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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997*
Commission file number: 0-19512
READ-RITE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2770690
(State of incorporation) (I.R.S. Employer Indentification No.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 262-6700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
RIGHTS TO PURCHASE SERIES A PARTICIPATING PREFERRED STOCK
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in 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]
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 28, 1997) was $918,489,389. 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 28, 1997 was 48,308,286.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be held February 24, 1998 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 Sunday closest to
September 30th.
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FORWARD LOOKING INFORMATION
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Certain statements in this Annual Report on Form 10-K for Read-Rite Corporation
("Read-Rite" or the "Company") 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 expectation that the trend towards increased demand
for higher performance disk drive products is expected to continue for the
foreseeable future; the Company's expectation that MR products will account for
the substantial majority of the Company's net sales during fiscal 1998; the
Company's expectation that HSAs will represent greater than 85% of net sales
during fiscal 1998; the Company's expectation that MR head manufacturing yields
will increase during fiscal 1998; the Company's plan to continue increasing its
research and development expenditures; the Company's expectation that selling,
general and administrative expenses will not increase significantly in the
near-term; the Company's plan to spend between approximately $250 million and
$300 million on capital expenditures during fiscal 1998; the Company's belief
that its liquid assets, credit facilities and cash generated from operations
will be sufficient to fund its operations during fiscal 1998; and the Company's
belief that the Company and the individual defendants in the purported class
actions (collectively, the "Actions") described in Part I, Item 3 "Legal
Proceedings," have meritorious defenses in such Actions. 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 include, but are not limited to; failure to meet forecasted
expenditures, failure by the Company to timely, effectively and continuously
execute on MR product development; failure to obtain necessary customer
qualifications on new programs, failure to timely and cost-effectively introduce
those programs into manufacturing, and failure to achieve and maintain
acceptable production yields on those programs; competitors introducing products
more quickly or cost effective than the Company; constraints on supplies of raw
materials or components limiting the Company's ability to maintain or increase
production; significant increases or decreases in demand for the Company's
products, cancellation or rescheduling of customer orders, changes to the
Company's product mix, and changes in business conditions affecting the
Company's financial position or results of operations which significantly
increase the Company's working capital needs; the Company's inability to obtain
or generate sufficient capital to fund its research and development expenses and
other working capital needs; or failure by the Company to obtain favorable
resolution of the claims set forth in the Actions. For a more detailed
discussion of certain risks associated with the Company's business, see "Certain
Additional Business Risks." The Company undertakes no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of such statements.
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PART I
ITEM 1. BUSINESS
GENERAL
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Read-Rite Corporation ("Read-Rite" or the "Company") is the world's largest
independent supplier of magnetic recording heads for rigid disk drives. The
Company operates in a single industry segment by designing, manufacturing and
marketing magnetic recording heads as head gimbal assemblies ("HGAs") and
incorporating multiple HGAs into headstack assemblies ("HSAs"). Read-Rite's
products are sold primarily for use in 3.5" form factor rigid disk drives. The
Company also supplies magnetoresistive ("MR") heads for quarter-inch cartridge
("QIC") tape drives. Read-Rite believes it supplies HGAs and HSAs for a broader
range of disk drive products than any other independent supplier.
During fiscal 1997, the Company supplied HGAs in volume for 37 different disk
drive products to 6 customers, and supplied HSAs in volume for 52 different disk
drive products to 3 customers. In comparison, 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.
During fiscal 1997, the Company sold approximately 106.8 million HGAs (including
HGAs incorporated into HSAs), and approximately 16.4 million HSAs. HGAs and HSAs
accounted for approximately 98% of the Company's net sales during fiscal 1997.
Read-Rite also produces thin film MR tape heads for use in QIC tape drives in
the 1.6 gigabyte ("GB") to 4GB range per cartridge. During fiscal 1997, the
Company supplied QIC tape heads in volume for 12 different tape drive products
to 6 customers. Tape heads accounted for approximately 2% of the Company's net
sales during fiscal 1997.
The Company's net sales to its largest customers during fiscal 1997 and fiscal
1996 were as follows (as a percentage of net sales):
<TABLE>
<CAPTION>
CUSTOMERS 1997 1996
- --------- ------------- -------------
<S> <C> <C>
Western Digital Corporation ("Western Digital") 51% 43%
Quantum Corporation ("Quantum") 18% 29%
Maxtor Corporation ("Maxtor") 13% 12%
All Others 18% 16%
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100% 100%
============= =============
</TABLE>
The Company's principal wafer manufacturing facilities are located in Fremont,
California, and at its headquarters in Milpitas, California. The Company has its
primary slider fabrication and HGA assembly facilities in Bangkok, Thailand, and
its primary HSA assembly facilities in Penang, Malaysia and Manila, the
Philippines. The Company also has sales and customer support offices in
Singapore and Longmont, Colorado. The Company manufactures wafers for tape heads
at its Milpitas facility, subcontracts device fabrication to a third party
subcontractor in China and performs further fabrication assembly and test
operations in the Philippines. 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 to the Company's Thailand subsidiary
(Read-Rite (Thailand) Co., Ltd. or "RRT"), subcontracts HGA assembly to RRT and
to Read-Rite SMI's own Thailand subsidiary, Read-Rite SMI (Thailand) Co., Ltd.
("RRST"), and sells finished HGAs primarily to Japanese customers.
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."
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COMPANY STRATEGY
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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. From fiscal
1994 to the end of fiscal 1996, the capacity for a single disk, 3.5" drive
increased from approximately 270 megabytes ("MB") to greater than 1GB. During
fiscal 1997, the capacity for a single disk, 3.5" drive typically ranged between
1GB and 4GB for desktop computers, which make up the majority of the recording
head market, and between 2GB and 9GB for high end computers. 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
closely with its customers as well as media, channel electronics and equipment
suppliers to ensure critical co-development projects proceed in a timely manner.
The Company must also continually design new product platforms to accommodate a
broad range of customer requirements while efficiently utilizing engineering
efforts and minimizing 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 in
order to become a primary supplier.
Throughout fiscal 1997, 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. The Company has business
units to provide dedicated customer support 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 short, medium and long-term
strategies for achieving those specifications. This customer focus and close
collaboration helps facilitate early design-in wins and improves the Company's
ability to timely reach volume production.
In response to the disk drive market's demand for higher performance products,
the Company has and continues to aggressively pursue a range of new and emerging
technologies to increase the areal density capability of its products. Areal
density is a measure of storage capacity per square inch on the recording
surface of a disk. For ease of reference, this measure is commonly converted to
megabytes or gigabytes per 3.5" disk. Early in fiscal 1997, the Company
successfully ramped significant production volumes of advanced inductive
recording heads enabling storage capacities of 1GB per 3.5" disk, and followed
with volume production later in the year of advanced inductive heads at 1.3GB
per 3.5" disk. During the year the Company sold approximately 81.6 million
inductive HGAs (including HGAs incorporated in HSAs), generating $881 million in
net sales from inductive products.
During fiscal 1997, the Company also successfully executed its primary strategic
objective of becoming a significant merchant market supplier of MR HGAs and
HSAs. MR heads consist of thin film inductive write structures and MR read
structures that take advantage of magnetic properties in certain metals to
achieve significantly higher storage capacities. The Company began the year with
production of MR heads at 1.3GB per 3.5" disk, and subsequently introduced MR
heads at 1.75 GB per 3.5" disk, which represented the majority of the Company's
MR production at fiscal year end. During the second half of the year, the
Company achieved several major design-in wins with its MR heads at 2.1GB per
3.5" disk, and began volume production of these products by year end. The
Company has also sampled its MR head products at 2.8-3.0GB per 3.5" disk. During
fiscal 1997, the Company sold approximately 24.0 million MR HGAs (including HGAs
incorporated in HSAs) to 4 customers, increasing net sales of MR products to
$279.8 million, compared to net sales of MR products of $34.2 million during
fiscal 1996. Responding to the industry's rapid shift to MR technology, during
the first quarter of fiscal 1998 the Company announced plans to accelerate its
existing MR transition strategy and to significantly reduce its production of
advanced inductive products. As a result, the Company expects that MR products,
which accounted for approximately 24% of the Company's net sales during fiscal
1997, will account for the substantial majority of net sales during fiscal 1998.
Reflecting this accelerated transition, the Company has announced that it
expects to take a non-recurring charge of up to $30 million during the first
quarter of fiscal 1998 related to obsolete fixed assets and excess inventory
associated with end-of-life inductive products.
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The Company's goal is to continue to strive for technology leadership through
significant investments in research and development, intensified efforts on MR
platforms, and continued efforts to attract, develop and retain high quality
technical and management talent. Further, the Company will strive for
operational excellence in wafer fabrication, slider fabrication, manufacturing
yields, manufacturing processes and costs, and management processes and supplier
relationships. This focus will be important to the Company's ability to achieve
steep production ramps to high volumes while maintaining flexibility and low
costs. There can be no assurance that the Company will be successful in
attaining these goals.
PRODUCTS
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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. Rigid disk drives are
used in computer systems to record, store and retrieve digital information. Most
computer applications require access to a greater volume of data than can
economically be stored in the random access memory of the computer's central
processing unit (commonly known as "semiconductor" memory). This information can
be stored on a variety of storage devices, including rigid disk drives, both
fixed and removable, flexible disk drives, magnetic tape drives, optical disk
drives and semiconductor memory. Rigid disk drives currently provide access to
large volumes of information faster than optical disk drives, flexible disk
drives or magnetic tape drives and at substantially lower cost than high-speed
semiconductor memory.
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. QIC tape drives are
peripheral hardware devices which enable low cost storage and protection of
large volumes of data through the use of small tape cartridges. Computer systems
of all types increasingly need dedicated backup storage peripherals that combine
high capacity, high performance, reliability and low cost.
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 37 different disk drive products to 6 customers
during fiscal 1997, as HGAs accounted for approximately 31% of the Company's net
sales for the year. During fiscal 1997, the Company manufactured in volume two
types of heads for rigid disk drives: inductive thin film and MR thin film.
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.
MR thin film 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. As of
November 1997, the Company was producing in volume MR thin film heads at areal
densities of up TO 2.1GB per 3.5" disk.
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.
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The Company supplied inductive thin film and MR thin film HSAs in volume for 52
different disk drive products to 3 customers during fiscal 1997. HSAs accounted
for approximately 67% of the Company's net sales during fiscal 1997, compared to
57% of the Company's net sales during fiscal 1996. The Company expects this
trend to continue, with HSAs expected to represent greater than 85% of total net
sales during fiscal 1998.
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 1.6GB to 4GB range per cartridge. During fiscal 1997, the Company supplied
QIC tape heads in volume for 12 different tape drive products to 6 customers.
Tape heads accounted for approximately 2% of the Company's net sales for the
year. The Company's largest tape head customers during fiscal 1997 were Colorado
Memory Systems (a subsidiary of Hewlett-Packard), Seagate and Exabyte
Corporation.
MANUFACTURING
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Read-Rite's operating results are highly dependent upon its ability to produce
large volumes of magnetic recording heads at acceptable manufacturing 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, assembly and
testing.
WAFER FABRICATION
The Company presently fabricates wafers at its Fremont and Milpitas, 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 6,500 to over 14,260 nanosliders, and
during fiscal 1997 produced approximately 41% of the Company's total slider
output. During fiscal 1997 and continuing in fiscal 1998, the Company has and
will continue to transition its wafer fabrication facilities to MR technology in
order to meet the specifications and demand for increased production of MR
products, as inductive products reach end-of-life. The Company's Fremont
facility will serve as the primary wafer supply for MR products during this
transition period, with the Milpitas facility serving as the primary wafer
supply for inductive products. As inductive products reach end-of-life during
fiscal 1998, the Milpitas facility will transition to MR production.
SLIDER FABRICATION/WAFER SLICING
The Company machines or slices wafers (other than for prototypes) primarily at
RRT's and RRST's Thailand facilities. 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. 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 example: 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.
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HSA ASSEMBLY AND TESTING
The Company assembles substantially all of its HSAs (other than prototypes) at
its facilities in Malaysia and the Philippines. HSAs can 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 continues to make 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 continue to 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 manufacturing
yields and to improve productivity. Additionally, the Company has experienced
lower manufacturing yields and higher costs during the production of MR HSAs in
comparison to inductive HSAs primarily due to the process learning curve
associated with the introduction of the newer technology. As the Company
continues to advance along the process learning curve as it relates to MR head
and HSA production, manufacturing yields are expected to increase during fiscal
1998. There can be no assurance that the Company will be able to achieve
component cost levels, manufacturing yields and productivity levels necessary to
achieve adequate MR 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 subsequently
sliced into individual elements by a subcontractor 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 performs all of
its tape head assembly operations at its facilities in the Philippines.
CUSTOMERS, MARKETING AND SALES
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The Company's largest customers during fiscal 1997 were Western Digital,
Quantum, and Maxtor, representing 51%, 18%, and 13%, respectively, of the
Company's net sales for the period. Given the small number of high performance
disk drive and QIC tape drive manufacturers who require an independent source of
HGA, HSA or tape head supply, the Company expects its dependence on a relatively
limited number of customers to continue. Moreover, customers in the disk drive
industry have been increasingly moving towards limiting their number of
suppliers of recording heads per program, as well as focusing their own efforts
on fewer, larger new programs. Thus, the Company expects it will be increasingly
important to successfully achieve design-in wins for all programs for its
primary customers. As a result, the loss of any customer, a significant decrease
in orders from one or more large customers, or the failure to achieve a
design-in win or wins on particular customer programs would have a material
adverse effect on the Company's business, financial condition and results of
operations.
For example, on November 10, 1997, the Company learned that Singapore
Technologies, Pte. Ltd. ("Singapore Technologies") intended to liquidate
Micropolis Ltd. ("Micropolis"), a wholly-owned Singapore Technologies
subsidiary. Immediately prior to this unexpected announcement, the Company had
anticipated that Micropolis would account for approximately 1.5% of the
Company's net sales during the first quarter of fiscal 1998. As required by
generally accepted accounting principles, the Company has taken a post-closing
charge of $14.8 million to establish a reserve for Micropolis related accounts
receivable, inventories and equipment exposures during the fourth quarter of
fiscal 1997. See Note 15 in "Notes to Consolidated Financial Statements." In
addition, Read-Rite SMI has not been qualified on Quantum/Matsushita Kotobuki
Electronics'("MKE") 2.1GB/disk MR programs. Accordingly, Quantum/MKE will not
represent a significant percentage of the Company's net sales during the first
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three quarters of fiscal 1998, materially and adversely affecting the business,
financial condition and results of operations of Read Rite SMI and thus the
Company. For a discussion of additional risk factors associated with the
Company's customer base, see "Certain Additional Business Risks."
During fiscal 1997, the Company sold prototype and some production level
shipments from its headquarters located in Milpitas, California. All other sales
to customers, exclusive of Read-Rite SMI sales, were conducted by the Company's
wholly-owned subsidiary, Read-Rite International, through its Singapore branch.
Read-Rite SMI sells to Japanese customers from its facility near Osaka, Japan.
The Company also maintains a sales support office in Longmont, Colorado. Foreign
net sales accounted for 98%, 95% and 97% of net sales during fiscal 1997, 1996
and 1995, respectively. See Note 13 in "Notes to Consolidated Financial
Statements."
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 involves 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 properly assess 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 volume disk drive programs and the
shorter life cycles of such products. Failure by the Company to execute
consistently on product design-ins has and may continue to have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
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The disk drive industry is intensely competitive, both at the drive level and
the component level, and is characterized by short product life cycles and
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 with respect to any of these
factors would likely have a material adverse effect on the Company's net sales
and gross margin.
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. The Company's primary domestic competitors are International
Business Machines Corporation ("IBM"), Applied Magnetics Corporation ("AMC"),
and Seagate Technology, Inc. ("Seagate"). IBM, Seagate, Quantum and other disk
drive manufacturers with "captive" or internal recording head manufacturing
capability 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. In recent years, Seagate has been the
Company's primary competitor among captive head manufacturers. However, IBM made
a series of announcements in 1997 regarding its plans to make substantial
investments to expand its disk drive and disk drive components business by
selling to original equipment manufacturers ("OEM"). During September 1997, IBM
announced that it was an OEM supplier to three MR head customers. Other MR
suppliers include Alps Electric, Headway Technologies, Sony, Hitachi Metals,
Toshiba and Sanyo. The Company's competitive position could be materially and
adversely affected if one or more of these competitors is successful in
marketing advanced MR products in the merchant market in volume quantities 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, AMC, Tandon, Kabool and Kaifa. The HSA business is less capital
intensive than the thin film HGA business, thus entry into the HSA manufacturing
business requires less capital than entry
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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, spin valve, or giant MR heads,
which the Company is currently developing, 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 inductive and MR
heads now in commercial production. Additionally, other manufacturers may
already have or may develop, more advanced MR technology or MR production
capability than the Company. For example, in a published announcement during
November, 1997, Sony, TDK, Yamaha, Alps, Toshiba and IBM have begun preparing or
expanding their manufacturing operations to make GMR heads. Also, certain
companies are developing alternative data storage technologies, such as
solid-state (flash or terroelectric) memory, optical disk drives or extensions
of MIG technologies, 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 manufacturing yields.
To address these issues, the Company has focused and will continue to focus on
technology advancements, customer satisfaction and cost efficiency. During
fiscal 1997, the Company continued development of improved process technologies,
including advanced photolithography processes, focused ion beam processes,
advanced sputtering techniques and equipment, slider fabrication processes and
implementation of such technologies as advanced surface preparation and coating
technologies and new tester technology. The Company is in its third generation
of sub-ambient (or negative) pressure air bearing contour designs and is
continuing development of additional thin film technological advances necessary
for higher performance rigid disk drives, including additional air bearing
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).
In addition to the Company's current focus on increasing the performance of its
"contiguous junction" MR heads, the Company is also pursuing longer-term
development to extend the areal density capabilities of MR heads, including
development of spin valve heads and other GMR heads.
During fiscal 1997, 1996 and 1995, the Company's research and development
expenses were $65.0 million, $52.2 million (which includes a $9.0 million charge
for the acquisition of planar technology) and $41.8 million (including a $2.4
million investment in Redwood MicroSystems Inc. and a $4.6 million write-off
associated with certain license rights acquired from KME, respectively).
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 offerings and customer base, the
Company has made several investments in new technologies.
The first investment was in magneto-optical data storage. During fiscal 1996,
the Company made a minority investment in Quinta Corporation ("Quinta"), a data
storage development company. During fiscal 1997, 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
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. In July 1997, Seagate
acquired 100% of the outstanding stock of Quinta. To date, Seagate's acquisition
of Quinta has not materially changed the Company's various agreements with
Quinta. However, Seagate has its own internal recording head capabilities and
substantially greater resources than the Company, and will likely become a
supplier of heads to Quinta in the near future, and thus a competitor of the
Company in this new technology. In addition, this new technology presents many
technical challenges and is thus subject to substantial risks.
The second investment was in advanced microinterconnect technology for use in
electronics packaging for semiconductors and to manufacture flex on suspension
("FOS") products to replace wires on certain of the Company's HGA products.
During fiscal 1996, the Company 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-
8
<PAGE> 10
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 fixed license fees and additional royalties, a license to
Tessera's assembly technology and processes. The Company is continuing product
and process development for both TCMT and FOS and is installing production
capacity for these products.
In the Company's tape head unit, the Company is pursuing development of a new
thin film planar head for consumer video applications. The tape head unit has
also launched development programs for certain customers of multichannel MR tape
heads in an effort to penetrate the digital linear tape drive market.
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.
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. See also "Certain Additional Business Risks" and
other risk factors discussed elsewhere in this report.
Accordingly, the Company does not believe its backlog is an accurate measure of
net sales or operating results for any future period. The Company's backlog of
purchase orders requesting delivery within six months was approximately $310.5
million as of September 30, 1997, compared to $194.8 million as of September 30,
1996.
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 during fiscal 1997
and fiscal 1996 were to MKE, a subcontractor to and partner of 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. More
recently, the Company and Read-Rite SMI amended their principal license
agreement to include additional technologies, including spin valve and GMR, and
to eliminate royalty provisions which were replaced by an ongoing cost sharing
arrangement allowing the parties to share equitably in their collective research
and development expenditures. Further investments in Read-Rite SMI beyond
current amounts are expected to be borne equally by the Company and Sumitomo.
The Company has retained a majority voting interest in Read-Rite SMI; however,
prior to the first quarter of fiscal 1998, all material corporate actions
required a supermajority vote of Read-Rite SMI's Board of Directors, and thus
the consent of both the Company and Sumitomo. During the first quarter of fiscal
1998, the Company and Sumitomo revised their various agreements and RRSMI's
charter documents to provide for a simple majority vote of the Board of
Directors of Read-Rite SMI on all matters except for certain non-ordinary course
of business matters requiring a supermajority. In the case of a shareholder vote
generally or due to the lack of the required vote by the Board of Directors, a
simple majority shareholder vote is required.
As a result of the June 1991, December 1993 and September 1996 transactions, the
Company and Read-Rite SMI have cross-licensed all of their respective inductive
thin film, MR, spin valve, and GMR technologies 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.
9
<PAGE> 11
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 Quantum/MKE,
or that Read-Rite SMI will be successful in further penetrating the Japanese
market. For example, though Read-Rite SMI was a supplier for Quantum/MKE on
certain previous MR programs, Read-Rite SMI is not currently a supplier on
Quantum/MKE's 2.1GB per 3.5" disk programs. Though Read-Rite SMI will continue
to seek qualification on Quantum/MKE's 2.5GB per 3.5-inch disk programs due for
production in the third quarter of fiscal 1998, there can be no assurance that
Read-Rite SMI will be successful in regaining market share at Quantum/MKE. The
failure of Read-Rite SMI to participate in future Quantum/MKE programs or to
obtain additional customers has had and may continue to 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 more than 60 patents with
expiration dates ranging from 2002 to 2017, and additional applications pending.
In addition, Read-Rite has a variety of licenses and cross-licenses with other
companies within the industry such as IBM, Seagate and TDK 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. 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, 1997, the Company had 23,107 employees, including 2,272 in
the United States, 11,886 in Thailand, 4,496 in Malaysia, 4,110 in the
Philippines, 319 at Read-Rite SMI, and 24 at the Company's sales and customer
support offices in Singapore. Read-Rite believes its future success will depend
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 currently 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.
10
<PAGE> 12
The Company uses a significant amount of water in its manufacturing process.
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.
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.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in its quarterly and annual
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 manufacturing 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 or execution issues 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, during the first quarter of fiscal 1998,
during 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 or are expected to reduce net sales and gross margin. The Company
expects periodic fluctuations will occur in the future.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; RISK OF REDUCED ORDERS
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 steady price erosion. In addition,
as demonstrated during the second half of 1996 when significant orders were
canceled and/or rescheduled by certain customers with little or no advance
warning, demand for the Company's products is highly variable and thus difficult
to predict accurately. 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. Further, during November 1997,
the Company responded to the disk drive industry's continuing rapid shift to MR
technology and accelerated implementation of its existing strategies to
transition fully to MR production, and reduced its build plan for its advanced
inductive thin film 1.3GB per 3.5 inch disk recording head product due to a
significant reduction in demand for this product. The Company's 1.3GB per 3.5
inch advanced inductive head products are Read-Rite's last generation inductive
products. See Note 15 in "Notes to Consolidated Financial Statements." In each
case, these demand variations materially and adversely affected the Company's
business, financial condition and results of operations.
The Company's largest customers are Western Digital, Quantum and Maxtor,
representing 51%, 18% and 13%, respectively, of the Company's net sales during
fiscal 1997. The Company produced HGAs in volume for 6 customers, HSAs in volume
for 3 customers and tape drive products in volume for 6 customers during fiscal
1997. Given the small number of high performance 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 reductions in orders for advanced inductive products in the
first quarter of fiscal 1998, 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. Further, the unexpected
November 10, 1997 announcement of the liquidation of Micropolis resulted in
post-closing charges of $12.2 million to selling, general and administrative
expense and $2.6 million to cost of sales during the fourth quarter of fiscal
1997 to establish a reserve for Micropolis-related accounts receivable,
inventory and equipment exposures. At the time of the announced Micropolis
bankruptcy, the Company expected Micropolis to account for approximately 1.5% of
the Company's net sales during the first quarter of fiscal 1998.
11
<PAGE> 13
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 during fiscal 1995, completed the acquisition
of Conner Peripherals, Inc., then a major customer of the Company during fiscal
1996, and completed the acquisition of Quinta Corporation, the Company's sole
customer for its magneto-optical head development effort, during August 1997.
Seagate has significant internal disk and tape head manufacturing capacity and
does not presently account for a material percentage of the Company's net sales.
Further, Hyundai completed its acquisition of Maxtor during fiscal 1996. While
the Company has remained a supplier to Maxtor notwithstanding the change in
ownership, there can be no assurance that this customer will continue purchasing
a significant quantity of its head requirements from the Company or that Hyundai
will continue to fund Maxtor if necessary.
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. In May 1997,
Quantum further announced the formation of a joint venture with its primary
manufacturing partner in Japan, MKE, to manufacture MR recording heads for rigid
disk drives. According to the announcement, this new venture took over Quantum's
existing recording heads operations and is owned 51% by MKE. Though the Company
believes its primary issues at Quantum are external competition and Company
execution, it cannot assess accurately the effect the Quantum/MKE joint venture
will have on the Company's head operations in the future, and there can be no
assurance that the Company will successfully regain market share at Quantum in
the near future, if at all. 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.
RAPID TECHNOLOGICAL CHANGE; TRANSITION TO MR TECHNOLOGY
Technology changes rapidly in the Company's industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new 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.
In addition, during the second quarter of fiscal 1996, the Company learned that
to participate in certain customer programs, the Company's products would have
to incorporate a technical feature which the Company called "undershoot
reduction." Though the Company began development of necessary processes for
undershoot reduction in the second quarter of fiscal 1996 and successfully
reached volume production during the fourth quarter of fiscal 1996, the
significant start-up costs and delays in new product introductions materially
and adversely impacted both the Company's net sales and gross margin during the
second half of fiscal 1996.
More recently, in November 1997, the Company responded to the disk drive
industry's continuing rapid shift to MR technology by accelerating
implementation of its existing strategies to transition fully to MR production
while reducing its build plan for its advanced inductive thin film 1.3GB per 3.5
inch disk recording head product due to a significant reduction in demand for
this product. In connection with such advanced inductive demand and the
accelerated transition to MR, the Company expects to take non-recurring charges
associated with inductive technologies of up to $30 million during the first
quarter of fiscal 1998 and that its first quarter of fiscal 1998 net sales and
earnings will be lower than those reported for the fourth quarter of fiscal
1997. See Note 15 in "Notes to Consolidated Financial Statements." The Company's
1.3GB per 3.5 inch advanced inductive head products are Read-Rite's last
generation inductive products.
During fiscal 1997, the Company's primary net sales were derived from thin film
inductive and MR products, which require substantial investments in product
development and manufacturing equipment and facilities 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 wafer fabrication, slider fabrication, HGA and HSA
technologies and facilities to meet industry demands, at competitive costs. As
the Company's customers continue to move towards fewer, larger programs, and as
competition for this increasingly limited number of large volume programs
continue to increase, 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.
12
<PAGE> 14
The Company shipped 24.0 million MR heads for 15 disk drive programs to 4
customers during fiscal 1997, accounting for approximately 24% of net sales
during the period. The Company intends to continue investing significant
resources in MR product development and manufacturing equipment to support the
continued rapid shift of its product mix to MR. There can be no assurance,
however, that the Company will be successful in timely and cost effectively
developing and manufacturing MR heads at acceptable manufacturing yields and as
necessary to achieve consistent design-in wins on new product programs.
SUBSTANTIAL CAPITAL EXPENDITURES AND WORKING CAPITAL NEEDS
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. 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 during fiscal 1997 of $272.8
million, compared to $265.8 million during fiscal 1996, and plans to spend
between approximately $250 million and $300 million during fiscal 1998. As of
September 30, 1997, total commitments for construction or purchase of capital
equipment were approximately $126 million. 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 during fiscal 1996, during the
latter half of fiscal 1993, and as is expected during the first quarter of
fiscal 1998, when net sales declined or are expected to decline quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
INTERNATIONAL OPERATIONS
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 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,
expiration of tax holidays, 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 during 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.
In addition, several Asian countries, including Japan, Thailand and the
Philippines, have recently experienced significant economic downturns and
significant declines in the value of their currencies relative to the US dollar.
Although the Company enters into foreign currency forward and option contracts
to manage exposure related to certain foreign currency commitments, certain
foreign currency denominated balance sheet positions and anticipated foreign
currency denominated expenditures and substantially all of the Company's foreign
sales are denominated in U.S. dollars, the Company is unable to predict what
effect, if any, these factors will have on its ability to maintain or increase
its sales or to manufacture products in these markets, or what economic effects
these factors will have upon general economic conditions, the drive industry, or
the Company's customers, and hence the Company.
COMPLEX MANUFACTURING PROCESSES
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss, and in some cases,
cause production to be suspended. Manufacturing 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 manufacturing yields; as a result,
material variances between projected and actual manufacturing yields have a
direct effect on the Company's gross margin and profitability. The difficulty of
forecasting manufacturing yields accurately and maintaining cost competitiveness
through improving manufacturing 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
13
<PAGE> 15
products on line faster and for shorter periods while maintaining acceptable
manufacturing yields and quality, without, in many cases, reaching the
longer-term, high volume manufacturing conducive to higher manufacturing yields
and declining costs.
DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS
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, photoresist, wires and suspensions 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.
INVENTORY RISKS
Due to the cyclical nature of and rapid technological change in the hard disk
drive industry, the Company's inventory is subject to substantial risk. To
address these risks, the Company monitors its inventories on a periodic basis
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 customer, 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 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 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, and as a result, its operating
results were materially and adversely affected. Additionally, the Company
experienced significant cancellations during the first quarter of fiscal 1998,
and as a result, expects its operating results will be materially and adversely
affected.
VOLATILITY OF STOCK PRICE
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.
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<PAGE> 16
EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The Company's executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Cyril J. Yansouni 55 Chairman of the Board of Directors and Chief Executive Officer
Alan S. Lowe 35 President and Chief Operating Officer
Michael A. Klyszeiko 58 Executive Vice President, Operations
Peter G. Bischoff 57 Executive Vice President, Opto Magnetic Division
James Murphy 38 Senior Vice President, Customer Business Units
John T. Kurtzweil 41 Vice President, Finance and Chief Financial Officer
Rex S. Jackson 37 Vice President, Business Development and General Counsel
Sherry F. McVicar 45 Vice President, Human Resources
</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 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, Raychem Corporation, a material sciences manufacturing company and
ActiveCard, Inc., a manufacturer of network access security systems.
Mr. Lowe has served as President and Chief Operating Officer since May 1997. 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. Mr. Lowe was Senior Vice President,
Customer Business Units, from October 1996 to March 1997. 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.
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. 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. Murphy has been Executive Vice President, Customer Business Units since
August, 1997. Mr. Murphy joined the Company in April 1991 as a Strategic
Accounts Manager. He was promoted to Director of Sales in Asia in 1993 and to
Vice President of Sales worldwide in 1995. Following the Company's
reorganization into customer business units in 1996, he was named Vice President
and General Manager for the Company's largest customer. Prior to joining the
Company, he held a variety of sales and marketing positions at IBM from 1982
through 1991. Mr. Murphy holds a B.S. degree in Finance from the University of
Santa Clara.
15
<PAGE> 17
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 joined 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. He is a Certified Public Accountant and also a Certified Management
Accountant.
Mr. Jackson has served as Vice President, Business Development and General
Counsel since April 1997. 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.
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.
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. In addition, 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 two facilities in Fremont, California of approximately
189,000 and 57,000 square feet, respectively, which primarily house wafer
fabrication and research and development facilities. The initial leases for
these facilities expire in February 2003 and April 2002, respectively, with
three 5-year renewal options and one 5-year renewal option, respectively. In
April 1996, the Company signed a three-year operating lease for a 23.5-acre
parcel of undeveloped land next to its larger Fremont facility. The Company
presently intends to construct a 100,000 square foot administrative and research
and development facility on the 23.5-acre parcel, with completion scheduled for
late calendar 1998. Additional office, manufacturing and support facilities may
also be constructed at this site over the next several years. The Company also
leases a 40,000 square foot facility in San Jose, California which houses the
Company's tape head unit, opto magnetic development unit, and microinterconnect
products unit. 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, 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
manufacturing facility adjacent to RRT's existing facilities. In addition, the
Company leases a 20,000 square foot warehouse facility in Thailand; the lease
for this facility expires in October 1998.
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 1998.
The Company owns a 6.5 acre site near Manila with a 150,000 square foot
manufacturing facility. This property and certain additional collateral secure a
$12 million loan obtained from a bank in the Philippines. The Company has
entered into an agreement to construct an additional 150,000 square foot
facility on this 6.5 acre site during fiscal 1998. Furthermore, the Company has
purchased an approximately 5.3 acre parcel of land for manufacturing purposes
adjacent to the 6.5 acre site. The Company also has two leased facilities of
approximately 108,000 and 24,000 square feet, in Manila; these leases expire in
16
<PAGE> 18
1999 and 1997, respectively. As a result of MIG products reaching end-of-life,
the larger facility was shut down during the fourth quarter of fiscal 1996. The
Company has an option to purchase this facility at the lease expiration in 1999.
