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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998*
COMMISSION FILE NUMBER: 0-19512
READ-RITE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 94-2770690
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 262-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
RIGHTS TO PURCHASE SERIES A PARTICIPATING PREFERRED STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing price as reported on the NASDAQ National
Market on November 30, 1998) was $655,424,020. Shares of voting stock held by
each officer and director and by each stockholder affiliated with a director
have been excluded from this calculation because such persons may be deemed to
be affiliates. This determination of officer or affiliate status is not
necessarily a conclusive determination for other purposes. The number of
outstanding shares of the Registrant's Common Stock as of November 30, 1998 was
49,030,236.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held February 25, 1999 are incorporated by reference into
Part III of this Form 10-K.
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* For purposes of this Form 10-K the Registrant has indicated its fiscal year as
ending on September 30th. The Registrant operates on a fifty-two/fifty-three
week fiscal year cycle ending on the Sunday closest to September 30th.
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FORWARD LOOKING INFORMATION
Certain statements in this Annual Report on Form 10-K for Read-Rite
Corporation ("Read-Rite" or the "Company") include forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These statements include, but
are not limited to, the Company's expectation that the trend towards increased
demand for higher performance disk drive products is expected to continue for
the foreseeable future; the Company's expectation that the trend toward fewer
average HGAs per HSA will continue; the Company's expectation that GMR products
will be sold in volume in fiscal 1999; the Company's expectation that HSA sales
will continue to represent greater than 85% of total net sales in fiscal 1999;
the Company's expectation that manufacturing cycle time will be further reduced
in fiscal 1999; the Company's plan that it will be a participant in the market
for recording heads for the sub $1,000 PC; the Company's expectation that MR
head manufacturing yields will increase during fiscal 1999; the Company's plan
to continue increasing its research and development expenditures; the Company's
expectation that selling, general and administrative expenses will not increase
significantly in the near-term; the Company's plan to spend between
approximately $125 million and $150 million on capital expenditures during
fiscal 1999; the Company's belief that its liquid assets, credit facilities and
cash generated from operations will be sufficient to fund its operations during
fiscal 1999; the Company's plan to have its critical internal systems be Year
2000 compliant by October 1, 1999, the first day of the Company's fiscal year
2000, and the Company's belief that the Company and the individual defendants in
the purported class actions (collectively, the "Actions") described in Part I,
Item 3 "Legal Proceedings," have meritorious defenses in such Actions. Actual
results for future periods could differ materially from those projected in such
forward-looking statements.
Some factors which could cause future actual results to materially differ
from the Company's recent results or those projected in the forward-looking
statements include, but are not limited to: failure to meet forecasted
expenditures; failure by the Company to timely, effectively and continuously
execute on MR and GMR product development; failure to establish efficient and
effective HSA operations in Thailand; failure to effectively transfer HSA
operations from Malaysia to Thailand and the Philippines; 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;
introduction of competitors' products more quickly or cost effective than the
Company; constraints on supplies of raw materials or components limiting the
Company's ability to maintain or increase production; significant increases or
decreases in demand for the Company's products, cancellation or rescheduling of
customer orders, changes to the Company's product mix, and changes in business
conditions affecting the Company's financial position or results of operations
which significantly increase the Company's working capital needs; the Company's
inability to obtain or generate sufficient capital to fund its research and
development expenses and other working capital needs; or failure by the Company
to obtain favorable resolution of the claims set forth in the Actions. For a
more detailed discussion of certain risks associated with the Company's
business, see "Certain Additional Business Risks." The Company undertakes no
obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of such statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") is one of the world's
largest independent suppliers of magnetic recording heads for rigid disk drives.
The Company operates in a single industry segment by designing, manufacturing
and marketing magnetic recording heads as head gimbal assemblies ("HGAs") and
incorporating multiple HGAs into headstack assemblies ("HSAs"). Read-Rite's
products are sold primarily for use in 3.5" form factor rigid disk drives. The
Company also supplies magnetoresistive ("MR") heads for quarter-inch cartridge
("QIC") tape drives.
During fiscal 1998, the Company supplied HGAs in volume for 24 different
disk drive products to 6 customers, and supplied HSAs in volume for 50 different
disk drive products to 4 customers. In comparison, during fiscal 1997, the
Company supplied HGAs in volume for 37 different disk drive products to 6
customers, and supplied HSAs in volume for 52 different disk drive products to 3
customers. During fiscal 1998, the Company sold approximately 68.2 million HGAs
(including HGAs incorporated into HSAs), and approximately 14.6 million HSAs.
HGAs and HSAs accounted for approximately 97% of the Company's net sales during
fiscal 1998.
Read-Rite also produces thin film MR tape heads for use in QIC tape drives
in the 1.6 gigabyte ("GB") to 4GB range per cartridge. During fiscal 1998, the
Company supplied QIC tape heads in volume for 8 different tape drive products to
6 customers. Tape heads accounted for approximately 2% of the Company's net
sales during fiscal 1998.
The Company's net sales to its largest customers during fiscal 1998 and
fiscal 1997 were as follows (as a percentage of net sales):
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CUSTOMERS 1998 1997
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Western Digital............................................. 49% 51%
Maxtor...................................................... 25% 13%
Samsung..................................................... 15% 5%
Quantum..................................................... 3% 18%
All Others.................................................. 8% 13%
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100% 100%
--- ---
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The Company's principal wafer manufacturing facility is located in Fremont,
California. The Company has its primary slider fabrication and HGA assembly
facilities in Bangkok, Thailand, and its primary HSA assembly facilities in
Manila, the Philippines and Bangkok, Thailand. The Company manufactures wafers
for tape heads at its Milpitas facility, and performs device fabrication,
assembly and test operations in the Philippines. Read-Rite SMI Corporation
("Read-Rite SMI"), the Company's joint venture in Japan with Sumitomo Metal
Industries, Ltd. ("Sumitomo"), operates a wafer manufacturing facility near
Osaka, Japan, and sells its wafers to the Company and to its Thailand
subsidiary, Read-Rite SMI (Thailand) Co., Ltd. ("RRST").
Read-Rite was incorporated in California in 1981 and reincorporated in
Delaware in 1985.
For a discussion of certain significant risk factors associated with the
Company's business, see "Certain Additional Business Risks."
COMPANY STRATEGY
Personal computer end-user demand and non-personal computer applications
such as network servers (intranet and internet), workstations, mainframes, video
on demand, voicemail and multimedia services are driving the computer industry's
demand for greater performance and higher data storage capacity. From fiscal
1994 to the end of fiscal 1996, the capacity for a single disk, 3.5" drive
increased from approximately
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270 megabytes ("MB") to greater than 1GB. From the beginning of fiscal 1997 to
the end of fiscal 1998, the capacity for a single disk, 3.5" drive increased
from 1GB to 4GB for desktop computers, which makes up the majority of the
recording head market. The rapid introduction of new, higher performance
products shortens product life cycles and places significant pricing pressure on
prior generation hard disk drives and drive components, including recording
heads. In addition, during fiscal 1998, the sub $1,000 PC market emerged. The
capacity for 3.5" drives in sub $1,000 PC's is typically less than that for
desktop computers due to the lower number of heads per drive typically found in
sub $1,000 PC's. The Company expects these trends to continue for the
foreseeable future.
To be competitive in this demanding environment, the Company must
collaborate closely with its customers as well as its media, channel electronics
and equipment suppliers to ensure critical development projects proceed in a
timely and coordinated manner. The Company must continually design new product
platforms to accommodate a broad range of customer requirements while
efficiently utilizing engineering efforts and minimizing manufacturing costs. In
addition, it is critical that the Company achieve continuous and timely
design-in qualifications to become the primary supplier for customer programs.
Although disk drive manufacturers commonly qualify more than one supplier, early
design-in wins are important in order to become the primary supplier. Given
shorter and shorter product life cycles, it is critical to work towards becoming
a primary supplier on customer programs.
In fiscal 1998, the Company focused substantial time and resources on
improving the flow of product throughout the Company's manufacturing process.
From the Company's wafer fabrication facility in Fremont, California to its HGA
and HSA manufacturing facilities in Bangkok, Thailand and Manila, the
Philippines, the Company worked towards reducing manufacturing cycle time -- the
time required for the Company's product to be manufactured. The Company's
manufacturing cycle time was significantly reduced during fiscal 1998. This
reduction allowed the Company to be more responsive to the requirements of its
customers. In addition, by decreasing manufacturing cycle time, less investment
in inventory is required allowing the Company to focus resources in other areas.
The Company expects to further reduce manufacturing cycle time in fiscal 1999;
however, there can be no assurance this will be achieved. Failure to further
reduce manufacturing throughput time may have a material adverse effect on the
Company's business, operating results and financial condition.
Throughout fiscal 1998, the Company continued its focus on strong customer
support, improved service and quality programs to strengthen its customer
relationships. The Company has implemented, and is continuing to implement, a
series of programs to enhance customer satisfaction. The Company has business
units to provide dedicated customer support teams that are responsive to the
specific needs of each customer. The teams provide focused improvements in new
product introductions, including design support, prototype production, and
volume manufacturing ramps. Further, to meet its customers' time-to-market
goals, the Company strives to anticipate its customers' requirements through use
of the Company's strategic technology plan to translate customer requirements
into product platform specifications and to develop short, medium and long-term
strategies for achieving those specifications. This customer focus and close
collaboration helps facilitate early design-in wins and improves the Company's
ability to timely reach volume production.
In response to the disk drive market's demand for higher performance
products, the Company has and continues to aggressively pursue a range of new
and emerging technologies to increase the areal density capability of its
products. Areal density is a measure of storage capacity per square inch on the
recording surface of a disk. For ease of reference, this measure is commonly
converted to gigabytes ("GB") per 3.5" disk. During fiscal 1998, the Company
continued to execute its primary strategic objective of becoming the significant
merchant market supplier of MR HGAs and HSAs. Responding to the industry's rapid
shift to MR technology which occurred during the first quarter of fiscal 1998,
the Company accelerated its existing MR transition strategy and significantly
reduced its production of advanced inductive products. MR heads consist of thin
film inductive write structures and MR read structures that take advantage of
magnetic properties in certain metals to achieve significantly higher storage
capacities. The Company began the year with production of MR heads at 2.1GB per
3.5" disk, and subsequently introduced MR heads at 2.5GB through 4.3GB per 3.5"
disk, which represented the majority of the Company's MR production at fiscal
year end. During fiscal 1998, the Company sold approximately 45.9 million MR
HGAs (including HGAs
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incorporated in HSAs) to 5 customers, increasing net sales of MR products to
$590.0 million, compared to net sales of MR products of $279.8 million during
fiscal 1997. The Company expects that MR products, which accounted for
approximately 73% of the Company's net sales during fiscal 1998, will account
for a substantially higher percentage of net sales during fiscal 1999. The
Company has also sampled its Giant MR ("GMR") head products at over 6GB per 3.5"
disk. The Company expects to be shipping its GMR products in volume during the
second half of fiscal 1999.
The Company's goal is to continue to strive to be the clear technology
leader through significant investments in research and development, intensified
efforts on GMR platforms, and continued efforts to attract, develop and retain
high quality technical and management talent. Further, the Company will strive
for operational excellence in wafer fabrication, slider fabrication,
manufacturing yields, manufacturing processes and costs, and supplier
relationships. This focus is important to the Company's ability to achieve steep
production ramps to high volumes while maintaining flexibility and low costs.
There can be no assurance that the Company will be successful in attaining these
goals.
PRODUCTS
An HGA consists of a magnetic recording head attached to a flexure, or
suspension arm, and a wire/tubing assembly. A number of HGAs can be combined
with an actuator for positioning the HGAs, a coil assembly and a flexible
circuit board assembly to form an HSA. The remaining principal components of
rigid disk drives are disks, a motor/spindle assembly for rotating the disk,
control electronics and firmware. The rigid disks, or media, are coated with a
thin layer of magnetic material and attached to the motor/spindle assembly,
which rotates the disks at high speed within a sealed enclosure. The heads,
attached to and positioned by the movable actuator, "fly" above both sides of
each disk, or, in some cases, operate in intermittent contact ("pseudo-contact")
with the disk. The position of the heads is controlled by the drive electronics
based on a servo pattern previously written on the surface of at least one disk.
The heads record or retrieve data from tracks pre-formatted in the magnetic
layer of each disk. Rigid disk drives are used in computer systems to record,
store and retrieve digital information. Most computer applications require
access to a greater volume of data than can economically be stored in the random
access memory of the computer's central processing unit (commonly known as
"semiconductor" memory). This information can be stored on a variety of storage
devices, including rigid disk drives, both fixed and removable, flexible disk
drives, magnetic tape drives, optical disk drives and semiconductor memory.
Rigid disk drives currently provide access to large volumes of information
faster than optical disk drives, flexible disk drives or magnetic tape drives
and at substantially lower cost per GB than high-speed semiconductor memory.
The principal elements of QIC tape drives are magnetic read/write heads and
electronics for read/write, motion control, and system interface functions. Data
cartridges contain tape motion and guidance mechanisms. QIC tape drives are
peripheral hardware devices which enable low cost storage and protection of
large volumes of data through the use of small tape cartridges. Computer systems
of all types increasingly use dedicated backup storage peripherals that combine
high capacity, high performance, reliability and low cost.
Head Gimbal Assemblies
Disk drive manufacturers purchase from the Company either fully assembled
HSAs, or purchase HGAs only and assemble, or have assembled, their own HSAs. The
Company supplied HGAs in volume for 24 different disk drive products to 6
customers during fiscal 1998. Direct sales of HGAs accounted for approximately
11% of the Company's net sales for the year. During fiscal 1998, the Company
manufactured in volume two types of heads for rigid disk drives: MR thin film
and inductive thin film.
MR thin film heads consist of a magnetoresistive read element and an
inductive write element. The MR read element incorporates certain materials
whose electrical resistances change in a magnetic field. In the read mode, as
the MR head flies over a previously written region on the disk, the magnetic
field generated by the directionally magnetized region causes a change in
electrical resistance. This change can be sensed or read by the drive's
electronic circuitry. MR heads have the ability to read data at lower media
velocities and narrower track widths than inductive heads. The ability to read
at lower media velocities improves performance as disk
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drives become smaller, because the surface velocity of a disk turning at the
same number of revolutions per minute is reduced as the diameter of the disk
decreases. Narrower track widths enable higher density magnetic recording, i.e.,
greater capacity per square inch. As of November 1998, the Company was producing
in volume 4.3GB per disk MR thin film heads per 3.5" disk.
Thin film MR heads are produced with manufacturing processes adapted from
semiconductor manufacturing operations. Thin films of highly permeable magnetic
material are deposited on a non-magnetic substrate to form the magnetic core,
and electrical coils are electroplated in a pattern which has been imprinted
through photolithographic techniques. This process facilitates miniaturization,
reduces electrical inductance and enhances manufacturing precision.
Headstack Assemblies
The Company has been supplying HSAs since fiscal 1992 as part of its
strategy to supply higher value products to its customers. In fiscal 1998, the
Company assembled substantially all of its HSAs (other than prototypes) at its
facilities in Malaysia and the Philippines. In the third quarter of fiscal 1998,
the Company decided to cease manufacturing operations in Malaysia. During the
fourth quarter of fiscal 1998 and continuing into early fiscal 1999, certain HSA
manufacturing equipment and manufacturing production in Malaysia have been
transferred to the Company's facilities in Thailand and the Philippines.
The Company supplied inductive thin film and MR thin film HSAs in volume
for 50 different disk drive products to 4 customers during fiscal 1998. HSAs
accounted for approximately 86% of the Company's net sales during fiscal 1998,
compared to 67% of the Company's net sales during fiscal 1997.
Tape Heads
Since fiscal 1994, the Company has been supplying MR tape heads for use in
QIC tape drives as part of its strategy to diversify its product offerings, and
is the leading independent producer of MR tape heads for use in QIC tape drives
in the 1.6GB to 4GB range per cartridge. During fiscal 1998, the Company
supplied QIC tape heads in volume for 8 different tape drive products to 6
customers. Tape heads accounted for approximately 2% of the Company's net sales
for the year.
MANUFACTURING
Read-Rite's operating results are highly dependent upon its ability to
produce large volumes of magnetic recording heads at acceptable manufacturing
yields. The Company's manufacturing process for thin film heads is divided into
four main areas: wafer fabrication, slider fabrication/wafer slicing, HGA
assembly and testing, and HSA assembly and testing. For tape heads, the
Company's manufacturing process consists of wafer fabrication, wafer slicing,
assembly and testing.
Wafer Fabrication
The Company presently fabricates wafers at its Fremont and Milpitas,
California facilities and at Read-Rite SMI's facility near Osaka, Japan. The
Company's Fremont facility produces 6" square wafers (versus 4" square wafers
currently produced in its Milpitas facility and at Read-Rite SMI), increasing
the unyielded per wafer slider count from approximately 6,500 per 4" wafer to
over 16,600 nanosliders per 6" wafer, and during fiscal 1998 produced
approximately 66% of the Company's total slider output. During fiscal 1998, the
Company transitioned its wafer fabrication facility almost entirely to MR
technology in order to meet the specifications and demand for increased
production of MR products, as inductive products reached end-of-life. The
Company's Fremont facility serves as the primary wafer supply for MR and
remaining inductive products, with the Milpitas facility serving as the primary
wafer supply for tapehead products.
At the end of fiscal 1998 and continuing into fiscal 1999, the Company's
Fremont facility has begun transitioning from fabricating wafers using MR
technology to GMR technology. While GMR technology has many similarities to MR
technology, there are critical differences. These differences require additional
investments be made in capital equipment due to the tighter manufacturing
tolerances which result from using GMR technology.
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Slider Fabrication/Wafer Slicing
The Company machines or slices wafers (other than for prototypes) primarily
at its Thailand facilities. The machining process is accomplished in five
phases. First, diamond saws cut the wafer into rows, or bars, of sliders.
Second, the rows are lapped to the proper throat height using an automated,
multi-stage lapping process. Third, the Company employs photolithography, ion
milling, focused ion beam equipment and other processes to form the final pole
geometries of the device. Fourth, the Company uses a variety of processes to
define and shape the air bearing surfaces of the individual sliders in each row.
Finally, the rows are cut into individual sliders.
HGA Assembly and Testing
The Company presently performs volume HGA assembly and testing at its
Thailand facilities. In HGA assembly, wire elements or flexible circuitry are
attached to bond pads on the slider and the slider is then bonded to the
stainless steel flexure/suspension. The Company then tests the head's read/write
capability (for example: signal strength, pulse shape, over-write and error
rate) and the circuit integrity of the magnetic elements. The Company typically
tests its HGAs before shipment to ensure the HGAs meet customer specifications.
Despite such testing, however, customers may return defective lots if, due to
different testing equipment or procedures, damage in shipment or other factors,
they determine that a previously agreed upon percentage of the HGAs in the lot
do not meet specifications.
HSA Assembly and Testing
As previously noted, the Company assembled substantially all of its HSAs
(other than prototypes) in fiscal 1998 at its facilities in Malaysia and the
Philippines. In the third quarter of fiscal 1998, the Company decided to cease
manufacturing operations in Malaysia. During the fourth quarter of fiscal 1998
and continuing into early fiscal 1999, certain HSA manufacturing operations from
Malaysia have been transferred to the Company's facilities in Thailand and the
Philippines. HSAs can consist of up to 30 or more total parts. The HGAs, the
actuator coil and a flexible printed circuit cable are mounted on the actuator
such that the heads can be positioned within the disk drive. The HSA also
includes a read/write preamplifier and head selection circuit, and may include
other miscellaneous parts, such as bearings, a voice coil, and a connector,
depending on the design of the customer's disk drive.
The Company is making a significant investment to set up HSA operations in
Thailand and continues to make significant investments in its HSA operations in
the Philippines. The HSA business carries certain risks and demands in addition
to those of the HGA business. Among those risks are lower gross margins,
increased exposure to inventory obsolescence due to the larger number of parts
required for an HSA and the fact that each HSA program requires unique
components with long lead-time purchasing cycles, and varying product life spans
between different HSA models. There can be no assurance that the Company will be
successful in setting up HSA operations in Thailand or that its current HSA
operations in the Philippines will continue to be successful. The failure to
successfully set up HSA operations in Thailand or the failure of the current HSA
operations in the Philippines would have a material adverse effect on the
Company's business, operating results and financial condition.
The cost of purchased components incorporated into the Company's HSAs
represents a substantial percentage of the total cost of manufacturing such
products. Accordingly, the Company's ability to maintain adequate margins in the
face of constant price erosion is principally a function of its ability to
obtain price reductions from its component vendors, to continuously improve
manufacturing yields and to improve productivity. Additionally, the Company has
experienced lower manufacturing yields and higher costs during the production of
MR HSAs in comparison to inductive HSAs primarily due to the process learning
curve associated with the introduction of the newer technology. As the Company
continues to advance along the process learning curve as it relates to MR and
GMR HGA and HSA production, manufacturing yields are expected to increase during
fiscal 1999. However, there can be no assurance that the Company will be able to
achieve component cost levels, manufacturing yields and productivity levels
necessary to achieve adequate MR and GMR HGA and HSA margins.
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Tape Heads
After the Company's tape head wafers are fabricated in its Milpitas
facility, they are high-speed probed for their electronic and magnetic
characteristics, and mapped for later sorting. The wafers are sliced into rows
and subsequently sliced into individual elements by a subcontractor in the Far
East. Individual units are then shaped to produce the contoured surface over
which the tape media passes.
After the tape wafers are sliced and shaped into individual MR devices,
they are assembled into a body and carriage mount, a flexible cable is attached
and the final unit is dynamically tested prior to shipping. The Company performs
all of its tape head assembly operations at its facilities in the Philippines.
CUSTOMERS, MARKETING AND SALES
The Company's largest customers during fiscal 1998 were Western Digital,
Maxtor, and Samsung, representing 49%, 25%, and 15%, respectively, of the
Company's net sales for the period. Given the small number of high performance
disk drive and QIC tape drive manufacturers who require an independent source of
HGA, HSA or tape head supply, the Company expects its dependence on a relatively
limited number of customers to continue. Moreover, customers in the disk drive
industry have been increasingly moving towards limiting their number of
suppliers of recording heads per program, as well as focusing their own efforts
on fewer and larger new programs. Thus, the Company expects it will be
increasingly important to successfully achieve design-in wins for all programs
for its primary customers. As a result, the loss of any customer, a significant
decrease in orders from one or more large customers, or the failure to achieve a
design-in win or wins on particular customer programs would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In the first quarter of fiscal 1998, Singapore Technologies, Pte. Ltd.
("Singapore Technologies") liquidated Micropolis Ltd. ("Micropolis"), a wholly
owned Singapore Technologies subsidiary. Immediately prior to this unexpected
announcement, the Company anticipated Micropolis would account for approximately
1.5% of the Company's net sales during the first quarter of fiscal 1998. In
addition, in fiscal 1998, Read-Rite SMI lost significant market share of its
principal customer, Quantum/Matsushita Kotobuki Electronics ("MKE").
Accordingly, Quantum/MKE did not represent a significant percentage of the
Company's net sales during fiscal 1998, which materially and adversely affected
the business, financial condition and results of operations of Read-Rite SMI and
thus the Company. For a discussion of additional risk factors associated with
the Company's customer base, see "Certain Additional Business Risks."
During fiscal 1998, the Company sold prototype and some production level
shipments from its headquarters located in Milpitas, California. All other sales
to customers, exclusive of Read-Rite SMI sales, were conducted by the Company's
wholly owned subsidiary, Read-Rite International, through its Singapore branch.
Read-Rite SMI sells to Japanese customers from its facility near Osaka, Japan.
The Company's total foreign net sales accounted for 98%, 98% and 95% of net
sales during fiscal 1998, 1997 and 1996, respectively. See Note 14 in "Notes to
Consolidated Financial Statements."
Disk drive and tape drive manufacturers offer a variety of products with
differing design, performance and cost characteristics. Magnetic recording head
vendors, such as the Company, work with manufacturers to determine the
performance characteristics required for the heads to be used in new designs and
develop customized HGAs and HSAs for each program. Head vendors seek to have
their heads "designed in" to a particular program and to be qualified as a
primary supplier for new programs. The development and commencement of
production of head products for new programs involves major expenditures for
product design, production engineering and capital equipment. Production
processes must also be adjusted to accommodate the unique specifications of each
new design. As manufacturers introduce new programs, the Company must seek to
qualify its heads in these new programs, requiring continual significant
expenditures of time and resources. Additionally, these new programs typically
require the development of new head technologies or enhancements to existing
platforms to address ever-higher performance criteria. These conditions place a
significant burden on the Company to properly assess the developments in the
industry and to market and sell products successfully to changing or emerging
market leaders.
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The Company continues to seek close technical collaboration with its
customers during the design phase of new programs to facilitate integration of
the Company's products into such programs, to improve the Company's ability to
rapidly reach high manufacturing volumes, and to position the Company to be a
primary supplier of HGAs, HSAs and tape heads for new programs. Read-Rite
believes that winning early design-in qualifications is critical, particularly
in light of the rapid migration toward higher volume disk drive programs and the
shorter life cycles of such products. Failure by the Company to execute
consistently on product design-ins has and may continue to have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
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 high quality new technologies, customer support, product
price, 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 Alps, TDK, and Yamaha have been aggressively
competing for business in the United States and in Japan, targeting the MR and
GMR marketplace. The Company's primary domestic competitors are IBM, Applied
Magnetics ("AMC") and Headway Technologies. IBM, Seagate, Quantum, Fujitsu and
other disk drive manufacturers with "captive" or internal recording head
manufacturing capability generally have significantly greater financial,
technical and marketing resources than the Company, and have made or may make
their products available in the merchant market. In fiscal 1998, Western Digital
Corporation ("WD"), which presently purchases a material percentage of its MR
head requirements from IBM, and IBM entered into an agreement under which IBM
will supply WD with GMR heads and other components for WD's manufacture of
desktop hard disk drives. The Company's competitive position could be materially
and adversely affected if one or more of its competitors is successful in
marketing advanced MR and/or GMR 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. Further, 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. 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 such as pico form factor sliders and GMR heads
may compete in the future with the Company's current head technologies and may
support areal density capabilities significantly greater than the Company's MR
heads now in volume production. Additionally, other manufacturers may already
have or may develop more advanced MR technology or production capability than
the Company. For example, it is believed that Alps, IBM, TDK, and Yamaha 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 Metal In Gap ("MIG") technologies that do not utilize the Company's products.
The Company's competitive position will be materially and adversely affected if
a competitor precedes the Company in the successful introduction of improved or
new technologies or products.
PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
The Company's current research and development efforts are principally
directed towards the development of next generation products and technologies
related to the Company's HGA, HSA and tape head businesses, enhancement of
existing products, and manufacturing process developments to improve product
performance and manufacturing yields.
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<PAGE> 10
To address these issues, the Company has focused and will continue to focus
on technology advancements, customer satisfaction and cost efficiency. During
fiscal 1998, the Company continued development of improved process technologies,
including advanced photolithography processes, focused ion beam processes,
advanced sputtering techniques and equipment, slider fabrication processes and
implementation of such technologies as advanced surface preparation and coating
technologies and new tester technology. The Company is in its third generation
of sub-ambient (or negative) pressure air bearing contour designs and is
continuing development of additional thin film technological advances necessary
for higher performance rigid disk drives, including additional air bearing
designs and the pico slider form factor (approximately 30% of the size of the
original minislider, and approximately 60% of the size of the current generation
nanoslider).
In addition to the Company's current focus on increasing the performance of
its MR heads and completing development of spin valve GMR heads, the Company is
also pursuing longer-term development to extend the areal density capabilities.
The Company anticipates shipping in volume in fiscal 1999 products utilizing
spin valve head technology. These GMR heads utilize the pico slider form factor.
The manufacture of spin valve GMR HGAs and HSAs presents additional technical
challenges and requires additional investment in capital equipment. There can be
no assurance the Company will be successful in designing and manufacturing these
products. Failure to successfully design and manufacture products utilizing spin
valve technology may have a material adverse effect on the Company's business,
financial condition and results of operations.
During fiscal 1998, 1997 and 1996, the Company's research and development
expenses were $92.3 million, $65.0 million and $52.2 million respectively
(fiscal 1996 included a $9.0 million charge for the acquisition of planar
technology).
The Company's tape head unit has launched development programs for certain
customers of multichannel MR tape heads in an effort to penetrate the digital
linear tape ("DLT") drive market. As announced by the Company, specific
development agreements have been signed with Quantum for their super DLT product
and Benchmark for their DLT product.
There can be no assurance that the Company will be successful in developing
any of these new technologies or that, if successful, it will be able to obtain
qualifications in customer programs or transition the technologies into
commercially viable volume production.
BACKLOG
The Company's sales are generally made pursuant to short-term purchase
orders rather than long-term contracts. In addition, the Company believes it is
common practice for disk drive manufacturers to place orders in excess of
requirements and to change or cancel outstanding purchase orders in response to
rapidly shifting business conditions. See also "Certain Additional Business
Risks" and other risk factors discussed elsewhere in this report. Accordingly,
the Company does not believe its backlog is an accurate measure of net sales or
operating results for any future period.
STRATEGIC ALLIANCE WITH SUMITOMO
In June 1991, the Company established a strategic alliance with Sumitomo, a
leading Japanese industrial company, including an investment by Sumitomo in the
Company and the establishment by the two companies of a joint venture, Read-Rite
SMI, in Japan. Substantially all of Read-Rite SMI's sales during fiscal 1998 and
fiscal 1997 were to the Company and to MKE, a subcontractor to and partner of
Quantum.
In December 1993, the Company and Sumitomo invested an additional $2.8
million and $9.2 million, respectively, in Read-Rite SMI as part of a series of
agreements pursuant to which Read-Rite SMI licensed from the Company the
Company's MR technology, sublicensed from the Company the technology licensed
from KME in the fourth quarter of fiscal 1993, and agreed to share with the
Company certain ongoing MR technology research and development costs. In
September 1996, the Company and Read-Rite SMI amended their principal license
agreement to include additional technologies, including spin valve and GMR, and
to eliminate royalty provisions which were replaced by an ongoing cost sharing
arrangement allowing the parties
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<PAGE> 11
to share equitably in their collective research and development expenditures.
Further investments in Read-Rite SMI beyond current amounts are expected to be
borne equally by the Company and Sumitomo.
The Company has retained a majority voting interest in Read-Rite SMI;
however, prior to the first quarter of fiscal 1998, all material corporate
actions required a supermajority vote of Read-Rite SMI's Board of Directors, and
thus the consent of both the Company and Sumitomo. During the first quarter of
fiscal 1998, the Company and Sumitomo revised their various agreements and
RRSMI's charter documents to provide for a simple majority vote of the Board of
Directors of Read-Rite SMI on all matters except for certain non-ordinary course
of business matters requiring a supermajority. In the case of a shareholder vote
due to the lack of the required vote by the Board of Directors, a simple
majority shareholder vote is required.
As a result of the June 1991, December 1993 and September 1996
transactions, the Company and Read-Rite SMI have cross-licensed all of their
respective inductive thin film, MR, spin valve, and GMR technologies owned or
developed during the term of the original joint venture agreement relating to
the manufacture of thin film heads for disk drives. Read-Rite SMI has the
exclusive right to distribute products of either Read-Rite SMI or the Company to
customers for integration into disk drives in Japan and to Japanese customers
for integration into rigid disk drives throughout the remainder of the world
other than North America. The Company has the exclusive right to distribute
products of either the Company or Read-Rite SMI for integration into rigid disk
drives in North America and throughout the rest of the world, other than in
Japan or by Japanese customers outside North America.
Although the Company believes Read-Rite SMI provides important advantages
to the Company, there can be no assurance that there will continue to be strong
market demand in Japan for thin film heads manufactured by independent
suppliers, that Read-Rite SMI will be successful in supplying heads to
Quantum/MKE, or that Read-Rite SMI will be successful in further penetrating the
Japanese market. For example, though Read-Rite SMI was a supplier for
Quantum/MKE on certain previous MR programs, Read-Rite SMI is not currently a
supplier on Quantum/MKE's disk programs. Though Read-Rite SMI will continue to
seek qualification on Quantum/MKE's disk programs, there can be no assurance
that Read-Rite SMI will be successful in regaining market share at Quantum/MKE.
The failure of Read-Rite SMI to participate in current and future Quantum/MKE
programs or to obtain additional customers has had and may continue to have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Read-Rite regards elements of its manufacturing processes, product designs,
and equipment as proprietary and seeks to protect its proprietary rights through
a combination of employee and third party non-disclosure agreements, internal
procedures and patent protection. The Company has approximately 102 U.S. and
additional foreign patents, generally having terms of 20 years from their filing
dates, and many additional U.S. and foreign applications pending. In addition,
Read-Rite has a variety of licenses and cross-licenses with other companies
within the industry such as IBM, Seagate and TDK for certain uses of those
companies' respective patents.
