Company
10.26(1) Lease between Confederation Life Insurance Corporation and the Company, dated
July 12, 1991
10.27(5) Single Tenant Industrial Lease Agreement, dated as of August 24, 1992, between
Shuwa Investments Corporation and the Company
10.28(5) Loan Agreement between The Industrial Finance Corporation of Thailand (the
"IFCT") and Read-Rite (Thailand) Co. Ltd., dated as of September 25, 1992 and
related Agreement for Pledge of Properties, Agreement for Custodianship of
Pledged Properties and Suretyship Contract, dated as of September 30, 1992, by
the Company in favor of the IFCT
10.29(6) Loan Agreement between the IFCT and Read-Rite (Thailand) Co. Ltd., dated as of
September 24, 1993 and related Suretyship Contract dated as of September 23,
1993 by the Company in favor of the IFCT
10.30(9) Third Amended and Restated Credit Agreement dated as of December 14, 1994 among
the Company, the financial institutions named therein, CIBC Inc., and Canadian
Imperial Bank of Commerce, New York Agency
10.31(10) First Amendment dated February 24, 1995 to Third Amended and Restated Credit
Agreement dated as of December 14, 1994 among the Company, the financial
institutions named therein, CIBC Inc., and Canadian Imperial Bank of Commerce,
New York Agency
10.32(11) Second Amendment dated June 30, 1995 to Third Amended and Restated Credit
Agreement dated as of December 14, 1994 among the Company, the financial
institutions named therein, CIBC Inc., and Canadian Imperial Bank of Commerce,
New York Agency
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -------------------------------------------------------------------------------
<S> <C>
10.33(12) Third Amendment dated September 22, 1995 to Third Amended and Restated Credit
Agreement dated as of December 14, 1994 among the Company, the financial
institutions named therein, CIBC Inc., and Canadian Imperial Bank of Commerce,
New York Agency
10.34(12) Note Purchase Agreement dated September 29, 1995 among the Company and the
purchasers named therein pertaining to the Company s sale of $100,000,000 in
7.53% Senior Notes due September 15, 2000
10.35(13) Agreement dated as of November 1, 1995 between the Company and Sumitomo Metal
Industries, Ltd. regarding the formation of Read-Rite SMI (Thailand) Co., Ltd.
10.36(13) Agreement and Second Addendum to License Agreement and Distribution Agreements
between the Company, Sumitomo Metal Industries, Ltd., Read-Rite SMI Kabushiki
Kaisha and Read-Rite SMI (Thailand) Co., Ltd.
10.37(14) Agreement for Purchase and Sale of Assets by and between Read-Rite Corporation
and Censtor Corporation dated March 29, 1996
10.38(14) Fourth Amendment to Third Amended and Restated Credit Agreement dated as of
December 14, 1994 among the Company, the financial institutions named therein,
CIBC Inc., and Canadian Imperial Bank of Commerce, New York Agency
10.39(14) Lease of the Land dated April 25, 1996 between Sumitomo Bank Leasing and
Finance, Inc., as landlord, and the Company, as tenant, together with a Deed of
Trust, Financing Statement, Security Agreement and Fixture Filing with
Assignment of Rents and Leases
10.40(16) Term Loan Agreement Between Read-Rite Corporation as Borrower and Financial
Institutions as Banks and Canadian Imperial Bank of Commerce as Agent, dated
June 28, 1996
10.41(15)* 1995 Stock Option Plan and form of Stock Option Agreement
10.42(15)* Years of Service Plan
10.43 First Amendment to Note Purchase Agreement dated September 29, 1995 among the
Company and the purchasers named therein pertaining to the Company s sale of
$100,000,000 in 7.53% Senior Notes due September 15, 2000, dated September 29,
1996
10.44 Amendment to Lease of the Land dated April 25, 1996 between Sumitomo Bank
Leasing and Finance, Inc., as landlord, and the Company, as tenant, together
with a Deed of Trust, Financing Statement, Security Agreement and Fixture
Filing with Assignment of Rents and Leases, dated October 15, 1996
10.45 Fifth Amendment to Third Amended and Restated Credit Agreement dated as of
December 14, 1994 among the Company, the financial institutions named therein,
CIBC Inc., and Canadian Imperial Bank of Commerce, New York Agency, dated
September 29, 1996
10.46 First Amendment to Term Loan Agreement dated June 28, 1996 between Read-Rite
Corporation as Borrower and Financial Institutions as Banks and Canadian
Imperial Bank of Commerce as Agent, dated September 29, 1996
11.1 Calculation of Earnings Per Share
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on page 49)
27 Financial Data Schedule
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
46
<PAGE> 48
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33 42570), effective October 17, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991.
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated January 10, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company s Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company s Registration Statement on Form
S-8 dated April 25, 1996.
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(b) Reports on Form 8-K
None
(c) Exhibits
See subsection (a)(3) above.
(d) Financial Statement Schedules
See subsection (a)(1) and (2) above.
47
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Milpitas, State of California, on this 18th day of December, 1996.
Read-Rite Corporation
By: /s/ CYRIL J. YANSOUNI
------------------------------------
Cyril J. Yansouni, Chairman and
Chief Executive Officer
48
<PAGE> 50
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cyril J. Yansouni and John T. Kurtzweil,
and each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments to this report
on Form 10-K, and to file with same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------- ------------------
<C> <S> <C>
/s/ CYRIL J. YANSOUNI Chief Executive Officer December 18, 1996
- ------------------------------------------ (Principal Executive
Cyril J. Yansouni Officer) and Chairman of
the Board of Directors
/s/ FREDERIC SCHWETTMANN President, Chief Operating December 18, 1996
- ------------------------------------------ Officer and Director
Frederic Schwettman
/s/ JOHN T. KURTZWEIL Vice President, Finance and December 18, 1996
- ------------------------------------------ Chief Financial Officer
John T. Kurtzweil (Principal Financial and
Accounting Officer)
/s/ JOHN G. LINVILL Director December 18, 1996
- ------------------------------------------
John G. Linvill
/s/ WILLIAM J. ALMON Director December 18, 1996
- ------------------------------------------
William J. Almon
/s/ MICHAEL L. HACKWORTH Director December 18, 1996
- ------------------------------------------
Michael L. Hackworth
/s/ MATTHEW J. O'ROURKE Director December 18, 1996
- ------------------------------------------
Matthew J. O'Rourke
</TABLE>
49
<PAGE> 51
SCHEDULE II
READ-RITE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT (CREDITED) CHARGED BALANCE
BEGINNING TO COSTS/ TO DEDUCTION AT END
PERIOD ENDING CERTIFICATION OF PERIOD EXPENSES OTHER(2) (1) OF PERIOD
- ------------------- -------------------------------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1996 Allowance for doubtful accounts $3,017 $ (620) $189 $ -- $ 2,586
September 30, 1995 Allowance for doubtful accounts $1,627 $1,390 $ -- $ -- $ 3,017
September 30, 1994 Allowance for doubtful accounts $2,163 $ 82 $ -- $ 618 $ 1,627
</TABLE>
- ---------------
(1) Reductions in the allowance represent write-offs of accounts receivable.
(2) Translation adjustment
50
<PAGE> 1
EXHIBIT 10.4
READ-RITE EMPLOYEE 401(k)
RETIREMENT SAVINGS PLAN
PLAN DOCUMENT
Amended and Restated
Effective January 1, 1991
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE 1 - DEFINITIONS AND CONSTRUCTION.................................... 1
1.1 Definitions.................................................. 1
1.2 Construction................................................. 7
1.3 Gender and Number............................................ 7
1.4 Headings..................................................... 7
ARTICLE 2 - ELIGIBILITY AND PARTICIPATION................................... 7
2.1 Commencement of Participation................................ 7
2.2 Termination of Participation................................. 7
2.3 Suspended Participation...................................... 8
2.4 Participation Upon Re-employment............................. 8
ARTICLE 3 - CONTRIBUTIONS................................................... 8
3.1 Salary Deferral Contributions................................ 8
3.2 Annual Limitation on Deferrals............................... 8
3.3 Distribution of Excess Deferrals............................. 8
3.4 All Contributions Deemed Employer Contributions.............. 9
3.5 Cessation and Resumption of Salary Deferral Contributions.... 9
3.6 Change in Salary Deferral Contributions...................... 9
3.7 Contributions Held in Trust.................................. 10
3.8 Rollover Contributions....................................... 10
3.9 Actual Deferral Percentage Limitation........................ 10
3.10 Avoidance and Distribution of Excess Contributions........... 12
3.11 Employer Matching Contributions.............................. 13
3.12 Excess Matching Contributions: Correction Methods............ 15
3.13 Further Limits on Non-Discrimination Testing of Salary
Deferral Contributions and Employer Matching Contributions... 18
3.14 Deposit of Employer Matching Contributions................... 20
3.15 Forfeiture of Employer Matching Contributions................ 20
3.16 Investment Options........................................... 20
3.17 Shareholder Voting Rights with Respect to Employer Stock..... 21
ARTICLE 4 - PARTICIPANTS' ACCOUNTS AND ALLOCATION
OF TRUST INCOME OR LOSS..................................................... 21
4.1 Salary Deferral Contribution Accounts........................ 21
4.2 Employer Matching Contribution Account....................... 21
4.3 Rollover Contribution Accounts............................... 21
4.4 Valuation Dates.............................................. 22
4.5 Allocation of Trust Income or Loss........................... 22
i
<PAGE> 3
ARTICLE 5 - VESTING......................................................... 22
5.1 Salary Deferral Contribution Account and Rollover Account.... 22
5.2 Vesting of Employer Matching Contribution Account............ 22
5.3 Employer Matching Contribution Accounts: Forfeitures........ 23
ARTICLE 6 - DISTRIBUTION OF BENEFITS UPON TERMINATION....................... 23
6.1 Form of Distributions........................................ 23
6.2 Amounts Available for Distribution........................... 24
6.3 Timing of Payment of Distributions........................... 24
6.4 Death Benefits............................................... 25
6.5 Deferred Distributions....................................... 25
6.6 Direct Transfer of Eligible Rollover Distributions........... 25
6.7 No Liability................................................. 26
ARTICLE 7 - LOANS........................................................... 26
7.1 Loans: Requirements.......................................... 26
7.2 Loans: Source of Funds, Application of Payments............. 27
ARTICLE 8 - IN-SERVICE WITHDRAWALS BY PARTICIPANTS.......................... 27
8.1 Withdrawals for Financial Hardship........................... 27
8.2 Frequency of Withdrawals..................................... 28
8.3 Withdrawal After Age 59-1/2.................................. 28
ARTICLE 9 - BENEFICIARIES................................................... 28
9.1 Beneficiary Designation...................................... 28
9.2 Absence of Valid Designation................................. 29
9.3 Surviving Spouse Beneficiary................................. 29
ARTICLE 10 - DESIGNATION OF NAMED FIDUCIARY................................. 29
10.1 Plan Administrator........................................... 29
10.2 Powers of Plan Administrator................................. 29
10.3 Other Agents................................................. 30
10.4 Fiduciaries.................................................. 30
10.5 Indemnification.............................................. 30
10.6 Costs........................................................ 30
ARTICLE 11 - TRUST FUND AND TRUSTEE......................................... 30
11.1 Trust Agreement.............................................. 30
ARTICLE 12 - AMENDMENT AND TERMINATION...................................... 31
12.1 Amendment.................................................... 31
12.2 Termination.................................................. 32
ARTICLE 13 - ASSIGNMENTS.................................................... 32
ii
<PAGE> 4
ARTICLE 14 - CLAIMS PROCEDURE.............................................. 32
14.1 General Procedure........................................... 32
14.2 Procedure of Company to Review Appeals...................... 33
ARTICLE 15 - TOP HEAVY PROVISIONS.......................................... 33
15.1 Top Heavy Determination..................................... 33
15.2 Required Aggregation Group.................................. 34
15.3 Top Heavy Group............................................. 34
15.4 Minimum Contribution for Top Heavy Plan..................... 34
15.5 Key Employees............................................... 35
15.6 Non-Key Employee............................................ 36
15.7 Top Heavy Vesting........................................... 36
ARTICLE 16 - MISCELLANEOUS................................................. 37
16.1 No Employment Relationship Established by Plan.............. 37
16.2 Plan Merger or Consolidation................................ 37
16.3 Section 415 Limits on Allocations........................... 38
16.4 Qualified Domestic Relations Orders......................... 39
16.5 Notices..................................................... 39
16.6 Severability................................................ 40
iii
<PAGE> 5
READ-RITE EMPLOYEE 401(K)
RETIREMENT SAVINGS PLAN
Effective as of January 1, 1991, Read-Rite Corporation, a Delaware
corporation (the "Company"), adopted the Read-Rite Employee 401(k) Retirement
Savings Plan (the "Prior Plan") for the purpose of (a) providing the employees
of the Company and designated related companies (collectively referred to as the
"Employer") with an opportunity to accumulate funds for their retirement, or (b)
paying death benefits to the dependents and beneficiaries of participants. The
Plan is a profit sharing plan which is intended to qualify under section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), which includes a
cash or deferred arrangement intended to satisfy the requirements of section
401(k) of the Code. Unless otherwise stated herein, the Plan's provisions are
effective January 1, 1991.
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
1.1 Definitions. The following words and phrases as used in this Plan
shall have the following meanings unless a different meaning is clearly required
by the context:
(a) "Account(s)" shall mean a Participant's Salary Deferred
Contribution Account, Employer Matching Contribution Account and Rollover
Contribution Account, or any one of such Accounts as the context may require.
(b) "Adjustment Factor" shall mean the cost of living adjustment
prescribed by the Secretary of the Treasury under section 415(d) of the Code, as
applied to such items and in such manner as the Secretary shall provide.
(c) "Beneficiary" shall mean the person or persons entitled under
the provisions of the Plan to receive benefits after the death of a Participant.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time. References to specific provisions of the Code or any
regulations promulgated thereunder shall be deemed to mean any successor
provisions.
(f) "Company" shall mean Read-Rite Corporation, a Delaware
corporation.
(g) "Compensation" shall have the following meanings:
(g)(1) For purposes of determining contributions to the Plan,
Compensation shall mean base wage or salary payments, overtime, shift
differentials, payments for paid time off and paid time off cashouts, payments
in lieu of notice and
1
<PAGE> 6
termination pay. For purposes of this definition, Compensation shall also
include amounts which would have been paid to an Employee but for Salary
Deferral Contributions to the Plan or amounts not includable in an Employee's
gross income pursuant to section 125 of the Code. Compensation shall not include
commissions, bonuses, or payments pursuant to a severance agreement.
Compensation for contribution purposes shall not exceed the maximum dollar limit
established under section 401(a)(17) of the Code.
(g)(2) For all other purposes, Compensation shall mean, for any
Plan Year, all wages, salaries, commissions, fees for professional services, and
other amounts received for personal services actually rendered in the course of
employment with the Company or a Related Company (up to the maximum dollar limit
under section 401(a)(17) of the Code) which are paid in cash or in kind to an
Employee during such Plan Year and are includable as wages under section 3401(a)
of the Code. For purposes of this definition, Compensation shall also include
amounts which would have been paid to an Employee but for Salary Deferral
Contributions to the Plan or amounts not includable in an Employee's gross
income pursuant to section 125 of the Code.
(h) "Effective Date of the Amended and Restated Plan" shall mean
January 1, 1991, unless otherwise provided herein.
(i) "Eligible Employee" shall mean every Employee who has attained
age 18, except any Employee (1) who is a member of a collective bargaining unit
and who is covered by a collective bargaining agreement, which agreement does
not specifically provide for coverage of such Employee under the Plan, or (2)
who is performing services for the Employer through an employment or leasing
agency, including leased employees within the meaning of section 414(n) of the
Code, or (3) who is a nonresident alien receiving no earned income (within the
meaning of section 911(d)(2) of the Code) from the Employer which constitutes
income from a United States source (within the meaning of section 861(a)(3) of
the Code).
(j) "Employee" shall mean a person currently employed by the
Employer, any portion of whose income is subject to withholding of income tax
and/or for whom Social Security contributions are made by the Employer, as well
as any other person qualifying as a common law employee of the Employer.
Notwithstanding any other provision of the Plan, for purposes of the
requirements listed in section 414(n)(3) of the Code, the term "Employee" shall
include leased employees within the meaning of section 414(n)(2) of the Code;
provided, however, that if such leased employees constitute less than 20% of the
Employer's non-highly compensated workforce within the meaning of section
414(n)(5)(C)(ii) of the Code, the term "Employee" shall not include those leased
employees covered by a plan described in section 414(n)(5)(B) of the Code.
(k) "Employer" shall mean Read-Rite Corporation, a Delaware
corporation, and any Related Company which adopts the Plan with the
authorization of the Company.
(l) "Employer Matching Contributions" shall mean the contribution
made by the Employer pursuant to Article 3.12 of the Plan.
2
<PAGE> 7
(m) "Employer Matching Contribution Account" shall mean that
Account of the Participant to which Employer Matching Contributions shall be
credited. The Employer Matching Contribution Account shall have two subaccounts;
an Employer Matching Contribution Account (Full Vesting) and an Employer
Matching Contribution Account (Phased Vesting).
(n) "Employer Stock" shall mean shares of common stock issued by
Read-Rite Corporation, which is listed on either a national securities exchange
or the national market system of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ").
(o) "Enrollment/Change Form" shall mean that form on which the
Participant designates the amount or percentage of the Participant's
Compensation to be contributed to the Participant's Salary Deferral Contribution
Account, the manner in which such contributions shall be invested, Rollover
Contribution information and Beneficiary information.
(p) "Entry Date" shall mean the date on which an Eligible Employee
commences Plan participation.
(q) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.
(r) "Family Members" shall mean an individual described in section
414(q)(6)(B) of the Code.
(s) "Highly Compensated Employee" shall mean:
(s)(1) Any Employee who, during the current Plan Year or the
12-month period immediately preceding the current Plan Year:
(A) Was at any time a 5% owner, as defined in Article
15.5(c)(1);
(B) Received Compensation in excess of $75,000 (adjusted
by the Adjustment Factor);
(C) Received Compensation in excess of $50,000 (adjusted
by the Adjustment Factor) and was in the top twenty percent (20%) of Employees,
ranked on the basis of Compensation for such Plan Year; or
(D) Was at any time an officer, within the meaning of
section 416(i) of the Code, and received Compensation greater than fifty percent
(50%) of the dollar limitation in effect under section 415(b)(1)(A) for such
Plan Year.
3
<PAGE> 8
(s)(2) Notwithstanding any other provision in the Plan,
subparagraphs (1)(B), (1)(C) or (1)(D) above shall not apply to an Employee for
the current Plan Year unless:
(A) Such Employee was a Highly Compensated Employee for
the preceding 12-month period by application of subparagraphs (1)(B), (1)(C) or
(1)(D) above; or
(B) Such Employee is a member of the group of the one
hundred (100) Employees paid the greatest Compensation for the current Plan
Year.
(s)(3) For purposes of subparagraph (1)(D) above, no more than
fifty (50) Employees (or, if lesser, the greater of three (3) Employees or ten
percent (10%) of the Employees) shall be treated as officers. If, for any Plan
Year, no officer is described in subparagraph (1)(D), the highest paid officer
of the Employer for such Plan Year shall be treated as described in subparagraph
(1)(D).
(s)(4) For purposes of this section 1.1(s), a former Employee
shall be treated as a Highly Compensated Employee if:
(A) Such Employee was a Highly Compensated Employee when
such Employee separated from service; or
(B) Such Employee was a Highly Compensated Employee at
any time after attaining age 55.
(s)(5) For purposes of determining a Highly Compensated
Employee under subparagraphs (1)(C) and (1)(D), an Employee described in section
414(q)(8) of the Code shall be excluded.
(s)(6) If the Employer is eligible under section 414(q)(12)(B)
of the Code to elect to determine Highly Compensated Employees pursuant to the
method described in section 414(q)(12)(A) of the Code, then for purposes of
determining the Highly Compensated Employees of such Employer, subparagraph
(1)(B) above shall be applied by substituting "$50,000" for "$75,000," and
subparagraph (1)(C) above shall not apply.
