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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 March 31, 1998
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 April 30, 1998, 48,699,042 shares of the registrant's common stock were
issued and outstanding.
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<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- ----------------------------------------------------- --------
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - 2
Three Months and Six Months Ended March 31, 1998
and 1997
Consolidated Condensed Balance Sheets - 3
March 31, 1998 and September 30, 1997
Consolidated Condensed Statements of Cash Flows - 4
Six Months Ended March 31, 1998 and 1997
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 19
Item 4. Submission of Matters to a Vote of Stockholders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
INDEX OF EXHIBITS 22
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 187,072 $ 282,068 $ 448,443 $ 533,656
Cost of sales 217,486 219,688 564,624 435,462
--------- --------- --------- ---------
Gross margin (30,414) 62,380 (116,181) 98,194
Operating expenses:
Research and development 23,906 15,691 45,637 30,629
Selling, general and administrative 9,234 10,370 18,730 21,123
--------- --------- --------- ---------
Total operating expenses 33,140 26,061 64,367 51,752
--------- --------- --------- ---------
Operating income (loss) (63,554) 36,319 (180,548) 46,442
Interest expense 7,666 3,434 14,965 7,062
Interest income and other, net 1,256 2,885 1,706 4,998
--------- --------- --------- ---------
Income (loss) before provision for
income taxes and minority interest (69,964) 35,770 (193,807) 44,378
Provision (benefit) for income taxes 50 8,428 (24,719) 11,096
--------- --------- --------- ---------
Income (loss) before minority interest (70,014) 27,342 (169,088) 33,282
Minority interest in net income (loss) of
consolidated subsidiary (7,843) 3,787 (15,988) 3,940
--------- --------- --------- ---------
Net income (loss) $ (62,171) $ 23,555 $(153,100) $ 29,342
========= ========= ========= =========
Basic earnings (loss) per share $ (1.29) $ 0.50 $ (3.17) $ 0.62
========= ========= ========= =========
Diluted earnings (loss) per share $ (1.29) $ 0.48 $ (3.17) $ 0.61
========= ========= ========= =========
Shares used in basic earnings (loss)
per share calculation 48,323 47,203 48,305 47,089
========= ========= ========= =========
Shares used in diluted earnings (loss)
per share calculation 48,323 48,816 48,305 48,457
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
<PAGE> 4
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997 (a)
---------- ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 104,979 $ 118,589
Short-term investments 64,370 179,508
Accounts receivable, net 119,419 173,335
Inventories 61,288 91,487
Prepaid expenses and other current assets 20,887 20,375
---------- ----------
Total current assets 370,943 583,294
Property, plant and equipment 1,217,432 1,091,442
Less: accumulated depreciation 545,492 418,629
---------- ----------
Property, plant and equipment, net 671,940 672,813
Intangible and other assets 36,977 45,374
---------- ----------
Total assets $1,079,860 $1,301,481
========== ==========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103,967 $ 122,379
Accrued compensation and benefits 32,667 37,558
Income taxes payable 26,653 26,071
Other accrued liabilities 39,730 41,499
Current portion of long-term debt and capital lease
obligations 12,193 12,602
---------- ----------
Total current liabilities 215,210 240,109
Convertible subordinated notes 345,000 345,000
Other long-term debt and capital lease obligations 53,558 58,871
Other long-term liabilities 13,892 38,726
---------- ----------
Total liabilities 627,660 682,706
---------- ----------
Minority interest in consolidated subsidiary 57,134 73,122
---------- ----------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value -- --
Common Stock, $0.0001 par value 5 5
Additional paid-in capital 358,272 354,546
Retained earnings 36,789 191,102
---------- ----------
Total stockholders' equity 395,066 545,653
---------- ----------
Total liabilities, minority interest in consolidated
subsidiary and stockholders' equity $1,079,860 $1,301,481
========== ==========
</TABLE>
(a) The information in this column was derived from the Company's audited
consolidated balance sheet included on Form 10-K as of September 30, 1997.
