<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 MARCH 31, 1997
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.
COMMON STOCK, $.0001 PAR VALUE 47,334,358 SHARES
(Class) (Outstanding at March 31, 1997)
<PAGE> 2
READ-RITE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets-
March 31, 1997 and September 30, 1996 3
Consolidated Condensed Statements of Operations-
Three and Six Months Ended March 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flow-
Three and Six Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 22
INDEX OF EXHIBITS 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL STATEMENTS
READ-RITE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 94,885 $ 82,291
Short-term investments 31,227 65,655
Accounts receivable, net 127,198 90,142
Inventories 67,115 58,005
Prepaid expenses and other current assets 13,052 13,962
-------- --------
Total current assets 333,477 310,055
Property, plant and equipment, at cost 937,902 834,852
Less: Accumulated depreciation and amortization 334,184 267,558
-------- --------
Net property, plant and equipment 603,718 567,294
Intangible and other assets 29,493 31,323
-------- --------
TOTAL ASSETS $966,688 $908,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $108,402 $ 88,434
Accrued compensation and benefits 34,505 27,099
Income taxes payable 26,126 27,754
Other accrued liabilities 40,366 37,196
Current portion of long-term debt and
capital lease obligations 15,554 15,613
-------- --------
Total current liabilities 224,953 196,096
Long-term debt and capital lease obligations 166,096 172,037
Deferred income taxes and other 16,199 15,458
-------- --------
TOTAL LIABILITIES 407,248 383,591
-------- --------
Minority interest in consolidated subsidiary 71,165 71,282
-------- --------
Commitments and contingencies
Stockholders' equity:
Series A Participating Preferred
Stock, $0.0001 par value -- --
Common stock, $.0001 par value 5 5
Additional paid-in capital 343,328 336,113
Retained earnings 144,317 114,979
Cumulative translation adjustment 625 2,702
-------- --------
TOTAL STOCKHOLDERS' EQUITY 488,275 453,799
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $966,688 $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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $282,068 $258,219 $533,656 $557,430
Cost of sales 219,688 215,510 435,462 431,319
-------- -------- -------- --------
Gross margin 62,380 42,709 98,194 126,111
Operating expenses:
Research and development 15,691 18,024 30,629 26,180
Selling, general and administrative 10,370 10,805 21,123 22,314
-------- -------- -------- --------
Total operating expenses 26,061 28,829 51,752 48,494
-------- -------- -------- --------
Operating income 36,319 13,880 46,442 77,617
Interest expense 3,434 2,970 7,062 6,093
Interest income and other, net 2,885 3,124 4,998 5,569
-------- -------- -------- --------
Income before provision for income taxes
and minority interest 35,770 14,034 44,378 77,093
Provision for income taxes 8,428 8,136 11,096 23,900
-------- -------- -------- --------
Income before minority interest 27,342 5,898 33,282 53,193
Minority interest in net income of
consolidated subsidiary 3,787 4,611 3,940 9,335
-------- -------- -------- --------
NET INCOME $ 23,555 $ 1,287 $ 29,342 $ 43,858
======== ======== ======== ========
NET INCOME PER SHARE $ 0.48 $ 0.03 $ 0.61 $ 0.91
======== ======== ======== ========
SHARES USED IN PER SHARE CALCULATION 48,816 47,461 48,457 48,025
======== ======== ======== ========
</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>
SIX MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,342 $ 43,858
Adjustments required to reconcile net income
to cash provided by operations:
Depreciation and amortization 75,721 44,464
Minority interest in net income of
consolidated subsidiary 3,940 9,335
Other, net (2,887) 2,814
Changes in assets and liabilities:
Accounts receivable, net (41,303) (5,699)
Inventories (9,846) (26,283)
Prepaid expenses and other current assets 851 (1,244)
Accounts payable, accrued liabilities and
income taxes payable 31,620 34,794
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 87,438 102,039
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (114,839) (125,481)
Maturities of available-for-sale investments 251,260 611,261
Purchases of available-for-sale investments (216,615) (612,570)
Other assets and liabilities, net (2,291) (4,154)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (82,485) (130,944)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on long-term debt and capital
lease obligations (6,000) (14,127)
Repurchase of common stock -- (43,046)
Proceeds from issuance of common stock 6,891 4,348
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 891 (52,825)
--------- ---------
Effect of exchange rate changes on cash 6,750 8,111
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,594 (73,619)
Cash and cash equivalents at beginning of period 82,291 168,860
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,885 $ 95,241
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 7,438 $ 5,809
Income taxes $ 10,436 $ 28,646
Other non-cash items:
Issuances of common stock under 401K plan $ 324 $ 589
</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 the Sunday closest to September 30. The second
quarters of fiscal 1997 and 1996 ended on March 30, 1997 and March 31, 1996,
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
1997 and fiscal 1996 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 consisted of the following at (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
--------- -------------
<S> <C> <C>
Raw materials $23,489 $13,591
Work-in-process 39,965 34,157
Finished goods 3,661 10,257
------- -------
Total inventories $67,115 $58,005
======= =======
</TABLE>
For a discussion of certain risks associated with the Company's inventories, see
"Certain Additional Business Risks" on pages 13 through 19 below.
Note 3.
The provision for income taxes for the three and six months ended March 31, 1997
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 the Company's foreign
operations.
Note 4
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement Number 128 (FASB 128), Earnings Per Share,
which the Company is required to adopt in the first quarter of fiscal 1998. 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 FASB 128, the
dilutive effect of outstanding stock options will be excluded from the
calculation of primary earnings per share. The impact of excluding the dilutive
effect of outstanding stock options is expected to result in an increase in
earnings per share presented by the Company of $0.02 for the three months ended
March 31, 1997, and $0.01 and $0.03 for the six months ended March 31, 1997 and
1996, respectively. The impact to primary earnings per share for the three
months ended March 31, 1996 is expected to be less than $0.005.
6
<PAGE> 7
READ-RITE CORPORATION
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5
In the first half of fiscal 1997, the Company adopted Financial Accounting
Standards Board Statement Number 121 (FASB 121), Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. FASB 121
requires the Company to periodically assess whether any events or circumstances
exist that indicate there may be impairment of (i) long-lived assets, (ii)
certain identifiable intangibles, (iii) goodwill related to those assets to be
held and used and (iv) for long-lived assets and certain identifiable
intangibles to be disposed of. To the extent there is any impairment, as
defined and determined in accordance with FASB 121, the Company would be
required to record an impairment loss for such assets. The adoption of FASB 121
did not have a material impact on the Company's financial condition or results
of operation for the three or six month periods ended March 31, 1997.
Note 6
On March 28, 1997, the Company filed an omnibus shelf registration statement on
Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission pursuant to Rule 415 under the Securities Act of 1933, as amended.
After the Registration Statement has become effective, the Company may from time
to time offer debt securities, which may be either senior or subordinated debt
securities, or shares of its common stock (collectively, "Securities"), which
together have an initial public offering price of up to $350 million. These
Securities may be offered, separately or together, in separate series, in
various amounts, at prices and on terms to be set forth in the prospectus
contained in the Registration Statement, and in one or more supplements to such
prospectus, and may only be offered pursuant thereto. The Registration Statement
is intended to provide the Company flexibility to raise up to $350 million from
offerings of debt securities, common stock or a combination thereof, subject to
market conditions and the Company's capital needs. Net proceeds from any
offering of Securities would be intended to be used for general corporate
purposes, including capital expenditures, and to meet working capital needs.
Note 7
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 false and misleading statements and suppressed
material information concerning the Company, in violation of the California
Corporations Law, the California Civil Code (those section prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount.
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 contains essentially the same
factual allegations as the Ferrari State Action, but concerns a purported class
period of July 19, 1995 - June 19, 1996, and alleges violation 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 also seek damages of an unspecified
amount.
The Company believes that the Company and the individual defendants have
meritorious defenses to these three actions. Accordingly, both on its own behalf
and pursuant to indemnification agreements between the Company and the named
individual defendants, the Company intends 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 can not be reasonably
estimated.
7
<PAGE> 8
READ-RITE CORPORATION
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7 (Continued)
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 8
On March 4, 1997, the Company declared a dividend distribution of one Preferred
Share Purchase Right ("Rights") on each outstanding share of the Company's
common stock. The dividend distribution was made on March 17, 1997 to
shareholders of record on March 17, 1997. The Rights, which expire on March 17,
2007, are represented by and traded with the Company's common stock. Following
such time as the Rights become exercisable, the Rights will separate from the
common stock and trade separately.
Each Right entitles shareholders to purchase one one-thousandth of a share of
the Company's Series A Participating Preferred Stock at an exercise price of
$150. The Rights will become exercisable following the tenth day after a person
or group announces acquisition of 20% or more of the Company's common stock or
announces commencement of a tender offer, the consummation of which would result
in ownership by the person or group of 20% or more of the Company's common
stock. The Company will be entitled to redeem the Rights for $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.
8
<PAGE> 9
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 for the next year, and the Company's belief that the Company
and the individual defendants in the Ferrari State Action, the Ferrari Federal
Action and the McDaid Federal Action (collectively, the "Actions") 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
are failure by the Company to execute on advanced inductive or magnetoresistive
("MR") product development; to 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 maintain or 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; the Company's
inability to obtain or generate sufficient capital to fund such 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"
on pages 13 through 19 below.
Three and Six Months Ended March 31, 1997 Compared with Three and Six Months
Ended March 31, 1996
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------- -----------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of sales 77.9 83.5 81.6 77.4
----- ----- ----- -----
Gross margin 22.1 16.5 18.4 22.6
----- ----- ----- -----
Operating expenses:
Research and development 5.6 6.9 5.7 4.7
Selling, general and administrative 3.6 4.2 4.0 4.0
----- ----- ----- -----
Total operating expenses 9.2 11.1 9.7 8.7
----- ----- ----- -----
Operating income 12.9 5.4 8.7 13.9
Interest expense 1.2 1.2 1.3 0.1
Interest income and other, net 1.0 1.2 0.9 0.0
----- ----- ----- -----
Income before income taxes and
minority interest 12.7 5.4 8.3 13.8
Provision for income taxes 3.0 3.2 2.1 4.3
----- ----- ----- -----
Income before minority interest 9.7 2.2 6.2 9.5
Minority interest in net income of
consolidated subsidiary 1.3 1.7 0.7 1.6
----- ----- ----- -----
Net income 8.4 0.5 5.5 7.9
===== ===== ===== =====
</TABLE>
9
<PAGE> 10
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 and six months ended March 31, 1997 were $282.1 million
and $533.7 million, respectively, a 9.3% increase and 4.3% decrease over net
sales of $258.2 million and $557.4 million, respectively, for the comparable
periods in fiscal 1996. The increase in net sales for the current three-month
period over the same period during the previous fiscal year was due to higher
unit sales and higher average selling prices for newer thin film and MR
products, partially offset by end-of-life for metal-in-gap ("MIG") products,
which accounted for a negligible amount of the Company's sales for the three
months ended March 31, 1997 and 21.1% of sales for the three months ended March
31, 1996. The decrease in net sales between the two six-month periods was
primarily attributable to end-of-life for MIG products, which accounted for a
negligible amount of the Company's sales for the six months ended March 31, 1997
and 21.5% of sales for the six months ended March 31, 1996, partially offset by
higher unit sales and higher average selling prices for thin film and MR
products. During the three months and six months ended March 31, 1997, MR
products accounted for approximately 26.7% and 22.4% of the Company's net
sales, respectively.
The Company's sales of head gimbal assemblies ("HGAs") accounted for
approximately 40% of net sales during the quarter ended March 31, 1997, compared
to approximately 59% of net sales for HSAs. Sales of HGAs and HSAs were
approximately 45% and 54%, respectively, of net sales for the quarter ended
March 31, 1996. Sales of HGAs and HSAs were approximately 38% and 61%,
respectively, of net sales for the six months ended March 31, 1997, compared to
approximately 47% and 52%, respectively, of net sales for the six months ended
March 31, 1996.
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 relative impact of these factors
fluctuates from time to time. The Company's gross margins also reflect charges
for inventory and fixed asset obsolescence related to products or technologies
that have reached their end-of-life.
The Company's gross margin for the three months ended March 31, 1997 was 22.1%
of net sales, compared to 16.5% of net sales for the three months ended March
31, 1996. The higher gross margin during the current quarter in comparison to
the previous fiscal year quarter is primarily attributable to higher average
selling prices and higher unit volume for newer products, partially offset by
lower yields associated with new programs and a product mix weighted toward
HSAs. The Company's gross margin for the six months ended March 31, 1997 was
18.4% of net sales, compared to 22.6% of net sales for the six months ended
March 31, 1996. The lower gross margin during the current six month period in
comparison to the previous fiscal year six month period is primarily
attributable to the lower 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 for newer 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.
10
<PAGE> 11
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Research and Development Expenses
Research and development ("R&D") expenses were $15.7 million, or 5.6% of net
sales, for the three months ended March 31, 1997 compared to $18.0 million, or
6.9% of net sales, for the three months ended March 31, 1996. R&D expenses were
$30.6 million, or 5.7% of net sales, for the six months ended March 31, 1997
compared to $26.2 million, or 4.7% of net sales, for the six months ended March
31, 1996.
R&D expenses for the three and six months ended March 31, 1996 reflected a
charge of $9.0 million due to an investment in planar recording technology.
Excluding this charge from such periods, R&D expenses for the current three- and
six-month periods increased significantly in both absolute dollars and as a
percentage of net sales due to hiring of additional engineers and related staff
and increased support expenses for the Company's ongoing development efforts in
advanced inductive, MR and emerging technologies.
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 and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $10.4 million, or
3.6% of net sales, for the three months ended March 31, 1997 compared to $10.8
million, or 4.2% of net sales, for the three months ended March 31, 1996. SG&A
expenses were $21.1 million, or 4.0% of net sales, for the six months ended
March 31, 1997 compared to $22.3 million, or 4.0% of net sales, for the same six
month period in fiscal 1996.
The absolute dollar decrease in SG&A expenses for the three- and six-month
periods in fiscal 1997 as compared to fiscal 1996 was primarily due to cost
reduction efforts implemented in fiscal 1996. 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 $3.4 million and $7.1 million for the three- and six-month
periods ended March 31, 1997, respectively, and $3.0 million and $6.1 million
for the comparable periods in fiscal 1996. The increase in interest expense for
the current periods as compared to the same periods in fiscal 1996 is primarily
due to the increase in the average amount of debt outstanding.
11
<PAGE> 12
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Interest Income and Other, Net
Interest income and other, net, was $2.9 million and $5.0 million for the three
and six-month periods ended March 31, 1997, respectively, and $3.1 million and
$5.6 million for the comparable periods in fiscal 1996.
The decrease in interest income and other, net, for the current periods as
compared to the same periods in fiscal 1996 is due to significantly lower
interest income on lower average cash balances, partially offset by foreign
exchange gains related to the Company's joint venture in Japan with Sumitomo
Metal Industries, Ltd. ("Sumitomo").
Provision for Income Taxes
The Company's estimated annual effective tax rate decreased to 25% for the six
months ended March 31, 1997, compared to 31% for the same period in fiscal 1996.
The decrease in the estimated annual effective tax rate for fiscal 1997 is
primarily due to lower net tax from foreign operations. The fiscal 1997
effective rate for the three and six month periods ended March 31, 1997 differ
from the statutory federal income tax rate primarily due to net tax savings
associated with the Company's foreign operations.
Liquidity and Capital Resources
As of March 31, 1997, the Company had cash, cash equivalents and short-term
investments of $126.1 million, total assets of $966.7 million and total
long-term debt, including the current portion, of $181.7 million. The Company's
cash generated by operating activities was $87.4 million for the six months
ended March 31, 1997, compared to $102.0 million for the same six-month period
during the previous fiscal year.
The Company's business is highly capital intensive. During the six months ended
March 31, 1997, the Company incurred capital expenditures of approximately
$114.8 million, compared to $125.5 million during the same six-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 MR. 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, planned expenditures may decrease. As of March 31,
1997, total commitments for construction or purchase of plant and equipment
totaled approximately $115.0 million.
12
<PAGE> 13
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
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 for the next year. 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 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.
On March 28, 1997, the Company filed an omnibus shelf registration statement on
Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission. The Registration Statement, which has yet to become effective, is
intended to provide the Company flexibility to raise up to $350 million from
offerings of debt securities, common stock or a combination thereof, subject to
market conditions and the Company's capital needs. Net proceeds from any
offering of Securities would be intended to be used for general corporate
purposes, including capital expenditures, and to meet working capital needs (see
Note 5 to Consolidated Condensed Financial Statements above).
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.
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 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. In both cases, these demand
variations materially and adversely affected the Company's business, financial
condition and results of operations.
