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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(Address of principal executive officers) (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 [ ]
On January 30, 1998, 48,313,925 shares of the registrant's common stock were
issued and outstanding.
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INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- -------- ------------------------------------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - 2
December 31, 1997 and September 30, 1997
Consolidated Condensed Statements of Operations - 3
Three Months Ended December 31, 1997 and 1996
Consolidated Condensed Statements of Cash Flows - 4
Three Months Ended December 31, 1997 and 1996
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
- -------- -------------------------------------------------
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
INDEX OF EXHIBITS 21
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
---------- ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 81,458 $ 118,589
Short-term investments 146,077 179,508
Accounts receivable, net 131,858 178,722
Inventories 81,431 91,487
Prepaid expenses and other current assets 17,634 14,988
---------- ----------
Total current assets 458,458 583,294
Property, plant and equipment 1,152,901 1,091,442
Less: accumulated depreciation 507,303 418,629
---------- ----------
Property, plant and equipment, net 645,598 672,813
Intangible and other assets 46,007 45,374
========== ==========
Total assets $1,150,063 $1,301,481
========== ==========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,823 $ 122,379
Accrued compensation and benefits 29,983 37,558
Income taxes payable 26,961 26,071
Other accrued liabilities 50,232 41,499
Current portion of long-term debt and capital
lease obligations 13,039 12,602
---------- ----------
Total current liabilities 211,038 240,109
Convertible subordinated notes 345,000 345,000
Other long-term debt and capital lease obligations 58,085 58,871
Other long-term liabilities 13,945 38,726
---------- ----------
Total liabilities 628,068 682,706
---------- ----------
Minority interest in consolidated subsidiary 64,977 73,122
---------- ----------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value -- --
Common Stock, $0.0001 par value 5 5
Additional paid-in capital 357,858 354,546
Retained earnings 99,155 191,102
---------- ----------
Total stockholders' equity 457,018 545,653
---------- ----------
Total liabilities, minority interest in
consolidated subsidiary and stockholders' equity $1,150,063 $1,301,481
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Net sales $ 261,371 $ 251,588
Cost of sales 347,138 215,774
--------- ---------
Gross margin (85,767) 35,814
Operating expenses:
Research and development 21,731 14,938
Selling, general and administrative 9,496 10,753
--------- ---------
Total operating expenses 31,227 25,691
--------- ---------
Operating income (loss) (116,994) 10,123
Interest expense 7,299 3,628
Interest income and other, net 450 2,113
--------- ---------
Income (loss) before provision for income taxes
and minority interest (123,843) 8,608
Provision (benefit) for income taxes (24,769) 2,668
--------- ---------
Income (loss) before minority interest (99,074) 5,940
Minority interest in net income (loss) of
consolidated subsidiary (8,145) 153
========= =========
Net income (loss) $ (90,929) $ 5,787
========= =========
Basic earnings (loss) per share $ (1.88) $ 0.12
========= =========
Diluted earnings (loss) per share $ (1.88) $ 0.12
========= =========
Shares used in basic earnings (loss) per
share calculation 48,286 46,976
========= =========
Shares used in diluted earnings (loss)
per share calculation 48,286 48,098
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL TATEMENTS.
3
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (90,929) $ 5,787
Adjustments required to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 105,525 37,194
Minority interest in net income (loss) of
consolidated subsidiary (8,145) 153
Other, net (25,489) (1,126)
Changes in assets and liabilities:
Accounts receivable 46,864 (21,347)
Inventories 10,056 6,646
Prepaid expenses and other current assets (2,646) (87)
Accounts payable, accrued liabilities and
income taxes payable (29,508) 8,567
--------- ---------
Net cash provided by operating activities 5,728 35,787
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (67,066) (51,731)
Maturities of available-for-sale investments 111,971 95,953
Purchase of available-for-sale investments (78,540) (98,687)
Other assets and liabilities, net (11,889) (1,099)
--------- ---------
Net cash used in investing activities (45,524) (55,564)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of other long-term debt and capital lease
obligations (349) (1,718)
Proceeds from issuance of common stock 3,014 2,974
--------- ---------
Net cash provided by financing activities 2,665 1,256
--------- ---------
Effect of foreign currency exchange rate changes
on cash -- 66
--------- ---------
Net decrease in cash and cash equivalents (37,131) (18,455)
Cash and cash equivalents at beginning of period 118,589 82,291
========= =========
Cash and cash equivalents at end of period $ 81,458 $ 63,836
========= =========
Supplemental disclosures of non-cash activities:
Issuance of common stock under 401(k) plan $ 298 $ 202
Supplemental disclosures of cash flow information:
Interest paid during the period $ 840 $ 1,456
Income taxes paid during the period $ 211 $ 5,489
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") maintains a
fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to
September 30. The first quarters of fiscal 1998 and 1997 ended on December 28,
1997 and December 29, 1996, respectively. To conform to the Company's fiscal
year ends, the Company must add a fifty-third week to every sixth or seventh
fiscal year; however, both fiscal 1998 and fiscal 1997 are 52-week years. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation of the
interim periods presented have been included. The interim results are not
necessarily indicative of the operating results expected for the full fiscal
year ending September 30, 1998. The accompanying unaudited financial statements
should be read in conjunction with the Company's audited financial statements
included in its 1997 Annual Report on Form 10-K.
NOTE 2. INVENTORIES
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------- -------
<S> <C> <C>
Raw material $18,462 $13,097
Work-in-process 55,358 73,280
Finished goods 7,611 5,110
======= =======
Total inventories $81,431 $91,487
======= =======
</TABLE>
NOTE 3. SPECIAL CHARGE
During the three months ended December 31, 1997 the Company responded to the
industry's rapid shift to Magnetoresistive ("MR") technology, accelerating its
existing MR transition strategy and significantly reducing its production of
advanced inductive products. As a result, the Company incurred a special charge
to cost of sales of approximately $114.8 million, primarily for the write-off of
equipment and inventory associated with the phase-out of advanced inductive
technologies.
NOTE 4. CREDIT FACILITY
In October 1997, the Company entered into a $200 million credit facility
("Credit Facility") with a syndicate of financial institutions. The four year
facility consists of a $50 million term loan and a $150 million revolving line
of credit, both unsecured. The term loan provides for quarterly principal
payments, beginning January 1999 and continuing through October 2001. The term
loan provides for interest payments which vary based on the London Interbank
Offered Rate ("LIBOR"), plus an applicable margin. Additionally, the terms of
the facility require the Company to maintain certain financial ratios, observe a
series of additional covenants, and prohibits the Company from paying dividends
without prior bank approval. As of December 31, 1997, the Company was not in
compliance with four covenants under the Credit Facility. On February 5, 1998,
the Company obtained the necessary amendments with respect to the Credit
Facility, and was thus in compliance with the revised covenants on such date. As
of December 31, 1997, the $50 million term loan was outstanding in full, and no
amounts were outstanding under the $150 million revolving line of credit.
5
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NOTE 5. ADOPTION OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," (SFAS 128") which
was adopted by the Company for the three months ended December 31, 1997.
Earnings per share for the three months ended December 31, 1996 have been
restated in accordance with SFAS 128. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options is excluded. The
following table sets forth the computation of basic and diluted earnings (loss)
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- --------
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $(90,929) $ 5,787
======== =======
Weighted average commons shares outstanding 48,286 46,976
======== =======
Basic earnings (loss) per share $ (1.88) $ 0.12
======== =======
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) $(90,929) $ 5,787
======== =======
Weighted average common shares outstanding 48,286 46,976
Common equivalent shares issuable under dilutive
stock options after applying treasury stock
method, net of tax benefit -- 1,122
======== =======
Common and common equivalent shares used in
computing diluted earnings (loss) per share 48,286 48,098
======== =======
Diluted earnings (loss) per share $ (1.88) $ 0.12
======== =======
</TABLE>
NOTE 6. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 - January
22, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. On May 20, 1997, the
Superior Court entered an order (1) sustaining the demurrers of certain
defendants to the California Corporations Code cause of action, and overruling
the demurrers of Read-Rite and certain other defendants to that same cause of
action; and (2) sustaining the demurrers of all defendants as to the remaining
causes of action.