Read-Rite believes that its success depends on the innovative skills and
technical competence of its employees and upon proper protection of its
intellectual properties. Despite Read-Rite's protective measures, there can be
no assurance that such measures will be adequate to protect its proprietary
rights or that the Company's competitors will not independently develop or
patent technologies that are equivalent or superior to the Company's technology.
The Company has, from time to time, been notified of claims that it may be
infringing patents owned by others. To the extent the Company receives
additional claims of infringement from others in the future, where necessary or
desirable, the Company may seek licenses under patents which it is allegedly
infringing. Although patent holders commonly offer such licenses, no assurance
can be given that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. Defending a claim of infringement or
the failure to obtain a key patent license from a third party could cause the
Company to incur substantial liabilities and/or to suspend the manufacture of
the products utilizing the patented invention.
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<PAGE> 12
EMPLOYEES
As of September 30, 1998, the Company had 18,257 employees, including 1,879
in the United States, 10,562 in Thailand, 5,200 in the Philippines, 155 in
Malaysia, 438 at Read-Rite SMI, and 23 at the Company's sales and customer
support offices in Singapore. Read-Rite believes its future success will depend
in large part upon its ability to continue to attract, retain, train and
motivate highly skilled and dedicated employees. None of the Company's employees
are currently represented by a labor union.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state, local and foreign
regulations relating to the use, storage, discharge and disposal of hazardous
materials used during its manufacturing process, to the treatment of water used
in manufacturing, and to air quality management. In addition to obtaining
necessary permits for expansion, the Company must also comply with expanded
regulations on its existing operations as they are imposed. Although the Company
has not to date suffered any material adverse effects in complying with
applicable environmental regulations, public attention has increasingly been
focused on the environmental impact of manufacturing operations which use
hazardous materials. The Company's failure to comply with present or future
regulations, or to obtain all necessary permits required under such regulations,
could subject it to significant liability and financial penalties (possibly
resulting in suspension of production), restrict the Company's ability to expand
or operate at its locations in California or its locations in Thailand, Japan
and the Philippines, restrict the Company's ability to establish additional
operations in other locations, or require the Company to acquire costly
equipment or to incur other significant expenses to comply with environmental
regulations. Moreover, while the Company has invested significant resources in
safety procedures, training, treatment equipment and systems and other measures
designed to minimize the possibility of an accidental hazardous discharge, any
such discharge could result in significant liability and clean-up expenses which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company uses a significant amount of water in its manufacturing
process. Although the Company is currently under no specific water use
restrictions, future drought conditions could cause the state or local
authorities to mandate higher fees and/or reductions in water usage allocations.
In such event, any such reductions could restrict the Company's level of
production and adversely affect the Company's business, financial condition and
results of operations.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Fluctuations in Operating Results
The Company has experienced substantial fluctuations in its quarterly and
annual operating results in the past, and the Company's future operating results
could vary substantially from quarter to quarter. The Company's operating
results for a particular quarter or longer periods can be materially and
adversely affected by numerous factors, such as increased competition or
execution issues leading to a failure by the Company to obtain "design-in wins"
on one or more customer programs; delayed product introductions or capacity
constraints on certain technologies; decreased demand for or decreased average
selling prices of the Company's products; low product manufacturing yields;
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; increased material costs or material or equipment
unavailability; and disruptions in domestic or foreign operations.
The Company's net 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 fiscal 1998, in the second half of fiscal 1996, and in calendar
1993, the Company experienced delays and
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<PAGE> 13
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, experienced a significant reduction in net sales
and gross margin and incurred significant losses.
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, 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, and in fiscal 1998 generally due to
industry conditions. In each case, these demand variations materially and
adversely affected the Company's business, financial condition and results of
operations. Further, during the third quarter of fiscal 1998, the Company
incurred restructuring costs of $93.7 million, principally reflecting the
Company's strategy to align worldwide operations with current industry
conditions and to improve the productivity of the Company's manufacturing
facilities. The restructuring costs were primarily associated with the decision
to cease the Company's manufacturing operations in Malaysia and the write-off of
excess equipment at its other manufacturing locations.
The Company's largest customers are Western Digital, Maxtor, and Samsung,
representing 49%, 25% and 15%, respectively, of the Company's net sales during
fiscal 1998. The Company produced HGAs in volume for 6 customers, HSAs in volume
for 4 customers and tape drive products in volume for 6 customers during fiscal
1998. Given the small number of high performance disk drive and tape drive
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 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 fiscal 1998, the loss of any large customer,
or a significant decrease in orders from one or more large customers, will have
a material adverse effect on the Company's business, financial condition and
results of operations.
Given the Company's dependence upon a limited number of customers,
acquisitions, 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, Seagate 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. In
fiscal 1998, Hyundai sold part of their holdings in Maxtor to the public. While
the Company has remained a supplier to Maxtor notwithstanding these changes in
ownership, there can be no assurance that Maxtor will continue purchasing a
significant quantity of its head requirements from the Company. Vertical
integration by the Company's customers, through which a customer acquires or
increases internal HGA or HSA production capability, could also materially and
adversely affect the Company's business, financial condition and results of
operations. In 1994, Quantum, a principal customer of the Company with no
previous magnetic recording head capacity, acquired Digital Equipment
Corporation's 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. The new venture took over Quantum's existing recording head
operations and is owned 51% by MKE. In October 1998, Quantum and MKE announced
that the joint venture would be dissolved. The Company believes the dissolution
of the joint venture will enable the Company to regain market share at
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<PAGE> 14
Quantum; however, there can be no assurance that the Company will be successful
in regaining such market share.
Finally, WD and IBM recently announced a hard disk drive component supply
and technology licensing agreement. The Company does not yet know the precise
impact this agreement will have on the Company's net sales to WD, but
anticipates that this agreement will contribute significantly to IBM's ability
to sustain or increase its market share at WD, which would make it more
difficult for the Company to sustain its own market share with this key
customer. 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 and GMR Technology
Technology changes rapidly in the Company's industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, 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 sold for the desktop
market. The Company expects continued small sales of advanced inductive products
to the removable storage market.
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 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 required 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 45.9 million MR heads (including heads in HSAs) for 44
disk drive programs to 5 customers during fiscal 1998, accounting for
approximately 73% of net sales during the period. The Company intends to
continue investing significant resources in MR and GMR product development and
manufacturing equipment. The Company anticipates primarily all of its sales for
fiscal 2000 will be derived from sales of MR and GMR products. There can be no
assurance, however, that the Company will be successful in timely and cost
effectively developing and manufacturing MR and GMR heads at acceptable
manufacturing yields and as necessary to achieve consistent design-in wins on
new product programs.
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Substantial Capital Expenditures and Working Capital Needs
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed
significant production capacity to support new technologies and increased demand
for its products. The Company made capital expenditures during fiscal 1998 of
$186.2 million, compared to $272.8 million during fiscal 1997, and plans to
spend between approximately $125 million and $150 million during fiscal 1999. As
of September 30, 1998, total commitments for construction or purchase of capital
equipment were approximately $38 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 in fiscal 1998, when net sales declined quarter to
quarter.
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 believes the worldwide decrease in demand for disk drives
during fiscal 1998 is, in part, impacted by the economic downturn in these
markets, and thus has negatively impacted the Company's net sales during the
last three quarters of fiscal 1998. The Company is unable to predict what
effect, if any, these factors will have on its ability to manufacture products
in these markets. The Company enters into foreign currency forward and option
contracts in an effort to manage exposure related to certain foreign currency
commitments, certain foreign currency denominated balance sheet positions, and
anticipated foreign currency denominated expenditures, as substantially all of
the Company's foreign sales are denominated in U.S. dollars.
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
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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 of manufacturing MR and GMR products, 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 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 write-downs, 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 two quarters of
fiscal 1998, as a result of which the Company incurred significant 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
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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.
EXECUTIVE OFFICERS
The Company's executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chairman of the Board of Directors and Chief Executive
Cyril J. Yansouni.................... 56 Officer
Alan S. Lowe......................... 36 President and Chief Operating Officer
Michael A. Klyszeiko................. 59 Executive Vice President, Operations
Peter G. Bischoff.................... 58 Executive Vice-President and Co-President, Read-Rite SMI
James Murphy......................... 39 Senior Vice President, Customer Business Units
Mark Re.............................. 38 Senior Vice President, Research and Development
John T. Kurtzweil.................... 42 Vice President, Finance and Chief Financial Officer
Sherry F. McVicar.................... 46 Vice President, Human Resources
</TABLE>
There are no family relationships among directors or executive officers of
the Company.
Mr. Yansouni has served as Chief Executive Officer and Chairman of the
Board of Directors of the Company since March 1991. Prior to joining the
Company, Mr. Yansouni was with Unisys Corporation, a manufacturer of computer
systems, from December 1988 to February 1991, where he served in various senior
management capacities, most recently as an Executive Vice President. From
October 1986 to December 1988, Mr. Yansouni was President of Convergent
Technologies, a manufacturer of computer systems, which was acquired by Unisys
in December 1988. From 1967 to 1986, Mr. Yansouni was at Hewlett-Packard
Company. During that time, he served in a variety of technical and management
positions, most recently as Vice President and General Manager of the Personal
Computer Group. Mr. Yansouni received his M.S. degree in electrical engineering
from Stanford University and his B.S. degree in electrical engineering and
mechanical engineering from the University of Louvain, Belgium. Mr. Yansouni is
also a director of Informix Software, Inc. and PeopleSoft, Inc., both software
companies, and of Raychem Corporation, a material sciences manufacturing
company.
Mr. Lowe has served as President and Chief Operating Officer since May
1997. He joined Read-Rite in 1989 in a sales position and also served as Vice
President, Sales from November 1991 to August 1994, as Vice President of
Customer Programs from August 1994 to November 1995, and as Senior Vice
President, Customer Programs from November 1995 to October 1996. Mr. Lowe was
Senior Vice President, Customer Business Units, from October 1996 to March 1997.
Prior to joining the Company, he was sales manager for Microcom Corporation, a
data communications hardware and software company, in 1989, and held various
sales positions at IBM from 1985 to 1989. Mr. Lowe holds B.A. degrees in
Computer Science and Business Economics from the University of California, Santa
Barbara.
Mr. Klyszeiko has been Executive Vice President, Operations, since November
1995. He joined Read-Rite in 1988 as Vice President, Planning and Logistics and
also served as Vice President, Manufacturing from January 1990 to October 1992,
Senior Vice President of Customer Programs from October 1992 to September 1994,
and Senior Vice President, Read-Rite International from September 1994 to
November 1995. Prior to joining the Company, he served at Advanced Micro Devices
as Director of Materials and Systems Planning. He was with VLSI Technology
during 1983 and 1984 as Director of Materials and served in various positions at
Fairchild Camera and Instrument from 1966 to 1983. Mr. Klyszeiko holds a B.A.
degree in business from the University of Vermont.
Mr. Bischoff, a co-founder of the Company, has served as Executive Vice
President since March 1996. He has also served as Executive Vice President,
Research and Development, from February 1994 to March
17
<PAGE> 18
1996, and Senior Vice President, Research and Development, from February 1983 to
February 1994. Since July 1991, he has also served as Executive Vice President
of Read-Rite SMI, and since July 1998, served as Co-President of Read-Rite SMI.
He served an apprenticeship in electrochemistry in Pforzheim, Germany and
received his B.A. degree in management from Saint Mary's College.
Mr. Murphy has been Senior Vice President, Customer Business Units since
August 1997. Mr. Murphy joined the Company in April 1991 as a Strategic Accounts
Manager. He was promoted to Director of Sales in Asia in 1993 and to Vice
President of Sales worldwide in 1995. Following the Company's reorganization
into customer business units in 1996, he was named Vice President and General
Manager for the Company's largest customer. Prior to joining the Company, he
held a variety of sales and marketing positions at IBM from 1982 through 1991.
Mr. Murphy holds a B.S. degree in Finance from the University of Santa Clara.
Dr. Re has served as Senior Vice President of Research and Development,
responsible for all research and development operations, since April 1998. Prior
to joining the Company, he served at IBM, where he held various senior
managerial positions, most recently Director of recording head development
engineering. At IBM, he managed magnetoresistive (MR) and giant magnetoresistive
(GMR) recording head development. Dr. Re has over 35 articles published in
scientific and engineering publications, and has more than 10 patents to his
credit involving magnetic recording technologies. He holds a Ph.D. and a M.S.
degree in Electrical and Computer Engineering from Carnegie Mellon University in
Pittsburgh, Pennsylvania, and a bachelor's degree in Electrical Engineering from
Northwestern University in Evanston, Illinois.
Mr. Kurtzweil joined the Company in August 1995 as Corporate Controller,
and became the Company's Vice President of Finance and Chief Financial Officer
in November 1995. Mr. Kurtzweil joined the Company from Maxtor Corporation where
he held a number of finance positions including Finance Director, Director of
Far East Finance based in Singapore, and Corporate Controller of a wholly owned
subsidiary. He was with Maxtor Corporation from July 1988 to August 1995. He
also held finance positions with Honeywell Incorporated from May 1978 to July
1988. Mr. Kurtzweil received his B.A. degree in Accounting from Arizona State
University and a M.B.A. from the University of St. Thomas in St. Paul,
Minnesota. He is a Certified Public Accountant and also a Certified Management
Accountant.
Ms. McVicar joined the Company in April 1991 as Vice President, Human
Resources. Prior to joining the Company, she was Vice President, Human Resources
at Unisys from January 1989 to April 1991 and held the same position at
Convergent Technologies from December 1987 until its merger into Unisys in
December 1988. Ms. McVicar was also Vice President, Human Resources at Qume, a
manufacturer of computer products, from 1976 to December 1987. She received her
B.A. degree in education and labor relations from Hofstra University and her
M.S. degree in education and labor relations from Queens College.
ITEM 2. PROPERTIES
The Company leases approximately 190,000 square feet at its campus in
Milpitas, California, which serves as the Company's corporate headquarters and
also houses wafer fabrication, prototype manufacturing and research and
development facilities. The primary leases for these properties expire at
various times from June 2000 to July 2001. In addition, in November 1995, the
Company purchased an approximately 18,000 square foot facility adjacent to its
Milpitas facilities, which houses certain technical and corporate operations.
The Company also leases two facilities in Fremont, California of
approximately 189,000 and 57,000 square feet, respectively, which primarily
house wafer fabrication, research and development and various administrative
functions. The initial leases for these facilities expire in February 2003 and
April 2002, respectively, with three 5-year renewal options and one 5-year
renewal option, respectively. The Company also leases a 40,000 square foot
facility in San Jose, California, which houses the Company's research and
development functions. This lease expires in July 2001.
The Company owns a seven-acre site near Bangkok, Thailand with two
facilities totaling 353,000 square feet used for slider fabrication and HGA
manufacturing. These properties and certain additional collateral owned by the
Company's wholly owned subsidiary, RRT, secure loans obtained by RRT from the
Industrial Finance Corporation of Thailand in fiscal 1993. In addition, the
Company leases a 20,000 square foot
18
<PAGE> 19
warehouse in Thailand; the lease for this facility expires in October 1999.
During fiscal 1996, RRST acquired an approximately 97,000 square foot
manufacturing facility adjacent to RRT's existing facilities.
The Company has a long-term land lease on a 13-acre site near Penang,
Malaysia, and owns a 136,000 square foot HSA manufacturing facility on that
site. As a result of the Company's decision to cease manufacturing operations in
Malaysia, the Company has decided to either lease or sell the facility once
manufacturing operations in Malaysia have ceased completely.
The Company owns a 6.5-acre site near Manila with an 189,000 square foot
manufacturing facility. During fiscal 1998, the Company constructed an
additional 162,000 square foot facility on this 6.5-acre site. Furthermore, the
Company has purchased an approximately 5.3-acre parcel of land for manufacturing
purposes adjacent to the 6.5-acre site. The Company also has two leased
facilities of approximately 108,000 and 24,000 square feet, near Manila; these
leases expire in 1999. The larger facility was shut down during the fourth
quarter of fiscal 1996. The Company has an option to purchase this facility at
the lease expiration in 1999. The smaller facility houses the Company's tape
head manufacturing operations.
Read-Rite SMI leases from Sumitomo an approximately 92,000 square foot
wafer fabrication and research and development office facility near Osaka,
Japan. This lease expires in November 2001.
The Company leases an office in Singapore totaling approximately 4,200
square feet for sales and customer support. The lease expires in February 2000.
ITEM 3. LEGAL PROCEEDINGS
In December 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. In May 1997, the Superior
Court entered an order (1) sustaining the demurrers of certain defendants to the
California Corporations Code cause of action and overruling the demurrers of
Read-Rite Corporation and certain other defendants to that same cause of action;
and (2) sustaining the demurrers of all defendants as to the remaining causes of
action.
In January 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.
In January 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 the Read-Rite Corp.
Securities Litigation (the "Consolidated Action").
In May 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)
19
<PAGE> 20
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.
Plaintiffs in the McDaid Federal Action moved in June 1997 to dismiss their
complaint. This motion was granted by the court. In June 1997, defendants
successfully moved to consolidate the Nevius Federal Action with the
Consolidated Action.
In August 1998, the court in the Consolidated Action granted defendants
motion to dismiss with leave to file an amended complaint. The amended complaint
is due to be filed in mid-January 1999, with a hearing on defendants' renewed
motion to dismiss planned for early June 1999.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes it has meritorious
defenses to all three of these actions (the Ferrari State Action and the Ferrari
and Nevius Federal actions), and intends to defend each of them vigorously.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions. Accordingly, both on its
own behalf and pursuant to indemnification agreements between the Company and
the named individual defendants, the Company intends to continue to defend each
of these actions vigorously. Failure by the Company to obtain a favorable
resolution of the claims set forth in any of these actions could have a material
adverse effect on the Company's business, results of operations and financial
condition. Currently, the amount of such material adverse effect cannot be
reasonably estimated.
Except as so noted, the Company is not a party, nor is its property
subject, to any material pending legal proceedings other than ordinary routine
litigation incidental to the Company's business. The Company does not believe
such routine litigation, taken individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ National Market
under the symbol "RDRT" since the Company's initial public offering on October
18, 1991. The following table sets forth for the periods indicated the high and
low closing sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ending September 30, 1998
First Quarter.......................................... $26 13/16 $15 3/8
Second Quarter......................................... 17 9/16 12 3/8
Third Quarter.......................................... 15 1/4 6 13/16
Fourth Quarter......................................... 9 17/32 5 1/2
Fiscal year ending September 30, 1997
First Quarter.......................................... 26 3/8 15 3/8
Second Quarter......................................... 33 1/8 24 7/8
Third Quarter.......................................... 32 5/8 19 7/8
Fourth Quarter......................................... 29 19 7/8
Fiscal year ending September 30, 1996
First Quarter.......................................... 39 1/8 21 3/4
Second Quarter......................................... 25 1/8 16 3/4
Third Quarter.......................................... 26 1/8 12 15/16
Fourth Quarter......................................... 15 3/4 9 7/8
</TABLE>
At November 30, 1998, there were approximately 2,500 record holders of the
Company's Common Stock.
The Company has never paid cash dividends on its capital stock. In
addition, the Company's bank line of credit prohibits payment of cash dividends
without prior bank approval. The Company currently intends to retain any
earnings for use in its business and does not anticipate paying cash dividends
in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
21
<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
1998(1) 1997(2) 1996(3) 1995 1994(4)
--------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 808,622 $1,162,050 $991,118 $1,003,040 $638,589
Gross margin.............................. (132,780) 238,806 103,654 264,040 93,193
Operating income (loss)................... (352,910) 119,713 7,789 177,846 31,836
Net income (loss)......................... (319,747) 76,179 (42,986) 123,565 19,694
Basic net income (loss) per share......... (6.59) 1.61 (0.92) 2.69 0.44
Diluted net income (loss) per share....... (6.59) 1.56 (0.92) 2.60 0.43
Total assets.............................. $ 879,800 $1,301,481 $908,672 $ 939,457 $630,592
Long-term obligations..................... 388,248 403,871 172,037 137,406 52,414
</TABLE>
- ---------------
(1) Fiscal 1998 includes a special charge of approximately $114.8 million to
cost of sales, primarily for the write-off of equipment and inventory
associated with the industry's rapid shift away from advanced inductive
technology to magnetoresistive ("MR") technology and the Company's decision
to accelerate its existing MR transition strategy. In addition, fiscal 1998
includes a restructuring charge of approximately $93.7 million to reflect
the Company's decision to cease the Company's manufacturing operations in
Malaysia and write-off excess equipment at the Company's other manufacturing
locations.
(2) The fourth quarter of fiscal 1997 results include post-closing charges of
approximately $12.2 million to selling, general and administrative expense
and $2.6 million to cost of sales to establish a reserve for accounts
receivable, inventory and equipment exposures related to the bankruptcy of
Micropolis, a customer of the Company.
(3) Fiscal 1996 includes severance, relocation and other charges of
approximately $11.2 million, research and development charges for the
acquisition of planar technology of approximately $9.0 million, and
approximately $24.1 million for the write-down of capital assets,
approximately $7.0 million associated with end-of-life inventory and
approximately $0.7 million in other charges, for a total of $52.0 million
for the year.
(4) Fiscal 1994 includes merger costs of $2.4 million.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the Company as a
percentage of net sales for the three fiscal years ended September 30, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 116.4 79.4 89.5
----- ----- -----
Gross margin........................................ (16.4) 20.6 10.5
Operating expenses:
Research and development.......................... 11.4 5.6 5.3
Selling, general and administrative............... 4.2 4.7 4.4
Restructuring costs............................... 11.6 -- --
----- ----- -----
Total operating expenses.................. 27.2 10.3 9.7
----- ----- -----
Operating income.................................... (43.6) 10.3 0.8
Interest expense.................................... 3.7 1.4 1.3
Interest income and other, net...................... 0.9 0.8 0.9
----- ----- -----
Income (loss) before provision (benefit) for income
taxes and minority interest....................... (46.4) 9.7 0.4
Provision (benefit) for income taxes................ (3.0) 2.5 3.5
----- ----- -----
Income (loss) before minority interest.............. (43.4) 7.2 (3.1)
Minority interest in net income (loss) of
consolidated subsidiary........................... (3.8) 0.6 1.2
----- ----- -----
Net income (loss)................................... (39.6) 6.6 (4.3)
===== ===== =====
</TABLE>
NET SALES
The following tables set forth certain sales information for the Company's
largest customers and HGA/HSA product mix as a percentage of net sales, for the
three fiscal years ended September 30, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customers
Western Digital....................................... 49% 51% 43%
Maxtor................................................ 25% 13% 12%
Samsung............................................... 15% 5% --
Quantum............................................... 3% 18% 29%
All Others............................................ 8% 13% 16%
--- --- ---
100% 100% 100%
--- --- ---
HGA/HSA Product Mix
HGA................................................... 11% 31% 41%
HSA................................................... 86% 67% 57%
Tape and Other........................................ 3% 2% 2%
--- --- ---
100% 100% 100%
--- --- ---
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Net sales were $808.6 million during fiscal 1998, a 30.4% decrease from net
sales of $1,162.1 million during fiscal 1997. The decrease in the Company's net
sales for fiscal 1998 as compared to fiscal 1997 was due to a general industry
slowdown in demand coupled with a large oversupply of disk drive inventory; the
abrupt phase-out of advanced inductive recording heads and the accelerated
transition to MR technology; the disk drive industry's trend towards fewer
suppliers of recording heads on each program which contributed to the
23
<PAGE> 24
Company's inability to achieve design wins on certain customer programs; and an
industry-wide trend towards a reduction in the numbers of heads per disk drive.
Net sales of MR products increased significantly in fiscal 1998 as the
Company accelerated its strategy to fully transition to MR recording head
technology production. Net sales of MR products were $590.0 million, or 73% of
total net sales, in fiscal 1998, as compared to $279.8 million, or 24% of net
sales, in fiscal 1997. Net sales of MR products were 94% of total net sales for
the fourth quarter of fiscal 1998. The increase in MR product net sales was more
than offset by the decrease in sales of advance inductive products. Advance
inductive products were $218.6 million, or 27% of total net sales, in fiscal
1998, as compared to $880.9 million, or 76% of total net sales, in fiscal 1997.
Sales of inductive products represented only 6% of total net sales in the fourth
quarter of fiscal 1998.
The Company's net sales decrease was attributable to overall decreases in
both unit sales and average selling prices ("ASPs") during fiscal 1998.
Decreased unit sales of advance inductive products and MR HGAs was offset
somewhat by increased unit sales of MR HSAs. ASPs for advance inductive HSA
products and MR HGA products decreased substantially during fiscal 1998. During
fiscal 1997, ASPs for MR HSA products were typically greater than that of
advance inductive HSA products. Thus, while ASPs for MR HSA products decreased
significantly during fiscal 1998, the impact on overall HSA ASPs for fiscal 1998
as compared to fiscal 1997 was not significant.
The Company's product mix has continued to shift towards HSAs, as net sales
of HSAs and HGAs accounted for approximately 86% and 11%, respectively, of net
sales during fiscal 1998, compared to approximately 67% and 31%, respectively,
of net sales during fiscal 1997. The Company's sales continue to be primarily
focused in the 3.5" disk form factor market, accounting for 96%, 91%, and 90% of
the Company's net sales during fiscal 1998, 1997, and 1996, respectively.
The Company's customer base remains highly concentrated, as the substantial
majority of net sales were to six major storage device manufacturers during
fiscal 1998 and fiscal 1997. The Company's three largest customers accounted for
89%, 82%, and 84% of the Company's net sales during fiscal 1998, 1997 and 1996,
respectively.
Fiscal 1997 Compared to Fiscal 1996
Net sales were $1,162.1 million during fiscal 1997, a 17.3% increase over
net sales of $991.1 million during fiscal 1996. During fiscal 1997, the Company
successfully executed on its advanced inductive products, and substantially
increased its production of MR products. Net sales of inductive products
increased approximately 10.3%, to $881 million during fiscal 1997 compared to
$799 million during fiscal 1996. Net sales generated from MR products increased
to $279.8 million during fiscal 1997 compared to $34.2 million during fiscal
1996. The overall increase in net sales from inductive and MR products was
partially offset by the decrease in the net sales of ferrite metal-in-gap
("MIG") products, which reached their end-of-life during the third quarter of
1996. The net sales generated from MIG products decreased to $1.3 million during
fiscal 1997 compared to $174.0 million during fiscal 1996.
For a discussion of certain risks associated with the Company's business,
see "Certain Additional Business Risks."
GROSS MARGIN
The Company's gross margins are primarily influenced by ASPs, the level of
unit sales in relation to fixed costs, manufacturing yields, product mix (newer
products and HGAs typically generate higher gross margins than older products
and HSAs) and material costs. The relative impact of these factors fluctuates
from time to time. Periodically, the Company's gross margins also reflect
charges for inventory and fixed assets obsolescence and employee severance
related to products or technologies that have reached their end of life.
HSAs typically have lower gross margins than HGAs. HSAs consist of two or
more HGAs and a variety of purchased components the Company assembles into a
single unit. The cost of the purchased components is
24
<PAGE> 25
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 margins on HGAs and non-HGA components
and associated labor and overhead included in HSAs typically produces a lower
aggregate gross margin on HSA sales compared to HGA sales.
Fiscal 1998 Compared to Fiscal 1997
The Company's gross margin was (16.4)% of net sales during fiscal 1998,
compared to a gross margin of 20.6% of net sales during fiscal 1997. The
significant decrease in gross margin during fiscal 1998 was primarily due to a
decrease in unit sales in relation to fixed costs, product mix and average
selling prices for HGA products.
The overall decrease in unit sales in relation to fixed costs was due to
decreased unit sales of advanced inductive and MR products (see "Net Sales").
The decreased level of unit sales lead to high per unit costs as the Company was
not able to fully utilize its production equipment. The decrease in unit sales
and the Company's decision to accelerate its existing MR transition strategy
caused the Company to incur a special charge of approximately $114.8 million in
cost of sales during the first quarter of fiscal 1998. This special charge was
primarily for the write-off of equipment and inventory. In addition, the
Company's product mix of HGA net sales to HSA net sales changed to fewer HGA net
sales from fiscal 1997 to fiscal 1998 (HGAs typically generate higher gross
margins than HSAs). Average selling prices for HGA products decreased
significantly from fiscal 1997 to 1998 as the Company's MR products matured.
Fiscal 1997 Compared to Fiscal 1996
The Company's gross margin was 20.6% of net sales during fiscal 1997,
compared to a gross margin of 10.5% of net sales during fiscal 1996. The
Company's significant increase in gross margin during fiscal 1997 was primarily
attributable to an overall increase in ASPs, an increase in total unit sales in
relation to fixed costs, and to the absence in fiscal 1997 of special charges to
cost of sales (which totaled approximately $42.3 million during fiscal 1996).
The overall increase in ASPs during fiscal 1997 was primarily due to increased
ASPs for inductive and MR HSAs and, to a lesser extent, to increased ASPs for
HGAs, primarily driven by MR products. The Company's increase in total unit
sales in relation to fixed costs was primarily related to increased unit sales
of inductive and MR HSAs, with a corresponding decrease in the overall cost per
unit of inductive and MR HSAs, as the Company was able to more fully utilize its
production equipment.
The Company's increase in gross margin, as discussed above, was partially
offset by a product mix weighted towards HSAs, lower manufacturing yields
associated with the introduction of new MR products, and a post-closing $2.6
million charge to cost of sales during the fourth quarter of fiscal 1997 to
establish a reserve for inventory and equipment exposures related to the
bankruptcy of Micropolis, a customer of the Company. See Note 15 in "Notes to
Consolidated Financial Statements." A product mix weighted towards HSAs tends to
generate lower gross margins notwithstanding the higher ASPs.
For a discussion of certain risks associated with the Company's business,
see "Certain Additional Business Risks."
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal 1998 Compared to Fiscal 1997
Research and development ("R&D") expenses were $92.3 million during fiscal
1998, a 42.0% increase over R&D expenses of $65.0 million during fiscal 1997.
The substantial increase in R&D expenses during fiscal 1998 was attributable to
increased development efforts in MR, GMR and other emerging technologies to
address the disk drive industry's rapidly changing requirements. The Company
intends to continue increasing its R&D expenditures on an absolute dollar basis
in future periods.
25
<PAGE> 26
From time to time, the Company has engaged in fully or partially funded
research and development for certain existing or potential customers. R&D
expenses under such projects were offset as incurred to the extent development
funds were provided. During 1998, $8.6 million of R&D expenses were offset by
development funding. During 1997, R&D expenses were offset by development
funding of $2.3 million.
Fiscal 1997 Compared to Fiscal 1996
R&D expenses were $65.0 million during fiscal 1997, a 24.5% increase over
R&D expenses of $52.2 million during fiscal 1996. R&D expenses during fiscal
1996 reflected a charge of $9.0 million due to an investment in planar recording
technology (see Note 9 in "Notes to Consolidated Financial Statements").
Excluding this one-time charge, R&D expenses increased 50.5% from fiscal 1996 to
fiscal 1997. The substantial increase in R&D expenses during fiscal 1997 was
attributable to increased development efforts in MR and other emerging
technologies to address the disk drive industry's rapidly changing requirements,
as well as ongoing development efforts in advanced inductive technology.
From time to time, the Company has engaged in fully or partially funded
research and development for certain existing or potential customers. R&D
expenses under such projects were offset as incurred to the extent development
funds were provided. During 1997, R&D expenses were offset by development
funding of $2.3 million. During fiscal 1996, funded research and development was
not material.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1998 Compared to Fiscal 1997
Selling, general & administrative ("SG&A") expenses were $34.1 million
during fiscal 1998, a 37.0% decrease from SG&A expenses of $54.1 million during
fiscal 1997. Fiscal year 1997 SG&A expenses included a post-closing charge of
$12.2 million during the fourth quarter of fiscal 1997 to establish a reserve
for accounts receivable exposures related to the bankruptcy of a customer,
Micropolis. See also Note 13 in "Notes to Consolidated Financial Statements."
After excluding this reserve, SG&A expenses in fiscal 1998 were $34.1 million,
an 18.6% or $7.8 million decrease from $41.9 million in fiscal 1997. This
decrease is due primarily to specific cost reduction efforts initiated in fiscal
1998 to lower SG&A expenses. These efforts included but were not limited to
reducing the number of employees in SG&A through both attrition and specific
headcount reduction 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 fiscal 1998.