During fiscal 1996, the Company produced HGAs in volume for 6 customers, HSAs in
volume for 4 customers and tape drive products in volume for 3 customers. Given
the small number of high performance 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
customer, or a significant decrease in orders from one or more customers, would
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)
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 ("AMC") 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 net 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 and tape drive
operations. In May 1997, Quantum further announced the formation of a joint
venture with its primary manufacturing partner in Japan, Matsushita-Kotobuki
Electronics Industries Ltd. ("MKE") to manufacture MR recording heads for rigid
disk drives. This new venture will take over Quantum's existing recording head
operations and will be owned 51 percent by MKE. While Quantum's original
acquisition of DEC's recording head operations has not had a material adverse
effect on the Company's thin film head operations to date, and Quantum has
stated its intention to continue purchasing the majority of its head and HGA
requirements from merchant suppliers, the Company cannot predict the effect the
formation of a Quantum/MKE recording head joint venture will have on the
Company's business with Quantum. Accordingly, there can be no assurance that
Quantum will continue to purchase a significant portion of its head requirements
from the Company. 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 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 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.
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)
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 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 in 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 revenues and gross margins for the second half of fiscal 1996.
The disk drive industry is intensely competitive. 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 AMC, IBM, Seagate and Quantum. IBM, Seagate,
Quantum and other disk drive manufacturers with "captive" or internal recording
head manufacturing capability such as NEC and Fujitsu generally have
significantly greater financial, technical and marketing resources than the
Company, and have made or may make their products available in the merchant
market. In recent years, Seagate has been the Company's primary competitor among
captive head manufacturers. However, in 1996 IBM made a series of announcements
regarding its plans to invest $1.32 billion, including investments in its MR
technology, to expand its disk drive and disk drive components business by
selling to original equipment manufacturers ("OEM") starting in 1997. In April
1997, IBM announced that Samsung Electronics had signed an agreement to purchase
MR heads from IBM, becoming IBM's first OEM customer for this technology. The
Company's competitive position could be materially and adversely affected if one
of these competitors is more successful than the Company in marketing its
advanced MR products in the merchant market at competitive pricing.
In its HSA business, the Company must compete against certain of its customers'
internal HSA capacity, as well as against other merchant HSA manufacturers. The
HSA business is far less capital intensive than the thin film HGA business, thus
making entry into the HSA manufacturing business easier than entry into the thin
film HGA business. Accordingly, there can be no assurance that the Company will
be able to compete successfully with its customers' own HSA capacity, or with
existing or new HSA manufacturers.
Finally, new technologies, including extensions of existing thin film head
technology such as contact, near-contact, pico, spin valve, or giant MR ("GMR")
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, and other manufacturers may
already have or may develop, more advanced MR technology or MR production
capability than the Company. Also, certain companies are developing alternative
data storage technologies, such as solid-state (flash or ferroelectric) memory,
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.
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 indicated above, 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. Though MIG products accounted for approximately $174 million, or 18% of
the Company's sales for fiscal 1996, the Company's MIG revenues for fiscal 1997
will be negligible, and the Company is no longer pursuing design-ins with this
technology. The rapid and unexpected decline in MIG sales in the fourth quarter
of fiscal 1996 (from approximately $65 million in the first quarter, $56 million
in the second quarter, $48 million in the third quarter and $5 million in the
fourth quarter), 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 as planned 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 significant charges for related
severance costs, equipment and inventory write-offs and facility-related
charges. Additionally, 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. However, due to delays in ramping production and to the accelerating
shift towards MR, in the latter half of February 1997 the Company decided to
discontinue planar product development for hard disk drive applications and
instead to investigate potential uses of this technology in other development
applications. The impact on the Company's business, financial condition, and
results of operations from this decision was not material.
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 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 12 and 13 above.
16
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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 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 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.
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. For example, in April
1997, a single source supplier to the Company of a certain chemical used in the
Company's operations experienced an explosion in their primary U.S. production
facility, thereby disrupting deliveries of the Company's supply of this chemical
for an estimated 12 weeks. While the Company believes it will be able to
continue manufacturing operations uninterrupted through inventory management,
conservation and allocations deliveries from the supplier's own stores and
foreign operations, failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
17
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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 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.
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.
18
<PAGE> 19
READ-RITE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Certain Additional Business Risks (continued)
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.
19
<PAGE> 20
READ-RITE CORPORATION
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
The Company's 1997 Annual Meeting of Stockholders was held on February 25, 1997
at the Company's Fremont, California manufacturing facility. At the meeting,
47,029,092 shares were entitled to vote and 40,622,363 were present in person
or by proxy.
(a) Election of Directors. Each person elected as a Director will serve until
the next annual meeting of stockholders or until such person's successor is
elected and qualified. The following nominees for Director were elected:
<TABLE>
<CAPTION>
Name of Nominee Votes Cast For Votes Withheld
- --------------- -------------- --------------
<S> <C> <C>
Cyril J. Yansouni 40,458,583 163,780
Frederic Schwettmann 40,460,419 161,944
John G. Linvill 40,441,337 181,026
William J. Almon 40,446,491 175,872
Michael L. Hackworth 40,438,965 183,398
Matthew J. O'Rourke 40,445,951 176,412
</TABLE>
(b) Amendment to Employee Stock Purchase Plan. An increase in the number of
shares reserved for issuance under the Company's Employee Stock Purchase Plan by
500,000 shares to 1,500,000 shares was approved by the stockholders with
39,000,726 voting in favor, 537,123 voting against and 1,084,514 representing
abstentions and broker non-votes.
(c) Ratification of Independent Auditors. The ratification and appointment of
Ernst & Young LLP as independent public accountants of the Company for fiscal
1997 was approved by the stockholders with 40,440,153 voting in favor, 53,767
voting against and 128,443 abstaining.
20
<PAGE> 21
READ-RITE CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C> <C>
10.49* Severance Plans
10.50 Fourth and Fifth Amendments to Read-Rite Corporation's 401(k) Plan
10.51 Amended and Restated License Agreement Between Read-Rite Corporation
and Sumitomo Metal Industries, Ltd.
10.52 Second Addendum to Joint Venture Agreement between Read-Rite Corporation
and Sumitomo Metal Industries, Ltd.
11.1 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule (electronic filing only)
</TABLE>
* 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 March 31,
1997.
21
<PAGE> 22
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: May 12, 1997 /s/ John T. Kurtzweil
-----------------------------
John T. Kurtzweil
Vice President, Finance and
Chief Financial Officer
22
<PAGE> 23
READ-RITE CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
-------------- ----------- --------
<S> <C> <C> <C>
10.49 Severance Plans 24
10.50 Fourth and Fifth Amendments to Read-Rite Corporation's 401(k) Plan 38
10.51 Amended and Restated License Agreement Between Read-Rite Corporation
and Sumitomo Metal Industries, Ltd. 44
10.52 Second Addendum to Joint Venture Agreement between Read-Rite Corporation
and Sumitomo Metal Industries, Ltd. 69
11.1 Statement Regarding Computation of Earnings Per Share 70
27 Financial Data Schedule (electronic filing only) 71
</TABLE>
23
<PAGE> 1
EXHIBIT 10.49
READ-RITE CORPORATION
MANAGEMENT SEVERANCE PLAN
ARTICLE I
PURPOSE, ESTABLISHMENT AND APPLICABILITY OF PLAN
1. Purposes. It is expected that the Company from time to time will
consider the possibility of a Change of Control. The Board recognizes that such
consideration can be a distraction to key Employees and can cause such Employees
to consider alternative employment opportunities. The Board has determined that
it is in the best interests of the Company and its stockholders to assure that
the Company will have the continued dedication and objectivity of these
Employees, notwithstanding the possibility, threat or occurrence of a Change of
Control. The Board believes that it is in the best interests of the Company and
its stockholders to provide these Employees with certain severance benefits upon
termination of employment following a Change of Control. Such benefits provide
these Employees with enhanced financial security and provide an efficient
incentive and encouragement to these Employees to remain with the Company,
notwithstanding the possibility or occurrence of a Change of Control, and to
maximize the value of the Company upon a Change of Control for the benefit of
its stockholders.
2. Establishment of Plan. As of the Effective Date, the Company hereby
establishes the Plan, as set forth in this document.
3. Applicability of Plan. Subject to the terms of this Plan, the
benefits provided by this Plan shall be available to those Employees who, on or
after the Effective Date, receive a Notice of Participation.
4. Contractual Right to Benefits. This Plan and the Notice of
Participation establish and vest in each Participant a contractual right to the
benefits to which he or she is entitled pursuant to the terms thereof,
enforceable by the Participant against the Company.
ARTICLE II
DEFINITIONS AND CONSTRUCTION
Whenever used in the Plan, the following terms shall have the meanings
set forth below.
1. Annual Compensation. "Annual Compensation" shall mean an amount
equal to the sum of (i) the Participant's gross annual base salary, exclusive of
bonuses, commissions and other incentive pay, as in effect immediately preceding
the Change of Control, and (ii) the Participant's Average Annual Bonus.
<PAGE> 2
2. Average Annual Bonus. "Average Annual Bonus" shall mean the average
bonus payments received by the Participant under the Company's incentive bonus
and variable compensation programs as in effect on the Effective Date (or any
predecessor or successor programs) for the three most recent consecutive and
complete fiscal years of the Company prior to the fiscal year in which the
Change of Control occurs. For purposes of calculating a Participant's Average
Annual Bonus, the following rules shall apply:
(i) In the event a Participant was not eligible to
participate in such bonus and variable compensation programs for the entire
three year period, the Average Annual Bonus shall be calculated based upon the
Participant's actual period of eligibility;
(ii) In the event a Participant first became eligible to
participate in such bonus and variable compensation programs in the fiscal year
in which the Change of Control occurs, the Participant=s Average Annual Bonus
shall be based on his or her targeted bonus and variable compensation amounts as
in effect immediately prior to such Change of Control; and
(iii) Bonus payments made to a Participant in the form of stock
option grants under the Company's Amended and Restated 1987 Stock Option Plan
(the "1987 Plan") shall be calculated based upon the cash equivalent of such
grants as specified on the Participant's Notice of Participation.
3. Benefits Continuation Period. "Benefits Continuation Period" shall
mean the period set forth in a Participant's Notice of Participation.
4. Board. "Board" shall mean the Board of Directors of the Company.
5. Cause. "Cause" shall mean (i) any act of personal dishonesty taken
by the Participant in connection with his or her responsibilities as an Employee
and intended to result in substantial personal enrichment of the Participant,
(ii) the Participant's conviction of a felony that is injurious to the Company,
(iii) a willful act by the Participant which constitutes gross misconduct and
which is injurious to the Company, or (iv) continued substantial violations by
the Participant of the Participant's employment duties which are demonstrably
willful and deliberate on the Participant's part after there has been delivered
to the Participant a written demand for performance from the Company which
specifically sets forth the factual basis for the Company's belief that the
Participant has not substantially performed his duties.
6. Change of Control. "Change of Control" shall mean the occurrence of
any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
-2-
<PAGE> 3
(ii) A change in the composition of the Board occurring within
a two-year period, as a result of which fewer than a majority of the directors
are Incumbent Directors. "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company); or
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation; or
(iv) the consummation of the sale or disposition by the
Company of all or substantially all of the Company's assets.
7. Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
8. Company. "Company" shall mean Read-Rite Corporation, any subsidiary
corporations, any successor entities as provided in Article VII hereof, and any
parent or subsidiaries of such successor entities.
9. Disability. "Disability" shall mean that the Participant has been
unable to perform his or her duties as an Employee as the result of incapacity
due to physical or mental illness, and such inability, at least 26 weeks after
its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Participant or the
Participant's legal representative (such agreement as to acceptability not to be
unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Participant's employment. In the event that the Participant
resumes the performance of substantially all of his or her duties hereunder
before the termination of his or her employment becomes effective, the notice of
intent to terminate shall automatically be deemed to have been revoked.
10. Effective Date. "Effective Date" shall mean the date this Plan is
approved by the Board.
11. Employee. "Employee" shall mean an employee of the Company.
12. ERISA. "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
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13. Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Participant's express written consent, the significant reduction of
the Participant's title, duties or responsibilities relative to the
Participant's title, duties or responsibilities in effect immediately prior to
such reduction; provided, however, that a reduction in title, duties or
responsibilities solely by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the Chief Financial Officer of Read-Rite
remains as such following a Change of Control and is not made the Chief
Financial Officer of the acquiring corporation) shall not constitute an
"Involuntary Termination;" (ii) without the Participant's express written
consent, a reduction by the Company in the annual base salary or in the maximum
dollar amount of potential annual cash bonuses relative to the annual base
salary and maximum dollar amount of potential annual cash bonuses as in effect
immediately prior to such reduction; (iii) without the Participant's express
written consent, a material reduction by the Company in the kind or level of
employee benefits to which the Participant is entitled immediately prior to such
reduction with the result that the Participant's overall benefits package is
significantly reduced; (iv) the relocation of the Participant to a facility or a
location more than 25 miles from the Participant's then present location,
without the Participant's express written consent; (v) any purported termination
of the Participant by the Company which is not effected for Disability or for
Cause; or (vi) the failure of the Company to obtain the assumption of this
agreement by any successors contemplated in Article VII below.
14. Notice of Participation. "Notice of Participation" shall mean an
individualized written notice of participation in the Plan from an authorized
officer of the Company.
15. Participant. "Participant" shall mean an individual who meets the
eligibility requirements of Article III.
16. Plan. "Plan" shall mean this Read-Rite Corporation Management
Severance Plan.
17. Plan Administrator. "Plan Administrator" shall mean the Board of
Directors of the Company, or its committee or designate, as shall be
administering the Plan.
18. Pro-Rated Bonus Amount. "Pro-Rated Bonus Amount" shall mean a
pro-rated portion of the Participant's quarterly and annual bonus and variable
compensation calculated as of the Change of Control date, as follows:
(i) In the case of quarterly bonus or variable compensation,
the portion shall be the amount of quarterly bonus or variable compensation paid
or payable to the Participant with respect to the fiscal quarter of the Company
completed as of or prior to the fiscal quarter in which the Change of Control
occurs, pro-rated by multiplying such amount by a fraction, the numerator of
which is the number of days during the fiscal quarter in which the Change of
Control occurs prior to the occurrence of the Change of Control, and the
denominator of which shall be ninety-one and one-quarter; and
(ii) In the case of annual bonus or variable compensation, the
portion shall be the amount of annual bonus or variable compensation payable to
the Participant under the Company's
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annual bonus or variable compensation program in effect as of the Change of
Control date, based on year-to-date financial performance of the Company for the
period ended immediately prior to the Change of Control. For this purpose, the
performance measures for such fiscal year shall be adjusted, as appropriate, to
take into account the shortened performance period. The amount so determined
shall be pro-rated by multiplying such amount by a fraction, the numerator of
which is the number of days during such fiscal year prior to the occurrence of
the Change of Control, and the denominator of which shall be three hundred and
sixty-five.
19. Severance Payment. "Severance Payment" shall mean the payment of
severance compensation as provided in Article IV hereof.
20. Severance Payment Percentage. "Severance Payment Percentage" shall
mean, for each Participant, the Severance Payment Percentage set forth in such
Participant's Notice of Participation.
21. Vesting Continuation Period. "Vesting Continuation Period" shall
mean, for each Participant, the period set forth in the Participant's Notice of
Participation.
ARTICLE III
ELIGIBILITY
1. Waiver. As a condition of receiving benefits under the Plan, an
Employee must sign a general waiver and release on a form provided by the
Company.
2. Participation in Plan. Each Employee who is designated by the Board
and who signs and timely returns to the Company a Notice of Participation shall
be a Participant in the Plan. A Participant shall cease to be a Participant in
the Plan (i) upon ceasing to be an Employee, or (ii) upon receiving written
notice from the Plan Administrator prior to a Change of Control that the
Participant is no longer eligible to participate in the Plan, unless in either
case such Participant is entitled to benefits hereunder. A Participant entitled
to benefits hereunder shall remain a Participant in the Plan until the full
amount of the benefits have been delivered to the Participant.
ARTICLE IV
SEVERANCE BENEFITS
1. Termination Following A Change of Control. If a Participant's
employment terminates at any time within the eighteen (18) month period
following a Change of Control, then, subject to Article V hereof, the
Participant shall be entitled to receive severance benefits as follows:
(a) Severance Pay Upon an Involuntary Termination. If the
Participant's employment with the Company terminates as a result of Involuntary
Termination other than for
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Cause, the Participant shall be entitled to receive a Severance Payment equal to
the sum of (i) the product obtained by multiplying the Participant's Severance
Payment Percentage times the Participant's Annual Compensation, plus (ii) the
Participant's Pro-Rated Bonus Amount. Any such Severance Payment shall be paid
in cash by the Company to the Participant in a single lump sum payment, less
applicable tax withholding, within ten (10) business days of the Participant's
termination date, and shall be in lieu of any other severance or severance-type
benefits to which the Participant may be entitled under any other
Company-sponsored plan, practice or arrangement.
EXAMPLE: A Change of Control is consummated on June 15, 1997.