On January 17, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
6
<PAGE> 8
On January 21, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Edward McDaid
against the Company and certain of its officers and directors (the "McDaid
Federal Action"). The McDaid Federal Action alleges that defendants made false
and misleading statements about the Company's business condition and prospects
during a purported class period of July 19, 1995 - June 19, 1996, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the McDaid Federal Action seek damages of
an unspecified amount. The Ferrari Federal Action and the McDaid Federal Action
were consolidated into one action by the court, In re Read-Rite Corp. Securities
Litigation (the "Consolidated Action").
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, 1996 - June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On December 22, 1997, the United States District Court for the Northern District
of California (1) dismissed the McDaid Federal Action; (2) consolidated the
Nevius Federal Action with the Consolidated Action; and (3) denied the motion of
the named plaintiffs in the Nevius Federal Action to be appointed lead
plaintiffs and to have their counsel appointed lead counsel. Plaintiffs in the
Consolidated Action have filed an amended and consolidated complaint. The
Company and the individual defendants intend to file a motion to dismiss the
amended and consolidated complaint.
There has been no discovery to date in the federal actions and no trial is
presently scheduled in any of these actions. The Company believes it has
meritorious defenses in all of these actions, and intends to defend each of them
vigorously.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions. Accordingly, both on its
own behalf and pursuant to indemnification agreements between the Company and
the named individual defendants, the Company intends to continue to defend each
of these actions vigorously. Failure by the Company to obtain a favorable
resolution of the claims set forth in any of these actions could, however, have
a material adverse effect on the Company's business, results of operations and
financial condition. Currently, the amount of such material adverse effect
cannot be reasonably estimated.
Except as so noted, the Company is not a party, nor is its property subject, to
any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
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 expectation that current unfavorable industry
conditions will continue for the next several quarters and that net sales, gross
margin and earnings for the second quarter of fiscal 1998 will decline from
those reported for the first quarter of fiscal 1998 (excluding the special
charge); the Company's expectation that MR products will account for the
substantial majority of the Company's net sales during fiscal 1998; the
Company's plan to continue increasing its research and development expenditures
in absolute dollars; the Company's expectation that selling, general and
administrative expenses will not increase significantly in the near-term; the
Company's plan to limit capital expenditures during fiscal 1998 to approximately
$200 million; the Company's belief that its liquid assets, credit facilities and
cash expected to be generated from operations will be sufficient to fund its
operations during fiscal 1998; and the Company's belief that the Company and the
individual defendants in the purported class actions (collectively, the
"Actions") described in Part II, Item 1 "Legal Proceedings," have meritorious
defenses in such Actions. Actual results for future periods could differ
materially from those projected in such forward-looking statements.
Some factors which could cause future actual results to materially differ from
the Company's recent results or those projected in the forward-looking
statements include, but are not limited to: the current unfavorable industry
environment could worsen and/or continue longer than expected; failure to meet
forecasted expenditures; failure by the Company to timely, effectively and
continuously execute on MR product development; failure to obtain necessary
customer qualifications on new programs, failure to timely and cost-effectively
introduce those programs into manufacturing, and failure to achieve and maintain
acceptable production yields on those programs; competitors may introduce
products more quickly or cost effectively than the Company; constraints on
supplies of raw materials or components limiting the Company's ability to
maintain or increase production; significant increases or decreases in demand
for the Company's products, cancellation or rescheduling of customer orders,
changes to the Company's product mix, and changes in business conditions
affecting the Company's financial position or results of operations which
significantly increase the Company's working capital needs; the Company's
inability to obtain or generate sufficient capital to fund its research and
development expenses and other working capital needs; or failure by the Company
to obtain favorable resolution of the claims set forth in the Actions. For a
more detailed discussion of certain risks associated with the Company's
business, see "Certain Additional Business Risks." The Company undertakes no
obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of such statements.
8
<PAGE> 10
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1996
The following table sets forth certain financial data for the Company as a
percentage of net sales for the three months ended December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 132.8 85.8
----- -----
Gross margin (32.8) 14.2
Operating expenses:
Research and development 8.3 5.9
Selling, general and administrative 3.7 4.3
----- -----
Total operating expenses 12.0 10.2
----- -----
Operating income (loss) (44.8) 4.0
Interest expense 2.8 1.4
Interest income and other, net 0.2 0.8
----- -----
Income (loss) before provision for income taxes
and minority interest (47.4) 3.4
Provision (benefit) for income taxes (9.5) 1.1
----- -----
Income (loss) before minority interest (37.9) 2.3
Minority interest in net income (loss) of
consolidated subsidiary (3.1) 0.0
===== =====
Net income (loss) (34.8) 2.3
===== =====
</TABLE>
NET SALES
Net sales were $261.4 million during the three months ended December 31, 1997
("Q198"), a 3.9% increase over net sales of $251.6 million during the three
months ended December 31, 1996 ("Q197"), but a 17.9% decline from net sales of
$318.2 million during the three months ended September 30, 1997 ("Q497"). Net
sales for Q198 were primarily impacted by a reduction of shipments late in the
quarter due to a general industry slowdown in demand for recording heads, the
industry's rapid shift to MR technology, the abrupt phase-out of advanced
inductive recording head products, and significant pricing pressures for advance
inductive products. The Company expects the current unfavorable industry
environment to continue for the next several quarters and expects net sales for
the three months ending March 31, 1998 ("Q298") to be significantly lower than
net sales during Q198.
To address these conditions, in Q198 Read-Rite accelerated implementation of its
strategy to transition fully to MR recording head technology production and
significantly reduced its production of advanced inductive products. Net sales
generated from MR products increased to $120.2 million, or 46% of the Company's
net sales, during Q198, compared to $49.8, million or 20% of the Company's net
sales, during Q197. This increase in net sales of MR products was largely
offset, however, by the decrease in net sales of inductive products, which
decreased to $141.2 million, or 54% of the Company's net sales, during Q198,
compared to $201.1 million, or 80% of the Company's net sales, during Q197.
The Company's largest volume MR product in Q198 was its 2.1 Gigabyte ("GB") per
3.5 inch disk MR recording head, which is being shipped to three major
customers. Entering Q298, the Company was in qualification at five customers
with its next generation 2.8 GB per 3.5 inch disk advanced recording head. The
Company expects that MR products, which accounted for approximately 24% of the
Company's net sales during fiscal 1997, will account for the substantial
majority of net sales during fiscal 1998.
Read-Rite shipped 22.4 million and 22.8 million recording heads (including heads
shipped in HSAs) and 4.1 million and 3.5 million HSAs during Q198 and Q197,
respectively, down from shipments of 29.7 million recording heads (including
heads shipped in HSAs) and 5.2 million HSAs during Q197. These figures reflect
the continuing shift of the Company's product mix towards HSAs, as net sales of
HSAs and HGAs accounted for approximately 81% and 17%, respectively, of net
sales during Q198, compared to approximately 66% and 33%, respectively, of net
sales during Q197. The Company's net sales continue to be primarily focused in
the 3.5" disk form factor market, which accounted for 94% and 89% of the
Company's net sales during Q198 and Q197, respectively.