The smaller facility houses the Company's tape head manufacturing operations.
Read-Rite SMI leases from Sumitomo an approximately 92,000 square foot wafer
fabrication and research and development office facility near Osaka, Japan. This
lease expires in 2001.
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 1998.
ITEM 3. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 - January
22, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. On May 20, 1997, the
Superior Court entered an order (1) sustaining the demurrers of certain
defendants to the California Corporations Code cause of action, and overruling
the demurrers of Read-Rite Corporation and certain other defendants to that same
cause of action; and (2) sustaining the demurrers of all defendants as to the
remaining causes of action.
On January 17, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On January 21, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Edward McDaid
against the Company and certain of its officers and directors (the "McDaid
Federal Action"). The McDaid Federal Action alleges that defendants made false
and misleading statements about the Company's business condition and prospects
during a purported class period of July 19, 1995 - June 19, 1996, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the McDaid Federal Action seek damages of
an unspecified amount. The Ferrari Federal Action and the McDaid Federal Action
were consolidated into one action by the court, In re Read-Rite Corp. Securities
Litigation (the "Consolidated Action").
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, 1996 - June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On June 6, 1997, plaintiffs in the McDaid Federal Action moved to dismiss their
complaint. On June 23, 1997, defendants moved to consolidate the Nevius Federal
Action with the Consolidated Action. On July 18, 1997, the named plaintiffs in
the Nevius Federal Action moved to be appointed lead plaintiffs and to have
their counsel appointed lead counsel. These three motions are pending.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes it has meritorious
defenses to all four of these actions, and intends to defend each of them
vigorously.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions. Accordingly, both on its
own behalf and pursuant to indemnification agreements between the Company and
the named individual defendants, the Company intends to continue to defend each
of these actions vigorously. Failure by the Company to obtain a favorable
resolution of the claims set forth in any of these actions could have a material
adverse effect on the Company's business,
17
<PAGE> 19
results of operations and financial condition. Currently, the amount of such
material adverse effect cannot be reasonably estimated.
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.
18
<PAGE> 20
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, 1997
First Quarter $ 26-3/8 $ 15-3/8
Second Quarter 33-1/8 24-7/8
Third Quarter 32-5/8 19-7/8
Fourth Quarter 29 19-7/8
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
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
</TABLE>
At November 28, 1997, there were approximately 42,000 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 cash 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>
1997 (1) 1996 (2) 1995 1994 (3) 1993 (4)
---------- --------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales $1,162,050 $ 991,118 $1,003,040 $638,589 $587,647
Gross margin 238,806 103,654 264,040 93,193 87,888
Operating Income 119,713 7,789 177,846 31,836 3,156
Net income (loss) 76,179 (42,986) 123,565 19,694 6,283
Primary earnings per 1.56 (0.92) 2.60 0.43 0.14
share
Total assets $1,301,481 $ 908,672 $ 939,457 $630,592 $553,010
Long-term obligations 403,871 172,037 137,406 52,414 52,065
</TABLE>
(1) The fourth quarter of fiscal 1997 results include post-closing charges of
approximately $12.2 million to selling, general and administrative expense
and $2.6 million to cost of sales to establish a reserve for accounts
receivable, inventory and equipment exposures related to the bankruptcy of
Micropolis, a customer of the Company.
19
<PAGE> 21
(2) Fiscal 1996 includes severance, relocation and other charges of
approximately $11.2 million, research and development charges for the
acquisition of planar technology of approximately $9.0 million,
approximately $24.1 million for the write-down of capital assets,
approximately $7.0 million associated with end-of-life inventory and
approximately $0.7 million in other charges, for a total of $52.0 million
for the year.
(3) Fiscal 1994 includes merger costs of $2.4 million.
(4) Fiscal 1993 includes a restructuring charge of $29.5 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the Company as a
percentage of net sales for the three fiscal years ended September 30, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.4 89.5 73.7
----- ----- -----
Gross margin 20.6 10.5 26.3
Operating expenses:
Research and development 5.6 5.3 4.2
Selling, general and administrative 4.7 4.4 4.4
----- ----- -----
Total operating expenses 10.3 9.7 8.6
----- ----- -----
Operating income 10.3 0.8 17.7
Interest expense 1.4 1.3 0.5
Interest income and other, net 0.8 0.9 0.5
----- ----- -----
Income before provision for income taxes and 9.7 0.4 17.7
minority interest
Provision for income taxes 2.5 3.5 4.2
----- ----- -----
Income (loss) before minority interest 7.2 (3.1) 13.5
Minority interest in net income of consolidated
subsidiary 0.6 1.2 1.2
----- ----- -----
Net income (loss) 6.6 (4.3) 12.3
===== ===== =====
</TABLE>
NET SALES
The following tables set forth certain sales information for the Company's
largest customers and HGA / HSA product mix as a percentage of net sales, for
the three fiscal years ended September 30, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Customers
Western Digital 51% 43% 37%
Quantum 18% 29% 29%
Maxtor 13% 12% 11%
Seagate --- 8% 13%
All Others 18% 8% 10%
--- --- ---
100% 100% 100%
=== === ===
HGA / HSA Product Mix
HGA 31% 41% 50%
HSA 67% 57% 48%
All Others 2% 2% 2%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
20
<PAGE> 22
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales were $1,162.1 million during fiscal 1997, a 17.3% increase over net
sales of $991.1 million during fiscal 1996. During fiscal 1997, the Company
successfully executed on its advanced inductive products, and substantially
increased its production of MR products. Net sales of inductive products
increased approximately 10.3%, to $881 million during fiscal 1997 compared to
$799 million during fiscal 1996. Net sales generated from MR products increased
to $279.8 million during fiscal 1997 compared to $34.2 million during fiscal
1996. The overall increase in net sales from inductive and MR products was
partially offset by the decrease in the net sales of ferrite metal-in-gap
("MIG") products, which reached their end-of-life during the third quarter of
1996. The net sales generated from MIG products decreased to $1.3 million during
fiscal 1997 compared to $174.0 million during fiscal 1996. Responding to the
industry's rapid shift to MR technology, during the first quarter of fiscal 1998
the Company announced plans to accelerate its existing MR transition strategy
and to significantly reduce its production of advanced inductive products. As a
result, the Company expects that MR products, which accounted for approximately
24% of the Company's net sales during fiscal 1997, will account for the
substantial majority of net sales during fiscal 1998. Reflecting reduced demand
for inductive products and this accelerated transition, the Company has
announced that it expects to take a non-recurring charge of up to $30 million
during the first quarter of fiscal 1998 related to obsolete fixed assets and
excess inventory associated with end-of-life inductive products. Further, as a
result of these factors, the Company expects net sales and earnings during the
first quarter of fiscal 1998 to be lower than net sales and earnings during the
fourth quarter of fiscal 1997.
The Company's net sales increase was attributable to overall increases in both
unit sales and average selling prices ("ASPs") during fiscal 1997. The overall
increase in unit sales during fiscal 1997 was primarily due to increased unit
sales for inductive and MR HSAs, partially offset by a decrease in inductive HGA
unit sales and by the end of life of MIG products. The overall increase in ASPs
during fiscal 1997 was primarily due to increased ASPs for both inductive and MR
HSAs, and to a lesser extent, to increased ASPs for HGAs, primarily driven by MR
products.
The Company's product mix has continued to shift towards HSAs, as net sales of
HSAs and HGAs accounted for approximately 67% and 31%, respectively, of net
sales during fiscal 1997, compared to approximately 57% and 41%, respectively,
of net sales during fiscal 1996. The Company's sales continue to be primarily
focused in the 3.5" disk form factor market, accounting for 91%, 90% and 91% of
the Company's net sales during fiscal 1997, 1996 and 1995, respectively.
The Company's customer base remains highly concentrated, as the substantial
majority of net sales were to six major storage device manufacturers during
fiscal 1997 and fiscal 1996. The Company's three largest customers accounted for
82%, 84% and 79% of the Company's net sales during fiscal 1997, 1996 and 1995,
respectively.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales were $991.1 million during fiscal 1996, a 1.2% decrease from net sales
of $1,003.0 million during fiscal 1995. The decrease in net sales during fiscal
1996 was primarily due to a decrease in ASPs, partially offset by higher overall
unit sales. Further, during the second quarter of fiscal 1996, the Company
learned that to participate in certain customer programs, the Company's products
would have to incorporate a new technical feature 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 the
second half of the fiscal year. In addition, MIG products, which accounted for
$174.0 million of the Company's sales during fiscal 1996, reached their
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.
For a discussion of certain risks associated with the Company's business, see
"Certain Additional Business Risks."
GROSS MARGIN
The Company's gross margins are primarily influenced by ASPs, the level of unit
sales in relation to fixed costs, manufacturing yields, product mix (newer
products and HGAs typically generate higher gross margins than older products
and HSAs) and material costs. The relative impact of these factors fluctuates
from time to time. Periodically, the Company's gross margins also reflect
charges for inventory and fixed assets obsolescence and employee 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 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 gross margin from such purchased components is
substantially lower than the gross margin on HGAs produced by the Company.
21
<PAGE> 23
The combination of the respective margins on HGAs and non-HGA components and
associated labor and overhead included in HSAs typically produces a lower
aggregate gross margin on HSA sales compared to HGA sales.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's gross margin was 20.6% of net sales during fiscal 1997, compared
to a gross margin of 10.5% of net sales during fiscal 1996. The Company's
significant increase in gross margin during fiscal 1997 was primarily
attributable to an overall increase in ASPs, an increase in total unit sales in
relation to fixed costs, and to the absence in fiscal 1997 of special charges to
cost of sales (which totaled approximately $42.3 million during fiscal 1996).
The overall increase in ASPs during fiscal 1997 was primarily due to increased
ASPs for inductive and MR HSAs and, to a lesser extent, to increased ASPs for
HGAs, primarily driven by MR products. The Company's increase in total unit
sales in relation to fixed costs was primarily related to increased unit sales
of inductive and MR HSAs, with a corresponding decrease in the overall cost per
unit of inductive and MR HSAs, as the Company was able to more fully utilize its
production equipment.
The Company's increase in gross margin, as discussed above, was partially offset
by a product mix weighted towards HSAs, lower manufacturing yields associated
with the introduction of new MR products, and a post-closing $2.6 million charge
to cost of sales during the fourth quarter of fiscal 1997 to establish a reserve
for inventory and equipment exposures related to the bankruptcy of Micropolis, a
customer of the Company. See Note 15 in "Notes to Consolidated Financial
Statements." A product mix weighted towards HSAs tends to generate lower gross
margins notwithstanding the higher ASPs.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's gross margin was 10.5% of net sales during fiscal 1996, compared
to a gross margin of 26.3% of net sales during fiscal 1995. The Company's
decrease in gross margin during fiscal 1996 was primarily due to decreases in
ASPs, the level of net unit sales in relation to fixed costs, a product mix
heavily weighted toward older MIG products and HSAs and significant start-up
costs and lower manufacturing yields associated with new programs and processes.
In addition to these operating factors, the Company incurred significant special
charges during fiscal 1996, of which approximately $42.3 million was charged to
cost of sales.
Special charges to cost of sales 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 the Company's 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 market place to newer technology products and the fact the programs the
Company had been participating in using MIG technology reached the end of life,
the Company also incurred approximately $37.0 million of charges, primarily to
cost of sales, 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 $0.7 million in other expenses. See
Note 10 in "Notes to Consolidated Financial Statements."
For a discussion of certain risks associated with the Company's business, see
"Certain Additional Business Risks."
RESEARCH AND DEVELOPMENT EXPENSES
FISCAL 1997 COMPARED TO FISCAL 1996
Research and development ("R&D") expenses were $65.0 million during fiscal 1997,
a 24.5% increase over R&D expenses of $52.2 million during fiscal 1996. R&D
expenses during fiscal 1996 reflected a charge of $9.0 million due to an
investment in planar recording technology (see Note 9 in "Notes to Consolidated
Financial Statements"). Excluding this one-time charge, R&D expenses increased
50.5% from fiscal 1996 to fiscal 1997. The substantial increase in R&D expenses
in absolute dollars and as a percentage of net sales during fiscal 1997 was
attributable to increased development efforts in MR and emerging technologies to
address the disk drive industry's rapidly changing requirements, as well as
ongoing development efforts in advanced inductive technology.
From time to time, the Company has engaged in fully or partially funded research
and development for certain existing or potential customers. R&D expenses under
such projects were offset as incurred to the extent of development funds
available. During 1997, R&D expenses were offset by development funding of $2.3
million. During fiscal 1996, funded research and development was not material.
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.
22
<PAGE> 24
FISCAL 1996 COMPARED TO FISCAL 1995
R&D expenses were $52.2 million during fiscal 1996, a 24.9% increase over R&D
expenses of $41.8 million during fiscal 1995. The increase in R&D expenses in
absolute dollars and as a percentage of net sales during fiscal 1996 was
primarily attributable to the license of planar technology from Censtor
Corporation ("Censtor") and the continued development of such technology. The
largest component of the purchase price for Censtor, technology in the
development stage and a related license, was approximately $9.0 million, which
was expensed in March 1996 as acquired in-process research and development.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
FISCAL 1997 COMPARED TO FISCAL 1996
Selling, general & administrative ("SG&A") expenses were $54.1 million during
fiscal 1997, a 24.0% increase over SG&A expenses of $43.6 million during fiscal
1996. The increase in SG&A expenses during fiscal 1997 was primarily due to a
post-closing charge of $12.2 million during the fourth quarter of fiscal 1997 to
establish a reserve for accounts receivable exposures related to the bankruptcy
of a customer, Micropolis. The increase in SG&A during the period was partially
offset by a full year of cost reduction efforts which were implemented in the
latter half of fiscal 1996. See also Note 15 in "Notes to Consolidated Financial
Statements."
The Company plans to continue its SG&A cost containment efforts, and thus does
not expect SG&A expenses to increase significantly in absolute dollars in the
near-term compared to the SG&A expenses during fiscal 1997 excluding the post-
closing charge of $12.2 million related to the Micropolis bankruptcy, but
anticipates SG&A expenses will vary from year to year as a percentage of net
sales, depending on the level of net sales.
FISCAL 1996 COMPARED TO FISCAL 1995
SG&A expenses were $43.6 million during fiscal 1996, a 1.7% decrease over SG&A
expenses of $44.4 million during fiscal 1995. The decrease in SG&A expenses
during fiscal 1996 was primarily due to cost reduction programs implemented by
the Company during the second half of fiscal 1996 in response to declining net
sales levels, partially offset by increases in staffing and overhead to support
higher net sales and volume during the first half of fiscal 1996.
INTEREST EXPENSE
FISCAL 1997 COMPARED TO FISCAL 1996
Interest expense was $15.7 million during fiscal 1997, compared to $12.9 million
during fiscal 1996. The increase in interest expense during fiscal 1997 was
primarily due to a $2.4 million charge in the fourth quarter related to a
pre-payment premium and incremental interest expense associated with the
Company's refinancing of $100 million in senior notes, and interest on the
Company's $345 million convertible subordinated debentures which were issued in
August 1997. See "Liquidity and Capital Resources."
FISCAL 1996 COMPARED TO FISCAL 1995
Interest expense was $12.9 million during fiscal 1996, compared to $5.6 million
during fiscal 1995. The increase in interest expense during fiscal 1996 was
primarily due to the significant increase in the average amount of debt
outstanding.
INTEREST INCOME AND OTHER, NET
FISCAL 1997 COMPARED TO FISCAL 1996
Interest income and other, net was $8.6 million during fiscal 1997, compared to
$9.0 million during fiscal 1996. The decrease in interest income and other, net
during fiscal 1997 was primarily due to lower interest income on lower average
cash balances, partially offset by foreign exchange gains related to Read-Rite
SMI.
FISCAL 1996 COMPARED TO FISCAL 1995
Interest income and other, net was $9.0 million during fiscal 1996, compared to
$5.3 million during fiscal 1995. The increase in interest income and other, net
during fiscal 1996 was primarily due to higher interest income on higher average
cash balances, and higher interest rates during fiscal 1996.
23
<PAGE> 25
PROVISION FOR INCOME TAXES
FISCAL 1997 COMPARED TO FISCAL 1996
The combined federal, state and foreign tax rate ("combined tax rate") was 26.0%
during fiscal 1997, compared to 883.0% during fiscal 1996. The decrease in the
combined tax rate during fiscal 1997 was primarily due to a shift in pretax
income from foreign operations. During fiscal 1997, the Company experienced
higher pretax income from foreign operations in lower tax jurisdictions and
lower pretax income from foreign operations in higher tax jurisdictions compared
to fiscal 1996. The combined tax rate during fiscal 1997 differed from the
federal statutory rate primarily due to foreign earnings taxed at lower rates,
partially offset by losses for which no current year benefit is available.
The Company did not provide for U.S. federal income taxes on undistributed
earnings of foreign subsidiaries, which it intends to permanently reinvest in
those operations, for any of the three fiscal years in the period ended
September 30, 1997. See also Note 6 in "Notes to Consolidated Financial
Statements."
FISCAL 1996 COMPARED TO FISCAL 1995
The combined tax rate was 883.0% during fiscal 1996, compared to 23.5% during
fiscal 1995. The increase in the combined tax rate during fiscal 1996 was
primarily due to a shift in pretax income from foreign operations. During fiscal
1996, the Company experienced a net pretax loss from certain foreign operations
in lower tax jurisdictions with no tax benefit provided on these net operating
losses, and higher pretax income from foreign operations in higher tax
jurisdictions in comparison to fiscal 1995. The combined tax rate during fiscal
1996 differed from the federal statutory rate primarily due to losses for which
no current year benefit is available.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash, cash equivalents and short-term
investments of $298.1 million, total assets of $1,301.5 million and total
long-term debt and capital leases, including the current portion, of $416.5
million. The Company's cash generated by operating activities was $190.1 million
during fiscal 1997, including non-cash charges of $168.4 million from
depreciation and amortization.
The Company's business is highly capital intensive. During fiscal 1997, the
Company incurred capital expenditures of approximately $272.8 million. Capital
expenditures have primarily been made to expand production capacity in Thailand,
Malaysia and the Philippines, to expand wafer production in the United States
and Japan, and to support new manufacturing processes and new technologies, such
as MR and emerging technologies and advanced inductive products. The Company's
plan for capital equipment purchases during fiscal 1998 is between approximately
$250 million and $300 million; however, to the extent yields for the Company's
products are lower than expected, demand for such products exceed Company
expectations, or the Company's manufacturing process requirements change
significantly, such expenditures may increase. Conversely, if demand is less
than anticipated, or if the Company is unable to obtain adequate financing for
such capital equipment purchases, the planned capital equipment purchases may
decrease. As of September 30, 1997, total commitments for construction or
purchase of capital equipment were approximately $126 million. The Company
expects to fund such commitments from available cash and cash equivalents, cash
flows from operations and, if necessary, from available lines of credit.
As the millennium approaches, the Company is preparing all of its computer
systems to be Year 2000 compliant. A company-wide taskforce has been assembled
to review all systems to ensure that they do not malfunction as a result of the
year 2000. In this process, the Company expects to both replace some systems and
upgrade others. The expenses incurred during fiscal years 1997, 1996 and 1995 to
be Year 2000 compliant were not material. Additionally, the Company does not
expect the amounts required to be expensed in the near future to be Year 2000
compliant to have a material effect on its financial position or results of
operations.
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. The
24
<PAGE> 26
Company's balance sheet at September 30, 1997 included cash, cash equivalents
and short-term investments of $38.7 million, and total assets of $187.4 million
at Read-Rite SMI.
In October 1997, the Company entered into a $200 million credit facility
("Credit Facility") with a syndicate of financial institutions. The four year
facility consists of an unsecured $50 million term loan and a $150 million
revolving line of credit. The term loan provides for quarterly principal
payments, beginning January 1999 and continuing through October 2001. The term
loan provides for interest payments which vary based on the London Interbank
Offered Rate ("LIBOR"), plus an applicable margin based on the ratio of senior
debt to total capitalization. Additionally, the terms of the facility require
the Company to maintain certain financial ratios and observe a series of
additional covenants, and prohibits the Company from paying dividends without
prior bank approval. The new Credit Facility refinances a $50 million term loan
and replaces an unused $65 million line of credit outstanding at September 30,
1997. The $150 million revolving line of credit is currently unused.
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. Interest is paid semi-annually in March and
September. The Notes are subordinated in right of payment to all existing and
future senior debt of the Company and may be redeemed at the option of the
Company subsequent to September 2000. The Notes are convertible at any time at a
conversion rate of 24.8524 shares per $1,000 principal amount of Notes
(equivalent to approximately $40.24 per share), subject to adjustment. Upon a
change in ownership control of the Company, the holders of the Notes will have
the right to require the Company to purchase all or part of their notes at 100%
of the principal amount, plus accrued interest. The repurchase price is payable
in cash or, subject to certain requirements, in shares of common stock. The
Company used a portion of the funds received from the public offering to
refinance $100 million of 7.53% senior notes. As of September 30, 1997 the
entire $345 million represented by the Notes was outstanding.
In April, 1996, the Company entered into a three-year operating lease ("Lease")
for a 23.5-acre parcel of undeveloped land across from its wafer fabrication
facility in Fremont, California on which additional wafer fabrication office and
support facilities may be constructed. The Lease provides for payments which
vary based on the LIBOR plus a margin, and requires the Company to comply, as
amended, with certain minimum financial covenants similar to those in the
Company's current credit facility. 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 has payment obligations under the Lease of
approximately $10.7 million over the three-year term, including the purchase
option. At September 30, 1997, the Company was in compliance with all of the
financial covenants of the Lease.
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. At September 30, 1997, the
Company had purchased no shares pursuant to this additional repurchase
authorization.
The Company believes that its current level of liquid assets, credit facilities,
and cash expected to be generated from operations will be sufficient to fund its
operations during fiscal 1998. However, if industry conditions become
unfavorable, the Company does not consistently achieve timely customer
qualifications on new product programs, or the Company is unsuccessful at
ramping up volume production on new products at acceptable yields, 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. The Credit Facility
currently prohibits payment of cash dividends.
25
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 118,589 $ 82,291
Short-term investments 179,508 65,655
Accounts receivable, net of allowance of $14,887 in 178,722 90,142
1997 ($2,586 in 1996)
Inventories 91,487 58,005
Prepaid expenses and other current assets 14,988 13,962
----------- --------
Total current assets 583,294 310,055
Property, plant and equipment, net 672,813 567,294
Intangible and other assets 45,374 31,323
----------- --------
Total assets $ 1,301,481 $908,672
=========== ========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 122,379 $ 88,434
Accrued compensation and benefits 37,558 27,099
Income taxes payable 26,071 27,754
Other accrued liabilities 41,499 37,196
Current portion of long-term debt and capital lease 12,602 15,613
obligations
----------- --------
Total current liabilities 240,109 196,096
Convertible subordinated notes 345,000 --
Other long-term debt and capital lease obligations 58,871 172,037
Other long-term liabilities 38,726 15,458
----------- --------
Total liabilities 682,706 383,591
----------- --------
Commitments and contingencies
Minority interest in consolidated subsidiary 73,122 71,282
----------- --------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value;
4,000 shares authorized, none issued -- --
Common Stock, $0.0001 par value; 160,000 shares
authorized; 48,133 and 46,771 issued in 1997
and 1996, respectively 5 5
Additional paid-in capital 354,546 336,113
Retained earnings 191,841 114,979
Foreign currency translation adjustment (739) 2,702
----------- --------
Total stockholders' equity 545,653 453,799
----------- --------
Total liabilities, minority interest in
consolidated subsidiary and stockholders' equity $1,301,481 $908,672
=========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE> 28
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $1,162,050 $ 991,118 $1,003,040
Cost of sales 923,244 887,464 739,000
---------- --------- ----------
Gross margin 238,806 103,654 264,040
Operating expenses:
Research and development 64,995 52,221 41,788
Selling, general and administrative 54,098 43,644 44,406
---------- --------- ----------
Total operating expenses 119,093 95,865 86,194
---------- --------- ----------
Operating income 119,713 7,789 177,846
Interest expense 15,699 12,897 5,589
Interest income and other, net 8,627 9,024 5,257
---------- --------- ----------
Income before provision for income taxes
and minority interest 112,641 3,916 177,514
Provision for income taxes 29,311 34,582 41,715
---------- --------- ----------
Income (loss) before minority interest 83,330 (30,666) 135,799
Minority interest in net income of consolidated
subsidiary 7,151 12,320 12,234
---------- --------- ----------
Net income (loss) $ 76,179 $ (42,986) $ 123,565
========== ========= ==========
Primary earnings per share $ 1.56 $ (0.92) $ 2.60
========== ========= ==========
Shares used in primary earnings per share
calculation 48,775 46,755 47,616
========== ========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 76,179 $(42,986) $123,565
Adjustments required to reconcile net income (loss)
to cash provided by operations:
Depreciation 166,043 124,783 70,422
Amortization 2,338 2,231 3,066
Bad debt provision 12,301 (620) 1,390
Minority interest in net income of consolidated 7,151 12,320 12,234
subsidiary
Deferred income taxes 11,953 (405) 8,140
Loss on disposal of fixed assets 898 23 10,925
Other non-cash expenses 3,281 2,709 1,864
Changes in assets and liabilities:
Accounts receivable (98,530) 54,704 (56,301)
Inventories (34,094) (5,128) (10,966)
Prepaid expenses and other current assets (6,472) (1,520) (2,202)
Accounts payable, accrued liabilities and
income taxes payable 49,064 24,311 53,063
--------- -------- --------
Net cash provided by operating activities 190,112 170,422 215,200
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (272,768) (265,847) (185,053)
Maturities of available-for-sale investments 540,390 839,623 --
Maturities of held-to-maturity investments -- 168,093 72,119
Purchase of available-for-sale investments (654,009) (980,075) (77,000)
Purchase of held-to-maturity investments -- -- (43,925)
Other assets and liabilities, net (6,369) (3,766) 4,798
--------- -------- --------
Net cash used in investing activities (392,756) (241,972) (229,061)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible subordinated debt, net 336,025 -- --
Proceeds from other long-term debt -- 50,000 110,123
Payment of other long-term debt and capital lease (116,177) (22,960) (17,688)
obligations
Proceeds from issuance of common stock, net 15,822 5,827 27,762
Repurchase of common stock -- (43,046) (7,879)
--------- -------- --------
Net cash provided by (used in) financing 235,670 (10,179) 112,318
activities
--------- -------- --------
Effect of foreign currency exchange rate changes on 3,272 (4,840) 4,926
cash
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 36,298 (86,569) 103,383
Cash and cash equivalents at beginning of period 82,291 168,860 65,477
--------- ------ -------
Cash and cash equivalents at end of period $ 118,589 $ 82,291 $168,860
========= ======== ========
Supplemental disclosures of non-cash activities:
Property and equipment acquired under capital
leases $ -- $ 1,018 $ --
Issuance of common stock under 401k plan 2,611 2,702 1,864
Supplemental disclosures of cash flow information:
Interest paid during the year 14,423 11,669 5,537
Income taxes paid during the year 12,641 42,542 1,956
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
COMMON COMMON ADDITIONAL CURRENCY TOTAL
STOCK STOCK PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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)
Foreign currency
translation adjustment,
net of deferred
tax liability 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)
Foreign currency
translation adjustment,
net of deferred
tax liability 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
Issuance of common
stock under stock
option plans 924 -- 11,498 -- -- 11,498
Issuance of common
stock under employee
stock purchase plan 326 -- 4,324 -- -- 4,324
Issuance of common stock
under 401k plan 112 -- 2,611 -- -- 2,611
Foreign currency
translation adjustment,
net of deferred
tax asset of $408 -- -- -- -- (3,441) (3,441)
Unrealized gain on
available-for sale
investments, net -- -- -- 683 -- 683
Net income -- -- -- 76,179 -- 76,179
------ --------- --------- --------- --------- ---------
Balance at
September 30, 1997 48,133 $ 5 $ 354,546 $ 191,841 $ (739) $ 545,653
====== ========= ========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Read-Rite Corporation (the "Company") designs, manufactures and markets magnetic
recording heads and head stack assemblies for storage device manufacturers. The
substantial majority of the Company's net sales during fiscal 1997 were to six
major storage device manufacturers in the U.S., or their foreign based
subsidiaries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries, including Read-Rite SMI, the
Company's joint venture in Japan with Sumitomo Metal Industries, Ltd
("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 net assets and
in the net income of Read-Rite SMI.
The Company maintains a fifty-two/fifty-three week fiscal year cycle ending on a
Sunday. Fiscal years 1997, 1996 and 1995 ended on September 28, September 29,
October 1, 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 materially from those estimates.
The Company is a custom 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 adversely impact the Company's financial position and results of
operations.
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.
EARNINGS PER SHARE
Primary earnings per share for fiscal 1997 and fiscal 1995 is based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents consist of stock options.
Primary earnings per share for fiscal 1996 is based upon the weighted average
number of shares of common stock outstanding during the year.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128") which
is required to be adopted in the Company's fiscal quarter ended December 28,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options will be excluded. If SFAS 128 had been effective for fiscal
1997 and fiscal 1995, it would have resulted in an increase in primary earnings
per share of $0.05 and $0.09, respectively. There would have been no impact of
SFAS 128 on the calculation of primary earnings per share for fiscal 1996.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with insignificant interest
rate risk and original maturities of three months or less to be cash
equivalents. Investments with original maturities greater than three months and
remaining maturities less than one year are classified as short-term
investments. The Company does not currently hold any investments with remaining
maturities greater than one year. Investments consist primarily of A1 and P1, or
better, rated financial instruments.
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company accounts for investments in accordance with SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." 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 accretions of discounts to maturity are 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 retained earnings within 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 standard cost (which approximates actual
cost on a first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The depreciation for property,
plant and equipment of the Company and its subsidiaries are provided primarily
on a straight-line basis over the estimated useful lives of the assets. The
estimated useful lives 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.
INTANGIBLE AND OTHER ASSETS
The deferred costs associated with the Company's convertible subordinated notes
offering, as further discussed in Note 4, "Long-Term Debt and Capital Lease
Obligations," was $8,975,000 at September 30, 1997. Accumulated amortization was
$107,000 at September 30, 1997, and is being amortized to interest expense on a
straight-line basis over the term of the notes.
The excess of the purchase price over the fair market value of identifiable
assets of businesses acquired was $21,651,000 at September 30, 1997 and 1996,
respectively. Accumulated amortization was approximately $12,728,000 and
$10,497,000 at September 30, 1997 and 1996, 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 rates during the year.
Exchange gains or losses arising from the 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 remeasured at the average exchange rates during the
year. Gains and losses from foreign currency remeasurement are included in
interest income and other, net.
On October 1, 1997, the Company changed the functional currency of its Japanese
based joint venture, Read-Rite SMI, from the local Yen currency to the U.S.
dollar to reflect the significance of predominately U.S. dollar based revenues.
The ending foreign currency translation adjustment of $739,000 will remain as a
component of stockholders' equity and the translated amounts for non-monetary
assets at the end of 1997 will become the accounting basis for those assets in
the future.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange and option contracts
to manage exposure related to certain foreign currency commitments, certain
foreign currency denominated balance sheet positions and anticipated foreign
currency denominated expenditures. The Company does not enter into derivative
financial instruments for speculative or trading purposes. Gains and losses on
any instruments not meeting the above criteria would be recognized in interest
income and other, net in the current period.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company currently manages foreign currency exposure for the Malaysian
Ringgit, Thai Baht, Singapore Dollar, 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 $3,579,000 and $408,000
during fiscal 1997 and 1996, respectively, and net foreign exchange losses of
$240,000 during fiscal 1995.
Read-Rite SMI 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.
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"). SFAS 123 provides an alternative to Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APBO 25"), and requires additional disclosures. SFAS 123 is effective for the
Company's fiscal year ended September 30, 1997. The Company has elected to
continue to account for its employee stock plans in accordance with the
provisions of APBO 25 while providing the additional disclosures required by
SFAS 123. Accordingly, the adoption of SFAS 123 had no impact on the Company's
financial position or results of operations.
NOTE 2. FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of September 30, 1997 and 1996 all investments were classified as
available-for-sale. The following is a summary of available-for-sale securities
at September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Money market funds $ 72,409 $ -- $ -- $ 72,409
Commercial paper 138,899 678 -- 139,577
Certificates of deposit 29,233 -- (1) 29,232
Auction rate preferred stocks 36,900 -- -- 36,900
U.S. government agency securities 19,970 9 -- 19,979
-------- --------- ------------ -----------
Total available-for-sale
securities $297,411 $ 687 $ (1) $ 298,097
======== ========= ============ ===========
Included in cash and cash
equivalents 118,589
Included in short-term investments 179,508
============
Total available-for-sale
securities $ 298,097
============
</TABLE>
The following is a summary of available-for-sale securities at September 30,
1996 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Money market funds $ 36,109 $ -- $ -- $ 36,109
Commercial paper 8,754 3 -- 8,757
Certificates of deposit 56,080 -- -- 56,080
Auction rate preferred stocks 47,000 -- -- 47,000
---------- ------------ ------------ ----------
Total available-for-sale
securities $ 147,943 $ 3 $ -- 147,946
========== ============ ============ ==========
Included in cash and cash
equivalents 82,291
Included in short-term
investments 65,655
-------------
Total available-for-sale securities
securities $ 147,946
=============
</TABLE>
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
There were no material gross realized gains or losses in any category of
investment during fiscal 1997 and 1996. The unrealized net gain, net of tax, is
reported as a component of retained earnings within stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments at September
30 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Foreign currency forward contracts to purchase foreign
currencies $117,000 $ 82,000
Currency swap agreement $ 30,000 $ 30,000
Foreign currency forward contracts to sell foreign
currencies $ 8,000 $ 38,000
Foreign currency option to buy foreign currencies $ 6,000 $ --
</TABLE>
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 other long term debt and the
determination that the interest rate on the $345 million convertible
subordinated notes approximates the current market rate.