Participant is Involuntarily Terminated other than for Cause as of July
1, 1997. Participant's Annual Compensation is $150,000. The Severance
Payment Percentage set forth in the Participant's Notice of
Participation is 100%. The Participant's Pro-Rated Bonus Amount for the
1997 fiscal year is $90,000. The Participant is entitled to a Severance
Payment equal to (i) 100% x $150,000, plus (ii) $90,000, for a total
Severance Payment equal to $240,000.
(b) Continued Option Vesting Upon an Involuntary Termination.
If the Participant's employment with the Company is terminated as a result of
Involuntary Termination other than for Cause, then, with respect to any Company
stock options held by the Participant as of the date of such termination, the
Participant shall be entitled to continued vesting of such options during the
Vesting Continuation Period, and, for all purposes of the 1987 Plan or the
Company's 1995 Stock Plan, the Participant shall be considered an employee of
the Company during the Vesting Continuation Period.
(c) Employee Benefits Upon an Involuntary Termination. If the
Participant's employment with the Company is terminated as a result of
Involuntary Termination other than for Cause, then the Company shall continue to
provide the Participant with medical, dental, vision, disability and life
insurance coverage and employee assistance programs (or such comparable
alternative benefits as the Company may, in its discretion, determine to be
sufficient to satisfy its obligations to the Participant under this Plan) that
are no less favorable to the Participant than such coverage as was provided to
the Participant immediately prior to the Change of Control, with the same
percentage of any premiums or costs for such coverage paid for by the Company as
was paid for by the Company on behalf of such Participant immediately prior to
the Change of Control (the "Company-Paid Coverage"). Company-Paid Coverage shall
be provided to the Participant for a period that ends on the earlier of (i)
termination of the Participant's Benefits Continuation Period, or (ii) the date
that the Participant and his or her covered dependents become covered under
another employer's employee benefit plans providing benefits and levels of
coverage comparable to the Company-Paid Coverage. For purposes of Title X of the
Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the date of the
"qualifying event" for the Participant and his or her covered dependents shall
be the date upon which Company-Paid Coverage terminates. Company-Paid Coverage
shall be provided at the Company's discretion, under either, (i) the Company's
plans, or (ii) other plans or arrangements secured by the Company no less
favorable to the Participant and his or her dependents.
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<PAGE> 7
2. Voluntary Resignation; Termination For Cause. If the Participant's
employment terminates by reason of the Participant's voluntary resignation (and
is not an Involuntary Termination), or if the Company terminates the Participant
for Cause, then the Participant shall not be entitled to receive severance or
other benefits under this Plan and shall be entitled only to those benefits (if
any) as may be available under the Company's then existing benefit plans and
policies at the time of such termination.
3. Disability; Death. If the Participant's employment terminates by
reason of the Participant's death, or in the event the Company terminates the
Participant's employment for Disability, then the Participant shall not be
entitled to receive severance or other benefits under this Plan and shall be
entitled only to those benefits (if any) as may be available under the Company's
then existing benefit plans and policies at the time of such death or
Disability.
4. Termination Apart from Change of Control. In the event that a
Participant's employment terminates for any reason prior to the occurrence of a
Change of Control or after the eighteen (18)-month period following a Change of
Control, then the Participant shall not be entitled to receive severance or
other benefits under this Plan and shall be entitled only to those benefits (if
any) as may be available under the Company's then existing benefit plans and
policies at the time of such termination.
ARTICLE V
GOLDEN PARACHUTE EXCISE TAX AND NON-DEDUCTIBILITY LIMITATIONS
1. Benefits Cap. Except if specifically otherwise set forth in a
Participant's Notice of Participation, in the event that the benefits under this
Plan, when aggregated with any other payments or benefits received by a
Participant, or to be received by a Participant, would (i) constitute "parachute
payments" within the meaning of Section 280G of the Code, and (ii) but for this
provision, would be subject to the excise tax imposed by Section 4999 of the
Code or any similar or successor provision, then the Participant's Plan benefits
shall be reduced to such lesser amount or degree as would result in no portion
of such benefits being subject to the excise tax under Section 4999 of the Code.
2. Determination. Unless the Company and the Participant otherwise
agree in writing, any determination required under this Article shall be made in
writing by the same firm of independent public accountants who were employed by
the Company immediately prior to the Change of Control (the "Accountants"),
whose determination shall be conclusive and binding upon the Participant and the
Company for all purposes. For purposes of making the calculations required by
this Article, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Participant shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a
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<PAGE> 8
determination under this Article. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Article.
ARTICLE VI
EMPLOYMENT STATUS; WITHHOLDING
1. Employment Status. This Plan does not constitute a contract of
employment or impose on the Participant or the Company any obligation to retain
the Participant as an Employee, to change the status of the Participant's
employment, or to change the Company's policies regarding termination of
employment. The Participant's employment is and shall continue to be at-will, as
defined under applicable law. If the Participant's employment with the Company
or a successor entity terminates for any reason, including (without limitation)
any termination prior to a Change of Control, the Participant shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Plan, or as may otherwise be available in accordance with
the Company's established employee plans and practices or other agreements with
the Company at the time of termination.
2. Taxation of Plan Payments. All amounts paid pursuant to this Plan
shall be subject to regular payroll and withholding taxes.
ARTICLE VII
SUCCESSORS TO COMPANY AND PARTICIPANTS
1. Company's Successors. Any successor to the Company (whether direct
or indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Plan and agree expressly to
perform the obligations under this Plan by executing a written agreement. For
all purposes under this Plan, the term "Company" shall include any successor to
the Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection or which becomes bound by the terms of
this Plan by operation of law.
2. Participant's Successors. All rights of the Participant hereunder
shall inure to the benefit of, and be enforceable by, the Participant's personal
or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
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<PAGE> 9
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
1. Duration. This Plan shall terminate on the fifth anniversary of the
Effective Date, unless, (i) this Plan is extended by the Board, (ii) a Change of
Control occurs prior to the fifth anniversary of the Effective Date or (iii) the
Board terminates the Plan in accordance with Article VIII.2 below. If a Change
of Control occurs prior to termination of this Plan pursuant to the preceding
sentence, then this Plan shall terminate upon the date that all obligations of
the Company hereunder have been satisfied, unless sooner terminated as provided
in this Article. A termination of this Plan pursuant to the preceding sentences
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits earned by a
Participant prior to the termination of this Plan.
2. Amendment and Termination. The Board shall have the discretionary
authority to amend the Plan in any respect, including as to the removal or
addition of Participants, by resolution adopted by a majority of the Board,
unless a Change of Control has previously occurred. The Plan may be terminated
by resolution adopted by a majority of the Board, unless a Change of Control has
previously occurred. If a Change of Control occurs, the Plan and the designation
of Participants thereto shall no longer be subject to amendment, change,
substitution, deletion, revocation or termination in any respect whatsoever.
ARTICLE IX
CLAIMS PROCESS
1. Right to Appeal. A Participant or former Participant who disagrees
with her or her allotment of benefits under this Plan may file a written appeal
with the designated Human Resources representative. Any claim relating to this
Plan shall be subject to this appeal process. The written appeal must be filed
within sixty (60) days of the Participant's termination date.
2. Form of Appeal. The appeal must state the reasons the Participant or
former Participant believes he or she is entitled to different benefits under
the Plan. The designated Human Resources representative shall review the claim.
If the claim is wholly or partially denied, the designated Human Resources
representative shall provide the Participant or former Participant a written
notice of the denial, specifying the reasons the claim was denied. Such notice
shall be provided within ninety (90) days of receiving the written appeal.
3. Right to Review. If the claim is denied, in whole or in part, the
Participant may request a review of the denial at any time within ninety (90)
days following the date the Participant received written notice of the denial of
his or her claim. For purposes of this subsection, any action required or
authorized to be taken by the Participant may be taken by a representative
authorized in
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<PAGE> 10
writing by the Participant to represent him or her. The designated Human
Resources representative shall afford the Participant a full and fair review of
the decision denying the claim and, if so requested, shall:
(a) Permit the Participant to review any documents that are
pertinent to the claim; and
(b) Permit the Participant to submit to the designated Human
Resources representative issues and comments in writing.
4. Decision on Review. The decision on review by the designated Human
Resources representative shall be in writing and shall be issued within 60 days
following receipt of the request for review. The decision on review shall
include specific reasons for the decision and specific references to the
pertinent Plan provisions on which the decision of the designated Human
Resources representative is based.
ARTICLE X
NOTICE
1. General. Notices and all other communications contemplated by this
Plan shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Participant, mailed
notices shall be addressed to him or her at the home address which he or she
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its General Counsel.
2. Notice of Termination by the Company. Any termination by the Company
of the Participant's employment with the Company at any time within the eighteen
(18) month period following a Change of Control shall be communicated by a
notice of termination to the Participant at least five (5) days prior to the
date of such termination (or at least thirty (30) days prior to the date of a
termination by reason of the Participant's Disability). Such notice shall
indicate the specific termination provision or provisions in this Plan relied
upon (if any), shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision or provisions so
indicated, and shall specify the termination date.
3. Notice by the Participant of Involuntary Termination by the Company.
In the event that the Participant determines that an Involuntary Termination has
occurred at any time within the eighteen (18) month period following a Change of
Control, the Participant shall give written notice to the Company that such
Involuntary Termination has occurred. Such notice shall be delivered by the
Participant to the Company within ninety (90) days following the date on which
such Involuntary Termination occurred, shall indicate the specific provision or
provisions in this Plan upon which the
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<PAGE> 11
Participant relied to make such determination and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
determination. The failure by the Participant to include in the notice any fact
or circumstance which contributes to a showing of Involuntary Termination shall
not waive any right of the Participant hereunder or preclude the Participant
from asserting such fact or circumstance in enforcing his or her rights
hereunder.
ARTICLE XI
MISCELLANEOUS PROVISIONS
1. No Duty to Mitigate. The Participant shall not be required to
mitigate the amount of any benefits contemplated by this Plan, nor shall any
such benefits be reduced by any earnings or benefits that the Participant may
receive from any other source.
2. Severability. The invalidity or unenforceability of any provision or
provisions of this Plan shall not affect the validity or enforceability of any
other provision hereof, which shall remain in full force and effect.
3. No Assignment of Benefits. The rights of any person to payments or
benefits under this Plan shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection shall be void.
4. Assignment by Company. The Company may assign its rights under this
Plan to an affiliate, and an affiliate may assign its rights under this Plan to
another affiliate of the Company or to the Company; provided, however, that no
assignment shall be made if the net worth of the assignee is less than the net
worth of the Company at the time of assignment; provided, further, that the
Company shall guarantee all benefits payable hereunder. In the case of any such
assignment, the term "Company" when used in this Plan shall mean the corporation
that actually employs the Participant.
ARTICLE XII
ERISA REQUIRED INFORMATION
1. Plan Sponsor. The Plan sponsor and administrator is:
Read-Rite Corporation
345 Los Coches Street
Milpitas, California 95035
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<PAGE> 12
2. Designated Agent. Designated agent for service of process:
General Counsel
Read-Rite Corporation
345 Los Coches Street
Milpitas, California 95035
3. Plan Records. Plan records are kept on a fiscal year basis.
4. Plan Funding. The Plan is funded from the Company's general
assets.
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<PAGE> 13
READ-RITE CORPORATION MANAGEMENT SEVERANCE PLAN
NOTICE OF PARTICIPATION
TO:
DATE:
The Board has designated you as a Participant in the Read-Rite
Corporation Management Severance Plan (the "Plan"), a copy of which is attached
hereto. The terms and conditions of your participation in the Plan are as set
forth in the Plan and herein. As a condition to receiving benefits under the
Plan you agree to sign a general waiver and release in the form provided by the
Company. The variables relating to your Plan participation are as follows:
STOCK OPTION CASH EQUIVALENT: [$ ]
SEVERANCE PAYMENT PERCENTAGE: [200%] [100%]
BENEFITS CONTINUATION PERIOD: [24 MONTHS] [12 MONTHS]
VESTING CONTINUATION PERIOD: [12 MONTHS] [6 MONTHS]
[GOLDEN PARACHUTE EXCISE TAX TREATMENT:
Instead of the limitation set forth in Article V.1 of the Plan, the
following provisions shall apply:
In the event that the benefits provided for in the Plan, when
aggregated with any other payments or benefits received by you, would (i)
constitute "parachute payments" within the meaning of Section 280G of the Code,
and (ii) would be subject to the excise tax imposed by Section 4999 of the Code
(the "Excise Tax"), then your Plan benefits shall be either
(a) delivered in full, or
(b) delivered as to such lesser extent which would result
in no portion of such benefits being subject to the
Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by you
on an after-tax basis, of the greatest amount of benefits, notwithstanding that
all or some portion of such benefits may be taxable under Section 4999 of the
Code.]
If you agree to participate in the Plan on these terms and conditions,
please acknowledge your acceptance by signing below. Please return the signed
copy of this Notice of Participation within ten (10) days of the date set forth
above to:
<PAGE> 14
Sherry McVicar
Vice President, Human Resources
Read-Rite Corporation
345 Los Coches Street
Milpitas, California 95035
Your failure to timely remit this signed Notice of Participation will result in
your removal from the Plan. Please retain a copy of this Notice of
Participation, along with the Plan, for your records.
Date: __________________________ Signature: ________________________________
<PAGE> 1
EXHIBIT 10.50
FOURTH AMENDMENT TO THE
READ-RITE EMPLOYEE 401(K)
RETIREMENT SAVINGS PLAN
The Read-Rite Employee 401(k) Retirement Savings Plan (the "Plan") is
amended by this Fourth Amendment, effective November 1, 1996.
Before January 1, 1995, Plan participants had the right to direct the
Plan trustee to purchase group universal life insurance contracts ("GULP
Contracts") with assets in their accounts. This right to purchase GULP contracts
was terminated on January 1, 1995, but participants were permitted to continue
to hold those GULP contracts purchased before January 1, 1995, in their Plan
accounts. Effective November 1, 1996, the Plan Administrative Committee amended
the Plan to require the surrender or sale of all GULP contracts held by the
Plan, as follows:.
The subparagraph (d) Section 3.16 is amended and restated in its
entirety to read as follows:
"(d) Before January 1, 1995, group universal life
insurance policy contracts ("GULP Contracts") issued
by one or more insurance companies could be purchased
from assets in the Participant's Accounts by the Plan
Trustee upon written direction from a Participant.
Effective January 1, 1995, GULP Contracts were
discontinued as an investment option under the Plan.
Notwithstanding the foregoing sentence, Participant
Accounts could continue to hold those GULP Contracts
purchased before January 1, 1995, in accordance with
the rules applicable to investments in life insurance
contracts set forth in Appendix A to this Plan.
Effective November 1, 1996, Participant Accounts
shall be prohibited from investing in GULP Contracts.
As soon as administratively feasible after November
1, 1996, any GULP Contract held by a Participant's
account on that date shall be surrendered to the
issuing insurance company in exchange for the total
accumulated cash value under the contract or, at the
Participant's option, sold to the Participant by the
Plan Trust in accordance with the requirements of
Prohibited Transaction Class Exemption 92-6 (57 Fed.
Reg. 5189, 2/11/92)."
b. Effective November 1, 1996, Appendix A to the Plan is deleted in its
entirety.
<PAGE> 2
The above Fourth Amendment to the Plan has been adopted by the Plan
Administrative Committee pursuant to and in a manner consistent with a valid
delegation of authority from the Board of Directors of Read-Rite Corporation.
IN WITNESS WHEREOF the Plan Administrative Committee hereby adopts the
Fourth Amendment to the Plan, effective November 1, 1996.
PLAN ADMINISTRATIVE COMMITTEE FOR THE
READ-RITE EMPLOYEE 401(k) RETIREMENT
SAVINGS PLAN
By: /s/ LUCIA BRANNON
------------------------
Lucia Brannon
Chairman, Plan Administrative Committee
2
<PAGE> 3
FIFTH AMENDMENT TO THE
READ-RITE EMPLOYEE
401(K) RETIREMENT SAVINGS PLAN
Effective March 20th, 1997, the Read-Rite Corporation Employee 401(k)
Retirement Savings Plan (the "Plan") is hereby amended pursuant to Section 12.1
of the Plan.
1. Investment Options. Section 3.16(c) of the Plan is hereby
deleted.
2. Shareholder Voting Rights With Respect To Employer Stock. Section
3.17 of the Plan is amended in its entirety to read as follows:
"3.17 Shareholder Voting Rights With Respect To Employer
Stock. Except to the extent an Investment Manager or independent fiduciary has
been appointed for such purpose as provided in Section 10.4(b), the Plan
Committee shall direct the Trustee whether to vote or tender (in the event of a
tender offer) shares of Employer Stock in Participants' Employer Matching
Contribution Accounts," subject to the provisions of Appendix B
3. Designation of Named Fiduciary. Article 10 is amended as follows:
(a) The following new Section 10.4 is added:
(b) Sections 10.4-10.6 are renumbered accordingly
"10.4 (a) Named Fiduciary for Investments. The Plan Committee
is the Named Fiduciary for Investments and shall have authority and
responsibility with respect to the control or management of the Plan assets
provided for by ERISA, including without limitation, selecting, reviewing and
retaining or changing investment options offered under the Plan, reviewing the
Trustee's performance with respect to the Trustee's duties, responsibilities and
obligations under the Plan and Trust Agreement, directing the investments of the
Trust's assets , communicating Participants' investment elections to the
Trustee, and directing the Trustee to vote or tender shares of Employer Stock
held by the Plan in accordance with the provisions of the Plan and Appendix B.