(s)(7) Notwithstanding any other provision in the Plan, the
Employer may elect to determine Highly Compensated Employees on the basis of the
"calendar year calculation election" set forth in the regulations promulgated
under the Code.
(s)(8) Notwithstanding any other provision in the Plan, the
determination of Highly Compensated Employees shall be made in accordance with
section 414(q)(6) of the Code and the regulations promulgated thereunder.
4
<PAGE> 9
(t) "Hour of Service" shall mean:
(t)(1) Generally, each hour for which an Employee is directly
or indirectly paid or entitled to payment by the Company or a Related Company
for the performance of duties. Hours of Service shall be credited to the
Employee based on the number of months worked. An Employee will be credited with
one hundred ninety (190) Hours of Service for each month in which the Employee
performs at least one Hour of Service or is entitled to payment by the Company
or a Related Company, directly or indirectly, for the performance of duties or
for a period during which no service is performed due to vacation, holiday,
sickness, incapacity (including disability), leaves of absence, layoff, jury
duty or military service. These hours shall be credited to the Employee for the
Plan Year or the computation period in which the service is performed or for
which payments are made. Payments made or due under a plan maintained by the
Company or a Related Company solely for the purpose of complying with applicable
worker's compensation, unemployment compensation or disability insurance laws,
or to reimburse the Employee for medical or medically related expenses shall not
be considered as payments by the Company or Related Company for purposes of this
Article 1.1(t). Notwithstanding the foregoing, however, no more than 501 Hours
of Service shall be credited to an Employee on account of any single continuous
period in which the Employee performs no duties. The number of Hours of Service
for which no duties are performed and the computation period to which they
relate shall be determined in accordance with the Department of Labor
Regulations section 2530.200b-2(b) and (c) or similar superseding regulations.
(t)(2) Each hour for which back pay, irrespective of mitigation
of damages, has been either awarded or agreed to by the Company or a Related
Company. The number of hours for which back pay is attributable shall be
determined in accordance with Department of Labor Regulations section 2530.200b-
2(b). These hours shall be credited to the Employee for the Plan Year or
computation period in which the award, agreement or payment pertains, rather
than the Plan Year or computation period in which the award, agreement or
payment is made. No hours shall be credited under this subparagraph (2) if the
same hours have been credited under subparagraph (1) above.
(u) "Investment Manager" shall mean (1) any fiduciary (other than a
Trustee or named fiduciary as specified in Article 10) who has the power to
manage, acquire, or dispose of any assets of the Plan; (2) who is (A) registered
as an investment adviser under the Investment Advisers Act of 1940; (B) is a
bank, as defined in that Act; or (C) is an insurance company qualified to
perform services under the laws of more than one State; and (3) who has
acknowledged in writing that such person is a fiduciary with respect to the
Plan.
(v) "Non-Highly Compensated Employee" shall mean an Employee who is
neither a Highly Compensated Employee nor a Family Member.
(w) "Normal Retirement Date" shall mean the day on which the
Participant attains his or her sixty-fifth (65th) birthday.
5
<PAGE> 10
(x) "One Year Break in Service" shall mean a Plan Year during
which the Participant is credited with less than 501 Hours of Service.
(y) "Participant" shall mean any Eligible Employee who has become
a participant in the Plan in accordance with the provisions of Article 2 and
whose participation has not terminated.
(z) "Plan" shall mean the Read-Rite Employee 401(k) Retirement
Savings Plan set forth herein and any amendments hereto.
(aa) "Plan Quarter" shall mean a three-month period ending on each
March 31, June 30, September 30, and December 31.
(bb) "Plan Year" shall mean a twelve-month period beginning on
January 1 and ending on December 31. A "limitation year," as that term is used
in section 415 of the Code and the Treasury regulations issued thereunder, shall
have the same meaning as "Plan Year."
(cc) "Related Company" shall mean any organization which is either
(1) a member of a controlled group of corporations (as determined for purposes
of section 414(b) of the Code) of which the Company is a member, (2) a member of
a group of trades or businesses (whether or not incorporated) which are under
common control with the Company (as determined for purposes of section 414(c) of
the Code), (3) is a member of an affiliated service group within the meaning of
section 414(m) of the Code, of which the Company is also a member, or (4) is
otherwise aggregated with the Company under section 414(o) of the Code.
(dd) "Rollover Contribution Account" shall mean that Account of the
Participant to which transfers to the Plan pursuant to Article 3.8 are credited.
(ee) "Salary Deferral Contribution" shall mean the contribution
made on behalf of a Participant pursuant to Article 3.1 of the Plan.
(ff) "Salary Deferral Contribution Account" shall mean that Account
of the Participant to which Salary Deferral Contributions shall be credited.
(gg) "Trust" shall mean the legal entity created by the Trust
Agreement as part of the Plan as the Trust Agreement may be amended from time to
time.
(hh) "Trust Agreement" shall mean that trust agreement entered into
between the Employer and Trustee on September 30, 1993, as such may be amended
from time to time.
(ii) "Trust Fund" shall mean all property and income held by the
Trustee under the Trust Agreement.
6
<PAGE> 11
(jj) "Trustee" at the time of the execution of the Plan shall mean
Frontier Trust Company. The term "Trustee" shall include any duly appointed
successor or successors to the individuals listed above and shall exclude any
individual named above or otherwise whose service as a Trustee of the Trust has
ended through removal, resignation or other termination in accordance with the
terms of the Trust Agreement.
(kk) "Valuation Date" shall mean the last business day of each
calendar month and such other date as may be designated as provided in Article
4.4 for the revaluation of Participants' Accounts.
(ll) "Year of Service for Vesting Purposes" shall mean each Plan
Year during which the Employee is credited with at least 1000 Hours of Service.
1.2 Construction. All matters respecting the validity, effect,
interpretation and administration of the Plan shall be determined in accordance
with ERISA, and to the extent allowed by ERISA, in accordance with the laws of
the State of California; provided, however, that if any provision is susceptible
of more than one interpretation, such interpretation shall be given thereto as
is consistent with the Plan being a qualified employees' profit sharing plan
which incorporates a qualified cash or deferred arrangement within the meaning
of the Code (including section 401(k) of the Code) and ERISA, or corresponding
provisions of subsequent federal revenue laws.
1.3 Gender and Number. As used in the Plan, the masculine, feminine or
neuter gender and the singular or plural number shall each be allowed to include
the others whenever the context so indicates.
1.4 Headings. All headings used in the Plan are inserted for convenience
of reference only and do not constitute part of the Plan.
ARTICLE 2
ELIGIBILITY AND PARTICIPATION
2.1 Commencement of Participation.
(a) Each Eligible Employee who was a Participant in the Prior Plan
on the Effective Date of the Amended and Restated Plan shall continue to be a
Participant in the Plan.
(b) Each Eligible Employee who first completes one Hour of Service
for the Employer after the Effective Date of the Amended and Restated Plan shall
become a Participant in the Plan as soon as administratively feasible after he
or she enrolls in the Plan.
2.2 Termination of Participation. Participation in the Plan continues
until a Participant terminates his or her employment by reason of retirement,
death, or for any other reason.
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2.3 Suspended Participation. A Participant who ceases to be an Eligible
Employee, but who continues to be an Employee, shall become a suspended
Participant. No Salary Deferral Contributions or Employer Matching Contributions
shall be made with respect to a suspended Participant. However, the suspended
Participant shall continue to be credited with Years of Service for Vesting
Purposes through the period during which he or she is a suspended Participant.
2.4 Participation Upon Re-employment. Any Employee who was previously a
Participant in the Plan, whose participation terminated for any reason, and who
is subsequently rehired shall become a Participant as soon as administratively
feasible after he or she enrolls in the Plan following the date on which the
Employee resumes employment or on which the Employee becomes an Eligible
Employee, whichever occurs later. Upon becoming a Participant, the rehired
Employee shall be entitled immediately to designate that contributions be made
to his or her Salary Deferral Contribution Account.
ARTICLE 3
CONTRIBUTIONS
3.1 Salary Deferral Contributions.
(a) Each Participant may designate a dollar amount or a whole
percentage of his or her Compensation to be contributed as a Salary Deferral
Contribution, provided that such dollar amount or percentage of Compensation
shall be not less than one percent (1%) nor more than fifteen percent (15%) for
each Plan Year. This designated amount or percentage of Compensation shall not
be paid to the Participant but shall, for each pay period during which the
authorization is in effect, be withheld from the Participant's pay and
contributed to his or her Salary Deferral Contribution Account as provided
herein.
(b) A Participant may initially authorize Salary Deferral
Contributions by filing an Enrollment/Change Form with the Employer prior to the
date on which such authorization is to be effective. Enrollment/Change Forms may
be filed at any time. Salary Deferral Contributions shall commence as soon as
administratively feasible following the date the Enrollment/Change Form is
submitted. A Participant's Salary Deferral Contribution designation shall remain
in effect until suspended or modified as provided in Articles 3.5 and 3.6.
3.2 Annual Limitation on Deferrals. Notwithstanding any other provision
of the Plan, no Participant shall be permitted to have Salary Deferral
Contributions made to the Plan on his or her behalf during any calendar year in
excess of the limits set forth under section 402(g) of the Code.
3.3 Distribution of Excess Deferrals.
(a) Notwithstanding any other provision of the Plan, Excess
Deferrals and income allocable thereto for a given calendar year may be
distributed no later than April 15
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of the following calendar year to Participants who claim such Excess Deferrals
by making a timely election. For purposes of this Article 3.3, a Participant's
"Excess Deferrals" shall mean the amount of Salary Deferral Contributions for a
calendar year which are in excess of the limit set forth in Article 3.2 (as
applied to all tax-deferred elective contributions under the Plan and other
plans specified by law) and which the Participant allocates to the Plan as part
of the Participant's election.
(b) A Participant's Excess Deferrals shall be adjusted for income
or loss for the calendar year in which the Excess Deferrals occurred, which
shall be determined by multiplying the total amount of income or loss allocable
to the Participant's Salary Deferral Contribution Account for the applicable
calendar year by a fraction, the numerator of which shall be the Participant's
Excess Deferrals and the denominator of which shall be the balance in the
Participant's Salary Deferral Contribution Account on the last day of the
applicable calendar year (excluding any income or loss allocable to such Account
for the calendar year in which the Excess Deferrals occurred). If the
distribution of Excess Deferrals to a Participant is made after the calendar
year in which the Excess Deferrals occur, then the Participant's Excess
Deferrals shall also be adjusted for income or loss for the period between the
end of the applicable calendar year and the time of the distribution by any
method permitted under regulations issued by the Internal Revenue Service.
3.4 All Contributions Deemed Employer Contributions. Except as
applicable law may otherwise require, contributions made pursuant to the
Participant's designation under Article 3.1 herein shall be deemed to be
Employer contributions to the Plan.
3.5 Cessation and Resumption of Salary Deferral Contributions.
(a) A Participant may cease Salary Deferral Contributions at any
time, either by filing with the Employer an Enrollment/Change Form or by
communicating with the Employer in such other manner as the Employer may
authorize to that effect. The cessation of Salary Deferral Contributions shall
be effective as soon thereafter as administratively feasible. A Participant who
has ceased making Salary Deferral Contributions may resume making Salary
Deferral Contributions beginning in any subsequent month by filing a new
Enrollment/Change Form which complies with the provisions of Article 3.1(b),
provided the Participant is otherwise eligible to participate in the Plan on
that date.
(b) If the Participant ceases to be an Eligible Employee, all
Salary Deferral Contributions made on his or her behalf shall be suspended
immediately. Such Participant shall be eligible to resume making Salary Deferral
Contributions by again authorizing such Contributions, pursuant to Article
3.1(b), following the date he or she again becomes an Eligible Employee.
3.6 Change in Salary Deferral Contributions. A Participant may change
the percentage of Compensation or the amount contributed as a Salary Deferral
Contribution at any time. Such changes shall be limited to once per month.
Generally, a change in the Salary Deferral Contribution will be implemented
immediately and a change that is
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submitted before noon on the Monday of a week in which a paycheck is issued on
the following Friday shall be effective with that Friday's paycheck. In the
event a paycheck is issued earlier in the week than Friday, then the change in
the Salary Deferral Contribution shall be effective with the next paycheck
issued on a Friday. Notwithstanding the foregoing, in the event a Salary
Deferral Contribution change cannot be implemented immediately for
administrative reasons, such change shall be implemented as soon as
administratively feasible. Changes in the Salary Deferral Contribution shall be
made on an Enrollment/Change Form and shall be submitted to the Plan
Administrator.
3.7 Contributions Held in Trust. The amount of Salary Deferral
Contributions contributed by the Employer on the Participant's behalf shall be
transferred to the Trustee, or such other depository as the Employer may
designate, as soon as it is reasonable to do so and in no event later than
thirty (30) days following the close of the month in which such Salary Deferral
Contributions were deducted from a Participant's Compensation.
3.8 Rollover Contributions.
(a) Subject to the consent of the Plan Administrator, the Trustee
shall be authorized to accept the direct transfer of assets from another
retirement plan on behalf of an Eligible Employee provided the transfer of such
assets to the Plan was initiated by such Eligible Employee and qualifies as a
rollover contribution within the meaning of section 402(a), section 403(a)(4),
section 403(b)(8), or section 408(d)(3) of the Code. Any assets so transferred
on behalf of an Eligible Employee shall be deposited in the Trust and allocated
to the Eligible Employee's Rollover Account.
(b) Subject to the consent of the Plan Administrator, an Eligible
Employee may rollover to this Plan a qualifying rollover distribution. A
qualifying rollover distribution is a distribution that qualifies for rollover
treatment under sections 402(a) or 408(d)(3) of the Code. Only cash rollovers
will be accepted. All rollover contributions shall be deposited in the Trust and
allocated to the Eligible Employee's Rollover Account.
3.9 Actual Deferral Percentage Limitation.
(a) In order that the Plan comply with the requirements of section
401(k) of the Code, the Salary Deferral Contributions made for each Plan Year
must satisfy one of the following tests:
(a)(1) The Actual Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Actual
Deferral Percentage for Participants who are Non-Highly Compensated Employees
for the Plan Year multiplied by 1.25; or
(a)(2) The Actual Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Actual
Deferral Percentage for Participants who are Non-Highly Compensated Employees
for the Plan Year multiplied by two (2), provided that the Actual Deferral
Percentage for Participants who are Highly
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Compensated Employees does not exceed the Actual Deferral Percentage for
Participants who are Non-Highly Compensated Employees by more than two (2)
percentage points, or such lesser amount as the Secretary of the Treasury shall
prescribe to prevent the multiple use of this alternative test with respect to
any Highly Compensated Employee.
(b) For purposes of this Article 3.10, the following definitions
shall apply:
(b)(1) "Actual Deferral Percentage" shall mean the average
(expressed as a percentage) of the Deferral Percentages of the Participants in a
group.
(b)(2) "Deferral Percentage" shall mean the ratio (expressed as
a percentage) that a Participant's Salary Deferral Contributions made during a
Plan Year bears to the Participant's compensation for such Plan Year.
(b)(3) "Compensation," for purposes of this Article 3.10, shall
have the meaning set forth in Article 1.1(g).
(c) For purposes of this Article 3.10, the following special rules
shall apply:
(c)(1) The Deferral Percentage for any Participant who is a
Highly Compensated Employee for the Plan Year and who is eligible to have
elective deferral contributions allocated to his or her account under two or
more plans or arrangements described in section 401(k) of the Code that are
maintained by the Company or a Related Company shall be determined as if all
such elective deferrals were made under a single arrangement.
(c)(2) For purposes of determining the Deferral Percentage of a
Participant who is a Highly Compensated Employee, the Salary Deferral
Contributions and compensation of such Participant shall include the Salary
Deferral Contributions and compensation of Family Members, and such Family
Members shall be disregarded in determining the Deferral Percentages for
Participants who are Non-Highly Compensated Employees.
(c)(3) As provided in regulations promulgated by the Secretary
of the Treasury, the Company may, in its sole discretion, elect to take into
account matching contributions and qualified non-elective contributions, as
defined in section 401(m) of the Code, made on behalf of a Participant under the
Plan or any other plan of the Employer for purposes of determining such
Participant's Deferral Percentage.
(c)(4) The determination and treatment of the Salary Deferral
Contributions and Deferral Percentage of any Participant shall satisfy such
other requirements as may be prescribed by the Secretary of the Treasury.
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3.10 Avoidance and Distribution of Excess Contributions.
(a) In order that the Plan shall comply with the requirements of
section 401(k) of the Code and the regulations thereunder, at any time in a Plan
Year the Company (in its sole discretion) may reduce for the remainder of that
Plan Year the rate of Salary Deferral Contributions authorized by any
Participant who is a Highly Compensated Employee, or the Company may require
that any Highly Compensated Employee who is a Participant discontinue all Salary
Deferral Contributions for the remainder of that Plan Year. Such a reduction or
discontinuance may be applied selectively to individual Participants who are
Highly Compensated Employees or to a particular class of Participants who are
Highly Compensated Employees, as the Company may determine. Upon the close of
the Plan Year, or on such earlier date as the Company may determine, this
Article 3.11 shall automatically cease to apply until the Company again
determines that a reduction or discontinuance of Salary Deferral Contributions
is required for any Participant who is a Highly Compensated Employee.
(b) Notwithstanding any other provision of the Plan, Excess
Contributions and income allocable thereto shall be distributed, if
administratively feasible, within the first 2-1/2 months of a Plan Year to
Participants on whose behalf such Excess Contributions were made during the
preceding Plan Year; provided, however, that in no event shall Excess
Contributions and income allocable thereto be distributed to Participants later
than the end of the Plan Year following the Plan Year in which such Excess
Contributions were made.
(b)(1) For purposes of this Article 3.11(b) and Article 3.11(c),
"Excess Contributions" shall mean the excess of:
(A) The aggregate amount of Salary Deferral Contributions
contributed on behalf of Highly Compensated Employees who were Participants
during a Plan Year, over
(B) The maximum amount of Salary Deferral Contributions
permitted under Article 3.10 hereof for such Plan Year, which shall be
determined by reducing the amount of Salary Deferral Contributions contributed
on behalf of Participants who were Highly Compensated Employees during such Plan
Year in order of their Deferral Percentages, beginning with the highest of such
Deferral Percentages.
(b)(2) A Participant's Excess Contributions shall be adjusted
for income and loss, which shall be determined by multiplying the total amount
of income or loss allocable to the Participant's Salary Deferral Contribution
Account for the applicable Plan Year by a fraction, the numerator of which shall
be the Participant's Excess Contributions for the applicable Plan Year and the
denominator of which shall be the balance in the Participant's Salary Deferral
Contribution Account on the last day of such Plan Year.
(b)(3) The Excess Contributions which would otherwise be
distributed to a Participant pursuant to this Article 3.11 shall be reduced by
the amount of Excess
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Deferrals distributed to such Participant, in accordance with regulations
promulgated by the Secretary of the Treasury.
(c) In the event Excess Contributions are not distributed as
provided in Article 3.11(b), above, then such Excess Contributions may, in the
discretion of the Committee, be recharacterized as voluntary after-tax
contributions no later than two and one-half months after the close of the Plan
Year to which the recharacterization relates.
(c)(1) Excess Contributions recharacterized under this Article
3.11(c) shall be includable in the Participant's income on the earliest dates
any Salary Deferral Contribution made on behalf of the Participant during the
Plan Year would have been received by the Participant had he or she originally
elected to receive the amounts in cash except as hereinafter provided.
(c)(2) Excess Contributions which are recharacterized under this
Article 3.11(c) shall be reported to the Internal Revenue Service in accordance
with such regulations as may be prescribed by the Secretary of the Treasury.
3.11 Employer Matching Contributions. Effective July 1, 1993, the
Employer shall make Employer Matching Contributions to the Plan in accordance
with the following provisions.
(a) The Employer shall contribute as an Employer Matching
Contribution shares of Employer Stock equal in value to one hundred fifty
percent (150%) of the eligible Salary Deferral Contributions made on behalf of
each Participant.
