<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996
Commission file number: 0-19512
READ-RITE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2770690
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(Address of principal executive offices)
(Zip Code)
(408) 262-6700
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
COMMON STOCK, $.0001 PAR VALUE 47,117,632 SHARES
(Class) (Outstanding at January 26, 1997)
</TABLE>
<PAGE> 2
READ-RITE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets-
December 31, 1996 and September 30, 1996 3
Consolidated Condensed Statements of Operations-
Three Months Ended December 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flow-
Three Months Ended December 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
INDEX OF EXHIBITS 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL STATEMENTS
READ-RITE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,836 $ 82,291
Short-term investments 68,585 65,655
Accounts receivable, net 109,806 90,142
Inventories 51,039 58,005
Prepaid expenses and other current assets 14,033 13,962
-------- --------
Total current assets 307,299 310,055
Property, plant and equipment, at cost 880,809 834,852
Less: Accumulated depreciation and amortization 299,786 267,558
-------- --------
Net property, plant and equipment 581,023 567,294
Intangible and other assets 30,546 31,323
-------- --------
TOTAL ASSETS $918,868 $908,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 94,130 $ 88,434
Accrued compensation and benefits 28,214 27,099
Income taxes payable 25,340 27,754
Other accrued liabilities 38,769 37,196
Current portion of long-term debt and
capital lease obligations 15,803 15,613
-------- --------
Total current liabilities 202,256 196,096
Long-term debt and capital lease obligations 170,129 172,037
Deferred income taxes and other 16,733 15,458
-------- --------
TOTAL LIABILITIES 389,118 383,591
-------- --------
Minority interest in consolidated subsidiary 68,902 71,282
-------- --------
Commitments and contingencies Stockholders' equity:
Common stock, $.0001 par value 5 5
Additional paid-in capital 339,289 336,113
Retained earnings 120,896 114,979
Cumulative translation adjustment 658 2,702
-------- --------
TOTAL STOCKHOLDERS' EQUITY 460,848 453,799
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $918,868 $908,672
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
3
<PAGE> 4
READ-RITE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales $251,588 $299,211
Cost of sales 215,774 215,809
-------- --------
Gross margin 35,814 83,402
Operating expenses:
Research and development 14,938 8,156
Selling, general and administrative 10,753 11,509
-------- --------
Total operating expenses 25,691 19,665
-------- --------
Operating income 10,123 63,737
Interest expense 3,628 3,123
Interest income and other, net 2,113 2,445
-------- --------
Income before provision for income taxes
and minority interest 8,608 63,059
Provision for income taxes 2,668 15,764
-------- --------
Income before minority interest 5,940 47,295
Minority interest in net income of
consolidated subsidiary 153 4,724
-------- --------
NET INCOME $ 5,787 $ 42,571
======== ========
NET INCOME PER SHARE $ 0.12 $ 0.88
======== ========
SHARES USED IN PER SHARE CALCULATION 48,098 48,589
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
4
<PAGE> 5
READ-RITE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,787 $ 42,571
Adjustments required to reconcile
net income to cash provided
by operations:
Depreciation and amortization 37,194 19,680
Minority interest in net income of
consolidated subsidiary 153 4,724
Other, net (1,126) 2,315
Changes in assets and liabilities:
Accounts receivable, net (21,347) 2,447
Inventories 6,646 (10,846)
Prepaid expenses and other current assets (87) (2,325)
Accounts payable, accrued liabilities and
income taxes payable 8,567 (1,803)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,787 56,763
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (51,731) (66,697)
Maturities of available-for-sale
investments 95,953 294,425
Purchases of available-for-sale
investments (98,687) (310,286)
Other assets and liabilities, net (1,099) (2,909)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (55,564) (85,467)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on
long-term debt and capital
lease obligations (1,718) (8,231)
Repurchase of common stock -- (32,804)
Proceeds from issuance of common stock 2,974 2,399
--------- ---------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES 1,256 (38,636)
--------- ---------
Effect of exchange rate changes on cash 66 5,925
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (18,455) (61,415)
Cash and cash equivalents at
beginning of period 82,291 168,860
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 63,836 $ 107,445
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,456 $ 512
Income taxes $ 5,489 $ 28,439
Other non-cash items:
Issuances of common stock under 401K plan $ 202 $ 292
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
5
<PAGE> 6
READ-RITE CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1.