Estimated fair values of financial instruments outstanding at September 30 were
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1997 1996 1996
-------- ---------- -------- ----------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $118,589 $118,589 $ 82,291 $ 82,291
Short-term investments 179,508 179,508 65,655 65,655
Convertible subordinated notes 345,000 345,000 -- --
Other long term debt 69,035 69,035 182,193 182,193
Currency swap agreement -- 2,000 -- (288)
Foreign currency forward
contracts (2,128) (2,128) 80 80
Foreign currency option 148 90 -- --
</TABLE>
NOTE 3. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Inventories consisted of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw material $13,097 $13,591
Work-in-process 73,280 34,157
Finished goods 5,110 10,257
------- -------
Total inventories $91,487 $58,005
======= =======
</TABLE>
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property, plant and equipment, net consisted of the following at September 30
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 10,903 $ 7,702
Building 76,038 68,160
Equipment 929,320 692,566
Furniture and fixtures 12,291 12,780
Leasehold improvements 62,890 53,644
---------- ----------
Property, plant and equipment 1,091,442 834,852
Less: Accumulated depreciation 418,629 267,558
---------- ----------
Total property, plant and equipment, net $ 672,813 $ 567,294
========== ==========
</TABLE>
NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Convertible subordinated notes due 2004 at 6.5% $345,000 $ --
Senior unsecured notes, prepaid during fiscal 1997 -- 100,000
Unsecured term loan due 1999-2001 at 7.1% 50,000 50,000
Secured loans due 1998-2000 at 6.7% to 8.7% 18,977 32,076
Capital lease obligations 2,438 5,457
Other 58 117
-------- -------
Total debt and capital lease obligations 416,473 187,650
Less: current portion 12,602 15,613
-------- -------
Total long term debt and capital lease obligations $403,871 172,037
======== ========
</TABLE>
At September 30, 1997, the future minimum principal payments on long-term debt
and capital lease obligations were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 12,602
1999 21,045
2000 12,826
2001 25,000
2002 --
After 2002 345,000
--------
Total future minimum principal payments on long-term debt and capital
lease obligations $416,473
========
</TABLE>
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 capital lease were approximately $19,848,000
and $21,197,000 at September 30, 1997 and 1996, respectively. Accumulated
depreciation of assets under capital lease was approximately $4,073,000 and
$2,944,000 at September 30, 1997 and 1996, respectively.
CONVERTIBLE SUBORDINATED NOTES
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. Interest is paid semi-annually in March and
September. The Notes are subordinated in right of payment to all existing and
future senior debt of the Company and may be redeemed at the option of the
Company subsequent to September 2000. The Notes are convertible at any time at a
conversion rate of 24.8524 shares per $1,000 principal amount of Notes
(equivalent to approximately $40.24 per share), subject to adjustment. Upon a
change in ownership control of the Company, the holders of the Notes will have
the right to require the Company to purchase all or part of their notes at 100%
of the principal amount, plus accrued interest. The repurchase price is payable
in cash or, subject to certain requirements, in shares of
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
common stock. The Company used a portion of the funds received from the public
offering to refinance $100 million of 7.53% senior notes. As of September 30,
1997 the entire $345 million represented by the Notes was outstanding.
UNSECURED TERM LOAN AND LINE OF CREDIT
As of September 30, 1997, the Company had $65 million available under a
revolving facility. The Company was is compliance with all of its covenants as
of September, 30, 1997.
On October 6, 1997, the Company entered into a new $200 million credit facility
to replace the $65 million available under the revolving facility and refinance
the $50 million term loan. The new four year credit facility includes a $50
million term loan and a $150 million revolving line of credit. The terms of the
facility require the Company to maintain certain financial ratios and observe a
series of additional covenants, and prohibits the Company from paying dividends
without prior bank approval.
NOTE 5. COMMITMENTS
PURCHASE COMMITMENTS
Purchase commitments for construction or purchase of plant and equipment for the
Company totaled approximately $126 million at September 30, 1997.
OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2003
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 $10,100,000, $8,415,000 and $11,306,000 during fiscal years 1997,
1996 and 1995, respectively.
At September 30, 1997, the future minimum payments under operating leases were
as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 9,326
1999 8,209
2000 7,898
2001 7,118
2002 3,181
After 2002 724
--------
Total future minimum payments on operating leases $ 36,456
========
</TABLE>
NOTE 6. INCOME TAXES
PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following for the years ended
September 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 2,010
State 155 161 160
Foreign 10,198 29,353 30,632
------- ------- -------
10,353 29,514 32,802
Deferred:
Federal 16,166 4,322 7,600
State 2,792 746 1,313
------- ------- -------
18,958 5,068 8,913
======= ======= =======
Provision for income taxes $29,311 $34,582 $41,715
======= ======= =======
</TABLE>
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DEFERRED INCOME TAXES
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 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Inventory $ 1,064 $ 1,419 $ 122
Accrued compensation and other benefits 7,744 4,186 4,051
Basis difference in fixed assets 1,570 -- --
Net operating loss carryforwards 40,911 40,248 34,950
Deferred rental payments 599 640 759
Allowance for doubtful accounts 312 263 151
Charitable contribution carryforwards 406 431 --
Investment valuation -- 902 --
Other 485 427 230
---------- ---------- ----------
Total deferred tax assets, gross 53,091 48,516 40,263
Valuation allowance for deferred tax assets (53,091) (44,653) (33,893)
---------- ---------- ----------
Total deferred tax assets, net -- 3,863 6,370
---------- ---------- ----------
Deferred tax liabilities:
Taxes on foreign operations including
translation gain 27,292 10,205 15,849
Basis difference in fixed assets -- 3,863 1,131
---------- ---------- ----------
Total deferred tax liabilities 27,292 14,068 16,980
---------- ---------- ----------
Total deferred tax liabilities, net $ 27,292 $ 10,205 $ 10,610
========== ========== ==========
</TABLE>
The Company's valuation allowance for deferred tax assets increased by
$8,438,000, $10,760,000 and $15,928,000 during fiscal 1997, 1996 and 1995,
respectively. Approximately $34,590,000 of the Company's valuation allowance for
deferred assets at September 30, 1997 is related to income tax benefits for
stock option deductions, which will be credited to stockholders' equity when
realized.
PROVISION FOR INCOME TAXES RECONCILIATION
The 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 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income tax expense computed at federal statutory
rate $ 39,425 $ 1,371 $ 62,130
State income tax, net of federal benefit 1,916 485 957
Net foreign earnings subject to taxes at lower
rates (20,503) (1,299) (18,222)
Losses for which no current year benefit is
available 8,473 34,025 --
Tax benefit of net operating loss carryforward -- -- (3,150)
-------- -------- --------
Provision for income taxes $ 29,311 $ 34,582 $ 41,715
======== ======== ========
</TABLE>
Pretax income from foreign operations was approximately $125,203,000,
$25,507,000 and $164,500,000 during fiscal 1997, 1996 and 1995, respectively.
The Company enjoys tax holidays with respect to its two operations in Thailand
which will expire during fiscal 1998 and 2002 and in Carmelray of the
Philippines which will expire in fiscal 2001. The impact of these holidays was
to increase net income by approximately $7,500,000 ($0.15 primary earnings per
share) during fiscal 1997 and $7,100,000 ($0.15 primary earnings per share)
during fiscal 1995, and to decrease the net loss by approximately $11,000,000
($0.24 primary earnings per share) during fiscal 1996. At September 30, 1997,
accumulated pretax earnings of approximately $211,960,000 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 $33,722,000
would be available to offset federal tax upon repatriation of foreign earnings.
At September 30, 1997, the Company had a federal net operating loss carryforward
of approximately $117,000,000 for United States federal tax return purposes,
expiring in fiscal years 1999 through 2011.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7. EMPLOYEE STOCK AND BENEFIT PLANS
STOCK PURCHASE RIGHTS
In March 1997, the Company implemented a plan to protect shareholders' rights in
the event of a proposed takeover of the Company. Under the plan, each share of
the Company's outstanding common stock carries one right to purchase one
one-thousandth of a share of the Company's Series "A" Participating Preferred
Stock (the "Right") at an exercise price of $150. The Right enables the holder
to purchase common stock of Read-Rite or of the acquiring company ten days after
a person or group publicly announces it has acquired or has tendered an offer
for 20% or more of the Company's outstanding common stock. The Rights are
redeemable by the Company at $0.001 per Right at any time on or before the tenth
day following acquisition by a person or group of 20% or more of the Company's
common stock. If prior to redemption of the Rights, a person or group acquires
20% or more of the Company's common stock, each Right not owned by a holder of
20% or more of the common stock (or an affiliate of such holder) will entitle
the holder to purchase, at the Right's then current exercise price, that number
of shares of common stock of the Company having a market value at that time of
twice the Right's exercise price. The Rights expire in March, 2007.
EMPLOYEE STOCK OPTION 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 generally have exercise prices equal to the fair market value as of the
date of grant. However, under both plans the Company's Board of Directors has
authority to grant nonstatutory stock options at not less than 85% of the fair
market value as of 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 in February 1996, with 3,000,000 shares
of Common Stock reserved for issuance thereunder; the 1995 Plan also provides
that approximately 1,400,000 shares under the 1987 Plan, plus any shares made
available due to cancelled options under the 1987 Plan, 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.
DIRECTOR STOCK OPTION PLAN
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.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK OPTION ACTIVITY
Stock option activity under the employee and director option plans was as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
EXERCISE NUMBER OF AVAILABLE
PRICE SHARES FOR GRANT
--------- --------- ----------
<S> <C> <C> <C>
Balance at September 30, 1994 $ 11.74 5,741,017 3,108,177
Granted $ 27.12 1,883,458 (1,883,458)
Exercised $ 10.54 (2,296,855) --
Canceled $ 15.35 (336,496) 326,144
---------- ----------
Balance at September 30, 1995 $ 17.85 4,991,124 1,550,863
Additional shares reserved -- -- 3,000,000
Granted $ 17.83 1,322,799 (1,322,799)
Exercised $ 11.17 (366,065) --
Canceled $ 20.81 (612,008) 577,403
---------- ----------
Balance at September 30, 1996 $ 18.05 5,335,850 3,805,467
Granted $ 21.20 2,462,383 (2,462,383)
Exercised $ 13.16 (873,517) --
Canceled $ 22.21 (522,738) 499,096
---------- ----------
Balance at September 30, 1997 $ 21.40 6,401,978 1,842,180
========== ==========
</TABLE>
At September 30, 1997, 1996 and 1995, there were exercisable options outstanding
under the above mentioned option plans to purchase an aggregate of approximately
2,374,000, 2,009,000 and 1,003,000 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. During the year ended September 30, 1997, options to purchase
50,000 shares were exercised. As of September 30, 1997, 758,760 options have
been exercised, and 429,277 options were exercisable.
STOCK OPTIONS OUTSTANDING AND STOCK OPTIONS EXERCISABLE
The following table summarizes information about options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICES SHARES YEARS) PRICE SHARES PRICE
- ----------------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.33 - $ 9.88 856,954 4.32 $ 4.33 737,898 $ 3.41
$ 9.94 - $13.44 865,141 7.41 $ 11.61 586,406 $ 12.19
$13.50 - $15.38 978,047 8.82 $ 15.30 63,288 $ 14.42
$15.88 - $19.63 927,519 7.92 $ 18.56 324,209 $ 18.84
$20.13 - $23.75 686,170 7.84 $ 21.45 250,484 $ 22.08
$24.00 - $24.38 934,637 8.23 $ 24.33 336,474 $ 24.24
$25.00 - $30.69 775,679 8.27 $ 27.44 220,281 $ 27.44
$31.25 - $36.13 697,614 7.96 $ 33.76 235,300 $ 32.93
$36.50 - $40.88 60,485 7.98 $ 38.51 22,027 $ 39.25
$41.25 49,009 7.84 $ 41.25 26,661 $ 41.25
--------- ---- --------- --------- ---------
6,831,255 7.64 $ 19.51 2,803,028 $ 16.62
========= ==== ========= ========= =========
</TABLE>
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") under
which all eligible employees may acquire Common Stock at a price per share equal
to 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 1,500,000 shares under this plan and, at September 30,
1997, there were 563,747 shares available for purchase.
401(K) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") under which
eligible U.S. employees may contribute, on a pre-tax basis, between 2% and 15%
of their total annual income from the Company, excluding 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 1,000,000 shares
under the 401(k) Plan and, at September 30, 1997, there were 438,851 shares
available for issuance.
STOCK-BASED COMPENSATION
The Company applies APBO 25 and related interpretations in accounting for its
stock-based compensation. Accordingly, no compensation expense has been
recognized for its stock-based option and stock purchase compensation plans. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS 123 the Company's fiscal 1997 net
income and primary earnings per share would have been decreased by approximately
$10.8 million, or $0.22 per share, and the Company's fiscal 1996 net loss and
primary earnings per share would have been increased by approximately $3.9
million, or $0.08 per share. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period for options, and the six-month purchase period for stock
purchases under the Employee Stock Purchase Plan.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.
The effects on pro forma disclosure of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosures of future years. Because
SFAS 123 is applicable only to options granted after September 30, 1995, the pro
forma effect will not be fully reflected until 1999.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using a dividend yield of 0% and the
following additional weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
STOCK OPTION PLAN SHARES PURCHASE PLAN SHARES
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Expected life (in years) 3.10 3.10 0.50 0.50
Risk-free interest rate 5.90% 6.40% 5.60% 5.80%
Volatility 0.63 0.63 0.63 0.63
</TABLE>
The weighted average exercise price and weighted average fair value of stock
options granted during 1997 under the Company's Stock Option Plans was $21.20
and $9.80 per share, respectively. The weighted average purchase price and
weighted average fair value of shares granted in 1997 under the Company's
Employee Stock Purchase Plans was $17.99 and $7.08, respectively.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8. CONSOLIDATION OF MAJORITY-OWNED SUBSIDIARY
In July 1997, the Emerging Issues Task Force ("EITF") reached a consensus in
EITF Issue 96-16 regarding whether rights of a minority shareholder should
preclude an investor from consolidating a majority-owned investee. The EITF
determined that consolidation of a majority-owned investee is not appropriate if
a minority shareholder has "participating rights" in decisions made in the
ordinary course of business.
The Company owns 50% plus two shares of the voting stock of Read-Rite SMI, its
joint venture in Japan with Sumitomo. 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.
The Company has retained a majority voting interest in Read-Rite SMI; however,
prior to the first quarter of fiscal 1998, all material corporate actions
required a supermajority vote of Read-Rite SMI's Board of Directors, and thus
the consent of both the Company and Sumitomo. During the first quarter of fiscal
1998, the Company and Sumitomo revised their various agreements and RRSMI's
charter documents to provide for a simple majority vote of the Board of
Directors of Read-Rite SMI on all matters except for certain non-ordinary course
of business matters requiring a supermajority. In the case of a shareholder vote
generally or due to the lack of the required vote by the Board of Directors, a
simple majority shareholder vote is required.
In accordance with EITF 96-16, the Company has concluded Sumitomo, as the
minority shareholder of Read-Rite SMI, does not have "participating rights" in
the significant decisions made in the ordinary course of business. As such, the
Company expects to continue to consolidate Read-Rite SMI in future periods.
NOTE 9. CENSTOR CORPORATION ACQUISITION
In 1996, the Company purchased certain assets, assumed certain liabilities and
acquired a non-exclusive license to intellectual property from Censtor
Corporation, a developer of planar pseudo-contact and contact recording
technology for disk drives. The purchase price included a series of cash
payments totaling approximately $10,000,000 all of which had been made by the
end of fiscal year 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 during fiscal 1996 as acquired in-process research and development. An
intangible asset 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.
NOTE 10. 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 9, incurring
charges to research and development expense of approximately $9,000,000 related
to the purchase of in-process research and development. 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 MIG technology programs the Company
had been participating in reached their 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
periods associated with these charges. Actual cash expenditures approximated
estimated amounts.
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11. LITIGATION
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 - January
22, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. On May 20, 1997, the
Superior Court entered an order (1) sustaining the demurrers of certain
defendants to the California Corporations Code cause of action, and overruling
the demurrers of Read-Rite Corporation and certain other defendants to that same
cause of action; and (2) sustaining the demurrers of all defendants as to the
remaining causes of action.
On January 17, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On January 21, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Edward McDaid
against the Company and certain of its officers and directors (the "McDaid
Federal Action"). The McDaid Federal Action alleges that defendants made false
and misleading statements about the Company's business condition and prospects
during a purported class period of July 19, 1995 - June 19, 1996, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the McDaid Federal Action seek damages of
an unspecified amount. The Ferrari Federal Action and the McDaid Federal Action
were consolidated into one action by the court, In re Read-Rite Corp. Securities
Litigation (the "Consolidated Action").
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, 1996 - June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On June 6, 1997, plaintiffs in the McDaid Federal Action moved to dismiss their
complaint. On June 23, 1997, defendants moved to consolidate the Nevius Federal
Action with the Consolidated Action. On July 18, 1997, the named plaintiffs in
the Nevius Federal Action moved to be appointed lead plaintiffs and to have
their counsel appointed lead counsel. These three motions are pending.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes it has meritorious
defenses to all four of these actions, and intends to defend each of them
vigorously.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions. Accordingly, both on its
own behalf and pursuant to indemnification agreements between the Company and
the named individual defendants, the Company intends to continue to defend each
of these actions vigorously. Failure by the Company to obtain a favorable
resolution of the claims set forth in any of these actions could have a material
adverse effect on the Company's business, results of operations and financial
condition. Currently, the amount of such material adverse effect cannot be
reasonably estimated.
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. CONCENTRATION OF CREDIT RISK
The Company's customer base is concentrated with a small number of storage
device manufacturers. Financial instruments which potentially subject the
Company to concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluation of its customer's financial condition and, generally, requires no
collateral from its customers. The allowance for noncollection of accounts
receivable is based upon the expected collectibility of all accounts receivable.
See Note 15.
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Principal customers for years ended September 30 were as follows (as a
percentage of net sales):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Western Digital 51% 43% 37%
Quantum 18% 29% 29%
Maxtor 13% 12% 11%
Seagate -- 8% 13%
All Others 18% 8% 10%
------------- ------------- -------------
100% 100% 100%
============= ============= =============
</TABLE>
The Company places its cash equivalents and short-term investments in investment
grade, short-term debt instruments and limits the amount of credit exposure to
any one commercial issuer.
NOTE 13. GEOGRAPHIC INFORMATION
The following table summarizes the Company's operations in different geographic
regions (in thousands):
<TABLE>
<CAPTION>
UNITED INTERCOMPANY
STATES FAR EAST ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Year Ended September 30, 1997
Net sales to unaffiliated
customers $ 21,956 $ 1,140,094 $ -- $ 1,162,050
Transfers between geographic
regions 134,909 378,433 513,342) --
----------- ----------- ------------- -----------
Total net sales $ 156,865 $ 1,518,527 $ (513,342) $ 1,162,050
=========== =========== ============= ===========
Operating income $ 9,887 $ 109,826 $ -- $ 119,713
=========== =========== ============= ===========
Identifiable assets $ 827,731 $ 847,255 $ (373,505) $ 1,301,481
=========== =========== ============= ===========
Year Ended September 30, 1996
Net sales to unaffiliated
customers $ 30,830 $ 960,288 -- $ 991,118
Transfer between geographic
regions 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
Net sales to unaffiliated
customers $ 181,631 $ 821,409 $ -- $ 1,003,040
Transfer between geographic
regions 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
=========== =========== ============= ===========
</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.
Foreign net sales represent sales to foreign-based subsidiaries of predominantly
United States headquartered companies and to customers of Read-Rite SMI in
Japan. These foreign net sales were primarily to the Far East and were
approximately $1,140 million, $946 million, and $972 million during fiscal years
1997, 1996 and 1995, respectively.
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly results of operations for
the years ended September 30 (in thousands):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997 (1)
Net Sales $ 251,588 $ 282,068 $ 310,236 $ 318,158
Gross margin $ 35,814 $ 62,380 $ 72,090 $ 68,522
Net income $ 5,787 $ 23,555 $ 31,173 $ 15,664
Primary earnings per share $ 0.12 $ 0.48 $ 0.64 $ 0.32
1996 (2), (3), (4)
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)
Primary earnings (loss) per
share $ 0.88 $ 0.03 $ (0.49) $ (1.37)
</TABLE>
(1) The fourth quarter results include post-closing charges of approximately
$12.2 million to selling, general and administrative expense and $2.6
million to cost of sales to establish a reserve for accounts receivable,
inventory and equipment exposures related to the bankruptcy of Micropolis, a
customer of the Company. See Note 15.
(2) The second quarter results include a $9.0 million charge to research and
development expenditures for the acquisition of planar technology, and a
$6.0 million charge to cost of sales for the consolidation of San Diego
operations to Northern California. See Notes 9 and 10.
(3) The third quarter results include $10.0 million in charges to cost of sales
related to obsolete fixed assets and excess inventory associated with
end-of-life products. See Note 10.
(4) The fourth quarter results include charges of approximately $27.0 million,
primarily to cost of sales for severance charges, fixed assets obsolescence
issues and excess inventory related to end-of-life products. See Note 10.
NOTE 15 - SUBSEQUENT EVENTS
During November 1997, the Company was advised by Singapore Technologies Pte.
Ltd. that Micropolis, a Singapore Technologies wholly-owned subsidiary, would be
filing for bankruptcy. As a result of the announced bankruptcy, the Company
established a reserve for Micropolis related accounts receivable, inventory and
equipment exposures resulting in post-closing charges of $12.2 million to
selling, general and administrative expense and $2.6 million to cost of sales
during the fourth quarter of fiscal 1997. (audited)
During November 1997, the Company responded to the disk drive industry's
announcements of a more rapid shift to MR technology by accelerating
implementation of its existing strategies to transition fully to MR production.
In connection with the accelerated transition to MR technology, the Company has
announced that it expects to take non-recurring charges of up to $30 million
during the first quarter of fiscal 1998 to cost of sales related to obsolete
fixed assets and excess inventory associated with end-of-life products.
(unaudited)
43
<PAGE> 45
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, 1997 and 1996, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended September 30, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Read-Rite Corporation at September 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1997, 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 20, 1997, except for the first paragraph of Note 15,
as to which the date is November 18, 1997
44
<PAGE> 46
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 24, 1998 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.
45
<PAGE> 47
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, 1997 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(20)* Employee Stock Purchase Plan (as amended and restated July 22, 1997)
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
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
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ----------------------------------------------------------------------------------------------
<S> <C>
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
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(20)* 1995 Stock Option Plan and form of Stock Option Agreement (as amended and
restated July 22, 1997)
10.42(15)* Years of Service Plan
10.43(17) 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(17) 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(17) 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(17) 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
10.47(18)* Executive Quarterly Variable Compensation Plan
10.48(18)* Read-Rite Corporation Super Bonus Plan
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ----------------------------------------------------------------------------------------------
<S> <C>
10.49(19)* Severance Plans
10.50(19)* Fourth and Fifth Amendments to Read-Rite Corporation's 401 (k) Plan
10.51(19) Amended and Restated License Agreement Between Read-Rite Corporation and
Sumitomo Metal Industries, Ltd.
10.52(19) Second Addendum to Joint Venture Agreement between Read-Rite Corporation
and Sumitomo Metal Industries, Ltd.
10.53(20)** License Agreement, date as of January 1, 1997, between the Read-Rite
Corporation and International Business Machines Corporation
10.54 Revolving Loan and Term Loan Agreement between Read-Rite Corporation as
Borrower and Financial Institutions as Banks and Canadian Imperial Bank of
Commerce as Agent, dated October 2, 1997.
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
27 Financial Data Schedule
- ----------------------------------------------------------------------------------------------
</TABLE>
* Indicates a management contract or compensatory plan or arrangement required
to be filed pursuant to Item 14(c).
** Confidential treatment requested for certain portions of this exhibit. In
accordance with the rules of the Commission, the confidential portions of
this exhibit have been omitted and filed separately with the Commission.
(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.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1996.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(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.
48
<PAGE> 50
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 17th day of December, 1997.
Read-Rite Corporation
By: /s/ Cyril J. Yansouni
-------------------------------
Cyril J. Yansouni, Chairman and
Chief Executive Officer
49
<PAGE> 51
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED
BEGINNING (CREDITED) BALANCE AT
OF PERIOD TO CHARGED TO END OF
EXPENSES (1) OTHER (2) PERIOD
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
September 30, 1997
Allowance for doubtful
accounts $ 2,586 $12,301 $ -- $14,887
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
</TABLE>
(1) The Company incurred a charge of $12.2 million to the allowance for doubtful
accounts during the fourth quarter of fiscal 1997 relating to the bankruptcy
filing of Micropolis, a customer of the Company. See Note 15 in "Notes to
Consolidated Financial Statements."
(2) Foreign currency translation adjustment.
50
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ----------------------------------------------------------------------------------------------
<S> <C>
10.54 Revolving Loan and Term Loan Agreement between Read-Rite Corporation as
Borrower and Financial Institutions as Banks and Canadian Imperial Bank of
Commerce as Agent, dated October 2, 1997.
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
27 Financial Data Schedule
- ----------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 1
EXHIBIT 10.54
CREDIT AGREEMENT
--------------------------
Dated as of October 2, 1997
among
Read-Rite Corporation
as Borrower
and
the Financial Institutions named herein
as Banks
and
Canadian Imperial Bank of Commerce, New York Agency
as Agent
and
Canadian Imperial Bank of Commerce
as Designated Issuer
and
CIBC Wood Gundy Securities Corp.
as Arranger
--------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE I DEFINITIONS........................................................ 1
Section 1.01. Defined Terms...................................................... 1
Section 1.02. Other Definitional Provisions...................................... 13
ARTICLE II THE LOANS.......................................................... 14
Section 2.01. The Loans.......................................................... 14
(a) The Revolving Facility............................................. 14
(b) The Term Facility.................................................. 14
(c) Making the Loans................................................... 15
(d) Commitment Fee..................................................... 16
(e) Reduction of the Revolving Commitment.............................. 16
(f) Revolving Notes.................................................... 17
(g) Term Notes......................................................... 17
(h) Arrangement Fee.................................................... 17
(i) Agency Fee......................................................... 17
(j) Upfront Fee........................................................ 17
Section 2.02. Repayment.......................................................... 18
(a) Repayment of Revolving Loans....................................... 18
(b) Repayment of Term Loans............................................ 18
(c) Optional Payment................................................... 18
(d) Application........................................................ 19
Section 2.03. Interest Rate and Payment Dates.................................... 19
(a) Payment of Interest................................................ 19
(b) Base Rate Loans.................................................... 19
(c) Eurodollar Rate Loans.............................................. 19
Section 2.04. Continuation and Conversion Options................................ 19
Section 2.05. Letters of Credit.................................................. 20
(a) Letters of Credit.................................................. 20
(b) Request for Issuance; Payments Under Letters of Credit............. 20
(c) Issuance of Letters of Credit...................................... 21
(d) Participation by Banks in Letters of Credit........................ 21
(e) Reimbursement of Amounts Drawn Under Letters of Credit............. 21
(f) Compensation....................................................... 22
(g) Obligations Absolute............................................... 22
(h) Payments Avoided................................................... 23
(i) Issuing Bank....................................................... 23
(j) Role of Issuing Bank............................................... 23
(k) Existing Letters of Credit......................................... 24
(l) Amendment and Renewal of Letters of Credit......................... 24
(m) Repayment and Cash Collateralization............................... 24
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS............................ 24
Section 3.01. Use of Proceeds.................................................... 24
Section 3.02. Post Maturity Interest............................................. 24
Section 3.03. Computation of Interest and Fees................................... 25
(a) Calculations....................................................... 25
(b) Determination by Agent............................................. 25
Section 3.04. Payments........................................................... 25
Section 3.05. Payment on Non-Business Days....................................... 25
Section 3.06. Reduced Return..................................................... 25
Section 3.07. Indemnities........................................................ 26
(a) General Indemnity.................................................. 26
(b) Funding Losses..................................................... 26
(c) Letters of Credit.................................................. 27
Section 3.08. Funding Sources.................................................... 28
Section 3.09. Inability to Determine Interest Rate............................... 28
Section 3.10. Requirements of Law................................................ 28
Section 3.11. Illegality......................................................... 29
Section 3.12. Right to Replace Bank.............................................. 30
Section 3.13. Taxes.............................................................. 30
(a) Payments........................................................... 30
(b) Other Taxes........................................................ 31
(c) Indemnity.......................................................... 31
(d) Evidence of Payment................................................ 31
(e) IRS Forms.......................................................... 31
(f) Change of Booking Office........................................... 32
Section 3.14. Sharing of Payments, Etc........................................... 32
ARTICLE IV CONDITIONS OF EFFECTIVENESS; CONDITIONS TO LOANS AND LETTERS
OF CREDIT.......................................................... 32
Section 4.01. Conditions Precedent to Effectiveness.............................. 32
Section 4.02. Conditions Precedent to Each Borrowing............................. 34
Section 4.03. Conditions Precedent to Each Letter of Credit...................... 35
ARTICLE V REPRESENTATIONS AND WARRANTIES..................................... 35
Section 5.01. Representations and Warranties..................................... 35
(a) Organization; Subsidiaries......................................... 35
(b) Authorization...................................................... 35
(c) Governmental Consents.............................................. 36
(d) Validity........................................................... 36
(e) Financial Condition................................................ 36
(f) Litigation......................................................... 36
(g) Employee Benefit Plans............................................. 36
(h) Disclosure......................................................... 36
(i) Margin Stock....................................................... 37
</TABLE>
ii.
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
(j) Environmental Matters.............................................. 37
(k) Employee Matters................................................... 38
(l) Insurance.......................................................... 38
(m) No Existing Events of Default; All Existing Obligations
Continued Hereunder................................................ 38
(n) Intellectual Property.............................................. 38
ARTICLE VI COVENANTS.......................................................... 38
Section 6.01. Affirmative Covenants.............................................. 38
(a) Financial Information.............................................. 39
(b) Notices and Information............................................ 39
(c) Corporate Existence, Etc........................................... 40
(d) Payment of Taxes and Claims........................................ 41
(e) Maintenance of Properties; Insurance............................... 41
(f) Inspection......................................................... 41
(g) Compliance with Laws, Etc.......................................... 41
Section 6.02. Negative Covenants................................................. 42
(a) Quick Ratio........................................................ 42
(b) Consolidated Tangible Net Worth.................................... 42
(c) Senior Debt Ratio.................................................. 42
(d) Interest-Expense Coverage.......................................... 42
(e) Minimum Profitability.............................................. 42
(f) Liens, Etc......................................................... 42
(g) Debt............................................................... 45
(h) Dividends, Etc..................................................... 45
(i) Consolidation, Merger.............................................. 46
(j) Loans, Investments, Secondary Liabilities.......................... 46
(k) Asset Sales........................................................ 48
(l) Acquisitions....................................................... 48
(m) Transactions with Affiliates....................................... 49
(n) Change of Business................................................. 49
(o) Permitted Subordinated Debt........................................ 49
ARTICLE VII EVENTS OF DEFAULT.................................................. 50
Section 7.01. Events of Default.................................................. 50
ARTICLE VIII THE AGENT AND ISSUING BANK......................................... 54
Section 8.01. Appointment, Powers and Immunities of Agent........................ 54
Section 8.02. Reliance by Agent.................................................. 54
Section 8.03. Defaults........................................................... 55
Section 8.04. Rights of Agent as a Bank.......................................... 55
Section 8.05. Indemnification of Agent and Issuing Bank.......................... 55
Section 8.06. Documents.......................................................... 56
Section 8.07. Non-Reliance on Agent and Other Banks.............................. 56
</TABLE>
iii.