(a)(1) Employer Matching Contributions shall be allocated to
each Participant's account quarterly. The first such Employer Matching
Contribution shall be allocated on September 30, 1993, and shall be based on
eligible Salary Deferral Contributions made during the period from January 1,
1993 through September 30, 1993.
(a)(2) In order to be eligible for an Employer Matching
Contribution for a given quarter, an Employee must be a Participant on the last
business day of that quarter. Effective January 1, 1994, Employer Matching
Contributions shall be made based on Salary Deferral Contributions in a quarter
whether or not the Employee is a Participant on the last business day of that
quarter.
(a)(3) Eligible Salary Deferral Contributions shall be the first
one thousand dollars ($1,000) contributed to the Plan each Plan Year.
(a)(4) The value of the shares of Employer Stock contributed
each Plan Quarter shall be determined by the reported closing price of the
Employer Stock on the national market system of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") on the last business
day of each Plan Quarter, beginning on September 30, 1993. If the closing price
is not so reported on the NASDAQ market system, then the price shall be that
reported on such other stock exchange or market system on which the Common Stock
is traded.
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(b) To ensure that the Plan complies with the requirements of
section 401(m) of the Code, the Employer Matching Contributions made for each
Plan Year must satisfy one of the following tests:
(b)(1) The Actual Contribution Percentage for Participants who
are Highly Compensated Employees for the Plan Year shall not exceed the Actual
Contribution Percentage for Participants who are Non-Highly Compensated
Employees for the Plan Year multiplied by 1.25; or
(2) The Actual Contribution Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Actual
Contribution Percentage for Participants who are Non-Highly Compensated
Employees multiplied by two (2), provided that the Actual Contribution
Percentage for Participants who are Highly Compensated Employees does not exceed
the Actual Contribution Percentage for Participants who are Non-Highly
Compensated Employees by more than two (2) percentage points, or such lesser
amount as the Secretary of the Treasury shall prescribe to prevent the multiple
use of this alternate test with respect to any Highly Compensated Employee.
(c) For purposes of this Article 3.12, the following definitions
shall apply:
(1) "Actual Contribution Percentage" shall mean the average
(expressed as a percentage) of the Contribution Percentages of the Participants
in a group.
(2) "Contribution Percentage" shall mean the ratio (expressed
as a percentage rounded to the nearest one hundredth of one percent) that the
Employer Matching Contributions made on behalf of or by a Participant during the
Plan Year bear to the Participant's Compensation for such Plan Year. For
purposes of this Article 3.12, "Compensation" shall have the same definition as
in Article 1.1(g).
(d) For purposes of this Article 3.12, the following special rules
shall apply:
(1) The Contribution Percentage for any Participant who is a
Highly Compensated Employee for the Plan Year and who is eligible to have
Employer Matching Contributions or elective deferral contributions allocated to
his account under two or more plans described in section 401(a) of the Code or
arrangements described in section 401(k) of the Code that are maintained by the
Company or a Related Company shall be determined as if all such contributions
were made under a single plan or arrangement. The previous sentence shall only
apply if such plans or arrangements have the same plan years.
(2) For purposes of determining the Contribution Percentage of
a Participant who is a Highly Compensated Employee and is either a 5% owner as
defined in Article 15.5(c)(1) or one of the ten most Highly Compensated
Employees of the Employer, the Employer Matching Contributions and compensation
of such Participant shall include the Employer Matching Contributions and
compensation of Family Members, and such Family Members shall be disregarded in
determining the Contribution Percentages for Participants who are Non-Highly
Compensated Employees.
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(3) As provided in, and in accordance with, the regulations
promulgated by the Secretary of the Treasury, the Employer may, in its sole
discretion, elect to take into account elective deferrals and qualified
non-elective contributions made on behalf of a Participant under the Plan or any
other plan of the Employer for purposes of determining such Participant's
Contribution Percentage only if such contributions are nonforfeitable when made
and distributable only under the following circumstances:
(A) The Employee's retirement, death, Total Disability or
other termination of employment;
(B) The termination of the Plan without establishment of a
successor plan;
(C) In the case of either a profit sharing plan or a plan
with a qualified cash or deferred arrangement under section 401(k) of the Code,
the Employee's attainment of age 59-1/2;
(D) The sale or other disposition by a corporation to an
unrelated corporation, which does not maintain the Plan, of substantially all of
the assets used in a trade or business, but only with respect to employees who
continue employment with the acquiring corporation; and
(E) The sale or other disposition by a corporation of its
interest in a subsidiary to an unrelated entity which does not maintain the
Plan, but only with respect to Employees who continue employment with the
subsidiary. Non-elective contributions which may be treated as Employer Matching
Contributions must satisfy these requirements without regard to whether they are
actually taken into account as Employer Matching Contributions.
(4) The Committee shall maintain such records as are necessary
to demonstrate compliance with the requirements of Article 3.12(b), including
the extent to which elective contributions and qualified non-elective
contributions are taken into account for purposes of determining a Participant's
Contribution Percentage.
(5) The determination and treatment of the Employer Matching
Contributions and Contribution Percentage of any Participant shall satisfy such
other requirements as may be prescribed by the Secretary of the Treasury.
3.12 Excess Matching Contributions: Correction Methods.
(a) Notwithstanding any other provision of the Plan, in the event
neither of the special tests described in Section 3.12(b) can be satisfied, then
the Excess Aggregate Contributions of certain Highly Compensated Employees for a
Plan Year shall be corrected by use of one or more of the following methods, as
determined by the Company:
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(a)(1) By distribution of such Excess Aggregate Contributions
and allocable income to any Participant with Excess Aggregate Contributions for
such Plan Year. Distribution must be made, if administratively feasible, within
the first 2-1/2 months of the Plan Year following the Plan Year for which the
Excess Aggregate Contributions were made; provided, however, that in no event
shall distribution occur later than the end of the Plan Year following the Plan
Year for which the Excess Aggregate Contributions were made. Notwithstanding any
other provision in the Plan, the consent of a Participant or his or her spouse
shall not be required for a distribution of Excess Aggregate Contributions and
allocable income. Such distributions shall be in compliance with section
401(a)(4) of the Code.
(a)(2) To the extent that Employer Matching Contributions made
on behalf of a Participant for such Plan Year are not vested, by forfeiture of
such Employer Matching Contributions and allocable income. Amounts forfeited
under this paragraph shall be reallocated to the Employer Matching Contribution
Accounts of other Participants, provided that such reallocation shall not cause
the Plan to fail to comply with the requirements of Article 3.12 above.
Forfeited amounts that are so reallocated shall be used to offset the Employer's
Matching Contribution each Plan Quarter.
(a)(3) By contribution by the Employer of qualified
non-elective contributions, as defined in section 401(k) and 401(m) of the Code,
which may be taken into account for purposes of determining a Participant's
Contribution Percentage, as provided in regulations promulgated by the Secretary
of the Treasury. If such method is used to correct Excess Aggregate
Contributions, it may not also be used to correct Excess Contributions pursuant
to Article 3.11. Notwithstanding any other provision of the Plan, qualified
non-elective contributions made under this paragraph may be allocated
selectively to Participants or to a particular class of Participants, as the
Company may determine in its sole discretion. Contributions to be made under
this paragraph shall be contributed by the Employer as soon as administratively
feasible, but in no event later than the end of the Plan Year following the Plan
Year for which the Excess Aggregate Contributions were made.
(b) In order to correct the Excess Aggregate Contributions of
Participants who are Highly Compensated Employees, the methods of correction
described in Article 3.13(a) must be accomplished on an Employee-by-Employee
basis. The Excess Aggregate Contributions for certain Participants who are
Highly Compensated Employees shall be reduced as follows: the first such
reduction shall be made by reducing the Contribution Percentage of the Highly
Compensated Employee with the highest Contribution Percentage to the
Contribution Percentage of the Highly Compensated Employee with the second
highest Contribution Percentage. If the requirements of Article 3.12(b) are not
satisfied by this first reduction, then the Contribution Percentages of the two
Highly Compensated Employees with the highest Contribution Percentages shall be
reduced to the Contribution Percentage of the Highly Compensated Employee with
the third highest Contribution Percentage. The reduction in Contribution
Percentages shall be repeated in the same manner until the requirements of
Article 3.12(b) are satisfied for such Plan Year.
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(c) For purposes of this Article 3.13, "Excess Aggregate
Contributions" shall mean the excess of:
(c)(1) The aggregate amount of the Employer Matching
Contributions made on behalf of Participants who are Highly Compensated
Employees during a Plan Year, over
(c)(2) The maximum amount of the Employer Matching
Contributions permitted for such Plan Year.
(d) The income allocable to Excess Aggregate Contributions shall be
equal to the sum of the allocable gain or loss for the Plan Year for which the
Excess Aggregate Contributions were made, and the allocable gain or loss for the
period between the end of such Plan Year and the date of distribution or
forfeiture, as determined as follows:
(d)(1) The income allocable to a Participant's Excess Aggregate
Contributions for a Plan Year shall be determined by multiplying the total
income for the Plan Year allocable to the Participant's Matching Contributions
(including amounts treated as Matching Contributions) by a fraction, the
numerator of which shall be the Participant's Excess Aggregate Contributions,
and the denominator of which shall be the total balance of the Participant's
Account(s) attributable to Matching Contributions (including amounts treated as
Matching Contributions) as of the end of the Plan Year, reduced by the gain
allocable to such total amount for the Plan Year, and increased by the loss
allocable to such total amount for the Plan Year.
(d)(2) The allocable income shall include income for the period
between the end of the Plan Year for which the Excess Contributions were made,
and the date on which the corrective distribution or forfeiture occurs. For
purposes of calculating the allocable income for this period, the Company, in
its sole discretion, shall select one of the two following methods, provided
that the method selected shall be applied on a uniform and nondiscriminatory
basis for all Participants with Excess Aggregate Contributions:
(A) The "fractional method," under which the income for the
period between the end of the Plan Year and the last day of the month preceding
the distribution or forfeiture date shall be multiplied by a fraction determined
under the method described in paragraph (1) above, or
(B) The "10% method," under which ten percent (10%) of the
allocable income determined pursuant to paragraph (1) above, shall be multiplied
by the number of calendar months that have elapsed between the end of the Plan
Year and the distribution or forfeiture date. For purposes of determining the
number of calendar months under the 10% method, a distribution or forfeiture
that occurs on or before the fifteenth day of a month shall be treated as having
occurred on the last day of the preceding month, and a distribution or
forfeiture occurring after the fifteenth day of a month shall be treated as
having occurred on the first day of the following month.
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(e) For purposes of this Article 3.13, if the Highly Compensated
Employee's Contribution Percentage is determined by combining the Matching
Contributions and compensation of all Family Members pursuant to Article
3.12(d)(2), then the maximum amount of Matching Contributions permitted is
determined in accordance with the leveling method set forth above in Article
3.13(b), and the Excess Aggregate Contributions for the Family Members are
allocated among the Family Members in proportion to their Matching
Contributions.
(f) Notwithstanding any other provision to the Plan, a
Participant's Excess Aggregate Contributions shall be determined after first
determining his or her Excess Deferrals under Article 3.3 and then determining
his or her Excess Contributions under Article 3.11.
(g) If Excess Aggregate Contributions and allocable income are not
corrected by distribution or forfeiture before the close of the first 2-1/2
months of the following Plan Year, the Employer shall be subject to a 10% excise
tax on the amount of such Excess Aggregate Contributions, pursuant to section
4979 of the Code. Such excise tax shall be due at the same time as the
Employer's income tax for its taxable year with or within which the Plan Year
ends. Notwithstanding any other provision in the Plan, qualified non-elective
contributions which are properly taken into account pursuant to Article
3.12(d)(3) may permit the Plan to avoid Excess Aggregate Contributions for a
Plan Year even if such qualified non-elective contributions are made after the
close of the first 2-1/2 months of the following Plan Year.
(h) The determination of the amount of Excess Aggregate
Contributions with respect to a Plan Year shall be made after determining the
amount of Excess Contributions, if any, to be treated as voluntary after-tax
contributions due to recharacterization under Article 3.11(c).
3.13 Further Limits on Non-Discrimination Testing of Salary Deferral
Contributions and Employer Matching Contributions.
(a) In order for the Plan to comply with the requirements of
sections 401(k) and 401(m) of the Code, the Plan must satisfy the tests set
forth in Article 3.10 and Article 3.12 hereof. However, the Employer must avoid
the multiple use of the alternative limitation as set forth in Articles
3.10(a)(2) and 3.12(b)(2) with respect to Highly Compensated Employees.
(b) For purposes of this Article 3.14, a multiple use of the
alternative limitation is present when all of the following conditions occur:
(b)(1) One or more Highly Compensated Employees of the Employer
are eligible to participate in a cash or deferred arrangement subject to section
401(k) of the Code and in a plan maintained by the Employer subject to section
401(m) of the Code;
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(b)(2) The sum of the Actual Deferral Percentage of the entire
group of eligible Highly Compensated Employees under such arrangement subject to
section 401(k) of the Code and the Actual Contribution Percentage of the entire
group of eligible Highly Compensated Employees under such plan subject to
section 401(m) of the Code exceeds the Aggregate Limit;
(b)(3) The Actual Deferral Percentage of the entire group of
eligible Highly Compensated Employees under the arrangement subject to section
401(k) of the Code exceeds 125 percent of the Actual Deferral Percentage of the
entire group of eligible Non-Highly Compensated Employees; and
(b)(4) The Actual Contribution Percentage of the entire group
of eligible Highly Compensated Employees under such plan subject to section
401(m) of the Code exceeds 125 percent of the Actual Contribution Percentage of
the entire group of eligible Non-Highly Compensated Employees.
(c) For purposes of this Article 3.14, the Aggregate Limit is
defined as the greater of:
(c)(1) The sum of:
(A) 125 percent of the greater of the Relevant Actual
Deferral Percentage or the Relevant Actual Contribution Percentage, and
(B) Two (2) percentage points plus the lesser of the
Relevant Actual Deferral Percentage or the Relevant Actual Contribution
Percentage. In no event, however, shall this amount exceed twice the lesser of
the Relevant Actual Deferral Percentage or the Relevant Actual Contribution
Percentage; or
(c)(2) The sum of:
(A) 125 percent of the lesser of the Relevant Actual
Deferral Percentage or the Relevant Actual Contribution Percentage, and
(B) Two (2) percentage points plus the greater of the
Relevant Actual Deferral Percentage or the Relevant Actual Contribution
Percentage. In no event, however, shall this amount exceed twice the greater of
the Relevant Actual Deferral Percentage or the Relevant Actual Contribution
Percentage.
(d) For purposes of this Article 3.14, the term "Relevant Actual
Deferral Percentage" and the term "Relevant Actual Contribution Percentage"
mean, respectively, the Actual Deferral Percentage and the Actual Contribution
Percentage of the eligible group of Non-Highly Compensated Employees.
(e) (1) In the event a multiple use of the alternative limitation
as described in Article 3.14(b) is present, such multiple use shall be corrected
by reducing the
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<PAGE> 24
Actual Deferral Percentage or the Actual Contribution Percentage of the Highly
Compensated Employees so that the combined Actual Deferral Percentage and the
Actual Contribution Percentage does not exceed the Aggregate Limit.
(2) The required reduction shall be treated as an Excess
Contribution as described in Article 3.11(b)(1) as an Excess Aggregate
Contribution as described in Article 3.13(c).
(3) The Employer may elect to reduce the Actual Deferral
Percentage or the Actual Contribution Percentage in order to correct the
multiple use of the alternative limitation.
(4) The method of correction to be used to reduce the Actual
Deferral Percentage shall be the method as set forth in Article 3.11. The method
of correction to be used to reduce the Actual Contribution Percentage shall be
the method as set forth in Article 3.13(b).
3.14 Deposit of Employer Matching Contributions. Employer Matching
Contributions shall be made in the form of Employer Stock and shall be delivered
by the Employer to the Trustee, or such other depository as the Company may
designate, as soon as administratively feasible after the end of the quarter for
which such contribution is made, but in no event later than 90 days after the
end of the Plan Year to which such Employer Matching Contributions relate.
3.15 Forfeiture of Employer Matching Contributions. Employer Matching
Contributions attributable to the portion of the Participant's Salary Deferral
Contributions which have been determined to be Excess Deferrals or Excess
Contributions shall be forfeited and shall reduce the Employer's Employee
Matching Contributions to the Plan.
3.16 Investment Options.
(a) Each Participant shall direct in writing the manner in which
his or her Salary Deferral Contribution and Rollover Accounts are invested.
Participants may direct investment in the funds that the Employer shall make
available. Participants may submit changes in their investment directions at any
time on an Enrollment/Change Form. Generally, changes in investment directions
shall be implemented immediately and shall take effect within five business days
after the last pay date in the fiscal month. If a change in investment
directions is submitted after 12:00 noon on the last Monday in the fiscal month
such change shall take effect within five business days after the last pay date
in the following fiscal month. Notwithstanding the foregoing, in the event a
change in investment directions cannot be implemented immediately for
administrative reasons, such change shall be implemented as soon as
administratively feasible.
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<PAGE> 25
(b) Employer Matching Contribution Accounts shall be invested in
Employer Stock and/or any other investment vehicle selected by the Plan
Administrator, in its sole discretion.
(c) In the event of a tender offer extended to all shareholders of
Employer Stock, Participants shall have the right to direct the Trustee as to
whether the shares of Employer Stock in their Employer Matching Contribution
Account should be tendered. If a Participant fails to direct the Trustee as to
the tender decision, such failure shall be deemed to be a direction to not
tender the shares of Employer Stock.
3.17 Shareholder Voting Rights with Respect to Employer Stock. With
respect to [vested] shares of Employer Stock in a Participant's Employer
Matching Contribution Account, the Plan Committee shall have all shareholder
voting rights exercisable by other shareholders of the same class of Employer
Stock. The Plan Committee shall direct the Trustee as to the manner in which all
shares of Employer Stock held by the Plan Trust shall be voted.
ARTICLE 4
PARTICIPANTS' ACCOUNTS AND ALLOCATION
OF TRUST INCOME OR LOSS
4.1 Salary Deferral Contribution Accounts. A Salary Deferral
Contribution Account shall be established and maintained for each Participant
which shall be credited with such Participant's Salary Deferral Contributions
and Trust income allocable thereto, and shall be charged with distributions
therefrom and any Trust losses allocable thereto.
4.2 Employer Matching Contribution Account. An Employer Matching
Contribution Account shall be established and maintained for each Participant
which shall be credited with shares of Employer Stock contributed as Employer
Matching Contributions and any dividends paid thereon and shall be charged with
distributions therefrom. Each Employer Matching Contribution Account shall have
two subaccounts: an "Employer Matching Contribution Account (Full Vesting)" and
an "Employer Matching Contribution Account (Phased Vesting)." Twenty-five
percent (25%) of the amount allocated to a Participant's Employer Matching
Contribution Account shall be allocated to that Participant's Employer Matching
Contribution Account (Full Vesting) and the remaining seventy-five percent (75%)
of such contribution shall be allocated to that Participant's Employer Matching
Contribution Account (Phased Vesting).
4.3 Rollover Contribution Accounts. A Rollover Contribution Account
shall be established for each Eligible Employee making a transfer to the Plan
pursuant to Article 3.8 which shall be credited with such Eligible Employee's
transfer and the Trust Income allocable thereto and shall be charged with
distributions therefrom and losses allocable thereto.
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<PAGE> 26
4.4 Valuation Dates. The Trustee shall value the assets of the Trust on
the basis of fair market value as of the close of the last business day in each
calendar month. Each such date shall be a Valuation Date. For valuation
purposes, shares of Employer Stock in the Employer Matching Contribution Account
shall be valued at the NASDAQ closing price.