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(153,100) $ 29,342
Adjustments required to reconcile net income (loss) to
cash provided by operations:
Depreciation and amortization 139,532 75,721
Minority interest in net income (loss) of consolidated
subsidiary (15,988) 3,940
Other, net (25,420) (2,887)
Changes in assets and liabilities:
Accounts receivable 53,916 (41,303)
Inventories 30,199 (9,846)
Prepaid expenses and other current assets (512) 851
Accounts payable, accrued liabilities and income
taxes payable (24,490) 31,620
--------- ---------
Net cash provided by operating activities 4,137 87,438
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (125,990) (114,839)
Maturities of available-for-sale investments 258,919 251,260
Purchase of available-for-sale investments (143,781) (216,615)
Other assets and liabilities, net (4,387) (2,291)
--------- ---------
Net cash used in investing activities (15,239) (82,485)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of other long-term debt and capital lease (5,722) (6,000)
Proceeds from issuance of common stock 3,214 6,891
--------- ---------
Net cash (used in) provided by financing activities (2,508) 891
--------- ---------
Effect of foreign currency exchange rate changes on cash -- 6,750
--------- ---------
Net (decrease) increase in cash and cash equivalents (13,610) 12,594
Cash and cash equivalents at beginning of period 118,589 82,291
--------- ---------
Cash and cash equivalents at end of period $ 104,979 $ 94,885
========= =========
Supplemental disclosures of non-cash activities:
Issuance of common stock under 401(k) plan $ 512 $ 324
Supplemental disclosures of cash flow information:
Interest paid during the period $ 14,227 $ 7,438
Income taxes paid during the period $ 376 $ 10,436
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
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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 second quarters of fiscal 1998 and 1997 ended on March 29,
1998 and March 30, 1997, 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 (including all normal recurring
adjustments) considered necessary for a fair presentation of the interim periods
presented have been included. The three month period ended December 31, 1997
included 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. 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>
MARCH 31, SEPTEMBER 30,
1998 1997
------- -------
<S> <C> <C>
Raw material $13,519 $13,097
Work-in-process 36,255 73,280
Finished goods 11,514 5,110
======= =======
Total inventories $61,288 $91,487
======= =======
</TABLE>
NOTE 3. SPECIAL CHARGE
During the three month period 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. EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
exclude any dilutive effects of options and convertible securities. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the SFAS 128
requirements.
For the periods in which the Company had net income, basic earnings per share
was based on the weighted average number of shares of common stock outstanding
during the period. For the same periods, diluted earnings per share further
included the effect of stock options outstanding during the period. For the
periods in which the Company had a net loss, the net loss per share
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was computed using only the weighted average number of shares of common stock
outstanding during the period.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ---------------------------
1998 1997 1998 1997
-------- ------- --------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS)
PER SHARE
Net income (loss) $(62,171) $23,555 $(153,100) $29,342
======== ======= ========= =======
Weighted average common shares
outstanding 48,323 47,203 48,305 47,089
======== ======= ========= =======
Basic earnings (loss) per share $ (1.29) $ 0.50 $ (3.17) $ 0.62
======== ======= ========= =======
DILUTED EARNINGS (LOSS)
PER SHARE
Net income (loss) $(62,171) $23,555 $(153,100) $29,342
======== ======= ========= =======
Weighted average common shares outstanding 48,323 47,203 48,305 47,089
Common equivalent shares issuable under
dilutive stock options after applying
treasury stock method, net of tax benefit -- 1,613 -- 1,368
-------- ------- --------- -------
Common and common equivalent shares used in
computing diluted earnings (loss) per share 48,323 48,816 48,305 48,457
======== ======= ========= =======
Diluted earnings (loss) per share $ (1.29) $ 0.48 $ (3.17) $ 0.61
======== ======= ========= =======
</TABLE>
Incremental common shares attributable to the conversion of convertible
subordinated debentures of 8,574,000 for the three and six months ended March
31, 1998 were not included in the diluted loss per share computation because the
effect would be antidilutive.