(b) The Plan Committee may, in its discretion,
appoint (or remove) one or more Investment Managers as defined in ERISA to
direct the investment and management of all or part of the assets of the Trust.
Such Investment Manager shall have the power to manage, acquire and dispose of
the part of the assets of the Trust designated by the Plan Committee. In
addition, the Plan Committee may, in its discretion, appoint (or remove) an
independent fiduciary to discharge any of its responsibilities as the Named
Fiduciary for Investments. Any appointment of an Investment Manager or an
independent fiduciary shall be in writing and shall clearly specify the actions
for which such Investment Manager or independent fiduciary is responsible. Any
Investment Manager or independent fiduciary appointed under this section shall
accept the
1
<PAGE> 4
responsibilities delegated to him, her or it and shall acknowledge that he, she
or it is a fiduciary of the Plan subject to the provisions of ERISA."
4. Tender Offers. Appendix B is hereby added to the Plan to read as
follows:
"APPENDIX B
VOTING EMPLOYER STOCK AND TENDER OFFERS
1. Voting Rights.
(a) Each Participant shall be entitled to direct the Plan
Committee or such Investment Manager or independent fiduciary who has been
appointed for this purpose with respect to voting on those certain matters
listed below (the "Pass-Through Voting Rights") as to all shares of Employer
Stock allocated to such Participant's Employer Matching Contribution Accounts,
whether or not vested, in accordance with the provisions of this Appendix B. For
purposes of this Appendix B, the Plan Committee, any such Investment Manager or
independent fiduciary is referred to as the "Employer Stock Fiduciary." The Plan
Committee shall conclusively determine the number of shares of Employer Stock
that are subject to each Participant's Pass-Through Voting Rights and shall
advise the Employer Stock Fiduciary accordingly.
(b) With respect to any matter which is the subject of
Pass-Through Voting Rights, the Employer Stock Fiduciary shall direct the
Trustee not to vote any shares of Employer Stock held in the Trust Fund with
respect to which the Employer Stock Fiduciary has not received, prior to the
date specified therefor, written instructions on the prescribed form from the
Participants who are entitled to direct the manner in which such shares shall be
voted.
(c) The matters which are the subject of Pass-Through
Voting Rights with respect to the Employer Stock are as follows:
(i) all matters which are the subject of proxy or
written consent solicitation if any proposal or election contained in such
solicitation is the subject of an opposing solicitation;
(ii) all matters contained in any opposing
solicitation described in paragraph 1(c)(i), above; and
(iii) any matters which are the subject of a proxy
or written consent solicitation which is made in connection with or is related
to a tender offer described in paragraph 2, below.
2. Tender Offer Instructions by Participants. Consistent with
section 403(a)(1) of ERISA, in the event that any person or group makes an offer
subject to section 13(e) or section 14(d) of the Securities Exchange Act of 1934
to acquire all or part of the outstanding shares of Employer Stock, including
Employer Stock held in the Plan, each Participant shall be entitled to
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<PAGE> 5
direct the Employer Stock Fiduciary whether to tender all or part of those
shares of Employer Stock, whether or not vested, which are allocated to the
Participant's Employer Matching Contribution Accounts. The Employer Stock
Fiduciary shall direct the Trustee to tender or not to tender such Employer
Stock in accordance with the Participant's instructions (the "Tender
Instructions"). The Employer Stock Fiduciary shall direct the Trustee not to
tender any Employer Stock held in the Trust Fund with respect to which the
Employer Stock Fiduciary does not receive Tender Instructions as provided in
this section.
3. Named Fiduciary. With respect to Voting Rights and Tender
Instructions, each participant is considered a named fiduciary pursuant to ERISA
section 403(a)(1) for the limited purpose of giving such directions.
4. Procedures for Voting and Tender Instructions. The Employer Stock
Fiduciary shall, in its discretion, establish such procedures as may be
appropriate to enable Participants to exercise their Pass Through Voting Rights
and/or issue Tender Instructions including, but not limited to, such procedures
as may:
(a) Specify the date by which such voting or Tender
Instructions must be received and the method by which such voting or Tender
Instructions shall be given;
(b) Ensure confidentiality of Participants' votes or Tender
Instructions;
(c) Protect Participants from coercion or undue pressure in
the exercise of their Pass Through Voting Rights or issuance of Tender
Instructions.
(d) Specify the method for determining the number of shares
of Employer Stock which are subject to each Participant's Pass Through Voting
Rights and/or Tender Instructions.
All procedures established hereunder shall be applied in a nondiscriminatory and
uniform manner."
5. Full Force and Effect. Except as otherwise provided in this
Fifth Amendment, the Plan shall remain in full force and effect.
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The above Fifth Amendment to the Plan has been adopted by the Plan
Committee pursuant to and in a manner consistent with a resolution of the Board
of Directors of Read-Rite Corporation.
IN WITNESS WHEREOF, the Plan Committee hereby adopts the Fifth
Amendment to the Plan on this 20th day of March, 1997.
PLAN COMMITTEE FOR THE READ-RITE
EMPLOYEE 401(k) RETIREMENT SAVINGS PLAN
By: /s/ LUCIA BRANNON
---------------------------------------
Lucia Brannon, Chairman, Plan Committee
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EXHIBIT 10.51
AMENDED AND RESTATED LICENSE AGREEMENT
This Amended and Restated License Agreement ("Agreement") is entered
into as of this 29th day of September, 1996 (the "Effective Date") by and among
Read-Rite Corporation, a Delaware corporation ("Read-Rite"), Read-Rite SMI
Kabushiki Kaisha, a Japan corporation ("Licensee"), and Read-Rite SMI (Thailand)
Co., Ltd., a Thailand corporation ("RRST").
W I T N E S S E T H:
A. Licensee was established in July 1991 as a joint venture between
Read-Rite and Sumitomo Metal Industries, Ltd., a Japan corporation ("Sumitomo"),
to manufacture certain magnetic recording heads in Japan, and to distribute such
heads within Japan and to certain Japanese customers outside North America.
B. As part of the organization of Licensee, Read-Rite granted Licensee
certain rights under Read-Rite technical information and industrial property
rights to develop, manufacture, use and sell certain magnetic recording heads,
and Licensee agreed to license back Licensee improvements to such technical
information and industrial property rights pursuant to the terms of the License
Agreement dated July 18, 1991 (the "Original License Agreement") between
Read-Rite and Licensee.
C. Also as part of such formation, Read-Rite and Licensee agreed to
grant the other certain rights to distribute the other party's products pursuant
to the Distribution Agreements dated July 18, 1991 ("Distribution Agreements")
between Read-Rite and Licensee.
D. The Original License Agreement was amended by a First Addendum to
the License Agreement and Distribution Agreements dated as of December 14, 1993
between Read-Rite and Licensee, the purpose of which was to (i) expand the scope
of the licenses granted under the Original License Agreement to include
technical information and industrial property rights relating to the
development, manufacture, use and sale of anisotropic thin film magnetoresistive
recording heads based on technology licensed by Read-Rite from Kyushu Matsushita
Electric Corporation, Ltd. ("KME"), on then-existing Read-Rite technology and
certain additional technical information and industrial property rights
subsequently developed by the parties; and (ii) to expand the Distribution
Agreements to include the right to distribute heads manufactured using such
technologies.
E. The Original License Agreement was further amended by an Agreement
and Second Addendum to License Agreement and Distribution Agreements dated as of
November 1, 1995 between Read-Rite and Licensee, the purpose of which was to (i)
permit Licensee to extend a sublicense to RRST to manufacture and sell products
for Licensee, and, where mutually deemed necessary and desirable by Read-Rite
and Licensee, to manufacture products for Read-Rite, (ii) to obtain for the
benefit of Read-Rite a license back from RRST of RRST improvements to any
Read-Rite technical information or industrial property rights, and (iii) to
provide for certain distribution rights between Read-Rite and RRST.
F. Read-Rite and Licensee now desire to enter into this Agreement in
order to further expand the scope of the license rights granted to Licensee.
G. In consideration of such expansion of Licensee's rights and
licenses, Read-Rite and Licensee, together with Read-Rite International, a
Cayman Islands corporation and a subsidiary of Read-Rite ("RRI"), are
concurrently herewith entering into a Research and Development Cost Sharing
Agreement
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("Cost Sharing Agreement") providing for the ongoing sharing by Read-Rite,
Licensee and RRI of certain research and development costs as provided therein,
and the inclusion herein of intellectual properties arising out of such shared
research and development costs. A copy of the Cost Sharing Agreement is attached
hereto as Appendix D.
H. Read-Rite further wishes to permit Licensee to expand its sublicense
to RRST to incorporate the rights and licenses expanded hereunder.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereby agree as follows:
ARTICLE 1 - DEFINITIONS
For the purpose of this Agreement, the following terms shall have the
following meanings:
1.1 "Products" shall mean Magnetic Recording Heads or components
thereof, including, without limitation, processed wafers or HGAs, developed or
manufactured in Japan by Licensee (or a permitted sublicensee), or in Thailand
by RRST, which incorporate, are derived from or are made using, in whole or in
part, Read-Rite Technical Information or Read-Rite Industrial Property Rights.
1.2 "Magnetic Recording Heads" shall mean (a) inductive read and
inductive write thin film recording heads for use in Winchester rigid disk
drives ("Inductive R/W Heads"), (b) magnetoresistive read, inductive write thin
film recording heads for use in Winchester rigid disk drives ("MR Heads"), (c)
spin valve recording heads for use in Winchester rigid disk drives ("Spin Valve
Heads"), and (d) giant magnetoresistive recording heads for use in Winchester
rigid disk drives ("GMR Heads").
1.3 "Integration" shall mean the integration and incorporation of a
Product (or higher levels of assembly incorporating a Product) into a completed
rigid magnetic disk Winchester disk drive, which drive is in final form for
commercial sale as a data storage device and for which all stages of manufacture
and assembly have been completed, including without limitation encasing and
final burn-in.
1.4 "Japanese Customer" shall mean a manufacturer of disk drives whose
principal executive offices are located in Japan, or a Controlling Interest in
which is ultimately owned by a Business Entity whose principal executive offices
are located in Japan, such ownership being either direct or through other
entities, with each entity in the chain of ownership owning a Controlling
Interest in the next lower entity. However, any manufacturer of disk drives
whose principal executive offices are located in the United States as of the
Effective Date ("U.S. Drive Manufacturer"), and any disk drive manufacturer
whose principal executive offices are outside Japan and in which a Controlling
Interest is ultimately owned, directly or indirectly, by a U.S. Drive
Manufacturer, including in each case their successors in interest, shall not be
included as Japanese Customers during the Term of this Agreement, even if a
change in ownership, merger, sale of assets or other reorganization of such U.S.
Drive Manufacturer would otherwise bring them within the definition set forth
above.
As used in this Section 1.4, "Controlling Interest" shall mean both the right to
elect more than fifty percent (50%) of the board of directors (or similar
managing authority) and to receive more than fifty percent (50%) of any
dividends or other distribution of profits to equity owners. A "Business Entity"
shall mean a corporation, partnership or other business entity.
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1.5 "Licensee Exclusive Market" shall have the meaning defined in
Section 2.1 below.
1.6 "North America" shall mean the United States, including its
possessions and territories, Canada and Mexico.
1.7 "Read-Rite Technical Information" shall mean the existing technical
knowledge, software, know-how, process technology and other information, which
is owned by or licensed to Read-Rite as of the date of this Agreement, to the
extent Read-Rite has the right to make such available to Licensee without
payment of consideration to any third party, and which is reasonably necessary
for the development, manufacture, sale, or use of Magnetic Recording Heads. In
addition, Read-Rite Technical Information shall include the technical knowledge,
software, know-how, process technology and other information (i) hereafter
constituting Developed Technology generated by Read-Rite under the Cost Sharing
Agreement or hereafter licensed to Read-Rite during the Term of this Agreement,
in the latter case to the extent Read-Rite has the right to make such available
to Licensee consideration to any third party, and (ii) which is reasonably
necessary for the development, manufacture, sale, or use of Magnetic Recording
Heads.
1.8 "Read-Rite Industrial Property Rights" shall mean existing patents,
utility models, copyrights and other intellectual property rights and
applications therefor in any country of the world, which are owned by or
licensed to Read-Rite as of the date of this Agreement, to the extent Read-Rite
is authorized to grant licenses without the payment of additional consideration
to third parties, and which are reasonably necessary for the development,
manufacture, sale, or use of Magnetic Recording Heads. In addition, Read-Rite
Industrial Property Rights shall include patents, utility models, copyrights and
other intellectual property rights and applications therefor in any country of
the world (i) hereafter constituting Developed Technology generated by Read-Rite
under the Cost Sharing Agreement or hereafter licensed to Read-Rite during the
Term of this Agreement, in the latter case to the extent Read-Rite has the right
to make such available to Licensee without payment of consideration to any third
party, and (ii) which are reasonably necessary for the development, manufacture,
sale, or use of Magnetic Recording Heads. Read-Rite Industrial Property Rights
shall include industrial property rights obtained by Licensee or RRST on
Read-Rite's behalf under Section 7.3(a) below.
1.9 "Licensee Improvements" shall mean any invention, discovery or
development, whether or not patentable or copyrightable, which is made or
acquired by Licensee during the term of the Original License Agreement or during
the Term of this Agreement and that modifies, improves upon, extends or enhances
the Read-Rite Technical Information or Industrial Property Rights or that
otherwise relates to the manufacture, sale or use of Magnetic Recording Heads.
1.10 "Licensee Technical Information" shall mean the existing technical
knowledge, software, know-how, process technology and other information which is
owned by or licensed to Licensee as of the date of this Agreement, to the extent
Licensee has the right to make such available to Read-Rite without payment of
consideration to any third party, and which is reasonably necessary for the
development, manufacture, sale, or use of Licensee Improvements or products
incorporating Licensee Improvements. In addition, Licensee Technical Information
shall mean the technical knowledge, software, know-how, process technology and
other information (i) hereafter constituting Developed Technology generated by
Licensee under the Cost Sharing Agreement or hereafter licensed to Licensee
during the Term of this Agreement, in the latter case to the extent Licensee has
the right to make such available to Read-Rite without payment of
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consideration to any third party, and (ii) which is reasonably necessary for the
development, manufacture, sale, or use of Licensee Improvements or products in
corporating Licensee Improvements.
1.11 "Licensee Industrial Property Rights" shall mean all existing
patents, utility models, copyrights and other intellectual property rights and
applications therefor in any country of the world, which are owned by or
licensed to Licensee as of the date hereof, to the extent Licensee is authorized
to grant licenses without the payment of additional consideration to third
parties, and which are reasonably necessary for the development, manufacture,
sale, or use of Licensee Improvements or products incorporating Licensee
Improvements. In addition, Licensee Industrial Property Rights shall mean all
patents, utility models, copyrights and other intellectual property rights and
applications therefor in any country of the world (i) hereafter constituting
Developed Technology generated by Licensee under the Cost Sharing Agreement or
hereafter licensed to Licensee during the Term of this Agreement, in the latter
case to the extent Licensee has the right to make such available to Read-Rite
without payment of consideration to any third party, and (ii) which are
reasonably necessary for the development, manufacture, sale, or use of Licensee
Improvements or products incorporating Licensee Improvements. Licensee
Industrial Property Rights shall include industrial property rights obtained by
Read-Rite on Licensee's behalf under Section 7.3(b) below.
1.12 "RRST Improvements" shall mean any invention, discovery or
development, whether or not patentable or copyrightable, which is made or
acquired by RRST during the term of the Original License Agreement or during the
Term of this Agreement and that modifies, improves upon, extends or enhances the
Read-Rite Technical Information or Industrial Property Rights or that otherwise
relates to the manufacture, sale or use of Magnetic Recording Heads.
1.13 "RRST Technical Information" shall mean the technical knowledge,
software, know-how, process technology and other information which is owned by
or licensed to RRST during the Term of this Agreement, to the extent RRST has
the right to make such available to Read-Rite without payment of consideration
to any third party, and which is reasonably necessary for the development,
manufacture, sale, or use of RRST Improvements or products incorporating RRST
Improvements. RRST Technical Information shall not, however, include any
Specific Developed Technology of Licensee.
1.14 "RRST Industrial Property Rights" shall mean all patents, utility
models, copyrights and other intellectual property rights and applications
therefor in any country of the world, which are owned by or licensed to RRST
during the Term of this Agreement, to the extent RRST is authorized to grant
licenses without the payment of additional consideration to third parties, and
which are reasonably necessary for the development, manufacture, sale, or use of
RRST Improvements or products incorporating RRST Improvements. RRST Industrial
Property Rights shall include industrial property rights obtained by Read-Rite
on RRST's behalf under Section 7.3(b) below. RRST Industrial Property Rights
shall not, however, include any Specific Developed Technology of Licensee.