The Company's net sales increase from Q197 to Q198 was attributable to a shift
in product mix to MR HSAs, which to date have typically had higher average
selling prices ("ASPs") than inductive HSAs. The Company's increase in net sales
was partially offset by the significant pricing pressures on advanced inductive
headstack assemblies ("HSAs"), as well as an overall decrease in unit sales for
inductive products and MR head gimbal assemblies ("HGAs").
9
<PAGE> 11
The Company's customer base remains highly concentrated, as the substantial
majority of net sales were to six major storage device manufacturers during Q198
and Q197. The Company's three largest customers accounted for 81% and 83% of the
Company's net sales during Q198 and Q197, respectively.
For a discussion of certain risks associated with the Company's business, see
"Certain Additional Business Risks."
GROSS MARGIN
The Company's gross margins are primarily influenced by ASPs, the level of unit
sales in relation to fixed costs, manufacturing yields, product mix (newer
products and HGAs typically generate higher gross margins than older products
and HSAs) and material costs. The relative impact of these factors fluctuates
from time to time. Periodically, the Company's gross margins also reflect
charges for inventory and fixed asset obsolescence related to products or
technologies that have reached their end of life.
HSAs typically have lower gross margins than HGAs. HSAs consist of two or more
HGAs and a variety of purchased components the Company assembles into a single
unit. The cost of the purchased components is a significant percentage of the
total cost of the HSA. The gross margin from such purchased components is
substantially lower than the gross margin on HGAs produced by the Company. The
combination of the respective gross margins on HGAs and non-HGA components and
associated labor and overhead included in HSAs typically produces a lower
aggregate gross margin on HSA net sales compared to HGA net sales.
The Company's gross margin was (32.8%) of net sales during Q198, compared to a
gross margin of 14.2% of net sales during Q197. The Company's significant
decrease in gross margin during Q198 was primarily attributable to a special
charge of $114.8 million to cost of sales, primarily for the write-off of
equipment and inventory associated with the phase-out of advanced inductive
technologies. Excluding this special charge, gross margin was 10.9% of net sales
during Q198.
The Company's decrease in gross margin during Q198, excluding the special charge
of $114.8 million, was primarily due to a product mix weighted towards HSAs and
a decrease in total unit sales in relation to fixed costs, partially offset by a
shift in product mix to MR HSAs, which have to date typically had higher ASPs
than inductive HSAs.
As indicated above, the Company expects that current unfavorable industry
conditions will continue for several quarters. Accordingly, the Company expects
that its net sales, gross margin and earnings (excluding the special charge of
$114.8 million) for Q298 will be below those reported for Q198.
For a discussion of certain risks associated with the Company's business, see
"Certain Additional Business Risks."
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $21.7 million during Q198, a
45.5% increase over R&D expenses of $14.9 million during Q197. The substantial
increase in R&D expenses in absolute dollars during Q198 was attributable to
increased development efforts in MR and emerging technologies to address the
disk drive industry's rapidly changing requirements.
From time to time, the Company has engaged in fully or partially funded R&D for
certain existing or potential customers. R&D funding under such projects was
offset as expenses were incurred. During Q198, approximately $1.9 million of
development funding was offset against R&D expenses. Funded R&D in Q197 was not
material.
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<PAGE> 12
The Company intends to continue increasing its R&D expenditures on an absolute
dollar basis in future periods. However, the level of R&D expenditures as a
percentage of net sales will vary from period to period depending on the level
of net sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses were $9.5 million during
Q198, a 11.7% decrease over SG&A expenses of $10.8 million during Q197. The
decrease in SG&A expenses during the period was due to continued cost
containment efforts.
The Company plans to continue its SG&A cost containment efforts, and thus does
not expect SG&A expenses to increase significantly in absolute dollars in the
near-term compared to the SG&A expenses during Q198, but anticipates SG&A
expenses will vary from year to year as a percentage of net sales, depending on
the level of net sales.
INTEREST EXPENSE
Interest expense was $7.3 million during Q198, compared to $3.6 million during
Q197. The increase in interest expense during Q198 was primarily due to the
significant increase in the average debt outstanding due to the Company's $345
million convertible subordinated debt financing in August 1997.
INTEREST INCOME AND OTHER, NET
Interest income and other, net was $0.5 million during Q198, compared to $2.1
million during Q197. The decrease in interest income and other, net was
primarily due to foreign exchange losses, partially offset by higher interest
income on higher average cash, cash equivalent and short-term investment
balances.
PROVISION FOR INCOME TAXES
The Company's 20% effective tax benefit rate for Q198 is based upon the expected
annual effective tax rate. The Company's effective tax rate for Q197 was 31%.
The lower effective tax benefit rate for fiscal 1998 compared to fiscal 1997 is
based on a different jurisdictional mix of profits and losses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash, cash equivalents and short-term
investments of $227.5 million, total assets of $1,150.1 million and total
long-term debt and capital leases, including the current portion, of $416.1
million. The Company's cash generated by operating activities was $5.7 million
during Q198, including non-cash charges of $105.5 million from depreciation and
amortization, which includes the special charge incurred during Q198. See Note 3
in "Notes to Consolidated Condensed Financial Statements."
The Company's business is highly capital intensive. During Q198, the Company
incurred capital expenditures of approximately $67.1 million. Capital
expenditures have primarily been made to expand production capacity in Thailand,
Malaysia and the Philippines, to expand wafer production in the United States
and Japan, and to support new manufacturing processes and new technologies, such
as MR and emerging technologies. In response to changing industry conditions,
the Company has reduced its plan for capital equipment purchases during fiscal
1998 from up to $300 million to approximately $200 million; however, to the
extent yields for the Company's products are lower than expected, demand for
products exceed Company expectations, or the Company's manufacturing process
requirements change significantly, such expenditures may increase. Conversely,
if demand is less than anticipated, or if the Company is unable to obtain
adequate financing for such capital equipment purchases, the planned capital
equipment purchases may decrease. As of December 31, 1997, total commitments for
construction or purchase of capital equipment were approximately $103 million.
The Company expects to fund such commitments from available cash and cash
equivalents, cash flows from operations and, if necessary, from available lines
of credit.
11
<PAGE> 13
In October 1997, the Company entered into a $200 million credit facility
("Credit Facility") with a syndicate of financial institutions. The four year
facility consists of a $50 million term loan and a $150 million revolving line
of credit, both unsecured. The term loan provides for quarterly principal
payments, beginning January 1999 and continuing through October 2001. The term
loan provides for interest payments which vary based on the London Interbank
Offered Rate ("LIBOR"), plus an applicable margin. Additionally, the terms of
the facility require the Company to maintain certain financial ratios, observe a
series of additional covenants, and prohibits the Company from paying dividends
without prior bank approval. As of December 31, 1997, the Company was not in
compliance with four covenants under the Credit Facility. On February 5, 1998,
the Company obtained the necessary amendments with respect to the Credit
Facility, and was thus in compliance with the revised covenants on such date. As
of December 31, 1997, the $50 million term loan was outstanding in full, and no
amounts were outstanding under the $150 million revolving line of credit.
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. Interest is paid semi-annually in March and
September. The Notes are subordinated in right of payment to all existing and
future senior debt of the Company and may be redeemed at the option of the
Company subsequent to September 2000. The Notes are convertible at any time at a
conversion rate of 24.8524 shares of the Company's common stock per $1,000
principal amount of Notes (equivalent to approximately $40.24 per share),
subject to adjustment. Upon a change in ownership control of the Company, the
holders of the Notes will have the right to require the Company to purchase all
or part of their Notes at 100% of the principal amount, plus accrued interest.