4.5 Allocation of Trust Income or Loss. As of any Valuation Date, the
net Trust income or loss (including appreciation or depreciation of the Trust
Fund, whether realized or unrealized) on those assets of the Trust Fund being
revalued, shall be allocated to the relevant Accounts of Participants in
proportion to the balances of such Accounts as of each Valuation Date, after
making such adjustments as may be appropriate to reflect contributions or
distributions which were made subsequent to the preceding Valuation Date. In
making such allocation, the income and loss of the portion of the Trust Fund
invested in any separate fund designated or authorized by the Company under
Article 3.9, shall be valued separately on each Valuation Date and the net Trust
income or loss attributable to each fund shall be allocated among Participants'
Accounts on a segregated basis. Principal payments and income on any Participant
loan made pursuant to Article 7 shall be credited to the Account of the
Participant who has obtained such a loan.
ARTICLE 5
VESTING
5.1 Salary Deferral Contribution Account and Rollover Account. The full
amount credited to a Participant's Salary Deferral Contribution Account and
Rollover Contribution Account, if any, shall be one hundred percent (100%)
vested and nonforfeitable at all times.
5.2 Vesting of Employer Matching Contribution Account.
(a) All shares of Employer Stock and other amounts in each
Participant's Employer Matching Contribution Account shall be one hundred
percent (100%) vested and nonforfeitable on the Participant's Normal Retirement
Date or on the date that the Participant terminates employment because of death.
(b) The full amount credited to a Participant's Employer
Matching Contribution Account (Full Vesting) shall be one hundred percent (100%)
vested and nonforfeitable at all times.
(c) Except as provided in Article 5.2(a), a Participant's
Employer Matching Contribution Account (Phased Vesting) shall vest and be
nonforfeitable in accordance with the following schedule:
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<PAGE> 27
<TABLE>
<CAPTION>
Years of Service
for Vesting Purposes Percentage Vested
-------------------- -----------------
<S> <C>
0 0%
1 33-1/3%
2 66-2/3%
3 or More 100%
</TABLE>
(d) For the purposes of determining a Participant's vested
percentage, all Years of Service for Vesting Purposes shall be counted.
Notwithstanding the foregoing sentence, if a Participant incurs five consecutive
One Year Breaks in Service, Years of Service earned before the onset of such
five year period shall not be counted.
5.3 Employer Matching Contribution Accounts: Forfeitures.
(a) If a Participant's Employer Matching Contribution Account
(Phased Vesting) is not 100% vested on the date the Participant terminates
employment, the portion of such subaccount which is not vested shall be
provisionally forfeited as of the employment termination date.
(b) If the Participant is rehired before incurring five
consecutive One Year Breaks in Service, the number of shares and amount of cash
previously forfeited shall be reinstated to an Employer Matching Contribution
Account (Phased Vesting) for the Participant. If the Participant incurs five
consecutive One Year Breaks in Service, then the provisional forfeiture shall
become a permanent forfeiture and shall not be subject to reinstatement.
(c) Notwithstanding any other provision of the Plan, shares
and/or cash amounts necessary to restore any provisionally forfeited amounts
shall be provided from other provisional forfeitures and Employer contributions,
in that order.
(d) If the Plan is terminated, all rights to restoration of
provisional forfeitures shall lapse as to persons who have not resumed
employment before Plan termination unless the Participant has not incurred five
consecutive One Year Breaks in Service prior to the Plan's termination.
ARTICLE 6
DISTRIBUTION OF BENEFITS UPON TERMINATION
6.1 Form of Distributions. When a Participant terminates employment,
the balance in the Participant's Salary Deferral Contribution and Rollover
Contribution Accounts shall be distributed in a single cash payment. The vested
balance in the Participant's Employer Matching Contribution Account shall be
distributed either (a) in the form of Shares of Employer Stock plus cash for
partial shares and/or any dividend payments
23
<PAGE> 28
held in such Account or (b) in cash in an amount equal to the value of the
Employer Stock determined pursuant to Section 6.2.
6.2 Amounts Available for Distribution. The value of the Participant's
Accounts shall be determined based on the Valuation Date that is within 21 days
of the date a request for distribution is received by the Plan Administrator.
6.3 Timing of Payment of Distributions.
(a) Distribution of the vested balance then standing in the
Participant's Accounts shall be made as soon as administratively feasible after
a Participant terminates employment and submits a written request for
distribution. If the value of the Participant's Accounts exceeds $3,500, no
distribution shall be made prior to the first day of the month during which the
Participant attains age 65 without the Participant's prior written consent. If a
Participant's vested Accounts are valued at $3,500 or less, the Plan
Administrator may distribute such Accounts to the Participant or his/her
Beneficiary without a written distribution request and without the Participant's
or Beneficiary's consent following the Participant's termination of employment.
(b) Notwithstanding any other provision of the Plan,
distribution of the total vested amount credited to a Participant's Accounts
shall commence no later than the earlier of:
(b)(1) The sixtieth (60th) day after the close of the Plan
Year in which the latest of the following events occur:
(A) The Participant's Normal Retirement Date;
(B) The tenth (10th) anniversary of Participant's
commencement of participation in the Plan; or
(C) The Participant's termination of employment
with the Employer.
(b)(2) Benefit payments to any Participant shall commence
not later than the April 1 after the calendar year in which the Participant
attains age 70-1/2 years.
(c) Distributions shall be made in accordance with section
401(a)(9) of the Code and the regulations promulgated thereunder, even to the
extent that such compliance requires provisions of the Plan to be overridden.
(d) If the amount of a required distribution cannot be ascertained
by the date the distribution is to be made, or it is not possible to make such
distribution because the Company has been unable to locate the Participant
after making reasonable efforts to do so, a distribution retroactive to the
required commencement date may be made no later
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<PAGE> 29
than sixty (60) days after the earliest date on which the amount of such
distribution can be ascertained under the Plan or the date on which the
Participant is located, whichever is applicable.
6.4 Death Benefits. Upon the death of a Participant, his or her
Beneficiary shall be entitled to receive a death benefit determined as follows:
(a) The death benefit will be an amount equal to the Participant's
vested benefits, reduced to the extent necessary to discharge any outstanding
loan obligation, at the time of the Participant's death. The death benefit
shall be paid in a single lump sum distribution.
(b) Any death benefit payable under subparagraph (a) above to a
Beneficiary who is not the Participant's surviving spouse shall be paid in full
within five (5) years of the Participant's death.
(c) If the Beneficiary is the Participant's surviving spouse, the
distribution of the death benefit payable under subparagraph (a) above must
commence no later than the date the Participant would have attained age 70-1/2
years, and if the surviving spouse dies before the distributions to such spouse
begin, the provisions of this subparagraph shall apply as if the surviving
spouse were the Participant.
6.5 Deferred Distributions. When the distribution to a terminated
Participant is deferred because such terminated Participant has not submitted a
written request for distribution, as required by Article 6.3(a), then such
terminated Participant shall have all the rights of an active Participant with
respect to the investment of his or her Accounts.
6.6 Direct Transfer of Eligible Rollover Distributions. If the
distribution made to a Participant or Beneficiary pursuant to this Article 6 is
eligible under section 402 of the Code to be rolled over to an eligible
retirement plan, the recipient of the distribution may request that the Company
direct the Trustee to pay the distribution directly to the eligible retirement
plan designated by the recipient. Such direct payment shall be made as soon as
administratively practicable following a request for the direct transfer and
shall be in the form described in Article 6.1. The value of the Employer Stock
in the Employer Matching Contribution Account may be transferred in cash if a
Participant requests a cash transfer in writing and on the form required by the
Company. The amount of such direct payment may not exceed the portion of the
distribution which would be included in the recipient's gross income for income
tax purposes if it were not directly paid or otherwise transferred in a timely
manner to an eligible retirement plan. For the purposes of this direct transfer
provision, an "eligible retirement plan" shall include the following: (i) an
individual retirement account described in section 408(a) of the Code, (ii) an
individual retirement annuity described in section 408(b) of the Code, (iii) an
annuity plan described in section 403(a) of the Code, and (iv) a qualified plan
trust described in section 401(a) of the Code, provided that such plan accepts
rollover distributions.
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<PAGE> 30
6.7 No Liability. Any payment to a Participant, or to his or her legal
representative or Beneficiary, or direct transfer to an eligible retirement plan
in accordance with the provisions of the Plan, shall be, to the extent of such
payment, in full satisfaction of all claims hereunder against the Trustee, the
Company and the Employer, any of whom may require such Participant, legal
representative or Beneficiary as a condition precedent to such payment to
execute a receipt therefor in such form as shall be determined by the Trustee,
the Company or the Employer, as the case may be. The Employer does not guarantee
the Trust, the Participants, or their legal representatives or Beneficiaries
against loss of or depreciation in value of any right or benefit that any of
them may acquire under the terms of the Plan. All of the benefits payable
hereunder shall be paid or provided for solely from the Trust, and the Employer
assumes no liability or responsibility therefor.
ARTICLE 7
LOANS
7.1 Loans: Requirements. Upon written application of a Participant, the
Company may direct the Trustee to make a loan to such Participant in accordance
with the following rules and such other guidelines as the Company shall
establish:
(a) The principal amount of a loan shall not exceed the lower of
paragraphs (1) and (2) below:
(a)(1) Fifty thousand dollars ($50,000), reduced by the
Participant's highest outstanding loan balance during the 1 year period ending
on the day before the day on which the current loan is made. For purposes of
determining the Participant's highest outstanding loan balance, all loans made
to the Participant from the Plan and any other qualified plan maintained by the
Company or a Related Company shall be aggregated.
(a)(2) Fifty percent (50%) of the Participant's vested interest
in his or her Accounts, reduced by the current outstanding balance of all other
loans to the Participant from the Plan and any other qualified plan maintained
by the Company or a Related Company.
(b) Loans shall be subject to such requirements as may be
specified by the Company in its sole discretion; provided, however, that loans
must be made available to all Participants on a reasonably equivalent basis.
(c) Loans must be adequately secured.
(d) Loans must be evidenced by the borrowing Participant's
promissory note for a fixed term bearing interest at a reasonable rate of
interest determined by the Company on a quarterly basis. Such interest rate
shall be the prime rate published in the Wall Street Journal on the first
business day of each calendar quarter plus two percentage points (2%), and
requiring regular, periodic repayment by payroll deductions.
26
<PAGE> 31
(e) Loans must be required to be repaid within five (5) years unless
the proceeds of the loan are used to acquire any dwelling unit which within a
reasonable time is to be used (determined at the time the loan is made) as a
principal residence of the Participant, in which case such a loan must be repaid
within fifteen (15) years.
(f) A loan shall not be made if such loan would constitute a
prohibited transaction under the applicable sections of ERISA and the Code, and
the regulations promulgated thereunder.
(g) A Participant may not have more than one loan outstanding from
the Plan at any single point in time.
(h) Loans shall be for the minimum amount of one thousand dollars
($1000.00).
(i) The Company shall charge the cost of processing a loan to the
Participant receiving the loan. Such loan processing costs shall be determined
by the Company and communicated to all Plan participants who apply for a Plan
loan.
7.2 Loans: Source of Funds, Application of Payments. The loan principal
shall be taken first from the Participant's Salary Deferral Contribution Account
and then, if necessary, from the Participant's Rollover Contribution Account.
The loan principal shall be withdrawn from the fixed income investment fund
only. Unless the Participant has specified otherwise, all interest and principal
payments on such loans shall be deposited in the investment funds in which the
Participant has invested his or her Salary Deferral Contribution Account
pursuant to such Participant's Enrollment/Change Form in effect at the time of
such deposit, or in such other investment fund as the Company may specify from
time to time.
ARTICLE 8
IN-SERVICE WITHDRAWALS BY PARTICIPANTS
8.1 Withdrawals for Financial Hardship. Upon written consent of the
Company, a Participant may withdraw an amount up to the account balance credited
to the Participant's Salary Deferral Contribution Account as may be required to
meet urgent and heavy financial needs of the Participant, provided that the
entire amount requested by the Participant is not reasonably available from
other resources of the Participant. Notwithstanding the foregoing, no earnings
credited to the Participant's Salary Deferral Contribution Account may be
withdrawn.
(a) A financial hardship distribution will be made only for one of
the following reasons:
(a)(1) Medical expenses incurred by the Participant, the
Participant's spouse, or any dependents of the Participant;
27
<PAGE> 32
(a)(2) Costs directly related to the purchase (excluding
mortgage payments) of a principal residence for the Participant;
(a)(3) Payment of tuition and related educational fees for
the next twelve (12) months of post-secondary education for the Participant,
his or her spouse, children, or dependents; or
(a)(4) The need to prevent the Participant's eviction from
his principal residence or foreclosure on the mortgage on the Participant's
principal residence.
(b) The withdrawal must not exceed the amount necessary to
satisfy the Participant's financial need and no more may be withdrawn than is
required to relieve the financial need (including any amounts necessary to pay
any federal, state or local income taxes or penalties reasonably anticipated to
result from the distribution).
(c) The Participant must have obtained any loans and distributions
which he or she may be entitled to obtain under the Plan.
(d) The Participant's Salary Deferral Contributions are limited
for the calendar year following the year in which such a withdrawal is received
to the maximum amount permitted under section 402(g) of the Code for such
calendar year reduced by the amount of the Participant's Salary Deferral
Contributions for the calendar year in which the hardship withdrawal is
received.
(e) The Participant may not authorize either Salary Deferral
Contributions to the Plan or elective contributions or employee contributions to
other plans of deferred compensation for at least twelve (12) months after
receipt of the hardship withdrawal.
8.2 Frequency of Withdrawals. Except as otherwise permitted by the
Company for good reason and pursuant to policies which are uniformly applied to
all Participants on a non-discriminatory basis, no Participant shall be
permitted to make more than one hardship withdrawal in any Plan Year pursuant to
Article 8.1.
8.3 Withdrawal After Age 59-1/2. After attaining age 59-1/2 years, a
Participant may withdraw all or any portion of the account balance credited to
his or her Salary Deferral Contribution or Rollover Contribution Accounts, as
the Participant may request.
ARTICLE 9
BENEFICIARIES
9.1 Beneficiary Designation. Subject to the provisions of this Article
9.1 and Article 9.3, each Participant shall have the right to designate on forms
provided by the Employer a Beneficiary or Beneficiaries to receive the benefits
provided under the Plan in the event of his or her death, and shall have the
right at any time to revoke such designation or to substitute another such
Beneficiary or Beneficiaries. If a Participant is married
28
<PAGE> 33
and has designated a Beneficiary or Beneficiaries other than the Participant's
spouse to receive any portion of the benefits herein provided in the event of
his or her death, such designation shall be invalid unless and until (a) the
Participant's spouse consents in writing to such designation, (b) such consent
acknowledges the effect of the beneficiary designation, and (c) such consent is
witnessed by a Notary Public or a Plan representative. Once such consent is
given, it may not be revoked and the Participant may not change his or her
beneficiary designation (except to name the Participant's spouse as the sole
Beneficiary) without a new consent by the Participant's spouse, which new
consent must also meet the above requirements.
9.2 Absence of Valid Designation. If, upon the death of a Participant,
former Participant or Beneficiary, there is no valid designation of Beneficiary
on file with the Employer, the Company shall designate as the Beneficiary, in
order of priority:
(a) The surviving spouse; or
(b) The Participant's estate.
9.3 Surviving Spouse Beneficiary. Notwithstanding any other provision
in the Plan, if a Participant or former Participant dies leaving a surviving
spouse, and if such spouse had been married to the Participant on the date of
the Participant's death, such surviving spouse shall be the Beneficiary for all
purposes under the Plan unless the Participant previously designated another or
an additional Beneficiary, and such surviving spouse consented to such
designation in accordance with the provisions of Article 9.1 above.
ARTICLE 10
DESIGNATION OF NAMED FIDUCIARY
10.1 Plan Administrator. The Plan Committee is the named fiduciary and
administrator of the Plan as provided for by ERISA and shall have the authority
to manage and control the operation and administration of the Plan. In the
absence of the formation of a Plan Committee, the Company shall be the named
fiduciary and administrator of the Plan and shall have all of the rights and
responsibilities of the Plan Committee as set forth under the Plan.
10.2 Powers of Plan Administrator. The Plan Committee shall have
complete control of the administration of the Plan herein set forth with all
powers necessary to enable it properly to carry out its duties in that respect.
Not in limitation, but in amplification of the foregoing, the Plan Committee
shall have the power to construe the Plan and to determine all questions that
shall arise hereunder, including determination of eligibility of Employees,
amounts of credits, allocation of assets, method of payment, whether
distributions from the Trust shall be made in cash or in kind and the assets to
be distributed, and participation and benefits under the terms of the Plan. The
Plan Committee shall also establish reasonable rules and procedures which shall
be applied in a uniform and nondiscriminatory manner for enrollment in the Plan
and to changes by Participants on their
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<PAGE> 34
contributions and investment options. The Plan Committee shall establish the
rules and procedures by which the Plan will operate. Decisions of the Plan
Committee made in good faith upon any matter within the scope of its authority
shall be final, conclusive and binding upon all persons, including Participants
and their legal representatives or Beneficiaries; but the Company shall at all
times, in giving effect to its decisions, act without discrimination in favor of
or against any Participant, legal representative or Beneficiary.
10.3 Other Agents. The Company may employ such persons or organizations
to render service or perform services with respect to the administrative
responsibilities of the Company under the Plan as the Company determines to be
necessary and appropriate. Such persons or organizations may include, without
limitation, actuaries, attorneys, accountants, and benefit, financial and
administrative consultants.
10.4 Fiduciaries. Any person or group of persons may serve in more than
one fiduciary capacity with respect to the Plan.
10.5 Indemnification. The Employer shall indemnify and hold harmless
the members of the Board and any other Employees to whom any fiduciary
responsibility with respect to the Plan is allocated or delegated, from and
against any and all liabilities, costs and expenses, including attorneys' fees,
incurred by such persons as a result of any act, or omission to act, in
connection with the performance of their duties, responsibilities and
obligations under the Plan and under ERISA, other than such liabilities, costs
and expenses as may result from the bad faith, willful misconduct or criminal
acts of such persons or to the extent such indemnification is specifically
prohibited by ERISA. The Employer shall have the obligation to conduct the
defense of such persons in any proceeding to which this Article 10.5 applies. If
any member of the Board or any Employee covered by this indemnification clause
of this Article 10.5 determines that the defense of the Employer is inadequate,
that member shall be entitled to retain separate legal counsel for his or her
defense and the Employer shall be obligated to pay for all reasonable legal fees
and other court costs incurred in the course of such defense unless a court of
competent jurisdiction finds such person has acted in bad faith or engaged in
willful misconduct or criminal acts. The Employer may satisfy its obligation
under this Article 10.5 in whole or in part, through the purchase of a policy or
policies of insurance, but no insurer shall have any rights against the Company
arising out of this Article 10.5.
10.6 Costs. All costs associated with the operation of the Plan and
Trust shall be paid by the Employer. Notwithstanding the foregoing, brokerage
commissions payable on Plan investments, if any, shall be paid from the proceeds
of the Guaranteed Income Contract fund or other investment alternative selected
by the Plan Committee.
ARTICLE 11
TRUST FUND AND TRUSTEE
11.1 Trust Agreement. Contributions made by the Employer and all other
assets of the Plan shall be held in Trust in accordance with the provisions of
the Trust Agreement.
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<PAGE> 35
All benefits payable under the Plan shall be paid solely from the assets of the
Trust, and the Employer assumes no liability or responsibility therefor.
ARTICLE 12
AMENDMENT AND TERMINATION
12.1 Amendment. The Company reserves the right at any time or times to
amend the Plan to any extent and in any manner that it may deem advisable, and
upon such amendment, the Employer, the Trustee, and all Participants, their
Beneficiaries and all other persons having any interest hereunder shall be bound
thereby. Such power includes the right, without limitation, to make retroactive
amendments referred to in section 401(b) of the Code (as amended by section 1023
of ERISA). However, except as provided in Article 12.3, no amendment:
(a) Shall cause or permit any part of the principal or income of
the Trust to revert to the Employer or to be used for, or to be diverted to,
any purpose other than the exclusive benefit of Participants and their
Beneficiaries, except that
(a)(1) A contribution made by the Employer by a mistake of
fact shall be returned to the Employer within one year after the payment of
such contribution to the extent permitted by section 403(c) of ERISA. A Salary
Deferral Contribution, or a portion thereof, returned to the Employer pursuant
to this Article 12.1(a)(1) shall be returned to the Employee from whose
Compensation the amount was withheld, as soon as administratively feasible, but
in no event later than thirty (30) days after the return of such contribution
to the Employer.