Read-Rite Corporation (the "Company") maintains a fifty-two/fifty-three week
fiscal year cycle ending on a Sunday closest to September 30. The first quarters
of fiscal 1997 and 1996 ended on December 29, 1996 and December 31, 1995,
respectively. To conform the Company's fiscal year ends, the Company must add a
fifty-third week to every sixth or seventh fiscal year; however, both fiscal
1996 and fiscal 1997 are 52-week years. For convenience, the accompanying
financial statements have been shown as ending on the last day of the calendar
month.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation of the
interim periods presented have been included. The interim results are not
necessarily indicative of the operating results expected for the full fiscal
year ending September 30, 1997. The accompanying unaudited financial statements
should be read in conjunction with the Company's audited financial statements
included in its 1996 Annual Report on Form 10-K.
Note 2.
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. Inventories (in thousands) consisted of the following at:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials $11,556 $13,591
Work-in-process 29,361 34,157
Finished goods 10,122 10,257
------- -------
Total inventories $51,039 $58,005
======= =======
</TABLE>
For a discussion of certain risks associated with the Company's inventories, see
"Certain Additional Business Risks" on pages 12 through 17 below.
Note 3.
The provision for income taxes for the three months ended December 31, 1996 is
based upon the Company's estimated annual effective tax rate for fiscal 1997.
The effective tax rate differs from the statutory federal income tax rate
primarily due to net tax savings associated with certain of the Company's
foreign operations.
Note 4.
On January 9, 1997, the Company accepted service of a class action complaint
(the "State Action Complaint") filed in the Superior Court of the State of
California, Santa Clara County, against the Company and certain of its officers
and directors. The Complaint alleges violations of certain California securities
laws, fraud, unlawful, unfair or fraudulent business practices, and false and
misleading advertising, and states a class period of April 19, 1995 through
January 22, 1996. The Company has since been advised that two additional
complaints (the "Federal Action Complaints") have been filed against the Company
and certain of its officers in the United States District Court, Northern
District of California, San Jose Division, alleging violations of the Securities
Exchange Act of 1934, and stating class periods of April 19, 1995 through
January 22, 1996, and July 19, 1995 through June 19, 1996, respectively. The
Company is accepting service of the Federal Action Complaints. Based on its
preliminary review of the State Action Complaint and the Federal Action
Complaints, the Company believes that the Company and the individual
6
<PAGE> 7
READ-RITE CORPORATION
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 4. (Continued)
defendants have meritorious defenses. Accordingly, both on its own behalf and
pursuant to indemnification agreements between the Company and the named
individual defendants, the Company intends to defend these actions vigorously.
Failure by the Company to obtain a favorable resolution of the claims set forth
in these complaints could have a material adverse effect on the Company's
business, results of operations and financial condition.
Except as so noted, the Company is not a party, nor is its property subject, to
any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
7
<PAGE> 8
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 plan to spend approximately $300 million on
capital expenditures in fiscal 1997, the Company's belief that its liquid
assets, credit facilities and cash generated from operations are sufficient to
fund its operations in fiscal 1997 and the Company's projection that head stack
assemblies ("HSAs") will comprise approximately two-thirds of the Company's net
sales in fiscal 1997. Actual results for future periods could differ materially
from those projected in such forward-looking statements. Some factors which
could cause future actual results to materially differ from the Company's recent
results or those projected in the forward-looking statements are failure by the
Company to execute on planar, inductive or MR product development, obtain
necessary customer qualifications on new programs, to timely and cost-
effectively introduce those programs into manufacturing, and to achieve and
maintain acceptable production yields on those programs; constraints on supplies
of raw materials or components limiting the Company's ability to increase
production; significant increases or decreases in demand for the Company's
products, changes to the Company's product mix, and changes in business
conditions affecting the Company which significantly increase the Company's
working capital needs; or the Company's inability to obtain or generate
sufficient capital to fund such working capital needs. For a more detailed
discussion of certain risks associated with the Company's business, see "Certain
Additional Business Risks" on pages 12 through 17 below.