The repurchase price is payable in cash or, subject to certain requirements, in
shares of common stock. The Company used a portion of the funds received from
the Notes offering to refinance $100 million of 7.53% senior notes. As of
December 31, 1997 the entire $345 million represented by the Notes was
outstanding.
The Company believes that its current level of liquid assets, credit facilities,
and cash expected to be generated from operations will be sufficient to fund its
operations during fiscal 1998. However, if industry conditions worsen further or
current industry conditions continue longer than anticipated, the Company does
not consistently achieve timely customer qualifications on new product programs,
or the Company is unsuccessful at ramping up volume production on new products
at acceptable yields, the Company's working capital and other capital needs will
increase. Conversely, if industry demand increases significantly such that the
Company's capital requirements exceed management's current estimates, the
Company may again need to raise additional capital. The Company may seek such
capital through additional bank facilities, debt or equity offerings, or other
sources. Further, the Company may elect from time to time to seek additional
financing to the extent available. There can be no assurance, however, that any
such required financing will be available when needed on terms and conditions
acceptable or favorable to the Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The Credit Facility
currently prohibits payment of cash dividends.
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.
12
<PAGE> 14
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in its quarterly and annual
operating results in the past, and the Company's future operating results could
vary substantially from quarter to quarter. The Company's operating results for
a particular quarter or longer periods can be materially and adversely affected
by numerous factors, such as delayed product introductions, capacity constraints
on certain technologies, low product manufacturing yields, increased material
costs or material or equipment unavailability, disruptions in foreign
operations, decreased demand for or decreased average selling prices of the
Company's products, increased competition or execution issues leading to a
failure by the Company to obtain "design-in wins" on one or more customer
programs, changes in product mix, increased operating costs associated with the
ramp up of production as capacity is added or under-utilization of capacity if
demand is less than anticipated. The Company's sales are generally made pursuant
to individual purchase orders which may be changed or canceled by customers on
short notice; often without material penalties. Changes or cancellations of
product orders could result in under-utilization of production capacity and
inventory write-offs. For example, during the first quarter of fiscal 1998,
during the second half of fiscal 1996, and in calendar 1993, the Company
experienced delays and cancellation of orders, reduced average selling prices,
inventory and equipment write-offs, increased unit costs due to
under-utilization of production capacity, and, as a consequence of the
foregoing, significantly reduced net sales, gross margin and earnings. Further,
as indicated above, the Company believes that the current difficult industry
conditions will continue for the next several quarters, and in the near term,
that net sales, gross margin and earnings for Q298 will be lower than those
reported for Q198 (excluding special charges).
COMPETITION
The disk drive industry is intensely competitive, both at the drive level and
the component level, and is characterized by short product life cycles and
substantial price declines over the useful life of a product. Accordingly, the
Company believes that the most important competitive factors in its industry are
timely delivery of new technologies and price for a given technology. Other
significant factors are customer support, product quality and the ability to
reach volume production rapidly. Failure to execute with respect to any of these
factors would likely have a material adverse effect on the Company's net sales
and gross margin.
Japanese competitors such as TDK/SAE, Yamaha and Alps have been aggressively
competing for business in the United States and in Japan, targeting the MR
marketplace in particular. The Company's primary domestic competitors are
International Business Machines Corporation ("IBM"), Applied Magnetics
Corporation ("AMC"), and Seagate Technology, Inc. ("Seagate"). IBM, Seagate,
Quantum and other disk drive manufacturers with "captive" or internal recording
head manufacturing capability generally have significantly greater financial,
technical and marketing resources than the Company, and have made or may make
their products available in the merchant market. Other MR suppliers include
Headway Technologies, Sony, Hitachi Metals, Toshiba and Sanyo. The Company's
competitive position could be materially and adversely affected if one or more
of these competitors is successful in marketing advanced MR products in the
merchant market in volume quantities at competitive pricing.
In its HSA business, the Company must compete against certain of its customers'
internal HSA capacity, as well as against other merchant HSA manufacturers such
as TDK/SAE, AMC, Tandon, Kabool and Kaifa. The HSA business is less capital
intensive than the thin film HGA business, thus entry into the HSA manufacturing
business requires less capital than entry into the thin film HGA business.
Accordingly, there can be no assurance that the Company will be able to compete
successfully with its customers' own HSA capacity, or with existing or new HSA
manufacturers.
Finally, new technologies, including extensions of existing thin film head
technology such as contact, near contact, pico, spin valve, or giant MR heads,
which the Company is currently developing, may compete in the future with the
Company's current head technologies and may support areal density capabilities
significantly greater than those of the Company's thin film inductive and MR
heads now in commercial production. Additionally, other manufacturers may
already have or may develop, more advanced MR technology or MR production
capability than the Company. For example, in a published announcement during
November 1997, Sony, TDK, Yamaha, Alps, Toshiba and IBM have begun preparing or
expanding their manufacturing operations to make GMR heads. Also, certain
companies are developing alternative data storage technologies, such as
solid-state (flash or terroelectric) memory, optical disk drives or extensions
of MIG technologies, which do not utilize the Company's products. The Company's
competitive position may be materially and adversely affected if a competitor
precedes the Company in the successful introduction of improved or new
technologies or products.
13
<PAGE> 15
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; RISK OF REDUCED ORDERS
The Company is a component supplier dependent upon a limited number of customers
in a volatile industry characterized by rapid technological change, short
product life cycles, intense competition and steady price erosion. In addition,
demand for the Company's products is highly variable and thus difficult to
predict accurately. This variability was demonstrated by strong demand in the
first half of fiscal 1993 and the significant industry contraction in the latter
half of fiscal 1993, during the second half of fiscal 1996 when significant
orders were canceled and/or rescheduled by certain customers with little or no
advanced warning, and late in Q198 as the Company significantly reduced its
build plan for its advanced inductive thin film 1.3GB per 3.5 inch disk
recording head product due to a significant and abrupt reduction in demand for
this product. In each case, these demand variations materially and adversely
affected the Company's business, financial condition and results of operations.
The Company's three largest customers accounted for approximately 81% of net
sales during Q198. The Company produced HGAs in volume for 7 customers, HSAs in
volume for 4 customers and tape drive products in volume for 5 customers during
Q198. 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 will continue to be dependent upon a limited number of customers. As
demonstrated by reductions in orders for advanced inductive products in the
first quarter of fiscal 1998, the significant reduction in the level of the
Company's business late in fiscal 1996 and in the second half of fiscal 1993,
the loss of any large customer, or a significant decrease in orders from one or
more large customers, has a material adverse effect on the Company's business,
financial condition and results of operations. Further, the unexpected November
10, 1997 announcement of Singapore Technologies' decision to liquidate
Micropolis resulted in post-closing charges of $12.2 million to SG&A expense and
$2.6 million to cost of sales during the fourth quarter of fiscal 1997 to
establish reserves and write-offs for Micropolis-related accounts receivable,
inventory and equipment exposures. At the time of the announced Micropolis
bankruptcy, the Company expected Micropolis to account for approximately 1.5% of
the Company's net sales during the first quarter of fiscal 1998.
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 AMC during fiscal 1995, completed the acquisition of Conner Peripherals, Inc.
(then a major customer of the Company) during fiscal 1996, and completed the
acquisition of Quinta Corporation, the Company's partner and sole customer for
its magneto-optical head development effort, during August 1997. Seagate has
significant internal disk and tape head manufacturing capacity and does not
presently account for a material percentage of the Company's net sales. Further,
Hyundai completed its acquisition of Maxtor during fiscal 1996. While the
Company has remained a supplier to Maxtor notwithstanding this change in
ownership, there can be no assurance that Maxtor will continue purchasing a
significant quantity of its head requirements from the Company or that Hyundai
will continue to fund Maxtor if necessary.