(a)(2) If an Employer contribution is conditioned upon the
deductibility of the contribution under Section 404 of the Code or any successor
provision thereto, then to the extent such contribution is disallowed, this
paragraph shall not prohibit the return to the Employer of such contribution (to
the extent disallowed) within one (1) year after such disallowance of the
deduction. A Salary Deferral Contribution, or a portion thereof, returned to the
Employer pursuant to this Article 12.1(a)(2) shall be returned to the Employee
from whose Compensation the amount was withheld, as soon as administratively
feasible, but in no event later than thirty (30) days after the return of such
contribution to the Employer.
(b) Shall change the duties or liabilities of the Trustee, or an
Investment Manager appointed pursuant to the Trust Agreement, without its
written assent to such amendment.
(c) Shall retroactively reduce the benefits of any Participant or
his or her Beneficiary accrued under the Plan by reason of contributions made
by the Employer prior to the amendment except to the extent that such reduction
is permitted by ERISA.
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<PAGE> 36
12.2 Termination. The Employer has established the Plan with the bona
fide intention and expectation that the Plan will continue indefinitely and that
it will be able to make its contributions indefinitely, but the Company and each
Related Company shall be under no obligation to continue its contributions or to
maintain the Plan for any given length of time and may, in its sole and absolute
discretion, discontinue its contributions or terminate its sponsorship of the
Plan in whole at any time without any liability whatsoever. In the event of the
complete or partial termination of the Plan or complete discontinuance of
further contributions hereunder by the Company or a Related Company, the full
value of the Accounts of all Participants employed by the business terminating
its sponsorship of the Plan or completely discontinuing its contributions to the
Plan shall become fully vested and nonforfeitable, notwithstanding any other
provisions of the Plan. However, the Trust shall continue until all
Participants' Accounts have been completely distributed to or for the benefit of
the Participants in accordance with the Plan.
ARTICLE 13
ASSIGNMENTS
The interest herein, whether vested or not, of any
Participant, or Beneficiary, shall not be subject to alienation, assignment,
encumbrance, attachment, garnishment, execution, sequestration or other legal or
equitable process, or transferability by operation of law in event of
bankruptcy, insolvency or otherwise, except security interests taken in a
Participant's Account(s) for loans made to Participants pursuant to Article 7 of
the Plan and qualified domestic relations orders as determined pursuant to
Article 16.4 hereof.
ARTICLE 14
CLAIMS PROCEDURE
14.1 General Procedure. A Participant or Beneficiary entitled to
benefits under the Plan need not file a request therefor. However, if the
Participant or Beneficiary believes that his or her benefits have been
incorrectly determined, he or she may make a written application for review of
the determination previously made by the Company.
All such applications for review shall be submitted to the Company at
the offices of the Company currently located at 345 Los Coches Street, Milpitas,
California 95035 (Attn: Employee 401(k) Plan Administrator) in writing on the
forms prescribed by the Company and must be signed by the Participant, or in the
case of a death benefit, by the Beneficiary or legal representative of the
deceased Participant. Each application shall be acted upon and approved or
disapproved within ninety (90) days following its receipt by the Company, which
period may be extended up to an additional ninety (90) days upon written notice
by the Company to the applicant. In the event any application for benefits is
denied, in whole or in part, the Company shall notify the applicant in writing
of such denial and of the applicant's right to a review by the Company. Said
denial shall set forth in a manner calculated to be understood by the applicant
specific reasons for such denial, specific references to pertinent Plan
provisions on which the denial is based, a description of any
32
<PAGE> 37
additional material or information necessary for the applicant to perfect his or
her application, an explanation of why such material or information is necessary
and an explanation of the Plan's review procedure.
Any person, or such person's duly authorized representative, whose
application for benefits is denied in whole or in part may appeal from such
denial to the Company for a review of the decision by submitting to the Company
within sixty (60) days after receiving written notice from the Company of the
denial of the claim a written statement:
(a) Requesting a review of his or her application for benefits by
the Company;
(b) Setting forth all of the grounds upon which his or her request
for review is based and any facts in support thereof; and
(c) Setting forth any issues or comments which the applicant deems
pertinent to this application.
14.2 Procedure of Company to Review Appeals.
(a) The Company shall make a full and fair review of each such
application and any written materials submitted by the applicant in connection
therewith and may require the applicant to submit such additional facts,
documents or other evidence as the Company, in its sole discretion, deems
necessary or advisable in making such a review. On the basis of its review, the
Company shall make a determination of the applicant's eligibility for benefits
under the Plan. The decision of the Company on any application for benefits
shall be final and conclusive upon all persons if supported by substantial
evidence in the record. Such a decision on review shall ordinarily be made
within sixty (60) days after the Company's receipt of an applicant's request for
review, unless the Company requires further time, in which case a decision shall
be rendered as soon as possible, but not later than one hundred twenty (120)
days after receipt of an applicant's request for review.
(b) In the event the Company denies an application in whole or in
part, the Company shall give written notice of its decision to the applicant
setting forth in a manner calculated to be understood by the applicant the
specific reasons for such denial and the specific references to the pertinent
Plan provisions on which the Company's decision was based.
ARTICLE 15
TOP HEAVY PROVISIONS
15.1 Top Heavy Determination. The Plan will be considered a Top Heavy
Plan for the Plan Year if as of the last day of the preceding Plan Year (or in
the case of the first Plan Year of the Plan, the last day of such Plan Year),
(a) the value of the sum of the Accounts of Key Employees (as defined in Article
15.5) exceeds sixty percent (60%) of the
33
<PAGE> 38
value of the sum of the Accounts of all Participants and certain former
participants in the Plan (the "60% Test") or (b) the Plan is part of a Required
Aggregation Group (within the meaning of section 416(g) of the Internal Revenue
Code) and the Required Aggregation Group is a Top Heavy Group.
In determining the value of Accounts of Participants for purposes of
the 60% Test, any contributions to the Plan pursuant to Article 3.1 initiated by
an Employee shall not, except to the extent provided by Treasury Regulations
promulgated under section 416(g)(4) of the Internal Revenue Code, be taken into
account. A Participant's Accounts for purposes of applying the 60% Test shall be
measured as of the most recent Valuation Date occurring within a 12-month period
ending on the determination date, and an adjustment in the amount of any
contributions actually made after the Valuation Date but on or before the
determination date. In the first Plan Year, such adjustment shall also include
the amount of any contributions made after the determination date that are
allocated as of a date in the first Plan Year. An individual's Accounts shall
not be taken into consideration for the purposes of applying the 60% Test if
either (a) that individual was a Non-Key Employee with respect to the Plan for
any Plan Year, but such individual was a Key Employee with respect to the Plan
prior to a Plan Year in which the individual was a Non-Key Employee, or (b) that
individual has not performed any services for the Employer at any time during
the 5-year period ending on the determination date. Notwithstanding the results
of the 60% Test, the Plan shall not be considered a Top Heavy Plan for any Plan
Year in which the Plan is a part of a Required Aggregation Group or permissive
aggregation group (within the meaning of section 416(g) of the Internal Revenue
Code) which is not a Top Heavy Group.
15.2 Required Aggregation Group. "Required Aggregation Group" shall
mean each plan of the Employer which has a Key Employee as a Participant and any
other Employer plan (including a terminated plan of the Employer to the extent
required by validly issued Treasury regulations) which enables a plan of the
Employer in which a Key Employee is a participant to meet the requirements of
section 401(a)(4) or 410 of the Code. In applying the 60% Test to two or more
plans, the 60% Test is applied to each plan and then the plans are aggregated by
adding together the results as of each plan's determination date which falls
within the same calendar year.
15.3 Top Heavy Group. "Top Heavy Group" shall mean any aggregation
group, whether or not a Required Aggregation Group, which meets the 60% Test. In
applying the 60% Test to two or more plans, the 60% Test is applied to each plan
and then the plans are aggregated by adding together the results as of each
plan's determination date which falls within the same calendar year.
15.4 Minimum Contribution for Top Heavy Plan. For any Plan Year in
which the Plan is a Top Heavy Plan, an amount shall be credited to the Employer
Matching Contribution Account of each Employee who is not a Key Employee and who
is eligible to share in this special minimum contribution for a Top Heavy Plan
pursuant to paragraph (c) below which is equal to:
34
<PAGE> 39
(a) the lesser of:
(a)(1) the amount of the contributions expressed as a
percentage of compensation (as defined in Article 16.3(a)(4)) which is credited
to the Accounts with respect to such Plan Year of the Key Employee having the
highest such percentage, or
(a)(2) Three percent (3%) of compensation (as defined in
Article 16.3(a)(4)),
(b) reduced by the amount of the Employer Matching Contribution
and other eligible Employer contributions otherwise credited to the Accounts of
each Employee who is not a Key Employee for such Plan Year.
(c) All Participants who are not Key Employees and who have not
separated from service prior to the last day of the Plan Year are eligible to
share in this special minimum contribution for a Top Heavy Plan described in
this Article 15.4.
15.5 Key Employees.
(a) The term "Key Employee" shall mean an Employee who, at any
time during the Plan Year or any of the four (4) preceding Plan Years, is:
(a)(1) an officer of the Employer having an annual
compensation greater than one hundred fifty percent (150%) of the maximum
dollar amount as set forth in section 415(c)(1)(A) of the Code (or such
greater amount as may be permitted pursuant to regulations issued under
section 415(d)(1) of the Code) for any such Plan Year;
(a)(2) One of ten Employees having annual compensation from
the Employer of more than such maximum dollar amount then in effect and owning
(or considered as owning within the meaning of section 318 of the Code), the
largest interests in the Employer;
(a)(3) a five percent (5%) owner of the Employer; or
(a)(4) a one percent (1%) owner of the Employer, having an
annual compensation from the Employer of more than $150,000.
(b) For purposes of paragraph (a)(1) above, no more than 50
Employees (or, if fewer, the greater of three (3) Employees or ten percent (10%)
of the Employees) shall be treated as officers. For purposes of paragraph (a)(2)
above, if two Employees have the same interest in the Employer, the Employee
having the greater compensation from the Employer shall be treated as having a
larger interest.
35
<PAGE> 40
(c) For purposes of this definition:
(c)(1) "5% owner" shall mean, in the case of a corporation,
any person who owns (or who is considered as owning within the meaning of
section 318 of the Code) more than 5% of the outstanding stock of the
corporation or stock possessing more than 5% of the total combined voting power
of all stock of the corporation and, in the case of an Employer which is not a
corporation, any person who owns more than 5% of the capital or profits interest
in the Employer; and
(c)(2) a "1% owner" is any person who would be described in
subparagraph (c)(1), above, if "1%" were substituted for "5%" each place it
appears therein.
(d) For purposes of paragraphs (a)(2) and (c) above, the rules of
section 318 of the Code shall be modified as set forth in section
416(i)(1)(B)(iii) of the Code.
(e) A Key Employee shall also include the Beneficiary of a Key
Employee.
(f) A Key Employee shall include an individual who is either
currently or was formerly employed by the Employer who meets the definition set
forth in paragraph (a) above.
15.6 Non-Key Employee. "Non-Key Employee" shall mean any Employee who
is not a Key Employee.
15.7 Top Heavy Vesting.
(a) In any Plan Year in which the Plan is a Top Heavy Plan, the
Accounts of a Participant shall vest in accordance with the following Top Heavy
Vesting Schedule, except to the extent the regular vesting schedule set forth in
Article 5 provides for a rate of vesting which is as rapid as or more rapid than
the Top Heavy Vesting Schedule selected in this Article 15.7.
<TABLE>
<CAPTION>
Year of Service for Percentage
Vesting Purposes Vested
------------------- ----------
<S> <C>
less than 2 0
2 20
3 40
4 60
5 80
6 100
</TABLE>
(b) For the purposes of determining a Participant's Years of
Service for Vesting Purposes applicable to the Top Heavy Vesting Schedule set
forth in Article 15.7(a),
36
<PAGE> 41
all of the Participant's service with the Company or a Related Company shall be
taken into account.
(c) If the Plan becomes a Top Heavy Plan and subsequently ceases
to be such, the Top Heavy Vesting Schedule set forth in Article 15.7(a) shall
continue to apply in determining the vested percentage of the Employer Matching
Contribution Account for any Participant who had at least five Years of Service
as of the last Plan Year in which the Plan was a Top Heavy Plan. For other
Participants, said schedule shall apply only to their account balance in their
Employer Matching Contribution Account as of the last day of such Plan Year and
Employer Matching Contributions relating to subsequent Plan Years shall vest
according to the vesting schedule set forth in Article 5.
ARTICLE 16
MISCELLANEOUS
16.1 No Employment Relationship Established by Plan. The adoption and
maintenance of the Plan and Trust shall not be deemed to be a contract between
the Employer and any Employee. Nothing herein contained shall be deemed to give
any Employee the right to be retained in the employ of the Employer or to
interfere with the right of the Employer to discharge any Employee in its employ
at any time, nor shall it be deemed to give the Employer the right to require
any Employee to remain in its employ, nor shall it interfere with the Employee's
right to terminate his or her employment at any time.
16.2 Plan Merger or Consolidation.
(a) In no event shall the Plan be merged or consolidated with any
other plan, nor shall there be any transfer of assets or liabilities from the
Plan to any other plan, unless immediately after such merger, consolidation or
transfer, each Participant's benefits, if such other plan were then to
terminate, are at least equal to or greater than the benefits which the
Participant would have been entitled to had the Plan been terminated immediately
before such merger, consolidation, or transfer.
(b) If the Employer merges or consolidates with or into a
corporation, or if substantially all of the assets of the Employer shall be
transferred to a corporation, the Plan hereby created shall terminate on the
effective date of such merger, consolidation or transfer. However, if the
surviving corporation resulting from such merger or consolidation, or the
corporation to which the assets have been transferred, adopts the Plan, the Plan
shall continue and said corporation shall succeed to all rights, powers and
duties of the Employer hereunder. The employment of any Employee who is
continued in the employ of such successor corporation shall not be deemed to
have been terminated for any purpose hereunder.
37
<PAGE> 42
16.3 Section 415 Limits on Allocations.
(a) Notwithstanding anything in the Plan to the contrary, in
accordance with the requirements of section 415 of the Code, no contribution to
the Plan shall knowingly be made and no amount allocated to a Participant's
Salary Deferral Contribution Account or Employer Matching Contribution Account
if such contribution or allocation would cause the Annual Addition to the
Participant's Accounts for a Plan Year to exceed the lesser of: (i) twenty five
percent (25%) of the Participant's compensation from the Employer for such Plan
Year, or (ii) the Defined Contribution Dollar Limitation. For purposes of this
Article 16.3(a), the following definitions and rules shall apply:
(a)(1) "Annual Addition" shall mean for any Plan Year the sum of
the Salary Deferral Contributions and Employer Matching Contributions allocated
to a Participant's Accounts.
(a)(2) "Defined Contribution Dollar Limitation" shall mean
$30,000 or, if greater, one-fourth of the defined benefit limitation set forth
in section 415(b)(1) of the Code in effect for such Plan Year.
(a)(3) If the Employer is contributing to another defined
contribution plan, as defined in section 414(i) of the Code, for Employees of
the Employer, some or all of whom may be Participants of the Plan, then any such
Participant's Annual Addition in such other plan shall be aggregated with such
Participant's Annual Addition derived from the Plan for purposes of the
limitation in this Article 16.3(a).
(a)(4) "Compensation" shall have the same meaning as in Article
1.1(g)(2), except that Salary Deferral Contributions under the Plan and salary
reductions not includable in an Employee's gross income pursuant to section 125
of the Code shall be excluded.
(b) If a Participant in the Plan is also a participant in a defined
benefit plan, as defined in section 414(j) of the Code, to which contributions
are made by the Employer, then in addition to the limitation contained in
Article 16.3(a), for any Plan Year the sum of such Participant's defined benefit
plan fraction (as defined by section 415(e)(2) of the Code) for all such plans
and his or her defined contribution plan fraction (as defined by section
415(e)(3) of the Code) for all such plans for such Plan Year shall not exceed
1.0.
(c) In order to implement the limitations set forth in Articles
16.3(a) and 16.3(b), the aggregate of the Annual Additions to the Plan and the
Annual Additions to any other defined contribution plan shall be limited or
reduced until the applicable limitation is satisfied, by limiting or reducing
the aggregate amount to the extent permitted by regulations promulgated pursuant
to the Plan, refund of any Salary Deferral Contributions, and earnings thereon,
made by the Participant to the Plan.
38
<PAGE> 43
16.4 Qualified Domestic Relations Orders.
(a) In accordance with section 414(p) of the Code, section
206(d)(3) of ERISA, and any regulations promulgated thereunder, the Company
shall establish reasonable written procedures to determine the qualified status
of domestic relations orders received with respect to Participants and to
administer distributions to alternate payees under such qualified domestic
relations orders.
(b) Notwithstanding any provision in the Plan to the contrary,
and in accordance with reasonable procedures applied in a uniform and
nondiscriminatory manner, the Company shall direct the Trustee to make a payment
as soon as administratively feasible to an alternate payee pursuant to the terms
of a qualified domestic relations order received with respect to a Participant,
regardless of whether such Participant has terminated employment with the
Employer; provided, however, that if the amount of such payment exceeds $3,500,
the payment shall not be made without the written consent of the alternate
payee.
(c) Any payment to an alternate payee, or to his or her legal
representative or beneficiary, pursuant to the terms of a qualified domestic
relations order shall be in full satisfaction of all claims under such order
against the Employer, the Company, and the Trustee, as the case may be, any of
whom may require such alternate payee, or his or her legal representative or
beneficiary, to execute a receipt therefor in such form as shall be determined
by the Employer, the Company, or the Trustee, as the case may be.
16.5 Notices. All notices, statements and other communications from the
Trustee, the Employer or the Company to an Employee, Participant, legal
representative or designated Beneficiary required or permitted hereunder shall
be deemed to have been duly given, furnished, delivered or transmitted, as the
case may be, when delivered to (or when mailed by first-class mail, postage
prepaid and addressed to) the Employee, Participant or Beneficiary at his
address last appearing on the books of the Employer.
39
<PAGE> 44
16.6 Severability. If any provision of the Plan shall be held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions of the Plan shall continue to be fully effective.
IN WITNESS WHEREOF, Read-Rite Corporation adopts the Plan effective as
of the date set forth above.
DATED: 8/9/94 READ-RITE CORPORATION
________________
By: /s/ Rex S. Jackson
__________________________
40
<PAGE> 45
EXHIBIT 10.4
Exhibit 2
EXHIBIT B
FIRST AMENDMENT TO THE
READ RITE CORPORATION EMPLOYEE 401(K)
RETIREMENT SAVINGS PLAN
Effective January 1, 1995, the Read Rite Corporation Employee 401(k)
Retirement Savings Plan is amended by restating Article 3.11(a) in its entirety
as follows:
"3.11 Employer Matching Contributions . . .
(a) The Employer shall contribute as an Employer Matching
Contribution shares of Employer Stock. The number of shares of Employer Stock
contributed as an Employer Matching Contribution each quarter shall be
determined as follows:
(1) The number of shares contributed as the Employer
Matching Contribution shall be equal to one hundred fifty percent (150%) times
the eligible Salary Deferral Contributions made on behalf of each Participant
divided by the value of the shares determined in accordance with subparagraph
(5) below. The maximum Employer Matching Contribution shall be limited to one
hundred (100) shares each Plan Year effective January 1, 1995.
(2) Employer Matching Contributions shall be allocated to
each Participant's account quarterly. The first such Employer Matching
Contribution shall be allocated on September 30, 1993, and shall be based on
eligible Salary Deferral Contributions made during the period from January 1,
1993 through September 30, 1993.
(3) In order to be eligible for an Employer Matching
Contribution for a given quarter, an Employee must be a Participant on the last
business day of that quarter. Effective January 1, 1994, Employer Matching
Contributions shall be made based on Salary Deferral Contributions in a quarter
whether or not the Employee is a Participant on the last business day of that
quarter.