Fiscal 1997 Compared to Fiscal 1996
SG&A expenses were $54.1 million during fiscal 1997, a 24.0% increase over
SG&A expenses of $43.6 million during fiscal 1996. The increase in SG&A expenses
during fiscal 1997 was primarily due to a post-closing charge of $12.2 million
during the fourth quarter of fiscal 1997 to establish a reserve for accounts
receivable exposures related to the bankruptcy of a customer, Micropolis. The
increase in SG&A during the period was partially offset by a full year of cost
reduction efforts which were implemented in the latter half of fiscal 1996.
RESTRUCTURING COSTS
During the third quarter of fiscal 1998, the Company incurred a
restructuring charge of $93.7 million. The restructuring costs reflect the
Company's strategy to align worldwide operations with market conditions and to
improve the productivity of the Company's manufacturing facilities. The
restructuring costs were primarily associated with the Company's decision to
cease its manufacturing operations in Malaysia and the write-off of excess
equipment at the Company's other manufacturing locations.
The restructuring costs consisted of $70.0 million to write-off or
write-down facilities and equipment, $7.2 million to write off goodwill
associated with the Company's original purchase of its Malaysian
26
<PAGE> 27
manufacturing operations, $10.0 million for severance and benefits for
terminated employees, and $6.5 million for other expenses associated with the
restructuring plan. In connection with the restructuring plan, the Company
expected a workforce reduction of approximately 4,300 full-time manufacturing
employees. As of September 30, 1998, approximately 4,200 employees had been
terminated and cash payments totaling approximately $13.3 million had been made
for employee severance and benefits and other expenses associated with the
restructuring plan. The Company expects to make additional cash payments of
approximately $3.2 million for employee severance and benefits and other
expenses associated with the restructuring plan in fiscal 1999. The Company
anticipates the implementation of the restructuring plan will be substantially
complete by the end of December 1998.
INTEREST EXPENSE
Fiscal 1998 Compared to Fiscal 1997
Interest expense was $29.6 million during fiscal 1998, compared to $15.7
million during fiscal 1997. The increase in interest expense during fiscal 1998
was primarily due to the increased debt from the Company's $345 million
convertible subordinated notes, which were issued in August 1997, offset by the
repayment in August 1997 of the Company's 7.53% $100 million senior notes.
Fiscal 1997 Compared to Fiscal 1996
Interest expense was $15.7 million during fiscal 1997, compared to $12.9
million during fiscal 1996. The increase in interest expense during fiscal 1997
was primarily due to a $2.4 million charge in the fourth quarter related to a
pre-payment premium and incremental interest expense associated with the
Company's repayment of $100 million in senior notes, and interest on the
Company's $345 million convertible subordinated notes which were issued in
August 1997.
INTEREST INCOME AND OTHER, NET
Fiscal 1998 Compared to Fiscal 1997
Interest income and other, net was $7.1 million during fiscal 1998,
compared to $8.6 million during fiscal 1997. The decrease in interest income and
other, net during fiscal 1998 was due to higher foreign exchange losses in
fiscal year 1998 as compared to fiscal 1997. These losses were due primarily to
foreign exchange losses related to the Malaysian Ringgit which were offset
somewhat by foreign exchange gains related to the Japanese Yen. The foreign
exchange losses in fiscal year 1998 was partially offset by higher interest
income on higher average cash balances during fiscal year 1998 as compared to
fiscal year 1997.
Fiscal 1997 Compared to Fiscal 1996
Interest income and other, net was $8.6 million during fiscal 1997,
compared to $9.0 million during fiscal 1996. The decrease in interest income and
other, net during fiscal 1997 was primarily due to lower interest income on
lower average cash balances, partially offset by foreign exchange gains related
to Read-Rite SMI.
PROVISION FOR INCOME TAXES
Fiscal 1998 Compared to Fiscal 1997
The federal, state and foreign tax benefit rate was 6.5% during fiscal
1998, compared to a combined tax rate of 26.0% during fiscal 1997. The decrease
in the combined rate during fiscal 1998 was primarily 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.
The Company did not provide for U.S. federal income taxes on undistributed
earnings of foreign subsidiaries, which it intends to permanently reinvest in
those operations, for any of the three fiscal years in the period ended
September 30, 1998. See also Note 6 in "Notes to Consolidated Financial
Statements."
27
<PAGE> 28
Fiscal 1997 Compared to Fiscal 1996
The combined tax rate was 26.0% during fiscal 1997, compared to 883.0%
during fiscal 1996. The decrease in the combined tax rate during fiscal 1997 was
primarily due to a shift in pretax income from foreign operations. During fiscal
1997, the Company experienced higher pretax income from foreign operations in
lower tax jurisdictions and lower pretax income from foreign operations in
higher tax jurisdictions compared to fiscal 1996. The combined tax rate during
fiscal 1997 differed from the federal statutory rate primarily due to foreign
earnings taxed at lower rates, partially offset by losses for which no current
year benefit is available.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Company considers a product to be in "Year
2000 compliance" if the product's performance and functionality are unaffected
by processing of dates prior to, during and after the year 2000, but only if all
products (for example, hardware, software and firmware) used with the product
properly exchange accurate date data with it. The Company has a program to
assess the capability of its products to determine whether or not they are in
Year 2000 compliance. The Company believes its head products are transparent to
Year 2000 requirements. As used herein, Year 2000 capable means, with respect to
its head products, that when used properly and in conformity with the product
information provided by the Company, the Company's products will accurately read
and write from the disk or from, into and between the twentieth and twenty-first
centuries, including leap year calculations, provided that all other
technologies and products used in combination with the Read-Rite products are in
Year 2000 compliance.
The Company does not believe it is legally responsible for costs incurred
by customers related to ensuring such customers' or end-users' Year 2000
capability. The Company has contacted its major customers to determine whether
their products into which the Company's products have been and will be
integrated are Year 2000 compliant. The Company has received assurances of Year
2000 compliance from a number of those customers. The Company anticipates that
substantial litigation may be brought against vendors, including the Company, of
all component products of systems that are unable to properly manage data
related to the Year 2000. The Company's agreements with customers typically
contain provisions designed to limit the Company's liability for such claims. It
is possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local laws
or ordinances or unfavorable judicial decisions. Any such claims, with or
without merit, could result in a material adverse affect on the Company's
business, financial condition and results of operations, including increased
warranty costs, customer satisfaction issues and potential lawsuits. The Company
has also initiated formal communications with its critical suppliers and
financial institutions to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issue.
To date the Company has contacted its critical suppliers and financial
institutions and has received assurances of Year 2000 compliance from a number
of those contacted. Most of the suppliers under existing contracts with the
Company are under no contractual obligation to provide such information to the
Company. The Company is taking steps with respect to new supplier agreements to
ensure that the suppliers' products and internal systems are Year 2000
compliant.
In fiscal 1998, a high level assessment was performed on the Company's
internal systems by an outside consulting group. This high level assessment
identified all critical and non-critical internal systems and the resources
required to ensure these systems are Year 2000 compliant. With this assessment,
the Company has developed and initiated a comprehensive program to address both
Year 2000 readiness in its internal systems and with its customers and
suppliers. The Company's program has been designed to address its most critical
internal systems first and to gather information regarding the Year 2000
compliance of products supplied to it and into which the Company's products are
integrated. The Company has formed internal teams to address Year 2000 readiness
at each of its manufacturing locations. Detailed assessment and remediation,
deployment, and integration testing of the Company's internal systems are
proceeding in tandem, and the Company intends to have its critical internal
systems in Year 2000 compliance by October 1, 1999 the first day of the
Company's fiscal year 2000. These activities are intended to encompass all major
categories of systems in use by the
28
<PAGE> 29
Company, including manufacturing, engineering, sales, finance and human
resources and will involve both the use of internal resources and outside
consultants. Certain of the Company's finance and human resource systems are
Year 2000 compliant as of September 30, 1998.
The costs incurred by the Company during fiscal 1998 related to its Year
2000 readiness program was less than $1 million. The Company currently expects
that the total cost of its Year 2000 readiness programs, excluding redeployed
resources, will not exceed $5 million over the next fiscal year. The total cost
estimate does not include potential costs related to any customer, vendor, or
other claims or the costs of internal software or hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of the Company's Year 2000 readiness needs, as defined by the high
level assessment performed in fiscal 1998, and is subject to change as the
projects proceed. The Company is identifying Year 2000 dependencies in its
equipment, processes and systems and is implementing changes to or replacements
of affected equipment, processes and systems to make them Year 2000 compliant.
There can be no assurance that the Company will have identified all such
dependencies (including those on its vendors, customers, or financial
institutions) or that it will implement its changes in an efficient and timely
manner or that any new systems will be adequate to support the Company's
operations. Problems with installation or initial operation of the changed
systems or replacements could cause substantial management difficulties in
operations planning, financial reporting and management and thus could have a
material adverse effect on the Company's business, financial condition and
results of operations. The cost of bringing the Company's systems into Year 2000
compliance is not expected to have a material effect on the Company's financial
condition or results of operations.
While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of changes in or
replacements of information systems or a failure to fully identify all Year 2000
dependencies in the Company's systems and in the systems of its suppliers,
customers and financial institutions could have material adverse effect on the
Company's business, financial condition and results of operations. Therefore,
the Company is developing contingency plans for continuing operations in the
event such problems arise.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash, cash equivalents and
short-term investments of $108.5 million, total assets of $879.8 million and
total long-term debt and capital leases, including the current portion, of
$403.3 million. The Company's cash used in operating activities was $8.8 million
during fiscal 1998, including non-cash charges of $229.1 million from
depreciation and amortization and $77.2 million from restructuring costs.
The Company's business is highly capital intensive. During fiscal 1998, the
Company incurred capital expenditures of approximately $186.2 million. Capital
expenditures have primarily been made to expand production capacity in Thailand,
the Philippines, and 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. The Company's plan for capital equipment purchases
during fiscal 1999 is between approximately $125 million and $150 million;
however, to the extent yields for the Company's products are lower than
expected, demand for such products exceed Company expectations, or the Company's
manufacturing process requirements change significantly, such expenditures may
increase. Conversely, if demand is less than anticipated, or if the Company is
unable to obtain adequate financing for such capital equipment purchases, the
planned capital equipment purchases may decrease. As of September 30, 1998,
total commitments for construction or purchase of capital equipment were
approximately $38 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.
In December 1993, the Company and Sumitomo invested an additional $2.8
million and $9.2 million, respectively, in Read-Rite SMI to support Read-Rite
SMI's development of MR technology. During fiscal 1999, the Company and Sumitomo
expect to fund Read-Rite SMI equally for any working capital requirements that
exceed Read-Rite SMI's cash, cash equivalent and short-term investment balances
at
29
<PAGE> 30
September 30, 1998. Read-Rite SMI's balance sheet at September 30, 1998 included
cash, cash equivalents and short-term investments of $10.9 million, and total
assets of $141.2 million.
The Company has a $150 million secured credit facility ("Credit Facility")
with a syndicate of financial institutions. The facility, which expires on
October 2, 2001, consists of an $50 million term loan and a $100 million
revolving line of credit. As of September 30, 1998, the $50 million term loan
was outstanding in full and no amounts were outstanding under the $100 million
revolving line of credit. The term loan provides for quarterly principal
payments, beginning January 1999 and continuing through October 2001. The
facility is secured by the assets of the Company and 65% of the stock of the
Company's international subsidiaries. Borrowings under the revolving credit
facility are based upon eligible receivables and cash balances of the Company.
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
and observe a series of additional covenants, and prohibits the Company from
paying dividends without prior bank approval.
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. Interest is paid semi-annually in March and
September. The Notes are subordinated in right of payment to all existing and
future senior debt of the Company and may be redeemed at the option of the
Company subsequent to September 2000. The Notes are convertible at any time at a
conversion rate of 24.8524 shares per $1,000 principal amount of Notes
(equivalent to approximately $40.24 per share), subject to adjustment. Upon a
change in ownership control of the Company, the holders of the Notes will have
the right to require the Company to purchase all or part of their notes at 100%
of the principal amount, plus accrued interest. The repurchase price is payable
in cash or, subject to certain requirements, in shares of common stock. The
Company used a portion of the funds received from the public offering to pay off
the $100 million 7.53% senior notes. As of September 30, 1998, the entire $345
million represented by the Notes was outstanding.
In 1995, the Company's board of directors approved a stock repurchase
program authorizing the Company to repurchase up to 2,000,000 shares of its
common stock on the open market, subject to certain conditions. As of March 31,
1996, the Company had repurchased all of the 2,000,000 shares authorized under
this program. In February 1996, the Board authorized the repurchase of an
additional 2,000,000 shares of common stock on the open market, subject to
certain conditions. During the first quarter of fiscal year 1998, the Company
repurchased 5,000 shares for approximately $102,000. As of September 30, 1998,
1,995,000 shares remained authorized for repurchase.
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 1999. However, if industry conditions
remain unfavorable, the Company does not consistently achieve timely customer
qualifications on new product programs, or the Company is unsuccessful at
ramping up volume production on new products at acceptable yields, the Company's
working capital and other capital needs will increase. Conversely, if industry
demand increases significantly such that the Company's capital requirements
exceed management's current estimates, the Company may again need to raise
additional capital. The Company may seek such capital through additional bank
facilities, debt or equity offerings, or other sources. Further, the Company may
elect from time to time to seek additional financing to the extent available.
There can be no assurance, however, that any such required financing will be
available when needed on terms and conditions acceptable or favorable to the
Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The Credit Facility
currently prohibits payment of cash dividends.
30
<PAGE> 31
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company does not use derivative financial instruments in its investment
portfolio. The Company's main investment objectives are the preservation of
investment capital, which is accomplished by investing with only high credit
quality issuers and limiting the amount of credit exposure to any one issuer and
the maximization of after-tax return on its investment portfolio.
The Company mitigates default risk by investing in only the safest and
highest credit quality securities and by monitoring the credit rating of
investment issuers. The portfolio includes only marketable securities with
active secondary or resale markets with original maturities of 18 months or less
in order to meet the liquidity needs of the Company.
The Company has no cash flow exposure due to rate changes for cash
equivalents and short-term investments as all these instruments are at fixed
interest rates. The Company's short-term borrowing is at a variable interest
rate. Long-term debt is at both fixed and variable interest rates. The Company
primarily enters into debt obligations to support general corporate purposes
including capital expenditures and working capital needs.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations.
<TABLE>
<CAPTION>
FAIR VALUE
SEPTEMBER 30,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
IN MILLIONS ---- ----- ----- ---- ---- ---------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents.................. $34.0 -- -- -- -- -- $ 34.0 $ 34.0
Average interest rate........... 5.47% -- -- -- -- -- 5.47%
Short-term investments............ $46.0 -- -- -- -- -- $ 46.0 $ 46.0
Average interest rate........... 6.28% -- -- -- -- -- 6.28%
Total investment securities....... $80.0 -- -- -- -- -- $ 80.0 $ 80.0
Average interest rate........... 5.94% -- -- -- -- -- 5.94%
Short-term borrowing.............. $ 7.4 -- -- -- -- -- $ 7.4 $ 7.4
Average interest rate........... 2.82% -- -- -- -- -- 2.82%
Long-term debt
Fixed rate...................... $ 0.6 $ 0.3 -- -- -- $345.0 $345.9 $183.8
Average interest rate......... 6.50% 6.50% -- -- -- 6.50% 6.50%
Variable rate................... $14.2 $13.8 $22.4 $6.3 -- -- $ 56.7 $ 56.7
Average interest rate(1)...... 7.98% 7.89% 7.72% 7.72% -- -- 7.83%
Total debt........................ $22.2 $14.1 $22.4 $6.3 -- $345.0 $410.0 $247.9
Average interest rate........... 6.22% 7.86% 7.72% 7.72% -- 6.50% 6.61%
</TABLE>
- ---------------
(1) Variable rates on debt are estimated assuming no changes in underlying
factors, including the London Interbank Offered Rate ("LIBOR").
Foreign Currency Risk
The Company transacts business in various foreign countries. Its primary
foreign currency cash flows are in emerging market countries in Asia. During
1998 and 1997, the Company employed a foreign currency hedging program utilizing
foreign currency forward exchange contracts and purchased currency options to
hedge certain foreign currency commitments, certain foreign currency denominated
balance sheet positions, and local currency cash flows for payroll, inventory,
and other operating expenditures in Thailand, Malaysia, Singapore, Japan, and
the Philippines. Under this program, increases or decreases in certain local
currency commitments and balance sheet positions, and increases or decreases in
local currency operating expenses and
31
<PAGE> 32
other cash outflows, as translated into U.S. dollars, are partially offset by
realized gains and losses on the hedging instruments. The goal of this hedging
program is to economically guarantee or lock in the exchange rates on the
Company's foreign currency cash outflows and to minimize the impact to the
Company of currency exchange rate fluctuations. The Company does not use foreign
currency forward exchange contracts or purchased currency options for
speculative or trading purposes.
Under the Company's foreign currency hedging program, all foreign currency
contracts are marked-to-market and unrealized gains and losses are included in
current period net income.
The table below provides information as of September 30, 1998 about the
Company's derivative financial instruments, which are comprised of foreign
currency forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts, as presented in the Company's financial statements. The
table presents the notional amounts (at the contract exchange rates) and the
weighted average contractual foreign currency exchange rates.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------
NOTIONAL AVERAGE ESTIMATED
IN THOUSANDS, EXCEPT AVERAGE CONTRACT RATE AMOUNT CONTRACT RATE FAIR VALUE
------------------------------------------ -------- ------------- ----------
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Philippine Peso........................................... $ 9,014 43.76 $ 12
Thai Baht................................................. $19,073 40.30 $636
Japanese Yen.............................................. $14,800 134.62 $(18)
</TABLE>
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 62,444 $ 118,589
Short-term investments.................................... 46,038 179,508
Accounts receivable, net of allowance of $5,637 in 1998
and
$14,887 in 1997........................................ 110,337 178,722
Inventories............................................... 52,367 91,487
Prepaid expenses and other current assets................. 10,061 14,988
-------- ----------
Total current assets.............................. 281,247 583,294
Property, plant and equipment, net.......................... 573,633 672,813
Intangible and other assets................................. 24,920 45,374
-------- ----------
Total assets...................................... $879,800 $1,301,481
======== ==========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing...................................... $ 7,399 $ --
Accounts payable.......................................... 89,857 122,379
Accrued compensation and benefits......................... 28,943 37,558
Income taxes payable...................................... 380 26,071
Other accrued liabilities................................. 41,985 41,499
Current portion of long-term debt and capital lease
obligations............................................ 15,065 12,602
-------- ----------
Total current liabilities......................... 183,629 240,109
Convertible subordinated notes.............................. 345,000 345,000
Other long-term debt and capital lease obligations.......... 43,248 58,871
Other long-term liabilities................................. 31,978 38,726
-------- ----------
Total liabilities................................. 603,855 682,706
-------- ----------
Commitments and contingencies
Minority interest in consolidated subsidiary................ 42,016 73,122
Stockholders' equity:
Preferred stock, $0.0001 par value; 4,000 shares
authorized, none issued................................ -- --
Common stock, $0.0001 par value; 160,000 shares
authorized, 48,764 and 48,133 issued in 1998 and 1997,
respectively........................................... 5 5
Additional paid-in capital................................ 363,176 354,546
(Accumulated deficit) Retained earnings................... (129,252) 191,102
-------- ----------
Total stockholders' equity........................ 233,929 545,653
-------- ----------
Total liabilities, minority interest in
consolidated subsidiary and stockholders'
equity.......................................... $879,800 $1,301,481
======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 34
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
--------- ---------- --------
<S> <C> <C> <C>
Net sales................................................ $ 808,622 $1,162,050 $991,118
Cost of sales............................................ 941,402 923,244 887,464
--------- ---------- --------
Gross margin............................................. (132,780) 238,806 103,654
Operating expenses:
Research and development............................... 92,265 64,995 52,221
Selling, general and administrative.................... 34,137 54,098 43,644
Restructuring costs.................................... 93,728 -- --
--------- ---------- --------
Total operating expenses....................... 220,130 119,093 95,865
--------- ---------- --------
Operating income (loss).................................. (352,910) 119,713 7,789
Interest expense......................................... 29,648 15,699 12,897
Interest income and other, net........................... 7,126 8,627 9,024
--------- ---------- --------
Income (loss) before provision (benefit) for income taxes
and minority interest.................................. (375,432) 112,641 3,916
Provision (benefit) for income taxes..................... (24,577) 29,311 34,582
--------- ---------- --------
Income (loss) before minority interest................... (350,855) 83,330 (30,666)
Minority interest in net income (loss) of consolidated
subsidiary............................................. (31,108) 7,151 12,320
--------- ---------- --------
Net income (loss)........................................ $(319,747) $ 76,179 $(42,986)
========= ========== ========
Basic net income (loss) per share........................ $ (6.59) $ 1.61 $ (0.92)
========= ========== ========
Diluted net income (loss) per share...................... $ (6.59) $ 1.56 $ (0.92)
========= ========== ========
Number of shares used in per share computation:
Basic.................................................... 48,513 47,444 46,755
========= ========== ========
Diluted.................................................. 48,513 48,775 46,755
========= ========== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
34
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss)........................................ $(319,747) $ 76,179 $(42,986)
Adjustments required to reconcile net income (loss) to
cash provided by operations:
Depreciation........................................... 223,980 166,043 124,783
Amortization........................................... 5,077 2,338 2,231
Bad debt provision..................................... -- 12,301 (620)
Non-cash portion of restructuring costs................ 77,205 -- --
Minority interest in net income (loss) of
consolidated subsidiary............................. (31,108) 7,151 12,320
Deferred income taxes.................................. (24,988) 18,958 5,068
Loss on disposal of fixed assets....................... 1,261 898 23
Other non-cash expenses................................ 2,194 3,281 2,709
Changes in assets and liabilities:
Accounts receivable................................. 68,378 (98,530) 54,704
Inventories......................................... 39,120 (34,094) (5,128)
Prepaid expenses and other current assets........... 4,934 (6,472) (1,520)
Accounts payable, accrued liabilities and income
taxes payable..................................... (55,068) 42,059 18,838
--------- --------- --------
Net cash provided by (used in) operating activities.... (8,762) 190,112 170,422
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (186,223) (272,768) (265,847)
Maturities of available-for-sale investments............. 675,541 540,390 839,623
Maturities of held-to-maturity investments............... -- -- 168,093
Purchase of available-for-sale investments............... (542,071) (654,009) (980,075)
Other assets and liabilities, net........................ (1,650) (6,369) (3,766)
--------- --------- --------
Net cash used in investing activities.................. (54,403) (392,756) (241,972)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowing....................... 6,952 -- --
Proceeds from convertible subordinated debt, net......... -- 336,025 --
Proceeds from other long-term debt....................... -- -- 50,000
Payment of other long-term debt and capital lease
obligations............................................ (5,761) (116,177) (22,960)
Proceeds from issuance of common stock, net.............. 5,727 15,822 5,827
Repurchase of common stock............................... 102 -- (43,046)
--------- --------- --------
Net cash provided by (used in) financing activities.... 7,020 235,670 (10,179)
--------- --------- --------
Effect of foreign currency exchange rate changes on
cash................................................... -- 3,272 (4,840)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents..... (56,145) 36,298 (86,569)
Cash and cash equivalents at beginning of period......... 118,589 82,291 168,860
--------- --------- --------
Cash and cash equivalents at end of period............... $ 62,444 $ 118,589 $ 82,291
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Property and equipment acquired under capital leases... $ -- $ -- $ 1,018
Issuance of common stock under 401k plan............... 2,801 2,611 2,702
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year.......................... 28,751 14,423 11,669
Income taxes paid during the year...................... 232 12,641 42,542
</TABLE>
See accompanying notes to the consolidated financial statements.
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(ACCUMULATED
COMMON COMMON ADDITIONAL DEFICIT) TOTAL
STOCK STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995...... 47,556 $ 5 $370,623 $ 167,349 $537,977
Issuance of common stock under
stock option plans............... 466 -- 4,099 -- 4,099
Issuance of common stock under
employee stock purchase plan..... 109 -- 1,735 -- 1,735
Issuance of common stock under
401(k) plan...................... 140 -- 2,702 -- 2,702
Repurchase of common stock......... (1,500) -- (43,046) -- (43,046)
Foreign currency translation
adjustment, net of deferred tax
liability of $5,473.............. -- -- -- (6,685) (6,685)
Change in unrealized gain on
available-for-sale investments,
net of income taxes.............. -- -- -- 3 3
Net loss........................... -- -- -- (42,986) (42,986)
------ --- -------- --------- --------
Balance at September 30, 1996...... 46,771 5 336,113 117,681 453,799
Issuance of common stock under
stock option plans............... 924 -- 11,498 -- 11,498
Issuance of common stock under
employee stock purchase plan..... 326 -- 4,324 -- 4,324
Issuance of common stock under
401(k) plan...................... 112 -- 2,611 -- 2,611
Repurchase of common stock......... -- -- -- -- --
Foreign currency translation
adjustment, net of deferred tax
liability of $408................ -- -- -- (3,441) (3,441)
Change in unrealized gain on
available-for-sale investments,
net of income taxes.............. -- -- -- 683 683
Net income......................... -- -- -- 76,179 76,179
------ --- -------- --------- --------
Balance at September 30, 1997...... 48,133 5 354,546 191,102 545,653
Issuance of common stock under
stock option plans............... 104 -- 921 -- 921
Issuance of common stock under
employee stock purchase plan..... 332 -- 5,010 -- 5,010
Issuance of common stock under
401(k) plan...................... 200 -- 2,801 -- 2,801
Repurchase of common stock......... (5) -- (102) -- (102)
Change in unrealized gain on
available-for-sale investments,
net of income taxes.............. -- -- -- (607) (607)
Net loss........................... -- -- -- (319,747) (319,747)
------ --- -------- --------- --------
Balance at September 30, 1998...... 48,764 $ 5 $363,176 $(129,252) $233,929
====== === ======== ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Read-Rite Corporation (the "Company") designs, manufactures and markets
magnetic recording heads and head stack assemblies for storage device
manufacturers. The substantial majority of the Company's net sales during fiscal
1998 were to six major storage device manufacturers whose corporate headquarters
primarily reside in the United States.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority-owned subsidiaries, including Read-Rite SMI,
the Company's joint venture in Japan with Sumitomo Metal Industries, Ltd
("Sumitomo"). All material intercompany accounts and transactions have been
eliminated in consolidation.
Minority Interest represents the minority stockholder's proportionate share
of the equity in the net assets and in the net income or loss of Read-Rite SMI.
The Company owns 50% plus two shares of the voting stock of Read-Rite SMI. All
decisions made by Read-Rite SMI in the ordinary course of business require a
simple majority vote of the Board of Directors of Read-Rite SMI. In the case of
a shareholder vote due to the lack of the required vote by the Board of
Directors, a simple majority shareholder vote is required.
The Company maintains a fifty-two/fifty-three week fiscal year cycle ending
on the Sunday closest to September 30. To conform the Company's fiscal year
ends, a fifty-third week must be added to every sixth or seventh fiscal year.
Fiscal years 1998, 1997 and 1996 each comprised 52 weeks and ended on September
27, September 28, September 29, respectively. For convenience, the accompanying
financial statements have been shown as ending on the last day of the calendar
month.
Certain amounts in prior year's financial statements have been reclassified
to conform to the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
The actual results with respect to restructuring charges could have a
material unfavorable impact on the Company's financial position and results of
operations if the actual expenditures to implement the restructuring plan are
greater than current estimates.
The Company is a custom component supplier dependent on a limited number of
customers in a single, volatile industry characterized by short product life
cycles, rapid technological change and obsolescence of inventory and related
production equipment. Management develops sales forecasts based upon the
expected production requirements of its primary customers; however such
forecasts are subject to modifications, cancellations and rescheduling. The
Company has provided write-downs for potentially excess or obsolete inventories
and production equipment. The Company believes these write-downs are adequate to
cover any losses incurred upon disposition. However, it is reasonably possible
that actual sales may differ materially from the sales forecast in the near
term, which could require additional reserves.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment and provides currently
for the estimated costs to rework products that may be returned for not meeting
customer specifications.
37
<PAGE> 38
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 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. Basic
earnings per share excludes the dilutive effect of options and convertible
securities while primary earnings per share included the impact of these common
stock equivalents. Diluted earnings per share is 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
SFAS 128. The adoption of SFAS 128 did not have a material impact on the
Company's earnings per share.
Basic earnings per share is based on the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share also
includes the effect of stock options outstanding during the period and assumes
the conversion of the Company's convertible subordinated notes for the period of
time such notes were outstanding, if such stock options and convertible notes
are dilutive.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with insignificant
interest rate risk and original maturities of three months or less to be cash
equivalents. Investments with original maturities greater than three months and
remaining maturities less than one year are classified as short-term
investments. The Company does not currently hold any investments with remaining
maturities greater than one year. Investments consist primarily of A1 and P1, or
equivalently rated financial instruments.
The Company classifies its entire investment portfolio as
available-for-sale. Available-for-sale securities are carried at fair value,
based on quoted market prices, with unrealized gains and losses, net of tax,
reported as a component of retained earnings within stockholder's equity.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income and
other, net.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The depreciation for
property, plant and equipment of the Company and its subsidiaries are provided
primarily on a straight-line basis over the estimated useful lives of the
assets. The estimated useful lives range from two to ten years for equipment and
furniture and fixtures, and primarily twenty years for buildings. Leasehold
improvements are amortized over the useful lives of the improvements or the
remaining lease term, whichever is shorter. Amortization of assets recorded
under capital leases is included with depreciation expense. The Company
evaluates property, plant and equipment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). In accordance with SFAS 121, the carrying value of
property, plant and equipment is reviewed if the facts and circumstances suggest
that property, plant and equipment may be permanently impaired. If this review
indicates an asset's carrying value is not recoverable, the asset's carrying
value is reduced to its estimated fair value.
INTANGIBLE AND OTHER ASSETS
The deferred costs associated with the Company's convertible subordinated
notes offering, as further discussed in Note 4, "Long-Term Debt and Capital
Lease Obligations," was $7,618,515 and $8,975,000 at September 30, 1998 and
1997, respectively. Accumulated amortization was $1,388,985 and $107,000 at
September 30, 1998 and 1997, respectively, and is being amortized to interest
expense on a straight-line basis over the term of the notes.
38
<PAGE> 39
The excess of the purchase price over the fair market value of identifiable
assets of businesses acquired and associated accumulated amortization was
$21,651,000 and $12,728,000, respectively, at September 30, 1997. During the
third quarter of fiscal 1998, the Company wrote off the remaining amount of the
above intangible as part of a restructuring charge, as further discussed in Note
10, "Restructuring Costs."
RESEARCH AND DEVELOPMENT EXPENSES
From time to time, the Company has engaged in fully or partially funded
research and development for certain existing or potential customers. R&D
expenses under such projects were offset as incurred to the extent development
funds were provided. During 1998, $8.6 million of R&D expenses were offset by
development funding. During 1997, R&D expenses were offset by development
funding of $2.3 million.
SHORT-TERM BORROWING
Short-term borrowing at September 30, 1998 consists of a Japanese Yen
denominated loan from a related party, Sumitomo, to Read-Rite SMI of
approximately $7,399,000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes unrealized gains and
losses and translation adjustments. SFAS 130 is effective for fiscal years
beginning after December 15, 1997 and will be adopted by the Company in fiscal
1999. Adoption of SFAS 130 is not expected to have a material impact on the
Company's financial statements.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting
Standards No. 14 and changes the way public companies report segment
information. SFAS 131 is effective for fiscal years beginning after December 15,
1997 and will be adopted by the Company in fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and will be adopted by the Company
for its fiscal year 2000. The Company is in the process of assessing the impact
of SFAS 133 on its financial statements.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT
During fiscal 1998, all foreign operations had the U.S. dollar as the
functional currency. As such, monetary assets and liabilities are remeasured at
the year-end exchange rates. Certain non-monetary assets and liabilities are
remeasured using historical rates. Statements of operations are remeasured at
the average exchange rates during the year. Gains and losses from foreign
currency remeasurement are included in interest income and other, net.
On October 1, 1997, the Company changed the functional currency of its
Japanese based joint venture, Read-Rite SMI, from the local Yen currency to the
U.S. dollar to reflect the significance of predominately U.S. dollar based
revenues. The ending foreign currency translation adjustment of $739,000 will
remain as a component of retained earnings and the translated amounts for
non-monetary assets as of September 30, 1997 will become the accounting basis
for those assets in the future.
39
<PAGE> 40
During fiscal 1997 and 1996, Read-Rite SMI's assets and liabilities are
translated at year-end exchange rates, and statements of operations are
translated at the average exchange rates during the year. Gains or losses
arising from the translation of foreign currency denominated assets and
liabilities have been included as a component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency commitments,
certain foreign currency denominated balance sheet positions and anticipated
foreign currency denominated expenditures. The Company does not enter into
derivative financial instruments for speculative or trading purposes.