Three Months Ended December 31, 1996 Compared with Three Months Ended
December 31, 1995
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
1996 1995
------- ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 85.8 72.1
------- ------
Gross margin 14.2 27.9
------- ------
Operating expenses:
Research and development 5.9 2.7
Selling, general and administrative 4.3 3.9
------- ------
Total operating expenses 10.2 6.6
------- ------
Operating income 4.0 21.3
Interest expense 1.4 1.0
Interest income and other, net 0.8 0.8
------- ------
Income before income taxes and
minority interest 3.4 21.1
Provision for income taxes 1.1 5.3
------- ------
Income before minority interest 2.3 15.8
Minority interest in net income of
consolidated subsidiary 0.0 1.6
------- ------
Net income 2.3 14.2
======= ======
</TABLE>
8
<PAGE> 9
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Net Sales
Net sales for the three months ended December 31, 1996 were $251.6 million, a
15.9% decrease from net sales of $299.2 million for the three months ended
December 31, 1995. The decrease in net sales between the two periods was
primarily attributable to end-of-life for the Company's metal-in-gap ("MIG")
products, which occurred at the end of the third quarter of fiscal 1996. MIG
products accounted for $64.9 million, or 21.7% of net sales for the three months
ended December 31, 1995, compared to less than $1 million for the three months
ended December 31, 1996. However, the Company's net sales of inductive and MR
products increased from $234.3 million for the three months ended December 1995
to $250.9 million for the three months ended December 31, 1996. Though the
Company's net sales of inductive HGAs decreased period to period, this decrease
was offset by a significant increase in HSA sales, sales of MR HGAs and higher
average selling prices due to the introduction of new products. The Company
shipped over 4 million MR HGAs on 3 programs in the first quarter of fiscal
1997, accounting for approximately 18% of net sales.
The Company's sales of HGAs accounted for approximately 33% of net sales during
the quarter ended December 31, 1996, compared to approximately 66% of net sales
for HSAs. Sales of HGAs and HSAs were approximately 48% and 50%, respectively,
of net sales for the quarter ended December 31, 1995. The Company expects HSAs
to remain at approximately two-thirds of net sales during fiscal 1997.
Principal Customers:
<TABLE>
<CAPTION>
(As a Percentage of Net Sales) Three Months Ended
December 31,
------------------
1996 1995
Customer: ------ ------
<S> <C> <C>
Western Digital 52.6% 39.0%
Quantum 22.0 32.0
Maxtor 8.3 12.3
Seagate/Conner 0.1 10.1
All Others 17.0 6.6
</TABLE>
9
<PAGE> 10
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Gross Margin
The Company's gross margins are primarily influenced by average selling prices,
the level of revenues in relation to fixed costs, process yields, product mix
(newer products and HGAs typically generate higher gross margins than older
products and HSAs) and material costs. The weight of the impact of any of these
factors fluctuates from time to time. The Company's gross margins also
periodically reflect charges for inventory obsolescence, fixed assets and
severance related to products or technologies that have reached their
end-of-life.
The Company's gross margin for the three months ended December 31, 1996 was
14.2% of net sales, compared to 27.9% of net sales for the three months ended
December 31, 1995. The lower gross margin during the current quarter in
comparison to the previous period is primarily attributable to the level of net
sales in relation to fixed costs, significant start-up costs and lower yields
associated with new programs and a product mix weighted toward HSAs, partially
offset by higher average selling prices associated with the introduction of new
products.
As mentioned above, HSAs typically have lower gross margins than HGAs. HSAs
consist of two or more HGAs and a variety of purchased components which the
Company assembles into a single unit. The cost of the purchased components is a
material percentage of the total cost of the HSA; the gross margin on such
purchased components is substantially lower than the gross margin on HGAs
produced by the Company. The combination of the respective margins on HGAs and
non-HGA components and associated labor and overhead included in HSAs thus
typically produces a significantly lower aggregate gross margin on HSA sales
compared to HGA sales.
Research and Development Expenses
Research and development ("R&D") expenses were $14.9 million, or 5.9% of net
sales, for the three months ended December 31, 1996 compared to $8.2 million, or
2.7% of net sales, for the three months ended December 31, 1995.
The absolute dollar increase for the three months ended December 31, 1996 over
the three months ended December 31, 1995 was primarily due to increased monthly
spending associated with planar recording technology and to the hiring of
additional engineers and related staff to support the Company's ongoing
development efforts in inductive, MR and emerging technologies. The increase
from period to period of R&D expenses as a percentage of net sales is due to the
increase in absolute dollar spending as well as to the lower level of net sales
during the current period.
The Company intends to continue increasing its R&D expenditures on an absolute
dollar basis in future periods. However, the level of R&D expenditures as a
percentage of net sales will vary from period to period depending on the level
of net sales.
Selling, General & Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $10.8 million, or
4.3% of net sales, for the three months ended December 31, 1996 compared to
$11.5 million, or 3.9% of net sales, for the three months ended December 31,
1995.
10
<PAGE> 11
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Selling, General & Administrative Expenses (continued)
The absolute dollar decrease in SG&A expenses for the three months ended
December 31, 1996 over the three months ended December 31, 1995 was primarily
due to cost reduction efforts implemented in fiscal 1996. The increase from
period to period of SG&A expenses as a percentage of net sales is due to the
lower level of net sales during the current period.