NOTE 5. 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 that 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 prohibit the Company from paying dividends
without prior bank approval. As of March 31, 1998, the Company was in compliance
with all covenants under the Credit Facility. The Company believes it will be in
compliance with all covenants under the Credit Facility for the upcoming
three-month period ended June 30, 1998. However, if the Company experiences a
significant unexpected decrease in forecasted sales
6
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orders, or experiences a significant unexpected increase in forecasted expenses,
the Company may need to seek amendments to maintain compliance with the
covenants of the Credit Facility; there can be no assurance, however, that the
Company will be successful in obtaining such amendments, if required. As of
March 31, 1998, the $50 million term loan was outstanding in full, and no
amounts were outstanding under the $150 million revolving line of credit.
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.
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.
The Ferrari Federal Action and the Nevius Federal Action were consolidated into
one action by the court, In re Read-Rite Corp. Securities Litigation (the
"Consolidated Action"). Plaintiffs in the Consolidated Action filed an amended
and consolidated complaint. On March 16, 1998, the Company and the individual
defendants filed a motion to dismiss the amended and consolidated complaint.
Oral argument on that motion is scheduled for June 23, 1998.
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. 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
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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 belief that it will be in compliance with the
covenants under the Credit Facility as of June 30, 1998; the Company's
expectation that the current unfavorable industry conditions will continue for
the remainder of fiscal 1998; the Company's expectation that net sales and gross
margin for fiscal 1998 will be significantly below those reported for fiscal
1997; the Company expectation that it will report a substantial net loss for
fiscal 1998; the Company's expectation that MR products will account for
approximately 90% of net sales for the three month period ended June 30, 1998;
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 in fiscal 1998 to approximately $180 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 for the next twelve months;
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; the Company may
fail to achieve its internal forecasts, resulting in potential noncompliance
with its covenants under the Credit Facility, and thereafter may be unable to
obtain necessary amendments of the Credit Facility to preserve compliance with
such covenants; 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 capital expenditures and 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
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RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
THREE AND SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE AND SIX MONTHS
ENDED MARCH 31, 1997
The following table sets forth certain financial data for the Company as a
percentage of net sales for the three months ended March 31:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 116.3 77.9 125.9 81.6
------- ------- ------- -------
Gross margin (16.3) 22.1 (25.9) 18.4
Operating expenses:
Research and development 12.8 5.6 10.2 5.7
Selling, general and administrative 4.9 3.6 4.2 4.0
------- ------- ------- -------
Total operating expenses 17.7 9.2 14.4 9.7
------- ------- ------- -------
Operating income (loss) (34.0) 12.9 (40.3) 8.7
Interest expense 4.1 1.2 3.3 1.3
Interest income and other, net 0.7 1.0 0.4 0.9
------- ------- ------- -------
Income (loss) before provision for
income taxes and minority interest (37.4) 12.7 (43.2) 8.3
Provision (benefit) for income taxes 0.0 3.0 (5.5) 2.1
------- ------- ------- -------
Income (loss) before minority interest (37.4) 9.7 (37.7) 6.2
Minority interest in net income (loss) of
consolidated subsidiary (4.2) 1.3 (3.6) 0.7
------- ------- ------- -------
Net income (loss) (33.2) 8.4 (34.1) 5.5
======= ======= ======= =======
</TABLE>
NET SALES
Net sales were $187.1 million and $448.4 million for the three and six month
periods ended March 31, 1998, respectively, a decrease from net sales of $282.1
million and $533.7 million for the comparable periods in fiscal 1997. Net sales
for the current periods were impacted by the rapid shift to MR technology and
abrupt phase-out of advanced inductive recording head products, as well as
product oversupply in the disk drive industry. These factors reduced customer
demand and significantly increased pricing competition in the recording head
manufacturing sector. Furthermore, net sales for the current periods were also
materially and adversely impacted by the Company's failure to achieve design-in
wins on certain customer programs.