(4) Eligible Salary Deferral Contributions shall be the
first one thousand dollars ($1,000) contributed to the Plan each Plan Year.
(5) The value of the shares of Employer Stock shall be
determined by the reported closing price of the Employer Stock on the national
market system of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") on the last business day of each Plan Quarter,
beginning on September 30, 1993. If the closing price is not so reported on the
NASDAQ market
<PAGE> 46
system, then the price shall be that reported on such other stock exchange or
market system on which the Common Stock is traded."
The above First Amendment to the Plan has been adopted by the Plan
Administrative Committee pursuant to and in a manner consistent with a valid
delegation of authority from the Board of Directors of Read Rite Corporation.
IN WITNESS WHEREOF the Plan Administrative Committee hereby adopts the
First Amendment to the Plan on this 12th day of October, 1994.
PLAN ADMINISTRATIVE COMMITTEE FOR THE
READ RITE EMPLOYEE 401(k) RETIREMENT
SAVINGS PLAN
By: /s/Patricia Winter
------------------------------------
Chairman, Plan Administrative Committee
<PAGE> 47
Exhibit 10.4
Exhibit 3
SECOND AMENDMENT TO THE
READ RITE EMPLOYEE 401(K)
RETIREMENT SAVINGS PLAN
The Read Rite Employee 401(k) Retirement Savings Plan (the "Plan") is
amended effective January 1, 1991, unless otherwise specifically stated herein,
as follows.
1. Life Insurance. The following provisions are added to
clarify that before January 1, 1995, Plan participants had the right to direct
the Plan trustee to purchase individual life insurance contracts with assets in
their accounts. This right to purchase life insurance was terminated on January
1, 1995, but a participant may continue to hold life insurance contracts
purchased before January 1, 1995, in his or her Plan accounts.
a. The following subparagraph (d) is added at the end
of Section 3.16:
"(d) Before January 1, 1995, individual life
insurance policies and individual annuity contracts
issued by one or more insurance companies may be
purchased by the Plan Trustee upon written directions
from a Participant from assets in the Participant's
Accounts. Effective January 1, 1995, individual life
insurance contracts shall not be available as an
investment option under the Plan. The rules
applicable to investments in life insurance contracts
shall be set forth in Appendix A to this Plan."
b. The following Appendix A is added at the end of the
Plan document:
"APPENDIX A
RULES APPLICABLE TO INVESTMENT IN LIFE INSURANCE CONTRACTS
A. The following rules shall apply to and determine a Participant's
right to direct the investment of his or her Account balances in life insurance
contracts pursuant to Section 3.16(d).
1. The insured for an individual policy or contract may be the
Participant, his spouse or his child or children under the age of
twenty-five (25) years, as the Participant shall designate.
<PAGE> 48
2. The Employer may limit the maximum amount of insurance that a
Participant may purchase on the life of his or her spouse and/or
children. Insurance shall be purchase in face amount increments of at
least one thousand dollars ($1000).
3. If a life insurance contract is purchased for a Participant, the
aggregate annual premium for ordinary life insurance for each
Participant must be less than fifty percent (50%) of the aggregate
contributions and forfeitures allocated to such Participant's Accounts
during the Plan Year. For purposes of this provision, "ordinary life
insurance" is defined as insurance with both a non-decreasing death
benefit and non-increasing premiums.
4. If a term insurance or universal life insurance contract is
purchased for a Participant, the aggregate annual premium for such
insurance contract for each Participant shall not exceed twenty-five
percent (25%) of the aggregate contributions and forfeitures allocated
to such Participant's Accounts during the Plan Year.
5. If both ordinary life insurance and term or universal life insurance
is purchased for a Participant, the aggregate annual premium for such
term or universal life insurance plus fifty percent (50%) of the
premium for ordinary life insurance shall not exceed twenty-five
percent (25%) of the aggregate contributions and forfeitures allocated
to such Participant's Accounts during the Plan Year.
6. Any dividends or credits earned on any insurance contracts purchased
for a Participant shall be allocated to the Account of the Participant
for whom the insurance is purchased.
7. If a Participant is eligible to receive a distribution from the
Plan, insurance contract investments shall be distributed in one of the
following forms, as elected by the Participant:
a. Distribution of the insurance contract to the Participant;
b. The insurance contract(s) shall be converted into cash and
the cash shall be distributed to the Participant; or
c. The insurance contract(s) shall be converted into an
annuity contract to provide for periodic income.
<PAGE> 49
Notwithstanding the foregoing provisions, no portion of the
insurance contract or the value of the contract may be used to
provide for life insurance benefits beyond the Participant's
Normal Retirement Date.
8. The above limitations on the purchase of life insurance
contracts shall not apply to such purchases with assets that
have accumulated in the Participant's Accounts for at least
two (2) Plan Years.
B. The Trustee shall be the owner of record for any contracts
purchased under the terms of Section 3.16(d) and this Appendix A. Any insurance
contract purchased with Plan assets must provide that all proceeds shall be
payable to the Trustee and shall be credited to the Participant's Accounts and
distributed in accordance with the distribution provisions in Article 6.
C. The premiums paid shall be allocated to the different types of
accumulation available under the insurance contract in accordance with the
Participant's directions.
D. Effective January 1, 1995, no additional life insurance
contracts or increases in life insurance coverage may be purchased under the
Plan. The rules set forth in this Appendix A shall continue to apply to life
insurance contracts purchased before January 1, 1995."
2. No Matching Contributions for Gregorio Reyes. To reflect
provisions in the individual employment agreement between Read Rite Corporation
and Gregorio Reyes, the Plan is amended to provide that no Matching
Contributions shall be made on behalf of Gregorio Reyes. Section 3.11(a) is
amended by the addition of the following sentence at the end thereof:
<PAGE> 50
"Notwithstanding the preceding sentence and/or any other
provision in this Plan to the contrary, no Employer Matching
Contributions shall be made on behalf of Gregorio Reyes."
The above Second Amendment to the Plan has been adopted by the Plan
Administrative Committee pursuant to and in a manner consistent with a valid
delegation of authority from the Board of Directors of Read Rite Corporation.
IN WITNESS WHEREOF the Plan Administrative Committee hereby adopts the
Second Amendment to the Plan on this 13 day of February, 1995.
PLAN ADMINISTRATIVE COMMITTEE FOR THE
READ RITE EMPLOYEE 401(k) RETIREMENT
SAVINGS PLAN
By: /s/Patricia L. Winter
-------------------------------------
Chairman, Plan Administrative Committee
<PAGE> 51
THIRD AMENDMENT TO THE
READ-RITE EMPLOYEE 401(K)
RETIREMENT SAVINGS PLAN
The Read-Rite Employee 401(k) Retirement Savings Plan (the "Plan") is
amended, effective January 1, 1996, as follows.
1. "Hour of Service" Definition. Section 1.1(t), the
definition of "Hour of Service" is amended and restated in its entirety to read
as follows:
"(t) `Hour of Service' shall have the meaning set forth in
Section 5.5(b)."
2. "One Year Break in Service" Definition. Section 1.1(x),
the definition of a One Year Break in Service, is amended and restated in its
entirety to read as follows:
"(x) `One Year Break In Service' shall have the meaning set
forth in Section 5.5(c)."
3. "Year of Service for Vesting Purposes" Definition.
Section 1.1(ll), the definition of a Year of Service for vesting purposes, is
amended and restated in its entirety to read as follows:
"(ll) `Year of Service' for purposes of determining a
Participant's vested benefit shall have the meaning set forth in Section
5.5(h)."
4. Employer Matching Contributions. Section 3.11(a)(1)
shall be amended and restated to clarify how Employer Matching Contributions
shall be allocated between the Employer Matching Contribution (Fully Vested)
Subaccount and the Employer Matching Contribution (Phased Vesting) Subaccount
and shall read as follows:
"(1) Employer Matching Contributions shall be allocated to
each Participant's Employer Matching Contribution Account
quarterly. Twenty-five percent (25%) of each Employer Matching
Contribution shall be allocated to the Employer Matching
Contribution Account (Full Vesting) subaccount; the remainder
of each quarterly Employer Matching Contribution shall be
allocated to the Employer Matching Contribution Account
(Phased Vesting)
<PAGE> 52
subaccount, which shall vest in accordance with Section
5.1(c)."
5. Vesting and Service Provisions. Article 5, which is
currently entitled "Vesting", is amended and restated in its entirety to set
forth the provisions for determining service credit, the vested percentage of a
Plan participant's accounts and forfeitures. Following amendment and
restatement, Article 5 shall read as follows:
"ARTICLE 5
VESTING AND SERVICE
5.1 Vesting of Contributions.
(a) All amounts credited to a Participant's Salary Deferral
Contribution Account and Rollover Contribution Account, if any, shall be one
hundred percent (100%) vested at all times.
(b) All amounts credited to a Participant's Employer Matching
Contribution Account (Full Vesting) shall be one hundred percent (100%) vested
and nonforfeitable at all times.
(c) All amounts credited to a Participant's Employer Matching
Contribution Account (Phased Vesting) shall be one hundred percent (100%) vested
and nonforfeitable on the Participant's Normal Retirement Date or on the date
that the Participant terminates employment because of death. If a Participant
terminates employment before his or her Normal Retirement Date or for reasons
other than death, then the vested percentage of such Participant's Employer
Matching Contribution Account (Phased Vesting) shall be determined based upon
the Participant's Years of Service as follows:
<TABLE>
<CAPTION>
Number of Completed Vested
Years of Service Percentage
---------------- ----------
<S> <C>
0 0%
1 33-1/3%
2 66-2/3%
3 or more 100%
</TABLE>
(d) For purposes of determining a Participant's Years of
Service, all of the Participant's service with the Company shall be taken into
account. Notwithstanding the foregoing sentence, if a Participant has incurred
five (5) consecutive One Year Breaks in Service, Years of Service following
reemployment shall not be taken into account for purposes of determining the
Vested portion of the
<PAGE> 53
Participant's Employer Matching Contribution Account (Phased Vesting)
attributable to contributions before the five (5) consecutive One Year Breaks in
Service.
(e) If a Participant is reemployed after incurring five (5) consecutive
One Year Breaks in Service and if such Participant did not receive a
distribution of the vested portion of his or her Employer Matching Contribution
Account (Phased Vesting), then separate sub- accounts shall be maintained as
follows:
(1) sub-account for the vested Employer Matching Contribution
Account (Phased Vesting) balance attributable to contributions before the five
(5) consecutive One Year Breaks in Service; and
(2) sub-account for contributions to the Employer Matching
Contribution Account (Phased Vesting) following reemployment.
(f) The computation of the vested percentage of a Participant's
Accounts shall not be reduced as the result of any direct or indirect amendment
of the Plan's vesting provisions. In the event that the Plan is amended to
change or modify any vesting schedule, a Participant with at least three (3)
Years of Service as of the expiration date of the election period may elect to
have his or her nonforfeitable percentage computed under the Plan without regard
to such amendment. If a Participant fails to make such election, then such
Participant shall be subject to the new vesting schedule. The Participant's
election period shall commence on the adoption date of the amendment and shall
end 60 days after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of the
amendment from the Employer or the Plan Committee.
5.2 Service. Effective January 1, 1996, an Employee's Years of
Service under the Plan shall be determined by use of the elapsed time method set
forth in Article 5.3. Except as provided in Article 5.1(d) and (e) all service
for the Company or a Related Company shall be counted.
5.3 Elapsed Time Method.
(a) For purposes of determining the Employee's vesting service
under the elapsed time method, an Employee shall receive service credit for the
time period that commences on his or her Employment Commencement Date and/or
Re-employment Commencement Date and ends on his or her Severance from Service
<PAGE> 54
Date. In addition, an Employee shall be credited with certain Periods of
Severance in accordance with the provisions of subparagraph (b), below.
(b) An Employee shall receive service credit for a Period of
Severance that is less than twelve (12) consecutive months in length.
(c) Except as provided in Article 5.1(d) and (e),
nonsuccessive Periods of Service shall be aggregated. Less than whole year
Periods of Service (whether or not consecutive) shall be aggregated on the basis
that twelve (12) months of service or three hundred sixty (360) days of service
equal a whole Year of Service. For purposes of this paragraph thirty (30) days
are deemed to be one (1) month in the case of aggregation of fractional months.
(d) No Employee shall be credited with less service as
determined under this Article 5.3 as of January 1, 1996, than such Employee
would have been credited as of the day before such date under the terms of the
Plan then in effect.
5.4 Change from Hours of Service Method to Elapsed Time Method of
Service Crediting. Before January 1, 1996, service for vesting purposes was
determined using the hours of service method. Individuals employed by the
Company or a Related Company before January 1, 1996, shall be credited with --
(a) for employment before the computation period in which the
change is effective, the number of Years of Service determined under the hours
of service method; and
(b) for employment during the computation period in which the
change is effective, the greater of (i) the period of service that would be
credited under the elapsed time method for the Employee's service during the
entire computation period in which the change is effective, or (ii) the service
taken into account under the hours of service method as of the effective date of
the change; and
(c) for employment after the last day of the computation
period in which the change is effective, service as determined under the elapsed
time method.
5.5 Service Definitions. For purposes of determining the amount of
service to be credited under the provisions of this Article 5, the following
words and phrases shall be as defined below, unless a different meaning is
clearly required by the context:
(a) "Employment Commencement Date" shall mean the date on
which an Employee first performs an Hour of Service for the Company or a Related
Company, as defined in subparagraph (b) below.
4
<PAGE> 55
(b) "Hour of Service" shall mean:
(1) Generally, each hour for which an Employee is directly
or indirectly paid or entitled to payment by the Company or a Related Company
for the performance of duties.
(2) For purposes of determining an Employee's Hours of
Service using the hours of service method, one hundred ninety (190) Hours of
Service shall be credited for each month in which the Employee performs at least
one Hour of Service or is entitled to payment by the Company or a Related
Company, directly or indirectly, for the performance of duties or for a period
during which no service is performed due to vacation, holiday, sickness,
incapacity (including disability), leaves of absence, layoff, jury duty or
military service. These hours shall be credited to the Employee for the Plan
Year or the computation period in which the service is performed or for which
payments are made. Payments made or due under a plan maintained by the Company
or a Related Company solely for the purpose of complying with applicable
worker's compensation, unemployment compensation or disability insurance laws,
or to reimburse the Employee for medical or medically related expenses shall not
be considered as payments by the Company or Related Company for purposes of this
Article 5.5. Notwithstanding the foregoing, however, no more than five hundred
one (501) Hours of Service shall be credited to an Employee on account of any
single continuous period in which the Employee performs no duties. The number of
Hours of Service for which no duties are performed and the computation period to
which they relate shall be determined in accordance with the Department of Labor
Regulations section 2530.200b-2(b) and (c) or similar superseding regulations.
(3) Each hour for which back pay, irrespective of
mitigation of damages, has been either awarded or agreed to by the Company or a
Related Company. The number of hours for which back pay is attributable shall be
determined in accordance with Department of Labor Regulations section
2530.200b-2(b). These hours shall be credited to the Employee for the Plan Year
or computation period in which the award, agreement or payment pertains, rather
than the Plan Year or computation period in which the award, agreement or
payment is made. No hours shall be credited under this subparagraph (3) if the
same hours have been credited under subparagraph (2) above.
(c) "One Year Break in Service" shall mean a twelve (12)
consecutive month period beginning on an Employee's Severance from Service Date
and ending on the first anniversary thereof, during which an Employee does not
perform one Hour of Service. Notwithstanding any provision to the contrary and
solely for the purpose of determining whether an Employee has incurred a One
Year Break in Service, the second anniversary of the first day of am Employee's
absence shall be his or her Severance from Service Date if the Employee is
absent from service beyond the
5
<PAGE> 56
first anniversary of the first day of a leave absence by reason of (A) pregnancy
of the Employee, (B) the birth of a child of the Employee, (C) the placement of
a child with the Employee in connection with the adoption of such child by such
Employee, or (D) care provided for such child by the Employee for a period
beginning immediately following such birth or placement. In such case, the
period between the first and second anniversaries of the first day of the
Employee's absence shall be neither a Period of Service nor a Period of
Severance, but shall be counted only for purposes of determining whether the
Employee has a One Year Break in Service. The Plan Committee may require, as a
condition of receiving such maternity or paternity leave credit, that such
Employee furnish timely information to establish that the absence from work was
for the reasons referred to above and to establish the period for which there
was a maternity or paternity leave of absence.
(d) "Period of Severance" shall mean the period of time commencing on
an Employee's Severance from Service Date and ending on the date such Employee
again performs an Hour of Service.
(e) "Period of Service" shall mean the time period commencing with the
Employment Commencement Date and/or Re-employment Commencement Date and ending
on the Severance from Service Date. In addition, an Employee shall receive
Service credit for Periods of Severance that are less than twelve (12)
consecutive months. Nonsuccessive Periods of Service shall be aggregated in
accordance with Article 5.3(c).
(f) "Re-employment Commencement Date" shall mean the first date on
which a rehired Employee who has incurred a One Year Break in Service performs
an Hour of Service.
(g) "Severance from Service Date" shall mean the date on which the
Employee ceases to be employed by the Company or any Related Company. This date
shall be the earlier of the date on which an Employee quits, retires, is
discharged or dies or the one-year anniversary date of the first day of an
approved leave of absence. Except as otherwise provided in subparagraph (c)
above, if an Employee does not resume employment upon the expiration of a leave
of absence and such leave of absence is not extended by the Employer, the
Employee shall be deemed to have been discharged as of the date the leave of
absence expired.
<PAGE> 57
(h) "Year of Service" under the elapsed time method shall mean a Period
of Service that is twelve (12) months or three hundred sixty (360) days in
length. Year of Service under the hours of service method shall mean a Plan Year
in which the Employee is credited with one thousand (1000) Hours of Service.
5.6 Forfeitures.
(a) If a Participant's Employer Matching Contribution Account (Phased
Vesting) is not 100% vested on the date the Participant terminates employment,
the portion of such subaccount which is not vested shall be provisionally
forfeited as of the employment termination date. Such forfeitures shall be used
first to reinstate any Participant's provisionally forfeited accounts as may be
required pursuant to subparagraph (b) below; thereafter all remaining
forfeitures shall offset the Employer's Matching Contribution obligation each
Plan Quarter.
(b) If the Participant is rehired before incurring five consecutive One
Year Breaks in Service, the number of shares and amount of cash previously
forfeited shall be reinstated to an Employer Matching Contribution Account
(Phased Vesting) for the Participant. If the Participant incurs five consecutive
One Year Breaks in Service, then the provisional forfeiture shall become a
permanent forfeiture and shall not be subject to reinstatement.
(c) Notwithstanding any other provision of the Plan, shares and/or cash
amounts necessary to restore any provisionally forfeited amounts shall be
provided from other provisional forfeitures and Employer contributions, in that
order.
<PAGE> 58
(d) If the Plan is terminated and if a Participant has not incurred,
five consecutive One Year Breaks in Service, then such Participant's provisional
forfeitures shall be reinstated, pursuant to Article 5.6(b), and shall be 100%
vested."
* * * * * * * * *
The above Third Amendment to the Plan has been adopted by the Plan
Administrative Committee pursuant to and in a manner consistent with a valid
delegation of authority from the Board of Directors of Read-Rite Corporation.
IN WITNESS WHEREOF the Plan Administrative Committee hereby adopts the
Third Amendment to the Plan on this 12th day of December, 1995.
PLAN ADMINISTRATIVE COMMITTEE FOR THE
READ-RITE EMPLOYEE 401(k) RETIREMENT
SAVINGS PLAN
By: /s/ Lucia Brannon
------------------------------------
Chairman, Plan Administrative Committee
<PAGE> 1
EXHIBIT 10.43
READ-RITE CORPORATION
---------------------------
FIRST AMENDMENT
DATED AS OF OCTOBER 15, 1996
TO
NOTE PURCHASE AGREEMENTS
DATED AS OF SEPTEMBER 29, 1995
---------------------------
RE: $100,000,000 7.53% SENIOR NOTES
DUE SEPTEMBER 15, 2000
<PAGE> 2
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENTS
THIS FIRST AMENDMENT dated as of October 15, 1996 (the or this "FIRST
AMENDMENT") to the Note Purchase Agreements each dated as of September 29, 1995
is between Read-Rite Corporation, a Delaware corporation (the "COMPANY"), and
each of the institutions which is a signatory to this First Amendment
(collectively, the "NOTEHOLDERS").