1.15 "Net Sales" shall, except for the purpose of Section 6.2(a) below,
mean the invoiced price of Royalty Bearing Products sold by Licensee, its
Subsidiaries and permitted sublicensees to customers, other than Read-Rite or
its Subsidiaries, less the following deductions, to the extent included in the
invoiced price: (a) sales taxes, customs duties and similar governmental
charges; (b) packing expenses and storage charges; (c) freight charges including
insurance premiums; (d) invoiced price of returned Royalty Bearing Products and
uncollectible accounts; and (e) sales discounts and commissions to third
parties. In addition, the total Net Sales for a particular calendar quarter
shall be reduced for amounts paid to Read-Rite for technical assistance or
manufacturing services provided to Licensee with respect to Royalty Bearing
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Products (including, but not limited to, amounts paid to Read-Rite for the
purchase of components, machining, assembly and test).
1.16 "Subsidiary" shall mean a corporation or other entity fifty
percent (50%) or more of whose outstanding shares or securities representing the
right to vote for the election of directors or similar managing authority are
owned or controlled, directly or indirectly by Licensee or Read-Rite, but only
during such period as such ownership or control exists.
1.17 "Confidentiality Agreement" shall mean that certain
Confidentiality Agreement dated July 18, 1991 among Read-Rite, Licensee and
Sumitomo.
1.18 "Joint Venture Agreement" shall mean that certain Joint Venture
Agreement dated June 14, 1991 between Read-Rite and Sumitomo, as amended by the
First Addendum to the Joint Venture Agreement dated December 14, 1993, pursuant
to which the Original License Agreement was executed by Read-Rite and Licensee.
1.19 "Term of this Agreement" shall mean the period from the Effective
Date until this Agreement terminates under Section 10.1 or 10.2 below.
1.20 "Royalty Bearing Products" shall mean, except for the purposes of
Section 6.2(a) below, the models of Products which Licensee or RRST is producing
as of the date hereof and which are listed on Appendix C attached hereto and
incorporated herein by reference.
1.21 "Sublicense Agreement" shall mean that certain Sublicense
Agreement dated as of January 1, 1996 between Licensee and RRST, as amended.
1.22 "Specific Development Technology" shall have the meaning assigned
thereto in the Cost Sharing Agreement.
ARTICLE 2 - GRANT OF LICENSES
2.1 Grant.
(a) Grant to Licensee. Read-Rite hereby grants to Licensee an
exclusive (subject to rights previously granted by Read-Rite, as set forth in
Appendix A hereto), nontransferable (except as provided in Section 13.3 below)
right and license under Read-Rite Technical Information and Read-Rite Industrial
Property Rights to (i) manufacture, use and sell Products (or higher levels of
assembly incorporating Products) within Japan for Integration in Japan (subject
to the last sentence of this Section 2.1(a)), and (ii) to sell Products (or
higher levels of assembly incorporating Products) to Japanese Customers in any
country of the world, other than North America, for Integration by such Japanese
Customers outside North America ((i) and (ii) together, the "Licensee Exclusive
Market"). Notwithstanding the foregoing, Licensee shall not sell or otherwise
provide Products (or higher levels of assembly incorporating Products) to any
third party who Licensee knows or has reason to believe is reselling or
distributing Products (or higher levels of assembly incorporating Products),
directly or indirectly, for any purpose not expressly authorized in this Section
2.1(a).
(b) RRST Sublicense. Solely for the purposes of permitting
Licensee to confirm and expand the rights granted by Licensee to RRST under the
Sublicense Agreement, Read-Rite hereby grants
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to Licensee all, and only such, additional rights as Licensee requires in order
to grant to RRST the nonexclusive, nontransferable (except as provided in
Section 13.3 below) right and license under the Read-Rite Technical Information
and Read-Rite Industrial Property Rights to (i) manufacture Products (or higher
levels of assembly incorporating Products) within Thailand for sale pursuant to
Sections 2.1 (b)(ii) and (iii) below, (ii) to sell Products (or higher levels of
assembly incorporating Products) within Japan for Integration in Japan (subject
to the last sentence of this Section 2.1(b)), and (iii) to sell Products (or
higher levels of assembly incorporating Products) to, either directly or
indirectly through Licensee, Japanese Customers in any country of the world,
other than North America, for Integration by such Japanese Customers outside
North America (subject to the last sentence of this Section 2.1(b)). RRST shall
not have the right to sell or otherwise provide Products (or higher levels of
assembly incorporating Products) to any third party other than Read-Rite,
Licensee or a Subsidiary of Read-Rite or Licensee who RRST knows or has reason
to believe is reselling or distributing Products (or higher levels of assembly
incorporating Products), directly or indirectly, for any purpose not expressly
authorized in this Section 2.1(b). Read-Rite hereby confirms its approval of
RRST as a sublicensee to Licensee and of the extension by Licensee to RRST of
certain additional rights consistent with those granted Licensee hereunder, for
so long as RRST remains a Subsidiary of Licensee and subject in all cases to the
provisions of Section 10 below.
2.2 Sublicenses. Except as explicitly provided for in Section 2.1(b)
above or unless Licensee obtains the prior written consent of Read-Rite,
Licensee may not sublicense the rights granted in Section 2.1, or subcontract
third parties to make, use or sell Products for Licensee to the extent that such
subcontract involves the use of the rights granted in Section 2.1. Read-Rite may
withhold such consent in its absolute discretion. Notwithstanding the foregoing:
(a) Acquisition by Competitor or Transfer of Read-Rite.
Licensee shall have the right, upon six (6) months notice to Read-Rite, to have
Products made for sale to Licensee inside or outside of Japan in the event that
(i) Read-Rite is acquired by a competitor of Sumitomo, as such an acquisition is
described in Section 5.1(e) of the Joint Venture Agreement, or (ii) neither
Read-Rite nor any transferee of Read-Rite pursuant to Section 5.1 of the Joint
Venture Agreement is a shareholder of Licensee.
(b) Third Party Offer. In addition, if Licensee receives a
bona fide offer from one or more third party subcontractors inside or outside of
Japan to provide all slider fabrication, assembly and test for Licensee, and
Read-Rite does not agree to meet such offer as provided below, Licensee shall
have the right to subcontract such slider fabrication assembly and test solely
for sale to Licensee, subject to the following:
(i) To exercise such right, Licensee shall provide to
Read-Rite a written offer submitted by the proposed subcontractor, and Read-Rite
shall have sixty (60) days after receiving such offer to agree in writing to
supply the subject subcontracting to Licensee on substantially the same price
and principal terms as those specified in the offer. If Read-Rite does not so
agree within the sixty (60) day period, Licensee shall have the right to
subcontract, with the third party identified in the offer, on terms that are not
more favorable to the subcontractor than those reflected in such offer. Licensee
shall provide Read-Rite with one-hundred eighty (180) days written notice before
it commences purchases from such subcontractor, and such notice (if any) shall
be given to Read-Rite within sixty (60) days after the end of the sixty (60) day
period described above.
(ii) Prior to providing any Read-Rite Technical
Information to the subcontractor, Licensee shall obtain from such subcontractor
restrictive and protective provisions that Read-Rite obtains from its
subcontractors under a written agreement to be approved by Read-Rite (which
approval shall not be withheld unreasonably). Such provisions shall include
prohibitions against the third party
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manufacturing similar products for itself or others; confidentiality provisions;
the right to terminate immediately upon a breach by the subcontractor;
Licensee's retention of ownership of wafers provided to the subcontractor; and a
right for Read-Rite to enforce the agreement as a third party beneficiary.
Licensee may disclose to a subcontractor permitted hereunder Read-Rite Technical
Information comprising Read-Rite's slider fabrication, assembly and test
processes, but not any Read-Rite Technical Information pertaining to fabrication
of wafers.
(iii) Any offer from a subcontractor must be for a
term covering at least twenty-four (24) months.
(iv) Notwithstanding the foregoing, Licensee shall
not be entitled to subcontract manufacturing, assembly or test services under
this Section 2.2(b) to a third party that has performed, or has entered into an
agreement under which it could reasonably be expected to perform, such services
for Read-Rite over a two (2) year period and for the equivalent of an average of
at least 300,000 Magnetic Recording Heads per month during twelve (12) months of
such period. A subcontractor that is permitted under this Section 2.2 may not
further subcontract the manufacturing of Products or components.
2.3 License to Read-Rite. Licensee hereby grants to Read-Rite a
perpetual, nonexclusive, nontransferable (except as provided in Section 13.3
below), royalty-free right and license, including the right to grant and
authorize sublicenses, under the Licensee Technical Information and Licensee
Industrial Property Rights, to manufacture, use and sell Magnetic Recording
Heads or other products throughout the world. Notwithstanding the foregoing,
Read-Rite shall not sell, or sublicense a third party to sell, Magnetic
Recording Heads (or higher levels of assembly incorporating Magnetic Recording
Heads) incorporating, made using or derived from Licensee Technical Information
or Licensee Industrial Property Rights for Integration in Japan or to a Japanese
Customer outside North America during the period that the license granted to
Licensee under Section 2.1 remains exclusive, except pursuant to a separate
distribution agreement with Licensee. Nor shall Read-Rite sell or otherwise
provide during such period, directly or indirectly, such Magnetic Recording
Heads (or higher levels of assembly incorporating Magnetic Recording Heads) to
any third party who Read-Rite knows or has reason to believe is reselling or
distributing such Magnetic Recording Heads (or higher levels of assembly
incorporating Magnetic Recording Heads) within Licensee's Exclusive Market.
2.4 RRST License to Read-Rite. RRST hereby grants to Read-Rite a
perpetual, nonexclusive, nontransferable (except as provided in Section 13.3
below), royalty-free right and license, including the right to grant and
authorize sublicenses, under the RRST Technical Information and RRST Industrial
Property Rights, to manufacture, use and sell Magnetic Recording Heads or other
products throughout the world. Notwithstanding the foregoing, Read-Rite shall
not sell, or sublicense a third party to sell, Magnetic Recording Heads (or
higher levels of assembly incorporating Magnetic Recording Heads) incorporating,
made using or derived from RRST Technical Information or RRST Industrial
Property Rights for Integration in Japan or to a Japanese Customer outside North
America during the period that the license granted to Licensee under Section 2.1
remains exclusive, except pursuant to a separate distribution agreement with
Licensee. Nor shall Read-Rite sell or otherwise provide during such period,
directly or indirectly, such Magnetic Recording Heads (or higher levels of
assembly incorporating Magnetic Recording Heads) to any third party who
Read-Rite knows or has reason to believe is reselling or distributing such
Magnetic Recording Heads (or higher levels of assembly incorporating Magnetic
Recording Heads) within Licensee's Exclusive Market.
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2.5 Nonsolicitation by Read-Rite. During the period that the license
granted to Licensee under Section 2.1 remains exclusive, Read-Rite shall not
directly or indirectly (i) solicit sales of Magnetic Recording Heads (or higher
levels of assembly incorporating Magnetic Recording Heads) for Integration in
Japan; or (ii) solicit outside North America sales of Magnetic Recording Heads
(or higher levels of assembly incorporating Magnetic Recording Heads) to
Japanese Customers. Read-Rite shall refer to Licensee any unsolicited inquiries
for such sales that Read-Rite may receive during such period.
2.6 Sales Outside Territory. It is understood that Japanese Customers
who request to purchase Products (or higher levels of assembly incorporating
Products) for Integration in North America could purchase such Products (or
higher level of assembly incorporating Products) from Read-Rite, in Read-Rite's
capacity as Licensee's distributor under a separate distribution agreement
mutually agreed upon between Read-Rite and Licensee.
2.7 Disk Drive Sales. It is understood and agreed that the limitations
in Section 2.1 above shall not be deemed to restrict customers of Licensee from
selling throughout the world disk drives into which Products have been
Integrated in accordance with Section 2.1. Similarly, the exclusivity granted to
Licensee under Section 2.1 or 2.5 shall not be deemed to limit Read-Rite, its
customers or licensees from selling within Licensee's Exclusive Market disk
drives into which Magnetic Recording Heads have been Integrated outside
Licensee's Exclusive Market.
2.8 Acquired Technology.
(a) Good Faith Efforts. Read-Rite, Licensee and RRST
acknowledge the advantage of having Licensee and Read-Rite offer similar
Magnetic Recording Heads for sale in their respective territories. To that end,
each party (the "Licensing Party") agrees to use good faith efforts to obtain
the right to include in the Licensing Party's Technical Information and
Industrial Property Rights licensed hereunder, technology that the Licensing
Party acquires from or develops together with third parties that is materially
necessary to make, use and sell Magnetic Recording Heads that the Licensing
Party develops and makes generally available to customers. The parties also
recognize, however, that this may not be accomplished, particularly in the event
that Licensee, RRST or Read-Rite develops particular products with customers and
the customer contributes materially to the technology developed.
(b) Third Party Payment Obligations. If any technical
information or industrial property rights that Read-Rite, Licensee or RRST
acquires would be within the licenses granted under this Article 2 but for the
fact that such a license would require additional payments to a third party,
such technical information or industrial property rights shall be included
within the Read-Rite Technical Information, Read-Rite Industrial Property
Rights, Licensee Technical Information, Licensee Industrial Property Rights,
RRST Technical Information or RRST Industrial Property Rights, as the case may
be, only if the party to whom such would be licensed under this Agreement agrees
in a separate written agreement to be bound by those payment obligations.
(c) KME Licensed Technology. Licensee understands,
acknowledges and agrees that (i) included within the Read-Rite Technical
Information and Read-Rite Industrial Property Rights are certain technical
information and industrial property rights licensed by KME to Read-Rite ("KME
Licensed Technology") under that certain License Agreement between Read-Rite and
KME dated September 14, 1993 ("KME License Agreement"), a copy of which is
attached hereto as Appendix B, (ii) the inclusion of such KME licensed
technology represents a sublicense by Read-Rite to Licensee of such technology
as explicitly permitted under Section 2.1 of the KME License Agreement, and such
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sublicense is subject to the terms, restrictions, obligations and limitations
(including, without limitation, the disclaimer of warranties set forth in
Section 7.4 and the possible termination under Section 8.3 of the KME License
Agreement), to which Licensee hereby agrees to be bound, and (iii) such KME
licensed technology is included in the licenses granted hereunder only to the
extent Read-Rite is entitled to sublicense such technology under the terms of
the KME License Agreement.
2.9 Reservation. Notwithstanding Section 2.1, above, Licensee and RRST
acknowledge that Read-Rite has previously granted the rights and licenses
identified in Appendix A hereto, and that such licenses limit the exclusivity
granted to Licensee and RRST under Section 2.1, as applicable. Nothing contained
in this Agreement shall be construed as conferring by implication, estoppel or
otherwise upon either party hereunder any license or other right except the
licenses and rights expressly granted hereunder.
ARTICLE 3 - FURNISHING OF TECHNICAL INFORMATION
3.1 Initial Disclosure. Licensee and Read-Rite acknowledge that
Read-Rite has disclosed to Licensee all presently existing Read-Rite Technical
Information regarding Inductive R/W Heads and MR Heads. Promptly following the
execution of this Agreement, Read-Rite and Licensee will cooperate to establish
a schedule for the initial disclosures to Licensee of Read-Rite Technical
Information pertaining to Spin Valve Heads and GMR Heads.
3.2 Subsequent Disclosures. During the term of this Agreement,
Read-Rite and Licensee shall keep each other well informed of any progress and
development with respect to Read-Rite Technical Information and Licensee
Technical Information developed or acquired by the respective parties after the
Effective Date. Upon request by either party, the other party shall furnish to
such party such later developed or acquired Technical Information, and shall
provide technical assistance with respect thereto, in the same manner as set
forth in this Article 3 and Article 4 below; provided that such exchange of
Read-Rite Technical Information and Licensee Technical Information is subject to
the prior receipt of any required Japanese or U.S. export licenses.
3.3 Standards. The Read-Rite Technical Information and Licensee
Technical Information referenced under Sections 3.1 and 3.2 above shall be
presented in an appropriate format based upon mutually agreed technical
standards, and shall be prepared in English. Such Technical Information shall be
delivered by air mail or courier to Licensee or Read-Rite, as applicable, at its
address set forth in Section 13.7 below.
3.4 Samples. If a party requires samples and/or prototypes of Magnetic
Recording Heads embodying the other party's Technical Information, such other
party shall supply these to the requesting party at the time, by the method and
on the terms and conditions mutually agreed to by the parties. Unless otherwise
agreed to by Read-Rite and Licensee, the costs of such samples and/or prototypes
shall be borne by the requesting party and paid to the delivering party within
forty-five (45) days after the requesting party's receipt of such samples and/or
prototypes or the invoice therefor, whichever is later.