The Company does not expect that SG&A expenses will increase significantly in
absolute dollars in the near-term, but anticipates that SG&A expenses will vary
from quarter to quarter as a percentage of net sales, depending on the level of
net sales.
Interest Expense
Interest expense was $3.6 and $3.1 million for the three-month periods ended
December 31, 1996 and 1995, respectively. The increase in interest expense in
the current period is primarily due to the significant increase in the average
amount of debt outstanding.
Interest Income and Other, Net
Interest income and other, net for the three months ended December 31, 1996 was
$2.1 million, compared to $2.4 million for the three months ended December 31,
1995. Interest income and other, net is lower for the current period primarily
due to less interest income on significantly lower cash balances, partially
offset by foreign currency exchange gains.
Provision for Income Taxes
The Company's estimated annual effective tax rate was 31% for the three months
ended December 31, 1996, compared to 25% for the three months ended December 31,
1995. The increase in rates from fiscal 1996 to fiscal 1997 was due to higher
net tax from certain foreign operations. The fiscal 1997 rate differs from the
statutory federal income tax rate primarily due to net tax savings associated
with certain of the Company's foreign operations.
Liquidity and Capital Resources
As of December 31, 1996, the Company had cash, cash equivalents and short-term
investments of $132.4 million, total assets of $918.9 million and total
long-term debt, including the current portion, of $185.9 million. The Company's
cash generated by operating activities was $35.8 million for the three months
ended December 31, 1996, compared to $56.8 million for the same three-month
period during the previous fiscal year. In total, the Company's net cash
decreased by $18.5 million for the three months ended December 31, 1996,
compared to a decrease of $61.4 million for the three months ended December 31,
1995. The higher decrease in the prior period was due primarily to the Company's
use of $32.8 million of cash to repurchase an aggregate of one million shares of
its Common Stock, and to higher capital expenditures.
11
<PAGE> 12
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The Company's business is highly capital intensive. During the three months
ended December 31, 1996, the Company incurred capital expenditures of
approximately $51.7 million, compared to $66.7 million during the same
three-month period of the previous fiscal year. Capital expenditures have
primarily been made to expand production capacity in Thailand and Malaysia, to
expand wafer production in Milpitas, Fremont and Japan, and to support new
manufacturing processes and new technologies, such as magnetoresistive ("MR")
and planar technology. The Company plans total capital expenditures of
approximately $300 million in fiscal 1997; however, to the extent yields for the
Company's products are lower than expected, that demand for such products
exceeds Company expectations, or that the Company's manufacturing process needs
change significantly, such expenditures may increase. Conversely, if demand for
the Company's products is lower than expected or if the Company is unable to
obtain adequate financing for such capital purchases, the planned expenditures
may decrease. As of December 31, 1996, total commitments for construction or
purchase of plant and equipment totaled approximately $85 million.
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 in fiscal 1997. However, if industry conditions become unfavorable,
or if the Company does not consistently achieve timely customer qualifications
on new product programs, or if the Company is unsuccessful at ramping up volume
production on new product introductions at acceptable yields (including but not
limited to its planar, advanced inductive and MR programs) thus negatively
affecting profits and cash flows from operations, the Company's working capital
and other capital needs will increase. Conversely, if industry demand increases
significantly such that the Company's capital requirements exceed management's
current estimates, the Company may again need to raise additional capital. The
Company may seek such capital through additional bank facilities, debt or equity
offerings, or other sources. Further, the Company may elect from time to time to
seek additional financing to the extent available. There can be no assurance,
however, that any such required financing will be available when needed on terms
and conditions acceptable or favorable to the Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. Certain of the
Company's credit facilities currently prohibit the payment of cash dividends and
the repurchase of Common Stock.
Certain Additional Business Risks
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
The Company is a component supplier dependent upon a limited number of customers
in a volatile industry characterized by rapid technological change, short
product life cycles, intense competition and steady price erosion. In addition,
as demonstrated late in the quarter ended June 30, 1996 as significant orders
were canceled and/or rescheduled by several customers with little or no advance
warning, demand for the Company's products is highly variable. This variability
was previously demonstrated by the strong demand in the first half of fiscal
1993 and the significant industry contraction in the latter half of fiscal 1993.
In both cases, these demand variations materially and adversely affected the
Company's business, financial condition and results of operations.