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Section 8.08. Failure of Agent to Act............................................ 56
Section 8.09. Resignation or Removal of Agent.................................... 57
Section 8.10. Amendments Concerning Agency Function.............................. 57
Section 8.11. Liability of Agent................................................. 57
Section 8.12. Transfer of Agency Function........................................ 57
Section 8.13. Non-Receipt of Funds by the Agent.................................. 57
ARTICLE IX MISCELLANEOUS...................................................... 58
Section 9.01. Amendments, Etc.................................................... 58
Section 9.02. Notices, Etc....................................................... 58
Section 9.03. Right of Setoff.................................................... 59
Section 9.04. No Waiver; Remedies................................................ 59
Section 9.05. Costs and Expenses................................................. 59
Section 9.06. Additional Banks; Assignments; Participations...................... 60
Section 9.07. Effectiveness; Binding Effect; Governing Law....................... 61
Section 9.08. Survival of Warranties and Certain Agreements...................... 62
Section 9.09. Waiver of Jury Trial............................................... 62
Section 9.10. Consent to Jurisdiction; Venue..................................... 62
Section 9.11. Entire Agreement................................................... 63
Section 9.12. Separability of Provisions......................................... 63
Section 9.13. Obligations Several................................................ 63
Section 9.14. Execution in Counterparts.......................................... 63
Section 9.15. 1654 Interpretation................................................ 63
SCHEDULES TO DISCLOSURE LETTER
Schedule 2.05(k)Existing Letters of Credit
Schedule 5.01(a)Subsidiaries
Schedule 5.01(f)Litigation
Schedule 6.02(f)Existing Liens
Schedule 6.02(g)Existing Debt
Schedule 6.02(j)Existing Investments
EXHIBITS
Exhibit A Form of Revolving Note
Exhibit B Form of Term Note
Exhibit C Form of Legal Opinion
Exhibit D Form of Compliance Certificate
Exhibit E Form of Assignment Agreement
Exhibit F Form of Notice of Borrowing
Exhibit G Form of Notice of Continuation
</TABLE>
iv.
<PAGE> 6
This Credit Agreement (this "Agreement") dated as of October 2, 1997 is
entered into among Read-Rite Corporation, a Delaware corporation (the
"Borrower"), the financial institutions named on the signature pages hereof or
who otherwise become parties hereto pursuant to Section 9.06(a) (each a "Bank"
and collectively the "Banks"), Canadian Imperial Bank of Commerce, New York
Agency, as agent for the Banks (in such capacity the "Agent"), Canadian Imperial
Bank of Commerce, New York Agency, as issuer of Letters of Credit (in such
capacity the "Designated Issuer"), and CIBC Wood Gundy Securities Corp. (the
"Arranger").
RECITALS
WHEREAS, the Borrower desires to obtain certain revolving credit
facilities and term loan facilities and the Banks are willing to provide such
facilities on the terms set forth herein.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Defined Terms As used in this Agreement, the following
terms have the following meanings:
"Acquisition": As defined in Section 6.02(l).
"Affiliate": As applied to any Person, any Person directly or indirectly
controlling, controlled by or under common control with, that Person. For the
purposes of this definition, "control" (including with correlative meanings, the
terms "controlling", "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
Person, whether through the ownership of voting securities or by contract or
otherwise.
"Agent": As set forth in the introductory paragraph of this Agreement.
"Agreement": This Credit Agreement, as amended, supplemented or modified
from time to time.
"Applicable Margin": With respect to any Pricing Period means the rate
per annum correlative to the ratio of Senior Debt to Total Capitalization
applicable to such Pricing Period as set forth in the pricing grid below:
1.
<PAGE> 7
<TABLE>
<CAPTION>
Ratio of Senior Debt
to Total Capitalization Applicable Margin
--------------------- ----------------
<S> <C>
Greater than 0.3:1.0 0.750%
Greater than 0.2:1.0 but less than or equal to 0.3:1.0 0.500%
Less than or equal to 0.2:1.0 0.375%
</TABLE>
For the purposes of determining the Applicable Margin, Senior Debt and Total
Capitalization shall be determined based on the financial statements and reports
for the last fiscal quarter ending at least forty days prior to the commencement
of the relevant Pricing Period as delivered pursuant to Section 6.01(a)(i) or
6.01(a)(ii); provided that if the Borrower shall fail to deliver to the Agent
the relevant financial statements and reports for any fiscal quarter prior to
the commencement of a Pricing Period, the Applicable Margin for such Pricing
Period shall be deemed to be at the highest rate; and provided, further, that
the Applicable Margin for the initial Pricing Period (running from the date of
this Agreement through June 28, 1998) shall be 0.500%.
"Assignment Agreement": An Assignment Agreement in substantially the
form of Exhibit E.
"Bank": As set forth in the introductory paragraph of this Agreement.
"Bank's Revolving Share": For each Bank, the percentage equal to such
Bank's Revolving Commitment as a percentage of the total aggregate Revolving
Commitments of all of the Banks.
"Base Rate": The higher of (i) the rate of interest announced from time
to time by Canadian Imperial Bank of Commerce in New York, New York as its Prime
Commercial Lending Rate and (ii) the sum of 1/2 of 1% plus the Federal Funds
Rate on the day prior to the date on which the Base Rate is to be determined.
The Prime Commercial Lending Rate is a reference rate; the Agent may make loans
at, above or below the Prime Commercial Lending Rate.
"Base Rate Loans", "Base Rate Term Loans" and "Base Rate Revolving
Loans": Loans, Term Loans or Revolving Loans (as appropriate) at such time as
they accrue interest at a rate based upon the Base Rate.
"Borrower": As set forth in the introductory paragraph of this
Agreement.
"Borrowing": A borrowing of Revolving Loans or Term Loans pursuant to
Article II of this Agreement.
"Business Day": A day other than a Saturday, Sunday or a day on which
commercial banks in New York, New York or San Francisco, California are
authorized or required by law to close.
2.
<PAGE> 8
"Capital Lease": As applied to any Person, any lease of any property
(whether real, personal or mixed) by that Person as lessee which would, in
accordance with GAAP, be required to be accounted for as a capital lease on the
balance sheet of that Person.
"Cash Collateralize" means to pledge and deposit with or deliver to the
Agent, for the benefit of the Agent, the Issuing Bank and the Banks, as
collateral for the obligations of the Borrower pursuant to this Agreement, cash
or deposit account balances pursuant to documentation in form and substance
satisfactory to the Agent and the Issuing Bank (which documents are hereby
consented to by the Banks). Derivatives of such term shall have corresponding
meaning. The Borrower hereby grants the Agent, for the benefit of the Agent, the
Issuing Bank and the Banks, a security interest in all such cash and deposit
account balances. Cash collateral shall be maintained in blocked, non-interest
bearing deposit accounts at the Agent.
"Change of Control": The occurrence, on or after the date this
Agreement, of any of the following:
(a) Any "person" (as such term is used in subsections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Act")) or group or syndicate
of persons becomes, directly or indirectly, the "beneficial owner" (as defined
in Rule 13d-3 under the Act), directly or indirectly, of securities representing
35% or more of the combined voting power of the Borrower's then-outstanding
voting securities entitled to vote in the election of directors;
(b) any consolidation of the Borrower with, or merger of the
Borrower into, any other Person, any merger of another Person into the Borrower,
or any sale or transfer of all or substantially all of the assets (other than to
a Wholly-Owned Subsidiary of the Borrower) of the Borrower to any other Person
(other than (x) any such transaction pursuant to which the holders of 50% or
more of the total voting power of all securities of the Borrower entitled to
vote generally in elections of directors immediately prior to such transaction
have, directly or indirectly, at least 50% or more of the total voting power of
all securities of the continuing or surviving corporation entitled to vote
generally in elections of directors of the continuing or surviving corporation
immediately after such transaction and (y) a merger (A) which does not result in
any reclassification, conversion, exchange or cancellation of outstanding shares
of capital stock of the Borrower or (B) which is effected solely to change the
jurisdiction of incorporation of the Borrower and results in a reclassification,
conversion or exchange of outstanding shares of Common Stock solely into shares
of common stock); or
(c) the existing directors of the Borrower for any reason cease
to constitute a majority of its board of directors. "Existing directors" means
(x) individuals constituting the Borrower's board of directors on the date of
this Agreement, and (y) any subsequent director whose election by the board of
directors or nomination for election by the Borrower's shareholders was approved
by a vote of at least a majority of the directors then in office, which
directors either were directors on the date of this Agreement or whose election
or nomination for election was previously so approved.
3.
<PAGE> 9
"Commitment": The obligation of each Bank to make Loans to the Borrower
and to reimburse the Issuing Bank for the unreimbursed portion of Letters of
Credit, each pursuant to Article II.
"Commitment Fee Percentage": With respect to any Pricing Period means
the rate per annum correlative to the ratio of Senior Debt to Total
Capitalization applicable to such Pricing Period as set forth in the pricing
grid below:
<TABLE>
<CAPTION>
Ratio of Senior Debt Commitment
to Total Capitalization Fee Percentage
--------------------- ----------------
<S> <C>
Greater than 0.3:1.0 0.250%
Greater than 0.2:1.0 but less than or equal to 0.3:1.0 0.200%
Less than or equal to 0.2:1.0 0.150%
</TABLE>
For the purposes of determining the Commitment Fee Percentage, Senior Debt and
Total Capitalization shall be determined based on the financial statements and
reports for the last fiscal quarter ending at least forty days prior to the
commencement of the relevant Pricing Period as delivered pursuant to Section
6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower shall fail to deliver
to the Agent the relevant financial statements and reports for any fiscal
quarter prior to the commencement of a Pricing Period, the Commitment Fee
Percentage for such Pricing Period shall be deemed to be at the highest rate;
and provided, further, that the Commitment Fee Percentage for the initial
Pricing Period (running from the date of this Agreement through June 28, 1998)
shall be 0.200%.
"Consolidated Current Liabilities": At any date of determination, the
Consolidated Liabilities that may properly be classified as current liabilities
in conformity with GAAP plus (without duplication) outstanding Revolving Loans
plus (without duplication) any Letter of Credit Usage.
"Consolidated Interest Expense": For any period, all interest expense
(including that portion attributable to Capital Leases in conformity with GAAP
and amortization of capitalized interest) of the Borrower and its Subsidiaries
on a consolidated basis determined in accordance with GAAP with respect to all
outstanding Debt of the Borrower and its Subsidiaries.
"Consolidated Liabilities": At any date of determination, the total
liabilities of the Borrower and its Subsidiaries required to be reflected on the
liability side of the consolidated balance sheet of the Borrower in accordance
with GAAP (including (1) any balance sheet liability with respect to a Pension
Plan recognized pursuant to Financial Accounting Standards Board Statements 87
or 88 and (2) any withdrawal liability under Section 4201 of ERISA with respect
to a withdrawal from a Multiemployer Plan, as such liability may be set forth in
a notice of withdrawal liability under Section 4219 (and as adjusted from time
to time subsequent to the date of such notice), but excluding Permitted
Subordinated Debt).
4.
<PAGE> 10
"Consolidated Net Income": For any period, on a consolidated basis
determined in accordance with GAAP, the net income (or loss) after income taxes
of the Borrower and its Subsidiaries for such period.
"Consolidated Quick Assets": At any date of determination, the total
cash, marketable securities and accounts receivable of the Borrower and its
Subsidiaries on a consolidated basis in conformity with GAAP, excluding any
Investments made by the Borrower or any of its Subsidiaries of the nature
permitted by Section 6.02(j)(xvi).
"Consolidated Tangible Net Worth": 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 Borrower and its Subsidiaries minus intangible
assets, on a consolidated basis determined in conformity with GAAP plus
Permitted Subordinated Debt. Consolidated Tangible Net Worth shall be calculated
without giving effect to any foreign currency translation adjustments.
"Debt": As applied to any Person, (i) all indebtedness for borrowed
money, (ii) that portion of obligations with respect to Capital Leases that 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), (vi) amounts outstanding under reimbursement obligations
to the issuer of any letter of credit other than trade or commercial letters of
credit and (vii) any direct or indirect liability, contingent or otherwise, of
that Person with respect to any obligation of another Person of the types listed
in clauses (i) through (vi) above.
"Designated Issuer": Canadian Imperial Bank of Commerce, New York
Agency.
"Disclosure Letter": The Disclosure Letter of even date herewith
delivered by the Borrower to the Agent and the Banks.
"Dollars and $": Dollars in lawful currency of the United States of
America.
"EBIT": The sum, determined on a rolling four-quarter basis, of the
following amounts for the Borrower on a consolidated basis determined in
accordance with GAAP: (i) Consolidated Net Income plus (ii) provisions for
income taxes plus (iii) Consolidated Interest Expense.
"Effective Date": The date on which all the conditions precedent set
forth in Section 4.01 are satisfied or waived in accordance with the terms of
this Agreement.
5.
<PAGE> 11
"Employee Benefit Plan": Any Pension Plan, any employee welfare benefit
plan, or any other employee benefit plan which is described in Section 3(3) of
ERISA and which is maintained for employees of the Borrower or any ERISA
affiliate of the Borrower.
"ERISA": The Employee Retirement Income Security Act of 1974, as amended
from time to time and any successor statute.
"ERISA Affiliate": As applied to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of Section
414(b) and (c) of the Internal Revenue Code.
"Eurodollar Business Day": A day which is a Business Day and on that
dealings in Dollar deposits may be carried out in the London interbank market.
"Eurodollar Rate": For each Interest Period the rate (rounded to the
next higher 1/100 of 1%) equal to (A) (i) the rate of interest per annum
determined by the Agent to be the rate of interest per annum appearing on
Telerate display page 3750 (or such other display page on the Telerate System as
may replace such page) for Dollar deposits in an amount substantially equal to
the proposed Eurodollar Rate Loan to be made, continued or converted by Agent,
in its individual capacity, and having a maturity comparable to such Interest
Period, at approximately 11:00 a.m. (London time) two Eurodollar Business Days
prior to the commencement of such Interest Period, subject to clause (ii) below;
or (ii) if for any reason the rate is not available as provided in the preceding
clause (i) of this definition, the "Eurodollar Rate" instead means the rate of
interest per annum determined by the Agent, on the basis of quotations furnished
to it by the Reference Banks, to be the average of the rates at which deposits
in Dollars are offered to prime banks by the principal office of the Reference
Banks in the London interbank market, at approximately 11:00 a.m. (London time),
two Eurodollar Business Days before the first day of such Interest Period, in
the approximate amount of the Eurodollar Rate Loan to be made by such Reference
Banks and for a period of time comparable to such Interest Period divided by (B)
a number equal to 1.00 minus the aggregate (but without duplication) of the
rates (expressed as a decimal fraction) of reserve requirements in effect on the
day which is two Eurodollar Business Days prior to the commencement of such
Interest Period (including basic, supplemental, marginal and emergency reserves
under any regulations of the Board of Governors of the Federal Reserve System or
other governmental authority having jurisdiction with respect thereto, as in
effect at the time the Reference Banks quote their rates to the Agent) for
Eurocurrency funding of domestic assets (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) that are required to be maintained
by a member bank of such System. If any Reference Bank does not provide its
offered quotation to the Agent, the Eurodollar Rate shall be determined on the
basis of the rates quoted by the remaining Reference Banks. The determination of
the Eurodollar Rate by the Agent shall be conclusive in the absence of manifest
error.
"Eurodollar Rate Loans", "Eurodollar Rate Terms Loans" or "Eurodollar
Rate Revolving Loans": Loans, Terms Loans or Revolving Loans (as appropriate) at
such time as they accrue interest at a rate based upon the Eurodollar Rate.
6.
<PAGE> 12
"Existing Letters of Credit": The Letters of Credit issued under the
Prior Credit Agreement and listed in Schedule 2.05(k) to the Disclosure Letter.
"Federal Funds Rate": On any day, a fluctuating interest rate per annum
equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York, or
if such rate is not so published for any day which is a Business Day, the
average of the quotations for such day on such transactions received by the
Agent from three Federal funds brokers of recognized standing selected by it.
"Fee Letter": That certain letter dated August 25, 1997 from the Agent
and Arranger, and countersigned by the Borrower, regarding the fees payable
pursuant to Sections 2.01(h) and 2.01(i).
"Financial Institution": Any (i) bank, savings bank, savings and loan
association or insurance company, (ii) pension plan or portfolio or investment
fund managed or administered by any bank, savings bank, savings and loan
association or insurance company, (iii) investment company owned by any bank,
savings bank, savings and loan association or insurance company, or (iv)
investment banking company.
"GAAP": Generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession.
"Indenture": The Original Indenture as the same may be amended,
supplemented or otherwise modified from time to time.
"Initial Term Loans": The Term Loans advanced by the Banks on the
Effective Date.
"Interest Payment Date": As to any Base Rate Loan until payment in full,
the Maturity Date and the last Business Day of each March, June, September and
December commencing on the first of such days to occur after a Base Rate Loan is
made. As to any Eurodollar Rate Loan with an Interest Period of three months or
less until payment in full, the last day of such Interest Period and the
Maturity Date, and as to any Eurodollar Rate Loan with an Interest Period in
excess of three months until payment in full, (i) the last day of the three
month period commencing on the first day of such Interest Period, (ii) the last
day of such Interest Period and (iii) the Maturity Date.
"Interest Period": With respect to any Eurodollar Rate Loan:
(i) initially, the period commencing on, as the case may
be, the
7.
<PAGE> 13
Borrowing or conversion date with respect to such Eurodollar Rate Loan and
ending one, two, three or six months thereafter as selected by the Borrower in
its notice of Borrowing as provided in Section 2.01(c) or its notice of
conversion as provided in Section 2.04; and
(ii) thereafter, each period commencing on the last day of
the next preceding Interest Period applicable to such Eurodollar Rate Loan and
ending one, two, three or six months thereafter as selected by the Borrower in
its notice of continuation as provided in Section 2.04;
(a) if any Interest Period for a Eurodollar Rate Loan would
otherwise end on a day which is not a Eurodollar Business Day, that Interest
Period shall be extended to the next succeeding Eurodollar Business Day unless
the result of such extension would be to carry such Interest Period into another
calendar month in which event such Interest Period shall end on the immediately
preceding Eurodollar Business Day;
(b) the Borrower may not select an Interest Period with respect
to any portion of principal of a Eurodollar Rate Loan which extends beyond the
Maturity Date or which, with respect to Eurodollar Rate Term Loans, would extend
beyond the scheduled repayment date pursuant to Section 2.02(b) for such portion
of principal of such Loan; and
(c) there shall be no more than six Interest Periods with
respect to Eurodollar Loans outstanding at any time.
"Internal Revenue Code": The Internal Revenue Code of 1986, as amended
to the date hereof and from time to time hereafter.
"Investment": As defined in Section 6.02(j).
"Issuing Bank": In case of all Letters of Credit issued hereunder, the
Designated Issuer or any other Bank that may act as the issuer of such Letter of
Credit hereunder as described in Section 2.05(i).
"Letter of Credit" or "Letters of Credit": Any Dollar denominated letter
of credit issued or to be issued by the Issuing Bank for the account of the
Borrower or any Subsidiary pursuant to Section 2.05 for the purpose of (i)
providing the primary payment mechanism in connection with the purchase of any
materials, goods or services by the Borrower or any Subsidiary in its ordinary
course of business or (ii) supporting any other obligations of the Borrower or
any Subsidiary permitted under this Agreement.
"Letter of Credit Usage": At any date of determination, the sum of (i)
the maximum aggregate amount that is or at any time thereafter may become
available for drawing under all Letters of Credit then outstanding and (ii) the
aggregate amount of all drawings under Letters of Credit honored by the Issuing
Bank and not theretofore reimbursed by the Borrower or converted to Revolving
Loans pursuant to Section 2.05(e).
8.
<PAGE> 14
"Lien": Any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind or other preferential arrangement (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest).
"Loans": Revolving Loans and Term Loans made to the Borrower pursuant to
Section 2.01.
"Loan Agreements": This Agreement, the Notes, the Disclosure Letter, the
Letters of Credit, the Letter of Credit applications delivered in connection
with each request for the issuance of a Letter of Credit, the Fee Letter, any
amendment to this Agreement or any other Loan Agreement, and any waiver to this
Agreement or any other Loan Agreement.
"Loan Documents": The Loan Agreements and each other certificate or
document delivered by the Borrower to the Agent or any Bank prior to the
Effective Date pursuant to Section 4.01, any amendment to any Loan Document, and
any waiver to any Loan Document.
"Majority Banks": As of any date of determination, Banks owed at least
51% of the then aggregate unpaid principal amount of the Notes, or, if no
principal amount of the Notes is outstanding, then Banks having at least 51% of
the Commitments.
"Material Adverse Effect": A material adverse effect (i) on the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of the Borrower and its Subsidiaries, taken as a whole, or (ii) on
the ability of the Borrower to perform, or of any of the Banks to enforce, the
obligations of the Borrower under the Loan Agreements.
"Maturity Date": October 2, 2001.
"Multiemployer Plan": A "multiemployer plan" as defined in Section
4001(a)(3) of ERISA which is maintained for employees of the Borrower or any
ERISA Affiliate of the Borrower.
"Note" and Notes": Any one or more of the Revolving Notes and Term
Notes.
"Offered Commitment": With respect to any Bank, the maximum firm
commitment offered to be undertaken by such Bank prior to September 15, 1997, as
notified to the Agent and the Borrower.
"Original Indenture": That certain Indenture, dated as of August 15,
1997, between the Borrower and State Street Bank and Trust Company of
California, N.A., as Trustee, as supplemented by a Supplemental Indenture dated
as of August 15, 1997 between the Borrower and such Trustee.
"Other Taxes": As defined in Section 3.13.
9.
<PAGE> 15
"Pension Plan": Any employee plan which is subject to Section 412 of the
Internal Revenue Code and which is maintained for employees of the Borrower or
any ERISA Affiliate of the Borrower, other than a Multiemployer Plan.
"Permitted Investments": Investments permitted under the Borrower's
investment policy as approved by the Borrower's Board of Directors (a true and
correct copy of which, as in effect on the date hereof, has been delivered to
each of the Banks), as amended from time to time, which amendments shall be
subject to the prior approval of the Agent.
"Permitted Subordinated Debt": The Debt evidenced by the Subordinated
Notes and such other Debt that (a) is subject to subordination provisions no
less favorable to the Banks than the subordination provisions set forth in the
Original Indenture, (b) has a maturity no earlier than thirty (30) days after
the Maturity Date, (c) bears an interest rate not in excess of the rate that has
been approved in writing by the Majority Banks and (d) is in an aggregate
principal amount not in excess of the amount that has been approved in writing
by the Majority Banks.
"Person": An individual, partnership, corporation, business trust, joint
stock company, trust, unincorporated association, joint venture, governmental
authority or other entity of whatever nature.
"Potential Event of Default": A condition or event which, after notice
or lapse of time or both, would constitute an Event of Default if that condition
or event were not cured or removed within any applicable grace or cure period.
"Pricing Period": The initial Pricing Period applicable to the Loans and
Letters of Credit shall commence on the date of this Agreement and shall
continue through June 28, 1998 and the second Pricing Period shall commence on
June 29, 1998 and shall continue through August 31, 1998. Thereafter the Pricing
Periods shall be determined as follows:
(a) September 1 through December 31 of each calendar year
(b) January 1 through the last day of February of each calendar year
(c) March 1 through May 31 of each calendar year
(d) June 1 through August 31 of each calendar year
"Prior Credit Agreement": That certain credit agreement dated as of
December 14, 1994, among the Borrower, Canadian Imperial Bank of Commerce, New
York Agency (as successor in interest to CIBC Inc.), as agent, and certain
financial institutions referred to therein, as such agreement has been restated,
amended and supplemented.
"Prior Loan Documents": The Prior Credit Agreement and Prior Term Loan
Agreement.
"Prior Term Loan": The term loan made pursuant to the Prior Term Loan
Agreement.
"Prior Term Loan Agreement": That certain term loan agreement dated as
of June 28, 1996, among the Borrower, Canadian Imperial Bank of Commerce, New
York Agency, as agent,
10.
<PAGE> 16
and certain financial institutions referred to therein, as such agreement has
been amended, amended and supplemented.
"Read-Rite International": Read-Rite International, a Cayman Islands
corporation.
"Read-Rite SMI": Read-Rite SMI Corporation, a Japanese corporation
formed by the Borrower and Sumitomo Metal Industries, Ltd. for the purpose of
developing and selling the products of the Borrower in Japan.
"Reference Banks": Canadian Imperial Bank of Commerce and any of the
other Banks that the Agent may from time to time designate.
"Regulation G, T, U and X": Regulations G, T, U and X, respectively,
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time, and any successors thereto.
"Repayment Date": As defined in Section 2.02(b).
"Responsible Officer": With respect to any financial or accounting
documents or matters, any of the Chief Financial Officer, Controller, Assistant
Controller or Treasurer of the Borrower; and with respect to other documents any
of the foregoing or the Chief Executive Officer of the Borrower.
"Revolving Commitment": For any Bank, the amount set forth as such
opposite the name of such Bank on the signature page to this Agreement as
reduced, from time to time, pursuant to Section 2.01(e) or, where the context so
requires, the obligation of a Bank to make Revolving Loans up to such amount.
"Revolving Facility": The amount of $150,000,000 as such amount may be
reduced pursuant to Section 2.01(e).
"Revolving Loans": As defined in Section 2.01(a).
"Revolving Note" and "Revolving Notes": As defined in Section 2.01(f).
"S.E.C.": The United States Securities and Exchange Commission and any
successor institution or body which performs the functions or substantially all
of the functions thereof.
"Senior Debt": All consolidated Debt of the Borrower other than
Permitted Subordinated Debt.
"SMI Joint Venture": The joint venture formed by the Borrower and
Sumitomo Metal Industries, Ltd. pursuant to the SMI Joint Venture Agreement.
"SMI Joint Venture Agreement": That certain Joint Venture Agreement,
dated as of
11.
<PAGE> 17
June 14, 1991, between the Borrower and Sumitomo Metal Industries, Ltd.,
providing for the formation of Read-Rite SMI, and (unless the context otherwise
requires) such agreement as it may be amended from time to time.
"Subordinated Notes": The 6-1/2% Convertible Subordinated Notes due
September 1, 2004 issued pursuant to the Original Indenture.
"Subsidiary": A corporation of which shares of stock having ordinary
voting power (other than stock having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, directly, or indirectly
through one or more intermediaries, or both, by the Borrower.
"subsidiary": With respect to any Person, a corporation of which shares
of stock having ordinary voting power (other than stock having such power only
by reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such corporation, or both, by such Person.
"Tangible Assets": With respect to any subsidiary of Read-Rite
International, the total assets of such subsidiary less goodwill, intellectual
property rights, organizational expenses, research and development expenses and
other intangible assets of the subsidiary all determined in accordance with
GAAP.
"Taxes": As defined in Section 3.13.
"Term Commitment": For any Bank, the amount set forth as such opposite
the name of such Bank on the signature page to this Agreement or where the
context so requires the obligation of a Bank to make Term Loans up to such
amount.
"Term Facility": The amount of $50,000,000.
"Termination Event": (i) a "Reportable Event" described in Section 4043
of ERISA and the regulations issued thereunder (other than a "Reportable Event"
not subject to the provision for 30-day notice to the Pension Benefit Guaranty
Corporation under such regulations), or (ii) the withdrawal of the Borrower or
any of its ERISA Affiliates from a Pension Plan during a plan year in which it
was a "substantial employer" as defined in Section 4001(1) (2) or 4068(f) of
ERISA, or (iii) the filing of a notice of intent to terminate a Pension Plan or
the treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA, or (iv) the institution of proceedings to terminate a Pension Plan by the
Pension Benefit Guaranty Corporation, or (v) any other event or condition which
might constitute grounds under ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan, or (vi) the imposition of a Lien
pursuant to Section 412(n) of the Internal Revenue Code.
"Term Loan": As defined in Section 2.01(b).
"Term Note" and "Term Notes": As defined in Section 2.01(g).
12.
<PAGE> 18
"Total Capitalization": At any time of determination, the sum of the
consolidated stockholders' equity of the Borrower determined in accordance with
GAAP and the aggregate consolidated Debt of the Borrower.
"Total Liabilities": With respect to any subsidiary of Read-Rite
International, all liabilities required to be reflected on the liabilities side
of a balance sheet of the relevant subsidiary in accordance with GAAP including,
without limitation, all Debt of such subsidiary.
"Transfer": As defined in Section 6.02(k).
"Wholly Owned Subsidiary": A Subsidiary, all of the stock of every class
of which, except (a) directors' qualifying shares and (b) any shares issued to
comply with local ownership legal requirements, is owned, directly or
indirectly, by the Borrower.
Section 1.02. Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the same
meanings when used in the Notes or any certificate or other document made or
delivered pursuant hereto, unless otherwise defined therein.
(b) As used herein and in the Notes, and any certificate or
other document made or delivered pursuant hereto, accounting terms not defined
in Section 1.01, and accounting terms partly defined in Section 1.01 to the
extent not defined, shall have the respective meanings given to them under GAAP
as the case may be. In the event that GAAP changes during the term of this
Agreement such that the financial covenants contained in Sections 6.02(a)
through (e) or (g) would then be calculated in a different manner or with
different components, (i) the Borrower and the Banks agree to negotiate to amend
this Agreement in such respects as are necessary to conform those covenants as
criteria for evaluating the Borrower's financial condition to substantially the
same criteria as were effective prior to such change in GAAP and (ii) the
Borrower shall be deemed to be in compliance with the financial covenants
contained in such Sections, pending reaching agreement on such amendment,
following any such change in GAAP if and to the extent that the Borrower would
have been in compliance therewith under GAAP as in effect immediately prior to
such change.
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. All article,
section, subsection, schedule and exhibit references are to this Agreement
unless otherwise specified.
(d) So long as the Borrower does not have any Subsidiaries,
references to a Subsidiary or Subsidiaries in this Agreement shall be deemed to
be deleted.
(e) The terms defined in this Section 1.01 include the plural
as well as the
13.
<PAGE> 19
singular. Pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms. The terms "includes" and "including" shall
not be construed to imply any limitation.
(f) In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including"; the words
"to" and "until" each mean "to but excluding"; and the word "through" means "to
and including."
ARTICLE II
THE LOANS
Section 2.01. The Loans.
(a) The Revolving Facility. Each Bank severally agrees, on the
terms and conditions hereinafter set forth, to make revolving loans (each a
"Revolving Loan" and collectively the "Revolving Loans") to the Borrower from
time to time during the period from the Effective Date through the Maturity Date
in an aggregate amount not to exceed at any time such Bank's Revolving
Commitment; provided, however, that the Banks shall not be obligated on any date
to make any Revolving Loans which, when added to the aggregate principal amount
of outstanding Revolving Loans on such date and the Letter of Credit Usage on
such date, would exceed the Revolving Facility then in effect. Base Rate
Revolving Loans shall be in an aggregate minimum amount of $1,000,000 and in an
integral multiple of $100,000. Eurodollar Rate Revolving Loans shall be in an
aggregate minimum amount of $2,000,000 and in an integral multiple of $500,000.
Each Borrowing made pursuant to this Section 2.01(a) shall be made on the same
day by the Banks ratably according to their respective Revolving Commitments.
Within the limits of the Revolving Facility, the Borrower may borrow, repay
pursuant to Section 2.02(c) and reborrow under this Section; provided, that at
no time shall the aggregate principal amount of outstanding Revolving Loans plus
the Letter of Credit Usage exceed the Revolving Facility then in effect.
(b) The Term Facility. Each Bank severally agrees, on the terms
and conditions hereinafter set forth, to make a term loan (each a "Term Loan"
and collectively the "Term Loans") to the Borrower in a single advance on the
Effective Date in an amount not to exceed such Bank's Term Commitment. Base Rate
Term Loans shall be in an aggregate minimum amount of $1,000,000 and an integral
multiple of $100,000. Eurodollar Rate Term Loans shall be in an aggregate
minimum amount of $2,000,000 and an integral multiple of $500,000. Any portion
of the Term Facility not borrowed on the Effective Date shall be automatically
canceled and the Term Commitment of each Bank reduced accordingly. Any amount of
the Term Loans repaid may not be reborrowed.
14.
<PAGE> 20
(c) Making the Loans.
(1) The Borrower may borrow under the Revolving Facility on
any Business Day if the Borrowing is to consist of a Base Rate Revolving Loan
and on any Eurodollar Business Day if the Borrowing is to consist of a
Eurodollar Rate Revolving Loan; provided that the Borrower shall give the Agent
irrevocable notice (which notice shall be substantially in the form of Exhibit F
and must be received by the Agent prior to 9:00 A.M., San Francisco time) (i)
three Eurodollar Business Days prior to the requested Borrowing date in the case
of a Eurodollar Rate Revolving Loan, and (ii) on or before the requested
Borrowing date in the case of a Base Rate Revolving Loan, specifying (A) the
amount of the proposed Borrowing, (B) the requested date of the Borrowing, (C)
whether the Borrowing is to consist of a Eurodollar Rate Revolving Loan or a
Base Rate Revolving Loan (provided that Eurodollar Rate Revolving Loans may only
be requested by notice given on or after the Effective Date), and (D) if the
Loan is to be a Eurodollar Rate Revolving Loan, the length of the Interest
Period therefor. Promptly following receipt of such notice, the Agent shall
notify each Bank of the date of the Revolving Loan, whether the Revolving Loan
will be a Base Rate Revolving Loan or a Eurodollar Rate Revolving Loan, the
amount of that Bank's pro rata share of the Revolving Loan and, if the Revolving
Loan is a Eurodollar Rate Revolving Loan, the applicable Interest Period. Not
later than 11:00 a.m., San Francisco time, on the date specified for any
Revolving Loan, each Bank shall make its pro rata share of the Revolving Loan in
immediately available funds available to the Agent at its address set forth on
the signature pages hereof. Upon satisfaction of the applicable conditions set
forth in Article IV, the Agent will make available the proceeds of all such
Revolving Loans to the Borrower by crediting the account of the Borrower on the
books of the Agent, or as otherwise directed by the Borrower.