RECITALS:
A. The Company and each of the Noteholders have heretofore entered into
separate and several Note Purchase Agreements each dated as of September 29,
1995 (collectively, the "NOTE AGREEMENTS"). The Company has heretofore issued
$100,000,000 aggregate principal amount of its 7.53% Senior Notes due September
15, 2000 (the "NOTES") pursuant to the Note Agreements. The Noteholders are,
collectively, the holders of at least 66 2/3% of the outstanding principal
amount of the Notes.
B. The Company and the Noteholders now desire to amend the Note
Agreements in the respects, but only in the respects, hereinafter set forth.
C. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Note Agreements unless herein defined or the context
shall otherwise require.
D. All requirements of law have been fully complied with and all other
acts and things necessary to make this First Amendment a valid, legal and
binding instrument according to its terms for the purposes herein expressed have
been done or performed.
E. The Company is a party to (i) the Term Loan Agreement dated as of
June 28, 1996 with Canadian Imperial Bank of Commerce, New York Agency, as
agent, and the financial institutions named on the signature pages thereof as
Banks, as amended, (ii) the Third Amended and Restated Credit Agreement dated as
of December 14, 1994 with CIBC Inc, as agent, and the financial institutions
named on the signature pages thereof as Banks, as amended, and (iii) a Lease of
Land dated as of April 25, 1996 with Sumitomo Bank Leasing and Finance, Inc, as
amended (collectively, the "Bank Facilities").
NOW, THEREFORE, upon the full and complete satisfaction of the
conditions precedent to the effectiveness of this First Amendment set forth in
SECTION 3.1 hereof, and in consideration of good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Noteholders do hereby agree as follows:
Section 1. AMENDMENTS
1
<PAGE> 3
1.1. Section 10.4 of the Note Agreements shall be and is hereby amended
in its entirety to read as follows:
"10.4. CONSOLIDATED TANGIBLE NET WORTH.
The Company will not permit Consolidated Tangible Net Worth
at any time to be less than $400,000,000 plus (i) 80% of Consolidated
Net Income (but not loss) for each fiscal quarter of the Company
commencing with the quarter beginning on or about July 1, 1996 plus
(ii) 100% of the net increase in Consolidated Tangible Net Worth
occurring after July 1, 1996 resulting from the issuance of equity
securities of the Company after July 1, 1996."
1.2. Section 10.7 of the Note Agreements shall be and is hereby amended
by adding the following proviso to the end thereof:
"; provided, that compliance by the Company with this Section
10.7 is hereby waived for the period of five fiscal quarters ending on
September 30, 1997."
1.3. Section 10.9 of the Note Agreements shall be and is hereby amended
in its entirety to read as follows:
"10.9. RESTRICTED PAYMENTS.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, at any time, declare or make, or incur any liability to declare
or make, any Restricted Payment, unless immediately after giving effect to such
action:
(i) the aggregate amount of Restricted Payments of the
Company and its Restricted Subsidiaries declared, made or for which a
liability has accrued during the period commencing on July 1, 1995, and
ending on the date such Restricted Payment is declared or made,
inclusive, would not exceed the sum of
(A) $20,000,000, plus
(B) 20% of Consolidated Net Income for the period
commencing on July 1, 1995 and ending on the last day of the
most recent fiscal quarter ended prior to the date such
Restricted Payment is declared or made (or minus 100% of
Consolidated Net Income for such period if Consolidated Net
Income for such period is a loss), plus
(C) the aggregate amount of Net Proceeds of Capital
Stock for such period; and
(ii) no Default or Event of Default would exist
2
<PAGE> 4
; provided, that notwithstanding the foregoing, the Company shall not,
during the period commencing on September 30, 1996 and ending on March
31, 1998, redeem, repurchase or otherwise acquire any of its capital
stock or other equity interests or warrants, rights or other options to
purchase such stock or other equity interests."
1.4. The following shall be added as a new Section 10.13 of the Note
Agreements:
"10.13. OPERATING PERFORMANCE RATIO.
Commencing the fiscal quarter beginning October 1, 1996,
the Company will not, at any time, permit, as of the last day of each
of the fiscal quarters of the Company, the ratio of (i) Annualized
Consolidated Cash Flow as of such date to (ii) the sum of (A) the
current portion of long term debt (determined for the Company and its
consolidated Subsidiaries in accordance with GAAP) as of such date,
plus (B) the aggregate Revolving Loans outstanding on such date, plus
(C) the product of four multiplied by Consolidated Interest Expense for
the fiscal quarter ending on such date, to be less than 2.50:1.00."
1.5. The following shall be added as a new Section 10.14 of the Note
Agreements:
"10.14. CONSOLIDATED NET INCOME.
The Company:
(i) shall not permit Consolidated Net Income to be
less than $0 for any two consecutive fiscal quarters beginning on or
after April 1, 1997 calculated as of the last day of each fiscal
quarter of the Company; and
(ii) shall not permit the net losses on the last day of
each fiscal quarter of the Company to be greater than the correlative
amount below:
<TABLE>
<CAPTION>
Amount of Loss
Quarter Ending Not to Exceed
-------------- -------------
<S> <C>
September 30, 1996 $65,000,000
December 31, 1996 $20,000,000
March 31, 1997 $10,000,000"
</TABLE>
1.6 The definition of Consolidated Net Income set forth in Schedule B
of the Note Agreements shall be and is hereby amended by adding the following
proviso to the end thereof:
"; provided, that for purposes of Sections 10.4 and 10.14 of this
Agreement and the definition of Annualized Consolidated Cash Flow set
forth in Schedule B, Consolidated Net Income shall mean, for any
period, on a consolidated basis
3
<PAGE> 5
determined in accordance with GAAP, the net income (or loss) after
income taxes of the Company and its Subsidiaries for such period."
1.7. The definition of Consolidated Tangible Net Worth set forth in
Schedule B of the Note Agreements shall be and is hereby amended by adding the
following proviso to the end thereof:
"; provided, that for purposes of Section 10.4 of this Agreement,
Consolidated Tangible Net Worth shall mean, at any date of
determination, the sum of the capital stock and additional paid-in
capital plus retained earnings (or minus accumulated deficit) of the
Company and its Subsidiaries minus intangible assets, on a consolidated
basis determined in conformity with GAAP, and calculated without giving
effect to any foreign currency translation adjustments."
1.8. The following shall be added as new definitions in alphabetical
order to Schedule B of the Note Agreements:
"ANNUALIZED CONSOLIDATED CASH FLOW" means the product of (A) four
multiplied by (B) the sum of the following amounts for the Company on a
consolidated basis determined in accordance with GAAP for the most
recently ended fiscal quarter: (i) Consolidated Net Income plus (ii)
provisions for income taxes plus (iii) Consolidated Interest Expense
plus (iv) depreciation and amortization plus (v) non-cash charges
(except for non-cash charges that are expected to result in cash
payments).
"CONSOLIDATED INTEREST EXPENSE" means, for any period, all
interest expense (including that portion attributable to Capital Leases
in conformity with GAAP and amortization of capitalized interest) of
the Company and its Subsidiaries on a consolidated basis determined in
accordance with GAAP with respect to all outstanding Debt of the
Company and its Subsidiaries.
"DEBT" means, as applied to any Person, (i) all indebtedness for
borrowed money, (ii) that portion of obligations with respect to
Capital Leases which is properly classified as a liability on a balance
sheet in conformity with GAAP, (iii) notes payable and drafts accepted
representing extensions of credit whether or not representing
obligations for borrowed money, (iv) any obligation owed for all or any
part of the deferred purchase price of property or services which
purchase price is (a) due more than twelve months from the date of
incurrence of the obligation in respect thereof, or (b) evidenced by a
note or similar written instrument, (v) all indebtedness secured by any
Lien on any property or asset owned or held by that Person regardless
of whether the indebtedness secured thereby shall have been assumed by
that Person or is nonrecourse to the credit of that Person (but only to
the extent of the lesser of (x) the Debt so secured or (y) the fair
market value of the property or asset subject to such Lien), and (vi)
amounts outstanding under reimbursement obligations of such
4
<PAGE> 6
Person to the issuer of any letter of credit other than trade or
commercial letters of credit.
"REVOLVING LOANS" means all Indebtedness outstanding under the
Third Amended and Restated Credit Agreement dated as of December 14,
1994 among the Company, CIBC Inc., as agent, and the financial
institutions named therein, as amended.
Section 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.1. To induce the Noteholders to execute and deliver this First
Amendment (which representations shall survive the execution and delivery of
this First Amendment), the Company represents and warrants to the Noteholders
that:
(a) this First Amendment has been duly authorized, executed and
delivered by it and this First Amendment constitutes the legal, valid
and binding obligation, contract and agreement of the Company
enforceable against it in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or
limiting creditors' rights generally;
(b) the Note Agreements, as amended by this First Amendment,
constitute the legal, valid and binding obligations, contracts and
agreements of the Company enforceable against it in accordance with
their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles relating to or limiting creditors' rights
generally;
(c) the execution, delivery and performance by the Company of this
First Amendment (i) has been duly authorized by all requisite corporate
action and, if required, shareholder action, (ii) does not require the
consent or approval of any governmental or regulatory body or agency,
and (iii) will not (A) violate (1) any provision of law, statute, rule
or regulation or its certificate of incorporation or bylaws,
(2) any order of any court or any rule, regulation or order of any
other agency or government binding upon it, or (3) any provision of any
material indenture, agreement or other instrument to which it is a
party or by which its properties or assets are or may be bound,
including, without limitation, the Bank Facilities, or (B) result in a
breach or constitute (alone or with due notice or lapse or both) a
default under any Indenture, agreement or other instrument referred to
in clause (iii)(A)(3) of this SECTION 2.1(C);
(d) as of the date hereof and after giving effect to this First
Amendment, no Default or Event of Default has occurred which is
continuing; and
(e) except as set forth in the disclosure letter dated as of
October 4, 1996 from the Company to the Noteholders with respect to
Section 5.3 of the Note
5
<PAGE> 7
Agreements, all the representations and warranties contained in
Section5 of the Note Agreements are true and correct in all material
respects with the same force and effect as if made by the Company on
and as of the date hereof.
Section 3. CONDITIONS TO EFFECTIVENESS OF THIS FIRST AMENDMENT.
3.1. This First Amendment shall become effective as of September 29,
1996 upon the satisfaction in full of each of the following conditions:
(a) executed counterparts of this First Amendment, duly executed
by the Company and the holders of at least 66 2/3% of the outstanding
principal of the Notes, shall have been delivered to the Noteholders;
(b) the Noteholders shall have received evidence satisfactory to
them that the terms of the Bank Facilities have been amended or waived
with the effect substantially as set forth in the form annexed hereto
as Exhibit A;
(c) (i) the representations and warranties of the Company set
forth in SECTION 2 hereof shall be true, correct and complete on and
with respect to the date hereof and (ii) no Default or Event of Default
shall have occurred and be continuing on the date hereof or would
result from this First Amendment becoming effective in accordance with
the terms hereof, and the Noteholders shall have received an Officer's
Certificate certifying to the effects set forth in clauses (i) and (ii)
above;
(d) the Company shall have paid the reasonable fees and expenses
of O'Melveny & Myers LLP, counsel to the Noteholders, in connection
with the negotiation, preparation, approval, execution and delivery of
this First Amendment; and
(e) each of the Noteholders shall have received a wire transfer of
immediately available funds from the Company in an amount equal to
0.05% of the aggregate principal amount of the Notes held by such
Noteholder and outstanding on the date this First Amendment becomes
effective.
Upon receipt of all of the foregoing, this First Amendment shall become
effective.
Section 4. MISCELLANEOUS
4.1. This First Amendment shall be construed in connection with and as
part of each of the Note Agreements, and except as modified and expressly
amended by this First Amendment, all terms, conditions, and covenants contained
in the Note Agreements and the Notes are hereby ratified and shall be and remain
in full force and effect.
4.2. Any and all notices, requests, certificates and other instruments
executed and delivered after the execution and delivery of this First Amendment
may refer to the Note
6
<PAGE> 8
Agreements without making specific reference to this First Amendment but
nevertheless all such references shall include this First Amendment unless the
context otherwise requires.
4.3. The descriptive heading of the various Sections or parts of this
First Amendment are for convenience only and shall not affect the meaning or
construction of any of the provisions hereof.
4.4. This First Amendment shall be governed by and construed in
accordance with California law.
4.5. The execution hereof by you shall constitute a contract between us
for the uses and purposes hereinabove set forth, and this First Amendment may be
executed in any number of counterparts, each executed counterpart constituting
an original, but all together only one agreement.
7
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
READ-RITE CORPORATION
By /s/ John T. Kurtzweil
-----------------------------------
Its V.P. Finance and CFO
-----------------------------------
Accepted and Agreed to:
ALLSTATE LIFE INSURANCE
COMPANY
By /s/ Patricia W. Wilson
-----------------------------------
Its
-----------------------------------
By /s/ Ronald A. Mendel
-----------------------------------
Its
-----------------------------------
CONNECTICUT GENERAL LIFE
INSURANCE COMPANY
By: CIGNA INVESTMENTS, INC.
By /s/ James F. Coggins, Jr.
-----------------------------------
Its Managing Director
-----------------------------------
CONNECTICUT GENERAL LIFE
INSURANCE COMPANY, on behalf of
one or more separate accounts
By: CIGNA INVESTMENTS, INC.
By /s/ James F. Coggins, Jr.
-----------------------------------
Its Managing Director
-----------------------------------
S-1
<PAGE> 10
LIFE INSURANCE COMPANY OF
NORTH AMERICA
By: CIGNA INVESTMENTS, INC.
By /s/ James F. Coggins, Jr.
-----------------------------------
Its Managing Director
-----------------------------------
PRINCIPAL MUTUAL LIFE
INSURANCE COMPANY
By /s/ James C. Fifield
-----------------------------------
Its Counsel
-----------------------------------
By /s/ John D. Cleavenger
-----------------------------------
Its Counsel
-----------------------------------
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By /s/ Jeffrey L. Dickson
-----------------------------------
Its Vice President
-----------------------------------
PRUCO LIFE INSURANCE COMPANY
By /s/ Jeffrey L. Dickson
-----------------------------------
Its Vice President
-----------------------------------
S-2
<PAGE> 1
EXHIBIT 10.44
- ---------------------------------------------------------------[SBLF LETTERHEAD]
October 15, 1996
Ms. Jane Conn
Treasurer
Read-Rite Corporation
345 Los Coches Street
Milpitas, CA 95035
Re: Lease of the Land (the "Lease") dated as of April 25, 1996, between
Sumitomo Bank Leasing and Finance, Inc. ("SBLF") as Landlord and
Read-Rite Corporation ("Read-Rite") as Tenant.
Dear Ms. Conn:
This letter confirms our understanding that SBLF, as Landlord, has agreed that
for the fiscal quarter ending on September 30, 1996, the fiscal quarter ending
on December 31, 1996, and the fiscal quarter ending on March 31,1997 and for
such fiscal quarters only:
the reference in Paragraph 16.1(h)(ii) to Consolidated Tangible Net Worth
of not less than $450,000,000 plus 80% of Consolidated Net Income plus 100%
of the proceeds from the issuance of equity securities shall be waived and
that in lieu thereof the Lessee shall not permit Consolidated Tangible Net
Worth to be less than $400,000,000 plus 80% of Consolidated Net Income plus
100% of the proceeds from the issuance of equity securities;
the reference in paragraph 16.1(h)(iii) of the Lease to a Leverage Ratio of
0.75 to 1.00 shall be waived and that in lieu thereof a leverage ratio of
1.00 to 1.00 shall be in effect;
the reference in paragraph 16.1(h)(iv) of the Lease to a Consolidated Net
Income of no less than $0.00 for any two consecutive fiscal quarters shall
be waived and that in lieu thereof the Lessee may incur a Consolidated Net
Loss (defined in accordance with GAAP) no greater than $65,000,000 for the
fiscal quarter ended on September 30, 1996; no greater than $20,000,000 for
the fiscal quarter to end December 31, 1996; and no greater than
$10,000,000 for the fiscal quarter to end on March 31, 1997; and
the reference in paragraph 16.1(h)(vi) of the Lease to a ratio of
Consolidated Cash Flow to Fixed Charges of 1.50 to 1.00 shall be waived and
that in lieu thereof a ratio of Consolidated Cash Flow to Fixed Charges of
-2.90 to 1.00 shall be in effect.
For each fiscal quarter of Read-Rite following the fiscal quarter ending on
March 31, 1997 during the Term of the Lease, paragraphs 16.1(h)(ii),
16.1(h)(iii), 16.1(h)(iv) and 16.1(h)(vi) shall be in full force and effect in
accordance with their original terms.
- --------------------------------------------------------------------------------
[LETTERHEAD]
<PAGE> 2
Except as otherwise set forth in this letter, all defined terms used in this
letter shall have the meanings given such terms in the Lease. SBLF requests that
Read-Rite, in addition to providing an officer's certificate of no default,
provide a compliance certificate for each fiscal quarter which details
compliance or non-compliance with the financial covenants contained in Paragraph
16.1 (h). Please indicate your acceptance of these terms and conditions by
signing in the signature box provided below.
Sincerely,
SUMITOMO BANK LEASING AND FINANCE, INC.
By: /s/ William M. Ginn
----------------------------------
William M. Ginn
President
ACKNOWLEDGED AND ACCEPTED:
READ-RITE CORPORATION
By: /s/ J. Conn
-----------------------------------
Its: Treasurer
-----------------------------------
Date: 10/15/96
-----------------------------------
cc: Bruce W. Hyman - Graham & James, LLP
Bradford O'Brien - Wilson, Sonsini, Goodrich & Rosati
- ---------------------------------------------------------------[SBLF LETTERHEAD]
<PAGE> 1
EXHIBIT 10.45
READ-RITE CORPORATION
FIFTH AMENDMENT
TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT
This FIFTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT
AGREEMENT (this "Amendment") is dated as of September 29, 1996 and entered into
among Read-Rite Corporation, a Delaware corporation (the "Borrower"), the
financial institutions named on the signature pages hereof (each a "Bank" and
collectively, the "Banks"), CIBC Inc., as agent for the Banks (the "Agent"), and
Canadian Imperial Bank of Commerce, New York Agency (the "Designated Issuer")
and is made with reference to that certain Third Amended and Restated Credit
Agreement dated as of December 14, 1994, subject to that certain Limited Waiver
dated as of February 1, 1995, as amended by that certain First Amendment to
Third Amended and Restated Credit Agreement dated as of February 24, 1995, and
as further amended by that certain Second Amendment to Third Amended and
Restated Credit Agreement dated as of June 30, 1995, and as further amended by
that certain Third Amendment to Third Amended and Restated Credit Agreement
dated as of September 22, 1995, subject to that certain Limited Waiver dated as
of November 8, 1995, and as further amended by that certain Fourth Amendment to
Third Amended and Restated Credit Agreement dated as of March 1, 1996, subject
to that certain Limited Waiver dated as of June 27, 1996 (collectively, the
"Credit Agree ment") among the Borrower, the Banks, the Designated Issuer and
the Agent. Capitalized terms used herein without definition shall have the same
meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower and the Banks desire to amend, delete
and to add certain covenants contained in the Credit Agreement as set forth
below;
NOW, THEREFORE, in consideration of the promises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENTS TO DEFINITIONS
A. Section 1.01 of the Credit Agreement is hereby
amended by adding the definition of Annualized Consolidated Cash Flow as
follows:
1
<PAGE> 2
"'Annualized Consolidated Cash Flow': The product of (A) four
(4) multiplied by (B) the sum of the following amounts for the
Borrower on a consolidated basis determined in accordance with
GAAP for the most recently ended fiscal quarter: (i)
Consolidated Net Income plus (ii) provisions for income taxes
plus (iii) Consolidated Interest Expense plus (iv)
depreciation and amortization plus (v) non-cash charges
(except for non-cash charges that are expected to result in
cash payments)."