12
<PAGE> 13
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Certain Additional Business Risks (continued)
During fiscal 1996, the Company produced HGAs in volume for 6 customers, HSAs in
volume for 4 customers and tape drive products in volume for 3 customers. Given
the small number of high performance disk drive and tape manufacturers who
require an independent source of HGA, HSA or tape head supply, the Company
expects its dependence on a limited number of customers to continue. As
demonstrated by the significant reduction in the level of the Company's business
late in fiscal 1996 and in the second half of fiscal 1993, the loss of any large
customer, or a significant decrease in orders from one or more large customers,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Given the Company's dependence upon a limited number of customers, acquisitions
and consolidations affecting such customers could also have a material adverse
effect on the Company's business, financial condition and operating results. For
example, Seagate, a competitor of the Company, acquired the tape head operations
of Applied Magnetics Corporation in fiscal 1995, and in fiscal 1996 completed
the acquisition of Conner Peripherals, Inc. ("Conner"), which was then a major
customer of the Company. Seagate has significant internal disk and tape head
manufacturing capacity and does not presently account for a material
percentage of the Company's total sales. Further, in fiscal 1996, Singapore
Technologies acquired the disk drive operations of Micropolis, while Hyundai
completed its acquisition of Maxtor. While the Company believes it will remain a
supplier to both Micropolis and Maxtor notwithstanding these changes in
ownership, there can be no assurance that these customers will continue
purchasing a significant quantity of their respective head requirements from the
Company.
Vertical integration by the Company's customers, through which a customer
acquires or increases internal HGA or HSA production capability, could also
materially and adversely affect the Company's business, financial condition and
results of operations. In 1994, Quantum, a principal customer of the Company
with no previous magnetic recording head capacity, acquired Digital Equipment
Corporation's ("DEC") recording head and disk drive operations. While this
integration has not had a material adverse effect on the Company's thin film
head operations to date, there can be no assurance that Quantum will continue to
purchase a significant portion of its head requirements from the Company,
particularly as Quantum transitions its drive programs to MR technology, the
primary focus of Quantum's internal head operations. Other acquisitions or
significant transactions by the Company's customers leading to further
consolidation or vertical integration could also materially and adversely affect
the Company's business, financial condition and results of operations.
Currently, the Company's revenues are principally derived from thin film
inductive and MR products, which require substantial resources for product
development and manufacturing equipment to effectively extend the performance of
these products to compete with new products supporting higher areal densities.
To maintain its market position, the Company must continually and timely improve
its head, HGA and HSA technologies to meet industry demands, at competitive
costs. In addition, the Company is dependent on a limited number of customers
who have an increasingly limited number of large volume programs in process at
any given time. The Company also faces strong competition among recording head
manufacturers. The failure by the Company to execute on technologies necessary
to consistently obtain qualification on any of such volume programs will have a
material adverse effect on the Company's business, financial condition and
results of operations.
13
<PAGE> 14
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Certain Additional Business Risks (continued)
For example, in the second quarter of fiscal 1996, the Company learned that to
participate in certain key customer programs, Company products would have to
incorporate a technical feature which the Company had not yet developed. Though
the Company began development of necessary processes for this feature in the
second quarter of fiscal 1996, thereafter the Company incurred significant
start-up costs without concurrently achieving the volume production necessary to
absorb those costs, thus materially and adversely impacting both the Company's
revenues and gross margins.
The Company shipped over 4 million MR heads on 3 programs in the first quarter
of fiscal 1997, accounting for approximately 18% of net revenues. 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 yields and as necessary to achieve consistent design-in wins on
new product programs.
In March 1996, the Company acquired a nonexclusive license to the intellectual
property of Censtor Corporation, including planar technology, with a goal of
combining that technology with the Company's own inductive technologies and
manufacturing processes to extend recording areal densities for inductive heads
beyond conventional advanced thin film inductive designs. The Company has
supplied samples of planar recording heads capable of an areal density of 1.5
gigabytes ("GB") per 3.5" disk to its customers. However, due to delays in
ramping production and to the accelerating shift towards MR, the Company is
considering design platforms intended to achieve higher areal densities. The
Company has made and is making significant investments in facilities and
equipment at its Milpitas wafer fabrication facility and its Philippines
assembly facility to support commercial production of products using planar
technology. However, there can be no assurance that the Company will be
successful in developing this new technology, that it will obtain the necessary
customer qualifications for planar heads, or that it will be able to transition
planar technology into commercially viable volume production.
As indicated above, technology changes rapidly in the Company's industry. These
rapid changes require the Company both to anticipate new technologies and to
address obsolescence of old technologies. Failure to execute on new technologies
or to smoothly transition from old technologies can have a material adverse
effect on the Company's business, financial condition and results of operations.