During fiscal 1998, the Company managed foreign currency exposure for the
Malaysian Ringgit, Thai Baht, Singapore Dollar, Philippine Peso and Japanese
Yen. Realized and unrealized gains and losses on foreign currency forward
contracts are not deferred and are recorded in interest income and other, net.
Interest income and other, net, includes realized and unrealized gains and
losses on foreign currency forward contracts and remeasurement gain and losses.
These amounted to a net foreign exchange loss of $2,574,000 in fiscal 1998 and a
net foreign exchange gain of $3,579,000 and $408,000 during fiscal 1997 and
1996, respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations. In
accordance with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation", pro forma net income and net income per share
amounts have been disclosed in Note 8, Employee Stock and Benefit Plans.
NOTE 2. FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of September 30, 1998 and 1997 all investments were classified as
available-for-sale. The following is a summary of available-for-sale securities
at September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
COST GAIN FAIR VALUE
--------- ---------- ----------
<S> <C> <C> <C>
Money market funds.................................. $29,067 $-- $29,067
Commercial paper.................................... 4,981 -- 4,981
Certificates of deposit............................. 5,058 -- 5,058
Auction rate preferred stocks....................... 40,901 80 40,981
------- --- -------
Total available-for-sale securities....... $80,007 $80 $80,087
======= === =======
Included in cash equivalents........................ 34,048
Included in short-term investments.................. 46,039
-------
Total available-for-sale securities....... $80,087
=======
</TABLE>
40
<PAGE> 41
The following is a summary of available-for-sale securities at September
30, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money market funds...................... $ 51,495 $ -- $-- $ 51,495
Commercial paper........................ 138,899 678 -- 139,577
Certificates of deposit................. 29,233 -- (1) 29,232
Auction rate preferred stocks........... 36,900 -- -- 36,900
U.S. government agency securities....... 19,970 9 -- 19,979
-------- ---- --- --------
Total available-for-sale
securities.................. $276,497 $687 $(1) $277,183
======== ==== === ========
Included in cash equivalents............ 97,675
Included in short-term investments...... 179,508
--------
Total available-for-sale
securities.................. $277,183
========
</TABLE>
There were no material gross realized gains or losses in any category of
investment during fiscal 1998 and 1997. The unrealized gain, net of tax, is
reported as a component of retained earnings within stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments at
September 30 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Foreign currency forward contracts to purchase foreign
currencies:
Philippine Peso........................................... $ 9,014 $17,128
Thai Baht................................................. $19,073 $45,622
Japanese Yen.............................................. $14,800 $ --
Singapore Dollar.......................................... $ -- $ 3,111
Malaysian Ringgit......................................... $ -- $51,139
Currency swap agreement:
Japanese Yen.............................................. $ -- $30,000
Foreign currency forward contracts to sell foreign
currencies:
Thai Baht................................................. $ -- $ 3,231
Malaysian Ringgit......................................... $ -- $ 4,435
Foreign currency option to buy foreign currencies:
Japanese Yen.............................................. $ -- $ 6,000
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies using current market rates. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. Fair
values of cash and cash equivalents and short-term investments approximate
amortized cost due to the short period of time to maturity. The fair value of
other long-term debt approximates the recorded value due to floating interest
rates. The fair value of the convertible subordinated notes is determined based
on quoted market value.
41
<PAGE> 42
Estimated fair values of financial instruments outstanding at September 30
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1998 1997 1997
-------- ---------- -------- ----------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 62,444 $ 62,444 $118,589 $118,589
Short-term investments.......................... 46,038 46,038 179,508 179,508
Convertible subordinated notes.................. 345,000 182,850 345,000 345,000
Other long-term debt............................ 57,641 57,641 69,035 69,035
Currency swap agreement......................... -- -- -- 2,000
Foreign currency forward contracts.............. 630 630 (2,128) (2,128)
Foreign currency option......................... -- -- 148 90
</TABLE>
NOTE 3. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Inventories consisted of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw material................................................ $ 8,653 $13,097
Work-in-process............................................. 39,516 73,280
Finished goods.............................................. 4,198 5,110
------- -------
Total inventories................................. $52,367 $91,487
======= =======
</TABLE>
Property, plant and equipment, net consisted of the following at September
30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land........................................................ $ 10,903 $ 10,903
Building.................................................... 94,257 76,038
Equipment................................................... 1,046,011 929,320
Furniture and fixtures...................................... 12,991 12,291
Leasehold improvements...................................... 85,893 62,890
---------- ----------
Property, plant and equipment............................. 1,250,055 1,091,442
Less: Accumulated depreciation.............................. 676,422 418,629
---------- ----------
Total property, plant and equipment, net.......... $ 573,633 $ 672,813
========== ==========
</TABLE>
NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Convertible subordinated notes due 2004 at 6.5%............. $345,000 $345,000
Secured term loan due 1999-2001 at LIBOR + 2%............... 50,000 50,000
Secured loans due 1998-2000 at LIBOR + 2.5%................. 6,672 18,977
Capital lease obligations and other......................... 1,641 2,496
-------- --------
Total debt and capital lease obligations.......... 403,313 416,473
Less: current portion....................................... 15,065 12,602
-------- --------
Total long-term debt and capital lease
obligations..................................... $388,248 $403,871
======== ========
</TABLE>
42
<PAGE> 43
At September 30, 1998, the future minimum principal payments on long-term
debt and capital lease obligations were as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 15,065
2000........................................................ 14,498
2001........................................................ 22,500
2002........................................................ 6,250
2003........................................................ --
After 2003.................................................. 345,000
--------
Total future minimum principal payments on
long-term debt and capital lease obligations.... $403,313
========
</TABLE>
Obligations under capital leases represent the present value of future
minimum lease payments under various lease arrangements. The Company typically
has an option to purchase the leased assets at the end of the lease term for the
fair market value. Obligations under the lease agreements are collateralized by
the assets leased. Total assets under capital lease were approximately
$4,431,139 and $19,848,000 at September 30, 1998 and 1997, respectively.
Accumulated depreciation of assets under capital lease was approximately
$1,088,987 and $4,073,000 at September 30, 1998 and 1997, respectively.
CONVERTIBLE SUBORDINATED NOTES
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. Interest is paid semi-annually in March and
September. The Notes are subordinated in right of payment to all existing and
future senior debt of the Company and may be redeemed at the option of the
Company subsequent to September 2000. The Notes are convertible at any time at a
conversion rate of 24.8524 shares per $1,000 principal amount of Notes
(equivalent to approximately $40.24 per share), subject to adjustment. Upon a
change in ownership control of the Company, the holders of the Notes will have
the right to require the Company to purchase all or part of their notes at 100%
of the principal amount, plus accrued interest. The repurchase price is payable
in cash or, subject to certain requirements, in shares of common stock. The
Company used a portion of the funds received from the public offering to repay
$100 million of 7.53% senior notes. As of September 30, 1998, the entire $345
million represented by the Notes was outstanding.
SECURED TERM LOAN AND LINE OF CREDIT
As of September 30, 1998, the Company had a $150 million secured credit
facility. The $150 million credit facility, which expires on October 2, 2001,
includes a $50 million term loan and a $100 million revolving line of credit. As
of September 30, 1998, the $50 million term loan was outstanding in full and no
amounts were outstanding under the $100 million revolving line of credit.
Borrowings under the revolving credit facility are based upon eligible
receivables and cash balances of the Company.
The terms of the credit facility, which is secured by the assets of the
Company and 65% of the stock of the Company's international subsidiaries,
require the Company to maintain certain financial ratios and observe a series of
additional covenants, and prohibits the Company from paying dividends without
prior bank approval. The Company was in compliance with all covenants as of
September 30, 1998.
NOTE 5. COMMITMENTS
PURCHASE COMMITMENTS
Purchase commitments for construction or purchase of plant and equipment
for the Company totaled approximately $38 million at September 30, 1998.
43
<PAGE> 44
OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2003
and contain various provisions for rental adjustments including, in certain
cases, a provision based on increases in the consumer price index. Rental
expense under these leases and other cancelable operating leases was
approximately $10,697,000, $10,100,000 and $8,415,000 during fiscal years 1998,
1997 and 1996, respectively.
At September 30, 1998, the future minimum payments under operating leases
were as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 8,526
2000........................................................ 8,015
2001........................................................ 7,003
2002........................................................ 2,562
2003........................................................ 724
After 2003.................................................. --
-------
Total future minimum payments on operating leases........... $26,830
=======
</TABLE>
NOTE 6. INCOME TAXES
PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current:
State...................................... $ 153 $ 155 $ 161
Foreign.................................... 258 10,198 29,353
-------- ------- -------
411 10,353 29,514
Deferred:
Federal.................................... (21,308) 16,166 4,322
State...................................... (3,680) 2,792 746
-------- ------- -------
(24,988) 18,958 5,068
-------- ------- -------
Provision (benefit) for income taxes......... $(24,577) $29,311 $34,582
======== ======= =======
</TABLE>
44
<PAGE> 45
DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows for the years
ended September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Inventory........................................... $ 990 $ 1,064
Accrued compensation and other benefits............. 5,280 7,744
Basis difference in fixed assets.................... -- 1,570
Net operating loss carryforwards.................... 100,445 40,911
Deferred rental payments............................ 575 599
Allowance for doubtful accounts..................... 53 312
Charitable contribution carryforwards............... 726 406
Investment valuation................................ 492 --
Restructuring valuation............................. 311 --
Other............................................... 231 485
--------- --------
Total deferred tax assets, gross............ 109,103 53,091
Valuation allowance for deferred tax assets........... (109,103) (53,091)
--------- --------
Total deferred tax assets, net........................ -- --
--------- --------
Deferred tax liabilities:
Taxes on foreign operations including translation
gain............................................. -- 27,292
Basis difference in fixed assets.................... 2,304 --
--------- --------
Total deferred tax liabilities................... 2,304 27,292
--------- --------
Total deferred tax liabilities, net......... $ 2,304 $ 27,292
========= ========
</TABLE>
The Company's valuation allowance for deferred tax assets increased by
$56,012,000 and $8,438,000 during fiscal 1998 and 1997 respectively.
Approximately $34,936,000 of the Company's valuation allowance for deferred
assets at September 30, 1998 is related to income tax benefits for stock option
deductions, which will be credited to stockholders' equity when realized.
PROVISION FOR INCOME TAXES RECONCILIATION
The reconciliation of the provision for income taxes, with the amount
computed by applying the statutory federal income tax rate, is as follows for
the years ended September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Income tax expense (benefit) computed at federal statutory
rate...................................................... $(131,401) $39,425 $ 1,371
State income tax (benefit), net of federal benefit
(charge).................................................. (2,228) 1,916 485
Net foreign earnings subject to taxes at lower rates........ (295) (20,503) (1,299)
Benefit of losses offset by valuation allowance............. 53,937 8,473 --
Losses for which no tax benefit is available................ 55,410 -- 34,025
--------- ------- -------
Provision (benefit) for income taxes........................ $ (24,577) $29,311 $34,582
========= ======= =======
</TABLE>
Pretax loss from foreign operations was approximately $275,825,000 during
fiscal 1998 and pretax income from foreign operations was approximately
$125,203,000 and $25,507,000 during fiscal 1997 and 1996, respectively. The
fiscal 1998 tax benefit resulting from net pretax loss from foreign operations
was approximately $25,000,000 ($0.52 basic and diluted net income per share).
The Company enjoys tax holidays with respect to its two operations in Thailand
which will expire in fiscal 2001 (extended from the holiday expiring in 1998)
and 2002 and in Carmelray of the Philippines which will expire in fiscal 2001.
Due to net pretax loss from foreign operations in fiscal 1998, the Company
enjoyed minimal tax savings from these
45
<PAGE> 46
holidays in fiscal 1998. The impact of these holidays increased net income by
approximately $7,500,000 ($0.16 basic net income per share, $0.15 diluted net
income per share) during fiscal 1997 and decreased the net loss by approximately
$11,000,000 ($0.24 basic and diluted net income per share) during fiscal 1996.
At September 30, 1998, accumulated pretax earnings of approximately $17,869,000
are intended to be permanently reinvested outside the United States and no
federal tax has been provided on these earnings. A foreign tax credit of
approximately $34,415,000 would be available to offset federal tax upon
repatriation of foreign earnings.
At September 30, 1998, the Company had a federal net operating loss
carryforward of approximately $244,000,000 for United States federal tax return
purposes, expiring in fiscal years 1999 through 2012.
NOTE 7. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share for the years ended September 30.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1998 1997 1996
----------------------------------- --------- ------- --------
<S> <C> <C> <C>
BASIC NET (LOSS) PER SHARE COMPUTATION
Numerator:
Net (loss) income........................................ $(319,747) $76,179 $(42,986)
--------- ------- --------
Denominator:
Weighted average number of common shares outstanding
during the period..................................... 48,513 47,444 46,755
--------- ------- --------
Basic net (loss) income per share.......................... $ (6.59) $ 1.61 $ (0.92)
========= ======= ========
DILUTED NET (LOSS) PER SHARE COMPUTATION
Numerator:
Net (loss) income........................................ $(319,747) $76,179 $(42,986)
--------- ------- --------
Denominator:
Weighted average number of common shares outstanding
during the period..................................... 48,513 47,444 46,755
Incremental common shares issuable under stock option
plans after applying treasury stock method, net of tax
benefit............................................... -- 1,331 --
--------- ------- --------
Total...................................................... 48,513 48,775 46,755
--------- ------- --------
Diluted net (loss) income per share........................ $ (6.59) $ 1.56 $ (0.92)
========= ======= ========
</TABLE>
For the year ended September 30, 1998, incremental common shares
attributable to the issuance of shares under stock option plans (after applying
the treasury stock method, net of tax benefit) of approximately 490,000 shares
and assumed conversion of the Company's convertible subordinated notes of 8.6
million shares were not included in the diluted loss per share computation as
the effect would be antidilutive.
NOTE 8. EMPLOYEE STOCK AND BENEFIT PLANS
STOCK PURCHASE RIGHTS
In fiscal 1997, the Company implemented a plan to protect shareholders'
rights in the event of a proposed takeover of the Company. Under the plan, each
share of the Company's outstanding common stock carries one right to purchase
one one-thousandth of a share of the Company's Series "A" Participating
Preferred Stock (the "Right") at an exercise price of $150. The Right enables
the holder to purchase common stock of Read-Rite or of the acquiring company ten
days after a person or group publicly announces it has acquired or has tendered
an offer for 20% or more of the Company's outstanding common stock. The Rights
are redeemable by the Company at $0.001 per Right at any time on or before the
tenth day following acquisition by a person or group of 20% or more of the
Company's common stock. If prior to redemption of the Rights, a person or group
acquires 20% or more of the Company's common stock, each Right not owned by a
holder of 20% or more of the common stock (or an affiliate of such holder) will
entitle the holder to purchase, at the
46
<PAGE> 47
Right's then current exercise price, that number of shares of common stock of
the Company having a market value at that time of twice the Right's exercise
price. The Rights expire in March 2007.
EMPLOYEE STOCK OPTION PLANS
The Company has granted stock options to purchase its common stock to key
employees under three option plans, the Amended and Restated 1987 Stock Option
Plan (the "1987 Plan"), the 1995 Stock Option Plan (the "1995 Plan"), and the
1998 Non-Statutory Stock Option Plan (the "1998 Plan"). Options granted
generally have exercise prices equal to the fair market value as of the date of
grant. However, under the plans the Company's Board of Directors has authority
to grant nonstatutory stock options at not less than 85% of the fair market
value as of the date of grant. Options granted under these plans generally vest
over four years and have a ten-year term, such that vesting occurs at the rate
of 25% per year, starting one year from the date of grant. The 1995 Plan was
approved by the Company's stockholders in February 1996, with 3,000,000 shares
of common stock reserved for issuance thereunder; the 1995 Plan also provides
that approximately 1,400,000 shares under the 1987 Plan, plus any shares made
available due to cancelled options under the 1987 Plan, be rolled over into the
1995 Plan. In February 1998, the 1995 Stock Plan was amended by the Company's
stockholders to increase the number of shares reserved for issuance by an
additional 2,250,000 shares. In July 1998, the 1995 Plan was amended to permit
stock option grants to non-employee directors of the Company. As of July 1,
1998, non-employee directors are granted options to purchase 4,000 shares
annually. In February 1998, the Company's Board of Directors approved the 1998
Plan and reserved 2,000,000 shares of common stock for issuance thereunder.
DIRECTOR STOCK OPTION PLAN
In May 1991, the Company's Board of Directors approved a Director Option
Plan (the "Director Plan") and reserved 150,000 shares of common stock for
issuance pursuant to the Director Plan. In February 1998, the Director Plan was
amended by the Company's stockholders to increase the number of shares reserved
for issuance by an additional 150,000 shares. The Director Plan provides for the
granting of stock options to non-employee directors of the Company. Under the
Director Plan, upon joining the Board and on each July 1 thereafter, each
non-employee director automatically receives an option to purchase 6,000 shares
of the Company's common stock at an exercise price equal to fair market value on
the date of grant. Options granted under the Director Plan generally vest over
four years, such that vesting will occur at the rate of 25% annually, starting
one year from the date of grant and have a ten-year term.
STOCK OPTION REPRICING
In the third quarter of fiscal 1998, the Company's Board of Directors
approved the cancellation and reissuance of outstanding options under the
Company's Employee Stock Option Plans. Under the program, all current employees,
except the Chairman of the Board of Directors and Chief Executive Officer of the
Company, with outstanding options at exercise prices in excess of $13.6875 per
share, were given the choice of retaining these options or of obtaining in
substitution, new options for the same number of shares. The new options are
exercisable at a price of $13.6875 per share, the fair market value of the stock
on the reissue date. The new options maintain the vesting schedule and the term
established by the original options, subject to a six-month blackout period on
exercise, which expired on October 2, 1998. Employees with a position of Vice
President or above, were subject to a one-year blackout period on exercise of
their options, expiring on April 2, 1999. During the fourth quarter of fiscal
year 1998, the Company approved the cancellation and reissuance of the
outstanding options for all current employees, except the Chief Executive
Officer, under the Company's stock option plans. Under the program, holders of
outstanding options with an exercise price in excess of $7.5625 per share were
granted new options and the old options were cancelled, unless the employee
elected not to participate in the program. Replacement options have been issued
with the same vesting schedules and term as the old options, subject to a
one-year blackout period for all employees on exercise which expires on August
4, 1999. If an employee voluntarily terminates his or her employment prior to
the end of the blackout period, the replacement options will be forfeited. The
number of options shown as granted and canceled in the table below reflects
these re-issuances of options.
47
<PAGE> 48
STOCK OPTION ACTIVITY
Stock option activity under the employee and director option plans was as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED
AVERAGE
EXERCISE NUMBER OF AVAILABLE
PRICE SHARES FOR GRANT
-------- ----------- -----------
<S> <C> <C> <C>
Balance at September 30, 1995.......................... $17.85 4,991,124 1,550,863
Additional shares reserved........................... -- -- 3,000,000
Granted.............................................. $17.83 1,322,799 (1,322,799)
Exercised............................................ $11.17 (366,065) --
Canceled............................................. $20.81 (612,008) 577,403
----------- -----------
Balance at September 30, 1996.......................... $18.05 5,335,850 3,805,467
Granted.............................................. $21.20 2,462,383 (2,462,383)
Exercised............................................ $13.16 (873,517) --
Canceled............................................. $22.21 (522,738) 499,096
----------- -----------
Balance at September 30, 1997.......................... $21.40 6,401,978 1,842,180
Additional shares reserved........................... -- -- 4,400,000
Granted.............................................. $11.57 12,852,085 (12,852,085)
Exercised............................................ $ 8.85 (104,267) --
Canceled............................................. $18.05 (11,379,492) 11,379,492
----------- -----------
Balance at September 30, 1998.......................... $ 9.62 7,770,304 4,769,587
=========== ===========
</TABLE>
At September 30, 1998, 1997 and 1996, there were exercisable options
outstanding under the above mentioned option plans to purchase an aggregate of
approximately 1,035,000, 2,374,000, and 2,009,000 shares, respectively.
In fiscal 1991, the Company granted to the Chief Executive Officer an
option, independent of an option plan, to purchase 1,188,037 shares of common
stock at $0.33 per share. As of September 30, 1998, 758,760 options had been
exercised, and 429,277 options were exercisable.
STOCK OPTIONS OUTSTANDING AND STOCK OPTIONS EXERCISABLE
The following table summarizes information about options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICES SHARES YEARS) PRICE SHARES PRICE
- ----------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.33 - $ 7.50 724,873 5.11 $ 2.85 467,923 $ 0.56
$ 7.56 - $ 7.56 5,441,584 7.66 $ 7.56 1,579 $ 7.56
$ 8.33 - $13.69 1,078,825 7.24 $12.25 495,374 $11.53
$13.81 - $24.25 839,416 7.52 $17.42 431,166 $19.55
$24.38 - $41.25 114,883 6.78 $33.24 67,961 $31.27
--------- ---- ------ --------- ------
8,199,581 7.36 $ 9.13 1,464,003 $11.30
========= ==== ====== ========= ======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") under
which all eligible employees may acquire common stock at a price per share equal
to the lesser of 85% of the closing sales price of the stock at the beginning or
at the end of each offering period. Offering periods each have a six-month
48
<PAGE> 49
duration commencing on April 1 and October 1 of each year. The Board of
Directors has reserved 1,500,000 shares under this plan and, at September 30,
1998, there were 231,659 shares available for purchase.
401(K) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") under
which eligible U.S. employees may contribute, on a pre-tax basis, between 2% and
15% of their total annual income from the Company, excluding bonuses and subject
to a maximum aggregate annual contribution imposed by the Internal Revenue Code.
The Company sponsors a "stock match" program pursuant to which the Company
contributes shares of the Company's Common Stock to the 401(k) Plan. Each
participating employee receives shares with a market value equal to $1.50 for
each $1.00 contributed by such employee up to the lesser of (i) $1,500 in Common
Stock, or (ii) 100 shares of Common Stock per participant per year. 25% of the
shares contributed to each employee's account vests immediately, and the balance
vests 25% for each year of service to the Company, with full credit given for
prior service. The Board of Directors has reserved 1,000,000 shares under the
401(k) Plan and, at September 30, 1998, there were 238,898 shares available for
issuance.
STOCK-BASED COMPENSATION
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation. Accordingly, no compensation expense has been
recognized for its stock-based option and stock purchase compensation plans. The
compensation cost for the Company's stock option plans, if it had been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, the Company's
fiscal 1998 net loss and basic and diluted net loss per share would have been
increased by approximately $30.1 million, or $0.62 per share, the Company's
fiscal 1997 net income, basic and diluted net income per share would have been
decreased by approximately $10.8 million, $0.23 per share or $0.22 per share
respectively, and the Company's fiscal 1996 net loss and basic and diluted net
loss per share would have been increased by approximately $3.9 million, or $0.08
per share. For purposes of pro forma disclosures, the estimated fair value of
the stock-based compensation is amortized to expense over the vesting period for
options, and the six-month purchase period for stock purchases under the
Employee Stock Purchase Plan.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
The effects on pro forma disclosure of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted after September 30, 1995,
the pro forma effect will not be fully reflected until 1999.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: a risk-free interest rate of 4.49%, 5.9% and 6.4% for 1998, 1997
and 1996, respectively; a dividend yield of 0%, and a volatility factor of the
expected market price for the Company's common stock of 0.66, 0.63 and 0.63 for
1998, 1997 and 1996, respectively; and a weighted average expected life of the
option of 1.9 years, 3.1 years and 3.1 years for 1998, 1997 and 1996,
respectively.
The fair value of employee stock purchase plan shares is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: a risk-free interest rate of 4.5%, 5.6% and 5.8%
for 1998, 1997 and 1996, respectively; a dividend yield of 0%, and a volatility
factor of the expected market price for the Company's common stock of 0.66, 0.63
and 0.63 for 1998, 1997 and 1996, respectively; and a weighted average expected
life of the option of .5 years.
49
<PAGE> 50
The weighted average exercise price and weighted average fair value of
stock options granted during 1998 under the Company's Stock Option Plans was
$11.57 and $4.28 per share, respectively, and $21.20 and $9.80 per share,
respectively, during 1997. The weighted average purchase price and weighted
average fair value of shares granted in 1998 under the Company's Employee Stock
Purchase Plans was $15.09 and $6.59, respectively, and $17.99 and $7.08,
respectively, in 1997.
NOTE 9. CENSTOR CORPORATION ACQUISITION
In 1996, the Company purchased certain assets, assumed certain liabilities
and acquired a non-exclusive license to intellectual property from Censtor
Corporation, a developer of planar pseudo-contact and contact recording
technology for disk drives. The purchase price included a series of cash
payments totaling approximately $10,000,000, all of which had been made by the
end of fiscal 1997. The purchase price was allocated based on the estimated fair
values of the license, equipment and assembled workforce acquired, and the
liabilities of approximately $1,000,000 assumed.
In determining the value of the technology in development and the related
license, the Company considered, among other factors, the stage of development
of the technology and the inherent difficulties and uncertainties in completing
the technology and converting it to a commercially viable product, and the non-
exclusivity of the license. Therefore, in accordance with generally accepted
accounting principles, the allocation of the purchase price related to
technology in the development stage was approximately $9,000,000 and was
expensed during fiscal 1996 as acquired in-process research and development. An
intangible asset representing the assembled workforce was valued at $825,000 and
was amortized on a straight-line basis over its estimated useful life of two
years.
NOTE 10. RESTRUCTURING COSTS
During the third quarter of fiscal 1998, the Company recorded restructuring
charges of $93.7 million. These charges reflected the Company's strategy to
align worldwide operations with market conditions and to improve the
productivity of the Company's manufacturing operations. The restructuring
charges were primarily associated with the Company's decision to cease the
Company's manufacturing operations in Malaysia and the write-off of excess
equipment at the Company's other manufacturing locations.
The restructuring charges consisted of $70.0 million to write-off or
write-down facilities and equipment, $7.2 million to write-off goodwill
associated with the Company's original purchase of its Malaysia manufacturing
operations, $10.0 million for severance and benefits for terminated employees,
and $6.5 million for other expenses associated with the restructuring plan.
In connection with this restructuring, the Company expects a workforce
reduction of approximately 4,300 full-time manufacturing employees. As of
September 30, 1998, approximately 4,200 employees had been terminated. During
the fourth quarter of fiscal 1998, the Company revised its estimate of costs
required to fully implement the restructuring plan. Based on actual employee
terminations and actual cash charges incurred through September 30, 1998, the
Company estimates future costs for employee severance and benefits will be less
than previously estimated and other expenses related to the restructuring plan
will be more than the previous estimate. Accordingly, the Company reallocated
amounts between these two categories. Actual future cash charges may differ
materially from the reserve balance at September 30, 1998. The Company
anticipates that the implementation of the restructuring plan will be
substantially complete by December 1998.
50
<PAGE> 51
The following table summarizes the Company's restructuring activity for the
year ended September 30, 1998:
<TABLE>
<CAPTION>
FACILITIES SEVERANCE
AND AND OTHER
EQUIPMENT GOODWILL BENEFITS EXPENSES TOTAL
---------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Restructuring Reserve................... $ 69,955 $ 7,250 $ 9,960 $ 6,563 $93,728
Non-Cash Charges........................ (69,955) (7,250) -- -- (77,205)
Cash Charges............................ -- -- (8,272) (5,025) (13,297)
Change in reserve estimate.............. -- -- (958) 958 --
-------- ------- ------- ------- -------
Reserve Balances at September 30,
1998.................................. $ -- $ -- $ 730 $ 2,496 $ 3,226
======== ======= ======= ======= =======
</TABLE>
NOTE 11. SPECIAL CHARGES
During the first quarter of fiscal 1998, 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.
During fiscal 1996, due to a variety of factors, the Company incurred
several special charges. The Company incurred charges to cost of goods sold of
approximately $6,000,000 in severance, relocation and other expenses during the
second quarter of fiscal 1996 associated with the consolidation of its San Diego
operations to Northern California. Also during the second quarter, the Company
made an investment in planar technology as discussed in Note 9, incurring
charges to research and development expense of approximately $9,000,000 related
to the purchase of in-process research and development. In response to sudden
reductions in certain customer programs in the disk drive industry during the
second half of fiscal 1996, the rapid shift in the marketplace to newer
technology products and the fact that the MIG technology programs the Company
had been participating in reached their end-of-life, the Company incurred
approximately $37,000,000 of charges, primarily to cost of goods sold, during
the third and fourth quarters of fiscal 1996. These charges were primarily for
the write-off of equipment and inventory associated with the phase-out of MIG
technology and severance associated with the termination of 5,000 employees
primarily at the Company's Philippines operations. Actual cash expenditures for
the above charges approximated estimated amounts.
NOTE 12. LITIGATION
In December 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. In May 1997, the Superior
Court entered an order (1) sustaining the demurrers of certain defendants to the
California Corporations Code cause of action and overruling the demurrers of
Read-Rite Corporation and certain other defendants to that same cause of action;
and (2) sustaining the demurrers of all defendants as to the remaining causes of
action.
In January 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.
51
<PAGE> 52
In January 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").
In May 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.
Plaintiffs in the McDaid Federal Action moved in June 1997 to dismiss their
complaint. This motion was granted by the court. In June 1997, defendants
successfully moved to consolidate the Nevius Federal Action with the
Consolidated Action.
In August 1998, the court in the Consolidated Action granted defendants
motion to dismiss with leave to file an amended complaint. The amended complaint
is due to be filed in mid-January 1999, with a hearing on defendants' renewed
motion to dismiss planned for early June 1999.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes it has meritorious
defenses to all three of these actions (the Ferrari State Action and the Ferrari
and Nevius Federal actions), and intends to defend each of them vigorously.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions. Accordingly, both on its
own behalf and pursuant to indemnification agreements between the Company and
the named individual defendants, the Company intends to continue to defend each
of these actions vigorously. Failure by the Company to obtain a favorable
resolution of the claims set forth in any of these actions could have a material
adverse effect on the Company's business, results of operations and financial
condition. Currently, the amount of such material adverse effect cannot be
reasonably estimated.
Except as so noted, the Company is not a party, nor is its property
subject, to any material pending legal proceedings other than ordinary routine
litigation incidental to the Company's business. The Company does not believe
such routine litigation, taken individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition or
results of operations.
NOTE 13. CONCENTRATION OF CREDIT RISK
The Company's customer base is concentrated with a small number of storage
device manufacturers. Financial instruments that potentially subject the Company
to concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluation of its customer's financial condition and, generally, requires no
collateral from its customers. The allowance for noncollection of accounts
receivable is based upon the expected collectibility of all accounts receivable.
52
<PAGE> 53
Principal customers for years ended September 30 were as follows (as a
percentage of net sales):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Western Digital......................................... 49% 51% 43%
Maxtor.................................................. 25% 13% 12%
Samsung................................................. 15% 5% --
Quantum................................................. 3% 18% 29%
All Others.............................................. 8% 13% 16%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The Company places its cash equivalents and short-term investments in
investment grade, short-term debt instruments and limits the amount of credit
exposure to any one commercial issuer.
In November 1997, Micropolis, a Singapore Technologies wholly owned
subsidiary and customer of the Company, announced it would be filing for
bankruptcy. As a result of the announced bankruptcy and in accordance with
generally accepted accounting principles, the Company established a reserve for
Micropolis related accounts receivable, inventory and equipment exposures
resulting in post closing charges to the fourth quarter of fiscal 1997 of $12.2
million to selling, general and administrative expense and $2.6 million to cost
of sales. During fiscal 1998, the Company wrote off $9.3 million of the
Micropolis related accounts receivables and all of the Micropolis related
inventory and equipment.