1.2 AMENDMENTS TO SECTION 6.02: NEGATIVE COVENANTS
A. Section 6.02(a) of the Credit Agreement is hereby
amended to read in its entirety as follows:
"(a) Quick Ratio. Permit the ratio of Consolidated Quick Assets to
Consolidated Quick Liabilities (i) on the last day of each of the fiscal
quarters of the Borrower ending on or about September 30, 1996 and thereafter to
be less than 0.95 to 1.00."
B. Section 6.02(b) of the Credit Agreement is hereby
amended to read in its entirety as follows:
"(b) Consolidated Tangible Net Worth. Permit Consolidated Tangible
Net Worth at any time to be less than $400,000,000 plus (i) 80% of Consolidated
Net Income (but not loss) for each fiscal quarter of the Borrower commencing
with the quarter beginning on or about July 1, 1996 plus (ii) 100% of the net
increase in Consolidated Tangible Net Worth occurring after July 1, 1996
resulting from the issuance of equity securities of the Borrower after July 1,
1996."
C. Section 6.02(c) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(c) Leverage Ratio. Permit the Leverage Ratio on the last day of
each of the fiscal quarters of the Borrower to be greater than the correlative
amount set forth below:
<TABLE>
<CAPTION>
Quarter Ending Ratio
-------------- -----
<S> <C>
September 30, 1996 1.00:1.00
December 31, 1996 1.05:1.00
March 31, 1997 1.05:1.00
June 30, 1997 1.05:1.00
September 30, 1997 1.00:1.00"
</TABLE>
2
<PAGE> 3
D. Section 6.02(d) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(d) Consolidated Net Income.
(i) Permit Consolidated Net Income to be less than $0 for any
two consecutive fiscal quarters beginning on or after April 1, 1997 calculated
as of the last day of each fiscal quarter of the Borrower; and
(ii) Permit the net losses on the last day of each fiscal
quarter of the Borrower to be greater than the correlative amount below:
<TABLE>
<CAPTION>
Amount of Loss
Quarter Ending Not to Exceed
-------------- -------------
<S> <C>
September 30, 1996 $65,000,000
December 31, 1996 $20,000,000
March 31, 1997 $10,000,000"
</TABLE>
E. Section 6.02(f) of the Credit Agreement is hereby amended
by deleting the word "and" at the end of clause (x) thereof and replacing the
period at the end of clause (xi) thereof with "; and" and adding a new clause
(xii) thereto to read as follows:
"(xii) The indebtedness evidenced by the Term Loan Agreement dated as
of June 28, 1996 among Read-Rite Corporation, as borrower and the financial
institutions named therein as banks and Canadian Imperial Bank of Commerce, New
York Agency, as agent, in a principal amount not in excess of $50,000,000."
F. Section 6.02(h)(i) of the Credit Agreement is hereby
amended by inserting the phrase "and current maturities of all existing Debt of
the Borrower" after the words "Revolving Loans" and before the words "by at
least $100,000,000."
G. Section 6.02(k) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(k) Operating Performance Ratio. Commencing the fiscal quarter
beginning October 1, 1996, permit, as of the last day of each of the fiscal
quarters of the Borrower, the ratio of (i) Annualized Consolidated Cash Flow as
of such date to (ii) the sum of (A) the current portion of long term debt
(determined for the Borrower and its consolidated Subsidiaries in accordance
with GAAP) as of such date, plus (B) the aggregate Revolving Loans outstanding
on such date, plus (C) the product of four
3
<PAGE> 4
(4) multiplied by Consolidated Interest Expense for the fiscal quarter ending on
such date, to be less than 2.50 to 1.00."
H. Section 6.02(o) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(o) [Intentionally Omitted]."
1.3 AMENDMENTS TO EXHIBITS
A. Exhibit C to the Credit Agreement is hereby amended in its
entirety and replaced with the Exhibit C attached hereto.
SECTION 2. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of September 29,
1996, only upon the satisfaction of the conditions precedent that: (a) on or
before the aforementioned date, the Agent shall have received for each Bank
counterparts hereof duly executed on behalf of the Borrower, the Agent, and all
of the Banks, or notice of the approval of this Amendment by all of the Banks
satisfactory to the Agent; (b) Borrower and each of those parties to whom
Borrower has issued a Senior Note shall enter into an agreement, effective on or
before the Fifth Amendment Closing Date, modifying each of the Senior Notes to
provide for substantially the same terms and conditions as provided in this
Amendment; (c) Borrower and each of those parties to the Term Loan Agreement
dated as of June 28, 1996 shall enter into an agreement, effective on or before
the Fifth Amendment Closing Date, modifying the Term Loan Agreement to provide
for substantially the same terms and conditions as provided in this Amendment;
and (d) Borrower shall have delivered to the Agent copies of all amendments to
its by-laws dated on or after October 27, 1992. (The date of satisfaction of
such conditions being referred to herein as the "Fifth Amendment Closing Date.")
SECTION 3. THE BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Amendment and
to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to each Bank that the following statements are true,
correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all
requisite corporate power and authority to enter into this Amendment and to
carry out the
4
<PAGE> 5
transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of the Borrower.
C. NO CONFLICT. The execution and delivery by the Borrower of this
Amendment do not and will not contravene (i) any law or any governmental rule or
regulation applicable to the Borrower or any of its Subsidiaries, (ii) the
Certificate of Incorporation or Bylaws of the Borrower, (iii) any order,
judgment or decree of any court or other agency of government binding on the
Borrower or any of its Subsidiaries or (iv) any material agreement or instrument
binding on the Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by the
Borrower of this Amendment and the performance by the Borrower of the Amended
Agreement do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement
have been duly executed and delivered by the Borrower and are the binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except in each case as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors' rights.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Article V of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the Fifth Amendment Closing Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date and except as described in a separate letter to the Banks dated September
24, 1996.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or
will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
5
<PAGE> 6
SECTION 4. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN AGREEMENTS.
(i) On and after the Fifth Amendment Closing Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Agreements to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Agreements shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Bank under, the Credit Agreement or any
of the other Loan Agreements.
B. FEES AND EXPENSES. The Borrower acknowledges that all
costs, fees and expenses as described in Section 9.05 of the Credit Agreement
incurred by the Agent and its counsel with respect to this Amendment and the
documents and transactions contemplated hereby shall be for the account of the
Borrower.
C. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
BORROWER:
READ-RITE CORPORATION
By: /s/ John T. Kurtzweil
--------------------------------
Title: V.P. Finance and CFO
--------------------------------
S-1
<PAGE> 8
AGENT
CIBC, INC., as Agent
By: /s/ James E. Anderson
---------------------------------
Title: Managing Director
---------------------------------
S-2
<PAGE> 9
BANKS:
CIBC INC.
By: /s/ James E. Anderson
---------------------------------
Title: Managing Director
---------------------------------
THE FIRST NATIONAL BANK OF
BOSTON
By: /s/ Lee A. Merkle
---------------------------------
Title: Vice President
---------------------------------
ABN AMRO BANK N.V.
By: /s/ Tom R. Wagner
---------------------------------
Title: V.P. and Director
---------------------------------
By: /s/ Robert Hartinger
---------------------------------
Title: S.V.P. & Managing Director
---------------------------------
WELLS FARGO BANK (FORMERLY FIRST
INTERSTATE BANK OF CALIFORNIA)
By: /s/ John Adams
---------------------------------
Title: V.P.
---------------------------------
S-3
<PAGE> 10
DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY
By: /s/ James E. Anderson
----------------------------------
Title: Senior Agent
-------------------------------
S-4
<PAGE> 1
EXHIBIT 10.46
READ-RITE CORPORATION
FIRST AMENDMENT
TO TERM LOAN AGREEMENT
This FIRST AMENDMENT TO TERM LOAN AGREEMENT (this "Amendment")
is dated as of September 29, 1996 and entered into among Read-Rite Corporation,
a Delaware corporation (the "Borrower"), the financial institutions named on the
signature pages hereof (each a "Bank" and collectively, the "Banks"), Canadian
Imperial Bank of Commerce, New York Agency, as agent for the Banks (the "Agent")
and is made with reference to that certain Term Loan Agreement dated as of June
28, 1996 (the "Credit Agreement") among the Borrower, the Banks and the Agent.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower and the Banks desire to amend and to add
certain covenants contained in the Credit Agreement as set forth below;
WHEREAS, the Borrower has requested that the Banks that are
"Banks" under the Credit Agreement before giving effect to this Amendment (the
"Existing Lenders") add additional lenders under the Credit Agreement (the "New
Lenders") and the Existing Lenders are willing to so agree;
WHEREAS, the Banks have agreed to reallocate their respective
commitments and in connection therewith reallocate their respective outstandings
under the Term Loan;
NOW, THEREFORE, in consideration of the promises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO DEFINED TERMS
A. The definition of "Interest Period" is amended to delete
the word "two" between the words "one" and "three" within clause (ii).
1.2 AMENDMENTS TO SECTION 6.02: NEGATIVE COVENANTS
A. Section 6.02(a) of the Credit Agreement is hereby amended
to read in its entirety as follows:
<PAGE> 2
"(a) Quick Ratio. Permit the ratio of Consolidated Quick Assets to
Consolidated Quick Liabilities (i) on the last day of each of the fiscal
quarters of the Borrower ending on or about September 30, 1996, December 31,
1996, March 31, 1997, June 30, 1997, September 30, 1997, December 31, 1997,
March 31, 1998 and June 30, 1998 to be less than 0.95 to 1.00; and (ii) on the
last day of each of the fiscal quarters of the Borrower ending on or about
September 30, 1998 and thereafter to be less than 1.00 to 1.00."
B. Section 6.02(b) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(b) Consolidated Tangible Net Worth. Permit Consolidated Tangible Net
Worth at any time to be less than $400,000,000 plus (i) 80% of Consolidated Net
Income (but not loss) for each fiscal quarter of the Borrower commencing with
the quarter beginning on or about July 1, 1996 plus (ii) 100% of the net
increase in Consolidated Tangible Net Worth occurring after July 1, 1996
resulting from the issuance of equity securities of the Borrower after July 1,
1996."
C. Section 6.02(c) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(c) Leverage Ratio. Permit the Leverage Ratio on the last day of each
of the fiscal quarters of the Borrower to be greater than the correlative amount
set forth below:
Quarter Ending Ratio
-------------- -----
September 30, 1996 1.00:1.00
December 31, 1996 1.05:1.00
March 31, 1997 1.05:1.00
June 30, 1997 1.05:1.00
September 30, 1997 1.00:1.00
December 31, 1997 0.90:1.00
March 31, 1998 0.85:1.00
June 30, 1998 0.80:1.00
September 30, 1998 and thereafter 0.75:1.00"
2
<PAGE> 3
D. Section 6.02(d) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(d) Consolidated Net Income.
(i) Permit Consolidated Net Income to be less than $0 for any
two consecutive fiscal quarters beginning on or after April 1, 1997 calculated
as of the last day of each fiscal quarter of the Borrower; and
(ii) Permit the net losses on the last day of each fiscal
quarter of the Borrower to be greater than the correlative amount below:
Amount of Loss
Quarter Ending Not to Exceed
-------------- --------------
September 30, 1996 $65,000,000
December 31, 1996 $20,000,000
March 31, 1997 $10,000,000"
E. Section 6.02(h)(i) of the Credit Agreement is hereby
amended by inserting the phrase "and current maturities of all existing Debt of
the Borrower" after the words "Revolving Loans" and before the words "by at
least One Hundred Million Dollars ($100,000,000),".
F. Section 6.02(o) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(o) Operating Performance Ratio. Commencing the fiscal quarter
beginning October 1, 1996, permit, as of the last day of each of the fiscal
quarters of the Borrower, the ratio of (i) Annualized Consolidated Cash Flow as
of such date to (ii) the sum of (A) the current portion of long term debt
(determined for the Borrower and its consolidated Subsidiaries in accordance
with GAAP) as of such date, plus (B) the aggregate Revolving Loans outstanding
on such date, plus (C) four (4) multiplied by Consolidated Interest Expense for
the fiscal quarter ending on such date, to be less than 2.50 to 1.00."
1.2 AMENDMENTS TO EXHIBITS
A. Annex 1 to the Credit Agreement is hereby amended in its
entirety and replaced with the Annex 1 attached hereto.
B. Exhibit E to the Credit Agreement is hereby amended in its
entirety and replaced with the Exhibit E attached hereto.
3
<PAGE> 4
SECTION 2. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of September 29,
1996, (the First Amendment Closing Date") only upon the satisfaction of the
conditions precedent that:
(i) the Agent shall have received for each Bank counterparts
hereof duly executed on behalf of the Borrower, the Agent, and all of the Banks,
or notice of the approval of this Amendment by all of the Banks satisfactory to
the Agent;
(ii) Borrower and each of those parties to whom Borrower has
issued a Senior Note shall enter into an agreement, effective on or before the
First Amendment Closing Date, modifying each of the Senior Notes to provide for
substantially the same terms and conditions as provided in this Amendment;
(iii) Borrower and each of those parties to the Revolver shall
enter into an agreement, effective on or before the First Amendment Closing
Date, modifying the Revolver to provide for substantially the same terms and
conditions as provided in this Amendment;
(iv) Borrower shall have delivered to the Agent copies of all
amendments to its by-laws dated on or after June 28, 1996;
(v) on or before October 15, 1996, the Agent shall have
received from the Borrower executed copies of the Term Notes dated October 15,
1996, payable to each of the Banks in amounts reflecting their respective
Commitments; and
(vi) on or before October 15, 1996, each of the New Lenders
shall have paid to the Agent an amount equal to their respective pro rata share
of the Term Commitment of all Term Loans outstanding as of October 15, 1996, and
the Agent shall have paid to each of the Existing Lenders such amounts in
proportion to their respective Term Commitments, such that when all such
transfers have been completed, the outstanding Term Loans of each Lender will be
in proportion to its pro rata share of its respective Term Commitment as of
October 15, 1996. In addition, on or before October 15, 1996, the Agent shall
have paid to each New Lender any fees as separately agreed to between Agent and
each such New Lender.
SECTION 3. THE BORROWER'S REPRESENTATIONS AND
WARRANTIES
In order to induce the Banks to enter into this Amendment and
to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to each Bank that the following statements are true,
correct and complete:
4
<PAGE> 5
A. CORPORATE POWER AND AUTHORITY. The Borrower has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "Amended Agreement").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of the Borrower.
C. NO CONFLICT. The execution and delivery by the Borrower of
this Amendment do not and will not contravene (i) any law or any governmental
rule or regulation applicable to the Borrower or any of its Subsidiaries, (ii)
the Certificate of Incorporation or Bylaws of the Borrower, (iii) any order,
judgment or decree of any court or other agency of government binding on the
Borrower or any of its Subsidiaries or (iv) any material agreement or instrument
binding on the Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by the
Borrower of this Amendment and the performance by the Borrower of the Amended
Agreement do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended
Agreement have been duly executed and delivered by the Borrower and are the
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except in each case as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium or other similar laws of general application and
equitable principles relating to or affecting creditors' rights.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Article V of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Closing Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
5
<PAGE> 6
SECTION 4. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN AGREEMENTS.
(i) On and after the First Amendment Closing Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Agreements to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Agreements shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Bank under, the Credit Agreement or any
of the other Loan Agreements.
B. FEES AND EXPENSES. The Borrower acknowledges that all
costs, fees and expenses as described in Section 9.05 of the Credit Agreement
incurred by the Agent and its counsel with respect to this Amendment and the
documents and transactions contemplated hereby shall be for the account of the
Borrower.
C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
BORROWER:
READ-RITE CORPORATION
By: /s/ John T. Kurtzweil
-----------------------------
Title: V.P. Finance & CFO
-----------------------------
S-1
<PAGE> 8
AGENT:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY, AS
AGENT
By: /s/ James E. Anderson
-----------------------------
Title: Senior Agent
-----------------------------
S-2
<PAGE> 9
BANKS:
CIBC INC.
By: /s/ James E. Anderson
-------------------------------
Title: Managing Director
----------------------------
THE FIRST NATIONAL BANK OF
BOSTON
By: /s/ Lee A. Merkle
-------------------------------
Title: Vice President
----------------------------
ABN AMRO BANK N.V.
By: /s/ Tom R. Wagner
-------------------------------
Title: V.P. & Director
----------------------------
By: /s/ Robert Hartinger
-------------------------------
Title: S.V.P. & Managing Director
----------------------------
WELLS FARGO BANK
By: /s/ John Adams
-------------------------------
Title: V.P.
----------------------------
S-3
<PAGE> 1
EXHIBIT 11.1
READ-RITE CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)........................................ $(42,986) $123,565 $ 19,694
======== ======== ========
Weighted average common shares outstanding............... 46,755 45,951 44,257
Common equivalent shares issuable under dilutive stock
options after applying treasury stock method, net of
tax benefits........................................... -- 1,665 1,868
-------- -------- --------
Common and common equivalent shares used in computing net
income (loss) per share................................ 46,755 47,616 46,125
======== ======== ========
Net income (loss) per share.............................. $ (0.92) $ 2.60 $ 0.43
======== ======== ========
</TABLE>
51
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries
<TABLE>
<CAPTION>
Subsidiary Parent
- ---------- ------
<S> <C>
Read-Rite International Read-Rite Corporation
Read-Rite (Malaysia) Sdn. Bhd Read-Rite International
Read-Rite (Thailand) Co., Ltd. Read-Rite Corporation
Sunward Technologies, Inc. Read-Rite Corporation
Sunward Technologies, California Sunward Technologies, Inc.
Sunward Technologies International
Limited, Hong Kong Sunward Technologies, Inc.
Sunward Technologies Philippines, Inc. Sunward Technologies International
Limited, Hong Kong
Read-Rite SMI Corporation Read-Rite Corporation (majority ownership)
Read-Rite SMI (Thailand) Co., Ltd. Read-Rite SMI Corporation
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-45085, 33-58906, 33-83760, 33-90842 and 333-4064)
pertaining to the Read-Rite Corporation Amended and Restated 1987 Stock Option
Plan and 1991 Director Option Plan, the Read-Rite Corporation Employee Stock
Purchase Plan, the Read-Rite Corporation Employee 401(k) Retirement Savings
Plan, Sunward Technologies, Inc. 1991 Incentive Stock Option Plan, Sunward
Technologies, Inc. 1990 Directors' Warrant Plan, the Read-Rite Corporation 1995
Stock Plan and the Read-Rite Corporation Years of Service Plan of our report
dated October 21, 1996 (except for Note 11, for which the date is December 11,
1996), with respect to the consolidated financial statements and schedule of
Read-Rite Corporation included in the Annual Report (Form 10-K) for the year
ended September 30, 1996.
/s/ Ernst & Young LLP
San Jose, California
December 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 29, 1996 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 29, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000819480
<NAME> READ-RITE CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1995
<PERIOD-END> SEP-29-1996
<EXCHANGE-RATE> 1
<CASH> 82,291
<SECURITIES> 65,655
<RECEIVABLES> 92,728
<ALLOWANCES> 2,586
<INVENTORY> 58,005
<CURRENT-ASSETS> 310,055
<PP&E> 834,852
<DEPRECIATION> 267,558
<TOTAL-ASSETS> 908,672
<CURRENT-LIABILITIES> 196,096
<BONDS> 172,037
0
0
<COMMON> 5
<OTHER-SE> 453,794
<TOTAL-LIABILITY-AND-EQUITY> 908,672
<SALES> 991,118
<TOTAL-REVENUES> 991,118
<CGS> 887,464
<TOTAL-COSTS> 887,464
<OTHER-EXPENSES> 95,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,897
<INCOME-PRETAX> 3,916
<INCOME-TAX> 34,582
<INCOME-CONTINUING> (42,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,986)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