Vertical integration by the Company's customers, through which a customer
acquires or increases internal HGA or HSA production capability, could also
materially and adversely affect the Company's business, financial condition and
results of operations. In 1994, Quantum, a principal customer of the Company
with no previous magnetic recording head capacity, acquired Digital Equipment
Corporation's recording head and disk drive operations. In May 1997, Quantum
further announced the formation of a joint venture with its primary
manufacturing partner in Japan, MKE, to manufacture MR recording heads for rigid
disk drives. According to the announcement, this new venture took over Quantum's
existing recording head operations and is owned 51% by MKE. Though the Company
believes the primary reasons for its loss of Quantum's business are external
competition and Company execution, it cannot assess accurately the effect the
Quantum/MKE joint venture has had or will have on the Company's head operations,
and there can be no assurance that the Company will successfully regain market
share at Quantum in the near future, if at all. Other acquisitions or
significant transactions by the Company's customers leading to further
consolidation or vertical integration could also materially and adversely affect
the Company's business, financial condition and results of operations.
14
<PAGE> 16
RAPID TECHNOLOGICAL CHANGE; TRANSITION TO MR TECHNOLOGY
Technology changes rapidly in the Company's industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition and
results of operations. In November 1997, the Company responded to the disk drive
industry's continuing rapid shift to MR technology by accelerating
implementation of its existing strategies to transition fully to MR production
while reducing its build plan for its advanced inductive thin film 1.3GB per 3.5
inch disk recording head product due to a significant reduction in demand for
this product. As a result, the Company incurred a special charge in Q198 of
$114.8 million primarily for the write-off of equipment and inventory associated
with the phase-out of advanced inductive technologies. The Company's 1.3GB per
3.5 inch advanced inductive head products are Read-Rite's last generation
inductive products.
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, materially and adversely impacting the
Company's financial results for several subsequent quarters. In addition, during
the second quarter of fiscal 1996, the Company learned that to participate in
certain customer programs, the Company's products would have to incorporate a
technical feature which the Company called "undershoot reduction." Though the
Company began development of necessary processes for undershoot reduction in the
second quarter of fiscal 1996 and successfully reached volume production during
the fourth quarter of fiscal 1996, the significant start-up costs and delays in
new product introductions materially and adversely impacted both the Company's
net sales and gross margin during the second half of fiscal 1996.
During fiscal 1997, the Company's primary net sales were derived from thin film
inductive and MR products, which require substantial investments in product
development and manufacturing equipment and facilities to effectively extend the
performance of these products to compete with new products supporting higher
areal densities. To maintain its market position, the Company must continually
and timely improve its wafer fabrication, slider fabrication, HGA and HSA
technologies and facilities to meet industry demands, at competitive costs. As
the Company's customers continue to move towards fewer, larger programs, and as
competition for this increasingly limited number of large volume programs
continues to increase, the failure by the Company to execute on technologies
necessary to consistently obtain qualification on any of such volume programs
will have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company shipped 8.6 million MR heads for 25 disk drive products to 6
customers in Q198, accounting for approximately 46% of net sales during the
period. The Company intends to continue investing significant resources in MR
product development and manufacturing equipment to support the continued rapid
shift of its product mix to MR. There can be no assurance, however, that the
Company will be successful in timely and cost effectively developing and
manufacturing MR heads at acceptable manufacturing yields and as necessary to
achieve consistent design-in wins on new product programs.
SUBSTANTIAL CAPITAL EXPENDITURES AND WORKING CAPITAL NEEDS
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
15
<PAGE> 17
The Company has made substantial capital expenditures and installed significant
production capacity to support new technologies and increased demand for its
products. The Company made capital expenditures during fiscal 1997 of $272.8
million, compared to $265.8 million during fiscal 1996, and plans to spend
approximately $200 million during fiscal 1998. As of December 31, 1997, total
commitments for construction or purchase of capital equipment were approximately
$103 million. There can be no assurance that the Company's net sales will
increase sufficiently to absorb such additional costs, and that there will not
be periods, such as during the latter half of fiscal 1993, during fiscal 1996,
from Q497 to Q198 and the expected further decline in Q298, when net sales
declined or are expected to decline quarter to quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
INTERNATIONAL OPERATIONS
The Company's production process is also labor intensive. As a result, the
Company conducts substantially all of its HGA machining, assembly and test
operations, HSA assembly and tape head assembly operations offshore, and is thus
subject to the many risks associated with contracting with foreign vendors and
suppliers and with the ownership and operation of foreign manufacturing
facilities, including obtaining requisite governmental permits and approvals,
currency exchange fluctuations and restrictions, variable or higher tax rates,
expiration of tax holidays, political instability, changes in government
policies relating to foreign investment and operations, cultural issues, labor
problems, trade restrictions, transportation delays and interruptions, and
changes in tariff and freight rates. The Company has from time to time
experienced labor organization activities at certain of its foreign operations,
most recently during the first quarter of fiscal 1997, but none of the Company's
employees are currently represented by a union. There can be no assurance,
however, that the Company will continue to be successful in avoiding work
stoppages or other labor issues in the future.
In addition, several Asian countries, including Japan, Malaysia, Thailand and
the Philippines, have recently experienced significant economic downturns and
significant declines in the value of their currencies relative to the U.S.
dollar. The Company enters into foreign currency forward and option contracts to
manage exposure related to certain foreign currency commitments, certain foreign
currency denominated balance sheet positions and anticipated foreign currency
denominated expenditures and substantially all of the Company's foreign sales
are denominated in U.S. dollars. The Company is unable to predict what effect,
if any, these factors will have on its ability to maintain or increase its sales
or to manufacture products in these markets, or what economic effects these
factors will have upon general economic conditions, the drive industry, or the
Company's customers, and hence the Company.
COMPLEX MANUFACTURING PROCESSES
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss, and in some cases,
cause production to be suspended. Manufacturing yields for new products
initially tend to be lower 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 manufacturing yields, and as a result, material
variances between projected and actual manufacturing yields have a direct effect
on the Company's gross margin and profitability. The difficulty of forecasting
manufacturing yields accurately and maintaining cost competitiveness through
improving manufacturing yields will continue to be magnified by ever increasing
process complexity, and by the compression of product life cycles which requires
the Company to bring new products on line faster and for shorter periods while
maintaining acceptable manufacturing yields and quality, without, in many cases,
reaching the longer-term, high volume manufacturing conducive to higher
manufacturing yields and declining costs.
DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS
As a high technology company in a narrowly defined industry, the Company is
often dependent upon a limited number of suppliers and subcontractors, and in
some cases on single sources, for critical components or supplies. Limitation on
or interruption of the supply of certain components or supplies can severely and
adversely affect the Company's production and results of operations. The Company
has limited alternative sources of certain key materials such as wafer
substrates, photoresist, wires and suspensions and frequently must rely on a
single equipment supplier for a given equipment type due to lack of viable
alternatives or to insure process consistency. Accordingly, capacity
constraints, production failures 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.
16
<PAGE> 18
INVENTORY RISKS
Due to the cyclical nature of and rapid technological change in the hard disk
drive industry, the Company's inventory is subject to substantial risk. To
address these risks, the Company monitors its inventories on a periodic basis
and provides inventory write-downs intended to cover inventory risks. However,
given the Company's dependence on a few customers and a limited number of
product programs for each customer, the magnitude of the commitments the Company
must make to support its customers' programs and the Company's limited remedies
in the event of program cancellations, if a customer cancels or materially
reduces one or more product programs, or should a customer experience financial
difficulties, the Company may be required to take significant inventory charges
which, in turn, could materially and adversely affect the Company's business,
financial condition and results of operations. While the Company has taken
certain charges and provided inventory reserves, there can be no assurance that
the Company will not be required to take additional inventory write-downs in the
future due to the Company's inability to obtain necessary product
qualifications, or to further cancellations by customers.