NOTE 14. GEOGRAPHIC INFORMATION
The following table summarizes the Company's operations in different
geographic regions (in thousands):
<TABLE>
<CAPTION>
UNITED INTERCOMPANY
STATES FAR EAST ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
Net sales to unaffiliated customers........ $ 18,544 $ 790,078 $ -- $ 808,622
Transfers between geographic regions....... 162,025 340,032 (502,057) --
-------- ---------- --------- ----------
Total net sales............................ $180,569 $1,130,110 $(502,057) $ 808,622
======== ========== ========= ==========
Operating (loss)........................... $(63,725) $ (289,185) $ -- $ (352,910)
======== ========== ========= ==========
Identifiable assets........................ $357,367 $ 522,433 $ -- $ 879,800
======== ========== ========= ==========
YEAR ENDED SEPTEMBER 30, 1997
Net sales to unaffiliated customers........ $ 21,956 $1,140,094 $ -- $1,162,050
Transfers between geographic regions....... 134,909 378,433 (513,342) --
-------- ---------- --------- ----------
Total net sales............................ $156,865 $1,518,527 $(513,342) $1,162,050
======== ========== ========= ==========
Operating income........................... $ 9,887 $ 109,826 $ -- $ 119,713
======== ========== ========= ==========
Identifiable assets........................ $571,679 $ 729,802 $ -- $1,301,481
======== ========== ========= ==========
YEAR ENDED SEPTEMBER 30, 1996
Net sales to unaffiliated customers........ $ 30,830 $ 960,288 $ -- $ 991,118
Transfers between geographic regions....... 152,905 337,991 (490,896) --
-------- ---------- --------- ----------
Total net sales............................ $183,735 $1,298,279 $(490,896) $ 991,118
======== ========== ========= ==========
Operating income (loss).................... $(17,867) $ 25,656 $ -- $ 7,789
======== ========== ========= ==========
Identifiable assets........................ $327,218 $ 581,454 $ -- $ 908,672
======== ========== ========= ==========
</TABLE>
The Company records sales and transfers between geographic areas under two
methods (1) at prices which, in general, provide a profit after coverage of all
manufacturing costs and (2) on a consignment basis, in which case the sales
recorded reflect only service revenue. Operating income (loss) is total net
sales less cost of sales and operating expenses. Identifiable assets by
geographic area are those assets used in the Company's operations in each area.
53
<PAGE> 54
Foreign net sales represent sales to foreign-based subsidiaries of
predominantly United States headquartered companies and to customers of
Read-Rite SMI in Japan. These foreign net sales were primarily to the Far East
and were approximately $790 million, $1,140 million, and $946 million during
fiscal years 1998, 1997, and 1996, respectively.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for the years ended September 30 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- --------- --------
<S> <C> <C> <C> <C>
1998(1)(2)
Net sales...................................... $261,371 $187,072 $ 184,247 $175,932
Gross margin................................... $(85,767) $(30,414) $ (14,749) $ (1,851)
Net (loss)..................................... $(90,929) $(62,171) $(137,150) $(29,496)
Basic net loss per share....................... $ (1.88) $ (1.29) $ (2.82) $ (0.61)
Diluted net loss per share..................... $ (1.88) $ (1.29) $ (2.82) $ (0.61)
1997(3)
Net sales...................................... $251,588 $282,068 $ 310,236 $318,158
Gross margin................................... $ 35,814 $ 62,380 $ 72,090 $ 68,522
Net income..................................... $ 5,787 $ 23,555 $ 31,173 $ 15,664
Basic net income per share..................... $ 0.12 $ 0.50 $ 0.65 $ 0.33
Diluted net income per share................... $ 0.12 $ 0.48 $ 0.64 $ 0.32
</TABLE>
- ---------------
(1) The first quarter results include a special charge of approximately $114.8
million to cost of sales, primarily for the write-off of equipment and
inventory associated with the industry's rapid shift away from advanced
inductive technology to magnetoresistive ("MR") technology and the Company's
decision to accelerate its existing MR transition strategy. See Note 11.
(2) The third quarter results include a restructuring charge of approximately
$93.7 million to reflect the Company's decision to cease the Company's
manufacturing operations in Malaysia and write-off excess equipment at the
Company's other manufacturing locations. See Note 10.
(3) The fourth quarter results include post-closing charges of approximately
$12.2 million to selling, general and administrative expense and $2.6
million to cost of sales to establish a reserve for accounts receivable,
inventory and equipment exposures related to the bankruptcy of Micropolis, a
customer of the Company. See Note 13.
54
<PAGE> 55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Read-Rite Corporation
We have audited the accompanying consolidated balance sheets of Read-Rite
Corporation as of September 30, 1998 and 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended September 30, 1998. Our audits also included the
financial statement schedule listed in the index at item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Read-Rite Corporation at September 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
San Jose, California
October 15, 1998
55
<PAGE> 56
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file its definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on February 25, 1999 pursuant to Regulation
14A of the Securities Exchange Act of 1934 (the "Proxy Statement") not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
sections entitled "Record Date and Principal Ownership" and "Security Ownership
of Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
56
<PAGE> 57
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company for the
fiscal year ended September 30, 1998 are included herewith:
Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Cash Flows, Consolidated Statements of
Stockholders' Equity, Notes to Consolidated Financial Statements, and
Report of Ernst & Young LLP, Independent Auditors
(2) SUPPLEMENTAL SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements or
notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1(16) Restated Certificate of Incorporation, as amended
3.2(16) Bylaws, as amended
4.1(16) Article X of Restated Certificate of Incorporation (See
Exhibit 3.1)
4.2(1) Amended Registration Rights Agreement, dated as of June 27,
1991 and amended August 12, 1991
4.3(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement
10.2(6)* Amended and Restated 1987 Stock Option Plan and form of
Stock Option Agreement
10.3* Amended and Restated 1991 Director Option Plan (as amended
and restated October 20, 1998) and form of Option Agreement
10.4(17)* Amended and Restated 401(k) Retirement Savings Plan and
Summary Plan Description
10.5(20)* Employee Stock Purchase Plan (as amended and restated July
22, 1997)
10.6(1)* Stock Option Agreement dated February 4, 1991 between the
Company and Cyril J. Yansouni, as amended May 16, 1991
10.8(1) Series CC Preferred Stock and Convertible Subordinated Note
Purchase Agreement between the Company and Sumitomo, dated
as of June 14, 1991
10.9(9) Joint Venture Agreement dated as of June 14, 1991 between
the Company and Sumitomo Metal Industries, Ltd. ("Sumitomo")
10.10(7) First Addendum dated as of December 14, 1993 to Joint
Venture Agreement dated as of June 14, 1991 between the
Company and Sumitomo (See Exhibit 10.11)
10.11(1) License Agreement between the Company and Read-Rite SMI
Corporation ("Read-Rite SMI") dated July 18, 1991
10.12(1) Distribution Agreement between the Company and Read-Rite SMI
dated July 18, 1991
10.13(1) Distribution Agreement between Read-Rite SMI and the Company
dated July 18, 1991
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.14(7) First Addendum dated as of December 14, 1993 to the License
and Distribution Agreements between the Company and
Read-Rite SMI (See Exhibits 10.13, 10.14 and 10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI
and Sumitomo dated July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and
between Company and Sunward Technologies, Inc.
10.18(1)(4) Asset Purchase Agreement between Conner Peripherals, Inc.,
Conner Peripherals Malaysia, Sdn Bhd and the Company, dated
as of August 30, 1991, as amended October 26, 1991
(Confidential treatment granted as to certain portions of
this exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of
November 14, 1991, by and among the Company, Read-Rite
International, Maxtor Singapore Limited and Maxtor
Corporation, as amended December 20, 1991
10.20(1) License Agreement between International Business Machines
Corporation and the Company dated as of October 1, 1986
10.21(6) License Agreement dated September 14, 1993 between the
Company and Kyushu Matsushita Electric Co., Ltd.
(Confidential treatment requested for certain portions of
this exhibit)
10.22(10) Cross-License Agreement dated December 31, 1994 between the
Company and Seagate Technology Inc.
10.27(5) Single Tenant Industrial Lease Agreement, dated as of August
24, 1992, between Shuwa Investments Corporation and the
Company
10.28(5) Loan Agreement between The Industrial Finance Corporation of
Thailand (the "IFCT") and Read-Rite (Thailand) Co. Ltd.,
dated as of September 25, 1992 and related Agreement for
Pledge of Properties, Agreement for Custodianship of Pledged
Properties and Suretyship Contract, dated as of September
30, 1992, by the Company in favor of the IFCT
10.29(6) Loan Agreement between the IFCT and Read-Rite (Thailand) Co.
Ltd., dated as of September 24, 1993 and related Suretyship
Contract dated as of September 23, 1993 by the Company in
favor of the IFCT
10.35(13) Agreement dated as of November 1, 1995 between the Company
and Sumitomo Metal Industries, Ltd. regarding the formation
of Read-Rite SMI (Thailand) Co., Ltd.
10.36(13) Agreement and Second Addendum to License Agreement and
Distribution Agreements between the Company, Sumitomo Metal
Industries, Ltd., Read-Rite SMI Kabushiki Kaisha and
Read-Rite SMI (Thailand) Co., Ltd.
10.37(14) Agreement for Purchase and Sale of Assets by and between
Read-Rite Corporation and Censtor Corporation dated March
29, 1996
10.39(14) Lease of the Land dated April 25, 1996 between Sumitomo Bank
Leasing and Finance, Inc., as landlord, and the Company, as
tenant, together with a Deed of Trust, Financing Statement,
Security Agreement and Fixture Filing with Assignment of
Rents and Leases
10.41* 1995 Stock Option Plan (as amended and restated July 1,
1998) and form of Stock Option Agreement
10.42(15)* Years of Service Plan
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.44(17) Amendment to Lease of the Land dated April 25, 1996 between
Sumitomo Bank Leasing and Finance, Inc., as landlord, and
the Company, as tenant, together with a Deed of Trust,
Financing Statement, Security Agreement and Fixture Filing
with Assignment of Rents and Leases, dated October 15, 1996
10.47(18)* Executive Quarterly Variable Compensation Plan
10.48(18)* Read-Rite Corporation Super Bonus Plan
10.49(19)* Severance Plans
10.50(19)* Fourth and Fifth Amendments to Read-Rite Corporation's
401(k) Plan
10.51(19) Amended and Restated License Agreement Between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.52(19) Second Addendum to Joint Venture Agreement between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.53(20)** License Agreement, date as of January 1, 1997, between the
Read-Rite Corporation and International Business Machines
Corporation.
10.54(21) Revolving Loan and Term Loan Agreement between Read-Rite
Corporation as Borrower and Financial Institutions as Banks
and Canadian Imperial Bank of Commerce as Agent, dated
October 2, 1997.
10.55(22) First Amendment, dated February 5, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.56 Second Amendment, dated August 10, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.57* 1998 Stock Plan and form of Stock Option Agreement
10.58* Sixth Amendment to Read-Rite Corporation's 401(k) Plan
21.1(22) List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1(23) Power of Attorney
27 Financial Data Schedule
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
** Confidential treatment requested for certain portions of this exhibit. In
accordance with the rules of the Commission, the confidential portions of
this exhibit have been omitted and filed separately with the Commission.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-42570), effective October 17, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991.
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated January 10, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
59
<PAGE> 60
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company's Registration Statement on Form
S-8 dated April 25, 1996.
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1996.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1997.
(22) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997
(23) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998.
(c) EXHIBITS
See subsection (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See subsection (a)(1) and (2) above.
60
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Milpitas, State of California, on this 22nd day of December, 1998.
Read-Rite Corporation
By: /s/ CYRIL J. YANSOUNI
------------------------------------
Cyril J. Yansouni,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cyril J. Yansouni and John T. Kurtzweil,
and each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments to this report
on Form 10-K, and to file with same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CYRIL J. YANSOUNI Chief Executive Officer December 22, 1998
- ----------------------------------------------------- (Principal Executive
Cyril J. Yansouni Officer) and Chairman of
the Board of Directors
/s/ JOHN T. KURTZWEIL Vice President, Finance December 22, 1998
- ----------------------------------------------------- and Chief Financial
John T. Kurtzweil Officer (Principal
Financial and Accounting
Officer)
/s/ WILLIAM J. ALMON Director December 22, 1998
- -----------------------------------------------------
William J. Almon
/s/ MICHAEL L. HACKWORTH Director December 22, 1998
- -----------------------------------------------------
Michael L. Hackworth
/s/ JOHN G. LINVILL Director December 22, 1998
- -----------------------------------------------------
John G. Linvill
/s/ MATTHEW J. O'ROURKE Director December 22, 1998
- -----------------------------------------------------
Matthew J. O'Rourke
</TABLE>
61
<PAGE> 62
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED CASH AND NON UNCOLLECTABLE BALANCE AT
BEGINNING (CREDITED) CASH CHARGES RECEIVABLES END OF
OF PERIOD TO EXPENSES AND OTHER WRITTEN OFF PERIOD
---------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
September 30, 1998
Allowance for doubtful accounts... $14,887 $ -- $ -- $9,250 $ 5,637
Restructuring reserve(1).......... -- 93,728 90,502 -- 3,226
September 30, 1997
Allowance for doubtful accounts... $ 2,586 $ 12,301(2) $ -- $ -- $14,887
September 30, 1996
Allowance for doubtful accounts... $ 3,017 $ (620) $ 189(3) $ -- $ 2,586
</TABLE>
- ---------------
(1) In the third quarter of fiscal 1998, the Company incurred a restructuring
charge of approximately $93.7 million to reflect the Company's decision to
cease the Company's manufacturing operations in Malaysia and write-off
excess equipment at the Company's other manufacturing locations. See Note 10
in "Notes to Consolidated Financial Statements."
(2) In the fourth quarter of fiscal 1997, the Company incurred a charge of $12.2
million to the allowance for doubtful accounts relating to the bankruptcy
filing of Micropolis, a customer of the Company. See Note 13 in "Notes to
Consolidated Financial Statements."
(3) Foreign currency translation adjustment.
62
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1(16) Restated Certificate of Incorporation, as amended
3.2(16) Bylaws, as amended
4.1(16) Article X of Restated Certificate of Incorporation (See
Exhibit 3.1)
4.2(1) Amended Registration Rights Agreement, dated as of June 27,
1991 and amended August 12, 1991
4.3(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement
10.2(6)* Amended and Restated 1987 Stock Option Plan and form of
Stock Option Agreement
10.3* Amended and Restated 1991 Director Option Plan (as amended
and restated October 20, 1998) and form of Option Agreement
10.4(17)* Amended and Restated 401(k) Retirement Savings Plan and
Summary Plan Description
10.5(20)* Employee Stock Purchase Plan (as amended and restated July
22, 1997)
10.6(1)* Stock Option Agreement dated February 4, 1991 between the
Company and Cyril J. Yansouni, as amended May 16, 1991
10.8(1) Series CC Preferred Stock and Convertible Subordinated Note
Purchase Agreement between the Company and Sumitomo, dated
as of June 14, 1991
10.9(9) Joint Venture Agreement dated as of June 14, 1991 between
the Company and Sumitomo Metal Industries, Ltd. ("Sumitomo")
10.10(7) First Addendum dated as of December 14, 1993 to Joint
Venture Agreement dated as of June 14, 1991 between the
Company and Sumitomo (See Exhibit 10.11)
10.11(1) License Agreement between the Company and Read-Rite SMI
Corporation ("Read-Rite SMI") dated July 18, 1991
10.12(1) Distribution Agreement between the Company and Read-Rite SMI
dated July 18, 1991
10.13(1) Distribution Agreement between Read-Rite SMI and the Company
dated July 18, 1991
10.14(7) First Addendum dated as of December 14, 1993 to the License
and Distribution Agreements between the Company and
Read-Rite SMI (See Exhibits 10.13, 10.14 and 10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI
and Sumitomo dated July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and
between Company and Sunward Technologies, Inc.
10.18(1)(4) Asset Purchase Agreement between Conner Peripherals, Inc.,
Conner Peripherals Malaysia, Sdn Bhd and the Company, dated
as of August 30, 1991, as amended October 26, 1991
(Confidential treatment granted as to certain portions of
this exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of
November 14, 1991, by and among the Company, Read-Rite
International, Maxtor Singapore Limited and Maxtor
Corporation, as amended December 20, 1991
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.20(1) License Agreement between International Business Machines
Corporation and the Company dated as of October 1, 1986
10.21(6) License Agreement dated September 14, 1993 between the
Company and Kyushu Matsushita Electric Co., Ltd.
(Confidential treatment requested for certain portions of
this exhibit)
10.22(10) Cross-License Agreement dated December 31, 1994 between the
Company and Seagate Technology Inc.
10.27(5) Single Tenant Industrial Lease Agreement, dated as of August
24, 1992, between Shuwa Investments Corporation and the
Company
10.28(5) Loan Agreement between The Industrial Finance Corporation of
Thailand (the "IFCT") and Read-Rite (Thailand) Co. Ltd.,
dated as of September 25, 1992 and related Agreement for
Pledge of Properties, Agreement for Custodianship of Pledged
Properties and Suretyship Contract, dated as of September
30, 1992, by the Company in favor of the IFCT
10.29(6) Loan Agreement between the IFCT and Read-Rite (Thailand) Co.
Ltd., dated as of September 24, 1993 and related Suretyship
Contract dated as of September 23, 1993 by the Company in
favor of the IFCT
10.35(13) Agreement dated as of November 1, 1995 between the Company
and Sumitomo Metal Industries, Ltd. regarding the formation
of Read-Rite SMI (Thailand) Co., Ltd.
10.36(13) Agreement and Second Addendum to License Agreement and
Distribution Agreements between the Company, Sumitomo Metal
Industries, Ltd., Read-Rite SMI Kabushiki Kaisha and
Read-Rite SMI (Thailand) Co., Ltd.
10.37(14) Agreement for Purchase and Sale of Assets by and between
Read-Rite Corporation and Censtor Corporation dated March
29, 1996
10.39(14) Lease of the Land dated April 25, 1996 between Sumitomo Bank
Leasing and Finance, Inc., as landlord, and the Company, as
tenant, together with a Deed of Trust, Financing Statement,
Security Agreement and Fixture Filing with Assignment of
Rents and Leases
10.41* 1995 Stock Option Plan (as amended and restated July 1,
1998) and form of Stock Option Agreement
10.42(15)* Years of Service Plan
10.44(17) Amendment to Lease of the Land dated April 25, 1996 between
Sumitomo Bank Leasing and Finance, Inc., as landlord, and
the Company, as tenant, together with a Deed of Trust,
Financing Statement, Security Agreement and Fixture Filing
with Assignment of Rents and Leases, dated October 15, 1996
10.47(18)* Executive Quarterly Variable Compensation Plan
10.48(18)* Read-Rite Corporation Super Bonus Plan
10.49(19)* Severance Plans
10.50(19)* Fourth and Fifth Amendments to Read-Rite Corporation's
401(k) Plan
10.51(19) Amended and Restated License Agreement Between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.52(19) Second Addendum to Joint Venture Agreement between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.53(20)** License Agreement, date as of January 1, 1997, between the
Read-Rite Corporation and International Business Machines
Corporation.
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.54(21) Revolving Loan and Term Loan Agreement between Read-Rite
Corporation as Borrower and Financial Institutions as Banks
and Canadian Imperial Bank of Commerce as Agent, dated
October 2, 1997.
10.55(22) First Amendment, dated February 5, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.56 Second Amendment, dated August 10, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.57* 1998 Stock Plan and form of Stock Option Agreement
10.58* Sixth Amendment to Read-Rite Corporation's 401(k) Plan
21.1(22) List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1(23) Power of Attorney
27 Financial Data Schedule
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
** Confidential treatment requested for certain portions of this exhibit. In
accordance with the rules of the Commission, the confidential portions of
this exhibit have been omitted and filed separately with the Commission.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-42570), effective October 17, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991.
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated January 10, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
<PAGE> 66
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company's Registration Statement on Form
S-8 dated April 25, 1996.
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1996.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1997.
(22) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997
(23) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998
<PAGE> 1
EXHIBIT 10.3
READ-RITE CORPORATION
1991 DIRECTOR OPTION PLAN
(AS AMENDED OCTOBER 20, 1998)
1. Purpose of the Plan. The purpose of this 1991 Director Option Plan is
to attract and retain the best available personnel to serve as Outside Directors
of the Company.
All options granted hereunder shall be "non-statutory stock options."
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Read-Rite Corporation, a Delaware
corporation.
(e) "Continuous Status as a Director" means the absence of any
interruption or termination of service as a Director.
(f) "Deferral Amount" means that portion of the Retainer Amount
than an Outside Director elects to defer under this Plan.
(g) "Deferral Option" means an Option granted to an Outside
Director under Section 5 in connection with the Director's election to defer
Retainer Fees.
(h) "Director" means a member of the Board.
(i) "Employee" means any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as off any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the
<PAGE> 2
National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ")
System, the Fair Market Value of a Share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such system or exchange (or the exchange with the greatest volume of
trading in Common Stock) on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System
(but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable, or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(l) "Option" means a stock option granted pursuant to the Plan.
(m) "Optioned Stock" means the Common Stock subject to an Option.
(n) "Optionee" means an Outside Director who receives an Option.
(o) "Outside Director" means a Director who is not an Employee.
(p) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(q) "Participation Year" means the Company's fiscal year,
provided that in the case of a person who first becomes an Outside Director or
in the case of the Company's 1999 fiscal year, the Participation Year shall be
the balance of the applicable fiscal year beginning thirty (30) days after such
person first becomes an Outside Director or January 1, 1999, respectively.
(r) "Plan" means this 1991 Director Option Plan, as amended.
(s) "Retainer Amount" means the amount that an Outside Director
is entitled to receive from the Company for a fiscal year of the Company for
serving on the Board, including fees for attendance at meetings of the Board or
attendance at any committee meeting of the Board.
(t) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
<PAGE> 3
(u) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is three hundred thousand (300,000) Shares (the "Pool") of Common
Stock. The Shares may be authorized but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grants under the Plan.
4. New Director Grants; Annual Grants.
(a) Administrator.Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) Procedure for Grants. The provisions set forth in this
Section 4(b) shall not be amended more than once every six months, other than to
comply with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder. All grants of Options pursuant to
this Section 4(b) shall be automatic and non-discretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
(ii) On July 1, 1991 and on each July 1 thereafter during
the term of this Plan, each Outside Director shall automatically receive an
Option to purchase six thousand (6,000) shares. In addition, each new Outside
Director shall be automatically granted an Option to purchase six thousand
(6,000) Shares upon the date (after July 1, 1991) on which such person first
becomes a Director, whether through election by the shareholders of the Company
or appointment by the Board to fill a vacancy.
(iii) The terms of each Option granted pursuant to this
Section 4(b) shall be as follows:
(A) the term of the Option shall be ten (10)
years.
(B) the Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth n
Section 9 hereof.
(C) the exercise price per Share shall be 100%
of the Fair Market Value per Share on the date of grant of the Option.
<PAGE> 4
(D) the Option shall become exercisable in
installments cumulatively as to twenty-five percent (25%) of the Optioned Stock
on the first through fourth anniversaries of the date of grant, so that 100% of
the Optioned Stock granted under an individual Option shall be exercisable four
years after the date of grant of the Option.
(iv) In the event that any Option granted under the Plan
would cause the number of Shares subject to outstanding Options plus the number
of Shares previously purchased upon exercise of Options to exceed the Pool, then
each such automatic grant shall be for that number of Shares determined by
dividing the total number of Shares remaining available for grant by the number
of Outside Directors on the automatic grant date. No further grants shall be
made until such time, if any, as additional Shares become available for grant
under the Plan through action of the shareholders to increase the number of
Shares which may be issued under the Plan or through cancellation or expiration
of Options previously granted hereunder.
(c) Powers of the Board. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its discretion:
(i) to determine, upon review of relevant information and in accordance with
Section 2(k) of the Plan, the Fair Market Value of the Common Stock; (ii) to
interpret the Plan; (iii) to prescribe, amend and rescind rules and regulations
relating the Plan; (iv) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (v) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final.
5. Deferral Options
(a) Deferral Election. An Outside Director may elect to defer the
entire Retainer Amount payable with respect to a Participation Year pursuant to
this Section by filing with the Company a deferral election before the first
business day of such Participation Year. The election by an Outside Director to
defer the entire Retainer Amount shall be irrevocable except that upon the
request of an Outside Director and based upon a showing of financial hardship
caused by accident, illness or any other event beyond the Outside Director's
control, the Board may in its sole discretion allow changes to such election.
(b) Procedure for Deferral Option Grants. Deferral Options shall
be granted automatically on the last day of each Participation Year with respect
to which an Outside Director makes a deferral election in accordance with
Section 5(a).
(c) Deferral Option Formula. The number of shares granted to an
Outside Director pursuant to a Deferral Option shall be equal to the Retainer
Amount (or a designated portion thereof) divided by seventy-five percent (75%)
of the Fair Market Value of a Share of the Company's Common Stock on the date of
grant of the Option.
<PAGE> 5
(d) Terms of Deferral Option. The terms of each Deferral Option
granted hereunder shall be as follows:
(i) The term of the Deferral Option shall be ten (10)
years.
(ii) The Deferral Option shall be exercisable only while
the Outside Director remains an Director of the Company, except as set forth in
Section 9 hereof.
(iii) The exercise price per Share shall be 25% of the
Fair Market Value per Share on the date of grant of the Deferral Option.
(iv) The Deferral Option shall be fully vested and
exercisable on the date of grant of the Deferral Option.
(v) In the event any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased upon exercise of Options to exceed the Pool, then
each such grant shall be for that number of Shares determined by dividing the
total number of Shares remaining available for grant by the number of Outside
Directors on the grant date. No further grants shall be made until such time, if
any, as additional Shares become available for grant under the Plan through
action of the shareholders to increase the number of Shares which may be issued
under the Plan or through cancellation or expiration of Options previously
granted hereunder.
6. Eligibility. Options may be granted only to Outside Directors. All
Options shall be granted in accordance with the terms set forth in Sections 4(b)
and 5(d) hereof. An Outside Director who has been granted an Option may, if he
is otherwise eligible, be granted an additional Option or Options in accordance
with such provisions.
The Plan shall not confer upon any Optionee any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with any rights which the director
or the Company may have to terminate his directorship at any time.
7. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 17 or the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 12 of the Plan.
8. Exercise Price and Consideration.
(a) Exercise Price. Except as otherwise provided in Section 5(d)
in connection with Deferral Options, the per Share exercise price for Optioned
Stock shall be 100% of the Fair Market Value per Share on the date of grant of
the Option.
<PAGE> 6
(b) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the board and may consist entirely of (i) cash, (ii)
check, (iii) promissory note, (iv) other shares which have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Option shall be exercised and which, in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than twelve (12) months on the date of surrender, (v) delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required to
pay the exercise price, (vi) delivery of an irrevocable subscription agreement
for the Shares which irrevocably obligates the Optionee to take and pay for the
Shares not more than twelve (12) months after the date of delivery of the
subscription agreement, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted under applicable law.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in
Sections 4(b) and 5(d) hereof; provided, however, that no Options shall be
exercisable until shareholder approval of the Plan in accordance with Section 17
hereof has been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 8(b) of the Plan. Until the issuance
(as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. A share certificate for the number of Shares so acquired
shall be issued to the Optionee as soon as practicable after exercise of the
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Continuous Status as a Director. In the event
an Optionee's Continuous Status as a Director terminates (other than upon the
Optionee's death or total and permanent disability (as defined in Section
22(e)(3) of the Code)), the Optionee may exercise his or her Option
<PAGE> 7
(c) Disability of Optionee. In the event Optionee's Continuous
Status as a Director terminates as a result of total and permanent disability
(as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or
her Option, but only within twelve (12) months from the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it at the date of such termination (but in no event later that the expiration of
its ten (10)-year term). To the extent that the Optionee was not entitled to
exercise an Option at the date of termination, or if he or she does not exercise
such Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it at the date of death (but in no event later than the
expiration of its ten (10)-year term). To the extent that the Optionee was not
entitled to exercise an Option at the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
10. Non-transferability of Option. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments.
(a) Changes in Capitalization. In the event that the stock of the
Company is changed by reason of any stock split, reverse stock split,
recapitalization, or other change in the capital structure of the Company, or
converted into or exchanged for other securities as a result of any merger,
consolidation or reorganization, or in the event that the outstanding number of
shares of stock of the Company is increased through payment of a stock dividend,
appropriate proportionate adjustments shall be made in the number and class of
shares of stock subject to the Plan, the number and class of shares subject to
any Option outstanding under the Plan, and the exercise price of any such
outstanding Option; provided, however, that the Company shall not be required to
issue fractional shares as a result of any such adjustment. Any such adjustment
shall be made upon approval by the Board, whose determination shall be
conclusive. If there is any other change in the number or type of the
outstanding shares of stock of the Company, or of any other security into which
such stock shall have been changed or for which it shall have been exchanged,
and if the Board in its sole discretion determines that such change equitably
requires an adjustment in the Options then outstanding under the Plan, such
adjustment shall be made in accordance with the determination of the Board. No
adjustments shall be required by reason of the issuance or sale by the Company
for cash or other consideration of additional shares of its stock or securities
convertible into or exchangeable for shares of its stock.
(b) Corporate Transactions. New Options (substantially equivalent
to the Options) may be substituted for the Options granted under the Plan, or
the Company's duties as
<PAGE> 8
to Options outstanding under the Plan may be assumed, by an employer corporation
other than the Company or by a parent or subsidiary of such employer
corporation, in connection with any merger, consolidation, acquisition of assets
or stock, separation, reorganization, liquidation or like occurrence in which
the Company is involved, provided, however, in the event such employer
corporation or parent or subsidiary of such employer corporation does not assume
the Options granted hereunder or substitute for such Options substantially
equivalent options, or if the Board determines, in its sole discretion, that
Options outstanding under the Plan should not then continue to be outstanding,
the options granted hereunder shall terminate and thereupon become null and void
(i) upon dissolution or liquidation of the Company, acquisition, separation, or
similar occurrence, or (ii) upon any merger, consolidation, or similar
acquisition, separation or similar occurrence and shall have the right, at any
time prior to, but contingent upon the consummation of such transaction, to
exercise (x) any unexpired Options granted hereunder to the extent they are then
exercisable, and (y) in the case of a merger, consolidation, or similar
occurrence where the Company is not the surviving corporation, those Options
which are not then otherwise exercisable; provided, further, that such exercise
right shall not in any event expire less than thirty (30) days after the date
notice of such transaction is sent to the Optionee.
12. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act (or any other applicable law or regulation), the Company shall
obtain shareholder approval of any Plan Amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
13. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Sections 4(b) and 5(b)
hereof. Notice of the determination shall be given to each Outside Director to
whom an Option is so granted within a reasonable time after the date of such
grant.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
<PAGE> 9
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect to the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
<PAGE> 10
READ-RITE CORPORATION
DIRECTOR OPTION AGREEMENT
(Amended And Restated December 1, 1995)
This Director Option Agreement ("Agreement") dated ______________ is by
and between Read-Rite Corporation, a Delaware corporation (the "Company"), and
_______ _______________ ("Optionee"). Subject to the terms, definitions and
provisions of the 1991 Director Option Plan (the "Plan") adopted by the Company
and incorporated herein by reference, the Company hereby grants to Optionee an
option to purchase six thousand (6,000) shares (the "Optioned Stock") of the
Company's common stock, $.0001 par value ("Common Stock"), at the price and on
the terms set forth below. Capitalized terms not otherwise defined herein shall
have the meaning assigned thereto in the Plan.
1. Nature of the Option. This Option is a nonstatutory stock option and
is not intended to qualify for any special tax benefits to Optionee.
2. Exercise Price. The exercise price is $_____ for each share of Common
Stock, 100% of the Fair Market Value of the Common Stock on the date of grant of
the Option.
3. Exercise of Option. This Option shall be exercisable during its term
in accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
(a) This Option shall become exercisable in installments
cumulatively as follows: twenty-five percent (25%) on the first anniversary of
the date of grant, twenty-five percent (25%) on the second anniversary,
twenty-five percent (25%) on the third anniversary, and twenty-five percent
(25%) on the fourth anniversary, such that the Option shall be vested as to one
hundred percent (100%) of the Optioned Shares four (4) years from the date of
grant.
(b) This Option may not be exercised for a fraction of a
Share.
(c) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option shall be
governed by Sections 6, 7 and 8 below.
(ii) Method of Exercise. This Option shall be exercisable by
written notice to the Company, which shall state the election to exercise the
Option, the number of Optioned Shares in respect of which the Option is being
exercised, and such other representations and agreements as to Optionee's
investment intent as may reasonably be required by the Company. Such written
notice shall be signed by Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the exercise price.
<PAGE> 11
4. Method of Payment. Payment of the exercise price shall be by any of
the following, or a combination thereof, at Optionee's election: (i) cash; (ii)
check; (iii) surrender of other shares of Common Stock of the Company which (A)
either have been owned by Optionee for more than twelve (12) months as of the
date of surrender or were not acquired, directly or indirectly, from the
Company, and (B) have a Fair Market Value on the date of surrender equal to the
exercise price of the Shares as to which the Option is being exercised; or (iv)
delivery of a promissory note (the "Note") of Optionee in the amount of the
exercise price, together with the execution and delivery by Optionee of a
security agreement ("Security Agreement"), in each case in a form prescribed by
the Company. The Note shall bear interest at a rate no less than the "applicable
federal rate" prescribed under the Code and its regulations at the time of
purchase, and pursuant to the Security Agreement, shall be secured by a pledge
of the shares purchased; or (v) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price.
5. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Termination of Continuous Status as a Director. If Optionee's
Continuous Status as a Director terminates (other than upon the Optionee's death
or permanent and total disability (as defined in Section 22(e)(3) of the Code)),
the Optionee may exercise his or her Option, but only within three (3) months
from the date of such termination, and only to the extent that the Optionee was
entitled to exercise it at the date of such termination (but in no event later
than the expiration of its ten (10) year term). To the extent that the Optionee
was not entitled to exercise this Option at the date of such termination, and to
the extent that Optionee does not exercise this Option (to the extent otherwise
so entitled) within the time specified herein, the Option shall terminate.
7. Disability of Optionee. If Optionee's Continuous Status as a Director
terminates as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), Optionee may exercise his or her Option, but
only within twelve (12) months from the date of termination, and only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the date of expiration of its ten (10)
year term). To the extent that Optionee was not entitled to exercise this Option
at the date of termination, and to the extent Optionee does not exercise this
Option (to the extent otherwise so entitled) within the time specified herein,
the Option shall terminate.
2
<PAGE> 12
8. Death of Optionee. In the event of Optionee's death while still a
Director of the Company, any Options which are then vested or which would
otherwise have vested pursuant to Section 3(i)(a) within the twelve (12)
calendar months following the date of death shall be exercisable by the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the Option's ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option at the date of death pursuant to Section 3(i)(a) or via the acceleration
provided in this Section 8, or to the extent that the Optionee's estate or a
person who by bequest or inheritance acquired the right to exercise such Option
does not exercise such Option within the time and to the extent specified
herein, the Option shall terminate.
9. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant hereof, and may be exercised during such term only
in accordance with the Plan and the terms of this Option.
11. Taxation Upon Exercise of Option. Optionee understands that, upon
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then Fair Market Value of the Shares purchased
over the exercise price paid for such Shares. If the Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, the
measurement and timing of such income may be deferred, and the Optionee is
advised to contact a tax advisor concerning the desirability of filing an 83(b)
election in connection with the exercise of the Option. Upon a resale of such
Shares by the Optionee, any difference between the sale price and the Fair
Market Value of the Shares on the date of exercise of the Option, to the extent
not included in income as described above, will be treated as capital gain or
loss.
DATE OF GRANT:
-----------------------
READ-RITE CORPORATION,
a Delaware corporation
By:
--------------------------------
Chairman and
Chief Executive Officer
3
<PAGE> 13
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
annexed hereto, and represents that he/she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under the Plan.
Dated: ______________________
----------------------------------
Optionee
----------------------------------
Address
----------------------------------
City, State
4
<PAGE> 1
EXHIBIT 10.41
READ-RITE CORPORATION
1995 STOCK PLAN
(as amended July 1, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility,
o to provide additional incentive to Employees and
Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to
the administration of stock option plans under state corporate and securities
laws and the Code.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Read-Rite Corporation, a Delaware
corporation.
-1-
<PAGE> 2
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services and who is
compensated for such services. The term "Consultant" shall include non-Employee
Directors.
(i) "Continuous Status as an Employee or Consultant" means that
the employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option.
(j) "Director" means a member of the Board.
(k) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(n) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading
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day prior to the day of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(p) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "Notice of Grant" means a written notice evidencing certain
terms and conditions of an individual Option or Stock Purchase Right grant. The
Notice of Grant is part of the Option Agreement.
(r) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(u) "Optioned Stock" means the Common Stock subject to an Option
or Stock Purchase Right.
(v) "Optionee" means an Employee or Consultant who holds an
outstanding Option or Stock Purchase Right.
(w) "Parent" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Read-Rite Corporation 1995 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 below.
(z) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under
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a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to
the terms and conditions of the Plan and the Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Securities
Exchange Act of 1934, as amended.
(cc) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(dd) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ee) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan shall be three million (3,000,000) Shares plus (i) any unused
Shares, (ii) any forfeited Shares under the Plan and (iii) the lesser of any
Shares covered by grants under the Amended and Restated 1987 Stock Option Plan
(the "1987 Plan") or any forfeited Shares under the 1987 Plan. For purposes of
this Section 3, the following apply: (i) "unused Shares" means any Shares
reserved for issuance which are not covered by grants prior to the termination
of the 1987 Plan; (ii) "forfeited Shares" means any Shares issued pursuant to
awards which are forfeited to the Company pursuant to award terms and
conditions. The term "forfeited Shares" shall not include Shares as to which the
original recipient received any benefits of ownership (other than voting
rights). The Shares may be authorized, but unissued, or reacquired Common Stock.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of
Employees and Consultants.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
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(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided
above, the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each Option and Stock Purchase Right granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
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(ix) to modify or amend each Option or Stock Purchase
Right (subject to Section 15(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Plan;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xi) to determine the terms and restrictions applicable
to Options and Stock Purchase Rights and any Restricted Stock; and
(xii) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable.
(xiii) to make all other determinations deemed necessary
or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. If otherwise eligible, an Employee or Consultant who has been
granted an Option or Stock Purchase Right may be granted additional Options or
Stock Purchase Rights.
6. Limitations.
(a) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
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<PAGE> 7
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
employment or consulting relationship with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options
and Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of
the Company, Options and Stock Purchase Rights to purchase more than 250,000
Shares.
(ii) In connection with his or her initial employment, an
Employee may be granted Options and Stock Purchase Rights to purchase up to an
additional 250,000 Shares which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option or Stock Purchase Right is cancelled in
the same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 13), the cancelled Option or
Stock Purchase Right will be counted against the limits set forth in subsections
(i) and (ii) above. For this purpose, if the exercise price of an Option or
Stock Purchase Right is reduced, the transaction will be treated as a
cancellation of the Option or Stock Purchase Right and the grant of a new Option
or Stock Purchase Right.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
become effective upon the earlier to occur of its adoption by the Board or its
approval by the shareholders of the Company as described in Section 19 of the
Plan. It shall continue in effect for a term of ten (10) years unless terminated
earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Notice
of Grant; provided, however, that in the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may
be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant or
such shorter term as may be provided in the Notice of Grant.
9. Option Exercise Price and Consideration.
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(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator but in no case
shall be less than 85% of the Fair Market Value per Share on the date of grant.
In the case of a Nonstatutory Stock Option intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the per Share exercise price shall be no less than 100% of the Fair Market
Value per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price of less than 100% of the Fair Market
Value per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In so doing, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
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<PAGE> 9
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of
payment; or
(viii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the stock certificate evidencing such Shares is issued (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly after the Option is exercised. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 13 of the Plan.
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<PAGE> 10
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. Upon
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for three (3) months following the Optionee's termination. In the
case of an Incentive Stock Option, such period of time for exercise shall not
exceed three (3) months from the date of termination. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change
in status from Consultant to Employee or Employee to Consultant, an Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. However, in such event, an
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option three months and one day following such change of status.
(c) Disability of Optionee. In the event that an Optionee's
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at any time
within twelve (12) months from the date of such termination, but only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while employed with
the Company, any options held by such Optionee which are then vested or which
would have otherwise vested pursuant to such Optionee's option agreement with
the Company within twelve (12) calendar months following the date of death shall
be exercisable by the Optionee's estate or a person who acquired the right to
exercise the Option by bequest or inheritance at any time within twelve (12)
months following the date of death (but in no event later than the expiration of
the Option's specified term). To the extent that the Optionee was not entitled
to exercise an Option at the date of death pursuant to
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<PAGE> 11
his/her option agreement with the Company or via the acceleration provided in
this Paragraph (d), or to the extent that the Optionee's estate or a person who
by bequest or inheritance acquired the right to exercise such Option does not
exercise such Option within the time and to the extent specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid, and the
time within which the offeree must accept such offer, which shall in no event
exceed six (6) months from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The Administrator shall not set
the purchase price for a Stock Purchase Right below the Fair Market Value per
share on the date of grant. The offer shall be accepted by execution of a
Restricted Stock Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. An Option
or Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
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<PAGE> 12
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option or Stock
Purchase Right has not been previously exercised, it will terminate immediately
prior to the consummation of such proposed action. The Board may, in the
exercise of its sole discretion in such instances, declare that any Option or
Stock Purchase Right shall terminate as of a date fixed by the Board and give
each Optionee the right to exercise his or her Option or Stock Purchase Right as
to all or any part of the Optioned Stock, including Shares as to which the
Option or Stock Purchase Right would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall have the right to exercise the Option
or Stock Purchase Right as to all of the Optioned Stock, including Shares as to
which it would not otherwise be exercisable. If an Option or Stock Purchase
Right is exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger
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<PAGE> 13
or sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets was not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Section 422 of the Code (or any successor rule or statute or other
applicable law, rule or regulation, including the requirements of any exchange
or quotation system on which the Common Stock is listed or quoted). Such
shareholder approval, if required, shall be obtained in such a manner and to
such a degree as is required by the applicable law, rule or regulation.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and
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<PAGE> 14
regulations promulgated thereunder, Applicable Laws, and the requirements of any
stock exchange or quotation system upon which the Shares may then be listed or
quoted, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Liability of Company.
(a) Inability to Obtain Authority. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock
covered by an Option or Stock Purchase Right exceeds, as of the date of grant,
the number of Shares which may be issued under the Plan without additional
shareholder approval, such Option or Stock Purchase Right shall be void with
respect to such excess Optioned Stock, unless shareholder approval of an
amendment sufficiently increasing the number of Shares subject to the Plan is
timely obtained in accordance with Section 15(b) of the Plan.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the manner and to the degree required under applicable federal and state law.
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<PAGE> 15
READ-RITE CORPORATION
1995 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, capitalized terms not otherwise
defined herein shall have the meanings assigned thereto in the Plan.
I. NOTICE OF GRANT OF STOCK OPTION
You have been granted a Nonstatutory Stock Option ("NSO") to purchase
Common Stock of the Company, subject to the terms and conditions of the Plan and
this Option Agreement, as set forth on the Notice of Grant of Stock Options and
Grant Agreement to which this Agreement is attached (the "Notice").
1. Vesting Schedule.
This Option may be exercised, in whole or in part, in accordance with
the following schedule: 25% of the Shares subject to the Option shall be
exercisable on and after each of the first, second, third and fourth
anniversaries of the Date of Grant set forth on the Notice.
2. Termination Period.
This Option may be exercised for three (3) months after termination of
the Optionee's employment or consulting relationship with the Company. Upon the
death or Disability of the Optionee, this Option may be exercised for the period
provided in the Plan. In the event of the Optionee's change in status from
Employee to Consultant or Consultant to Employee, this Option Agreement shall
remain in effect. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
<PAGE> 16
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, Disability or other termination of Optionee's employment or
consulting relationship, the exercisability of the Option is governed by the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery
of an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice shall be
signed by the Optionee and shall be delivered in person or by certified mail to
the Secretary of the Company or to Stock Administration. The Exercise Notice
shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of
this Option unless such issuance and exercise complies with all relevant
provisions of law and the requirements of any stock exchange or quotation
service upon which the Shares are then listed. Assuming such compliance, for
income tax purposes the Exercised Shares shall be considered transferred to the
Optionee on the date the Option is exercised with respect to such Exercised
Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
<PAGE> 17
5. Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal and state tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular
federal income tax and state income tax liability upon exercise of a NSO. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Exercised Shares on the date of exercise over their aggregate Exercise
Price. If the Optionee is an Employee or a former Employee, the Company will be
required to withhold from his or her compensation or collect from Optionee and
pay to the applicable taxing authorities an amount in cash equal to a percentage
of this compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
By your signature and the signature of the Company's
representative on the Notice, you and the Company agree that this Option is
granted under and governed by the terms and conditions of the Plan and this
Option Agreement. Optionee confirms that he or she has reviewed the Plan and
this Option Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Option Agreement and fully understands
all provisions of the Plan and Option Agreement. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions relating to the Plan and Option Agreement.
Optionee further agrees to notify the Company upon any change in Optionee's
residence address.
<PAGE> 1
EXHIBIT 10.56
READ-RITE CORPORATION
SECOND AMENDMENT
TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as
of August 10, 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 (as amended by the
First Amendment to Credit Agreement dated February 5, 1998, the "Credit
Agreement" and the Credit Agreement, as amended by this Amendment, the "Amended
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 Amended 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
1.1 AMENDMENTS TO DEFINITIONS.
1.1.1 The definitions of "Commitment Fee Percentage," "Loan Agreements,"
"Material Adverse Effect," "Pricing Period" and "Revolving Facility" in Section
1.01 of the Credit Agreement shall be amended to read in their entirety as
follows:
"Commitment Fee Percentage"
(i) With respect to the initial through fourth Pricing Periods,
as determined under the Credit Agreement as in effect prior to the Second
Amendment Date;
(ii) With respect to the fifth Pricing Period, means 0.75%
(iii) With respect to any subsequent Pricing Period, means the
rate determined in accordance with the pricing grid set forth below:
<PAGE> 2
<TABLE>
<CAPTION>
EBITDA FOR APPLICABLE FISCAL QUARTER COMMITMENT FEE PERCENTAGE
- ------------------------------------ -------------------------
<S> <C>
Less than $25,000,000 0.75%
Greater than or equal to $25,000,000 0.50%
</TABLE>
For the purpose of determining the Commitment Fee Percentage in
accordance with this pricing grid, EBITDA 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 Sections 6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower
shall fail to deliver to 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.
"Loan Agreements": (i) This Agreement, the Notes, the Disclosure Letter,
the Second Disclosure Letter, the Letters of Credit, the Letter of Credit
applications delivered in connection with each request for the issuance of a
Letter of Credit, the Fee Letter, the Collateral Documents, (ii) any amendment
to this Agreement or any of the foregoing, and (iii) any waiver to this
Agreement or any of the foregoing.
"Material Adverse Effect": A material adverse effect (i) on the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of the Borrower and its Subsidiaries, taken as a whole, or (ii) on
the ability of the Borrower to perform, or any of the Banks to enforce, the
obligations of the Borrower under any of the Loan Agreements, or (iii) on the
legality, validity, binding effect or enforceability of the Collateral Documents
or the perfection or priority of the Agent's Lien over the Collateral.
"Pricing Period": The initial through third Pricing Periods applicable
to the Loans and Letters of Credit are as determined under the Credit Agreement
as in effect prior to the Second Amendment Date, the fourth Pricing Period
commenced on June 1, 1998 and shall continue through the day (whether or not a
Business Day) preceding the Second Amendment Date, the fifth pricing period
shall commence on the Second Amendment Date and expire on December 31, 1998.
Thereafter, the Pricing Periods shall be based on the following periods:
(i) January 1 through the last day of February of each calendar
year;
(ii) March 1 through May 31 of each calendar year;
(iii) June 1 through August 31 of each calendar year;
(iv) September 1 through December 31 of each calendar year.
"Revolving Commitment": For any Bank, (i) the amount set forth as such
opposite the name of such Bank on the signature page to this Agreement as
reduced, from time to time, pursuant to Section 2.01(e) or pursuant to the
Second Amendment to Credit Agreement among the Borrower, the Banks, the
Designated Issuer and the Agent dated as of August 10, 1998 or
2.
<PAGE> 3
(ii), where the context so requires, the obligation of a Bank to make
Revolving Loans up to such amount.
"Revolving Facility": The amount of $100,000,000 as such amount may be
reduced pursuant to Section 2.01(e).
1.1.2 There shall be added to Section 1.01 of the Credit Agreement, in their
appropriate alphabetical order, the following additional definitions:
"Base Rate Margin":
(i) With respect to the initial Pricing Period through the
fourth Pricing Period, means 0.00%;
(ii) With respect to the fifth Pricing Period, means 1.00%;
(iii) With respect to any subsequent Pricing Period, means a
rate equal to the higher of (i) the Eurodollar Rate Margin less 1.00% and (ii)
0.00%
For the purpose of determining the Base Rate Margin in accordance with
this pricing grid, EBITDA 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 Sections
6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower shall fail to deliver
to Agent the relevant financial statements and reports for any fiscal quarter
prior to the commencement of a Pricing Period, the Base Rate Margin for such
Pricing Period shall be deemed to be at the highest rate.
"Borrowing Base": At any time the sum (without duplication) of (A) the
excess, if any, of (x) the sum of (i) 100% of the Eligible Cash of the Borrower
at such time plus (ii) 100% of the fair market value of the Eligible Cash
Equivalents of the Borrower at such time over (y) $25,000,000 plus (B) 70%
Eligible Receivables of the Borrower and Read-Rite International at such time
minus (C) the aggregate principal amount of the outstanding Revolving Loans and
Letter of Credit Usage.
"Borrowing Base Certificate": A certificate of a Responsible Officer in
substantially the form of Exhibit H with such changes thereto as the Agent or
the Majority Banks may reasonably request from time to time.
"Building No. 6": That certain real property located on Los Coches
Street in Milpitas, California, including the buildings located thereon.
"Capital Expenditures": For any period, the sum, without duplication, of
(i) all expenditures of the Borrower determined on a consolidated basis, which
would be classified as capital expenditures in accordance with GAAP consistently
applied and (ii) all expenditures in connection with Capital Leases.
3.
<PAGE> 4
"Cash Equivalents" Investments maturing within one year from the date of
investment (in the case of Investments referenced in clauses (a) through (e)) in
(a) certificates of deposit, Eurodollar time deposits and other interest bearing
deposits or accounts with United States commercial banks having a combined
capital and surplus of at least $500,000,000 and rated C or better by Keefe
Bruyette and Associates or with any Bank, (b) certificates of deposit, other
interest bearing accounts or deposits and demand deposits with other United
States commercial banks, which deposits and accounts are in amounts fully
insured by the Federal Deposit Insurance Corporation, (c) obligations issued or
unconditionally guaranteed by the United States government or issued by an
agency thereof and backed by the full faith and credit of the United States, (d)
direct obligations issued by any state of the United States or any political
subdivision thereof which have the highest rating obtainable from S&P on the
date of investment, (e) commercial paper rated A-1 or better by S&P and P-1 or
better by Moody's, (f) auction rate preferred stock issued by issuers whose
senior debt is rated AA or better by S&P and Aa2 or better by Moody's, provided
that the remaining time to the next auction is less than one year, or (g) shares
in money market mutual funds with U.S. dollar denominated investments in fixed
income obligations, including repurchase agreements, fixed time deposits and
other obligations, with a credit quality comparable to any of the Investments
described in clauses (a) through (f) above and a dollar weighted average
maturity of not more than one year.
"Collateral": The property described in the Collateral Documents, and
all other property now existing or hereafter arising or acquired which may at
any time be or become subject to a Lien in favor of the Agent or the Banks
pursuant to the Collateral Documents or otherwise, securing the payment or
performance of the Obligations.
"Collateral Documents": The Pledge Agreement, the Guaranty, the Security
Agreement, the Intellectual Property Security Agreement, the Fee Mortgages, the
Leasehold Mortgages, the Designated Account Agreements and any other agreement
pursuant to which the Borrower, or any of its Subsidiaries or Affiliates, or any
other Person, provides a Lien on its assets in favor of the Agent or the Banks
and all financing statements, fixture filings, patent, trademark, and copyright
filings and acknowledgements and other filings, documents and agreements
(including, without limitation brokerage account control agreements) made or
delivered pursuant thereto (all as such agreements, documents and filings may be
amended, restated, supplemented, or otherwise modified from time to time).
"Depository Banks": The banks designated by the Borrower from time to
time to hold the Eligible Cash deposits and acceptable to the Agent (initially
being Wells Fargo Bank, N.A.).
"Designated Accounts": The bank accounts of the Borrower maintained with
Depository Banks in California, Hawaii, Idaho, Illinois or Oregon in the United
States of America, designated by the Borrower to hold Eligible Cash and subject
to a Designated Account Agreement.
"Designated Account Agreement": The Control Agreement entered between
the Depository Banks and the Agent relating to the administration and control of
Designated Accounts in form and substance acceptable to the Agent.
4.
<PAGE> 5
"Domestic Subsidiary": Sunward Technologies, Inc. and Sunward
Technologies, California and any other Subsidiary (other than Rite Flex)
incorporated in any state of the United States or the District of Columbia with
either (i) assets with an aggregate value in excess of $1,000,000, or (ii)
annual revenues in excess of $1,000,000.
"EBITDA": For any period, the sum of the following determined for the
Borrower on a consolidated basis in accordance with GAAP consistently applied:
(i) Consolidated Net Income; plus
(ii) provisions for income taxes; plus
(iii) Consolidated Interest Expense; plus
(iv) depreciation and amortization expenses; plus
(v) non-cash and non-recurring expenses plus any non-recurring
cash expenses associated with the $93,728,000 charge taken in the fiscal quarter
ending June 28, 1998 less non-cash and non-recurring gains.
"Eligible Cash": At any time the positive cash balances in the
Designated Accounts, provided, that, such cash balances shall only be treated as
Eligible Cash if, at such time,
(i) in the case of cash balances held in a Designated Account
of the Borrower such Designated Account shall be subject to a first priority
perfected security interest in favor of the Agent (for the ratable benefit of
the Banks and Designated Issuer).
(ii) the relevant Designated Account is not subject to any
right of set-off, counterclaim or other defense or any lien or encumbrance in
favor of any Person other than as contemplated in (i) above or as set forth in
the applicable Designated Account Agreement;
(iii) the cash balances are in Dollars;
(iv) the cash balances and relevant Designated Account are
solely owned by the Borrower; and
(v) the cash balances are not subject to any order of
attachment or other restriction on transfer (other than as set forth in the Loan
Documents).
"Eligible Cash Equivalents": At any time the Cash Equivalents of the
Borrower which are:
(i) (A) in the physical possession of the Agent and subject to a
first priority perfected security interest in favor of the Agent (for the
ratable benefit of the Banks and Designated Issuer); or
(B) held in brokerage or investment accounts with securities
intermediaries acceptable to the Agent and the Majority Banks and subject to a
first priority
5.
<PAGE> 6
perfected security interest in favor of the Agent (for the ratable benefit of
the Banks and Designated Issuer) and subject to control agreements relating to
the administration and control of the securities and security entitlements in
such accounts in form and substance satisfactory to the Agent; and
(ii) the Cash Equivalents are owned solely by the Borrower and
are not subject to any order of attachment or other restriction on transfer
(other than as set forth in the Loan Documents.)
"Eligible Receivables": At any time (without duplication) the aggregate
amount of the Receivables of the Borrower and Read-Rite International, payable
in cash in Dollars or Philippine Pesos and Thai Baht, net of applicable
allowances, reserves, discounts, returns, credits or offsets (including
allowances or reserves for doubtful accounts), excluding the following:
(i) Receivables for which the right to receive payment has not
been fully earned by performance or is contingent upon the fulfillment of any
condition whatsoever or which otherwise do not arise from a bona fide completed
transaction;
(ii) Receivables against which there are asserted any defenses,
counterclaims, discounts (other than normal trade discounts granted in the
ordinary course of business) or offsets of any nature, whether well-founded or
otherwise;
(iii) Receivables that do not comply with all applicable legal
requirements, including all laws, rules, regulations and orders of any
governmental authority or other regulatory body;
(iv) Receivables which represent a prepayment or progress payment
or arising out of the placement of goods on consignment, guaranteed sale or
other arrangement by reason of which the payment by the obligor on the
Receivable may be conditional or contingent;
(v) Receivables which are not owned by the Borrower or Read-Rite
International (as appropriate) free and clear of all Liens and rights of others
(other than the Liens in favor of the Agent on behalf of the Banks and
Designated Issuer or the Borrower);
(vi) Receivables of the Borrower in which the Agent on behalf of
the Banks and Designated Issuer shall not have a valid and perfected
first-priority Lien;
(vii) Receivables of Read-Rite International in which the
Borrower shall not have a valid and perfected first priority Lien pursuant to
the RRI Security Agreement and which rights of the Borrower under the RRI
Security Agreement shall not be subject to a valid and perfected first priority
Lien in favor of Agent on behalf of the Banks and Designated Issuer;
(viii) Receivables owing by any officer, director, employee,
agent, partner, Subsidiary or Affiliate of the Borrower or Read-Rite
International;
(ix) Receivables owing (A) by the United States or any
department, agency or instrumentality thereof or (B) by a foreign government or
any State of the United States or any department, agency, instrumentality or
political subdivision thereof, unless, in the case of
6.
<PAGE> 7
Receivables described in sub-clause (A), the Agent has agreed to the contrary in
writing and the Borrower or Read-Rite International (as appropriate) has
complied with the Federal Assignment of Claims Act with respect to such
Receivables;
(x) Receivables not paid in full within 75 days from the date of
invoice;
(xi) Receivables owing by any Receivable debtor or obligor who
has failed to make full payment within 75 days from the date of invoice on more
than 10% of the aggregate amount of Receivables owing to the Borrower by such
Receivable debtor or obligor;
(xii) Receivables owing by any Receivable debtor or obligor who
is the subject of a proceeding of the types described in Sections 7.01(g) and
(h) with respect to the Borrower and its Subsidiaries.
(xiii) Receivables which are evidenced by a promissory note or
other instrument;
(xiv) Receivables with respect to which the terms or conditions
prohibit or restrict assignment or collection rights to the extent such
restrictions are enforceable against assignees of such Receivables; and
(xv) Receivables of any Receivable debtor or obligor located in a
jurisdiction (other than any jurisdiction in which were located Receivable
debtors or obligors generating at least $50,000 in Receivables in the aggregate
from such jurisdiction during the four fiscal quarter period ending June 28,
1998) whose laws materially impair the collectability or enforceability of such
Receivables or in which Borrower or Read-Rite International (as appropriate) has
failed to file, register or otherwise take action required to enable enforcement
proceedings in respect of such Receivables to be taken in such jurisdiction;
Any Receivable which is at any time an Eligible Receivable, but which
subsequently fails to meet any of the foregoing eligibility requirements, shall
forthwith cease to be an Eligible Receivable until such time as such Receivable
shall meet all of the foregoing requirements.
"Eurodollar Rate Margin":
(i) With respect to the initial through fourth Pricing Periods,
as determined under the Credit Agreement as in effect prior to the Second
Amendment Date;
(ii) With respect to the fifth Pricing Period, means 2.00%;
(iii) With respect to any subsequent Pricing Period, means the
rate determined in accordance with the pricing grid set forth below:
7.
<PAGE> 8
<TABLE>
<CAPTION>
EBITDA FOR APPLICABLE FISCAL QUARTER EURODOLLAR RATE MARGIN
- ------------------------------------ ----------------------
<S> <C>
Less than $25,000,000 2.00%
Greater than or equal to $25,000,000 but less than $50,000,000 1.50%
Greater than or equal to $50,000,000 1.00%
</TABLE>
For the purpose of determining the Eurodollar Rate Margin in accordance
with this pricing grid, EBITDA 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 Sections 6.01(a)(i) or 6.01(a)(ii); provided that if the Borrower shall fail
to deliver to Agent the relevant financial statements and reports for any fiscal
quarter prior to the commencement of a Pricing Period, the Eurodollar Rate
Margin for such Pricing Period shall be deemed to be at the highest rate.
"Fee Mortgage": A Deed of Trust in form and substance acceptable to the
Agent on real estate owned by the Borrower or its Domestic Subsidiaries.
"Fremont Property": That certain real property located on Skyway Court
in Fremont, California leased as of the Second Amendment Date by the Borrower.
"Guaranty": That certain Guaranty substantially in the form attached
hereto as Exhibit I dated as of the Second Amendment Date entered into by the
Domestic Subsidiaries guaranteeing the payment and performance of the
Obligations (as such agreement may be amended, supplemented, restated or
otherwise modified from time to time).
"Intellectual Property Security Agreement": That certain Intellectual
Property Security Agreement substantially in the form attached hereto as Exhibit
L dated as of the Second Amendment Date entered into by the Borrower, the
Domestic Subsidiaries and the Agent securing the payment and performance of the
Obligations (as such agreement may be amended, supplemented, restated or
otherwise modified from time to time).
"Landlord Consent": A consent in form and substance acceptable to the
Agent from the landlord (and/or lien holder) of any real property leased by the
Borrower or its Domestic Subsidiaries.
"Leasehold Mortgage": A leasehold Deed of Trust in form and substance
acceptable to the Agent on any leasehold interest of the Borrower or its
Domestic Subsidiaries in any real estate.
"Lessor Consent": A consent in form and substance acceptable to the
Agent from the lessor of any personal property leased by the Borrower or its
Domestic Subsidiaries.
"Obligations": The indebtedness, liabilities and other obligations of
the Borrower to the Agent or the Banks now or hereafter existing or arising out
of or in connection with the Loan
8.
<PAGE> 9
Documents including, without limitation, all Loans, all interest accrued
(including interest that but for the filing of a bankruptcy petition would
accrue on such obligations) all fees and expenses due under the Loan Documents,
reimbursement obligations of amounts drawn under Letters of Credit, indemnities
and all other amounts payable by Borrower under or in connection with any Loan
Document, whether now or hereafter existing or arising, whether due or to become
due, absolute or contingent, liquidated or unliquidated, determined and
undetermined.
"Pledge Agreement": That certain Stock Pledge and Charge Agreement
substantially in the form attached hereto as Exhibit J dated as of the Second
Amendment Date entered into between Borrower, certain of the Domestic
Subsidiaries and the Agent (as the same may be amended, supplemented, restated
or otherwise modified from time to time).
"Permitted Liens": Those Liens permitted pursuant to Section 6.02(f).
"Receivables": All rights to payment arising out of the sale or lease of
goods or the performance of services in the ordinary and usual course of
business, however evidenced.
"RRI Security Agreement": That certain security agreement entered by
Read-Rite International in favor of the Borrower in form and substance
acceptable to the Agent.
"Second Amendment Date": Shall have the meaning ascribed to it in that
certain Second Amendment to Credit Agreement among the Borrower, the Banks, the
Designated Issuer and the Agent dated as of August 10, 1998.
"Second Disclosure Letter": That certain letter dated as of the Second
Amendment Date containing the disclosure of certain information to the Agent and
the Banks.
"Security Agreement": That certain Security Agreement substantially in
the form attached hereto as Exhibit K dated as of the Second Amendment Date
entered into between the Borrower, the Domestic Subsidiaries and the Agent
securing the payment and performance of the Obligations (as such agreement may
be amended, supplemented, restated or otherwise modified from time to time).
1.1.3 The definitions of "Applicable Margin" and "EBIT" shall be deleted from
Section 1.01 of the Credit Agreement.
1.2 AMENDMENTS TO PRICING.
1.2.1 Section 2.03(b) of the Credit Agreement shall be amended by adding after
the phrase "rate per annum equal to the Base Rate" the phrase: "plus the Base
Rate Margin."
1.2.2 Section 2.03(c) of the Credit Agreement shall be amended by deleting the
phrase "Applicable Margin" and replacing it with "Eurodollar Rate Margin."
1.2.3 Section 2.06(f) of the Credit Agreement shall be amended by deleting the
reference to "Applicable Margin" and replacing it by "Eurodollar Rate Margin."
1.3 ADDITIONAL AMENDMENTS TO CREDIT AGREEMENT.
9.
<PAGE> 10
1.3.1 Section 2.01 of the Credit Agreement is amended by adding at the end of
the first sentence thereof the following:
and provided, further, that immediately after giving effect to such
Revolving Loans the aggregate Revolving Loans and Letter of Credit Usage
then outstanding shall not exceed the Borrowing Base then in effect.
1.3.2 Section 2.01(c) of the Credit Agreement is amended by adding at the end of
the first sentence thereof the following:
and provided, further, that the Borrower shall have delivered a
completed Borrowing Base Certificate, together with the related
collateral reports, required by Section 6.01(a)(v). Borrower at its
option may also deliver a completed Borrowing Base Certificate, together
with the related collateral reports described in Section 6.01(a)(v), as
of a more recent date than required by Section 6.01(a)(v), in which
event the more recent completed Borrowing Base Certificate shall be
applicable to the requested Borrowing.
1.3.3 Section 2.02(a) of the Credit Agreement shall be amended by adding as the
first sentence thereof the following:
If at any time the aggregate principal amount of the outstanding
Revolving Loans and Letter of Credit Usage shall exceed the Borrowing
Base as set forth in the Borrowing Base Certificate then in effect, the
Borrower, upon becoming aware of such excess, shall immediately prepay
the outstanding principal amount of the Revolving Loans in an amount
equal to such excess (together with interest accrued thereon and any
amounts payable pursuant to Section 3.07(b)).
1.3.4 Section 3.07(a) of the Credit Agreement is amended by deleting in the
eleventh line thereof the phrase "related to or in connection contemplated by
this Agreement" and replacing such phrase with "related to or in connection with
the Loan Documents or the Collateral".