During the six month period ended March 31, 1998, the Company continued
implementing its strategy to transition the substantial majority of its
production to MR recording head technology. Net sales generated from MR products
increased to $145.6 million and $265.7 million for the three and six month
periods ended March 31, 1998, respectively, from net sales of $75.3 million and
$119.5 million for the comparable periods in fiscal 1997. This increase in net
sales of MR products was more than offset, however, by the decrease in net sales
of inductive products. Net sales generated from inductive products decreased to
$41.5 million and $182.7 million for the three and six month periods ended March
31, 1998, respectively, from net sales of $206.1 million and $413.6 million for
the comparable periods in fiscal 1997. The Company expects MR products to
represent approximately 90% of net sales for the three month period ended June
30, 1998.
Read-Rite shipped 15.0 million and 37.4 million recording heads (including heads
shipped in headstack assemblies), and 3.3 million and 7.4 million headstack
assemblies ("HSAs"), for the
9
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three and six month periods ended March 31, 1998, respectively. In fiscal 1997,
the Company shipped 25.9 million and 48.7 million recording heads, and 3.3
million and 6.8 million HSAs, for the three and six month periods ended March
31, 1997. The Company's product mix continued to shift towards HSAs, as net
sales of HSAs accounted for 90% and 85% of net sales for the three and six-month
periods ended March 31, 1998, respectively, compared to 59% and 61% of net sales
for the comparable periods in fiscal 1997.
The Company's three largest customers accounted for 92% and 86% of net sales for
the three and six month periods ended March 31, 1998, respectively, compared to
82% and 81% of net sales for the comparable periods in fiscal 1997. The
Company's largest volume MR product platform for the current periods ended March
31, 1998 consisted of recording heads for the 2.1 Gigabyte ("GB") per 3.5-inch
disk applications, which were shipped to three major customers.
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 the unit average sales
price, 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 typically 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 on 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 (16.3%) and (25.9%) of net sales for the three
and six month periods ended March 31, 1998, compared to a gross margin of 22.1%
and 18.4% of net sales for the comparable periods in fiscal 1997. The Company's
significant decrease in gross margin during the three month period ended March
31, 1998 was primarily attributable to a decrease in total unit sales in
relation to fixed costs, a product mix heavily weighted towards HSAs, and lower
than expected manufacturing yields. The Company's significant decrease in gross
margin during the six month period ended March 31, 1998 was primarily
attributable to a special charge of $114.8 million to cost of sales for the
write-off of equipment and inventory associated with the phase-out of advanced
inductive technologies, a decrease in total unit sales in relation to fixed
costs, and a product mix heavily weighted towards HSAs.
The Company expects that current unfavorable industry conditions will continue
for the remainder of fiscal 1998. Accordingly, the Company expects that its net
sales and gross margin for fiscal 1998 will be significantly below those
reported for fiscal 1997. Additionally, the Company expects to report a
substantial net loss for fiscal 1998.
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 $23.9 million and $45.6 million
for the three and six month periods ended March 31, 1998, respectively, a
substantial increase over R&D
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expenses of $15.7 million and $30.6 million for the comparable periods in fiscal
1997. The increase in R&D expenses in absolute dollars for the current periods
was attributable to increased development efforts in MR, Giant MR ("GMR") 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 is
offset as expenses are incurred. During the three and six month periods ended
March 31, 1998, approximately $2.4 million and $4.3 million, respectively, of
development funding was offset against R&D expenses. Funded R&D for the three
and six month periods ended March 31, 1997 was immaterial.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses were $9.2 million and $18.7
million for the three and six month periods ended March 31, 1998, respectively,
a decrease from SG&A expenses of $10.4 million and $21.1 million for the
comparable periods in fiscal 1997. The decrease in SG&A expenses for the current
periods 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 SG&A expenses for the three and six-month periods ended
March 31, 1998.