For example, due to the ever-increasing performance requirements for recording
heads, all of the customer programs using the Company's MIG products reached
end-of-life during the third quarter of fiscal 1996. Though MIG products
accounted for $174 million, or 18% of the Company's sales for fiscal 1996, the
Company expects its MIG revenues for fiscal 1997 to be negligible and is no
longer pursuing design-ins with this technology. The rapid decline in MIG sales
in the fourth quarter of fiscal 1996 (from approximately $48 million in the
third quarter to approximately $5 million in the fourth), coupled with the
timing of certain new product introductions in the Company's thin film business
and reductions in certain customer programs in the disk drive industry during
the third and fourth quarters, made it difficult for the Company to transition
its MIG facilities to the production of more advanced inductive or MR products.
As a result, during the fourth quarter of fiscal 1996, the Company reduced its
workforce in the Philippines by approximately 5,000 employees, and incurred
charges for related severance costs, equipment and inventory write-offs and
facility-related charges.
14
<PAGE> 15
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Certain Additional Business Risks (continued)
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. For example, as
stated above, the Company is making significant investments in facilities and
equipment to support planar products in advance of obtaining customer
qualifications for this new technology. Accurate capacity planning is
complicated by the pace of technological change, unpredictable demand
variations, the effects of variable manufacturing yields, and the fact that most
of the Company's plant and equipment expenditures have long lead times, thus
requiring major commitments well in advance of actual requirements. The
Company's underestimation or overestimation of its capacity requirements, or
failure to successfully and timely put in place the proper technologies, would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has made substantial capital expenditures and installed significant
production capacity to support new technologies and increased demand for its
products. The Company made capital expenditures in fiscal 1996 of approximately
$265.8 million, compared to approximately $185.1 million for fiscal 1995, and
plans to expend approximately $300 million in fiscal 1997. There can be no
assurance that the Company's net sales will increase sufficiently to absorb such
additional costs, and that there will not be periods, such as in fiscal 1996 and
in the latter half of fiscal 1993, when net sales decline quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" on pages 11 through 12 above.
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,
political instability, changes in government policies relating to foreign
investment and operations, cultural issues, labor problems, trade restrictions,
transportation delays and interruptions, and changes in tariff and freight
rates. The Company has from time to time experienced labor organization
activities at certain of its foreign operations, most recently in the first
quarter of fiscal 1997, but none of the Company's employees are currently
represented by a union. There can be no assurance, however, that the Company
will continue to be successful in avoiding work stoppages or other labor issues
in the future.
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial yield loss, and in some cases, cause production
to be suspended. Yields for new products initially tend to be low as the Company
completes product development and commences volume manufacturing, and thereafter
typically increase as the Company ramps to full production. The Company's
forward product pricing reflects this assumption of improving yields; as a
result, material variances between projected and actual yields have a direct
effect on the Company's gross margins and profitability. The difficulty of
forecasting yields accurately and maintaining cost competitiveness through
improving yields will continue to be magnified by ever-increasing process
complexity, and by the compression of product life cycles which requires the
Company to bring new products on line faster and for shorter periods while
maintaining acceptable yields and quality, without, in many cases, reaching the
longer-term, high volume manufacturing conducive to higher yields and declining
costs.
15
<PAGE> 16
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Certain Additional Business Risks (continued)
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 materially
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.
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 technological 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 of orders 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.
As a result of the above factors, the Company's inventory is subject to
substantial risk. To address these risks, the Company monitors its inventories
and provides inventory write-downs intended to cover inventory risks. However,
given the Company's dependence on a few customers and a limited number of
product programs for each 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 to address known issues, 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 due to further order cancellations by customers.
16
<PAGE> 17
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Certain Additional Business Risks (continued)
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 yields, increased material costs or
material or equipment unavailability, disruptions in foreign operations,
decreased demand for or decreased average selling prices of the Company's
products, increased competition leading to a failure by the Company to obtain
"design-in wins" on one or more customer programs, changes in product mix,
increased operating costs associated with the ramp-up of production as capacity
is added or under-utilization of capacity if demand is less than anticipated.
The Company's sales are generally made pursuant to individual purchase orders
which may be changed or canceled by customers on short notice, often without
material penalties. Changes or cancellations of product orders could result in
under-utilization of production capacity and inventory write-offs. For example,
in the second half of fiscal 1996, and in calendar 1993, the Company experienced
delays and cancellation of orders, reduced average selling prices, inventory
write-offs, increased unit costs due to under-utilization of production
capacity, and, as a consequence of the foregoing, significantly reduced revenues
and gross margins, generating operating losses. The Company expects periodic
fluctuations will occur in the future.