1.3.5 Section 4.02(a)(i) of the Credit Agreement shall be amended by adding
after the phrase "contained in Section 5.01" in the first line thereof the
phrase: "and the other Loan Documents".
1.3.6 Section 4.02 of the Credit Agreement is amended by adding at the end
thereof the following:
(c) the Borrower shall have delivered, or caused its Subsidiaries
to deliver, the Collateral Documents and other documents, certificates,
notices agreements and taken such actions, or caused its Subsidiaries to
take such actions, as described in Section 6.01(k).
10.
<PAGE> 11
1.3.7 Section 4.03 of the Credit Agreement is amended by adding at the end
thereof the following:
(d) the Borrower shall have delivered, or caused its Subsidiaries
to deliver, the Collateral Documents and other documents, certificates,
notices agreements and taken such actions, or caused its Subsidiaries to
take such actions, as described in Section 6.01(k).
1.3.8 Section 5.01 of the Credit Agreement shall be amended by adding at the end
thereof the following:
(o) Borrowing Base Certificates. The Statements contained in the
most recent Borrowing Base Certificate delivered pursuant to Section
2.01(c) prior to any request for any given Borrowing are true, correct
and complete both on and as of the date set forth in the Borrowing Base
Certificate and on and as of the date of such Borrowing as though made
on and as of such date except (in the case of the date of Borrowing) for
changes in the information set forth in such Borrowing Base Certificate
in the ordinary course of business between the date set forth in the
Borrowing Base Certificate and the date of Borrowing; and the Eligible
Cash and Eligible Cash Equivalents balances as of the date two days
prior to such date of Borrowing are not more than 10% less than the
balances for Eligible Cash and Eligible Cash Equivalents set forth in
such Borrowing Base Certificate.
(p) Real Property. Neither the Borrower nor any of its Domestic
Subsidiaries owns any real property (other than leasehold interests
therein) except for (i) as of the Second Amendment Date, the Borrower
leases the Fremont Property under a synthetic lease, subject to a
contract for sale which is scheduled to close in October 1998, and the
Borrower owns Building No. 6 and (ii) such other real property as may be
acquired by the Borrower or a Domestic Subsidiary after the Second
Amendment Date and as to which the Borrower has given written notice to
the Agent of the acquisition of such real property at least thirty days
prior to the acquisition.
1.3.9 Section 6.01(a) of the Credit Agreement is amended by adding at the end
thereof the following:
(v) as soon as available, but in any event within fifteen days
after the end of each fiscal month (or within 20 days after the end of
the fiscal month ending in July 1998), (A) a completed Borrowing Base
Certificate, (B) full and complete reports with respect to Receivables,
including information as to concentration, aging, identity of
Receivables debtors and obligors, letters of credit securing
Receivables, disputed Receivables and such other matters as Agent may
request and (C) a statement from the Depository Banks of the balances
standing to the credit of each Designated Account as of the end of such
month in form and substance satisfactory to the Agent.
1.3.10 Section 6.01(e) of the Credit Agreement shall be amended by adding at the
end thereof the following:
11.
<PAGE> 12
Casualty insurance policies shall name the Agent, for the ratable
benefit of the Banks, as additional insured and loss payee. All casualty
insurance policies shall provide that they shall not be terminated or
cancelled nor shall any such policy be materially altered without at
least 30 days' prior written notice to the Borrower and Agent (or at
least 10 days' prior written notice to the Borrower and Agent for
termination or cancellation for failure to pay premiums). Should such
notice of termination be received or should the Borrower otherwise fail
to maintain the insurance policies required by this paragraph, the Agent
shall be authorized to renew, obtain or otherwise cause such insurance
coverage as required by this paragraph to be maintained (in whole or in
part), in any such case at the expense of the Borrower.
1.3.11 Section 6.01 of the Credit Agreement shall be amended by adding at the
end thereof the following:
(h) Additional Domestic Subsidiaries. Cause each Domestic
Subsidiary arising after the date hereof to (A) become party to each of
the Security Agreement and Guaranty and, to the extent it has
subsidiaries, the Pledge Agreement, (B) file all financing statements
and (C) execute, deliver, file, notarize and register such further
agreements, instruments, certificates, documents and assurances and
perform such acts as Agent shall deem necessary or appropriate to
perfect or protect any security interest or guaranty created thereby.
(i) Year 2000. Review (and cause each of its Subsidiaries to
review) the areas within their respective businesses and operation
(including, without limitation, computer systems and equipment
containing embedded software) which could be adversely affected by, and
develop and implement (and cause each of its Subsidiaries to develop and
implement) a comprehensive and detailed program to address on a timely
basis (and in any event by October 1, 1999), including where necessary
reprogramming and replacing affected systems and equipment, the "Year
2000 problem" (that is, the risk that computer applications used by the
Borrower or its Subsidiaries may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and
any date on or after December 31, 1999). Borrower and its Subsidiaries
will also make inquiry and monitor each supplier, vendor and customer of
Borrower and its Subsidiaries that is of material importance to the
financial well-being of Borrower and its Subsidiaries, taken as a whole,
with a view to successfully resolving on a timely basis the Year 2000
problem. Borrower and its Subsidiaries will not suffer a Material
Adverse Effect in resolving the Year 2000 problem.
(j) Read-Rite International. Insure that the total aggregate
value, at any time, of the outstanding, enforceable and assignable
inter-company obligations of Read-Rite International in favor of the
Borrower shall not be less than $125,000,000. Borrower shall further
insure that Read-Rite International shall enter into and maintain the
RRI Security Agreement and shall at all times thereafter maintain a
valid and perfected first priority security interest pursuant to the RRI
Security Agreement.
(k) Security. (i) Within 10 Business Days after the Second
Amendment Date, (i) deliver, in form and substance satisfactory to the
Agent, (A) completed schedules and
12.
<PAGE> 13
exhibits to the Security Agreement, Pledge Agreement and Intellectual
Property Security Agreement and completed Second Disclosure Letter, (B)
original share certificates for the shares of the Domestic Subsidiaries
pledged pursuant to the Pledge Agreement together with instruments of
transfer duly executed in blank, (C) duly signed UCC financing
statements and fixture filings for states where any Collateral is
located, (D) notices of pledge of stock to the Domestic Subsidiaries in
which stock was pledged pursuant to the Pledge Agreement, (E) board
resolutions authorizing the execution, delivery and performance of the
Collateral Documents from each of the Domestic Subsidiaries together
with a Secretary's or Assistant Secretary's Certificate from such
Subsidiaries;
(ii) Within 30 days (45 days in the case of Pledged
Collateral under the Pledge Agreement) after the Second Amendment Date,
(i) execute, acknowledge, deliver, file, notarize, or register, and
cause the Domestic Subsidiaries to execute, acknowledge, deliver, file,
notarize and register, at their own expense any Collateral Documents
(including the Intellectual Property Security Agreement and, subject to
the last sentence of clause (iv) and to clause (v) below, a Fee Mortgage
on Building No. 6) in form and substance satisfactory to Agent (and any
Pledged Collateral under the Pledge Agreement) not previously executed,
acknowledged, delivered, filed, notarized, or registered; and (ii) take,
or cause the Domestic Subsidiaries to take, any action required by the
Agent pursuant to the Collateral Documents for the perfection of the
security interests in the Collateral or notification of the Agent's and
the Banks' security interests therein; and (iii) deliver to the Agent,
in form and substance satisfactory to the Agent, (A) evidence that all
filings, registrations and recordings have been made in the appropriate
governmental offices, and all other action has been taken, which shall
be necessary to create in favor of Agent and the Banks, a perfected
first priority Lien on the Collateral including filing of completed
UCC-1 financing statements, (B) the results of searches conducted in the
UCC filing records in each governmental office in each jurisdiction in
which personal property and fixture Collateral is located which searches
disclose the security interests granted in favor of the Agent and which
shall have revealed no other Liens on the Collateral except Permitted
Liens; and (iv) legal opinions relating to the Second Amendment, the
Collateral Documents and the foregoing (including, without limitation,
opinions of Wilson Sonsini Goodrich & Rosati, Lovell White Durrant,
Mongkolnavin Law Office and W. S. Walker & Company) from such Persons
and in form and substance satisfactory to the Agent; and
(iii) Borrower shall use its reasonable commercial efforts
to obtain at its expense, within 45 days after the Second Amendment
Date, (A) Landlord Consents and Lessor Consents as to all real and
personal property leased by the Borrower and its Domestic Subsidiaries
where the value of the property under the individual lease has a value
in excess of $50,000 and (B) Leasehold Mortgages in favor of the Agent
on behalf of the Banks over all real property leased by Borrower or its
Domestic Subsidiaries as tenants, which Leasehold Mortgages shall be
appropriately recorded and covered by title insurance reasonably
satisfactory to the Agent.
(iv) By the earlier of December 15, 1998 or fifteen days
after the termination of any sale agreement for the Fremont Property (if
such property has not been sold by such earlier date), the Borrower
shall at its expense, if requested by the Agent,
13.
<PAGE> 14
(x) use its reasonable commercial efforts to obtain any necessary
consents to enable the Borrower to execute and deliver to the Agent, and
to record, a Leasehold Mortgage on the Fremont Property naming the Agent
as beneficiary for the ratable benefit of the Banks and Designated
Issuer ,and to obtain a title insurance policy with respect to such Fee
Mortgage in favor of the Agent in the approximate amount of the
Borrower's equity in the Fremont Property showing no exceptions to title
other than the existing first mortgage on such property (with a
principal balance not to exceed $9,000,000) and such other exceptions as
may be reasonably acceptable to the Agent, and (y) promptly upon
obtaining any such consents undertake such actions. Prior to the
acquisition by the Borrower or any Domestic Subsidiary of any real
property after the Second Amendment Date, the Borrower shall give the
Agent at least thirty days' prior written notice of such acquisition. If
requested by the Agent, the Borrower shall at its expense execute and
deliver to the Agent, and record, a Fee Mortgage on such property naming
the Agent as beneficiary for the ratable benefit of the Banks and
Designated Issuer and shall obtain a title insurance policy with respect
to such Fee Mortgage in favor of the Agent in the approximate amount of
the Borrower's equity in such property showing no exceptions to title
other than any prior liens existing on such property prior to such
acquisition and such other exceptions as may be reasonably acceptable to
the Agent.
(v) The Borrower shall cooperate fully with the Agent with
respect to determining the environmental condition of any real property
which may become the potential subject of a Fee Mortgage or a Leasehold
Mortgage
(l) Further Assurances. Execute, acknowledge, deliver, file,
notarize and register at its own expense all such further agreements,
instruments, certificates, documents and assurances and perform such
acts as the Agent shall deem necessary or appropriate to effectuate the
purposes of the Loan Documents and promptly provide the Agent with
evidence of the foregoing in form and substance satisfactory to the
Agent.
1.3.12 Section 6.02(a) to (e) inclusive of the Credit Agreement are 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 fiscal quarter
to be less than 0.85 to 1.00.
(b) Consolidated Tangible Net Worth. Permit Consolidated Tangible
Net Worth at any time to be less than $160,000,000 plus (i) 80% of
Consolidated Net Income (but not loss) for each fiscal quarter of the
Borrower commencing with the fiscal quarter ending in September 1998
plus (ii) 100% of the net increase in Consolidated Tangible Net Worth
occurring after June 30, 1998 resulting from the issuance of equity
securities of the Borrower (other than pursuant to any employee stock
purchase plan or employee stock option plan) plus (iii) Permitted
Subordinated Debt.
(c) Senior Debt Ratio. Permit the ratio of Senior Debt to Total
Capitalization to exceed 0.20 to 1.00, unless and until the Borrower's
EBITDA for any fiscal quarter
14.
<PAGE> 15
ending after March 1999 shall exceed $60,000,000, after which event the
Borrower shall not permit the ratio of Senior Debt to Total
Capitalization to exceed 0.30 to 1.00.
(d) Interest-Expense Coverage. As at the last day of each fiscal
quarter of the Borrower, permit the ratio of (i) EBITDA for the four
fiscal quarter period ending on such date to (ii) Consolidated Interest
Expense for the four fiscal quarter period ending on such date, to be
less than (A) 1.50 to 1.00 for the fiscal quarter ending in March 1999
or (B) 2.50 to 1.00 for the fiscal quarter ending in June 1999 or (C)
3.00 to 1.00 for the fiscal quarter ending in September 1999 or (D) 3.50
to 1.00 for any fiscal quarter ending after September 1999.
(e) Minimum EBITDA. As at the end of the relevant fiscal quarter
of the Borrower, (i) permit EBITDA of the Borrower for the fiscal
quarter period ending (A) in September 1998 to be a negative figure in
excess of $7,500,000 or (B) in December 1998 to be less than $5,000,000,
or (ii) permit EBITDA of the Borrower to be less than (A) $50,000,000 in
the case of the four fiscal quarter period ending in March 1999, or (B)
$75,000,000 in the case of the four fiscal quarter period ending in June
1999, or (C) $100,000,000 in the case of the four fiscal quarter period
ending in September 1999 or (D) $125,000,000 in the case of the four
fiscal quarter period ending in December 1999 or (E) $150,000,000 in the
case of any four fiscal quarter period ending after December 1999.
1.3.13 Section 6.02(g)(A)(iii) and (iv) of the Credit Agreement are amended to
read in their entirety as follows:
(iii) Debt not otherwise permitted under this Section 6.02(g) so
long as the Debt falling within this clause does not at any time exceed
in the aggregate $40,000,000 (or $25,000,000 in the case of Debt secured
by a Lien); provided that if the EBITDA of the Borrower for two
consecutive fiscal quarters ending after December 1998 shall exceed
$50,000,000 in each such quarter, then thereafter the Borrower shall be
permitted to incur Debt not otherwise permitted under this Section
6.02(g) so long as the Debt falling within this clause shall not exceed
in the aggregate 30% (or 15% in the case of Debt secured by a Lien) of
the Borrower's then Consolidated Tangible Net Worth.
(iv) [intentionally omitted]
1.3.14 Section 6.02(g)(A) of the Credit Agreement is amended by adding at the
end thereof the following:
(ix) Debt with a maturity of at least seven years which is not
secured by any Lien so long as the Debt falling within this clause does
not at any time exceed $250,000,000 and, provided, that any proceeds of
such Debt in excess of $100,000,000 (in the aggregate) are used first to
repay the Term Loans and then to repay any outstanding principal of the
Revolving Loans and, provided, further, that the then existing Revolving
Commitment shall be being reduced by an amount equal to the amount by
which the proceeds of such Debt in excess of $100,000,000 exceed the
Term Loans then
15.
<PAGE> 16
outstanding and provided, further, that no prepayments of any such Debt
shall be permitted until 90 days after the Maturity Date.
1.3.15 Section 6.02(j)(viii) is amended to read in its entirety as follows:
(viii) Investments in Read-Rite SMI made prior to October 2,
1997; and additional Investments in Read-Rite SMI, and loans and
guaranties of debt of Read-Rite SMI, not in excess of $40,000,000 in the
aggregate.
1.3.16 Section 6.02(j)(xi) of the Credit Agreement is amended by deleting the
reference to "$20,000,000" and replacing it by "$10,000,000."
1.3.17 Section 6.02(j)(xvi) of the Credit Agreement is amended by deleting the
reference to "10%" and replacing it by "5%."
1.3.18 Section 6.02(l) of the Credit Agreement is amended to read in its
entirety as follows:
(l) Acquisitions: Acquire or permit any Subsidiary (other than
Read-Rite SMI) to acquire (an "Acquisition") any assets or any business
as a going concern, whether through purchase of assets, merger or
otherwise, if the consideration for such Acquisition (except for equity
securities of Borrower or such Subsidiary) exceeds $10,000,000;
provided, that, if EBITDA for the Borrower in any two consecutive fiscal
quarters ending after December 1998 exceeds $50,000,000 in each such
quarter, then, notwithstanding the foregoing part of this clause,
Acquisitions will be permitted provided that the aggregate value of
consideration (in whatever form) for any such Acquisition when
aggregated with the consideration (in whatever form) for all
Acquisitions made in the twelve month period preceding the Acquisition
in question does not exceed 25% of the Consolidated Tangible Net Worth
of the Borrower (determined as at the date of the Acquisition in
question).
1.3.19 Section 6.02(p) of the Credit Agreement is amended to read in its
entirety as follows:
(p) Maximum Capital Expenditures: Permit Capital Expenditures (i)
as at the end of any fiscal year, to exceed (A) $210,000,000 in the case
of the fiscal year ending in September 1998, or (B) $150,000,000 in the
case of any fiscal year thereafter; and (ii) as of the end of the two
consecutive fiscal years ending in September 1999, to exceed
$350,000,000.
1.3.20 Section 6.02 of the Credit Agreement is amended by adding at the end
thereof the following:
(q) Read-Rite International. Permit Read-Rite International (i)
to incur any Debt, guarantees, trade payables (other than payables to
Borrower or its Subsidiaries) or other indebtedness with an aggregate
value at any time exceeding $10,000,000, or (ii) to sell, assign,
transfer, charge, encumber or otherwise dispose of any interest in or to
any accounts receivable arising from the sale of products or provision
of services by Read-Rite International to any Person except the
Borrower.
16.
<PAGE> 17
(r) Designated Accounts. Withdraw or permit Read-Rite
International to withdraw any amounts standing to the credit of the
Designated Accounts if the effect of such withdrawal is to reduce the
Borrowing Base in effect immediately after such withdrawal to an amount
less than the aggregate Revolving Loans and Letter of Credit Usage then
outstanding, unless such withdrawals are immediately applied in their
entirety to repay Revolving Loans.
(s) Hong Kong Offices. The Borrower shall not, and shall procure
that its Domestic Subsidiaries do not, establish or maintain an office
in Hong Kong or reincorporate in Hong Kong unless there shall
contemporaneously therewith be made any filings or registrations
necessary in Hong Kong to perfect any security interests granted by such
entities in connection with the Loan Documents.
1.3.21 Section 7.01(c) of the Credit Agreement shall be amended to read in its
entirety as follows:
(c) The Borrower shall fail to perform or observe any term,
covenant or agreement contained in Sections 2.02(a), 3.01, 6.01(a)(v),
6.01(l), or 6.02(a), (b), (c), (d), (e), (f), (h), (i), (k), (l), (m),
(o) or (r) on its part to be performed or observed.
1.3.22 Section 7.01(d) of the Credit Agreement shall be amended by deleting the
phrase "(f)".
1.3.23 Section 7.01(g) of the Credit Agreement is amended by deleting the word
"unhanded" in subsection (ii)(B) thereof and replacing it with "unbonded
1.3.24 Section 7.01 shall be amended by adding thereto as paragraph (l) thereof
the following:
(l) There shall have occurred a "Default" as defined in any of
the Collateral Documents.
1.3.25 Section 7.01 of the Credit Agreement shall be amended by adding at the
end of the last paragraph of that section the following:
Upon the occurrence of an Event of Default the Agent shall at the
request, or may with the consent of the Majority Banks, (i) exercise any
or all of the Agent's rights and remedies under the Collateral Documents
and (ii) proceed to enforce all other rights and remedies available to
the Agent or the Banks under the Loan Documents and applicable law.
1.3.26 Section 9.01 of the Credit Agreement shall be amended by renumbering
subparagraph "(i)" as "(j)" and adding after subparagraph (h) the following:
(i) release the Guaranty or any substantial portion of the Collateral
except as contemplated herein or in the Collateral Documents.
1.3.27 Section 9.05 of the Credit Agreement is amended by adding at the end
thereof the following:
17.
<PAGE> 18
, or arising out of or in connection with the preservation of and
realization upon any of the Collateral.
1.3.28 The first sentence of Section 9.09 of the Credit Agreement is amended to
read as :
THE BORROWER, THE AGENT, THE ISSUING BANK AND EACH BANK HEREBY AGREE TO
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN
AGREEMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER
OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP THAT IS
BEING ESTABLISHED.
1.3.29 The Credit Agreement is amended by adding thereto as Exhibit H, I, J, K
and L the Borrowing Base Certificate, the Guaranty, Pledge Agreement, Security
Agreement and Intellectual Property Security Agreement attached hereto
respectively as Exhibits A, B, C, D and E.
SECTION 2. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of the first date (the "Second
Amendment Date") on or before August 14, 1998 upon which the following
conditions have been satisfied:
A. 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
B. The Agent shall have received, for each Bank and the Agent,
counterparts to the Pledge Agreement executed on behalf of the Borrower and
Sunward Technology, Inc. and the Agent; and
C. The Agent shall have received, for each Bank and the Agent,
counterparts to the Security Agreement executed on behalf of the Borrower, each
of the Borrower's domestic subsidiaries and the Agent.
D. The Agent shall have received, for each Bank and the Agent,
counterparts to the Guaranty executed on behalf of each of the Borrower's
domestic subsidiaries and the Agent.
E. 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 and the Collateral
Documents certified by the Secretary of the Borrower as being in full force and
effect on the date hereof.
18.
<PAGE> 19
F. The Amendment Fee referred to in Section 4.C shall have been
paid, and all other fees and expenses payable by the Borrower pursuant to the
Loan Documents shall have been paid or provided for.
G. All the representations and warranties in Section 3 shall be
true and correct as of the date of this Amendment.
H. 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 June 1, 1998.
I. The Agent shall have received, in form and substance
satisfactory to it, a certificate dated on or before the date of this Amendment
certifying that the conditions in clauses (G) and (H) have been met.
When and if this Amendment becomes effective, the amendments set forth in
Section 1 shall be deemed effective as of August 7, 1998, except that the
amendments in Sections 1.3.12 through 1.3.19 of this Amendment and any of the
defined terms used in such sections (as they relate to the amendments in such
sections) shall be deemed effective as of June 28, 1998.
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 the Collateral
Documents and to carry out the transactions contemplated by, and perform its
obligations under, this Amendment, the Amended Agreement and the Collateral
Documents.
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the Collateral Documents and the performance of the Amended
Agreement and the Collateral Documents 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 and the Collateral Documents 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 Collateral Documents and the performance by
the Borrower of the
19.
<PAGE> 20
Amended Agreement and the Collateral Documents 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 Collateral
Documents 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
Amended Agreement 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 or the Collateral Documents 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 June 28, 1998 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
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 Second 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.
20.
<PAGE> 21
(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,
the Collateral Documents and the documents and transactions contemplated hereby.
C. AMENDMENT FEE. The Company hereby agrees to pay to the Agent
on or before the Second Amendment Date, for the ratable benefit of those Banks
who consent to this Amendment (as evidenced by their return of a signed
signature page to Agent or Agent's counsel) by 5:00 p.m. (San Francisco time)
August 7, 1998, an amendment fee (the "Amendment Fee") of 0.25% of the aggregate
Revolving Commitments and Term Commitments of such consenting Banks (after any
reduction made by this Second Amendment). 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 Collateral Documents or the Amended
Agreement.
D. RRI SECURITY AGREEMENT. The Company covenants to procure that
Read-Rite International enter into the RRI Security Agreement, and grant to the
Company a first priority perfected security interest in the collateral covered
thereby, within 10 days after the Second Amendment Effective Date. Failure to
comply with this covenant shall be an Event of Default under the Amended
Agreement.
E. 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.
F. 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.
G. 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
21.
<PAGE> 22
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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
22.
<PAGE> 23
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.
BORROWER:
READ-RITE CORPORATION
By:
-----------------------------------------
Title:
--------------------------------------
<PAGE> 24
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK
AGENCY, as Agent
By:
-----------------------------------------
Title:
--------------------------------------
<PAGE> 25
BANKS:
CIBC, INC.
By:
-----------------------------------------
Title:
--------------------------------------
ABN AMRO BANK N.V.
By:
-----------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
FLEET NATIONAL BANK
By:
-----------------------------------------
Title:
--------------------------------------
KEYBANK, N.A.
By:
-----------------------------------------
Title:
--------------------------------------
THE LONG TERM CREDIT BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
<PAGE> 26
MELLON BANK
By:
-----------------------------------------
Title:
--------------------------------------
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
THE SUMITOMO BANK LIMITED, SAN FRANCISCO
BRANCH
By:
-----------------------------------------
Title:
--------------------------------------
THE INDUSTRIAL BANK OF JAPAN LIMITED, SAN
FRANCISCO AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
<PAGE> 27
BANKBOSTON, N.A.
By:
-----------------------------------------
Title:
--------------------------------------
BANQUE NATIONALE DE PARIS
By:
-----------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
ROYAL BANK OF CANADA
By:
-----------------------------------------
Title:
--------------------------------------
WELLS FARGO BANK, N.A.
By:
-----------------------------------------
Title:
--------------------------------------
THE DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK
AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
<PAGE> 28
EXHIBIT A
TO SECOND AMENDMENT TO CREDIT AGREEMENT
FORM OF BORROWING BASE CERTIFICATE
<PAGE> 29
EXHIBIT B
TO SECOND AMENDMENT TO CREDIT AGREEMENT
FORM OF GUARANTY
<PAGE> 30
EXHIBIT C
TO SECOND AMENDMENT TO CREDIT AGREEMENT
FORM OF PLEDGE AGREEMENT
<PAGE> 31
EXHIBIT D
TO SECOND AMENDMENT TO CREDIT AGREEMENT
FORM OF SECURITY AGREEMENT
<PAGE> 32
EXHIBIT E
TO SECOND AMENDMENT TO CREDIT AGREEMENT
FORM OF INTELLECTUAL PROPERTY SECURITY AGREEMENT
<PAGE> 33
FORM OF BORROWING BASE CERTIFICATE
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, AS AGENT
Re: Read-Rite Corporation
Gentlemen:
This Borrowing Base Certificate is made and delivered pursuant
to the Credit Agreement dated as of October 2, 1997 (as amended, modified,
renewed or extended from time to time, the "Credit Agreement") among Read-Rite
Corporation (the "Borrower"), certain financial institutions named therein as
Banks, Canadian Imperial Bank of Commerce, New York Agency as issuer of letters
of credit (in such capacity the "Designated Issuer") and Canadian Imperial Bank
of Commerce, New York Agency, as Agent for the Banks and Designated Issuer (in
such capacity the "Agent"), and reference is made thereto for full particulars
of the matters described herein. All capitalized terms used in this Borrowing
Base Certificate and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement.
I am the chief financial officer of the Borrower and hereby
certify that the information set forth on Schedule 1 hereto is true, accurate
and complete as of _____________, 19__.
IN WITNESS WHEREOF, the undersigned officer has signed this
Borrowing Base Certificate this ____ day of ______________, 19__.
-----------------------------------
Chief Financial Officer
SCHEDULE 1
to the Borrowing Base Certificate
<TABLE>
<CAPTION>
Date of Calculation ____________, 199_
<S> <C>
A. Eligible Cash
1. Cash balances of Borrower's Designated Accounts
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
(a) $
-------------------------------- ------------
(b) $
-------------------------------- ------------
2. Aggregate positive cash balances in Borrower's Designated Accounts $
------------
B. Eligible Cash Equivalents
1. Brokerage Accounts
(a) $
-------------------------------- ------------
(b) $
-------------------------------- ------------
2. Aggregate Eligible Cash Equivalents in Brokerage Accounts $
------------
C. Less Reserves
1. Sum of A.2 and B.2 $
============
2. Less reserve $ 25,000,000
------------
3. Excess (but not less than $0) $
------------
D. Eligible Receivables of Borrower
1. Aggregate amount of the Borrower's Receivables, less allowances, $
reserves, discounts, returns, credits or offsets ------------
2. Less ineligible receivables (without duplication):
(a) Receivables not paid in full within 75 days from the date of $
invoice ------------
(b) Receivables owing by any Receivable debtor or obligor $
with 10% or more of the aggregate Receivables owing to ------------
the Borrower by such Receivable debtor or obligor not
paid in full within 75 days from the date of invoice
(c) Receivables ineligible for other reasons specified under $
definition of "Eligible Receivables" ------------
3. Total ineligible Receivables (sum of(a) through (c) of 2) $
------------
4. Total Eligible Receivables (1 minus 3) $
------------
</TABLE>
2.
<PAGE> 35
<TABLE>
<S> <C>
5. Eligible Receivables included in Borrowing Base (70% of 4) $
------------
E. Eligible Receivables of Read-Rite International
1. Aggregate amount of the Read-Rite International Receivables, less $
allowances, reserves, discounts, returns, credits or offsets ------------
2. Less ineligible receivables (without duplication):
(a) Receivables not paid in full within 75 days from the date of $
invoice ------------
(b) Receivables owing by any Receivable debtor or obligor $
with 10% or more of the aggregate Receivables owing to ------------
the Read-Rite International by such Receivable debtor or
obligor not paid in full within 75 days from the date of
invoice
(c) Receivables ineligible for other reasons specified under $
definition of "Eligible Receivables" ------------
3. Total ineligible Receivables (sum of(a) through (c) of 2) $
------------
4. Total Eligible Receivables (1 minus 3) $
------------
5. Eligible Receivables included in Borrowing Base (70% of 4) $
------------
F. Borrowing Base and Availability
1. Total Borrowing Base $
------------
(a) Sum of C.3, D.5 and E.5 $
------------
(b) Less outstanding aggregate amount of Revolving Loans and $
Letter of Credit Usage ------------
(c) Total Borrowing Base (a minus b) $
------------
2. Total Revolving Commitments $
------------
3. Lesser of Item 1 and Item 2 $
------------
4. Outstanding aggregate amount of Revolving Loans and Letter of Credit $
Usage ------------
</TABLE>
3.
<PAGE> 36
<TABLE>
<S> <C>
5. Aggregate principal amount of Revolving Loans available for borrowing $
(amount by which 3 exceeds 4) ----------
6. Aggregate principal amount of Revolving Loans to be repaid (amount by $
which 4 exceeds 3) ----------
</TABLE>
4.
<PAGE> 37
CONTINUING GUARANTY
THIS CONTINUING GUARANTY (this "Guaranty"), dated as of
_______, 1998, is made by each of the corporations listed on the signature page
hereto (each a "Guarantor" and collectively, the "Guarantors"), in favor of the
Banks and Designated Issuer and any other Issuing Bank party to the Credit
Agreement referred to below and Canadian Imperial Bank of Commerce, New York
Agency, as agent for such Banks and Designated Issuer and any other Issuing Bank
(in such capacity, the "Agent").
Read-Rite Corporation, a Delaware corporation (the
"Borrower"), certain financial institutions as lenders (the "Banks"), Canadian
Imperial Bank of Commerce, New York Agency, as issuer of certain letters of
credit for the account of the Borrower (in such capacity, the "Designated
Issuer") and the Agent are parties to a Credit Agreement dated as of October 2,
1997 (as amended, modified, renewed or extended from time to time, the "Credit
Agreement"). It is a condition precedent to the borrowings and issuances of
letters of credit under the Credit Agreement that the Guarantors guarantee the
indebtedness and other obligations of the Borrower to the Agent, the Issuing
Bank and the Banks under or in connection with the Credit Agreement as set forth
herein. The Guarantors, as wholly owned subsidiaries of the Borrower, will
derive substantial direct and indirect benefits from the making of the loans to
the Borrower and the issuances of letters of credit pursuant to the Credit
Agreement (which benefits are hereby acknowledged by the Guarantors).
Accordingly, to induce the Banks to make such loans, and to
induce the Issuing Bank to issue its letters of credit, and in consideration
thereof, the Guarantors hereby joint and severally agree as follows:
SECTION 1. Definitions; Interpretation.
(a) Terms Defined in Credit Agreement. All capitalized terms
used in this Guaranty (including the recitals above) and not otherwise defined
herein shall have the meanings assigned to them in the Credit Agreement.
(b) Certain Defined Terms. As used in this Guaranty the
following terms shall have the following meanings:
"Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy" as in effect from time to time.
"Default" has the meaning set forth in Section 11.
"Guaranteed Obligations" has the meaning set forth in Section
2.
"Insolvency Proceeding" with respect to any Person, means (i)
any case, action or proceeding under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, or (ii) action by any Person to have an
order for relief entered with respect to it, or seeking to adjudicate it
bankrupt or insolvent, or
<PAGE> 38
seeking a reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition, or other relief with respect to it or its debts or
seeking the appointment of a receiver, trustee, custodian or similar official
for it or a substantial part of its assets, or (iii) the making of a general
assignment for the benefit of the creditors of such Person.
"Material Adverse Effect" means, with respect to any
Guarantor, a material adverse effect on (i) the business operations, prospects,
properties, assets or condition (financial or otherwise) of such Guarantor and
its Subsidiaries, taken as a whole, or (ii) the ability of such Guarantor to
perform, or any of the Agent, the Banks or the Designated Issuer to enforce the
obligations of such Guarantor under this Guaranty or the other Loan Agreements.