INTEREST EXPENSE
Interest expense was $7.7 million and $15.0 million for the three and six month
periods ended March 31, 1998, respectively, an increase over interest expense of
$3.4 million and $7.1 million for the comparable periods in fiscal 1997. The
increase in interest expense for the current periods 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 $1.3 million and $1.7 million for the three
and six month periods ended March 31, 1998, compared to $2.9 million and $5.0
million for the comparable periods in fiscal 1997. The decrease in interest
income and other, net in the current periods was primarily due to foreign
exchange losses, compared to foreign exchange gains during the comparable
periods in fiscal 1997, partially offset by higher interest income on higher
average cash, cash equivalent and short-term investment balances.
PROVISION FOR INCOME TAXES
The Company's effective tax benefit rate of 12.75% for the six month period
ended March 31, 1998 was based upon the expected annual effective tax rate. The
Company's effective tax provision rate was 25% for the six month period ended
March 31, 1997. The decrease in the effective tax rate for fiscal 1998 compared
to fiscal 1997 was due to a different jurisdictional mix of profits and losses
as well as an increase in the valuation allowance related to the tax benefit of
certain foreign losses.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
As of March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $169.3 million, total assets of $1,079.9 million and total
long-term debt and capital leases, including the current portion, of $410.8
million. The Company's cash generated by operating activities was $4.1 million
during the six months ended March 31, 1998, including non-cash charges of $139.5
million from depreciation and amortization and special charges.
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<PAGE> 13
The Company's business is highly capital intensive. During the six months ended
March 31, 1998, the Company incurred capital expenditures of $126.0 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, GMR and emerging technologies. In response to changing
industry conditions, the Company reduced its plan for capital equipment
purchases during fiscal 1998 from up to $300 million to approximately $180
million. However, to the extent yields for the Company's products are lower than
expected, demand for products exceeds 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 March 31, 1998, total
commitments for construction or purchase of capital equipment were approximately
$55 million. The Company expects to fund such commitments from available cash
and cash equivalents, cash flows from operations and, if necessary, from
available credit facilities.
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 that 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 prohibit the Company from paying dividends
without prior bank approval. As of March 31, 1998, the Company was in compliance
with all covenants under the Credit Facility. The Company believes it will be in
compliance with all covenants under the Credit Facility for the upcoming
three-month period ended June 30, 1998. However, if the Company experiences a
significant unexpected decrease in forecasted sales orders, or experiences a
significant unexpected increase in forecasted expenses, the Company may need to
seek amendments to maintain compliance with the covenants of the Credit
facility; there can be no assurance, however, that the Company will be
successful in obtaining such amendments, if required. As of March 31, 1998, the
$50 million term loan was outstanding in full, and no amounts were outstanding
under the $150 million revolving line of credit.
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 twelve months. 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.
12
<PAGE> 14
CERTAIN ADDITIONAL BUSINESS RISKS
- --------------------------------------------------------------------------------
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in its quarterly and annual
operating results in the past, and the Company's future operating results could
vary substantially from quarter to quarter. The Company's operating results for
a particular quarter or longer periods can be materially and adversely affected
by numerous factors, such as delayed product introductions, capacity constraints
on certain technologies, low product manufacturing yields, increased material
costs or material or equipment unavailability, disruptions in foreign
operations, decreased demand for or decreased average selling prices of the
Company's products, increased competition or execution issues leading to a
failure by the Company to obtain "design-in wins" on one or more customer
programs, changes in product mix, and 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 that 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 first half of fiscal
1998, in 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 remainder of fiscal year 1998, and in the near
term, net sales and gross margin for fiscal 1998 will be lower than those
reported in fiscal 1997. Additionally, the Company expects to report a
substantial net loss for fiscal 1998.
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. For example, on May 4, 1998,
Western Digital Corporation ("WD") announced a letter of intent with IBM under
which, among other things, IBM would supply WD with GMR heads and other
components for WD's manufacture of desktop hard disk drives. Other MR suppliers
include Headway Technologies, Sony, Hitachi Metals and Toshiba. 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.