3.5 Indemnification. Neither party shall be responsible for loss or
damage to the property of, or injury to, or the death of the other party's
personnel arising out of or in connection with the dispatch of such other
party's personnel to its premises, and the party who has dispatched its
employees to the other party's premises (the "Indemnifying Party") shall
indemnify and hold harmless the other party (the "Indemnified Party") from and
against any liabilities and expenses resulting from a claim for such loss,
damage, injury or death; provided the Indemnified Party notifies the
Indemnifying Party immediately of any
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such actual or threatened action, gives the Indemnifying Party sole control of
the defense and settlement of such action, and provides the Indemnifying Party
with reasonable assistance, on the Indemnifying Party's request and at the
Indemnifying Party's expense, in defending or settling such action.
ARTICLE 4 - TECHNICAL AND OTHER ASSISTANCE
4.1 Technical Assistance. Upon written request by Licensee, and upon
Read-Rite's mutual agreement, Read-Rite shall dispatch its engineers to the
factory or office of Licensee to give technical assistance to Licensee for the
development and manufacture of the Products. The number of Read-Rite's engineers
to be dispatched and the duration of their stay shall be determined each time by
the mutual consultation of the parties. Licensee shall pay reasonable travel and
living expenses for each engineer, as separately agreed to by the parties.
4.2 Additional Training. Upon a reasonable request by Licensee and upon
Read-Rite's mutual agreement, Read-Rite shall accept trainees of Licensee at
Read-Rite's facilities for the purpose of studying the Read-Rite Technical
Information. The number of Licensee's trainees to be dispatched, the duration of
their stay and any necessary training fees shall be determined each time by the
mutual consultation of the parties. Licensee shall bear all the expenses
necessary for dispatching such trainees.
4.3 Training and Assistance by Licensee and RRST. Upon a reasonable
request by Read-Rite, and Licensee's mutual agreement, Licensee shall provide
Read-Rite with technical assistance and training with regard to the Licensee
Improvements in the same manner and on corresponding terms as Read-Rite is to
provide such assistance and training under Sections 4.1 and 4.2 above.
Similarly, upon a reasonable request by Read-Rite, and RRST's mutual agreement,
RRST shall provide Read-Rite with technical assistance and training with regard
to RRST Improvements in the same manner and on corresponding terms as Read-Rite
is to provide such assistance and training under Sections 4.1 and 4.2 above. All
training and assistance of RRST in Read-Rite Technical Information shall be
performed by Licensee.
4.4 Inspection. In addition to the foregoing, the parties agree, at
reasonable intervals, upon reasonable written notice from a party and at
mutually agreed times, to provide the requesting party (at no charge to the
requesting party) tours of manufacturing facilities of the requested party or
parties, reasonable opportunity to hold discussions with technical personnel
concerning the manufacturing process and efforts underway to develop
improvements, and the opportunity to conduct reasonable inspections of process
documentation and process equipment relating to the Magnetic Recording Heads and
the parties' respective Technical Information, as applicable.
ARTICLE 5 - COMMERCIALIZATION
5.1 Licensee Efforts. In consideration for the exclusive rights granted
to Licensee hereunder, Licensee shall use its best efforts to promote and meet
the market demand for Products in the Licensee Exclusive Market.
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5.2 Standardization. To facilitate the development of standardized
products by Read-Rite and Licensee, each party agrees to keep the other party
informed of its product development plans and activities. Toward this end, the
parties will cooperate and review, at mutually agreed intervals, details of
their respective activities in this regard.
ARTICLE 6 - ROYALTIES; COST SHARING
6.1 Calculation of Royalty. In consideration for the License to
Read-Rite Technical Information granted hereunder, Licensee shall pay to
Read-Rite royalties calculated at the rate of (i) one percent (1%) of the Net
Sales of all Royalty Bearing Products sold or otherwise distributed by Licensee,
its Subsidiaries and any permitted sublicensees during the first year following
execution of this Agreement, and (ii) one half of one percent (.5%) of such Net
Sales of Royalty Bearing Products sold or otherwise distributed by Licensee, its
Subsidiaries and any permitted sublicensees during the second year following
execution of this Agreement; no royalties shall be due on Royalty Bearing
Products sold thereafter. Royalty Bearing Products shall be deemed sold when
Licensee, its Subsidiary or sublicensee has received payment from the customer
for such Royalty Bearing Products; provided, however, that any Royalty Bearing
Products purchased by Read-Rite or any of its Subsidiaries from Licensee, its
Subsidiaries, or permitted sublicensees shall not be subject to any such royalty
payment. No royalty shall be payable on sales by Licensee to its Subsidiaries or
permitted sublicensees for resale; royalties shall only be due in the event such
Subsidiaries or permitted sublicensees resell such Royalty Bearing Products to a
third party (other than Read-Rite's Subsidiary), whether separately as
components or combined with other components.
6.2 KME Royalty Obligation.
(a) Licensee agrees to pay a royalty equal to two and one-half
percent (2.5%) of Net Sales (as defined in the KME License Agreement) derived by
Licensee from the sale or other disposition of Royalty Bearing Products (as
defined in the KME License Agreement) prior to (i) September 28, 1997 or (ii)
such other earlier date as the aggregate payment by Read-Rite and all its
sublicensees equal the Aggregate Royalty Cap (as defined in the KME License
Agreement) to the extent required by the KME License Agreement. Such royalties
shall be paid by Licensee to Read-Rite for subsequent payment to KME or, if
permitted under Japanese law and agreed to by KME, directly by Licensee to KME.
(b) If Licensee pays a royalty directly to KME, Licensee shall
provide Read-Rite with a copy of the royalty reports and proof of payment
submitted to KME pursuant to Section 5.3 of the KME License Agreement
simultaneously with providing such reports and payment to KME. Additionally,
Read-Rite's right to audit Licensee's books and records under Section 6.5 hereof
shall be deemed to include, to the extent required under Section 5.5 of the KME
License Agreement, the obligation to keep records pertaining to, and permit
Read-Rite's inspection to ensure compliance with, such royalty obligations to
KME.
(c) Read-Rite shall, whenever requested by Licensee, advise
Licensee promptly (in any event within five (5) days after Read-Rite's receipt
of such request) in writing of the aggregate amount of royalties paid by
Read-Rite and its sublicensees (including Licensee) to KME under the KME License
Agreement as of the most recent practicable date. In addition, Read-Rite will
coordinate closely with Licensee to ensure that, as the aggregate payments by
Read-Rite and all its sublicensees approach the Aggregate Royalty Cap, the
remaining royalties due KME are properly allocated in a way equitable to the
interest of Licensee and do not exceed the Aggregate Royalty Cap.
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6.3 IBM Royalties and Fees. Read-Rite has previously executed a
cross-license agreement dated as of June 26, 1986 (the "IBM Agreement") with
International Business Machines Corporation ("IBM") pursuant to which Read-Rite,
in addition to the cross license provisions therein, paid license fees to IBM in
the amount of US$1,125,000. Read-Rite has extended, to the extent permitted
under the IBM Agreement and subject to exclusivity provisions herein, the
benefits of the IBM Agreement to Licensee. Read-Rite has initiated discussions
with IBM to renew said IBM Agreement to cover industrial property rights
generated by the parties since the cut-off date of the original IBM Agreement,
and anticipates that such renewal will require Read-Rite to pay additional fees
or royalties to IBM. Licensee acknowledges that any extension by Read-Rite of
the benefits of any renewal of the IBM Agreement or of any additional agreements
with IBM will require Licensee to pay a portion of the fees or royalties payable
to IBM thereunder, and that Read-Rite shall only be obligated to include such
rights hereunder upon payment by Licensee to Read-Rite (or IBM, as appropriate)
the portion of such fees or royalties mutually agreed to by Licensee and
Read-Rite.
6.4 Reports and Payment. Within forty-five (45) days after the end of
each calendar quarter, Licensee shall submit to Read-Rite a report setting forth
by type of Royalty Bearing Product, the volume of Royalty Bearing Products sold
or otherwise distributed during such quarter, the total Net Sales arising
therefrom and the calculation of royalties due Read-Rite thereon. Payments shall
be made at the same time as reports are due and shall be remitted to Read-Rite's
bank account, in accordance with written instructions provided by Read-Rite from
time to time.
6.5 Currency of Payment. All royalty payments to be made by Licensee to
Read-Rite shall be made in U.S. dollars. Royalties shall be first determined in
the currency of the country in which the corresponding Net Sales are earned and
then converted directly to its equivalent in U.S. dollars. The buying rates of
exchange for the currencies involved into U.S. dollars as published in The Wall
Street Journal (U.S. West Coast Edition) at the close of business on the last
business day of the quarterly period in which the royalties were earned shall be
used to determine any such conversion.
6.6 Records and Audit. Licensee shall make and maintain for a period of
three (3) years after the last payment under this Agreement is due complete and
accurate records of Licensee's development, manufacturing, distribution and
other activities in sufficient detail for determination of the royalties payable
hereunder. Licensee shall permit an independent certified public accountant
selected by Read-Rite and reasonably acceptable to Licensee, at Read-Rite's
expense, to inspect and take copies of the said records during regular business
hours of Licensee from time to time during the Term of this Agreement. In the
event that such certified public accountant finds a discrepancy Licensee shall
promptly make up any deficits in the amount of royalties payable, and in the
event there is a discrepancy of more than five percent (5%) between the said
records and the amount of royalties paid by Licensee to Read-Rite, Licensee
shall bear the costs of any such inspection.
6.7 Withholding. If any Japanese or Thailand withholding taxes are
imposed on royalty payments to Read-Rite by Licensee or RRST and are required to
be withheld by Licensee or RRST, then Licensee or RRST, as the case may be, may
withhold such amounts, but promptly shall furnish Read-Rite with appropriate
documentation of the amounts so withheld as soon as practicable. The parties
shall cooperate to make any necessary filings to utilize the lowest withholding
rate available under any treaty between the United States and Japan or Thailand,
as the case may be. Notwithstanding the foregoing, with respect to any royalties
or license fees payable by Licensee or RRST to Read-Rite to reimburse Read-Rite
for its royalty or license fee obligations to a third party licensor (e.g. KME
under the KME License Agreement as provided in Section 6.2 above, or IBM as
described in Section 6.3 above) which Licensee or RRST, as the case may be, has
not paid or cannot pay directly to such third party licensor, then Licensee or
RRST, as the
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case may be, shall gross the payments to Read-Rite up such that Read-Rite
actually receives, net of withholdings, the full amount of the royalties and/or
license fees payable by Licensee or RRST hereunder, allowing Read-Rite to make
such payments to the third party licensor in full without having to contribute
its own funds to replace the amounts withheld due to local taxation
requirements. Read-Rite shall fully cooperate with Licensee and RRST in
minimizing any such withholding taxes and other deductions which Licensee or
RRST, as the case may be, is required to withhold or otherwise deduct under the
laws of Japan or Thailand, and (i) if the aggregate amount withheld or deducted
by Licensee and RRST in a given fiscal year of Read-Rite is Fifty Thousand
United States Dollars (U.S. $50,000) or more and (ii) Read-Rite obtains tax
reductions for such year as a result of such withholding or deduction by
Licensee or RRST, then Read-Rite shall refund to either Licensee or RRST, as
applicable, the amount of the tax reductions Read-Rite actually obtains.
6.8 Calculation of Royalty. Read-Rite acknowledges the royalty
referenced in Section 6.1 shall not be payable on wafers sold by Licensee to
RRST, but shall be payable by Licensee or RRST on sales of finished sliders,
head gimbal assemblies or other higher levels of assembly by Licensee or RRST
(other than sales by RRST to Licensee for resale, in which case said royalty
shall be due solely on Licensee's subsequent resales) which constitute Royalty
Bearing Products hereunder.
6.9 Cost Sharing Agreement. As stated above, in consideration of the
significant expansion by Read-Rite of the scope of the license rights granted to
Licensee hereunder, Read-Rite, Licensee and RRI are concurrently herewith
entering into the Cost Sharing Agreement, a copy of which is attached hereto as
Appendix D. The intent of such Cost Sharing Agreement is that Read-Rite, RRI and
Licensee shall share the costs of research and development activities which the
parties thereto mutually agree to include within the Research Program (as
defined therein), and that the technology resulting from such projects will be
subject to the licenses contemplated by this Agreement. Accordingly, any
Developed Technology (as defined therein) generated by Read-Rite and/or RRI as
part of the Research Program thereunder shall be considered "Read-Rite Technical
Information" or "Read-Rite Industrial Property Rights" as appropriate and as
defined herein. Similarly, any Developed Technology generated by Licensee as
part of the Research Program thereunder shall be considered "Licensee Technical
Information" or "Licensee Industrial Property Rights" as appropriate and as
defined herein. Notwithstanding any other provision herein to the contrary,
Specific Development Technology (as defined in the Cost Sharing Agreement) of
Read-Rite and/or RRI thereunder shall not constitute Read-Rite Technical
Information or Read-Rite Industrial Property Rights under this Agreement, nor
shall Specific Development Technology of Licensee thereunder constitute Licensee
Technical Information or Licensee Industrial Property Rights under this
Agreement. As a result of the foregoing, neither Read-Rite nor Licensee shall
have any rights whatsoever with respect to any Specific Development Technology
of the other.
ARTICLE 7 - PROPRIETARY RIGHTS AND IMPROVEMENTS
7.1 Read-Rite Technology. Licensee acknowledges that, except for the
license granted to Licensee under Sections 2.1 and 8.1, Licensee acquires no
right, title, or interest in the Read-Rite Technical Information or Read-Rite
Industrial Property Rights, or in any of Read-Rite's patents, copyrights or
other intellectual property rights, trademarks, trade names, inventions,
know-how, and trade secrets made, developed or acquired by Read-Rite during the
Term of this Agreement. RRST acknowledges that, except for the sublicense
granted to RRST by Licensee under the Sublicense Agreement, RRST acquires no
right, title, or interest in Read-Rite Technical Information or Read-Rite
Industrial Property Rights, or in any of Read-Rite's patents, copyrights or
other intellectual property rights, trademarks, trade names, inventions,
know-how, and trade secrets made, developed or acquired by Read-Rite during the
Term of this Agreement.
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7.2 Licensee and RRST Technology. Read-Rite acknowledges that, except
as provided under Sections 2.3, 2.4 and 8.2, Read-Rite acquires no right, title
or interest in the Licensee or RRST Technical Information or Licensee or RRST
Industrial Property Rights or in any of Licensee's or RRST's patent, copyrights
or other intellectual property rights, trademarks, trade names, inventions,
know-how or trade secrets made, developed or acquired by Licensee or RRST during
the Term of this Agreement.
7.3 Patent Filing. Read-Rite and Licensee Industrial Property Rights
shall be dealt with as follows:
(a) Read-Rite Industrial Property Rights. Read-Rite shall be
responsible, at its option, for filing and prosecuting applications for
Read-Rite Industrial Property Rights, and maintaining Read-Rite Industrial
Property Rights issuing thereon. Read-Rite shall keep Licensee and RRST informed
of material developments with respect to such applications. If Read-Rite does
not file an application for Industrial Property Rights in Japan or Thailand
corresponding to an application filed by or for Read-Rite outside Japan or
Thailand, or determines not to prosecute such application in Japan or Thailand,
or to maintain the patent or other Read-Rite Industrial Property Right issuing
thereon in Japan on Thailand, or defend against an interference or reexamination
proceeding with respect thereto, in each such case Licensee and RRST shall have
the right to do so in Japan and Thailand, respectively, at their respective
expenses. All such Industrial Property Rights shall be owned by Read-Rite in
Read-Rite's name, subject to the license granted to Licensee and RRST under 2.1
above.
(b) Licensee Industrial Property Rights. Licensee shall be
responsible, at its option, for filing and prosecuting applications for Licensee
Industrial Property Rights, and maintaining Licensee Industrial Property Rights
issuing thereon. Licensee shall keep Read-Rite informed of material developments
with respect to such applications. If Licensee does not file an application for
Licensee Industrial Property Rights outside Japan, or RRST does not file such
application for Licensee Industrial Property Rights outside Thailand
corresponding to an application filed by or for such parties in Japan or
Thailand, respectively, or determines not to prosecute such application or to
maintain the patent or other Licensee Industrial Property Rights issuing thereon
outside Japan or Thailand, as the case may be, or defend against an interference
or reexamination proceeding with respect thereto, in each such case Read-Rite
shall have the right to do so at its own expense. All such Industrial Property
Rights shall be owned by Licensee or RRST, as applicable, in the name of
Licensee or RRST as the case may be, subject to the licenses granted to
Read-Rite under 2.3 and 2.4 above, respectively.
ARTICLE 8 - TRADEMARK RIGHTS
8.1 Licensee Products. Subject to the obligations of this Article 8,
Licensee shall have the right, at its option, to use in connection with the
distribution, promotion, use, and sale of Products in accordance with Section
2.1 above, the trade names, trademarks, model designations and/or logos
("Marks") that Read-Rite uses for its Magnetic Recording Heads and has the right
to authorize Licensee to use without the payment of compensation to third
parties. Licensee also shall have the right to use its own Marks in connection
with the Products in lieu of or in addition to Read-Rite's Marks. Licensee may
sublicense the rights granted in this Section 8.1 to RRST, provided that
Licensee ensures that RRST's usage of the Marks complies with the requirements
of Section 8.4 below, that RRST grants to Read-Rite rights to use RRST's Marks
consistent with those granted by Licensee to Read-Rite under Section 8.2 below,
and that RRST consents to the provisions of Section 8.3 below.