The Company manufactures custom products for a limited number of customers.
Because its products are custom, the Company typically cannot shift raw
materials, work-in-process or finished goods from customer to customer, or from
one product program to another for a particular customer. However, to enable its
customers to get their products to market quickly and to address its customers'
demand requirements, the Company must invest substantial resources and make
significant materials commitments, often before obtaining formal customer
qualifications and generally before the market prospects for its customers'
products are clear. Moreover, given the rapid pace of technology advancement in
the disk drive industry, the disk drive products which do succeed have
unpredictable, and typically very short, life cycles. Finally, in response to
rapidly shifting business conditions, the Company's customers have generally
sought to limit their purchase order commitments to the Company, and certain
customers have on occasion canceled or materially modified outstanding purchase
orders with the Company without significant penalties. For example, the Company
experienced significant cancellations during the third quarter of fiscal 1993,
during the second half of fiscal 1996 and during Q198, as a result of which the
Company incurred charges for inventory obsolescence, which materially and
adversely affected the Company's operating results.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock is expected to continue to be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, general conditions in the disk drive and
computer industries, and other events or factors. In addition, stock markets
have experienced extreme price volatility in recent years. This volatility has
had a substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's Common Stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's Common Stock.
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 - January
22, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. On May 20, 1997, the
Superior Court entered an order (1) sustaining the demurrers of certain
defendants to the California Corporations Code cause of action, and overruling
the demurrers of Read-Rite and certain other defendants to that same cause of
action; and (2) sustaining the demurrers of all defendants as to the remaining
causes of action.
On January 17, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On January 21, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Edward McDaid
against the Company and certain of its officers and directors (the "McDaid
Federal Action"). The McDaid Federal Action alleges that defendants made false
and misleading statements about the Company's business condition and prospects
during a purported class period of July 19, 1995 - June 19, 1996, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the McDaid Federal Action seek damages of
an unspecified amount. The Ferrari Federal Action and the McDaid Federal Action
were consolidated into one action by the court, In re Read-Rite Corp. Securities
Litigation (the "Consolidated Action").
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, 1996 - June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On December 22, 1997, the United States District Court for the Northern District
of California (1) dismissed the McDaid Federal Action; (2) consolidated the
Nevius Federal Action with the Consolidated Action; and (3) denied the motion of
the named plaintiffs in the Nevius Federal Action to be appointed lead
plaintiffs and to have their counsel appointed lead counsel. Plaintiffs in the
Consolidated Action have filed an amended and consolidated complaint. The
Company and the individual defendants intend to file a motion to dismiss the
amended and consolidated complaint.
There has been no discovery to date in the federal actions and no trial is
presently scheduled in any of these actions. The Company believes it has
meritorious defenses in all of these actions, and intends to defend each of them
vigorously.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions. Accordingly, both on its
own behalf and pursuant to indemnification agreements between the Company and
the named individual defendants, the Company intends to continue to defend each
of these actions vigorously. Failure by the Company to obtain a favorable
resolution of the claims set forth in any of these actions could, however, have
a material adverse effect on the Company's business, results of operations and
financial condition. Currently, the amount of such material adverse effect
cannot be reasonably estimated.
Except as so noted, the Company is not a party, nor is its property subject, to
any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
18
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.55 First Amendment to Credit Agreement between the Company, the
financial institutions named therein, and Canadian Imperial Bank
of Commerce as agent and designated issuer, dated
February 5, 1998
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1997.
19
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 6, 1998 /s/ John T. Kurtzweil
----------------------
John T. Kurtzweil
Vice President, Finance and
Chief Financial Officer
20
<PAGE> 22
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- -------------- ---------------------------------------------------------- --------
<S> <C> <C>
10.55 First Amendment to Credit Agreement between the Company, 22
the financial institutions named therein, and Canadian
Imperial Bank of Commerce as agent and designated issuer,
dated February 5, 1998
27 Financial Data Schedule (electronic filing only) 30
</TABLE>
<PAGE> 1
EXHIBIT 10.55
READ-RITE CORPORATION
FIRST AMENDMENT
TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
dated as of February 5, 1998 and entered into among Read-Rite Corporation, a
Delaware corporation (the "Borrower"), the financial institutions named on the
signature pages hereof (each a "Bank" and collectively the "Banks"), Canadian
Imperial Bank of Commerce, New York Agency as agent for the Banks (the "Agent")
and issuer of Letters of Credit (the "Designated Issuer") and is made with
reference to that certain Credit Agreement dated as of October 2, 1997 (the
"Credit Agreement"), among the Borrower, the Banks, the Designated Issuer and
the Agent. Capitalized terms used herein without definition shall have the same
meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower has requested that the Banks consent to the
amendment of certain financial covenants and other provisions set forth in
Credit Agreement.
NOW, THEREFORE, in consideration of the promises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
A. The definition of "Applicable Margin" in Section 1.01 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"Applicable Margin":
(i) With respect to the initial Pricing Period, means 0.500%;
(ii) With respect to the second Pricing Period, means 1.00%;
(iii) With respect to the third and any subsequent Pricing
Periods, means the higher of the ratio determined in accordance with (I) the
ratio of Senior Debt to Total Capitalization determined in accordance with the
correlative pricing grid set forth below and (II) EBIT for such Pricing Period
determined in accordance with the correlative pricing grid set forth below.
I. Senior Debt to Total Capitalization Ratio Pricing Grid
<TABLE>
<CAPTION>
Ratio of Senior Debt
to Total Capitalization Applicable Margin
--------------------- ----------------
<S> <C>
Greater than 0.3:1.0 0.750%
Greater than 0.2:1.0 but less than or equal to 0.3:1.0 0.500%
Less than or equal to 0.2:1.0 0.375%
</TABLE>
For the purposes of determining the Applicable Margin in accordance with this
pricing grid, Senior Debt and Total Capitalization shall be determined based on
the financial statements and reports for the last fiscal quarter ending at least
forty days prior to the commencement of the relevant Pricing Period as delivered
pursuant to Section 6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower
shall fail to deliver to the Agent the relevant financial statements and reports
for
1
<PAGE> 2
any fiscal quarter prior to the commencement of a Pricing Period, the Applicable
Margin for such Pricing Period shall be deemed to be at the highest rate;
II. EBIT Pricing Grid
<TABLE>
<CAPTION>
EBIT Applicable Margin
---- -----------------
<S> <C>
If negative 1.000%
Greater than 0 but less than
or equal to $10,000,000 0.750%
Greater than $10,000,000 0.500%
</TABLE>
For the purposes of determining the Applicable Margin in accordance with this
pricing grid, EBIT shall be determined based on the financial statements and
reports for the last fiscal quarter ending at least forty days prior to the
commencement of the relevant Pricing Period as delivered pursuant to Section
6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower shall fail to deliver
to the Agent the relevant financial statements and reports for any fiscal
quarter prior to the commencement of a Pricing Period, the Applicable Margin for
such Pricing Period shall be deemed to be at the highest rate.