13
<PAGE> 15
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; entry into the HSA manufacturing
business thus 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 pico, spin valve, or 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 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, IBM,
TDK, Yamaha, Alps, Toshiba and Sony have begun expanding their manufacturing
operations to make GMR heads. 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 that 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.
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, in 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 the first quarter of fiscal 1998 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 92% of net
sales in the three month period ended March 31, 1998, during which the Company
produced HGAs in volume for 6 customers, HSAs in volume for 4 customers and tape
drive products in volume for 4 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 will continue to be dependent upon
a limited number of customers. As demonstrated by the significant reduction in
the level of the Company's business in the second quarter of fiscal 1998, late
in fiscal 1996 and in the second half of fiscal 1993, as well as the reduction
in orders for advanced inductive products and the bankruptcy filing by
Micropolis in the first quarter of fiscal 1998, 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 $14.6 million for 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,
consolidations, or other material agreements affecting such customers could also
have a material adverse effect on the Company's business, financial condition
and operating results. For example,
14
<PAGE> 16
Seagate, a competitor of the Company, acquired the tape head operations of AMC
in fiscal 1995, completed the acquisition of Conner Peripherals, Inc. (then a
major customer of the Company) in fiscal 1996, and completed the acquisition of
Quinta Corporation, the Company's partner and sole customer for its
magneto-optical head development effort, in 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 will have in the
future 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.
Finally, on May 4, 1998, WD and IBM announced a letter of intent for a hard disk
drive component supply and technology licensing agreement. The Company cannot
presently assess accurately the effect this agreement, if finalized, will have
on the Company's net sales to WD. There can be no assurance, however, that this
pending arrangement between WD and IBM will not have a material adverse effect
on the Company's ability to market products successfully to WD. Other
acquisitions or significant transactions by the Company's customers leading to
further consolidation, vertical integration or other material agreements could
also materially and adversely affect the Company's business, financial condition
and results of operations.
RAPID TECHNOLOGICAL CHANGE; TRANSITION TO MR TECHNOLOGY
Technology changes rapidly in the Company's industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition and
results of operations. 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 during the
first quarter of fiscal 1998 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 that 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
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<PAGE> 17
significant start-up costs and delays in new product introductions materially
and adversely impacted both the Company's net sales and gross margin in 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 10.6 million MR heads (including heads in HSAs), accounting
for 78% of net sales for the three month period ended March 31, 1998. The
Company intends to continue investing significant resources in MR product
development and manufacturing equipment to support the continued rapid shift of
its product mix to MR. There can be no assurance, however, that the Company will
be successful in timely and cost effectively developing and manufacturing MR
heads at acceptable manufacturing yields and as necessary to achieve consistent
design-in wins on new product programs.
SUBSTANTIAL CAPITAL EXPENDITURES AND WORKING CAPITAL NEEDS
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed significant
production capacity to support new technologies and increased demand for its
products. The Company made capital expenditures in fiscal 1997 of $272.8
million, compared to $265.8 million in fiscal 1996, and plans to spend
approximately $180 million in fiscal 1998. As of March 31, 1998, total
commitments for construction or purchase of capital equipment were approximately
$55 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, in fiscal 1996, and
the first half of fiscal 1998, when net sales declined 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
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<PAGE> 18
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.
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
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<PAGE> 19
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-built, 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 that 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 the first quarter of fiscal
1998, 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.
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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 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.
The Ferrari Federal Action and the Nevius Federal Action were consolidated into
one action by the court, In re Read-Rite Corp. Securities Litigation (the
"Consolidated Action"). Plaintiffs in the Consolidated Action filed an amended
and consolidated complaint. On March 16, 1998, the Company and the individual
defendants filed a motion to dismiss the amended and consolidated complaint.
Oral argument on that motion is scheduled for June 23, 1998.
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. 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.