(2) The borrowing of Term Loans on the Effective Date shall
be made on the notice of the Borrower and shall initially consist of Base Rate
Term Loans. The Borrower shall deliver to the Agent on or prior to the Effective
Date an irrevocable notice (which notice shall be substantially in the form of
Exhibit F and must be received by the Agent prior to 9:00 a.m. San Francisco
time on the Effective Date) specifying (A) the amount of the proposed Borrowing,
and (B) the requested date of Borrowing. Promptly following receipt of such
notice, the Agent shall notify each Bank of the proposed date of the Borrowing
of Term Loans and the amount of that Bank's pro rata share of the Borrowing. Not
later than 11:00 a.m., San Francisco time, on the Effective Date, each Bank
shall deposit immediately available funds in the amount of its pro rata share of
the Borrowing of Term Loans to the account of the Agent set forth on the
signature pages hereof. Upon satisfaction of the applicable conditions set forth
in Article IV, the Agent will make available the proceeds of the Term Loans to
the Borrower by crediting the account of the Borrower on the books of the Agent
or otherwise as directed by the Borrower. On or after the Effective Date, the
Borrower may elect to continue or convert the Term Loan into one or more Base
Rate Term Loans or Eurodollar Rate Term Loans as described in Section 2.04.
(3) A notice of Borrowing shall be irrevocable and may be
given orally (including telephonically) or in writing substantially in the form
of Exhibit F (including
15.
<PAGE> 21
telex or facsimile transmission) and any conflict regarding a notice or between
an oral notice and a written notice applicable to the same Borrowing shall be
conclusively determined by the Agent's books and records. Any oral notice shall
be promptly confirmed in writing substantially in the form of Exhibit F to the
Agent on the same Business Day. The Agent's failure to receive any written
notice of a particular Borrowing shall not relieve the Borrower of its
obligations to repay the Borrowing made and to pay interest thereon. The Agent
shall not incur any liability to the Borrower in acting upon any notice of
Borrowing that the Agent believes in good faith to have been given by a Person
duly authorized to borrow on behalf of the Borrower.
(4) Unless the Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Agent such Bank's ratable portion of such Borrowing, the Agent may assume that
such Bank has made such portion available to the Agent on the date of such
Borrowing in accordance with subsection (1) or (2) of this Section 2.01(c) and
the Agent may, in reliance upon such assumption, make available to the Borrower
on such date a corresponding amount. If and to the extent that such Bank shall
not have so made such ratable portion available to the Agent, such Bank and the
Borrower severally agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent, at (i) in the case of the Borrower, the interest rate
applicable at the time to such Borrowing and (ii) in the case of such Bank, the
average daily Federal Funds Rate for such period. If such Bank shall repay to
the Agent such corresponding amount, such amount so repaid shall constitute such
Bank's pro rata share of such Borrowing for purposes of this Agreement. The
failure of any Bank to make available its pro rata share of any Borrowing shall
not relieve any other Bank of its obligation, if any, hereunder to make
available its pro rata share of such Borrowing on the date of such Borrowing,
but no Bank shall be responsible for the failure of any other Bank to make
available its pro rata share of any Borrowing on the date of any Borrowing. The
Borrower reserves all of its rights against any defaulting Bank.
(d) Commitment Fee. The Borrower agrees to pay to the Agent,
for the ratable account of the Banks, a commitment fee on the daily unused
portion of the Banks' Commitments in each Pricing Period at a rate per annum
equal to the Commitment Fee Percentage applicable to such Pricing Period. For
the purposes of calculating the commitment fee, the Letter of Credit Usage shall
be deemed a usage of the Revolving Commitment. The commitment fee shall be
determined by the Agent and shall be payable upon the Interest Payment Dates
applicable to Base Rate Loans and shall be based upon the number of days elapsed
from the previous Interest Payment Date or date of this Agreement (as
appropriate).
(e) Reduction of the Revolving Commitment. The Borrower shall
have the right, upon at least two Business Days' notice to the Agent, to
terminate in whole or reduce in part the unused portion of the Revolving
Commitment, without premium or penalty; provided that each partial reduction
shall be in the aggregate minimum amount of $5,000,000 or an integral multiple
of $1,000,000 thereafter and
16.
<PAGE> 22
(ii) that such reduction shall not reduce the Revolving Commitment to an amount
less than the aggregate principal amount of Revolving Loans plus the Letters of
Credit Usage hereunder on the effective date of the reduction and (iii) that
following such reduction, the aggregate Revolving Commitments of the Banks shall
not be less than $50,000,000.
(f) Revolving Notes. The Revolving Loans made by the Banks
pursuant hereto shall be evidenced by promissory notes of the Borrower,
substantially in the form of Exhibit A, with appropriate insertions (each a
"Revolving Note" and collectively the "Revolving Notes"), payable to the order
of each Bank and representing the obligation of the Borrower to pay the
aggregate unpaid principal amount of all Revolving Loans made by that Bank, with
interest thereon as prescribed in Section 2.03. Each Bank is hereby authorized
to record in its books and records and on any schedule annexed to a Revolving
Note, the date and amount of each Revolving Loan made by that Bank, and the date
and amount of each payment of principal thereof, and in the case of Eurodollar
Rate Revolving Loans, the Interest Period and interest rate with respect thereto
and any such recordation shall constitute prima facie evidence of the accuracy
of the information so recorded; provided that failure by any Bank to effect such
recordation shall not affect the Borrower's obligations hereunder. Prior to the
transfer of a Revolving Note, each Bank shall record such information on any
schedule annexed to and forming a part of such Revolving Note.
(g) Term Notes. The Term Loans made by the Banks pursuant
hereto shall be evidenced by promissory notes of the Borrower, substantially in
the form of Exhibit B, with appropriate insertions (each a "Term Note" and
collectively the "Term Notes"), payable to the order of each Bank and
representing the obligation of the Borrower to pay the unpaid principal amount
of the Term Loans made by that Bank, with interest thereon as prescribed in
Section 2.03. Each Bank is hereby authorized to record in its books and records
and on any schedule annexed to its Term Note, the date and amount of the Term
Loans made by that Bank and the date and amount of each payment of principal
thereof, and in the case of Eurodollar Rate Term Loans, the Interest Period and
interest rate with respect thereto and any such recordation shall constitute
prima facie evidence of the accuracy of the information so recorded; provided
that failure by any Bank to effect such recordation shall not affect the
Borrower's obligations hereunder. Prior to the transfer of a Term Note, the
transferring Bank shall record such information on any schedule annexed to and
forming a part of such Term Note.
(h) Arrangement Fee. The Borrower agrees to pay on the date of
this Agreement to the Arranger, for its own account, a non-refundable fee in the
amount set forth in the Fee Letter.
(i) Agency Fee. The Borrower agrees to pay on the date of this
Agreement, and thereafter on such dates as agreed, to the Agent for its own
account, such fee for agency services rendered by it as set forth in the Fee
Letter (or as shall otherwise be separately agreed between the Borrower and
Agent from time to time).
17.
<PAGE> 23
(j) Upfront Fee. The Borrower agrees to pay on the date of this
Agreement to the Agent, for the ratable benefit of each Bank in accordance with
its Commitment on the date hereof, upfront fees determined in accordance with
the following pricing grid:
<TABLE>
<CAPTION>
Offered Upfront Fee
Commitment of a Bank Payable to a Bank
--------------------- ----------------------
<S> <C>
Less than $25,000,000 but greater than or equal to $15,000,000 0.10% of Commitment
Greater than or equal to $25,000,000 0.15% of Commitment
</TABLE>
Section 2.02. Repayment.
(a) Repayment of Revolving Loans. The aggregate principal
amount of the Revolving Loans outstanding on the Maturity Date, together with
accrued interest thereon, shall be due and payable in full on the Maturity Date.
(b) Repayment of Term Loans. The aggregate principal amount of
the Term Loans, together with accrued interest thereon, shall be repaid in
twelve (12) consecutive installments commencing on the date that is three (3)
months after the first anniversary of the Effective Date and on each date that
is three (3) months thereafter (each a "Repayment Date") in accordance with the
following schedule:
18.
<PAGE> 24
<TABLE>
<CAPTION>
Aggregate Term Loan
Principal Repayment
(as a percentage of the
Repayment Date Initial Term Loans)
-------------- -----------------------
<S> <C>
1 5%
2 5%
3 5%
4 5%
5 7.5%
6 7.5%
7 7.5%
8 7.5%
9 12.5%
10 12.5%
11 12.5%
12 any outstanding principal
amount of the Term Loans
</TABLE>
(c) Optional Payment. The Borrower may at its option repay the
Revolving Loans or prepay the Term Loans (in each case, together with accrued
interest on such Loan (except in the case of a Revolving Loan which is a Base
Rate Loan, as to which interest will be payable on the next Interest Payment
Date) and any amounts payable pursuant to Section 3.07(b) with respect to such
payment), in whole or in part, at any time and from time to time; provided that
the Agent shall have received from the Borrower notice of any such payment at
least one Business Day prior to the date of the proposed payment if such date is
not the last day of the then current Interest Period for each Loan being paid,
in each case specifying the date and the amount of payment. Partial payments
hereunder shall be in an aggregate principal amount of the lesser of (i)
$500,000 or any integral multiple thereof and (ii) the outstanding balance of
the Loan being paid.
(d) Application. Any prepayments made pursuant to Section
2.02(c) with respect to Term Loans shall be applied in inverse order of
maturity. Notwithstanding the foregoing, following an Event of Default the
application of any payment received from the Borrower shall be determined by the
Majority Banks in their sole discretion.
Section 2.03. Interest Rate and Payment Dates.
(a) Payment of Interest. Interest with respect to each Loan
shall be payable in arrears on each Interest Payment Date for such Loan and on
each date upon which a Loan is repaid if required under Section 2.02.
19.
<PAGE> 25
(b) Base Rate Loans. Base Rate Loans shall bear interest on the
unpaid principal amount thereof at a fluctuating rate per annum equal to the
Base Rate in effect at such time.
(c) Eurodollar Rate Loans. Eurodollar Rate Loans shall bear
interest for each Interest Period, or remaining portion thereof, with respect
thereto on the unpaid principal amount thereof at a rate per annum equal to the
Eurodollar Rate determined for such Interest Period plus the Applicable Margin
(as applicable during such period).
20.
<PAGE> 26
Section 2.04. Continuation and Conversion Options. The Borrower may
elect from time to time to convert its outstanding Loans from Loans tions
bearing interest at a rate determined by reference to one basis to Loans bearing
interest at a rate determined by reference to an alternative basis by giving the
Agent (i) irrevocable notice of an election to convert Eurodollar Rate Loans to
Base Rate Loans and (ii) at least three Eurodollar Business Days' prior
irrevocable notice of an election to convert Base Rate Loans to Eurodollar Rate
Loans; provided that any conversion of Eurodollar Rate Loans shall only be made
on the last day of an Interest Period with respect thereto; provided, further
that no Base Rate Loan may be converted to a Eurodollar Rate Loan so long as an
Event of Default or Potential Event of Default has occurred and is continuing.
The Borrower may elect from time to time to continue its outstanding Eurodollar
Rate Loans upon the expiration of the Interest Period(s) applicable thereto by
giving to the Agent at least three Eurodollar Business Days' prior irrevocable
notice of continuation of a Eurodollar Rate Loan and the succeeding Interest
Period(s) of such continued Loan or Loans will commence on the last day of the
Interest Period of the Loan to be continued; provided that no Eurodollar Rate
Loan may be continued as a Eurodollar Rate Loan so long as an Event of Default
or Potential Event of Default has occurred and is continuing. Each notice
electing to convert or continue a Loan shall specify: (i) the proposed
conversion/continuation date; (ii) the amount of the Loan to be
converted/continued; (iii) the nature of the proposed continuation/conversion;
(iv) in the case of a conversion to, or continuation of a Eurodollar Rate Loan,
the requested Interest Period; and (v) whether the Loan is a Revolving Loan or
Term Loan, and shall certify that no Event of Default or Potential Event of
Default has occurred and is continuing. On the date on which such conversion or
continuation is being made, each Bank shall take such action as is necessary to
effect such conversion or continuation. In the event that no notice of
continuation or conversion is received by the Agent with respect to outstanding
Eurodollar Rate Loans, upon expiration of the Interest Period(s) applicable
thereto, such Loans shall convert to Base Rate Loans. Subject to the limitations
set forth in this Section and in the definition of Interest Period, all or any
part of outstanding Loans may be converted or continued as provided herein;
provided that partial conversions or continuations of any Base Rate Loan to a
Eurodollar Rate Loan shall be in an aggregate minimum amount of $2,000,000 and
in an integral multiple of $500,000 thereafter and any conversion of a
Eurodollar Rate Loan to a Base Rate Loan shall be in an aggregate minimum amount
of $1,000,000 and in an integral multiple of $100,000. A notice of
conversion/continuation shall be irrevocable, may be given orally (including
telephonically), and shall be promptly confirmed by a notice of
conversion/continuation in writing substantially in the form of Exhibit G on the
same Business Day, or in writing substantially in the form of Exhibit G
(including facsimile transmission) and any conflict regarding a notice or
between an oral notice and a written notice applicable to the same Loan shall be
conclusively determined in the absence of manifest error by the Agent's books
and records. The Agent's failure to receive any written notice of a particular
Loan shall not relieve the Borrower of its obligations to repay the Loan made
and to pay interest thereon. The Agent shall not incur any liability to the
Borrower in acting upon any notice which the Agent believes in good faith to
have been given by a Person duly authorized to borrow on behalf of the Borrower.
21.
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Section 2.05. Letters of Credit.
(a) Letters of Credit. The Borrower may request from time to
time during the period from the date hereof to but excluding the Maturity Date
that the Issuing Bank issue Letters of Credit for the account of the Borrower;
provided that the Borrower shall not request the issuance of any Letter of
Credit, and the Issuing Bank shall not issue any Letter of Credit, (i) if, after
giving effect to such issuance, the Letter of Credit Usage would exceed
$10,000,000, (ii) if, after giving effect to such issuance, the sum of the
aggregate principal amount of outstanding Revolving Loans plus the Letter of
Credit Usage exceeds the Revolving Facility then in effect, (iii) if, after
giving effect to such issuance, the Letter of Credit Usage exceeds any
regulatory, legal or internal limit on the Issuing Bank's ability to issue the
requested Letter of Credit, (iv) if, the requested Letter of Credit would have
an expiration date (x) later than the Maturity Date or (y) more than one (1)
year from the date of issuance, (v) if any order, judgment, decree, request or
directive of any court, arbitrator, government authority or other regulatory
authority with jurisdiction over the Issuing Bank shall by its terms purport to
enjoin or restrain the Issuing Bank from issuing such Letter of Credit, or (vi)
if the Letter of Credit is in a currency other than Dollars.
(b) Request for Issuance; Payments Under Letters of Credit.
Whenever the Borrower requests that the Issuing Bank issue a Letter of Credit,
it shall deliver to the Issuing Bank an executed application for such Letter of
Credit in the form customarily required by the Issuing Bank and the form of the
Letter of Credit requested, together with such other information or materials as
the Issuing Bank may request with respect to such Letter of Credit no later than
2:00 p.m. (New York time) at least three (3) Business Days in advance of the
proposed date of issuance (which shall be a Business Day). The Issuing Bank
shall have the right to approve the form of the requested Letter of Credit, in
its sole discretion. To the extent any provisions of any such application for a
Letter of Credit are inconsistent with the terms hereof, the terms of this
Agreement shall be controlling. WITHOUT PREJUDICE TO THE APPLICATION OF SECTIONS
2.05(g) AND 2.05(j), IN DETERMINING WHETHER TO PAY UNDER ANY LETTER OF CREDIT,
THE ISSUING BANK SHALL BE RESPONSIBLE ONLY TO DETERMINE THAT THE DOCUMENTS AND
CERTIFICATES REQUIRED TO BE DELIVERED UNDER THAT LETTER OF CREDIT HAVE BEEN
DELIVERED AND THAT THEY COMPLY ON THEIR FACE WITH THE REQUIREMENTS OF THAT
LETTER OF CREDIT.
(c) Issuance of Letters of Credit. Upon the satisfaction of all
conditions set forth in Section 4.03, the Issuing Bank shall issue a Letter of
Credit by delivering the Letter of Credit to the beneficiary, and shall promptly
notify the Agent, and the Agent shall promptly notify each Bank, of the amount
and terms thereof. If the Issuing Bank cannot issue the requested Letter of
Credit, it shall so notify the Borrower as soon as practicable
22.
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but in no event later than the proposed date of issuance and the Borrower shall
either withdraw its application therefor or request that another Bank issue the
requested Letter of Credit.
(d) Participation by Banks in Letters of Credit. Upon the
issuance of a Letter of Credit and as to Existing Letters of Credit on the
Effective Date, each Bank shall be deemed to have irrevocably purchased from the
Issuing Bank, without recourse to or warranty from the Issuing Bank, a pro rata
undivided participation in such Letter of Credit, in an amount equal to the face
amount of such Letter of Credit multiplied by that Bank's Revolving Share.
(e) Reimbursement of Amounts Drawn Under Letters of Credit. The
Issuing Bank shall notify the Borrower and the Agent of each request for a
drawing under a Letter of Credit promptly after receipt thereof by the Issuing
Bank, and the Borrower shall reimburse the Issuing Bank for such amount in
immediately available funds prior to 1:00 p.m. (New York time) on the date of
the drawing. In the event that the Borrower shall fail to so reimburse the
Issuing Bank, the Issuing Bank shall promptly notify the Agent and the Agent
shall promptly notify each Bank. Prior to 2:00 p.m. (New York time) on the date
of any such notice of nonreimbursement by the Borrower, each Bank shall fund
pursuant to its participation in such Letter of Credit (which, unless the
conditions in Section 4.02 shall not have been met or waived, shall constitute a
Revolving Loan to the Borrower) in an amount equal to that Bank's ratable share
of the unreimbursed amount of such drawing, by depositing immediately available
funds in such amount to the account of the Issuing Bank set forth on the
signature pages hereof. Such Revolving Loans shall be evidenced by the Revolving
Notes and shall initially be Base Rate Loans. Any such reimbursement shall not
relieve or otherwise impair the obligation of the Borrower to reimburse the
Issuing Bank for the amount of any payment made by the Issuing Bank under any
Letter of Credit as set forth herein. If any Bank fails to make available to the
Issuing Bank the amount of such Bank's participation in such Letter of Credit as
provided above, the Issuing Bank shall be entitled to recover such amount on
demand from such Bank, together with interest thereon, for each day from the
date of notice to such Bank to the date such amount is paid to the Issuing Bank
at a rate which is at all times equal to (i) for the first three days after the
date of notice, the Federal Funds Rate and (ii) thereafter, two percent (2%) per
annum in excess of the Base Rate in effect from time to time.
(f) Compensation. The Borrower agrees to pay the following
amounts to the Agent with respect to Letters of Credit:
(i) with respect to each Letter of Credit, payable on the
date of issuance of such Letter of Credit and on the date of any extension or
amendment thereof, a nonrefundable Letter of Credit fee for the account of the
Issuing Bank equal to one-eighth of one percent (1/8%) per annum of the stated
amount of such Letter of Credit (or any increase therein in the case of an
amendment);
23.
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(ii) with respect to each Letter of Credit, a Letter of
Credit fee, for the ratable benefit of the Banks, for the period from and
including the date of issuance of the Letter of Credit to but not including the
date such Letter of Credit is drawn in full, expires or is terminated. Such
Letter of Credit fee shall be payable in respect of each Pricing Period at a
rate per annum equal to the Applicable Margin relative to such Pricing Period on
the stated amount of the Letter of Credit as at the date of its issuance. Such
Letter of Credit fee shall be payable quarterly in arrears on the last Business
Day of each March, June, September and December and on the Maturity Date;
(iii) with respect to drawings made under any Letter of
Credit to the extent a Revolving Loan cannot be made to reimburse the Issuing
Bank for each such drawing as the result of the failure of the Borrower to meet
any of the conditions set forth in Section 4.02, or the Issuing Bank is not
otherwise reimbursed for any reason, interest for the ratable benefit of the
Banks, payable on demand, on the amount paid by the Issuing Bank in respect of
each such drawing from the date of the drawing through the date such amount is
reimbursed by the Borrower at a rate that is at all times equal to two percent
(2%) per annum in excess of the Base Rate in effect from time to time; and
(iv) with respect to the amendment or transfer of each
Letter of Credit and each drawing made thereunder, documentary and processing
charges for the account of the Issuing Bank in accordance with the Issuing
Bank's standard schedule for such charges in effect at the time of amendment,
transfer or drawing, as the case may be, or other agreed upon rate.
(g) Obligations Absolute. The obligations of the Borrower to
reimburse the Issuing Bank for drawings made under each Letter of Credit and the
obligation of the Banks under Section 2.05(e) shall be unconditional and
irrevocable and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including the following circumstances:
(i) any lack of validity or enforceability of any Letter of
Credit or this Agreement;
(ii) the existence of any claim, set-off, defense or other
right which the Borrower may have at any time against the beneficiary or any
transferee of the Letter of Credit (or any Persons for whom any such transferee
may be acting), the Agent or any Bank or any other Person whether in connection
with this Agreement, the transactions contemplated herein or any unrelated
transaction (including any underlying transaction between the Borrower and the
beneficiary for which the Letter of Credit was procured);
(iii) any draft, certificate or any other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) payment against any draft, document or other demand
for payment
24.
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that does not comply with the terms of the Letter of Credit, provided that such
payment does not constitute gross negligence or willful misconduct on the part
of the Issuing Bank; and provided further that, in the event that any
reimbursement has been made by the Borrower or a Loan or a participation in the
Letter of Credit has been funded by a Bank other than the Issuing Bank, the
Issuing Bank shall not be relieved of any liability it may otherwise have to the
Borrower or the other Banks for any damages resulting from any gross negligence
or willful misconduct on the part of the Issuing Bank; or
(v) any other circumstance or happening whatsoever, whether
or not similar to any of the foregoing.
(h) Payments Avoided. If any payment received on account of any
reimbursement obligation in respect of a Letter of Credit and distributed to a
Bank as a participant under this Section 2.05 is thereafter set aside, avoided
or recovered from the Issuing Bank in connection with any receivership,
liquidation, reorganization or bankruptcy proceeding relating to the Borrower,
each Bank that received a distribution in respect of such payment shall, upon
demand by the Agent, pay to the Issuing Bank the amount of such distribution
received by such Bank.
(i) Issuing Bank. If for any reason, Canadian Imperial Bank of
Commerce is unable or refuses to issue a Letter of Credit hereunder, then the
Borrower shall have the right to request that another Bank act as the Issuing
Bank with respect to such Letter of Credit. Any other Bank acting as the issuer
of any Letter of Credit hereunder shall be treated for all purposes of this
Agreement as the Issuing Bank with respect to such Letter of Credit.
(j) Role of Issuing Bank. In performing its functions as
Issuing Bank, the Issuing Bank shall be entitled to the same benefits and
immunities as afforded to the Agent pursuant to Article VIII and shall, without
limitation, have no liability to any Bank for: (i) any action taken or omitted
(x) at the request or with the approval of the Majority Banks, or (y) without
gross negligence or willful misconduct on the part of the Issuing Bank; or (ii)
the due execution, effectiveness, validity or enforcement of any Letter of
Credit and other documents relating thereto. The Borrower assumes the risk of
all acts or omissions of any beneficiary or transferee with respect to its use
of any Letter of Credit.
(k) Existing Letters of Credit. On and after the Effective Date
the Existing Letters of Credit shall be deemed for all purposes (including
without limitation Sections 2.05(d), (e) and (f)) to be Letters of Credit
outstanding under this Agreement and shall be governed by and subject to the
application of this Agreement and the other Loan Documents. No amendment or
other changes to the Existing Letters of Credit shall be required to reflect the
continuance of such Letters of Credit under this Agreement.
25.
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(l) Amendment and Renewal of Letters of Credit. The Borrower
may, on at least three (3) Business Days advance notice to the Issuing Bank in
such form as the Issuing Bank may require, request the amendment or renewal of a
Letter of Credit. The Issuing Bank shall not amend or renew any Letter of Credit
if: (i) the Issuing Bank would not at such time have an obligation under this
Agreement to issue such Letter of Credit in its amended or renewed form; or (ii)
the beneficiary of any such Letter of Credit does not accept such amendment or
renewal. The date of any such amendment or renewal shall be treated as the
issuance date of such amended or renewed Letter of Credit for the purposes of
this Agreement.
(m) Repayment and Cash Collateralization. If at any time the
aggregate amount of Revolving Loans and Letter of Credit Usage outstanding shall
exceed the aggregate Revolving Commitments of the Banks then in effect, the
Borrower shall forthwith repay or prepay, as the case may be, the outstanding
principal amount of the Loans by an amount equal to such excess (together with
any amounts payable pursuant to Section 3.07(b) with respect to such payment and
all accrued interest on the Loans repaid or prepaid). If after such repayment or
prepayment the Letter of Credit Usage outstanding shall still exceed the
aggregate Revolving Commitments of the Banks then in effect, the Borrower shall
Cash Collateralize the excess remaining after repayment of the Loans.
ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOANS
Section 3.01. The proceeds of the Revolving Loans hereunder shall be
used by the Borrower for general corporate purposes. The proceeds of the Term
Loans hereunder shall be used solely to repay the Prior Term Loan Agreement.
Section 3.02. Post Maturity Interest. Notwithstanding anything to the
contrary contained in Section 2.03, if all or a portion of the principal amount
of any of the Loans made hereunder or any interest accrued thereon shall not be
paid when due (whether at the stated maturity, by acceleration or otherwise),
any such overdue amount shall bear interest at a rate per annum that is equal to
the greater of (a) two percent (2%) above the highest rate which would otherwise
be applicable pursuant to Section 2.03 and (b) two percent (2%) above the Base
Rate, from the date of such nonpayment until paid in full (after as well as
before judgment), payable on demand. In addition, such Loan, if a Loan other
than a Base Rate Loan, shall be converted to a Base Rate Loan at the end of the
then current Interest Period therefor.
26.
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Section 3.03. Computation of Interest and Fees.
(a) Calculations. Interest in respect of the Base Rate Loans
and fees shall be calculated on the basis of a 365/366 day year for the actual
days elapsed. Any change in the interest rate on a Base Rate Loan resulting from
a change in the Base Rate shall become effective as of the opening of business
on the day on which such change in the Base Rate shall become effective.
Interest in respect of the Eurodollar Rate Loans shall be calculated on the
basis of a 360 day year for the actual days elapsed.
(b) Determination by Agent. Each determination of an interest
rate or fee by the Agent pursuant to any provision of this Agreement shall be
conclusive and binding on the Borrower in the absence of manifest error.
Section 3.04. Payments.
The Borrower shall make each payment of principal, interest and fees
hereunder and under the Notes, without setoff or counterclaim, not later than
10:00 A.M. (San Francisco time) on the day when due in lawful money of the
United States of America to the Agent at the office of the Agent designated from
time to time in immediately available funds. The Agent shall promptly pay to
each Bank such Bank's pro rata share of each payment received by the Agent.
27.
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Section 3.05. Payment on Non-Business Days. Whenever any payment to be
made hereunder or under the Notes shall be stated to be due on a day that is not
a Business Day, such payment may be made on the next succeeding Business Day,
and with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.
Section 3.06. Reduced Return. If any Bank or the Issuing Bank shall have
determined that any applicable law, regulation, rule or regulatory requirement
("Requirement") regarding capital adequacy, or any change therein, or any change
in the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Bank or the Issuing Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on that Bank's or the Issuing
Bank's capital as a consequence of its Commitments and obligations hereunder,
the Letters of Credit issued hereunder or its obligation to purchase a
participation in the Letters of Credit to a level below that which would have
been achieved but for such Requirement, change or compliance (taking into
consideration that Bank's or the Issuing Bank's, as the case may be, policies
with respect to capital adequacy) by an amount deemed by that Bank or the
Issuing Bank, as the case may be, to be material (which amount shall be
determined by that Bank's or the Issuing Bank's, as the case may be, reasonable
allocation of the aggregate of such reductions resulting from such events), then
from time to time, within five (5) Business Days after demand by such Bank or
the Issuing Bank, as the case may be, the Borrower shall pay to that Bank or the
Issuing Bank, as the case may be, such additional amount or amounts as will
compensate that Bank or the Issuing Bank, as the case may be, for such
reduction; provided, however, that the Borrower shall not be obligated to pay
any Bank or the Issuing Bank, as the case may be, for any such additional amount
incurred more than 180 days prior to the date of demand for payment by such Bank
or the Issuing Bank, as the case may be; provided, further, however, that the
Borrower shall not be obligated to pay any Bank or the Issuing Bank, as the case
may be, for any additional amount otherwise payable pursuant to this Section
3.06 to the extent such amount is reflected in adjustments to the interest rates
applicable to the Loans.
28.
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Section 3.07. Indemnities.
(a) General Indemnity. Whether or not the transactions
contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay
and hold the Agent, the Issuing Bank and each Bank, and the shareholders,
officers, directors, employees and agents of the Agent, the Issuing Bank and
each Bank (each, an "Indemnified Person"), harmless from and against any and all
claims, liabilities, losses, damages, costs and expenses, including reasonable
attorneys' fees and costs (including the reasonable estimate of the allocated
cost of in-house legal counsel and legal staff) and including costs of
investigation, document production, attendance at deposition or other discovery,
that may be incurred by or asserted against any Indemnified Person, in each case
arising out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or proceeding
arising out of, related to or in connection contemplated by this Agreement or
any contemplated use of the proceeds of the Loans, or the issuance of any Letter
of Credit, whether or not an Indemnified Person is a party thereto
(collectively, the "Indemnified Liabilities"), except to the extent that such
Indemnified Liabilities result from the gross negligence or willful misconduct
of the Agent, the Issuing Bank or any Bank. If any claim is made, or any action,
suit or proceeding is brought, against any Indemnified Person pursuant to this
Section, the Indemnified Person shall notify the Borrower of such claim or of
the commencement of such action, suit or proceeding, and the Borrower shall have
the option to, and at the request of the Indemnified Person shall, direct and
control the defense of such action, suit or proceeding, employing counsel
selected by the Borrower and reasonably satisfactory to the Indemnified Person,
and pay the fees and expenses of such counsel. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in this Section 3.07
may be unenforceable because it is violative of any law or public policy, the
Borrower shall contribute the maximum portion which it is permitted to pay and
satisfy under applicable law, to the payment and satisfaction of all Indemnified
Liabilities incurred by any Indemnified Person.
(b) Funding Losses. The Borrower agrees to indemnify each Bank
and to hold each Bank harmless from any loss or expense (excluding loss of
anticipated profits) including any such loss or expense arising from interest or
fees payable by such Bank to lenders of funds obtained by it in order to
maintain its Eurodollar Rate Loans hereunder, which such Bank may sustain or
incur as a consequence of (i) default by the Borrower in payment of the
principal amount of or interest on the Eurodollar Rate Loans, (ii) failure by
the Borrower to borrow a Eurodollar Rate Loan after delivery of a notice
required by Section 2.01(b)(1) or (2), (iii) default by the Borrower in making a
conversion or continuation after the Borrower has given a notice thereof (other
than pursuant to Section 3.09), (iv) default by the Borrower in making any
payment after the Borrower has given a notice of payment or (v) the Borrower
making any payment of a Eurodollar Rate Loan, or converting a Eurodollar Rate
Loan, on a day other than the last day of the Interest Period for such Loan
(other than pursuant to Section 3.09). For purposes of this Section and Section
3.11, it shall be assumed that the affected Bank had funded or would have funded
100%, as the case may be, of a Eurodollar Rate Loan in the London interbank
market for a corresponding amount and
29.
<PAGE> 35
term. Each Bank making a claim for payment under this Section shall submit to
the Agent, who shall promptly transmit it to the Borrower, an invoice for the
amount claimed to be owed by the Borrower, showing in reasonable detail the
calculations necessary to determine the amount. The determination of such amount
by such Bank shall be presumed correct in the absence of manifest error.