B. The definition of "Commitment Fee Percentage" in Section
1.01 of the Credit Agreement is hereby amended to read in its entirety as
follows:
"Commitment Fee Percentage":
(i) With respect to the initial Pricing Period, means 0.200%;
(ii) With respect to the second Pricing Period, means 0.250%;
(iii) With respect to the third and any subsequent Pricing
Period, means the higher of the rates determined in accordance with (I) the
ratio of Senior Debt to Total Capitalization determined in accordance with the
correlative pricing grid set forth below and (II) EBIT for such Pricing Period
determined in accordance with the correlative pricing grid set forth below:
I. Senior Debt to Total Capitalization Ratio Pricing Grid
<TABLE>
<CAPTION>
Ratio of Senior Debt Commitment
to Total Capitalization Fee Percentage
--------------------- ----------------
<S> <C>
Greater than 0.3:1.0 0.250%
Greater than 0.2:1.0 but less than or equal to 0.3:1.0 0.200%
Less than or equal to 0.2:1.0 0.150%
</TABLE>
For the purposes of determining the Commitment Fee Percentage in accordance with
this pricing grid, Senior Debt and Total Capitalization shall be determined
based on the financial statements and reports for the last fiscal quarter ending
at least forty days prior to the commencement of the relevant Pricing Period as
delivered pursuant to Section 6.01(a)(i) or 6.01(a)(ii); provided that if the
Borrower shall fail to deliver to the Agent the relevant financial statements
and reports for any fiscal quarter prior to the commencement of a Pricing
Period, the Commitment Fee Percentage for such Pricing Period shall be deemed to
be at the highest rate.
2
<PAGE> 3
II. EBIT Pricing Grid
<TABLE>
<CAPTION>
Commitment
EBIT Fee Percentage
---- --------------
<S> <C>
If negative 0.250%
If greater than or equal to 0 0.200%
</TABLE>
For the purposes of determining the Applicable Margin in accordance with this
pricing grid, EBIT shall be determined based on the financial statements and
reports for the last fiscal quarter ending at least forty days prior to the
commencement of the relevant Pricing Period as delivered pursuant to Section
6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower shall fail to deliver
to the Agent the relevant financial statements and reports for any fiscal
quarter prior to the commencement of a Pricing Period, the Applicable Margin for
such Pricing Period shall be deemed to be at the highest rate.
C. The definition of "EBIT" in Section 1.01 of the Credit
Agreement is hereby amended to read in its entirety as follows:
"EBIT": For any period, the sum of the following amounts for the
Borrower for such period on a consolidated basis determined in accordance with
GAAP: (i) Consolidated Net Income plus (ii) provisions for income taxes plus
(iii) Consolidated Interest Expense.
D. The definition of "Pricing Period" in Section 1.01 of the
Credit Agreement is hereby amended to read as follows:
"Pricing Period": The initial Pricing Period applicable to the Loans and
Letters of Credit shall commence on October 2, 1997 and shall continue through
the day (whether or not a Business Day) preceding the date of the First
Amendment Agreement and the second Pricing Period shall commence on the date of
the First Amendment Agreement and shall continue through February 28, 1998.
Thereafter the Pricing Periods shall be determined as follows:
(a) March 1 through May 31 of each calendar year
(b) June 1 through August 31 of each calendar year
(c) September 1 through December 31 of each calendar year
(d) January 1 through the last day of February of each calendar year
E. Section 1.01 of the Credit Agreement is amended by adding to
the definitions, in its appropriate alphabetic order, the following additional
definition:
"First Amendment Agreement": That certain First Amendment to Credit
Agreement dated as of February 11, 1998 among the Borrower, the Banks, the
Designated Issuer and the Agent.
F. Section 5.01(e) of the Credit Agreement is hereby amended by
substituting the following sentence for the last sentence of such subsection:
Since December 28, 1997 there has been no Material Adverse
Effect.
G. Subsections 6.02(a) through 6.02(e) of the Credit Agreement
are hereby amended to read in their entirety as follows:
(a) Quick Ratio. Permit the ratio of Consolidated Quick
Assets to Consolidated Current Liabilities on the last day of each of the fiscal
quarters of the Borrower (i) ending in June 1997 and September 1997 to be less
than 0.85 to 1.00 and (ii) ending in December 1997 and thereafter to be less
than 1.00 to 1.00.
(b) Consolidated Tangible Net Worth. Permit Consolidated
Tangible Net Worth at any time to be less than $375,000,000 plus (i) 80% of
Consolidated Net Income (but not loss) for each fiscal quarter of the Borrower
commencing with the quarter beginning on or about June 30, 1997 plus (ii) 100%
of the net increase in
3
<PAGE> 4
Consolidated Tangible Net Worth occurring after June 30, 1997 resulting from the
issuance of equity securities of the Borrower (other than pursuant to any
employee stock purchase plan or employee stock option plan) after June 30, 1997,
plus (iii) Permitted Subordinated Debt.
(c) Senior Debt Ratio. Permit the ratio of Senior Debt
to Total Capitalization as at the last day of each fiscal quarter of the
Borrower, (i) ending in September 1997, to exceed 0.4 to 1.0, and (ii) ending in
December 1997 and thereafter, to exceed 0.25 to 1.00 except that if during any
fiscal quarter of the Borrower ending after December 1997 the Borrowers
quarterly EBIT equals or exceeds $10,000,000, then for such fiscal quarter and
all fiscal quarters thereafter such ratio shall not exceed 0.3 to 1.0.
(d) Interest Expense Coverage. Permit (x) for any fiscal
quarter (an "Interim Quarter") of the Borrower ending after December 1997 but
before March 1999 in which the Borrower's EBIT for such fiscal quarter equals or
exceeds $10,000,000, as at the last day of such Interim Quarter, and of each
fiscal quarter thereafter to but not including the fiscal quarter ending in
March 1999, permit the ratio of (i) EBIT for such quarter to (ii) Consolidated
Interest Expense for such quarter to be less than 1.0 to 1.0; and (y) for the
fiscal quarter of the Borrower ending in March 1999, as of the last day of such
fiscal quarter, the ratio of (i) EBIT for such quarter to (ii) Consolidated
Interest Expense for such quarter to be less than 2.0 to 1.0; and (z) as at the
last day of each fiscal quarter of the Borrower ending in June 1999 or
thereafter the ratio of (i) EBIT for the four fiscal quarters ending on such
date to (ii) Consolidated Interest Expense for the four fiscal quarters ending
on such date, to be less than 2.0 to 1.0.
(e) Minimum Profitability. Permit the Consolidated Net
Income of the Borrower for the fiscal quarter ending in March 1999, for the two
fiscal quarters ending in June 1999, for the three fiscal quarters ending in
September 1999, and for any period thereafter of four consecutive fiscal
quarters to be less than $1.00; provided that in no such fiscal quarter may any
Consolidated Net Income be a negative amount in excess of 5% of the Consolidated
Tangible Net Worth as of the end of the preceding fiscal quarter.
H. Section 6.02 of the Credit Agreement shall be amended by the
addition thereto, as subsection 6.02(p), the following additional covenant:
(p) Minimum Cash Balance. Permit the value of the
Borrower's cash and cash equivalents (as determined in
accordance with GAAP) to be less than $100,000,000 at
any time between January 27, 1998 and the earlier of (i)
the end of the Borrower's fiscal quarter ending in March
1999 and (ii) the date after January 1, 1998 on which
the Borrower's quarterly EBIT for the most recently
ended fiscal quarter equals or exceeds $10,000,000 (as
determined in accordance with the financial statements
delivered to the Agent under Section 6.01(a)).
SECTION 2. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of the first date (the "First
Amendment Date") on or before February 11, 1998 upon which the following
conditions have been satisfied:
(i) the Agent shall have received for each Bank counterparts
hereof duly executed on behalf of the Borrower, the Agent, and the Majority
Banks (or, in lieu of execution by the Majority Banks, notice of the approval of
this Amendment by the Majority Banks satisfactory to the Agent); and
(ii) the Agent shall have received a copy of a board resolution
of the Borrower in form and substance satisfactory to the Agent authorizing the
execution, delivery and performance of this Amendment certified by the Secretary
of the Borrower as being in full force and effect on the date hereof.