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8.2 Read Rite Products. Subject to the obligations of this Article 8,
Read-Rite shall have the right, at its option, to use in connection with the
distribution, promotion, use, and sale of Magnetic Recording Heads the Marks
that Licensee uses for its Products and has the right to authorize Read-Rite to
use without the payment of compensation to third parties. Such right shall
include the right to authorize others to so use Licensee's Marks in connection
with Magnetic Recording Heads manufactured under authority from Read-Rite.
However, Read-Rite shall not use or sublicense Licensee's Marks in Japan during
the Term of this Agreement. Read-Rite shall also have the right to use its own
Marks in connection with its Magnetic Recording Heads, in lieu of or in addition
to Licensee's Marks.
8.3 Registration. At the request of Licensee or Read-Rite, the other
party shall use commercially reasonable efforts, at the requesting party's
expense, to register such other party's Marks in countries throughout the world
where the requesting party reasonably expects to sell Products (in the case of
Licensee) or Magnetic Recording Heads (in the case of Read-Rite).
8.4 Quality Control. Each of Read-Rite and Licensee (the "Authorized
Party") agrees that, as a condition to its use of the other party's Marks
hereunder, the performance and quality of the product which the Authorized Party
distributes under any of the other party's Marks shall be substantially the same
in quality and performance as those distributed by the other party under such
Marks. Accordingly, the Authorized Party shall provide samples of such products
to the other party for evaluation reasonably in advance of the first commercial
shipment of such product under the other party's Marks (or the first shipment of
a modified version of a previously shipped product), and shall not use such
Marks with that product until receiving written approval from the other party.
The other party shall not unreasonably withhold such consent.
All representations by the Authorized Party of Marks licensed to it hereunder,
with respect to design, size, color, location and other details, shall be exact
copies of those used by the other party, and, at the other party's request, the
Authorized Party shall provide copies of its use of such Marks for verification
that they comply with those used by the other party.
ARTICLE 9 - REPRESENTATIONS, WARRANTIES AND INDEMNITIES
9.1 Representations and Warranties.
(a) By Read-Rite. Read-Rite warrants that, as of the date
hereof, (i) the Read-Rite Technical Information being furnished to Licensee
hereunder is the same as that Read-Rite uses to manufacture its own magnetic
recording heads in its own factories, (ii) Read-Rite has the right to grant the
licenses granted hereunder and to permit and authorize Licensee to sublicense
the same to RRST as contemplated hereby, without breaching or conflicting with
any agreement of Read-Rite with third parties, and (iii) except as disclosed on
Appendix E hereto, Read-Rite has received no claims that the Read-Rite Technical
Information infringes on the industrial property rights of any third party. In
addition, Read-Rite warrants that, as of the date hereof, the Read-Rite
Technical Information and the Read-Rite Industrial Property Rights include
(together with Licensee Technical Information, Licensee Industrial Property
Rights, RRST Technical Information and RRST Industrial Property Rights licensed
hereunder) all of technical information and intellectual property rights owned
by or licensed to Read-Rite that are materially necessary to manufacture and
sell magnetic recording heads that Read-Rite presently manufactures and makes
generally available to customers; provided, however, the parties acknowledge
that Read-Rite makes no warranty with respect to Read-Rite's right to sublicense
the rights granted to Read-Rite pursuant to the IBM Agreement; and provided
further that, while it is Read-Rite's belief that its rights under the IBM
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Agreement extend to the design, manufacture and sale of all types of Magnetic
Recording Heads, the parties hereto acknowledge that Read-Rite does not
represent or warrant that Read-Rite's rights under the IBM Agreement so extend
to any Magnetic Recording Heads other than Inductive R/W Heads.
(b) By Licensee. Licensee warrants that, as of the date
hereof, (i) the Licensee Technical Information being furnished to Read-Rite
hereunder is the same as that Licensee uses (together with Read-Rite Technical
Information and Read-Rite Industrial Property Rights licensed to Licensee
hereunder, and with any RRST Technical Information and RRST Industrial Property
Rights licensed to Licensee under the Sublicense Agreement) to manufacture its
own magnetic recording heads in its own factories, (ii) Licensee has the right
to grant the licenses granted hereunder without breaching or conflicting with
any agreement of Licensee with third parties, and (iii) Licensee has received no
claims that the Licensee Technical Information infringes on the industrial
property rights of any third party. In addition, Licensee warrants that, as of
the date hereof, the Licensee Technical Information and the Licensee Industrial
Property Rights include (together with Read-Rite Technical Information,
Read-Rite Industrial Property Rights, RRST Technical Information and RRST
Industrial Property Rights licensed hereunder or under the Sublicense Agreement)
all of technical information and intellectual property rights owned by or
licensed to Licensee that are materially necessary to manufacture and sell
magnetic recording heads that Licensee presently manufactures and makes
generally available to customers.
(c) By RRST. RRST warrants that, as of the date hereof, (i)
the RRST Technical Information being furnished to Read-Rite hereunder is the
same as that RRST uses (together with Read-Rite Technical Information and
Read-Rite Industrial Property Rights licensed to Licensee hereunder, and with
any Licensee Technical Information and Licensee Industrial Property Rights
licensed to RRST under the Sublicense Agreement) to manufacture its own magnetic
recording heads in its own factories, (ii) RRST has the right to grant the
licenses granted hereunder without breaching or conflicting with any agreement
of RRST with third parties, and (iii) RRST has received no claims that the RRST
Technical Information infringes on the industrial property rights of any third
party. In addition, RRST warrants that, as of the date hereof, the RRST
Technical Information and the RRST Industrial Property Rights include (together
with Read-Rite Technical Information, Read-Rite Industrial Property Rights,
Licensee Technical Information and Licensee Industrial Property Rights licensed
hereunder or sublicensed under the Sublicense Agreement) all of technical
information and intellectual property rights owned by or licensed to RRST that
are materially necessary to manufacture and sell magnetic recording heads that
RRST presently manufactures and makes generally available to customers.
9.2 Indemnity.
(a) By Read-Rite. Read-Rite shall indemnify Licensee against
any and all expenses and/or liabilities paid to third parties incurred by
Licensee as a result of any legal action arising out of a breach of the
warranties set forth in Section 9.1(a) above; provided Licensee notifies
Read-Rite immediately of any such actual or threatened action, gives Read-Rite
sole control of the defense and settlement of such action, and provides
Read-Rite with reasonable assistance, on Read-Rite's request and at Read-Rite's
expense, in defending or settling such action. Read-Rite agrees to duly exercise
its rights and discharge its duties and obligations under the KME License
Agreement. Further, Read-Rite agrees to indemnify and hold Licensee harmless
against any loss, liability, cost or expense (including reasonable attorneys'
fees) which Licensee might incur arising out of any breach by Read-Rite of the
terms and conditions of the KME License Agreement. For any claim arising out of
a claim that Read-Rite breached any obligation under such Agreement, Licensee
shall provide Read-Rite with prompt notice of such claim and permit Read-Rite to
participate in the defense thereof. It is acknowledged and agreed that
Licensee's
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expenses and liabilities indemnified by Read-Rite under the foregoing provisions
shall include, but not be limited to, the expenses and liabilities which
Licensee incurs to indemnify RRST as a result of a breach by Read-Rite of its
warranties set forth in Section 9.1(a) above.
(b) By Licensee. Licensee shall indemnify Read-Rite against
any and all expenses and/or liabilities paid to third parties incurred by
Read-Rite as a result of any legal action arising out of a breach of the
warranties set forth in Section 9.1(b) above; provided Read-Rite notifies
Licensee immediately of any such actual or threatened action, gives Licensee
sole control of the defense and settlement of such action, and provides Licensee
with reasonable assistance, on Licensee's request and at Licensee's expense, in
defending or settling such action. Licensee agrees to duly exercise its rights
and discharge its duties and obligations under its sublicense under the KME
License Agreement. Licensee agrees to indemnify and hold Read-Rite harmless
against any loss, liability, cost or expense (including reasonable attorney's
fees) which Read-Rite might incur arising out of any breach by Licensee of the
terms and conditions of the KME License Agreement. For any claim arising out of
a claim that Licensee breached any obligation under such Agreement, Read-Rite
shall provide Licensee with prompt notice of such claim and permit Licensee to
participate in the defense thereof.
(c) By RRST. RRST shall indemnify Read-Rite against any and
all expenses and/or liabilities paid to third parties incurred by Read-Rite as a
result of any legal action arising out of a breach of the warranties set forth
in Section 9.1(c) above; provided Read-Rite notifies RRST immediately of any
such actual or threatened action, gives RRST sole control of the defense and
settlement of such action, and provides RRST with reasonable assistance, on
RRST's request and at RRST's expense, in defending or settling such action. RRST
agrees to duly exercise its rights and discharge its duties and obligations
under its sublicense under the KME License Agreement. RRST agrees to indemnify
and hold Read-Rite harmless against any loss, liability, cost or expense
(including reasonable attorney's fees) which Read-Rite might incur arising out
of any breach by RRST of the terms and conditions of the KME License Agreement.
For any claim arising out of a claim that RRST breached any obligation under
such Agreement, Read-Rite shall provide RRST with prompt notice of such claim
and permit RRST to participate in the defense thereof.
9.3 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 9,
LICENSEE, RRST AND READ-RITE INDUSTRIAL PROPERTY RIGHTS, TECHNICAL INFORMATION
AND MARKS ARE PROVIDED "AS IS" WITHOUT WARRANTY OR CONDITION OF ANY KIND,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OR CONDITIONS AS
TO CONTENT OR USEFULNESS AND ANY IMPLIED WARRANTIES OR CONDITIONS OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN PARTICULAR, BUT WITHOUT
LIMITATION, NO PARTY WARRANTS THAT THE OTHERS WILL BE ABLE TO MANUFACTURE
PRODUCTS TO THE SAME STANDARD OR WITH THE SAME YIELDS AS THE LICENSING PARTY BY
UTILIZING SUCH TECHNICAL INFORMATION AND INDUSTRIAL PROPERTY RIGHTS.
17
<PAGE> 18
NO PARTY MAKES ANY WARRANTY, WHETHER EXPRESS OR IMPLIED, THAT THE PRACTICE OF
SUCH PARTY'S TECHNICAL INFORMATION OR INDUSTRIAL PROPERTY RIGHTS DOES NOT
INFRINGE ON THE INTELLECTUAL OR INDUSTRIAL PROPERTY RIGHTS OF ANY THIRD PARTY
AND EACH PARTY HEREBY AGREES THAT THE PRACTICE OF ANY SUCH SUBJECT MATTER SHALL
BE ENTIRELY AT ITS OWN RISK.
ARTICLE 10 - TERM AND TERMINATION
10.1 Term. This Agreement shall be through June 14, 2041, unless
earlier terminated by mutual agreement of Read-Rite, Licensee and RRST or as
otherwise provided in this Article 10.
10.2 Termination of the Joint Venture Agreement. Upon termination of
the Joint Venture Agreement pursuant to Section 14.2 thereof, the following
shall occur:
(a) If the Joint Venture Agreement is terminated by agreement
between Read-Rite and Sumitomo pursuant to Section 14.2(a) thereof, Read-Rite
and Licensee will negotiate at such time whether this Agreement will continue in
effect after such termination and, if so, terms on which it would continue.
(b) If the Joint Venture Agreement is terminated by Sumitomo
or Read-Rite under Section 14.2(b) thereof by reason of an event described
therein occurring to Licensee (including by reason of a dissolution of Licensee
under Section 14.4(e) of the Joint Venture Agreement) then this Agreement shall
automatically terminate upon the effective date of such termination without
notice.
(c) If the Joint Venture Agreement is terminated (i) by
Sumitomo or Read-Rite under Section 14.2(b) thereof by reason of an event
described therein occurring to either Sumitomo or Read-Rite and the other party
elects not to dissolve Licensee in accordance with Section 14.4(e) thereof, (ii)
by Sumitomo or Read-Rite under Section 14.2(d), (iii) by RRC under Section
14(c)(i) thereof, and Sumitomo purchases Read-Rite's shares in Licensee in
accordance with Section 14.4(c) thereof, or (iv) by either Read-Rite or Sumitomo
pursuant to Section 14.2(c)(ii) thereof, then in any such case this Agreement
shall continue according to its terms; provided that (1) the parties'
obligations under Articles 3 and 4 above shall terminate; (2) the rights and
license granted to Licensee under Articles 2, 7.3 and 11 hereof shall not apply
to any Read-Rite Technical Information developed or acquired by Read-Rite after
the date of such termination, or any Read-Rite Industrial Property Rights
covering such later-developed or later-acquired Read-Rite Technical Information
(in which event Licensee's sublicense to RRST shall be similarly restricted);
(3) the license granted to Read-Rite under Section 2.3 above shall not include
any Licensee Technical Information developed or acquired by Licensee after the
date of such termination, or any Licensee Industrial Property Rights covering
such later-developed or later-acquired Licensee Technical Information; (4) the
license granted to Read-Rite under Section 2.4 above shall not include any RRST
Technical Information developed or acquired by RRST after the date of such
termination, or any RRST Industrial Property Rights covering such
later-developed of later-acquired RRST Technical Information; and (5) the
licenses granted to Licensee and Read-Rite under Article 8 shall terminate as to
any product models first sold commercially after the date of such termination of
the Joint Venture Agreement.
10.3 Effect of Termination. Except as expressly provided in Section
10.2 above, upon the expiration or any earlier termination of this Agreement,
all rights and obligations of the parties shall terminate except that the
provisions of Sections 2.3, 2.4, 6.6, 7.1, 7.2, 10.3 and 10.5 hereof, and
Articles 9, 12 and 13 hereof, shall survive. In addition, the licenses granted
to Licensee under Section 2.1 above shall
18
<PAGE> 19
survive the expiration of this Agreement under Section 10.1, but not an earlier
termination under Section 10.2 (except as expressly provided therein); provided
that following such expiration the license granted to Licensee shall become
nonexclusive.
10.4 No Termination For Breach. The parties acknowledge and agree that
this Agreement shall not be terminated by reason of any breach hereof by any
party, but shall be terminated prior to the end of the term specified in Section
10.1 only by mutual agreement or as provided in Section 10.2.
10.5 Bankruptcy Protection. Notwithstanding any provision contained
herein to the contrary, in case Read-Rite is under any proceeding under the U.S.
Bankruptcy Code and the trustee in bankruptcy of Read-Rite or Read-Rite as a
debtor in possession rightfully elects to reject this Agreement, Licensee may,
pursuant to 11 U.S.C. Section 365(n)(1) and (2), retain any and all rights
hereunder, to the maximum extent permitted by law, subject to the royalty
payments specified herein.
10.6 Termination of Rights to KME Licensed Technology. Read-Rite shall
have the right to terminate Licensee's rights to the KME Licensed Technology
included in the licenses granted hereunder if, at any time prior to September
28, 1997, or the date the Aggregate Royalty Cap is paid to KME, whichever is
earlier: (i) Licensee fails to meet its royalty obligations to KME within five
(5) days of Read-Rite's written demand to Licensee that it pay KME; (ii)
Licensee materially breaches any term of the KME License Agreement and fails to
cure said breach within forty-five (45) days of Read-Rite's written notice to
Licensee thereof, or if such breach cannot reasonably be cured within forty-five
(45) days, if Licensee fails to commence within such forty-five (45) day period,
and thereafter to diligently pursue such cure to completion; provided that a
determination as to whether the cure can reasonably be accomplished within
forty-five (45) days, and whether Licensee is diligently pursuing such cure
shall be at the reasonable discretion of Read-Rite, (iii) if an application for
bankruptcy, receivership, liquidation or other similar proceeding against
Licensee is made by Licensee or any other person, such application is not
vacated within sixty (60) days; (iv) all of the assets of Licensee are seized or
attached in conjunction with any action against Licensee by any third party; or
(v) if Licensee is dissolved except as permitted under Section 11.3 of the KME
License Agreement, if Licensee assigns its rights under the Licensee Agreement
except as permitted under Section 11.3 of the KME License Agreement, or if
Licensee attempts to sublicense any of the KME licensed technology to any third
party who is not an Affiliate (as defined in the KME License Agreement) of
Licensee. Thereafter, pursuant to (ii), (iii), (iv) and (v) above, Read-Rite
shall continue to have the right to terminate Licensee's rights to any of the
patents included in the KME licensed technology which are included within the
Read-Rite Industrial Property Rights.