(c) Letters of Credit. As between the Borrower on the one hand
and the Issuing Bank and the other Banks on the other hand, the Borrower assumes
all risks of the acts and omissions of, or misuse of the Letters of Credit by,
the respective beneficiaries of the Letters of Credit. In furtherance and not in
limitation of the foregoing, the Issuing Bank shall not be responsible: (i) for
the form, validity, sufficiency, accuracy, genuineness or legal effect of any
document submitted by any party in connection with the application for an
issuance of or draw under the Letters of Credit, even if it should in fact prove
to be in any or all respects invalid, insufficient, inaccurate, fraudulent or
forged; (ii) for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign a Letter of Credit or the rights
or benefits thereunder or proceeds thereof, in whole or in part, which may prove
to be invalid or ineffective for any reason; (iii) for failure of the
beneficiary of a Letter of Credit to comply fully with conditions required in
order to draw upon such Letter of Credit (it being understood that this clause
(iii) does not address the payment by the Issuing Bank following failure of the
beneficiary of a Letter of Credit to comply fully with the conditions required
to draw upon such Letter of Credit); (iv) for errors, omissions, interruptions
or delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors
in interpretation of technical terms; (vi) for any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any Letter of Credit or of the proceeds thereof; (vii) for the
misapplication by the beneficiary of a Letter of Credit of the proceeds of any
drawing under such Letter of Credit; and (viii) for any consequences arising
from causes beyond the control of the Issuing Bank, including any act or
omission by any government or governmental authority. None of the above shall
affect, impair, or prevent the vesting of any of the Issuing Bank's rights or
powers hereunder. In furtherance and extension and not in limitation of the
specific provisions set forth herein, any action taken or omitted by the Issuing
Bank, under or in connection with the Letters of Credit or the related
certificates, if taken or omitted in good faith, shall not put the Issuing Bank
under any resulting liability to the Borrower. Notwithstanding anything in this
Agreement to the contrary, the Issuing Bank shall not be relieved of any
liability it may otherwise have as a result of its gross negligence or willful
misconduct, but the Borrower shall remain liable with respect to any Loans made
or participations in the Letter of Credit purchased by the Banks other than the
Issuing Bank.
30.
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Section 3.08. Funding Sources. Except to the extent provided in Sections
3.10, 3.11 and 3.13(f), nothing in this Agreement shall be deemed to obligate
any Bank to obtain the funds for any Loan in any particular place or manner or
to constitute a representation by any Bank that it has obtained or will obtain
the funds for any Loan in any particular place or manner.
Section 3.09. Inability to Determine Interest Rate. In the event that
any Bank shall have determined (which determination shall be conclusive and
binding upon the Borrower) that by reason of circumstances affecting the London
interbank market, the Eurodollar Rate applicable pursuant to Section 2.03 for
any Interest Period with respect to a Eurodollar Rate Loan does not adequately
cover the cost of funding such Loan, such Bank shall forthwith give notice of
such determination to the Borrower and the Agent not later than 9:00 A.M., San
Francisco time, on the requested Borrowing date, the requested conversion date
or the last day of an Interest Period of a Loan which was to have been continued
as a Eurodollar Rate Loan. If such notice is given and has not been withdrawn
(i) any requested Eurodollar Rate Loan shall be made as a Base Rate Loan, or, at
the Borrower's option, such Loan shall not be made, (ii) any Base Rate Loan that
was to have been converted to a Eurodollar Rate Loan shall be continued as a
Base Rate Loan and (iii) any outstanding Eurodollar Rate Loan shall be
converted, on the last day of the then current interest Period with respect
thereto, to a Base Rate Loan. Until such notice has been withdrawn by such Bank,
no further Eurodollar Rate Loans shall be made and the Borrower shall not have
the right to convert a Base Rate Loan to a Eurodollar Rate Loan. The affected
Bank will review the circumstances affecting the London interbank market from
time to time and such Bank will withdraw such notice at such time as it shall
determine that the circumstances giving rise to said notice no longer exist.
Section 3.10. Requirements of Law. Without duplication of any amounts
payable under Section 3.06 or 3.13, in the event that (i) the enactment or
issuance of or any change in any law, regulation or directive or in the
interpretation or application thereof or (ii) compliance by any Bank or the
Issuing Bank with any request or directive (whether or not having the force of
law) from any central bank or other governmental authority, agency or
instrumentality:
(a) does or shall impose, modify or hold applicable any
reserve, assessment rate, special deposit, compulsory loan or other requirement
against assets held by, or deposits or other liabilities in or for the account
of, advances or loans by, or other credit extended by, or any other acquisition
of funds by, any office of such Bank or the Issuing Bank which are not otherwise
included in the determination of any Eurodollar Rate at the last Borrowing,
conversion or continuation date of a Loan;
(b) does or shall impose, modify or hold applicable any
reserve, special deposit, compulsory loan or other requirement against
Commitments to extend credit;
(c) does or shall impose on any Bank or the Issuing Bank any
other condition;
31.
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and the result of any of the foregoing is to increase the cost to any Bank or
the Issuing Bank of making, renewing or maintaining its Commitment or the
Eurodollar Rate Loans or of issuing, renewing or maintaining the Letters of
Credit or purchasing a participation therein or to reduce any amount receivable
thereunder (which increase or reduction shall be determined by such Bank's or
the Issuing Bank's, as the case may be, reasonable allocation of the aggregate
of such cost increases or reduced amounts receivable resulting from such
events), then, in any such case, the Borrower shall pay to such Bank or the
Issuing Bank, as the case may be, within three (3) Business Days of its demand,
any additional amounts necessary to compensate such Bank or the Issuing Bank, as
the case may be, for such additional cost or reduced amount receivable as
determined by such Bank or the Issuing Bank, as the case may be, with respect to
this Agreement; provided, however, that the Borrower shall not be obligated to
pay any Bank or the Issuing Bank for any such additional cost or reduced amount
incurred more than 180 days prior to the date of demand for payment by such Bank
or the Issuing Bank, as the case may be; provided, further, that before making
such demand, each Bank and the Issuing Bank, as the case may be, agrees to use
its reasonable efforts (consistent with its internal policy and legal and
regulatory restrictions) to designate a different lending office if the making
of such a designation would avoid, or reduce the amount of, such additional cost
or reduced amount, and would not, in the reasonable judgment of such Bank or the
Issuing Bank, as the case may be, be otherwise disadvantageous to the Bank or
the Issuing Bank, as the case may be; provided, further, that the Borrower shall
not be obligated to pay any Bank or the Issuing Bank for any additional amount
otherwise payable pursuant to this Section 3.10 to the extent such amount is
reflected in adjustments to the interest rates applicable to the Loans. Each
Bank and the Issuing Bank making a claim for payment under this Section 3.10
shall submit an invoice to the Agent, who shall promptly transmit such invoice
to the Borrower, for the amount claimed to be owed by the Borrower, showing in
reasonable detail the calculations necessary to determine the amount. Such
statement shall be conclusive in the absence of manifest error; provided,
further, that this Section 3.10 shall not apply to any increased cost or reduced
receivable as the result of Taxes or Other Taxes.
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Section 3.11. Illegality. Notwithstanding any other provisions herein,
if the introduction of or any change in or in the interpretation or application
of any law, regulation, treaty or directive shall make it unlawful, or any
central bank or other governmental authority shall assert that it is unlawful,
for any Bank to make or maintain Eurodollar Rate Loans as contemplated by this
Agreement, (a) the commitment of such Bank hereunder to make Eurodollar Rate
Loans or convert Base Rate Loans to Eurodollar Rate Loans shall forthwith be
cancelled and (b) such Bank's Loans then outstanding as Eurodollar Rate Loans,
if any, shall be converted automatically to Base Rate Loans on the next
succeeding Interest Payment Date or within such earlier period as allowed by
law; provided, further, that before such cancellation and conversion, each Bank
agrees to use its reasonable efforts (consistent with its internal policy and
legal and regulatory restrictions) to designate a different lending office if
the making of such a designation would avoid the need for such cancellation and
conversion and would not, in the reasonable judgment of such Bank, be otherwise
disadvantageous to the Bank. The Borrower hereby agrees to pay any Bank, within
three (3) Business Days of its demand, any additional amounts necessary to
compensate such Bank for any costs (excluding loss of anticipated profits)
incurred by such Bank in making any conversion in accordance with this Section,
including any interest or fees payable by such Bank to lenders of funds obtained
by it in order to make or maintain its Eurodollar Rate Loans hereunder (such
Bank's notice of such costs, as certified to the Borrower ant the Agent shall be
conclusive absent manifest error).
Section 3.12. Right to Replace Bank. If the Borrower shall, as a result
of the requirements of Sections 3.06, 3.07(b), 3.09, 3.10, 3.11 or 3.13 be
required to pay any Bank the additional costs referred to in such Sections or if
any Bank fails to make available its ratable portion of any Borrowing, the
Borrower shall have the right to substitute another Financial Institution
satisfactory to Agent and the Issuing Bank (whose approval will not be
unreasonably withheld) for such Bank which has submitted an invoice for such
additional costs or has failed to make available its ratable portion of any
Borrowing. Any such substitution shall be on terms and conditions satisfactory
to the Agent. Until such time as such substitution shall be consummated, the
Borrower shall continue to pay any additional costs invoiced by such Bank and
shall continue to pay all other amounts payable to such Bank hereunder. The
substituting Financial Institution and the Bank that is being replaced shall
execute and deliver an Assignment Agreement substantially in the form of Exhibit
E, and the terms of the second and third sentences of Section 9.06(a) shall
apply to such substitution. Upon any such substitution, the Borrower shall pay
or cause to be paid to the Bank that is being replaced, all principal, interest
(to the date of such substitution) and other amounts owing hereunder to such
Bank.
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. Section 3.13. Taxes.
(a) Payments. Subject to the following sentence, any and all
payments by the Borrower hereunder shall be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding, in
the case of each Bank, the Issuing Bank and the Agent, taxes imposed on its
income, and franchise taxes imposed on it, by the jurisdiction under the laws of
which such Bank, the Issuing Bank or the Agent (as the case may be) is organized
or any political subdivision thereof and, in the case of each Bank and the
Issuing Bank, taxes imposed on its income, and franchise taxes imposed on it, by
the jurisdiction of the office or branch in which such Bank, Issuing Bank or the
Agent books the Loans or the Letters of Credit or any political subdivision
thereof (all such nonexcluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "Taxes"). If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder to any Bank, the Issuing Bank or the Agent, (i) the sum
payable shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 3.13) such Bank, the Issuing Bank or the Agent, as the case may be,
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law; provided that the Borrower
shall not be required pursuant to clause (i) above to increase the sum payable
to any Bank, the Issuing Bank or the Agent organized under the laws of a
jurisdiction outside of the United States if such Bank, the Issuing Bank or the
Agent, as the case may be, shall have failed to provide either the forms or
documents referred to in Section 3.13(e) indicating a complete exemption from
United States withholding tax.
(b) Other Taxes. In addition, the Borrower agrees to pay any
present or future stamp or documentary taxes or any other excise or property
taxes, charges or similar levies (other than those taxes, levies, imposts,
deductions, charges, withholdings and liabilities excluded pursuant to Section
3.13(a) above) which arise from any payment made hereunder or from the
execution, delivery, enforcement or registration of, or otherwise with respect
to, this Agreement (hereinafter referred to as "Other Taxes").
(c) Indemnity. The Borrower will indemnify each Bank, the
Issuing Bank and the Agent for the full amount of Taxes or Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed by any
jurisdiction on amounts payable under this Section 3.13) paid by such Bank, the
Issuing Bank or the Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted;
provided, in the case of Taxes or Other Taxes imposed by jurisdictions outside
of the United States of America, the Borrower shall not be required to indemnify
any Bank, the Issuing Bank or the Agent for any liability resulting from the
failure of such Bank, the Issuing Bank or
34.
<PAGE> 40
the Agent to notify the Borrower on a timely basis of the assertion of such
Taxes or Other Taxes. This indemnification shall be made within 30 days from the
date such Bank, the Issuing Bank or the Agent (as the case may be) makes written
demand therefor. Each Bank, the Issuing Bank and the Agent agrees to reimburse
the Borrower for amounts paid by the Borrower pursuant to this Section 3.13 to
the extent that such Bank, the Issuing Bank or the Agent actually recovers all
or any portion of such amounts from the applicable taxing authority which
recovery is specifically designated by such taxing authority as being applicable
to such amounts.
(d) Evidence of Payment. Within 60 days after the date of any
payment of Taxes, the Borrower will furnish to the Agent, at its address
referred to in Section 9.02, the original or a certified copy of a receipt
evidencing payment thereof or other evidence of the payment thereof satisfactory
to the Agent.
(e) IRS Forms. Prior to the date of the initial Borrowing in
the case of the Agent and each Bank listed on the signature pages hereof, and on
the date of the Assignment Agreement pursuant to which it became a Bank in the
case of each other Bank, and prior to the issuance of the first Letter of Credit
in the case of the Issuing Bank (and, in each case, from time to time thereafter
if requested by the Borrower or the Agent) organized under the laws of a
jurisdiction outside the United States, shall provide the Agent and the Borrower
with the forms prescribed by the Internal Revenue Service of the United States
certifying as to such Bank's, the Issuing Bank's or the Agent's status for
purposes of determining exemption from United States withholding taxes with
respect to all payments to be made to such Bank, the Issuing Bank or the Agent
hereunder or other documents satisfactory to the Borrower and the Agent
indicating that all payments to be made to such Bank, the Issuing Bank or the
Agent, as the case may be, hereunder are subject to such taxes at a rate reduced
by an applicable tax treaty. Unless the Borrower and the Agent have received
forms or other documents satisfactory to them indicating that payments hereunder
are not subject to United States withholding tax, the Borrower or the Agent
shall withhold taxes from such payments at the applicable statutory rate or such
lower rate as provided in an applicable tax treaty (if such Bank, the Issuing
Bank or the Agent, if applicable, has provided the required forms entitling it
to such reduced withholding rate) in the case of payments to or for any Bank,
the Issuing Bank or the Agent organized under the laws of a jurisdiction outside
the United States.
(f) Change of Booking Office. Any Bank claiming any additional
amounts payable pursuant to this Section 3.13 shall use its reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions) to
change the jurisdiction of the office or branch in which it books the Loans if
the making of such a change would avoid the need for, or reduce the amount of,
any such additional amounts which may thereafter accrue and would not, in the
reasonable judgment of such Bank, be otherwise disadvantageous to such Bank.
Section 3.14. Sharing of Payments, Etc. If any Bank shall obtain any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or
35.
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otherwise) on account of the Loans owing to it in excess of its ratable share of
payments on account of the Loans obtained by all the Banks such Bank shall
forthwith purchase from the other Banks such participations in the Loans owing
to them as shall be necessary to cause such purchasing Bank to share the excess
payment ratably with each of them; provided, however, that if all or any portion
of such excess payment is thereafter recovered from such purchasing Bank, such
purchase from each Bank shall be rescinded and such Bank shall repay to the
purchasing Bank the purchase price to the extent of such recovery together with
an amount equal to the Bank's ratable share (according to the proportion of (i)
the amount of such Bank's required repayment to (ii) the total amount so
recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. The
Borrower agrees that any Bank so purchasing a participation from another Bank
pursuant to this Section 3.14 or any other provision of this Agreement may, to
the fullest extent permitted by law, exercise all of its rights of payment
(including the right to set-off) with respect to such participation as fully as
if such Bank were the direct creditor of the Borrower in the amount of such
participation.
ARTICLE IV
CONDITIONS OF EFFECTIVENESS;
CONDITIONS TO LOANS AND LETTERS OF CREDIT
Section 4.01. Conditions Precedent to Effectiveness. This Agreement
shall become effective on the date (the "Effective Date") on which each of the
following conditions precedent is fulfilled:
(a) The Agent shall have received on or before the Effective
Date the following, each dated the Effective Date (except for the document
referred to in clause (ii)), in form and substance satisfactory to the Agent and
(except for the Notes) in sufficient copies for each Bank:
(i) The Notes issued by the Borrower to the order of the
Banks, respectively;
(ii) Borrower's certificate that the copies of the
Certificate of Incorporation of the Borrower, certified by the Secretary of
State of Delaware most recently provided to the Agent are in full force and
effect and have not been amended and/or supplemented;
(iii) Borrower's certificate that the copies of the Bylaws,
if any, of the Borrower, certified by the Secretary or an Assistant Secretary of
the Borrower most recently provided to the Agent are in full force and effect
and have not been amended and/or supplemented;
(iv) Copies of resolutions of the Board of Directors or
other authorizing
36.
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documents of the Borrower, approving the transactions represented or
contemplated by the Loan Documents and the incurring of Borrowings and the
reimbursement obligations under the Letters of Credit;
(v) An incumbency certificate executed by the Secretary or
an Assistant Secretary of the Borrower or equivalent document, certifying the
names and signatures of the officers of the Borrower or other Persons authorized
to sign the Loan Documents and the other documents to be delivered hereunder;
(vi) An executed copy of this Agreement, signed by the
Borrower, each of the Banks and the Issuing Bank;
(vii) A favorable opinion of counsel to the Borrower, in
the form of Exhibit C hereto, and as to such other matters as any Bank may
reasonably request; and
(viii) Such additional approvals, opinions, documents and
other information as the Agent or a Bank (through the Agent) may reasonably
request.
(b) The Agent shall have received the fees referred to in
Sections 2.01(h), (i) and (j).
(c) All corporate and legal proceedings and all instruments and
documents in connection this Agreement shall be reasonably satisfactory in
content, form and substance to the Agent and its counsel, and each Bank, the
Agent and Agent's counsel shall have received any and all further information
and documents which any Bank, the Agent or such counsel may reasonably have
requested in connection therewith, such documents where appropriate to be
certified by proper corporate or governmental authorities.
(d) The Prior Credit Agreement and the Prior Term Loan
Agreement shall have been terminated and all principal, interest, fees and other
amounts payable in respect thereof (including any amounts payable with respect
to broken funding costs relating thereto), except for such portion of the Prior
Term Loan as will be repaid from the proceeds of the Initial Term Loan, shall
have been paid or discharged in full and all obligations under the Prior Loan
Documents (except for inchoate indemnity obligations and except for repayment of
any portion of the 1996 Term Loan to be repaid from the proceeds of the Initial
Term Loan) terminated.
(e) The Lenders party to the Prior Credit Agreement shall have
retransferred or otherwise terminated their participations or any other interest
in the Existing Letters of Credit.
Section 4.02. Conditions Precedent to Each Borrowing. The obligation of
each Bank to make a Loan on the occasion of each Borrowing shall be subject to
the further conditions precedent that on the date of such Borrowing:
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(a) the following statements shall be true and the Agent shall
have received any notices required by Section 2.01(c), which notices shall be
deemed to be a certification by the Borrower that:
(i) The representations and warranties contained in Section
5.01 are correct in all material respects on and as of the date of such
Borrowing as though made on and as of such date, except to the extent such
representations and warranties specifically relate to an earlier date in which
case they shall be true and correct in all material respects as of such earlier
date,
(ii) No event has occurred and is continuing, or would
result from such Borrowing, which constitutes an Event of Default or Potential
Event of Default,
(iii) All Loan Agreements are in full force and effect,
(iv) There shall not then be pending or threatened any
action or proceeding against or affecting the Borrower or any of its
Subsidiaries before any court, governmental agency or arbitrator, which could
reasonably be expected to have a Material Adverse Effect, and
(b) no injunction or other restraining order shall have been
issued and no hearing to cause an injunction or other restraining order to be
issued shall be pending or noticed with respect to any action, suit or
proceeding seeking to enjoin or otherwise prevent the consummation of, or to
recover any damages or obtain relief as a result of, or that could otherwise
prohibit or impose materially adverse conditions upon this Agreement or the
other Loan Agreements, the making of Loans hereunder or the application of the
proceeds thereof as contemplated hereby.
Section 4.03. Conditions Precedent to Each Letter of Credit. The
issuance of any Letter of Credit hereunder is subject to the prior or concurrent
satisfaction of all of the following conditions:
(a) On or before the date of issuance of the initial Letter of
Credit, each of the conditions set forth in Section 4.01 shall have been
satisfied or waived.
(b) On or before three (3) Business Days prior to the date of
issuance, the Issuing Bank shall have received the executed application for such
Letter of Credit in the form customarily required by the Issuing Bank and all
other information specified in Section 2.05(b) and such other documents as the
Issuing Bank may reasonably require in connection with the issuance of such
Letter of Credit, and the Issuing Bank shall have approved the form of the
requested Letter of Credit, in its sole discretion.
(c) On the date of issuance, all conditions precedent described
in Section 4.02 shall be satisfied to the same extent as though the issuance of
such Letter of Credit were the
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making of a Loan and the date of issuance of such Letter of Credit were the date
of a Borrowing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.01. Representations and Warranties. The Borrower represents
and warrants as follows:
(a) Organization; Subsidiaries. The Borrower is duly organized,
validly existing and in good standing under the laws of the state of Delaware.
The Borrower is also duly authorized, qualified and licensed in all applicable
jurisdictions, and under all applicable laws, regulations, ordinances or orders
of public authorities, to carry on its business in the locations and in the
manner presently conducted, except where failure to be so authorized, qualified
or licensed could not reasonably be expected to have a Material Adverse Effect.
All of the Subsidiaries of the Borrower as of the Effective Date are identified
on Schedule 5.01(a) of the Disclosure Letter. The capital stock of each
Subsidiary identified in such Schedule 5.01(a) owned by the Borrower is duly
authorized, validly issued, fully paid and non-assessable and such shares of
capital stock are free and clear of any claim, Lien, or agreement with respect
thereto, except to the extent otherwise provided in the SMI Joint Venture
Agreement and Liens permitted under this Agreement. Such Schedule 5.01(a)
correctly sets forth as of the Effective Date the ownership interest of the
Borrower in each of its Subsidiaries.
(b) Authorization. The execution and delivery by the Borrower
of the Loan Documents and the performance by the Borrower of the Loan
Agreements, and the making of Borrowings hereunder, are within the Borrower's
corporate powers, have been duly authorized by all necessary corporate action,
and do not contravene (i) the Borrower's Certificate of Incorporation or bylaws,
(ii) any law or regulation applicable to the Borrower or (iii) any material
agreement or instrument binding on the Borrower or any Subsidiary.
(c) Governmental Consents. No authorization or approval or
other action by the Borrower, and no notice to or filing with, any governmental
authority or regulatory body is required by the Borrower for the due execution
and delivery by the Borrower of the Loan Documents and the performance by the
Borrower of the Loan Agreements, except as contemplated by the Loan Agreements.
(d) Validity. The Loan Agreements are the binding obligations
of the Borrower, enforceable 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.
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(e) Financial Condition. The audited consolidated balance sheet
of the Borrower for the Borrower's fiscal year ended September 29, 1996 and the
related consolidated statements of operations and cash flows of the Borrower for
the fiscal year then ended, and the consolidated balance sheet of the Borrower
as of June 29, 1997 and the related consolidated statements of operations and
cash flows of the Borrower for the fiscal quarter then ended, copies of which
have been furnished to each Bank, fairly present in all material respects the
consolidated financial condition of the Borrower as at such dates and the
consolidated results of the operations of the Borrower for the respective
periods ended on such dates, all in accordance with GAAP, consistently applied,
subject, in the case of the June 29, 1997 financial statements, to year-end
adjustments and the absence of footnotes. Since June 29, 1997 there has been no
Material Adverse Effect.
(f) Litigation. Except as set forth on Schedule 5.01(f) to the
Disclosure Letter, as of the Effective Date, there is no pending or threatened
action or proceeding against or affecting the Borrower or any of its
Subsidiaries before any court, governmental agency or arbitrator, which could
reasonably be expected to have a Material Adverse Effect.
(g) Employee Benefit Plans. The Borrower and each of its ERISA
Affiliates is in compliance in all material respects with any applicable
provisions of ERISA and the regulations and published interpretations thereunder
with respect to all Employee Benefit Plans. No Termination Event has occurred or
is reasonably expected to occur with respect to any Pension Plan. The excess of
the actuarial present value of all benefit liabilities under all Pension Plans
(excluding in such computation Pension Plans with assets greater than benefit
liabilities) over the fair market value of the assets allocable to such benefit
liabilities are not greater than five percent (5%) of Consolidated Tangible Net
Worth. For purposes of the preceding sentence, the terms "actuarial present
value" and "benefit liabilities" shall have the meanings specified in Section
4001 of ERISA.
(h) Disclosure. The documents, certificates and written
statements (including the Loan Documents) (i) furnished to the Agent or any Bank
prior to or on the Effective Date by the Borrower for use in connection with the
transactions contemplated by this Agreement or (ii) filed by the Borrower with
the S.E.C. on or after January 1, 1997 and available electronically to the
public from the S.E.C. on or prior to September 8, 1997, taken as a whole, do
not contain any untrue statement of a material fact or omit to state a material
fact (known to the Borrower in the case of any document not furnished by it)
necessary in order to make the statements contained herein or therein not
misleading (it being recognized by the Agent and the Banks that projections and
forecasts provided by the Borrower are not to be viewed as facts and that actual
results during the period or periods covered by any such projections and
forecasts may differ from the projected or forecasted results). As of the
Effective Date, there is no fact known to the Borrower (other than matters of a
general economic nature) which would have a Material Adverse Effect, which has
not been disclosed herein or in
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such other documents, certificates and statements furnished to the Agent and
each Bank for use in connection with the transactions contemplated hereby.
(i) Margin Stock. The aggregate value of all margin stock (as
defined in Regulation U) directly or indirectly owned by the Borrower and its
Subsidiaries is less than 25% of the aggregate value of the Borrower's assets.
(j) Environmental Matters. I. As of the Effective Date: (i)
neither the Borrower nor any Subsidiary, nor any of their respective officers,
employees, representatives or agents, nor, to the best of their knowledge, any
other person, has treated, stored, processed, discharged, spilled, or otherwise
disposed of any substance defined as hazardous or toxic by any applicable
federal, state or local law, rule, regulation, order or directive, or any waste
or by-product thereof, at any real property or any other facility owned, leased
or used by the Borrower or any Subsidiary, in violation of any applicable
statutes, regulations, ordinances or directives of any governmental authority or
court, which violations could reasonably be expected to have a Material Adverse
Effect; (ii) no employee or other person has ever made a claim or demand against
the Borrower or any Subsidiary based on alleged damage to health caused by any
such hazardous or toxic substance or by any waste or by-product thereof, which
claim or demand could reasonably be expected to have a Material Adverse Effect;
(iii) neither the Borrower nor any Subsidiary has been charged by any
governmental authority with improperly using, handling, storing, discharging or
disposing of any such hazardous or toxic substance or waste or by-product
thereof or with causing or permitting any pollution of any body of water, which
charge could reasonably be expected to have a Material Adverse Effect. II. To
the best of the Borrower's knowledge: (i) neither the Borrower nor any
Subsidiary, nor any of their respective officers, employees, representatives or
agents, nor, any other person, has treated, stored, processed, discharged,
spilled, or otherwise disposed of any substance defined as hazardous or toxic by
any applicable federal, state or local law, rule, regulation, order or
directive, or any waste or by-product thereof, at any real property or any other
facility owned, leased or used by the Borrower or any Subsidiary, in violation
of any applicable statutes, regulations, ordinances or directives of any
governmental authority or court, which violations could reasonably be expected
to have a Material Adverse Effect; (ii) no employee or other person has ever
made a claim or demand against the Borrower or any Subsidiary based on alleged
damage to health caused by any such hazardous or toxic substance or by any waste
or by-product thereof, which claim or demand could reasonably be expected to
have a Material Adverse Effect; (iii) neither the Borrower nor any Subsidiary
has been charged by any governmental authority with improperly using, handling,
storing, discharging or disposing of any such hazardous or toxic substance or
waste or by-product thereof or with causing or permitting any pollution of any
body of water, which charge could reasonably be expected to have a Material
Adverse Effect.
(k) Employee Matters. There is no strike or work stoppage in
existence or threatened involving the Borrower or its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect.
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(l) Insurance. The Borrower maintains with financially sound
and reputable insurers, insurance with respect to its properties and business
and the properties and business of its Subsidiaries (other than Read-Rite SMI)
against loss or damage of the kinds customarily insured against by corporations
of established reputation engaged in the same or similar businesses and
similarly situated, of such types and in such amounts as are customarily carried
under similar circumstances by such other corporations. Such insurance is in
full force and effect and all required premiums required to be paid prior to the
Effective Date have been paid.
(m) No Existing Events of Default; All Existing Obligations
Continued Hereunder. No Events of Default (as defined in each of the Prior Loan
Documents and this Agreement) had occurred and were continuing on the Effective
Date, immediately prior to the effectiveness of this Agreement. Except for any
portion of the Prior Term Loan which will be repaid from proceeds of the Initial
Term Loan, no amounts were owed (whether or not due and payable) to the Banks
under the Prior Loan Documents on the Effective Date, immediately prior to the
effectiveness of this Agreement.
(n) Intellectual Property. Except as set forth in the
Borrower's filings with the S.E.C. made on or after January 1, 1997, and
available electronically to the public from the S.E.C. on or prior to September
8, 1997, the Borrower or its Subsidiaries own or are licensed or otherwise have
the right to use (or could obtain such ownership or licenses or rights on terms
not materially adverse to the Borrower and its Subsidiaries, taken as a whole)
all copyrights, patents, trademarks, service marks, and other intellectual
property rights that are necessary for the operation of their respective
businesses, without conflict with the rights of any other Person, except where
any failure to have any such ownership, license or other rights, or any such
conflict could not reasonably be expected to have a Material Adverse Effect.
ARTICLE VI
COVENANTS
Section 6.01. Affirmative Covenants. So long as any Note shall remain
unpaid, any Letter of Credit shall remain outstanding or unreimbursed or any
Bank shall have any Commitment hereunder, the Borrower will, unless the Majority
Banks shall otherwise consent in writing:
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(a) Financial Information. Furnish to each Bank and the Agent:
(i) as soon as available, but in any event within ninety
(90) days after the end of each fiscal year of the Borrower, a copy of the
Borrower's consolidated balance sheet as at the end of each fiscal year and the
related consolidated statements of operations, stockholders' equity (deficit)
(or comparable statement) and cash flows for such year, setting forth in each
case in comparative form the figures for the previous year, accompanied by an
unqualified report and opinion thereon (with respect to the consolidated
financial statements) of nationally recognized independent certified public
accountants;
(ii) as soon as available, but in any event within
forty-five (45) days after the end of each of the first three fiscal quarters of
the Borrower, the Borrower's unaudited consolidated balance sheet as at the end
of such period and the related unaudited consolidated statements of operations,
stockholders' equity (deficit) (or comparable statement) and cash flows for such
period and year to date, setting forth in each case in comparative form the
figures for the previous corresponding period, certified by a duly authorized
officer of the Borrower as being fairly stated in all material respects subject
to year end adjustments and the absence of footnotes;
all such financial statements to be complete and correct in all material
respects and to be prepared in accordance with GAAP (subject to year end
adjustments and absence of footnotes in the case of statements required by
clause (ii)) applied consistently throughout the periods reflected therein
(except as approved by such accountants and disclosed therein);
(iii) within five (5) Business Days of each delivery of
consolidated financial statements of the Borrower pursuant to subdivisions (i)
and (ii) above, a Compliance Certificate signed by a Responsible Officer
substantially in the form of Exhibit D hereto demonstrating in reasonable detail
compliance with the restrictions contained in Sections 6.02(a), (b), (c), (d),
(e) and (g) as of the end of the fiscal period covered thereby; and
(iv) substantially concurrent with the sending or filing
thereof, copies of all proxy statements, financial statements and reports that
the Borrower sends to its stockholders generally, and copies of all final
registration statements (other than on Form S-8 or other registration statements
relating to option plans) and material reports (in each case, without exhibits)
which the Borrower or any Subsidiary files with the S.E.C. or any national
securities exchange.
(b) Notices and Information. Deliver to the Agent and each
Bank:
(i) promptly upon any Responsible Officer of the Borrower
obtaining knowledge (a) of any condition or event that constitutes an Event of
Default which is continuing or Potential Event of Default, (b) that any Person
has given any notice to the Borrower or any Subsidiary of the Borrower or taken
any other action with respect to a claimed default or event or condition of the
type referred to in Section 7.01(f), (c) of the institution of any litigation of
the
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type described in Section 5.01(f), or (d) of any condition or event with respect
to Borrower or any of its Subsidiaries that constitutes a Material Adverse
Effect, an officers' certificate specifying the nature and period of existence
of any such condition or event, or specifying the notice given or action taken
by such holder or Person and the nature of such claimed default, Event of
Default, Potential Event of Default, event or condition, and what action the
Borrower has taken, is taking and proposes to take with respect thereto;
(ii) promptly upon any Responsible Officer of the Borrower
becoming aware of the occurrence of or forthcoming occurrence of any (a)
Termination Event, or (b) "prohibited transaction," as such term is defined in
Section 4975 of the Internal Revenue Code or Section 406 of ERISA, in connection
with any Employee Benefit Plan or any trust created thereunder in excess of
$100,000, a written notice specifying the nature thereof, what action the
Borrower has taken, is taking or proposes to take with respect thereto, and,
when known, any action taken or threatened by the Internal Revenue Service, the
Department of Labor, or the Pension Benefit Guaranty Corporation with respect
thereto; provided, however, that this clause (ii) shall not apply to any
prohibited transaction for which an exemption has been granted pursuant to
Section 4975(c)(ii) of the Internal Revenue Code or Section 408 of ERISA;
(iii) with reasonable promptness copies of (a) all notices
received by the Borrower or any of its ERISA Affiliates of the Pension Benefit
Guaranty Corporation's intent to terminate any Pension Plan or to have a trustee
appointed to administer any Pension Plan; and (b) all notices received by the
Borrower or any of its ERISA Affiliates from a Multiemployer Plan sponsor
concerning the imposition or amount of withdrawal liability pursuant to Section
4202 of ERISA;
(iv) promptly, and in any event within thirty (30) days
after receipt thereof, a copy of any notice, summons, citation, directive,
letter or other form of communication from any governmental authority or court
in any way concerning any action or omission on the part of the Borrower or any
of its Subsidiaries in connection with any substance defined as toxic or
hazardous by any applicable federal, state or local law, rule, regulation, order
or directive or any waste or by product thereof, or concerning the filing of a
lien upon, against or in connection with the Borrower, its Subsidiaries, or any
of their leased or owned real or personal property, in connection with a
Hazardous Substance Superfund or a Post-Closure Liability Fund as maintained
pursuant to Section 9507 of the Internal Revenue Code, which could reasonably be
expected to have a Material Adverse Effect; and
(v) promptly, and in any event within ten (10) days after
request, such other information and data with respect to the Borrower or any of
its Subsidiaries as from time to time may be reasonably requested by any Bank,
subject, however, to the last sentence of Section 6.01(f).