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<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on February 24, 1998
at the Company's Fremont, California manufacturing facility. At the meeting,
48,310,293 shares were entitled to vote and 45,005,281 shares were presented in
person or represented by proxy.
(1) ELECTION OF THE BOARD OF DIRECTORS. A Board of Directors consisting of five
directors to serve for the ensuing year or until their successors are duly
elected and qualified. The following nominees for Board of Directors were
elected:
<TABLE>
<CAPTION>
NAME OF NOMINEE VOTES CAST FOR VOTES WITHHELD
------------------------------------------------------ -------------- --------------
<S> <C> <C>
Cyril J. Yansouni 44,480,630 524,651
John G. Linvill 44,445,732 559,549
William J. Almon 44,454,272 551,009
Michael L. Hackworth 44,478,799 526,482
Matthew J. O'Rourke 44,467,571 537,710
</TABLE>
(1) FIRST AMENDMENT OF THE 1995 STOCK PLAN. The First Amendment of the 1995
Stock Plan provided for an increase in the number of shares reserved for
issuance thereunder by 2,250,000 shares. The stockholders approved the
First Amendment of the 1995 Stock Plan with 37,808,296 voting in favor,
6,953,167 voting against and 243,818 abstaining.
(2) SECOND AMENDMENT OF THE 1995 STOCK PLAN. The Second Amendment of the 1995
Stock Plan provided for an increase in the number of shares that may be
granted to an employee in any one fiscal year from 250,000 shares to
500,000 shares, an increase in the number of shares that may be granted to
any employee upon initial employment from 250,000 shares to 500,000
shares, and to provide that an employee may be granted up to an additional
500,000 shares in any fiscal year (other than the first fiscal year of
employment) that the employee receives a promotion. The stockholders
approved the Second Amendment of the 1995 Stock Plan with 41,868,255
voting in favor, 2,847,573 voting against and 289,453 abstaining.
(3) AMENDMENT OF THE 1991 DIRECTOR OPTION PLAN. The Amendment of the 1991
Director Option Plan provided to increase the number of shares reserved for
issuance thereunder by 150,000 shares. The stockholders approved the
Amendment of the 1991 Director Option Plan with 42,356,401 voting in favor,
2,368,627 voting against and 280,253 abstaining.
(4) RATIFICATION OF INDEPENDENT AUDITORS. The Ratification of Independent
Auditors provides for the appointment of Ernst & Young LLP as independent
auditors for the Company for the 1998 fiscal year. The stockholders
approved the Ratification of Independent Auditors with 44,676,062 voting in
favor, 171,664 voting against and 157,555 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three month period ended
March 31, 1998.
20
<PAGE> 22
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 8, 1998 /s/ John T. Kurtzweil
----------------------------------------
John T. Kurtzweil
Vice President, Finance and
Chief Financial Officer
21
<PAGE> 23
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- --------------------------------------------------- --------
<S> <C> <C>
27.1 Financial Data Schedule (electronic filing only) 26
27.2 Financial Data Schedule (electronic filing only) 27
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT MARCH 31, 1998, SEPTEMBER 30, 1997, JUNE