The trading price of the Company's Common Stock has been and 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, changes in earnings estimates or recommendations
by securities analysts, 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.
17
<PAGE> 18
READ-RITE CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
10.47* Executive Quarterly Variable Compensation Plan
10.48* Read-Rite Corporation Super Bonus Plan
11.1 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule (electronic filing only)
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1996.
18
<PAGE> 19
READ-RITE CORPORATION
SIGNATURE
Pursuant to the requirements 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.
Date: February 7, 1997 /s/ John T. Kurtzweil
------------------------------------
John T. Kurtzweil
Vice President, Finance and
Chief Financial Officer
19
<PAGE> 20
READ-RITE CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.47 Executive Quarterly Variable Compensation Plan
10.48 Read-Rite Corporation Super Bonus Plan
11.1 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule (electronic filing only)
</TABLE>
20
<PAGE> 1
EXHIBIT 10.47
READ-RITE CORPORATION
EXECUTIVE QUARTERLY VARIABLE COMPENSATION PLAN
SUMMARY PLAN DESCRIPTION
1. OBJECTIVE.
The Read-Rite Corporation Quarterly Executive Variable Compensation Plan
(the "Plan") is designed to recognize certain executives who have made and
continue to make a significant contribution to the Company's success. Under the
Plan, quarterly variable compensation is payable to eligible executives upon the
Company's achievement of quarterly financial targets set by the Company's Board
of Directors ("Board") at the beginning of the fiscal year.
2. PARTICIPATION.
A. Participants are designated by the Compensation Committee of the Board
(the "Committee"), and must be regular, actively employed, executives of the
Company both during the applicable quarter and at the time the payment is made.
The Committee reserves the discretion, however, to add new participants to the
Plan during a fiscal quarter, and to make such adjustments to such new
participants' eligibility as it deems fit to reflect participation for less than
the full quarter.
B. Under the Plan, each participant is eligible to receive quarterly
variable compensation equal to a percentage of that participant's base salary as
determined by the Committee.
C. Participating executives who work less than a full-time schedule shall
have their quarterly variable compensation payments prorated accordingly.
3. PLAN STRUCTURE.
A. At the beginning of the fiscal year, the Board sets Company profit
after tax ("PAT") goals for the year, by quarter.
B. No variable compensation can be paid under the program unless the
Company is profitable for the applicable quarter.
C. If the Company is profitable, quarterly variable compensation
eligibility begins to accrue once the Company achieves 90% of the applicable
quarterly PAT target and increases on a straight line basis to full eligibility
at 100% of the applicable quarterly PAT target (e.g., at 95.5% of the Company
performance target, eligibility is 55%).
D. Once eligibility is established based on Company performance, actual
payments are subject to individual performance considerations. 80% of the
eligibility is payable based on Company performance; 20% is payable based on
individual performance. This weighting applies to all participants except the
Chairman/CEO and President/COO, whose quarterly variable compensation is based
100% on Company performance. This Plan is not, nor should it be
<PAGE> 2
construed to be, an entitlement; accordingly, in all cases, including the
Chairman/CEO and the President/COO, the Committee reserves the right to reduce
or withhold payments in its sole discretion.
E. Quarterly variable compensation payments will be provided to recipients
as soon as practical following Board review of reported quarterly financial
results and receipt of required approvals.
4. GENERAL.
A. This Plan applies to the Company's 1997 fiscal year, and shall be
reviewed, and in the Committee's sole discretion, revised for subsequent fiscal
years.
B. The Company's Compensation Department shall provide the Committee and
the Chairman/CEO and President/COO administrative guidance to operate the Plan
and secure appropriate approvals.
C. The Company reserves the right to amend or terminate this Plan at any
time, with or without notice.
D. Neither the Plan nor any provision within the Plan constitutes a
contract of employment between the Company and any Plan participant. All
employment with the Company is "at will," and thus may be terminated at any
time, with or without cause.
E. None of the benefits, payments, proceeds, or claims of a participating
executive shall be subject to any claim of any creditor of such executive, and
in particular, shall not be subject to attachment or garnishment or other legal
process by any creditor of the executive, nor shall the executive have any right
to alienate, anticipate, commute, pledge, encumber or assign any of the benefits
or payments or proceeds that he or she may expect to receive under this Plan.
F. In the event of any dispute regarding the application of this Plan, the
Committee shall make a determination and that decision will be final and
binding.