(c) Corporate Existence, Etc. At all times preserve and keep in
full force and effect its and its Subsidiaries' (other than Read-Rite SMI)
corporate existence and rights and franchises material to its business and those
of such Subsidiaries; provided, however, that the
44.
<PAGE> 50
corporate existence of any such Subsidiary may be terminated and any such rights
and franchises may be terminated or permitted to lapse, if, in the good faith
judgment of the Board of Directors of the Borrower, such termination or lapse is
in the best interests of the Borrower and its Subsidiaries, taken as a whole,
and does not result in a Material Adverse Effect.
(d) Payment of Taxes and Claims. Pay, and cause each of its
Subsidiaries (other than Read-Rite SMI) to pay, all material taxes, assessments
and other governmental charges imposed upon it or any of its properties or
assets or in respect of any of its franchises, business, income or property
before any penalty or interest accrues thereon, and all claims (including claims
for labor, services, materials and supplies) for sums which have become due and
payable and which by law have or may become a lien upon any of its properties or
assets, prior to the time when any penalty or fine shall be incurred with
respect thereto; provided that no such tax, assessment, charge or claim need be
paid if being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if such reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor.
(e) Maintenance of Properties; Insurance. Maintain or cause to
be maintained in good repair, working order and condition all nsurance
properties material to the continued conduct of the business of the Borrower and
its Subsidiaries (other than Read-Rite SMI). The Borrower will maintain or cause
to be maintained, with financially sound and reputable insurers, insurance with
respect to its properties and business and the properties and business of its
Subsidiaries (other than Read-Rite SMI) against loss or damage of the kinds
customarily insured against by corporations of established reputation engaged in
the same or similar businesses and similarly situated, of such types and in such
amounts as are customarily carried under similar circumstances by such other
corporations.
(f) Inspection. Permit any authorized representatives
designated by any Bank in writing, at such Bank's expense, upon reasonable
notice to the Borrower, to visit and inspect any of the properties of the
Borrower or any of its Subsidiaries (not including Read-Rite SMI), including its
and their financial and accounting records, and to make copies and take extracts
therefrom, and to discuss its and their affairs, finances and accounts with its
and their officers and independent public accountants, all at such reasonable
times during normal business hours and as often as may be reasonably requested.
Notwithstanding any provision of this Agreement to the contrary, neither the
Borrower nor any of its Subsidiaries will be required to disclose, permit the
inspection, examination, copying or making extracts of, or discussion of, any
document, information or other matter that (i) constitutes non-financial trade
secrets or non-financial proprietary information, or (ii) in respect of which
disclosure to such Bank (or designated representative) is then prohibited by (a)
law, or (b) an agreement binding on the Borrower or any Subsidiary that was not
entered into by the Borrower or such Subsidiary for the primary purpose of
concealing information from the Banks.
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(g) Compliance with Laws, Etc. Exercise, and cause each of its
Subsidiaries (other than Read-Rite SMI) to exercise, all due diligence in order
to comply with the requirements of all applicable laws, rules, regulations and
orders of any governmental authority, including all environmental laws, rules,
regulations and orders, noncompliance with which could reasonably be expected to
have a Material Adverse Effect.
Section 6.02. Negative Covenants. So long as any Note shall remain
unpaid, any Letter of Credit shall remain outstanding or unreimbursed or any
Bank shall have any Commitment hereunder, the Borrower will not, without the
written consent of the Majority Banks:
(a) Quick Ratio. Permit the ratio of Consolidated Quick Assets
to Consolidated Current Liabilities (i) on the last day of each of the fiscal
quarters of the Borrower ending on or about June 29, 1997 and thereafter to be
less than 0.85 to 1.00.
(b) Consolidated Tangible Net Worth. Permit Consolidated
Tangible Net Worth at any time to be less than $446,193,000 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 June 30, 1997 plus (ii) 100%
of the net increase in Consolidated Tangible Net Worth occurring after June 30,
1997 resulting from the issuance of equity securities of the Borrower after June
30, 1997, plus (iii) Permitted Subordinated Debt.
(c) Senior Debt. Permit the ratio of Senior Debt to Total
Capitalization as at the last day of each fiscal quarter of the Borrower,
commencing on June 30, 1997, to exceed 0.4:1.0.
(d) Interest-Expense Coverage. As at the last day of each
fiscal quarter of the Borrower, commencing on June 30, 1997, permit the ratio of
(i) EBIT as of such date to (ii) Consolidated Interest Expense for the four
fiscal quarters ending on such date, to be less than 2.0:1.0.
(e) Minimum Profitability. Permit the Consolidated Net Income
of the Borrower as at the end of any fiscal quarter, determined on a rolling
four quarter basis, to be less than $1.00; provided that in no fiscal quarter
may any Consolidated Net Income be a negative amount in excess of 5% of the
Consolidated Tangible Net Worth as of the end of the preceding fiscal quarter.
(f) Liens, Etc. Create or suffer to exist, or permit any of its
Subsidiaries to create or suffer to exist, any Lien upon or with respect to any
of its properties, whether now owned or hereafter acquired to secure any Debt of
46.
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any Person other than:
(i) Liens in favor of the Agent for the benefit of the
Banks;
(ii) Liens existing on the date hereof and set forth in
Schedule 6.02(f) to the Disclosure Letter;
(iii) Purchase money Liens upon or in any property acquired
or held by the Borrower or any Subsidiary in the ordinary course of business
(including the proceeds thereof and accessions thereto) to secure the purchase
price of such property or to secure indebtedness incurred solely for the purpose
of financing the acquisition of such property;
(iv) Liens created to secure the purchase price, cost of
construction and/or improvement of property or assets or Debt incurred to
finance such purchase price and/or cost, provided that (1) any such Liens attach
only to the property or assets so purchased, constructed and/or improved (and
any theretofore unimproved real property on which such property or assets are
located) and, if the real property is located outside the United States, to any
equipment to be located in the property so purchased or so constructed, (2) the
Debts secured by any such Lien shall not exceed 100% of the lesser of the fair
market value or the purchase price of the property or assets purchased,
constructed and/or improved and (3) any such Liens shall be created within
twelve months following the acquisition assets or the completion of such
construction and/or improvements;
(v) Leases or subleases and licenses and sublicenses
granted to others not interfering in any material respect with the business of
the Borrower and its Subsidiaries taken as a whole, and any interest or title of
a lessor, licenser or under any lease or license;
(vi) Liens with respect to any conditional sale or other
title retention agreements and any lease in the nature thereof (other than
Capital Leases); provided that any such Lien with respect to conditional sales
or other title retention agreements encumber only property and accretions
thereto (and proceeds arising from the disposition thereof) which are subject to
such conditional sale or other title retention agreement or lease in the nature
thereof;
(vii) Liens existing on property, including the proceeds
thereof and accessions thereto, acquired by the Borrower or any Subsidiary
(including Liens on assets of any corporation at the time it becomes a
Subsidiary, unless such Lien was created in contemplation of such corporation
becoming a Subsidiary); provided that such Liens are confined solely to the
property acquired and improvements thereon;
(viii) Liens on property leased by the Borrower or any
Subsidiary in the ordinary course of business (including proceeds thereof and
accessions thereto) incurred solely for the purpose of financing the lease of
such property (including Liens pursuant to Capital Leases permitted pursuant to
Section 6.02(g));
(ix) Liens on assets of Read-Rite SMI and not secured by
any other
47.
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assets of the Borrower or any of its other Subsidiaries;
(x) Liens for taxes, assessments or governmental charges or
levies (1) not more than thirty (30) days past due or (2) which are being
contested in good faith and by appropriate proceedings, which proceedings have
the effect of preventing the forfeiture or sale of the property or asset subject
to such Lien, or (3) which do not in the aggregate materially detract from the
value of such property or assets or materially impair the use thereof in the
operation of the business of the Borrower and its Subsidiaries;
(xi) Liens in respect of property or assets of the Borrower
or any of its Subsidiaries imposed by law which were incurred in the ordinary
course of business, such as carriers', warehousemen's and mechanics' Liens and
other similar Liens arising in the ordinary course of business, and (x) which do
not in the aggregate materially detract from the value of such property or
assets or materially impair the use thereof in the operation of the business of
the Borrower and its Subsidiaries or (y) which are being contested in good faith
by appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the property or asset subject to such Lien;
(xii) Liens arising from judgments, decrees or attachments
in circumstances not constituting an Event of Default under Section 7.01(i);
(xiii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases (including
landlords' Liens), government contracts, performance and return-of-money bonds
and other similar obligations incurred in the ordinary course of business
(exclusive of obligations in respect of the payment for borrowed money);
(xiv) Easements, reservations, defects or irregularities in
title and other similar charges or encumbrances affecting real property not
interfering in any material respect with the ordinary conduct of the business of
the Borrower and its Subsidiaries, taken as a whole;
(xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods;
(xvi) Liens securing reimbursement obligations of the
Borrower or its Subsidiaries with respect to commercial letters of credit;
provided that such Liens shall attach only to documents or other property
relating to such letters of credit and products and proceeds thereof;
(xvii) Liens which constitute rights of set-off of a
customary nature or bankers' Liens with respect to amounts on deposit, whether
arising by operation of law or by contract, in connection with arrangements
entered into with banks in the ordinary course of business;
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(xviii) Liens on real property located outside of the
United States, whether existing at the time of acquisition of such property or
created in connection with the acquisition or construction of such property or
created at any time thereafter, together with Liens on equipment located on any
such real property; provided that the Debts secured by any such Lien or Liens
shall not exceed 100% of the lesser of the fair market value or the purchase
price of the real property purchased;
(xix) Liens, not otherwise permitted by this Section
6.02(f), on assets other than current assets, intellectual property and/or stock
of Subsidiaries, which Liens do not in the aggregate exceed 5% of Consolidated
Tangible Net Worth; and
(xx) Any Lien renewing, extending, or refunding any Lien
permitted under clauses (i) to (xix), inclusive, of this Section 6.02(f);
provided that the principal amount secured is not increased and that such Lien
is not extended to other property (other than pursuant to its original terms).
(g) Debt. (A) Create or suffer to exist, or permit any of its
Subsidiaries (other than Read-Rite International) to create or suffer to exist,
any Debt other than:
(i) Debt owed to the Banks and reimbursement obligations
with respect to Letters of Credit issued hereunder in accordance with Section
2.05;
(ii) Debt listed on Schedule 6.02(g) to the Disclosure
Letter;
(iii) Debt secured by a Lien and not otherwise permitted
under this Section 6.02(g) so long as the Debt falling within this clause (iii)
does not at any time exceed 20% of Consolidated Tangible Net Worth;
(iv) Debt not secured by a Lien and not otherwise permitted
under this Section 6.02(g);
(v) Permitted Subordinated Debt;
(vi) Debt of a Wholly Owned Subsidiary of the Borrower to
another Wholly Owned Subsidiary of the Borrower or to the Borrower, and Debt of
the Borrower to any Wholly Owned Subsidiary of the Borrower;
(vii) Debt of Read-Rite SMI; and
(viii) Debt secured by Liens permitted by Section
6.02(f)(ii), (ix), (xvi) or (xx) (but with respect to such clause (xx) only to
the extent such Debt secured by a Lien that constitutes a renewal, extension or
refunding of any of the Liens permitted pursuant to clauses (ii), (ix) and (xvi)
of Section 6.02(f));
49.
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(B) Permit Read-Rite International to create or suffer to exist
any Debt, other than guarantees issued in support of Debt obligations of its
subsidiaries; provided that the maximum exposure in respect of such guarantees
relating to any given subsidiary shall not exceed an amount, in Dollars, equal
to ninety per cent (90%) of such subsidiary's Tangible Assets; and provided,
further, that such subsidiary's Tangible Assets at all times exceed its Total
Liabilities.
(h) Dividends, Etc. Declare or pay any dividends, purchase or
otherwise acquire for value any of its capital stock now or hereafter
outstanding, or make any distribution of assets to its stockholders as such, or
permit any of its Subsidiaries to purchase or otherwise acquire for value any
stock of the Borrower (collectively, a "Restricted Payment"); except that (i)
the Borrower may declare and make any dividend payment or other distribution
payable in its equity securities; (ii) the Borrower may redeem or repurchase its
securities in connection with any agreement between the Borrower or its
Subsidiaries and any officer, director, employee or consultant of the Borrower
or its Subsidiaries entered into in the ordinary course of business wherein the
Borrower (or its Subsidiary) is obligated or entitled to repurchase from such
officer, director, employee or consultant shares of equity securities of the
Borrower upon such Person's termination of employment or services with the
Borrower; (iii) that in connection with exercises of options to purchase the
Borrower's common stock, $.0001 par value per share ("Common Stock"), by
optionees under the Borrower's stock option plan, the Borrower may permit or
require optionees concurrently to surrender to the Borrower one or more of the
shares of Common Stock acquired upon such exercise having a value equal to the
applicable withholding taxes payable with respect to the options exercised
(including for purposes of such calculation the value of the shares surrendered)
and the Borrower may thereafter submit payment of such withholding taxes to the
appropriate authorities on the optionee's behalf; and (iv) the Borrower may
repurchase shares of Common Stock so long as such repurchase does not result in
an Event of Default or a Potential Event of Default.
(i) Consolidation, Merger. Consolidate with or merge into any
other corporation or entity, except that any corporation or entity may
consolidate with or merge into the Borrower; provided that the Borrower shall be
the surviving entity of such merger or consolidation, and; provided, further,
that immediately after the consummation of such consolidation or merger there
shall exist no condition or event that constitutes an Event of Default or a
Potential Event of Default.
(j) Loans, Investments, Secondary Liabilities. Make or permit
to remain outstanding, or permit any Subsidiary (other than Read-Rite SMI) to
make or permit to remain outstanding, any loan or advance to, or guarantee the
obligations of, or otherwise become contingently liable, directly or indirectly,
to purchase the stock of, pay dividends with respect to the stock of, or for the
liabilities of (if the primary purpose or intent of the arrangement giving rise
to such liability is to provide assurance that such obligations will be paid or
discharged, or that any agreements relating thereto will be
50.
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complied with, or that the holders of such obligations will be protected against
loss in respect thereof), or own, purchase or acquire any stock, obligations or
securities of or any other interest in, or make any capital contribution to, any
other Person (all of the foregoing referred to as "Investments"), except:
(i) Investments consisting of Permitted Investments;
(ii) Investments existing on the date hereof and listed on
Schedule 6.02(j) to the Disclosure Letter;
(iii) the endorsement of negotiable instruments for deposit
or collection or similar transactions business;
(iv) Investments in or to the Borrower and Investments in
or to Wholly Owned Subsidiaries to the extent permitted by clauses (iv) and (v)
of Section 6.02(k) and Investments in or to companies which simultaneously with
such Investments become Wholly Owned Subsidiaries, and guarantees (and other
credit support) by the Borrower of obligations of Wholly Owned Subsidiaries and
guarantees (and other credit support) by Subsidiaries (other than Read-Rite
International) of obligations of the Borrower or other Wholly Owned
Subsidiaries;
(v) receivables owing to the Borrower or its Subsidiaries
and advances to customers or suppliers, in each case, if created, acquired or
made in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms;
(vi) Investments consisting of (a) travel advances,
employee relocation loans and other employee loans and advances in the ordinary
course of business, (b) loans to employees, officers or directors relating to
the purchase of equity securities of the Borrower or its Subsidiaries, and (c)
other loans to officers and employees approved by the Board of Directors of the
Borrower in an aggregate amount not in excess of $5,000,000 outstanding at any
time;
(vii) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(viii) existing Investments in Read-Rite SMI; and
additional Investments in Read-Rite SMI from the Effective Date until
termination of this Agreement, but not in excess of $15,000,000;
(ix) Investments accepted in connection with the sale or
disposition of assets permitted by Section 6.02(k);
(x) Investments pursuant to or arising under currency
agreements or interest rate agreements entered into in the ordinary course of
business for the purpose of directly mitigating risks associated with interest
rate or exchange rate changes and not for the purpose of
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speculation;
(xi) Investments (including the purchase of sovereign debt
obligations issued by the countries where located) by Subsidiaries incorporated
outside of the United States required by local law, regulation or customary
practice; provided that such Investments shall not exceed in the aggregate at
any one time $20,000,000;
(xii) notes receivable of, or prepaid royalties and other
credit extensions to, customers and suppliers in the ordinary course of
business;
(xiii) Investments of Read-Rite SMI;
(xiv) Investments constituting Acquisitions permitted
pursuant to Section 6.02(l);
(xv) Investments by the Borrower and its Subsidiaries
consisting of guarantees (and other credit support) of the obligations of
vendors and suppliers of Wholly Owned Subsidiaries and guarantees (and other
credit support) of the obligations of vendors and suppliers of Subsidiaries
which are not Wholly Owned Subsidiaries, in each case in respect of transactions
entered into in the ordinary course of business provided that such guarantees
(and other credit support) shall not at any time exceed $15,000,000; and
(xvi) Investments not otherwise permitted by this Section
6.02(j) not in excess of 10% of Consolidated Tangible Net Worth at any time
outstanding.
(k) Asset Sales. Convey, sell, lease, transfer or otherwise
dispose of (collectively a "Transfer"), or permit any Subsidiary (other than
Read-Rite SMI) to Transfer, in one transaction or a series of transactions, all
or any part of its or its Subsidiary's business, property or fixed assets
outside the ordinary course of business, whether now owned or hereafter
acquired, except that the Borrower and its Subsidiaries may make Transfers of
business, property or fixed assets in transactions outside of the ordinary
course of business for consideration which in the aggregate does not exceed in
any fiscal year of the Borrower 20% of Consolidated Tangible Net Worth as of the
beginning of such fiscal year; provided, however, that, notwithstanding any
other provision in this Credit Agreement, Borrower shall continue to own at all
times 100% of the capital stock of Read-Rite International. For purposes of this
Section 6.02(k), the following shall be regarded in the ordinary course of
business (in addition to any other transaction in the ordinary course of
business): (i) Transfers of non-exclusive licenses and similar arrangements for
the use of the property of the Borrower or its Subsidiaries; (ii) Transfers of
worn-out or obsolete property and equipment; (iii) Transfers that constitute
liquidations of Investments permitted under Section 6.02(j); (iv) Transfers by
the Borrower to any Wholly Owned Subsidiary which Transfers in the aggregate, on
a cumulative basis from and after the date hereof, do not exceed 10% of
Consolidated Tangible Net Worth, measured immediately after each Transfer; and
(v) Transfers from any Wholly Owned Subsidiary to another Wholly Owned
Subsidiary or the Borrower.
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(l) Acquisitions. Acquire, or permit any Subsidiary (other than
Read-Rite SMI) to acquire (an "Acquisition"), any assets or a going business,
whether through purchase of assets, merger or otherwise, outside of the ordinary
course of business, if the aggregate fair market value of the consideration
(whether in the form of cash, debt or equity securities of the Borrower or any
Subsidiary or assumed liabilities) paid for all such Acquisitions during the
twelve-month period immediately preceding such Acquisition and including the
Acquisition in question does not exceed 25% of Consolidated Tangible Net Worth
as at the date of the Acquisition. For purposes of this Section 6.02(l), the
following shall be regarded as being in the ordinary course of business (in
addition to any other transaction in the ordinary course of business): (i)
Acquisitions that constitute Investments permitted by Section 6.02(j); and (ii)
Acquisitions by the Borrower from any Wholly Owned Subsidiary, or Acquisitions
by any Wholly Owned Subsidiary from another Wholly Owned Subsidiary or from the
Borrower.
(m) Transactions with Affiliates. Enter into, or permit any of
its Subsidiaries to enter into, any transaction (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
holder of 10% or more of any class of equity securities of the Borrower, or with
any Affiliate of the Borrower or any such holder, on terms that (when taken in
the light of any related or series of transactions of which such transaction is
a part (if any)) are less favorable to the Borrower or any such Subsidiary than
those that might be obtained at the time from Persons who are not such a holder
or Affiliate, other than (i) compensation of employees, officers and directors
so long as the Board of Directors of the Borrower determines that such
compensation is in the best interests of the Borrower, (ii) transactions between
the Borrower and any of its Wholly Owned Subsidiaries or transactions from one
Wholly Owned Subsidiary to another Wholly Owned Subsidiary and (iii) the supply
of equipment and resources to Read-Rite SMI for fair value and the transactions
contemplated by the SMI Joint Venture Agreement.
(n) Change of Business. Cease to be engaged primarily in the
business of a component supplier in the hard disk storage industry or otherwise
make, or engage in any business or permit any Subsidiary to engage in any
business other than the businesses in which the Company and its Subsidiaries are
engaged on the date of this Agreement and businesses that are extensions thereof
or reasonably related or incidental thereto (which shall include businesses
utilizing the core competences of the Company and its Subsidiaries).
(o) Permitted Subordinated Debt. Pay, prepay, redeem, purchase,
defease or otherwise satisfy (nor permit any of its Subsidiaries to pay, prepay,
redeem, purchase, defease or otherwise satisfy) in any manner prior to the
scheduled payment thereof any Permitted Subordinated Debt except upon conversion
of the notes evidencing such Permitted Subordinated Debt in accordance with
their terms and except as otherwise permitted under this Section 6.02(o); amend,
modify or otherwise change the terms of any document, instrument or agreement
evidencing Permitted Subordinated Debt such that such amendment, modification or
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change would (i) cause the outstanding aggregate principal amount of all such
Permitted Subordinated Debt so amended, modified or changed to be increased as a
consequence of such amendment, modification or change, (ii) cause the
subordination provisions applicable to such Permitted Subordinated Debt to be
less favorable to the Agent and the Banks than those set forth in the Original
Indenture, (iii) increase the interest rate applicable thereto or (iv)
accelerate the scheduled payment thereof; provided that, notwithstanding the
prior provisions of this Section 6.02(o), the Borrower may call for redemption
the entire outstanding amount of the Permitted Subordinated Debt and, to the
extent such Permitted Subordinated Debt is not converted prior to the redemption
date, redeem such Permitted Subordinated Debt, provided that (A) no Default or
Event of Default has occurred and is continuing or would result from such call
for redemption or redemption and (B) the closing price of the Borrower's common
stock shall have exceeded one hundred twenty percent (120%) of the then
applicable conversion price of the Permitted Subordinated Debt for twenty (20)
trading days within a period of thirty (30) consecutive trading days ending
within five (5) trading days prior to the notice of redemption. The Debt of the
Borrower under this Agreement shall at all times constitute "Designated Senior
Indebtedness" under the Indenture. Only Senior Debt shall constitute "Designated
Senior Indebtedness" under the Indenture.
Notwithstanding any provision of this Section 6.02 to the
contrary, but subject in all cases to Article 15 of the Indenture, none of the
following shall be prohibited by this Section 6.02:
(i) the delivery of securities, cash and other property
upon conversion of the Subordinated Notes in accordance with the terms
thereof (including the payment by the Borrower of cash in lieu of
fractional shares in connection with such a conversion); and
(ii) any mandatory payments of interest on Permitted
Subordinated Debt.
For all purposes under Section 6.02, in the event any Permitted Subordinated
Debt is called for prepayment or redemption in accordance with Section 6.02(o),
the effect of calling such Permitted Subordinated Debt for prepayment or
redemption (but not the actual payment thereof) shall be disregarded for
purposes of determining compliance with the covenants set forth in Section 6.02.
Nothing in this Section shall be construed to permit any action that would not
be permitted under the subordination provisions of any indenture or other
document governing the terms of Permitted Subordinated Debt.
ARTICLE VII
EVENTS OF DEFAULT
Section 7.01. Events of Default. If any of the following events ("Events
of Default") shall occur and be continuing:
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(a) The Borrower shall fail to pay any installment of the
principal when due, or shall fail to pay any installment of interest within
three (3) Business Days of the date when due, or shall fail to pay any other
amount payable hereunder within five (5) Business Days of the date when due; or
(b) Any representation or warranty made or deemed made by the
Borrower herein or in any other Loan Agreement or any other certificate or
writing delivered pursuant hereto or thereto shall prove to have been incorrect
in any material respect when made; or
(c) The Borrower shall fail to perform or observe any term,
covenant or agreement contained in Sections 3.01 or 6.02(a), (b), (c), (d), (e),
(h), (i), (k), (l), (m), or (o) on its part to be performed or observed; or
(d) The Borrower shall fail to perform or observe any term,
covenant or agreement contained in Sections 6.01(b), 6.02(f), (g), (j) or (n) on
its part to be performed or observed and any such failure shall remain
unremedied or uncured for thirty (30) days after the Chief Executive Officer or
any Responsible Officer of the Borrower knows of such failure (whether by notice
from the Agent or any Bank or otherwise); or
(e) The Borrower shall fail to perform or observe any term,
covenant or agreement contained in this Agreement or any other Loan Document
other than those referred to in Sections 7.01(a), (b), (c) and (d) above on its
part to be performed or observed and any such failure shall remain unremedied or
uncured for thirty (30) days after the Agent or any Bank notifies the Borrower
of such failure; or
(f) The Borrower or any of its Subsidiaries (other than
Read-Rite SMI) shall (i) fail to pay any principal of, or premium or interest
on, any Debt, the aggregate outstanding principal amount of which is at least
$10,000,000 (excluding Debt evidenced by the Notes), when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) and
such failure shall continue after the applicable grace period, if any, or (ii)
fail to perform or observe any term, covenant or condition on its part required
to be performed or observed under any agreement or instrument relating to any
Debt, the aggregate outstanding principal of which is at least $10,000,000
(excluding Debt evidenced by the Notes), and the effect of such failure is to
accelerate or permit the acceleration of the maturity of such Debt, or (iii)
fail to perform or observe any term, covenant or condition on its part to be
performed or observed under any agreement or instrument relating to any Debt,
the aggregate outstanding principal amount of which is at least $5,000,000
(excluding Debt evidenced by the Notes), and the effect of such failure is to
accelerate the maturity of such Debt; or
(g) (i) The Borrower shall commence any case, proceeding or
other action (A) under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
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other relief with respect to it or its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Borrower shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against the
Borrower any case, proceeding or other action of a nature referred to in clause
(i) above which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or unhanded
for a period of sixty (60) consecutive days; or (iii) there shall be commenced
against the Borrower any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all or
any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) consecutive days from the entry thereof;
or (iv) the Borrower shall take any action in furtherance of, or indicating its
consent to, approval of, or acquiescence in, any of the acts set forth in clause
(i), (ii) and (iii) above; or (v) the Borrower shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as they
become due; or
(h) (i) Any Subsidiary (other than Read-Rite SMI) shall
commence any case, proceeding or other action (A) under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or its
debts, or (B) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its assets, or any
such Subsidiary shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against any such Subsidiary any
case, proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such adjudication
or appointment or (B) remains undismissed, undischarged or unbonded for a period
of sixty (60) consecutive days; or (iii) there shall be commenced against any
such Subsidiary any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all or
any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) consecutive days from the entry thereof;
or (iv) any such Subsidiary shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (i), (ii) and (iii) above; or (v) any such Subsidiary shall
generally not, or shall be unable to, or shall admit in writing its inability
to, pay its debts as they become due; or
(i) One or more judgments or decrees requiring the payment of
money shall be entered against the Borrower or any of the Subsidiaries involving
in the aggregate a liability (to the extent not paid or covered by insurance)
equal to or greater than $10,000,000 and such judgments or decrees shall not
have been satisfied in full, vacated, discharged, or stayed or bonded pending
appeal within sixty (60) consecutive days from the entry thereof; or
(j) (i) The Borrower or any of its ERISA Affiliates fails to
make full payment when due of all amounts which, under the provisions of any
Pension Plan or Section 412 of the Internal Revenue Code, the Borrower or any of
its ERISA Affiliates is
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required to pay as contributions thereto;
(ii) any accumulated funding deficiency occurs or exists,
whether or not waived, with respect to any Pension Plan;
(iii) the excess of the actuarial present value of all
benefit liabilities under all Pension Plans over the fair market value of the
assets of such Pension Plans (excluding in such computation Pension Plans with
assets greater than benefit liabilities) allocable to such benefit liabilities
are greater than five percent (5%) of Consolidated Tangible Net Worth;
(iv) the Borrower or any of its ERISA Affiliates enters
into any transaction which has as its principal purpose the evasion of liability
under Subtitle D of Title IV of ERISA;
(v) (A) any Pension Plan maintained by the Borrower or any
of its ERISA Affiliates shall be terminated within the meaning of Title IV of
ERISA, or (B) a trustee shall be appointed by an appropriate United States
district court to administer any Pension Plan, or (C) the Pension Benefit
Guaranty Corporation (or any successor thereto) shall institute proceedings to
terminate any Pension Plan or to appoint a trustee to administer any Pension
Plan, or (D) the Borrower or any of its ERISA Affiliates shall withdraw (under
Section 4063 of ERISA) from a Pension Plan, if as of the date of the event
listed in subclauses (A)-(D) above or any subsequent date, either the Borrower
or its ERISA Affiliates has any liability (such liability to include, without
limitation, any liability to the Pension Benefit Guaranty Corporation, or any
successor thereto, or to any other party under Sections 4062, 4063 or 4064 of
ERISA or any other provision of law) resulting from or otherwise associated with
the events listed in subclauses (A)-(D) above;
(vi) as used in this subsection 7.01(i) the term
"accumulated funding deficiency" has the meaning specified in Section 412 of the
Internal Revenue Code, and the terms "actuarial present value" and "benefit
liabilities" have the meanings specified in Section 4001 of ERISA; or
(k) There shall occur a Change of Control;
Then, (i) upon the occurrence of any Event of Default described in clause (g)
above, the Commitments and any obligation of the Issuing Bank to issue any
Letter of Credit shall immediately terminate and all Loans hereunder together
with accrued interest thereon, an amount equal to the Letter of Credit Usage and
all other amounts owing under this Agreement, the Notes and the other Loan
Documents shall automatically become due and payable, and (ii) upon the
occurrence of any other Event of Default, the Agent shall at the request, or may
with the consent, of the Majority Banks, by notice to the Borrower, declare the
Commitments and any obligation of the Issuing Bank to issue any Letter of Credit
to be terminated forthwith, whereupon the Commitments and any obligation of the
Issuing Bank to issue any Letter of Credit shall immediately terminate; and/or,
by notice to the Borrower, declare the Loans hereunder, with accrued interest
thereon, an amount equal to the Letter of Credit Usage and all other amounts
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owing under this Agreement, the Notes, the Letters of Credit and the other Loan
Documents to be due and payable forthwith, whereupon the same shall immediately
become due and payable. Except as expressly provided above in this Section or
elsewhere in this Agreement, presentment, demand, protest and all other notices
of any kind are hereby expressly waived. At any time after the occurrence of any
of the events described in clauses (i) or (ii) of the first sentence of this
paragraph, so long as any Letter of Credit shall remain outstanding, the
Borrower shall Cash Collateralize such Letters of Credit. Under such
circumstances, in the event any Letter of Credit in respect of which the
Borrower has deposited cash collateral with the Issuing Bank is cancelled or
expires, the cash collateral shall be applied first to the reimbursement of the
Issuing Bank for any drawings thereunder, and second to the payment of any
outstanding obligations of the Borrower hereunder or under any other Loan
Document.