ARTICLE 11 - INFRINGEMENT BY THIRD PARTIES
11.1 Infringement of Read-Rite Rights. In the event of any third party
infringement of Read-Rite Industrial Property Rights, Read-Rite Technical
Information and/or Read-Rite Marks, with respect to the manufacture or sale of
Magnetic Recording Heads in Japan or Thailand, the party which first becomes
aware thereof shall promptly notify the other parties of such infringement. In
the event that Read-Rite does not take action to abate such infringement within
one hundred twenty (120) days of receiving notice from Licensee or RRST, or (if
earlier) within ninety (90) days prior to the effective date of any statutory
bar to action, and thereafter diligently pursue such action, then Licensee may
at its sole discretion bring suit to restrain such infringement. At Licensee's
or RRST's request, Read-Rite may, if necessary, be joined in such action, and
will cooperate at Licensee's or RRST's expense in the conduct of such action,
including, without limitation, providing Licensee or RRST with authority to
bring such suit in Read-Rite's name and providing such information, data and
assistance as Licensee or RRST reasonably may request. Any
19
<PAGE> 20
recovery awarded in such suit with respect to such infringement in Japan or
Thailand shall be applied first to reimburse the party prosecuting such action
for expenses paid to third parties in bringing such action, with the balance, if
any, to be shared equally by Read-Rite and Licensee or RRST.
11.2 Infringement of Licensee Rights. In the event of any third party
infringement of Licensee Industrial Property Rights, Licensee Technical
Information or Licensee Marks with respect to the manufacture or sale of
Magnetic Recording Heads outside Japan or Thailand, the party which first
becomes aware thereof shall promptly notify the other parties of such
infringement. In the event that Licensee or RRST does not take appropriate
action to abate such infringement, within one hundred twenty (120) days of
receiving notice for Read-Rite, or (if earlier) within ninety (90) days prior to
the effective date of any statutory bar to such action, then Read-Rite may at
its sole discretion bring action to abate such infringement. At Read-Rite's
request, Licensee or RRST may, if necessary, be joined in such action, and will
cooperate at Read-Rite's expense in the conduct of such action, including,
without limitation, providing Read-Rite with authority to bring such action in
Licensee's name and providing such information, data and assistance at
Read-Rite's expense as Read-Rite reasonably may request. Any recovery awarded in
such suit with respect to Licensee's Industrial Property Rights or Licensee
Technical Information shall be applied first to reimburse Read-Rite for expenses
paid to third parties in bringing such suit, with the balance, if any, to be
shared equally by Read-Rite and Licensee or RRST.
ARTICLE 12 - LIMITATION OF LIABILITY; INDEMNITY
12.1 LIMITATION. IN NO EVENT WILL ANY PARTY BE LIABLE FOR LOST
PROFITS, OR ANY SPECIAL, INDIRECT, CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER
CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT,
OTHER THAN A BREACH OF THE CONFIDENTIALITY AGREEMENT. THIS LIMITATION SHALL
APPLY EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THE PARTIES AGREE THAT THIS SECTION 12.1 REPRESENTS A REASONABLE ALLOCATION OF
RISK.
12.2 Indemnification.
(a) By Licensee. Except to the extent that Read-Rite is
obligated to indemnify Licensee under Section 9.2(a) above or as otherwise
agreed in writing by Read-Rite, Licensee assumes responsibility and shall
indemnify and defend Read-Rite from and against all liability to third parties
and expenses (including reasonable attorney's fees) resulting from claims for
personal injuries or property damage, or any other claim, resulting from or
arising out of the manufacture, sale or use of Products by Licensee; provided
that Read-Rite notifies Licensee immediately of any such actual or threatened
action, gives Licensee sole control of the defense and settlement of such
action, and provides Licensee with reasonable assistance in defending or
settling such action.
(b) By RRST. Except to the extent that Read-Rite is obligated
to indemnify RRST under Section 9.2(a) above or as otherwise agreed in writing
by Read-Rite, RRST assumes responsibility and shall indemnify and defend
Read-Rite from and against all liability to third parties and expenses
(including reasonable attorney's fees) resulting from claims for personal
injuries or property damage, or any other claim, resulting from or arising out
of the manufacture, sale or use of Products by RRST; provided that Read-Rite
notifies RRST immediately of any such actual or threatened action, gives RRST
sole control of the defense and settlement of such action, and provides RRST
with reasonable assistance in defending or settling such action.
20
<PAGE> 21
(c) By Read-Rite.
(i) Of Licensee. Except to the extent that Licensee
is obligated to indemnify Read-Rite under Section 9.2(b) above or as otherwise
agreed in writing by Licensee, Read-Rite assumes responsibility and shall
indemnify and defend Licensee from and against all liability to third parties
and expenses (including reasonable attorney's fees) resulting from claims for
personal injuries or property damage, or any other claim, resulting from or
arising out of the manufacture, sale or use of Magnetic Recording Heads or other
products by Read-Rite; provided that Licensee notifies Read-Rite immediately of
any such actual or threatened action, gives Read-Rite sole control of the
defense and settlement of such action, and provides Read-Rite with reasonable
assistance in defending or settling such action.
(ii) Of RRST. Except to the extent that RRST is
obligated to indemnify Read-Rite under Section 9.2(c) above or as otherwise
agreed in writing by RRST, Read-Rite assumes responsibility and shall indemnify
and defend RRST from and against all liability to third parties and expenses
(including reasonable attorney's fees) resulting from claims for personal
injuries or property damage, or any other claim, resulting from or arising out
of the manufacture, sale or use of Magnetic Recording Heads or other products by
Read-Rite; provided that RRST notifies Read-Rite immediately of any such actual
or threatened action, gives Read-Rite sole control of the defense and settlement
of such action, and provides Read-Rite with reasonable assistance in defending
or settling such action.
12.3 No Application to Infringement Claims. The indemnities under
Section 12.2 above shall not apply to claims that Read-Rite Technical
Information, Read-Rite Industrial Property Rights, Licensee Technical
Information, Licensee Industrial Property Rights, RRST Technical Information or
RRST Industrial Property Rights infringe intellectual property rights of a third
party.
ARTICLE 13 - MISCELLANEOUS
13.1 Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California, without reference to
conflict of laws principles.
13.2 Arbitration. Any dispute or claim between the parties under this
Agreement shall be finally settled by binding arbitration in Paris, France,
under the rules of arbitration of the International Chamber of Commerce by one
arbitrator appointed in accordance with said rules. Judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, the parties may apply to any court of
competent jurisdiction for injunctive relief without breach of this arbitration
provision.
13.3 Assignment. No party may assign or delegate this Agreement or any
of its licenses, rights or duties under this Agreement without the prior written
consent of the other parties, except to a person or entity into which it has
merged or which has otherwise succeeded to all or substantially all of its
business and assets to which this Agreement pertains, by merger, reorganization
or otherwise, and which has assumed in writing or by operation of law its
obligations under this Agreement.
21
<PAGE> 22
13.4 Language. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications, royalty reports, Read-Rite Technical
Information, Licensee Technical Information, RRST Technical Information and
notices to be made or given pursuant to this Agreement shall be in the English
language.
13.5 Force Majeure. No Party shall be held in breach of this Agreement
for any performance required of it hereunder to the extent the same is prevented
in whole or in part by reason of strike, fire, flood, acts of God, governmental
acts, failure of suppliers, lack of transportation or any other force majeure
beyond the reasonable control of such party. Provided, however, the party
affected shall give prompt written notice to the other parties of the nature and
date of commencement of the force majeure and expected duration, and the party
so affected shall use reasonable efforts to avoid or remove the force majeure to
the extent it is so able to do.
13.6 Construction. All parties have been represented by counsel during
the negotiation and drafting of this Agreement. Accordingly, any rule of
construction relating to the author of specific language shall not apply.
13.7 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand, or by
commercial express courier service, addressed as follows:
To Read-Rite:
Read-Rite Corporation
Los Coches Street
Milpitas, CA 95035
Attention: Chairman and Chief Executive Officer
cc: Vice President and General Counsel
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
Palo Alto Square
Palo Alto, California 95306
Attention: Francis S. Currie, Esq.
To Licensee:
Read-Rite SMI Kabushiki Kaisha
2-15-17 Egawa
Shimamoto-cho, Mishima-gun
Osaka, 618 JAPAN
Attention: President
22
<PAGE> 23
with copies to:
Sumitomo Metal Industries, Ltd.
Ote Center Building
Otemachi 1-Chome
Chiyoda-ku, Tokyo 100, Japan
Attn: General Manager, Electronics Components Division
Sumitomo Metal Industries, Ltd.
Ote Center Building
Otemachi 1-Chome
Chiyoda-ku, Tokyo 100, Japan
Attn: General Manager, Legal Department
To RRST:
Read-Rite SMI (Thailand) Co., Ltd.
139/4 Moo 2 Bangpa-In Industrial Estate
Udomsorayuth Road, Klongjig Bangpa-in
Ayutthaya 13160, Thailand
Attention: President
Such notices shall be deemed to have been served when delivered or, if delivery
is not accomplished by reason of some fault of the addressee, when tendered.
13.8 Export Controls.
(a) United States. Licensee understands and acknowledges that
Read-Rite is subject to regulation by agencies of the U.S. government, including
the U.S. Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. Any and all obligations of
Read-Rite to provide technical information, technical assistance, any media in
which any of the foregoing is contained, training and related technical data
(collectively, "Data") shall be subject in all respects to such United States
laws and regulations as shall from time to time govern the license and delivery
of technology and products abroad by persons subject to the jurisdiction of the
United States, including the Export Administration Act of 1979, as amended, any
successor legislation, and the Export Administration Regulations issued by the
Department of Commerce, or the Bureau of Export Administration. Licensee
warrants that it will comply in all respects with the export and re-export
restrictions set forth in any export license (if necessary) for Data disclosed
to Licensee hereunder; provided that Read-Rite informs Licensee of such
restrictions.
(b) Japan. Read-Rite understands and acknowledges that
Licensee is subject to similar regulation on technology transfer under the
Foreign Currency and Foreign Trade Control Act of Japan, as amended from time to
time, and regulations and guidelines with respect thereto. Any and all
obligations of Licensee to provide Licensee Technical Information shall be
subject in all respects to such Japanese laws, regulations and guidelines.
Read-Rite agrees that it will comply in all respects with the export and
re-export restrictions set forth in any export license (if necessary) for Data
disclosed to Read-Rite hereunder, provided that Licensee informs Read-Rite of
any restrictions contained therein.
23
<PAGE> 24
(c) Thailand. Read-Rite understands and acknowledges that RRST
is or may be subject to similar regulation on technology transfer under the
applicable export laws in Thailand, as they may be amended from time to time,
and regulations and guidelines with respect thereto. Any and all obligations of
RRST to provide RRST Technical Information shall be subject in all respects to
such Thai laws, regulations and guidelines. Read-Rite agrees that it will comply
in all respects with the export and re-export restrictions set forth in any
export license (if necessary) for Data disclosed to Read-Rite hereunder,
provided that RRST informs Read-Rite of any restrictions contained therein.
13.9 Partial Invalidity. If any paragraph, provision, or clause thereof
in this Agreement shall be found or be held to be invalid or unenforceable in
any jurisdiction in which this Agreement is being performed, the remainder of
this Agreement shall be valid and enforceable and the parties shall use their
respective best efforts to negotiate a substitute, valid and enforceable
provision which most nearly effects the parties' intent in entering into this
Agreement.
13.10 Counterparts. This Agreement may be executed in three (3) or more
counterparts, all of which, taken together, shall be regarded as one and the
same instrument.
13.11 Waiver. The failure of any party to enforce at any time the
provisions of this Agreement shall in no way be constituted to be a present or
future waiver of such provisions, nor in any way affect the validity of any
party to enforce each and every such provision thereafter.
13.12 Entire Agreement. The terms and conditions herein contained, in
those certain Distribution Agreements as amended from time to time, in the Joint
Venture Agreement, in the Confidentiality Agreement or in the related Indemnity
Agreement entered into pursuant to the terms thereof, constitute the entire
agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matters hereof and thereof and no agreement or understanding
varying or extending the same shall be binding upon any party hereto unless in a
written document signed by the party to be bound thereby. This Agreement
specifically supersedes the Original License Agreement and all amendments
thereto.
13.13 Further Assurances. At any time or from time to time on and after
the date of this Agreement, each party shall at the request of the other party,
at such requesting party's expense, (i) deliver such records, data or other
documents consistent with the provisions of this Agreement, (ii) execute, and
deliver or cause to be delivered, all such assignments, consents, documents or
further instruments of transfer or license, and (iii) take or cause to be taken
all such other actions, as the requesting party may reasonably deem necessary or
desirable in order for the requesting party to obtain the full benefits of this
Agreement and the transactions contemplated hereby.
24
<PAGE> 25
13.14 Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by duly authorized officers or representatives as of the date first above
written.
READ-RITE CORPORATION READ-RITE SMI KABUSHIKI KAISHA
By: _________________________ By: ______________________________
Name: _______________________ Name: ____________________________
Title: ______________________ Title: ___________________________
READ-RITE SMI (THAILAND) CO., LTD.
By: _________________________
Name: _______________________
Title: ______________________
APPENDICES:
Appendix A: Rights Previously Granted by Read-Rite
Appendix B: KME License Agreement
Appendix C: Royalty-Bearing Products
Appendix D: Cost-Sharing Agreement
Appendix E: Disclosure Schedule
25
<PAGE> 1
EXHIBIT 10.52
SECOND ADDENDUM
TO JOINT VENTURE AGREEMENT
This Second Addendum ("Addendum") dated as of September 29, 1996 is by
and between Read-Rite Corporation, a Delaware corporation ("Read-Rite"), and
Sumitomo Metal Industries, Ltd., a Japanese corporation ("SMI"), amends that
certain Joint Venture Agreement dated as of June 14, 1991 by and between
Read-Rite and SMI (the "Agreement"), and supersedes that certain First Addendum
to the Agreement dated as of December 14, 1993 between Read-Rite and SMI ("First
Addendum"). Capitalized terms not otherwise defined herein shall have the
meanings assigned thereto in the Agreement.
R E C I T A L S
WHEREAS, pursuant to the Agreement, Read-Rite and SMI have formed a
joint venture in Japan, Read-Rite SMI Kabushiki Kaisha, a Japan corporation (the
"Company"); and
WHEREAS, Read-Rite and SMI wish to further expand the business purposes
of the Company beyond those contemplated in the Agreement and the First Addendum
to include certain additional technologies which Read-Rite and SMI believe will
provide the Company an opportunity to promote and expand its thin film head
business in the future, thereby serving the interests of both parties as joint
venturers.
A G R E E M E N T
1. Amendment of Business Purposes. Section 1.3 (a) of the Agreement
shall be amended in its entirety to read as follows:
"(a) To design, develop and manufacture (i) inductive read, inductive
write thin film heads for use in rigid magnetic disk Winchester disk drives,
(ii) magnetoresistive read, inductive write thin film recording heads for use in
Winchester rigid disk drives, (iii) planar recording heads for use in Winchester
rigid disk drives, (iv) spin valve recording heads for use in Winchester rigid
disk drives, and (v) giant magnetoresistive recording heads for use in
Winchester rigid disk drives (hereinafter, collectively, the "Products"), in
Japan and to sell such Products in Japan for integration into such disk drives
in Japan, and to certain Japanese customers outside of North America for
integration by the Japanese customers outside North America, all as provided in
this Agreement and the Ancillary Agreements;"
2. Affirmation. Except as modified by this Addendum, the Agreement
shall remain unmodified and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
signed by duly authorized officers or representatives as of the date first
written above.
READ-RITE CORPORATION SUMITOMO METAL INDUSTRIES, LTD.
By: ________________________ By: ________________________________
Name: ______________________ Name: ______________________________
Title: _____________________ Title: _____________________________
<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 Six Months Ended
---------------------- ----------------------
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $23,555 $ 1,287 $29,342 $43,858
======= ======= ======= =======
Weighted average common shares
outstanding 47,203 46,538 47,089 46,827
Common equivalent shares issuable
under dilutive stock options after
applying treasury stock method,
net of tax benefits 1,613 923 1,368 1,198
------- ------- ------- -------
Common and common equivalent
shares used in computing net
income per share 48,816 47,461 48,457 48,025
======= ======= ======= =======
Net income per share $ 0.48 $ 0.03 $ 0.61 $ 0.91
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT MARCH 31, 1997 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 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> MAR-30-1997
<CASH> 94,885
<SECURITIES> 31,227
<RECEIVABLES> 127,198
<ALLOWANCES> 2,965
<INVENTORY> 67,115
<CURRENT-ASSETS> 333,477
<PP&E> 937,902
<DEPRECIATION> 334,184
<TOTAL-ASSETS> 966,688
<CURRENT-LIABILITIES> 224,953
<BONDS> 166,096
0
0
<COMMON> 5
<OTHER-SE> 488,270
<TOTAL-LIABILITY-AND-EQUITY> 966,688
<SALES> 282,068
<TOTAL-REVENUES> 282,068
<CGS> 219,688
<TOTAL-COSTS> 219,688
<OTHER-EXPENSES> 26,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,434
<INCOME-PRETAX> 35,770
<INCOME-TAX> 8,428
<INCOME-CONTINUING> 23,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,555
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