<PAGE> 1
EXHIBIT 10.48
READ-RITE CORPORATION
SUPER BONUS PLAN
SUMMARY PLAN DESCRIPTION
1. OBJECTIVE.
The Read-Rite Super Bonus Plan ("Plan") is a compensation plan which
compensates participating executives for the Company's achievement of
extraordinary corporate financial objectives.
2. PARTICIPATION.
Participants are designated by the Compensation Committee of the Board
(the "Committee"), and must be regular, actively employed, full-time executives
of the Company both during the applicable fiscal year and at the time the award
is made. The Committee reserves the discretion, however, to add new participants
to the Plan during a fiscal year, and to make such adjustments to such new
participants' eligibility as it deems fit to reflect participation for less than
the full year.
3. DETERMINATION OF THE SUPER BONUS POOL.
At the beginning of the fiscal year, the Board will set minimum and
maximum Company profit after tax ("PAT") objectives for the fiscal year. The
minimum PAT objective will be the sum of the quarterly PAT targets used for the
Quarterly Variable Compensation Plan. The Board will also set the percentage of
the aggregate PAT between such minimum and maximum targets which the Company
will accrue as the pool available for awards under the Plan.
4. PLAN STRUCTURE.
A. This Plan will not constitute a qualified plan under the provisions of
the Internal Revenue Code of 1986, as amended ("the Code"), or any applicable
state laws.
B. Each participating executive's target bonus eligibility will be the
same percentage of the executive's base salary used for the quarterly variable
compensation program ("1x") when Company performance for the fiscal year exceeds
the PAT objective by 25%, up to a maximum of twice such percentage ("2x") when
the Company's performance for the fiscal year exceeds the PAT objective by 50%.
C. Awards begin to accrue if the Company's financial performance exceeds
the PAT target for the year, and increases on a straight-line basis to 1x at 25%
over the PAT target for the year, up to a maximum of 2x at 50% over the PAT
target for the year.
D. Awards under this Plan will be paid in cash, in full, at the time of
the award.
E. Distributions under the Plan will be provided to participants as soon
as practical following the end of the fiscal year. The Company will withhold
statutory federal, state and local taxes from any distribution as applicable.
<PAGE> 2
5. GENERAL.
A. This Plan applies to the Company's 1997 fiscal year, and shall be
reviewed, and in the Committee's sole discretion, revised for subsequent fiscal
years.
B. The Company's Compensation Department shall provide the Committee and
the Chairman/CEO and President/COO administrative guidance to operate the Plan
and secure appropriate approvals.
C. The Company reserves the right to amend or terminate this Plan at any
time, with or without notice.
D. Neither this Plan nor any provision within this Plan constitutes a
contract of employment between the Company and any Plan participant. All
employment with the Company is "at will," and thus may be terminated at any
time, with or without cause.
E. None of the benefits, payments, proceeds, or claims of a participating
executive shall be subject to any claim of any creditor of such executive, and
in particular, the same shall not be subject to attachment or garnishment or
other legal process by any creditor of the executive, nor shall the executive
have any right to alienate, anticipate, commute, pledge, encumber or assign any
of the benefits or payments or proceeds that he or she may expect to receive
under this Plan.
F. In the event of any dispute regarding the application of this Plan, the
Committee shall make a determination and that decision will be final and
binding.
<PAGE> 1
EXHIBIT 11.1
READ-RITE CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net income $ 5,787 $ 42,571
========== ==========
Weighted average common shares
outstanding 46,976 47,117
Common equivalent shares
issuable under dilutive stock
options after applying treasury
stock method, net of tax benefits 1,122 1,472
---------- ----------
Common and common equivalent
shares used in computing net
income per share 48,098 48,589
========== ==========
Net income per share $ 0.12 $ 0.88
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT DECEMBER 29, 1996 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 29,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-29-1996
<CASH> 63,836
<SECURITIES> 68,585
<RECEIVABLES> 112,781
<ALLOWANCES> 2,975
<INVENTORY> 51,039
<CURRENT-ASSETS> 307,299
<PP&E> 880,809
<DEPRECIATION> 299,786
<TOTAL-ASSETS> 918,868
<CURRENT-LIABILITIES> 202,256
<BONDS> 170,129
0
0
<COMMON> 5
<OTHER-SE> 460,843
<TOTAL-LIABILITY-AND-EQUITY> 918,868
<SALES> 251,588
<TOTAL-REVENUES> 251,588
<CGS> 215,774
<TOTAL-COSTS> 215,774
<OTHER-EXPENSES> 25,691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,628
<INCOME-PRETAX> 8,608
<INCOME-TAX> 2,668
<INCOME-CONTINUING> 5,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,787
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