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ARTICLE VIII
THE AGENT AND ISSUING BANK
Section 8.01. Appointment, Powers and Immunities of Agent. Each Bank
hereby irrevocably (but subject to removal by the Majority Banks pursuant to
Section 8.09) appoints and authorizes the Agent to act as its agent hereunder
and under any other Loan Document with such powers as are specifically delegated
to the Agent by the terms of this Agreement and any other Loan Document,
together with such other powers as are reasonably incidental thereto. The Agent
shall have no duties or responsibilities except those expressly set forth in
this Agreement and any other Loan Document, and shall not by reason of this
Agreement be a trustee for any Bank. Without limiting the generality of the
foregoing, (a) the Agent shall not be subject to any fiduciary or other implied
duties, regardless of whether a Default has occurred and is continuing, (b) the
Agent shall not have any duty to take any discretionary action or exercise any
discretionary powers, except discretionary rights and powers expressly
contemplated hereby that the Agent is required to exercise in writing by the
Majority Banks, and (c) except as expressly set forth herein and except for
information received by officers of the Agent assigned to administering this
Agreement which information such officers reasonably believe to be material, the
Agent shall not have any duty to disclose, and shall not be liable for the
failure to disclose, any information relating to the Borrower or any of its
Affiliates that is communicated to or obtained by the bank serving as Agent or
any of its Affiliates in any capacity. The Agent shall not be responsible to the
Banks for any recitals, statements, representations or warranties made by the
Borrower or any officer or official of the Borrower or any other Person
contained in this Agreement or any other Loan Document, or in any certificate or
other document or instrument referred to or provided for in, or received by any
of them under, this Agreement or any other Loan Document, or for the value,
legality, validity, effectiveness, genuineness, enforceability or sufficiency of
this Agreement or any other Loan Document or any other document or instrument
referred to or provided for herein or therein, for the perfection or priority of
any collateral security for the Loans or for any failure by the Borrower or any
other Person to perform any of its obligations hereunder or thereunder. The
Agent may employ agents and attorneys-in-fact and shall not be responsible,
except as to money or securities received by it or its authorized agents, for
the negligence or misconduct of any such agents or attorneys-in-fact selected by
it with reasonable care. Neither the Agent nor any of its directors, officers,
employees or agents shall be liable or responsible for any action taken or
omitted to be taken by it or them hereunder or under any other Loan Document or
in connection herewith or therewith except for its or their own gross negligence
or willful misconduct. The Borrower shall pay any fee agreed to by the Borrower
and the Agent with respect to the Agent's services hereunder. Beyond the
exercise of reasonable care to assure the safe custody of collateral in the
Agent's possession and the accounting for monies actually received by the Agent
hereunder, the Agent shall have no duty or liability to exercise or preserve any
rights, privileges or powers pertaining to any collateral.
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Section 8.02. Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any thereof by
telephone, telex, telegram or cable) believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or Persons,
and upon advice and statements of legal counsel, independent accountants and
other experts selected by the Agent. The Agent may deem and treat each Bank as
the holder of any Loan made by it for all purposes hereof unless and until a
notice of the assignment or transfer thereof satisfactory to the Agent signed by
such Bank shall have been furnished to the Agent but the Agent shall not be
required to deal with any Person who has acquired a participation in any Loan
from a Bank. As to any matters not expressly provided for by this Agreement or
any other Loan Document, the Agent shall in all cases be fully protected in
acting, or in refraining from acting, hereunder in accordance with instructions
signed by the Majority Banks, and such instructions of the Majority Banks and
any action taken or failure to act pursuant thereto shall be binding on all of
the Banks and any other holder of all or any portion of any Loan.
Section 8.03. Defaults. The Agent shall not be deemed to have knowledge
of the occurrence of a Potential Event of Default or Event of Default (other
than the non-payment of principal of or interest on the Loans to the extent the
same is required to be paid to the Agent for the account of the Banks) unless
the Agent has received notice from a Bank or the Borrower specifying such
Potential Event of Default or Event of Default and stating that such notice is a
"Notice of Default." In the event that the Agent receives such a notice of the
occurrence of a Potential Event of Default or Event of Default, the Agent shall
give prompt notice thereof to the Banks (and shall give each Bank prompt notice
of each such non-payment). The Agent shall (subject to Section 8.08) take such
action with respect to such Potential Event of Default or Event of Default which
is continuing as shall be directed by the Majority Banks; provided that, unless
and until the Agent shall have received such directions and subject to the
provisions of Section 9.01, the Agent may take such action, or refrain from
taking such action, with respect to such Potential Event of Default or Event of
Default as it shall deem advisable in the best interest of the Banks; and
provided further that the Agent shall not be required to take any such action
which it determines to be contrary to law.
Section 8.04. Rights of Agent as a Bank. With respect to its Commitment
and any Loan made by it, the Agent in its capacity as a Bank hereunder shall
have the same rights and powers hereunder as any other Bank and may exercise the
same as though it were not acting as the Agent, and the term "Bank" or "Banks"
shall, unless the context otherwise indicates, include the Agent in its capacity
as a Bank. The Agent and its affiliates may (without having to account therefor
to any Bank) accept deposits from, lend money to (on a secured or unsecured
basis), and generally engage in any kind of banking, trust or other business
with, the Borrower (and any of its Affiliates) as if it were not acting as the
Agent, and the Agent may accept fees and other consideration from the Borrower
for services in connection with this Agreement or otherwise without having to
account for the same to the Banks. Although the Agent and its affiliates may in
the course of such relationships and relationships with other Persons acquire
information about the Borrower, its Affiliates and such other Persons, the Agent
shall have no duty to disclose such information to the Banks.
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Section 8.05. Indemnification of Agent and Issuing Bank. The Banks agree
to indemnify the Agent and Issuing Bank (to the extent not reimbursed under any
other applicable provisions of any Loan Document), ratably in accordance with
the aggregate unpaid principal amount of the Loans made by the Banks (without
giving effect to any participations, in all or any portion of such Loans, sold
by them to any other Person) (or, if no Loans are at the time outstanding,
ratably in accordance with their respective Commitments), for any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind and nature whatsoever which may be
imposed on, incurred by or asserted against the Agent or Issuing Bank in any way
relating to or arising out of this Agreement, any other Loan Document or any
other documents contemplated by or referred to herein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses which the Borrower is obligated to pay under any applicable provisions
of any other Loan Document but excluding, unless a Potential Event of Default or
Event of Default has occurred and the Loans are secured by collateral, normal
administrative costs and expenses incident to the performance of agency duties
hereunder) or the enforcement of any of the terms hereof or thereof or of any
such other documents or instruments; provided that no Bank shall be liable for
any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the party to be indemnified.
Section 8.06. Documents. The Agent will forward to each Bank, promptly
after the Agent's receipt thereof, a copy of each report, notice or other
document required by this Agreement or any other Loan Document to be delivered
to the Agent for such Bank.
Section 8.07. Non-Reliance on Agent and Other Banks. Each Bank and the
Issuing Bank agrees that it has, independently and without reliance on the Agent
or any other Bank or the Issuing Bank, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Borrower and its Subsidiaries and decision to enter into this Agreement and that
it will, independently and without reliance upon the Agent or any other Bank or
the Issuing Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement or any other Loan Document. The
Agent shall not be required to keep itself informed as to the performance or
observance by the Borrower of this Agreement or any other Loan Document or any
other document referred to or provided for herein or therein or to inspect the
properties or books of the Borrower or any Subsidiary. Except for notices,
reports and other documents and information expressly required to be furnished
to the Banks by the Agent or Issuing Bank hereunder, the Agent and Issuing Bank
shall not have any duty or responsibility to provide any Bank with any credit or
other information concerning the affairs, financial condition or business of the
Borrower or any Subsidiary (or any of their Affiliates) which may come into the
possession of the Agent, the Issuing Bank or any of their affiliates. The Agent
shall not be required to file this Agreement, any other Loan Document or any
document or instrument referred to herein or therein, for record or give notice
of this Agreement, any other Loan
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Document or any document or instrument referred to herein or therein, to
anyone.
Section 8.08. Failure of Agent to Act. Except for action expressly
required of the Agent hereunder, the Agent shall in all cases be fully justified
in failing or refusing to act hereunder unless it shall have received further
assurances of the indemnification obligations of the Banks under Section 8.05 in
respect of any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action.
Section 8.09. Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent may
resign at any time by giving written notice thereof to the Banks and the
Borrower, and the Agent may be removed at any time with or without cause by the
Majority Banks; provided that the Borrower and the other Banks shall be promptly
notified thereof. Upon any such resignation or removal, the Majority Banks, with
the consent of the Borrower, shall have the right to appoint a successor Agent.
If no successor Agent shall have been so appointed by the Majority Banks and
shall have accepted such appointment within 30 days after the retiring Agent's
giving of notice of resignation or the Majority Banks' removal of the retiring
Agent, then the retiring Agent may, on behalf of the Banks, after consulting
with the Borrower, appoint a successor Agent, which shall be a bank which has an
office in New York, New York and has a combined capital and surplus of at least
$500,000,000. The Majority Banks or the retiring Agent, as the case may be,
shall upon the appointment of a successor Agent promptly so notify the Borrower
and the other Banks. Upon the acceptance of any appointment as Agent hereunder
by a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation or removal hereunder as Agent,
the provisions of this Article VIII shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Agent.
Section 8.10. Amendments Concerning Agency Function. The Agent shall
not be bound by any waiver, amendment, supplement or modification of this
Agreement or any other Loan Document which affects its duties hereunder or
thereunder unless it shall have given its prior consent thereto.
Section 8.11. Liability of Agent. The Agent shall not have any
liabilities or responsibilities to the Borrower on account of the failure of any
Bank to perform its obligations hereunder or to any Bank on account of the
failure of the Borrower to perform its obligations hereunder or under any other
Loan Document.
Section 8.12. Transfer of Agency Function. Without the consent
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of the Borrower or any Bank, the Agent may at any time or from time to time
transfer its functions as Agent hereunder to any of its offices wherever
located, provided that the Agent shall promptly notify the Borrower and the
Banks thereof.
Section 8.13. Non-Receipt of Funds by the Agent. Unless the Agent shall
have been notified by the Borrower prior to the date on which the Borrower is to
make payment to the Agent (a "Required Payment"), which notice shall be
effective upon receipt, that the Borrower does not intend to make the Required
Payment to the Agent, the Agent may assume that the Required Payment has been
made and may, in reliance upon such assumption (but shall not be required to),
make the amount thereof available to the intended recipient on such date and, if
the Borrower has not in fact made the Required Payment to the Agent, the
recipient of such payment shall, on demand, repay to the Agent the amount made
available to it together with interest thereon for the period from the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to the average daily Federal Funds Rate for
such period.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. No amendment or waiver of any provision
of the Loan Agreements nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Majority Banks, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given; provided,
however, that no amendment, waiver or consent shall, unless in writing and
signed by all the Banks, do any of the following: (a) waive any of the
conditions specified in Sections 4.01, 4.02, or 4.03, (b) increase or extend the
date for termination or reduction of the Commitments of the Banks, (c) reduce
the principal of, or interest on, the Notes or any fees or other amounts payable
hereunder, (d) postpone any date fixed for any payment of principal of, or
interest on, the Notes or any fees or other amounts payable hereunder, (e)
change the definition of Majority Banks or other provision requiring the
approval of a designated number or proportion of the Banks for any action
hereunder, (f) amend any of the provisions in Sections 3.06 through 3.13, (g)
alter or limit the obligation of the Borrower to reimburse the Issuing Bank for
amounts drawn under the Letters of Credit, (h) alter or limit the obligations of
the Banks set forth in Section 2.05(d), or (i) amend this Section 9.01; and
provided, further that no amendment, waiver or consent shall, unless in writing
and signed by the Agent in addition to the Banks required above to take such
action, affect the rights or duties of the Agent under this Agreement or any
other Loan Document; and provided, further that no amendment, waiver or consent
shall, unless in writing and signed by the Issuing Bank in addition to the Banks
required above to take such action, alter or effect the obligations of the
Issuing Bank under Section 2.05 or otherwise affect the rights or duties of the
Issuing Bank hereunder; and provided, further that no waiver or consent shall,
unless in writing and signed by the affected Bank, waive the rights of that Bank
to receive any payment or compensation under any of Sections 3.06 through 3.13.
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Section 9.02. Notices, Etc. Except as otherwise set forth in this
Agreement, all notices and other communications provided for hereunder shall be
in writing (including telegraphic, telex or facsimile communication) and mailed
or telegraphed or telexed or sent by facsimile or delivered, if to the Borrower,
at its address set forth on the signature page hereof; and if to any Bank, the
Issuing Bank or the Agent, at its address set forth on the signature page
hereof; or, as to each party, at such other address as shall be designated by
such party in a written notice to the other parties. All such notices and
communications shall be effective upon receipt. The agreement of the Agent and
the Banks to receive notices by telephone and facsimile is solely for the
convenience and at the request of the Borrower. Any notice given orally shall be
promptly confirmed in writing. The Agent and the Banks shall be entitled to rely
and act upon any notice or communication which the Agent and Banks believe in
good faith to have been given by a Person authorized by the Borrower to give
such notice and the Agent and the Banks shall not have any liability to the
Borrower or other Person on account of any action taken or not taken by the
Agent and the Banks in reliance upon such telephonic or facsimile notice. The
obligations of the Borrower pursuant to this Agreement shall not be affected by
any failure by the Agent and the Banks to receive written confirmation of any
telephonic or facsimile notice or the receipt by the Agent and the Banks of a
confirmation which is at variance with the terms understood by the Agent and the
Banks to be contained in the telephonic or facsimile notice.
Section 9.03. Right of Setoff. Upon the occurrence of both (i) any Event
of Default and (ii) the making of the request or the granting of the consent
specified by the last paragraph of Article VII to authorize the Agent to declare
the Loans and other amounts due and payable pursuant to the provisions of the
last paragraph of Article VII, each Bank and the Issuing Bank is hereby
authorized by the Borrower, at any time and from time to time, without notice,
(a) to set off against, and to appropriate and apply to the payment of, the
obligations and liabilities of the Borrower under the Loan Documents (whether
matured or unmatured, fixed or contingent or liquidated or unliquidated) any and
all amounts owing by such Bank or the Issuing Bank to the Borrower (whether
payable in Dollars or any other currency, whether matured or unmatured, and, in
the case of deposits, whether general or special, time or demand and however
evidenced) and (b) pending any such action, to the extent necessary, to hold
such amounts as collateral to secure such obligations and liabilities and to
return as unpaid for insufficient funds any and all checks and other items drawn
against any deposits so held as such Bank or the Issuing Bank in its sole
discretion may elect. The rights of each Bank and the Issuing Bank under this
Section are in addition to other rights and remedies (including other rights of
set-off) which such Bank and the Issuing Bank may have.
Section 9.04. No Waiver; Remedies. No failure on the part of the Agent,
the Issuing Bank or any Bank to exercise, and no delay in exercising, any right
under any of the Loan Documents shall operate as a waiver thereof; nor shall any
single or partial exercise of any right under any of the Loan Documents preclude
any other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
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Section 9.05. Costs and Expenses. Without duplication of any amounts
payable pursuant to Article III, the Borrower agrees to pay on demand all
reasonable costs and expenses of the Agent and the Arranger (including
reasonable attorney's fees and the reasonable estimate of the allocated cost of
in-house counsel and legal staff) in connection with the preparation, amendment,
modification, enforcement (including in appellate, bankruptcy, insolvency,
liquidation, reorganization, moratorium or other similar proceedings) or
restructuring of the Loan Documents. In addition, without duplication of any
amounts payable pursuant to Article III, the Borrower agrees to pay on demand
all reasonable costs and expenses of each Bank (including reasonable attorney's
fees and the reasonable estimate of the allocated cost of in-house counsel and
staff) in connection with the bankruptcy, insolvency, liquidation,
reorganization, moratorium or other similar proceedings of the Borrower.
Section 9.06. Additional Banks; Assignments; Participations. (a) Any
Bank may assign, from time to time, all or any portion of its pro rata share of
the Commitments and its Note to an Affiliate of that Bank or (so long as no
Event of Default shall have occurred and be continuing) with the prior written
approval of the Borrower (which approval will not be unreasonably withheld), to
any other Financial Institution approved in writing by the Agent and by each
Issuing Bank; provided that (i) the amount of the Commitment of the assigning
Bank being assigned pursuant to each such assignment (determined as of the date
of the Assignment Agreement with respect to such assignment) shall in no event
be less than $5,000,000 and shall be an integral multiple of $1,000,000, (ii)
the parties to each such assignment shall execute and deliver to the Agent and
the Borrower an Assignment Agreement substantially in the form of Exhibit E, and
(iii) the Agent shall (except in the case of a transfer to an assignee which is
already a Bank at such time) have received a payment of an administrative
transfer charge in the amount of $3,000 from the assigning Bank (or the assignee
if it shall have agreed to pay such charge). Upon such execution and delivery,
from and after the effective date specified in such Assignment Agreement (y) the
assignee thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment
Agreement, have the rights and obligations of a Bank hereunder and (z) the Bank
assignor thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment Agreement, relinquish its
rights (other than with respect to any indemnities which would survive the
termination of this Agreement under Section 9.08, which rights shall be
applicable both to the assignor and the assignee) and be released from its
obligations under this Agreement (other than pursuant to Section 9.06(e)), and,
in the case of an Assignment Agreement covering all or the remaining portion of
an assigning Bank's rights and obligations under this Agreement, such Bank shall
cease to be a party hereto, subject to its continuing rights under any indemnity
provisions and its continuing obligations under Section 9.06(e). The Commitments
hereunder shall be modified to reflect the Commitment of such assignee, and, if
any such assignment occurs while any Loan is outstanding, new Notes shall, upon
the surrender of the assigning Bank's Notes, be issued to such assignee and to
the assigning Bank as necessary to reflect the new Commitments of the assigning
Bank and of its assignee.
65.
<PAGE> 71
(b) Each Bank may sell, negotiate or grant participations to
other Financial Institutions in all or part of the obligations of the Borrower
outstanding under the Loan Agreements, without notice to or the approval of the
Agent or the Borrower; provided that any such sale, negotiation or participation
shall be in compliance with the applicable federal and state securities laws and
the other requirements of this Section 9.06. No participant shall constitute a
"Bank" under any Loan Document, and the Borrower shall continue to deal solely
and directly with the Agent and the Banks.
(c) Each Bank may disclose to any proposed assignee or
participant which is a Financial Institution any information relating to the
Borrower or any of its Subsidiaries; provided, that prior to such disclosure
such proposed assignee or participant shall have agreed in writing to keep any
such information confidential substantially on the terms of Section 9.06(e).
(d) The grant of a participation interest shall be on such
terms as the granting Bank determines are appropriate, provided only that (1)
the holder of such a participation interest shall not have any of the rights of
a Bank under this Agreement except, if the participation agreement so provides,
rights to demand the payment of costs of the type described in Article III,
provided that the aggregate amount that the Borrower shall be required to pay
under Article III with respect to any ratable share of the Commitment or any
Loan (including amounts paid to participants) shall not exceed the amount that
the Borrower would have had to pay if no participation agreements had been
entered into, and (2) the consent of the holder of such a participation interest
shall not be required for amendments or waivers of provisions of the Loan
Agreements other than those which (i) increase the amount of the Commitment,
(ii) extend the term of the Commitment, (iii) decrease the rate of interest or
the amount of any fee or any other amount payable to the Banks under the Loan
Agreements, (iv) reduce the principal amount payable under the Loan Agreements,
or (v) extend the date fixed for the payment of principal or interest or any
other amount payable under the Loan Agreements.
(e) Each Bank understands that some of the information and
documents furnished to it pursuant to this Agreement may be confidential and
each Bank agrees that it will keep all nonpublic information, documents and
agreements so furnished to it confidential and will make no disclosure to other
Persons of such information or agreements until it shall have become public,
except (i) to the extent required in connection with matters involving
operations under or enforcement or amendment of the Loan Agreements; (ii) in
accordance with such Bank's obligations under law or regulations or pursuant to
subpoenas or other process to make information available to governmental
agencies and examiners or to others; (iii) to any corporate parent of any Bank
so long as such parent agrees to accept such information or agreement subject to
the restrictions provided in this Section 9.06(e); (iv) to any participant bank
or trust company of any Bank so long as such participant shares the corporate
parent with such Bank and agrees to keep such information, documents or
agreement confidential in accordance with the restrictions provided in this
Section 9.06(e); (v) to the Agent or to any other Bank and their respective
counsel and other professional advisors and to its own counsel and professional
advisors so long as such Persons are instructed to keep such information
confidential in accordance with the provisions of this Section 9.06(e); (vi) to
proposed assignees and participants which are Financial
66.
<PAGE> 72
Institutions in accordance with Section 9.06(c); and (vii) with the prior
written consent of the Borrower.
Section 9.07. Effectiveness; Binding Effect; Governing Law. This
Agreement shall become effective when it shall have been executed by the
Borrower, the Agent, the Designated Issuer and each Bank and each of the
conditions precedent set forth in Section 4.01 shall have been satisfied. An
executed copy of this Agreement shall serve as evidence that the Effective Date
has occurred. This Agreement shall be binding upon and inure to the benefit of
the Borrower, the Agent, the Designated Issuer, each Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Agent and all the Banks. THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE. EACH LETTER OF
CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDIT (1993 REVISION),
INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UCP") AND, AS TO
MATTERS NOT GOVERNED BY THE UCP, THE LAWS OF THE STATE OF CALIFORNIA.
Section 9.08. Survival of Warranties and Certain Agreements. Subject to
the remainder of this Section 9.08, this Agreement shall terminate upon the
termination of the Commitment and the indefeasible repayment in full of the
Notes and all other amounts owing under this Agreement. All agreements,
representations and warranties made herein and in any Loan Document shall
survive the execution and delivery of this Agreement and the making of the Loans
hereunder. Notwithstanding anything in this Agreement or implied by law to the
contrary, the agreements contained in Sections 3.06, 3.07, 3.10, 3.13, 8.05 and
9.05 shall survive the payment of the Loans and the Notes and the termination of
this Agreement; provided however, that such Sections (other than Sections 8.05
and 9.05) shall terminate on the fifth anniversary of the termination of this
Agreement.
67.
<PAGE> 73
Section 9.09. Waiver of Jury Trial. THE ISSUING BANK AND EACH BANK
HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN
AGREEMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED.
The scope of this waiver is intended to be all encompassing of any and all
disputes that may be filed in any court and that relate to the subject matter of
this transaction, including contract claims, tort claims, breach of duty claims,
and all other common law and statutory claims. The Agent, each Bank, the Issuing
Bank and the Borrower each acknowledge that this waiver is a material inducement
to enter into a business relationship, that each has already relied on the
waiver in entering into this Agreement, and that each will continue to rely on
the waiver in their related future dealings. The Agent, each Bank, the Issuing
Bank and the Borrower further warrant and represent that each has reviewed this
waiver with its legal counsel, and that each knowingly and voluntarily waives
its jury trial rights following consultation with legal counsel. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN AGREEMENTS, OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN. In the event of litigation, this
Agreement may be filed as a written consent to a trial by the court.
Section 9.10. Consent to Jurisdiction; Venue. All judicial proceedings
brought against the Borrower with respect to this Agreement and the Loan
Documents may be brought in any state or federal court of competent jurisdiction
in the City of Los Angeles or San Francisco in the State of California
(whichever city is closest to the Borrower's executive offices), and by
execution and delivery of this Agreement, the Borrower accepts for itself and in
connection with its properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement. The Borrower
irrevocably waives any right it may have to assert the doctrine of forum non
conveniens or to object to venue to the extent any proceeding is brought in
accordance with this Section. Nothing herein shall affect the right of the Agent
or any Bank to bring proceedings against the Borrower in courts of any
jurisdiction.
68.
<PAGE> 74
Section 9.11. Entire Agreement. This Agreement with Exhibits, the
Disclosure Letter and the Schedules thereto and the other Loan Documents embody
the entire agreement and understanding between the parties hereto and supersedes
all prior agreements and understandings relating to the subject matter hereof.
Section 9.12. Separability of Provisions. In case any one or more of the
provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
Section 9.13. Obligations Several. The obligation of each Bank hereunder
is several, and no Bank shall be responsible for the obligation or commitment of
any other Bank hereunder. Nothing contained in this Agreement and no action
taken by the Banks pursuant hereto shall be deemed to constitute the Banks to be
a partnership, an association, a joint venture or any other kind of entity.
Section 9.14. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
Section 9.15. 1654 Interpretation. This Agreement has been negotiated at
arm's length and between persons sophisticated and knowledgeable in the matters
dealt with in this Agreement. Each party has been represented by experienced and
knowledgeable legal counsel. Accordingly, any rule of law (including California
Civil Code Section 1654) or legal decision that would require interpretation of
any ambiguities in this Agreement against the party that has drafted it is not
applicable and is waived. The provisions of this Agreement shall be interpreted
in a reasonable manner to effect the purpose of the parties and this Agreement.
69.
<PAGE> 75
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
READ-RITE CORPORATION
By: /s/ John Kurtzweil
----------------------------------
Title: C.F.O.
Address:
345 Los Coches Street
Milpitas, California 95035
Telephone: (408) 262-6700
Telecopier: (408) 945-9644
Attention: Chief Financial Officer
CANADIAN IMPERIAL BANK OF COMMERCE, NEW
YORK AGENCY, as Agent
By: /s/ Cyd Petre
----------------------------------
Title:
Address:
425 Lexington Avenue
Seventh Floor
New York, New York 10017
Telephone: (212) 856-3675
Telecopier: (212) 856-3763
Attention: Agency Services, Luz Ortiz
Payment Address:
The Bank of New York
New York, New York
ABA No: 021-000-018
Account Name: CICB, New York Agency
Account Number: 890-0331-046 for further
credit to: Agented Loans Account Number:
07-09611
Attention: Agency Services
Reference: Read-Rite Corporation
S-1
<PAGE> 76
BANKS:
REVOLVING COMMITMENT CIBC INC.
$20,250,000
By: /s/ Cyd Petre
-----------------------------------------
TERM COMMITMENT Title:
$6,750,000
Address:
425 Lexington Avenue
New York, New York 10017
Telephone: (212) 856-4165
Telecopier: (212) 856-3991
Attention: Cyd D. Petre
REVOLVING COMMITMENT ABN AMRO BANK N.V.
$16,500,000
By: /s/ Thomas R. Wagner
-----------------------------------------
TERM COMMITMENT Title: Group Vice President
$5,500,000
By: /s/ Jamie Dillon
-----------------------------------------
Title: Vice President
Address:
101 California Street, Suite 4550
San Francisco, California 94111
Attention: Tom Wagner
(Tel) (415) 984-3734
(Fax) (415) 362-3524
S-2
<PAGE> 77
REVOLVING COMMITMENT FLEET NATIONAL BANK
$13,500,000
By: /s/ Mathew Glauninger
-----------------------------------------
TERM COMMITMENT Title:
$4,500,000
Address:
Mail Stop MA.BO.F04 M
75 State Street
Boston, Massachusetts 02109
Attention: Mathew M. Glauninger
(Tel) (617) 346-1563
(Fax) (617) 346-1633
REVOLVING COMMITMENT THE LONG TERM CREDIT BANK OF JAPAN, LTD., LOS
$13,500,000 ANGELES AGENCY
TERM COMMITMENT By: /s/
-----------------------------------------
$4,500,000 Title:
Address:
350 S. Grand Avenue, Suite 3000
Los Angeles, California 90071
Attention: Tamotsu Ukai
(Tel) (213) 689-6345
(Fax) (213) 622-6988
S-3
<PAGE> 78
REVOLVING COMMITMENT MELLON BANK
$13,500,000
TERM COMMITMENT By: /s/ Sean Gannon
-----------------------------------------
$4,500,000 Title:
Address:
435 Tasso Street, Suite 100
Palo Alto, California 94301
Attention: Sean Gannon
(Tel) (650) 326-3005
(Fax) (650) 326-2385
REVOLVING COMMITMENT THE MITSUBISHI TRUST AND BANKING CORPORATION,
$13,500,000 LOS ANGELES AGENCY
TERM COMMITMENT By: /s/ Yasushi Satomi
-----------------------------------------
$4,500,000 Title: Senior Vice President
Address:
801 South Figueroa Street, Suite 500
Los Angeles, California 90017
Attention: Jill Kato
(Tel) (213) 896-4655
(Fax) (213) 687-4631
REVOLVING COMMITMENT THE SUMITOMO BANK LIMITED,
$11,250,000 SAN FRANCISCO BRANCH
TERM COMMITMENT By: /s/
-----------------------------------------
$3,750,000 Title:
Address:
555 California Street, Suite 3350
San Francisco, California 94104
Attention: Gus Madrigal
S-4
<PAGE> 79
(Tel) (415) 616-3018
(Fax) (415) 398-3580
REVOLVING COMMITMENT THE INDUSTRIAL BANK OF JAPAN LIMITED, SAN
$10,500,000 FRANCISCO AGENCY
TERM COMMITMENT By: /s/ Haruhiko Masuda
-----------------------------------------
$3,500,000 Title: Deputy General Manager
Address:
555 California Street, Suite 3110
San Francisco, California 94104
Attention: Debbie S. Rajkumar
(Tel) (415) 693-1830
(Fax) (415) 982-1917
REVOLVING COMMITMENT BANKBOSTON, N.A.
$9,375,000
By: /s/
-----------------------------------------
TERM COMMITMENT Title:
$3,125,000
Address:
435 Tasso Street, Suite 250
Palo Alto, California 94301
Attention: Lee A. Merkle-Raymond
(Tel) (650) 853-0370
(Fax) (650) 853-1425
S-5
<PAGE> 80
REVOLVING COMMITMENT BANQUE NATIONALE DE PARIS
$9,375,000
By: /s/ Jennifer Y. Cho
-----------------------------------------
TERM COMMITMENT Title: Vice President
$3,125,000
By: /s/ Katherine Wolfe
-----------------------------------------
Title: Vice President
Address:
180 Montgomery Street
San Francisco, California 94104
Attention: William J. La Herran
(Tel) (415) 956-0707 ext. 218
(Fax) (415) 296-8954
S-6
<PAGE> 81
REVOLVING COMMITMENT ROYAL BANK OF CANADA
$9,375,000
By: /s/ Stephen S. Hughes
-----------------------------------------
TERM COMMITMENT Title: Senior Manger
$3,125,000
Address:
600 Wilshire Boulevard, Suite 800
Los Angeles, California 90017
Attention: Stephen S. Hughes
(Tel) (213) 955-5320
(Fax) (213) 955-5350
REVOLVING COMMITMENT WELLS FARGO BANK N.A.
$9,375,000
By: /s/ Gus Martin
-----------------------------------------
TERM COMMITMENT Title:
$3,125,000
Address:
121 Park Center Plaza, Suite 300
San Jose, California 95113
Attention: John Adams
(Tel) (408) 277-6206
(Fax) (408) 295-0639
THE DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY
By: /s/ Cyd Petre
-----------------------------------------
Title:
Address:
425 Lexington Avenue
Seventh Floor
New York, New York 10017
S-7
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Primary earnings per share
Net income (loss) $ 76,179 $(42,986) $123,565
======== ======== ========
Weighted average common shares outstanding 47,444 46,755 45,951
Common equivalent shares issuable under
dilutive stock options after applying
treasury stock method, net of tax benefit 1,331 -- 1,665
-------- -------- --------
Common and common equivalent shares used
in computing primary earnings per share 48,775 46,755 47,616
======== ======== ========
Primary earnings per share $ 1.56 $ (0.92) $ 2.60
======== ======== ========
</TABLE>
Note: The difference between primary earnings per share and fully diluted
earnings per share was less than 3% for fiscal years 1997, 1996 and 1995. As
such, the calculation of fully diluted earnings per share is not required.
<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 Sunward Technologies, Inc.
Limited, Hong Kong
Read-Rite Philippines, Inc. Sunward Technologies International
(formerly Sunward Technologies Limited, Hong Kong
Philippines, Inc.)
Read-Rite SMI Corporation Read-Rite Corporation (majority
ownership)
Read-Rite SMI (Thailand) Co., Ltd. Read-Rite SMI Corporation
Rite-Flex, Inc. Read-Rite 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
(Form S-8 Nos. 33-45085, 33-58906, 33-83760, 33-90842, 333-4064, and 333-23973;
and Form S-3 No. 333-24183) of our report dated October 20, 1997 (except for
Note 15, for which the date is November 10, 1997), 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, 1997.
/s/ Ernst & Young LLP
San Jose, California
December 16, 1997
<PAGE> 1
EXHIBIT 24.1
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
--------- ----- ----
<S> <C> <C>
/s/ Cyril J. Yansouni Chief Executive Officer December 17, 1997
- --------------------- (Principal Executive Officer)
Cyril J. Yansouni and Chairman of the Board of
Directors
/s/ John T. Kurtzweil Vice President, Finance December 17, 1997
- --------------------- and Chief Financial Officer
John T. Kurtzweil (Principal Financial and
Accounting Officer)
/s/ William J. Almon Director December 17, 1997
- --------------------
William J. Almon
/s/ Michael L. Hackworth Director December 17, 1997
- ------------------------
Michael L. Hackworth
/s/ John G. Linvill Director December 17, 1997
- ------------------------
John G. Linvill
/s/ Matthew J. O'Rourke Director December 17, 1997
- ------------------------
Matthew J. O'Rourke
/s/ Frederic Schwettmann Director December 17, 1997
- ------------------------
Frederic Schwettmann
</TABLE>
50
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1997 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 118,589
<SECURITIES> 179,507
<RECEIVABLES> 193,609
<ALLOWANCES> 14,887
<INVENTORY> 91,487
<CURRENT-ASSETS> 583,294
<PP&E> 1,091,442
<DEPRECIATION> 418,629
<TOTAL-ASSETS> 1,301,481
<CURRENT-LIABILITIES> 240,109
<BONDS> 403,871
0
0
<COMMON> 5
<OTHER-SE> 545,648
<TOTAL-LIABILITY-AND-EQUITY> 1,301,481
<SALES> 1,162,050
<TOTAL-REVENUES> 1,162,050
<CGS> 923,244
<TOTAL-COSTS> 923,244
<OTHER-EXPENSES> 106,792
<LOSS-PROVISION> 12,301
<INTEREST-EXPENSE> 15,699
<INCOME-PRETAX> 105,490
<INCOME-TAX> 29,311
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,179
<EPS-PRIMARY> $1.56
<EPS-DILUTED> $1.56
</TABLE>