(iii) the Amendment Fee referred to in Section 4.C shall have
been paid, and all other fees and expenses payable by the Borrower hereunder
shall have been paid or provided for.
(iv) all the representations and warranties in Section 3 shall
be true and correct as of the date of this Amendment.
4
<PAGE> 5
(v) no Potential Event of Default or Event of Default shall
have occurred and be continuing on the date of this Amendment or will result
from the consummation of this Amendment (after giving effect to this Amendment)
except for those which would not have been a Potential Event of Default or Event
of Default if this Amendment had been in effect since October 2, 1997.
(vi) the Agent shall have received a certificate dated on or
after the date of this Agreement certifying that the conditions in clauses (iv)
and (v) have been met.
When and if this Amendment becomes effective, the amendments set forth in
Section 1 shall be deemed effective as of October 2, 1997.
SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Banks to enter into this Amendment
and to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to the Agent and each Bank that the following statements
are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "Amended Agreement").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of the Borrower.
C. NO CONFLICT. The execution and delivery by the Borrower of
this Amendment does not and will not contravene (i) any law or any governmental
rule or regulation applicable to the Borrower or any of its Subsidiaries, (ii)
the Certificate of Incorporation or Bylaws of the Borrower, (iii) any order,
judgment or decree of any court or other agency of government binding on the
Borrower or any of its Subsidiaries or (iv) any material agreement or instrument
binding on the Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by the
Borrower of this Amendment and the performance by the Borrower of the Amended
Agreement do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement
have been duly executed and delivered by the Borrower and are the binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except in each case as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors' rights.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Article V of the
Credit Agreement (as amended hereby) are and will be true, correct and complete
in all material respects on and as of the date of this Amendment to the same
extent as though made on and as of such date, except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they were true, correct and complete in all material respects on and as of
such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing
as of the date of this Amendment or will result from the consummation of the
transactions contemplated by this Amendment that would constitute an Event of
Default or a Potential Event of Default (as determined after giving effect to
the amendments made by this Amendment).
H. FINANCIAL CONDITION. The unaudited consolidated balance
sheet of the Borrower for the Borrower's fiscal quarter ended December 28, 1997
and the related consolidated statements of operations and cash flow of the
Borrower for the fiscal quarter then ended, which have been previously
circulated to the Banks, fairly present in all material respects the
consolidated financial condition of the Borrower as at such date and the
consolidated results of the
5
<PAGE> 6
operations of the Borrower for the period ended on such date, all in accordance
with GAAP, consistently applied, subject to year-end adjustments and the absence
of footnotes.
SECTION 4. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN AGREEMENTS.
(i) On and after the First Amendment Date, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import referring to the Credit Agreement, and each reference in
the other Loan Agreements to the "Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement shall mean and be a
reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Agreements shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the Agent
or any Bank under, the Credit Agreement or any of the other Loan Agreements nor
to create any course of dealing or otherwise obligate the Agent or the Banks to
forebear or execute similar amendments or any waiver in similar circumstances in
the future.
B. COSTS AND EXPENSES. The Company covenants to pay to or
reimburse the Agent, upon demand, for all costs and expenses (including
allocated costs of in-house counsel) incurred in connection with the
development, preparation, negotiation, execution and delivery of this Amendment
and the documents and transactions contemplated hereby.
C. AMENDMENT FEE. The Company hereby agrees to pay to the Agent
on or before the First Amendment Date, for the ratable benefit of those Banks
who agree to this Amendment (as evidenced by their return of a signed signature
page to Agent or Agent's counsel) on or before February 5, 1998, an amendment
fee (the "Amendment Fee") of $100,000. The Amendment Fee shall be paid to the
Agent in immediately available funds and shall be non-refundable. The Amendment
Fee is in addition to any fees, costs, expenses or other amounts otherwise
payable pursuant to this Amendment, the Credit Agreement or the Amended
Agreement.
D. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
E. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
F. COUNTERPARTS. This Amendment may be executed in any number
of counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Agent of a facsimile transmitted document purportedly
bearing the signature of a Bank or the Borrower shall bind such Bank or the
Borrower, respectively, with the same force and effect as the delivery of a hard
copy original. Any failure by the Agent to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document of the party whose
hard copy page was not received by the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first written above.
6
<PAGE> 7
BORROWER:
READ-RITE CORPORATION
By: /s/ John Kurtweil
-----------------------------------
Title: Vice President, Finance and CFO
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE,
NEW YORK AGENCY, as Agent
By: /s/ Timothy Doyle
------------------------------------
Title: Managing Director
---------------------------------
BANKS
CIBC, INC.
By: /s/ Timothy Doyle
------------------------------------
Title: Managing Director
---------------------------------
ABN AMRO BANK N.V.
By:
------------------------------------
Title:
---------------------------------
By:
------------------------------------
Title:
---------------------------------
FLEET NATIONAL BANK
By: /s/ Matthew Glauninger
------------------------------------
Title: Vice President
---------------------------------
THE LONG TERM CREDIT BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY
By: /s/ Teiji Sakata
------------------------------------
Title: Joint General Manager
---------------------------------
MELLON BANK
By: /s/ Michael Rogers
------------------------------------
Title: Vice President
---------------------------------
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By: /s/ Yasushi Satomi
------------------------------------
Title: Senior Vice President
---------------------------------
THE SUMITOMO BANK LIMITED, SAN FRANCISCO
BRANCH
By:
------------------------------------
Title:
---------------------------------
7
<PAGE> 8
THE INDUSTRIAL BANK OF JAPAN LIMITED,
SAN FRANCISCO AGENCY
By: /s/ Haruhiko Masuda
------------------------------------
Title: Deputy General Manager
---------------------------------
BANKBOSTON, N.A.
By: /s/ Kevin F. Malone
------------------------------------
Title: Division Executive
---------------------------------
BANQUE NATIONALE DE PARIS
By: /s/ Rafael C. Lumanlan
------------------------------------
Title: Vice President
---------------------------------
By: /s/ William J. LaHerran
------------------------------------
Title: Vice President
---------------------------------
ROYAL BANK OF CANADA
By:
------------------------------------
Title:
---------------------------------
WELLS FARGO BANK, N.A.
By: /s/ Gus Martin
------------------------------------
Title: Vice President
---------------------------------
THE DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF COMMERCE,
NEW YORK AGENCY
By: /s/ Timothy Doyle
------------------------------------
Title: Managing Director
---------------------------------
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT DECEMBER 31, 1997 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 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-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 81,458
<SECURITIES> 146,077
<RECEIVABLES> 131,858
<ALLOWANCES> 0
<INVENTORY> 81,431
<CURRENT-ASSETS> 458,458
<PP&E> 1,152,901
<DEPRECIATION> 507,303
<TOTAL-ASSETS> 1,150,063
<CURRENT-LIABILITIES> 211,038
<BONDS> 403,085
0
0
<COMMON> 5
<OTHER-SE> 457,013
<TOTAL-LIABILITY-AND-EQUITY> 1,150,063
<SALES> 261,371
<TOTAL-REVENUES> 261,371
<CGS> 347,138
<TOTAL-COSTS> 347,138
<OTHER-EXPENSES> 22,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,299
<INCOME-PRETAX> (115,698)
<INCOME-TAX> (24,769)
<INCOME-CONTINUING> (90,929)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (90,929)
<EPS-PRIMARY> (1.88)
<EPS-DILUTED> (1.88)
</TABLE>