30, 1997 AND MARCH 31, 1997 AND CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998, YEAR ENDED SEPTEMBER 30, 1997, NINE
MONTHS ENDED JUNE 30, 1997 AND SIX MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS 9-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996 OCT-01-1996 SEP-30-1996
<PERIOD-END> MAR-31-1998 SEP-30-1997<F1> JUN-30-1997<F1> MAR-31-1997<F1>
<CASH> 104,979 118,589 81,110 94,885
<SECURITIES> 64,370 179,508 36,809 31,227
<RECEIVABLES> 119,419 193,609 137,173 127,198
<ALLOWANCES> 0 14,887 0 0
<INVENTORY> 61,288 91,487 80,769 67,115
<CURRENT-ASSETS> 370,943 583,294 349,533 333,477
<PP&E> 1,217,432 1,091,442 1,019,850 937,902
<DEPRECIATION> 545,492 418,629 378,716 334,184
<TOTAL-ASSETS> 1,079,860 1,301,481 1,028,092 966,688
<CURRENT-LIABILITIES> 215,210 240,109 232,035 224,953
<BONDS> 398,558 403,871 164,986 166,096
0 0 0 0
0 0 0 0
<COMMON> 5 5 5 5
<OTHER-SE> 395,061 545,648 525,729 488,270
<TOTAL-LIABILITY-AND-EQUITY> 1,079,860 1,301,481 1,028,092 966,688
<SALES> 448,443 1,162,050 843,892 533,656
<TOTAL-REVENUES> 448,443 1,162,050 843,892 533,656
<CGS> 564,624 923,244 673,608 435,462
<TOTAL-COSTS> 564,624 923,244 673,608 435,462
<OTHER-EXPENSES> 46,679 117,617 77,348 50,694
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 14,965 15,699 10,631 7,062
<INCOME-PRETAX> (177,819) 105,490 81,705 40,438
<INCOME-TAX> (24,719) 29,311 21,190 11,096
<INCOME-CONTINUING> (153,100) 76,179 60,515 29,342
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (153,100) 76,179 60,515 29,342
<EPS-PRIMARY> (3.17) 1.61 1.28 0.62
<EPS-DILUTED> (3.17) 1.56 1.24 0.61
<FN>
<F1>AMENDED AND RESTATED
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT DECEMBER 31, 1996, SEPTEMBER 30, 1996,
JUNE 30, 1996 AND MARCH 31, 1996 AND CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996, YEAR ENDED SEPTEMBER
30, 1996, NINE MONTHS ENDED JUNE 30, 1996 AND SIX MONTHS ENDED MARCH 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS 9-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996 SEP-30-1996 SEP-30-1996
<PERIOD-START> SEP-30-1996 OCT-01-1995 OCT-01-1995 OCT-01-1995
<PERIOD-END> DEC-31-1996<F1> SEP-30-1996<F1> JUN-30-1996<F1> MAR-31-1996<F1>
<CASH> 63,836 82,291 152,987 95,241
<SECURITIES> 68,585 65,655 51,052 94,192
<RECEIVABLES> 109,806 92,728 111,253 149,539
<ALLOWANCES> 0 2,586 0 0
<INVENTORY> 51,039 58,005 82,527 79,512
<CURRENT-ASSETS> 307,299 310,055 412,322 432,105
<PP&E> 880,809 834,852 780,952 697,443
<DEPRECIATION> 299,786 267,558 222,616 195,361
<TOTAL-ASSETS> 916,868 906,672 1,003,837 967,527
<CURRENT-LIABILITIES> 202,256 196,096 222,730 214,950
<BONDS> 170,129 172,037 178,031 129,790
0 0 0 0
0 0 0 0
<COMMON> 5 5 5 5
<OTHER-SE> 460,843 458,794 517,629 538,517
<TOTAL-LIABILITY-AND-EQUITY> 918,868 908,672 1,003,837 967,527
<SALES> 251,588 991,118 795,711 557,430
<TOTAL-REVENUES> 251,588 991,118 795,711 557,430
<CGS> 215,774 887,464 658,231 431,319
<TOTAL-COSTS> 215,774 887,464 658,231 431,319
<OTHER-EXPENSES> 23,731 99,161 76,110 52,260
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 3,628 12,897 9,113 6,093
<INCOME-PRETAX> 8,455 (8,404) 52,257 67,758
<INCOME-TAX> 2,668 34,582 31,309 23,900
<INCOME-CONTINUING> 5,787 (42,986) 20,948 43,858
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 5,787 (42,986) 20,948 43,858
<EPS-PRIMARY> 0.12 (0.92) 0.45 0.94
<EPS-DILUTED> 0.12 (0.92) 0.44 0.91
<FN>
<F1>AMENDED AND RESTATED
</FN>
</TABLE>