"Solvent" means, as to any Person at any time, that (i) the
fair value of the property of such Person is greater than the amount of such
Person's liabilities (including disputed, contingent and unliquidated
liabilities) as such value is established and liabilities evaluated for purposes
of Section 101(31) of the Bankruptcy Code, (ii) the present fair saleable value
of the property of such Person is not less than the amount that will be required
to pay the probable liability of such Person on its debts as they become
absolute and matured, (iii) such Person is able to realize upon its property and
pay its debts and other liabilities (including disputed, contingent and
unliquidated liabilities) as they mature in the normal course of business, (iv)
such Person does not intend to, and does not believe that it will, incur debts
or liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
(c) Interpretation. The rules of interpretation set forth in
Section 1.02 of the Credit Agreement shall be applicable to this Guaranty and
are incorporated herein by this reference.
SECTION 2. Guaranty. The Guarantors hereby jointly and
severally, unconditionally and irrevocably guarantee to the Agent, the Issuing
Bank and the Banks, and their respective successors, endorsees, transferees and
assigns, the full and prompt payment when due (whether at stated maturity, by
required prepayment, declaration, acceleration, demand or otherwise) and
performance of the indebtedness, liabilities and other obligations of the
Borrower to the Agent, the Issuing Bank and the Banks under or in connection
with the Credit Agreement, the Notes, the Letters of Credit and the other Loan
Agreements, including without limitation all unpaid principal of the Loans, all
unreimbursed drawings under the Letters of Credit, all interest accrued thereon,
all fees due under the Credit Agreement and other Loan Agreements and all other
amounts payable by the Borrower to the Agent, the Issuing Bank and the Banks
thereunder or in connection therewith. The terms "indebtedness," "liabilities"
and "obligations" are used herein in their most comprehensive sense and include
any and all advances, debts, obligations and liabilities (including interest
which but for the filing of a petition in any Insolvency Proceedings against the
Borrower would have accrued on such obligations, whether or not a claim is
allowed against the Borrower for such interest in any such Insolvency
Proceedings), now existing or hereafter arising, whether voluntary or
involuntary and whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether recovery upon such
indebtedness, liabilities and obligations may be or hereafter become
unenforceable or shall be an allowed or disallowed claim under the
2
<PAGE> 39
Bankruptcy Code or other applicable law. The foregoing indebtedness, liabilities
and other obligations of the Borrower, and all other indebtedness, liabilities
and obligations to be paid or performed by the Guarantors in connection with
this Guaranty or the Collateral Documents (including any and all amounts due
under Section 14), shall hereinafter be collectively referred to as the
"Guaranteed Obligations."
SECTION 3. Liability of Guarantors. The liability of the Guarantors
under this Guaranty shall be irrevocable, absolute, independent and
unconditional, and shall not be affected by any circumstance which might
constitute a discharge of a surety or guarantor other than the indefeasible
payment and performance in full of all Guaranteed Obligations. In furtherance of
the foregoing and without limiting the generality thereof, each of the
Guarantors agrees as follows:
(i) each Guarantor's liability hereunder shall be the immediate,
direct, and primary obligation of such Guarantor and shall not be contingent
upon the Agent's, the Issuing Bank's or any Bank's exercise or enforcement of
any remedy it may have against the Borrower, any other Guarantor, or any other
Person, or against any Collateral;
(ii) this Guaranty is a guaranty of payment and performance when
due and not merely of collectibility;
(iii) the Agent, the Issuing Bank and the Banks may enforce this
Guaranty upon the occurrence of a Default notwithstanding the existence of any
dispute among the Agent, the Issuing Bank and the Banks and the Borrower with
respect to the existence of such Default;
(iv) a Guarantor's payment of a portion, but not all, of the
Guaranteed Obligations shall in no way limit, affect, modify or abridge such
Guarantor's or any other Guarantor's liability for any portion of the Guaranteed
Obligations remaining unsatisfied; and
(v) a Guarantor's liability with respect to the Guaranteed
Obligations shall remain in full force and effect without regard to, and shall
not be impaired or affected by, nor shall any Guarantor be exonerated or
discharged by, any of the following events:
(A) any Insolvency Proceeding with respect to the
Borrower, any other Guarantor, or any other Person;
(B) any limitation, discharge, or cessation of the
liability of the Borrower, any other Guarantor, or any other Person for any
Guaranteed Obligations due to any statute, regulation or rule of law, or any
invalidity or unenforceability in whole or in part of any of the Guaranteed
Obligations or the Loan Agreements;
(C) any merger, acquisition, consolidation or change in
structure of the Borrower, any other Guarantor or any other Person, or any sale,
lease, transfer or other disposition of any or all of the assets or shares of
the Borrower, any other Guarantor, or any other Person;
3
<PAGE> 40
(D) any assignment or other transfer, in whole or in
part, of the Agent's, the Issuing Bank's or any Bank's interests in and rights
under this Guaranty or the other Loan Agreements, including the Agent's, the
Issuing Bank's or any Bank's right to receive payment of the Guaranteed
Obligations, or any assignment or other transfer, in whole or in part, of the
Agent's, the Issuing Bank's or any Bank's interests in and to any of the
Collateral;
(E) any claim, defense, counterclaim or setoff, other
than that of prior performance, that the Borrower, any other Guarantor, any
other Person may have or assert, including any defense of incapacity or lack of
corporate or other authority to execute any of the Loan Agreements;
(F) the Agent's, the Issuing Bank's or any Bank's
amendment, modification, renewal, extension, cancellation or surrender of any
Loan Agreement, any Guaranteed Obligations, any Collateral, or the Agent's, the
Issuing Bank's or any Bank's exchange, release, or waiver of any Collateral;
(G) the Agent's, the Issuing Bank's or any Bank's
exercise or nonexercise of any power, right or remedy with respect to any of the
Collateral, including the Agent's, the Issuing Bank's or any Bank's compromise,
release, settlement or waiver with or of the Borrower, any other Guarantor, or
any other Person;
(H) the Agent's, the Issuing Bank's or any Bank's vote,
claim, distribution, election, acceptance, action or inaction in any Insolvency
Proceeding related to the Guaranteed Obligations;
(I) any impairment or invalidity of any of the
Collateral or any other collateral securing any of the Guaranteed Obligations or
any failure to perfect any of the Liens of the Agent, the Issuing Bank and the
Banks thereon or therein; and
(J) any other guaranty, whether by any other Guarantor
or any other Person, of all or any part of the Guaranteed Obligations or any
other indebtedness, obligations or liabilities of the Borrower to the Agent or
the Banks or the Issuing Bank.
SECTION 4. Consents of Guarantor. Each of the Guarantors hereby
unconditionally consents and agrees that, without notice to or further assent
from such Guarantor:
(i) the principal amount of the Guaranteed Obligations may be
increased or decreased and additional indebtedness or obligations of the
Borrower under the Loan Agreements may be incurred, by one or more amendments,
restatements, modifications, renewals or extensions of any Loan Agreement or
otherwise;
(ii) the time, manner, place or terms of any payment under any
Loan Agreement may be extended or changed, including by an increase or decrease
in the interest rate on any Guaranteed Obligation or any fee or other amount
payable under such Loan Agreement, by an amendment, restatement, modification or
renewal of any Loan Agreement or otherwise;
4
<PAGE> 41
(iii) the time for the Borrower's (or any other Person's)
performance of or compliance with any term, covenant or agreement on its part to
be performed or observed under any Loan Agreement may be extended, or such
performance or compliance waived, or failure in or departure from such
performance or compliance consented to, all in such manner and upon such terms
as the Agent, the Issuing Bank and the Banks may deem proper;
(iv) the Agent, the Issuing Bank or the Banks may discharge or
release, in whole or in part, any other Guarantor or other Person liable for the
payment and performance of all or any part of the Guaranteed Obligations, and
may permit or consent to any such action or any result of such action, and shall
not be obligated to demand or enforce payment upon any of the Collateral or any
other collateral, nor shall the Agent, the Issuing Bank or the Banks be liable
to the Guarantors for any failure to collect or enforce payment or performance
of the Guaranteed Obligations from any Person or to realize on the Collateral or
other collateral therefor;
(v) in addition to the Collateral, the Agent, the Issuing Bank
and the Banks may take and hold other security (legal or equitable) of any kind,
at any time, as collateral for the Guaranteed Obligations, and may, from time to
time, in whole or in part, exchange, sell, surrender, release, subordinate,
modify, waive, rescind, compromise or extend such security and may permit or
consent to any such action or the result of any such action, and may apply such
security and direct the order or manner of sale thereof;
(vi) the Agent, the Issuing Bank and the Banks may request and
accept other guaranties of the Guaranteed Obligations and any other
indebtedness, obligations or liabilities of the Borrower to the Agent or the
Banks or the Issuing Bank and may, from time to time, in whole or in part,
surrender, release, subordinate, modify, waive, rescind, compromise or extend
any such guaranty and may permit or consent to any such action or the result of
any such action; and
(vii) the Agent, the Issuing Bank and the Banks may exercise, or
waive or otherwise refrain from exercising, any other right, remedy, power or
privilege (including the right to accelerate the maturity of any Loan and any
power of sale) granted by any Loan Agreement or other security document or
agreement, or otherwise available to the Agent, the Issuing Bank and the Banks,
with respect to the Guaranteed Obligations or any of the Collateral, even if the
exercise of such right, remedy, power or privilege affects or eliminates any
right of subrogation or any other right of any Guarantor against the Borrower;
all as the Agent, the Issuing Bank and the Banks may deem advisable, and all
without impairing, abridging, releasing or affecting this Guaranty.
SECTION 5. Guarantor's Waivers.
(a) Certain Waivers. Each of the Guarantors waives and agrees not to
assert:
(i) any right to require the Agent, the Issuing Bank or any Bank
to marshal assets in favor of the Borrower, any Guarantor, or any other Person,
to proceed against the Borrower, any other Guarantor or any other Person, to
proceed against or exhaust any of the Collateral or other collateral for the
Guaranteed Obligations, to give notice of the terms, time and
5
<PAGE> 42
place of any public or private sale of personal property security constituting
the Collateral or other collateral for the Guaranteed Obligations or comply with
any other provisions of Section 9504 of the California UCC (or any equivalent
provision of any other applicable law) or to pursue any other right, remedy,
power or privilege of the Agent, the Issuing Bank or any Bank whatsoever;
(ii) the defense of the statute of limitations in any action
hereunder or for the collection or performance of the Guaranteed Obligations;
(iii) any defense arising by reason of any lack of corporate or
other authority or any other defense of the Borrower, any other Guarantor or any
other Person;
(iv) any defense based upon the Agent's, the Issuing Bank's or
any Bank's errors or omissions in the administration of the Guaranteed
Obligations;
(v) any rights to set-offs and counterclaims;
(vi) any defense based upon an election of remedies by the
Agent, Issuing Bank or the Banks even though that election of remedies
(including, if available, an election to proceed by nonjudicial foreclosure)
destroys or impairs the subrogation rights of such Guarantor or any other
Guarantor or Person or the right of such Guarantor or any other Guarantor or
Person to proceed against the Borrower, any other Guarantor or any other obligor
of the Guaranteed Obligations for reimbursement by operation of Section 580d of
the California Civil Code or otherwise; and
(vii) without limiting the generality of the foregoing, to the
fullest extent permitted by law, any defenses or benefits that may be derived
from or afforded by applicable law limiting the liability of or exonerating
guarantors or sureties, or which may conflict with the terms of this Guaranty,
including, without limitation, rights of subrogation, indemnification,
contribution and other rights and defenses that are or may become available to
such Guarantor, directly or indirectly, under California Civil Code
Sections 1432, 2787 to 2855, inclusive, and 3433 and California Code of
Civil Procedure Sections 580a, 580b, 580d and 726. Accordingly, each
Guarantor waives all rights and defenses that such Guarantor may have because
the Borrower's or another Guarantor's debt is secured by real property. This
means, among other things: (A) the Agent, the Issuing Bank and the Banks may
collect from a Guarantor without first foreclosing on any real or personal
property Collateral pledged by the Borrower or any Guarantor; and (B) if the
Agent forecloses on any real property Collateral pledged by the Borrower or any
Guarantor: (1) the amount of the debt may be reduced only by the price for which
that Collateral is sold at the foreclosure sale, even if the Collateral is worth
more than the sale price, and (2) the Agent, the Issuing Bank and the Banks may
collect from a Guarantor even if the Agent, by foreclosing on the real property
Collateral, has destroyed any right any Guarantor may have to collect from the
Borrower or any other Guarantor. This is an unconditional and irrevocable waiver
of any rights and defenses any Guarantor may have because the Borrower's or any
Guarantor's debt is secured by real property. These rights and defenses include,
but are not limited to, any rights of defenses based upon Section 580a, 580b,
580d or 726 of the California Code of Civil Procedure.
6
<PAGE> 43
(b) Additional Waivers. Each of the Guarantors waives any and all notice
of the acceptance of this Guaranty, and any and all notice of the creation,
renewal, modification, extension or accrual of the Guaranteed Obligations, or
the reliance by the Agent, the Issuing Bank and the Banks upon this Guaranty, or
the exercise of any right, power or privilege hereunder. The Guaranteed
Obligations shall conclusively be deemed to have been created, contracted,
incurred and permitted to exist in reliance upon this Guaranty. Each of the
Guarantors waives promptness, diligence, presentment, protest, demand for
payment, notice of default, dishonor or nonpayment and all other notices to or
upon the Borrower, any Guarantor or any other Person with respect to the
Guaranteed Obligations.
(c) Independent Obligations. The obligations of each Guarantor hereunder
are independent of and separate from the obligations of the Borrower, each other
Guarantor and any other Person and upon the occurrence and during the
continuance of any Default, a separate action or actions may be brought against
any and all of the Guarantors, whether or not the Borrower, any other Guarantor
or any other guarantor of the Guaranteed Obligations is joined therein or a
separate action or actions are brought against the Borrower, any other Guarantor
or any such other guarantor of the Guaranteed Obligations.
(d) Financial Condition of Borrower. No Guarantor shall have any right
to require the Agent, the Issuing Bank or the Banks to obtain or disclose any
information with respect to: (i) the financial condition or character of the
Borrower or any other Guarantor or the ability of the Borrower or any other
Guarantor to pay and perform the Guaranteed Obligations; (ii) the Guaranteed
Obligations; (iii) the Collateral; (iv) the existence or nonexistence of any
other guarantees of all or any part of the Guaranteed Obligations; (v) any
action or inaction on the part of the Agent, the Issuing Bank or the Banks or
any other Person; or (vi) any other matter, fact or occurrence whatsoever.
SECTION 6. Subrogation. Unless and until the Guaranteed Obligations are
indefensibly paid in full, no Guarantor shall have, and none of the Guarantors
shall directly or indirectly exercise, (i) any rights that it may acquire by way
of subrogation under this Guaranty, by any payment hereunder or otherwise, (ii)
any rights of contribution, indemnification, reimbursement or similar suretyship
claims arising out of this Guaranty, or (iii) any other right which it might
otherwise have or acquire (in any way whatsoever) which could entitle it at any
time to share or participate in any right, remedy or security of the Banks, the
Issuing Bank or the Agent as against the Borrower, the other Guarantors or other
guarantors of the Guaranteed Obligations, whether in connection with this
Guaranty, any of the other Loan Agreements or otherwise. If any amount shall be
paid to a Guarantor on account of the foregoing rights at any time when all the
Guaranteed Obligations shall not have been indefensibly paid in full, such
amount shall be held in trust for the benefit of the Agent, the Issuing Bank and
the Banks and shall forthwith be paid to the Agent to be credited and applied to
the Guaranteed Obligations, whether matured or unmatured, in accordance with the
terms of the Loan Agreements.
SECTION 7. Continuing Guaranty; Reinstatement.
(a) Continuing Guaranty. This Guaranty is a continuing guaranty and
shall continue in effect and be binding upon the Guarantors until termination of
the Commitments and the irrevocable payment and performance in full of the
Guaranteed Obligations, including
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Guaranteed Obligations which may exist continuously or which may arise from time
to time under successive transactions, and each Guarantor expressly acknowledges
that this Guaranty shall remain in full force and effect notwithstanding that
there may be periods in which no Guaranteed Obligations exist.
(b) Reinstatement. This Guaranty shall continue to be effective or shall
be reinstated and revived, as the case may be, if, for any reason, any payment
of the Guaranteed Obligations by or on behalf of the Borrower or any Guarantor
(or receipt of any proceeds of Collateral) shall be rescinded, invalidated,
declared to be fraudulent or preferential, set aside, voided or otherwise
required to be repaid to the Borrower or any Guarantor, their estates, trustees,
receivers or any other Person (including under the Bankruptcy Code or other
state or federal or foreign law), or must otherwise be restored by the Agent,
the Issuing Bank or any Bank, whether as a result of Insolvency Proceedings or
otherwise. To the extent any payment is so rescinded, set aside, voided or
otherwise repaid or restored, the Guaranteed Obligations shall be revived in
full force and effect without reduction or discharge for such payment. All
losses, damages, costs and expenses that the Agent, the Issuing Bank or the
Banks may suffer or incur as a result of any voided or otherwise set aside
payments shall be specifically covered by the indemnity in favor of the Banks,
the Issuing Bank and the Agent contained in Section 14.
SECTION 8. Payments. Each of the Guarantors hereby jointly and severally
agrees, in furtherance of the foregoing provisions of this Guaranty and not in
limitation of any other right which the Agent, the Issuing Bank or any Bank or
any other Person may have against such Guarantor by virtue hereof, upon the
failure of the Borrower to pay any of the Guaranteed Obligations when and as the
same shall become due, whether at stated maturity, by required prepayment,
declaration, acceleration, demand or otherwise (including amounts that would
become due but for the operation of the automatic stay under Section 362(a) of
the Bankruptcy Code), such Guarantor shall forthwith pay, or cause to be paid,
in cash, to the Agent an amount equal to the amount of the Guaranteed
Obligations then due as aforesaid (including interest which, but for the filing
of a petition in any Insolvency Proceeding with respect to the Borrower, would
have accrued on such Guaranteed Obligations, whether or not a claim is allowed
against the Borrower for such interest in any such Insolvency Proceeding). Each
of the Guarantors jointly and severally agrees to make each payment hereunder,
unconditionally in full without set-off, counterclaim or other defense, or
deduction for any Taxes, on the day when due in lawful money of the United
States of America and in same day or immediately available funds, to the Agent
at such office of the Agent as may be designated from time to time for the
receipt of payments by the Agent pursuant to the Credit Agreement. All such
payments shall be promptly applied from time to time by the Agent (i) first, to
the payment of any fees, costs, expenses and other amounts due the Agent
hereunder, and (ii) second, to the payment of the other Guaranteed Obligations
in such order of application as the Agent and the Majority Banks in their sole
discretion may choose.
SECTION 9. Representations and Warranties. Each of the Guarantors
jointly and severally represents and warrants to the Agent, the Issuing Bank and
each Bank that:
(a) Organization and Powers. Each of the Guarantors and its Subsidiaries
is a corporation or partnership duly organized or formed, as the case may be,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or formation, is qualified to
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<PAGE> 45
do business and is in good standing in each jurisdiction in which the failure so
to qualify or be in good standing would have a Material Adverse Effect and has
all requisite power and authority to own its assets and carry on its business
and, with respect to such Guarantor, to execute, deliver and perform its
obligations under this Guaranty and the Loan Agreements to which it is a party.
(b) Authorization; No Conflict. The execution, delivery and performance
by each Guarantor of this Guaranty and any other Loan Agreements to which it is
a party have been duly authorized by all necessary corporate action of such
Guarantor, and do not and will not: (i) contravene the terms of the certificate
or articles, as the case may be, of incorporation and the bylaws of such
Guarantor or result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other agreement, lease or instrument to which
the Guarantor is a party or by which it or its properties may be bound or
affected which breach or default could reasonably be expected to have a Material
Adverse Effect; or (ii) violate any provision of any law, rule, regulation,
order, writ, judgment, injunction, decree or the like binding on or affecting
such Guarantor.
(c) Binding Obligation. This Guaranty and the other Loan Agreements to
which a Guarantor is a party constitute the legal, valid and binding obligations
of such Guarantor, enforceable against such Guarantor in accordance with their
respective terms.
(d) Governmental Consents. No authorization, consent, approval, license,
exemption of, or filing or registration with, any governmental authority or
regulatory body, or approval or consent of any other Person, is required for the
due execution, delivery or performance by each Guarantor of this Guaranty or the
other Loan Agreements to which it is a party.
(e) Solvency. Immediately prior to and after and giving effect to the
incurrence of such Guarantor's obligations under this Guaranty each Guarantor
will be Solvent.
(f) Consideration. Each Guarantor has received at least "reasonably
equivalent value" (as such phrase is used in Section 548 of the Bankruptcy Code,
in Section 3439.04 of the California Uniform Fraudulent Transfer Act and in
comparable provisions of other applicable law) and more than sufficient
consideration to support its obligations hereunder in respect of the Guaranteed
Obligations and under any of the Collateral Documents to which it is a party.
(g) Independent Investigation. Each Guarantor hereby acknowledges that
it has undertaken its own independent investigation of the financial condition
of the Borrower, the other Guarantors and all other matters pertaining to this
Guaranty and further acknowledges that it is not relying in any manner upon any
representation or statement of the Agent, the Issuing Bank or any Bank with
respect thereto. Each Guarantor represents and warrants that it has received and
reviewed copies of the Loan Agreements and that it is in a position to obtain,
and it hereby assumes full responsibility for obtaining, any additional
information concerning the financial condition of the Borrower, any other
Guarantor and any other matters pertinent hereto that such Guarantor may desire.
No Guarantor is relying upon or expecting the Agent, the Issuing Bank or any
Bank to furnish to it any information now or hereafter in the Agent's, the
Issuing Bank's or any such Bank's possession concerning the financial condition
of the Borrower, any other Guarantor or any other matter.
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SECTION 10. Additional Affirmative Covenants. So long as any Guaranteed
Obligations shall remain unsatisfied or any Bank shall have any Commitment, each
of the Guarantors agrees that:
(a) Preservation of Existence, Etc. Each Guarantor shall maintain and
preserve its legal existence, its rights to transact business and all other
rights, franchises and privileges necessary or desirable in the normal course of
its business and operations and the ownership of its properties, provided that
Sunward Technologies, California may, in accordance with the provisions of the
Credit Agreement, be liquidated, dissolved, sold or transferred provided,
further, that the proceeds of such transfer are paid in full to the other
Guarantors and that any merger may only be with Sunward Technologies, Inc.
(b) Further Assurances and Additional Acts. Each Guarantor shall
execute, acknowledge, deliver, file, notarize and register at its own expense
all such further agreements, instruments, certificates, documents and assurances
and perform such acts as the Agent or the Majority Banks shall deem necessary or
appropriate to effectuate the purposes of this Guaranty and the other Loan
Agreements to which it is a party, and promptly provide the Agent with evidence
of the foregoing satisfactory in form and substance to the Agent and the
Majority Banks.
(c) Credit Agreement Covenants. Each Guarantor shall observe, perform
and comply with all covenants applicable to such Guarantor set forth in the
Credit Agreement, which by their terms the Borrower is required to cause such
Guarantor to observe, perform and comply with, as if such covenants were set
forth in full herein.
SECTION 11. Defaults. Any of the following shall constitute a "Default":
(a) Representations and Warranties. Any representation or warranty by
any Guarantor under or in connection with the Loan Agreements to which it is a
party shall prove to have been incorrect in any material respect when made or
deemed made.
(b) Failure by Guarantors to Perform Certain Covenants. Any Guarantor
shall fail to perform or observe any term, covenant or agreement contained in
this Guaranty and in the case of subsection (c) of Section 10 such failure shall
continue beyond any applicable grace periods under the Credit Agreement.
(c) Dissolution, Etc. Any Guarantor or any of its Subsidiaries shall (i)
liquidate, wind up or dissolve (or suffer any liquidation, winding-up or
dissolution), except to the extent expressly permitted by the Credit Agreement,
(ii) suspend its operations other than in the ordinary course of business, or
(iii) take any corporate action to authorize any of the actions or events set
forth above in this subsection (c).
(d) Collateral. (A) This Guaranty or any of the other Collateral
Documents or any certificates, documents, agreements or other instruments
executed in connection herewith or therewith shall for any reason be revoked or
invalidated, or otherwise cease to be in full force and effect, or (B) any
Guarantor or any other Person shall contest in any manner the validity or
enforceability thereof or deny that it has any further liability or obligation
hereunder or thereunder, or (C) there shall be a material adverse effect on the
ability of any Guarantor to
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perform its obligations under this Guaranty or the other Collateral Documents,
or there shall be a material adverse change on the value of the Collateral or
the priority of the Agent's, the Issuing Bank's or any Bank's lien therein, or
(D) there shall be any levy upon, seizure or attachment of the Collateral or any
part thereof.
Upon the occurrence and during the continuance of an Event of
Default under the Credit Agreement, the Agent, the Issuing Bank and the Banks
shall have the rights and remedies set forth herein and in Article VII of the
Credit Agreement and may exercise any or all of their rights and remedies under
the Collateral Documents and proceed to enforce all other rights and remedies
available to them under the Loan Agreements and applicable law.
SECTION 12. Notices. All notices and other communications provided for
hereunder shall, unless otherwise stated herein, be in writing (including by
facsimile) and shall be mailed, sent or delivered (i) if to the Agent, the
Issuing Bank or any Bank, at or to its address or facsimile number provided in
Section 9.02 of the Credit Agreement, and (ii) if to a Guarantor, at or to its
address or facsimile number set forth below its name on the signature page
hereof, or at or to such other address or facsimile number as such party shall
have designated in a written notice to the other party. All such notices and
communications shall be effective at the time and in the manner provided for in
Section 9.02 of the Credit Agreement.
SECTION 13. No Waiver; Cumulative Remedies. No failure on the part of
the Agent, the Issuing Bank or any Bank to exercise, and no delay in exercising,
any right, remedy, power or privilege hereunder or under any other Loan
Agreements shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, remedy, power or privilege preclude any other or
further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights and remedies under this Guaranty and the other Loan
Agreements are cumulative and not exclusive of any rights, remedies, powers and
privileges that may otherwise be available to the Agent, the Issuing Bank or any
Bank.
SECTION 14. Costs and Expenses; Indemnification.
(a) Costs and Expenses. Each Guarantor jointly and severally agrees to
pay on demand:
(i) the reasonable out-of-pocket costs and expenses of the Agent
and any of its Affiliates, and the reasonable fees and disbursements of counsel
to the Agent (including allocated costs of internal counsel), in connection with
the negotiation, preparation, execution, delivery and administration of this
Guaranty or any other Loan Agreements, and any amendments, modifications or
waivers of the terms thereof; and
(ii) all costs and expenses of the Agent, its Affiliates, the
Issuing Bank and each of the Banks, and fees and disbursements of counsel
(including allocated costs of internal counsel), in connection with the
enforcement or attempted enforcement, or preservation of any rights or interests
under this Guaranty and any other Loan Agreements, and any out-of-court workout
or other refinancing or restructuring or any Insolvency Proceeding, including
any losses, costs and expenses sustained by the Agent, the Issuing Bank and any
of the Banks as a
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result of any failure by any Guarantor to perform or observe its obligations
contained in this Guaranty and the other Loan Agreements to which such Guarantor
is a party.
(b) Indemnification. In addition, whether or not the transactions
contemplated by the Loan Agreements shall be consummated, the Guarantor hereby
agrees to indemnify the Agent, the Issuing Bank, each Bank and any officers,
directors, employees or agents thereof (each an "Indemnified Person"), against
and hold each of them harmless from any and all liabilities, obligations,
losses, claims, damages, penalties, actions, judgments, suits, costs, expenses
or disbursements of any kind or nature whatsoever, including the reasonable fees
and disbursements of counsel to an Indemnified Person (including allocated costs
of internal counsel), which may be imposed on, incurred by, or asserted against
any Indemnified Person, (i) in any way relating to or arising out of this
Guaranty or any other Loan Agreement, the Guaranteed Obligations, the Collateral
Documents or the transactions contemplated hereby or thereby, or (ii) with
respect to any investigation, litigation or other proceeding relating to any of
the foregoing, irrespective of whether the Indemnified Person shall be
designated a party thereto (the "Indemnified Liabilities"); provided that the
Guarantor shall not be liable to any Indemnified Person for any portion of such
Indemnified Liabilities to the extent they are found by a final decision of a
court of competent jurisdiction to have resulted from such Indemnified Person's
gross negligence or willful misconduct. If and to the extent that the foregoing
indemnification is for any reason held unenforceable, each Guarantor jointly and
severally agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
(c) Defense. The Guarantors shall have the option to, and at the request
of any Indemnified Person shall, direct and control the defense of the
Indemnified Person in such proceedings, employing legal counsel selected by such
Guarantor and acceptable to the Indemnified Person, and pay the fees and
expenses of any legal counsel.
(d) Interest. Any amounts payable to the Agent, the Issuing Bank or any
Bank under this Section 14 if not paid upon demand shall bear interest from the
date of such demand until paid in full, at the rate of interest then applicable
to Base Rate Loans under the Credit Agreement.
(e) Right of Set-Off. Upon (i) the occurrence and during the continuance
of any Default, each Bank and the Issuing Bank is hereby authorized at any time
and from time to time, without notice to any Guarantor (any such notice being
expressly waived by the Guarantors), to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Bank to or for the credit or the
account of any of the Guarantors against any and all of the obligations of the
Guarantors now or hereafter existing under this Guaranty, irrespective of
whether or not such Bank shall have made any demand upon the Borrower or any
Guarantor under the Loan Agreements and although such obligations may be
contingent and unmatured. Each Bank shall promptly notify the Guarantors
(through the Agent) after any such set-off and application made by it; provided,
however, that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of the Banks under this Section 14 are
in addition to other rights and remedies (including other rights of set-off)
which the Banks may have.
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SECTION 15. Survival. All covenants, agreements, representations and
warranties made in this Guaranty shall survive the execution and delivery of
this Guaranty, and shall continue in full force and effect so long as any Bank
has any Commitment or any Guaranteed Obligations remain unsatisfied.
Notwithstanding the foregoing, the obligations of the Guarantors under Section
14 shall survive the satisfaction of the Guaranteed Obligations and the
termination of the Commitments.
SECTION 16. Benefits of Guaranty. This Guaranty is entered into for the
sole protection and benefit of the Agent, the Issuing Bank and each Bank and
their respective successors and assigns, and no other Person (other than any
Indemnified Person specified herein) shall be a direct or indirect beneficiary
of, or shall have any direct or indirect cause of action or claim in connection
with, this Guaranty. The Agent and the Banks, by their acceptance of this
Guaranty, shall not have any obligations under this Guaranty to any Person other
than the Guarantors, and such obligations shall be limited to those expressly
stated herein.
SECTION 17. Binding Effect; Assignment.
(a) Binding Effect. This Guaranty shall be binding upon the Guarantors
and their respective successors and assigns, and inure to the benefit of and be
enforceable by the Agent, the Issuing Bank and each Bank and their respective
successors, endorsees, transferees and assigns.
(b) Assignment. The Guarantors shall not have the right to assign or
transfer their respective rights and obligations hereunder without the prior
written consent of the Banks. Each Bank may, without notice to or consent by the
Guarantors, sell, assign, transfer or grant participations in all or any portion
of such Bank's rights and obligations hereunder in connection with any sale,
assignment, transfer or grant of a participation by such Bank under Section 9.06
of the Credit Agreement of or in its rights and obligations thereunder and under
the other Loan Agreements. Each Guarantor agrees that in connection with any
such sale, assignment, transfer or grant by any Bank and to the extent permitted
under the Credit Agreement with respect to any such sale, assignment, transfer
or grant, such Bank may deliver to the prospective participant or assignee
financial statements and other relevant information relating to the Guarantors
and their Subsidiaries. In the event of any grant of a participation, the
participant (i) shall be deemed to have a right of setoff under Section 14 in
respect of its participation to the same extent as if it were such "Bank;" and
(ii) shall also be entitled to the benefits of Section 14.
SECTION 18. Governing Law. THIS GUARANTY SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT GIVING
EFFECT TO ITS CHOICE OF LAW DOCTRINE.
(a) Waiver of Jury Trial. THE AGENT, THE GUARANTORS, THE ISSUING BANK
AND EACH BANK HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY, ANY OF
THE LOAN AGREEMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER
OF THE LOAN AGREEMENTS. The scope of this waiver is intended to be all
encompassing of any and all disputes that may be filed in any court and that
relate to the subject matter of this transaction,
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including contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. The Agent, each Bank, the issuing Bank and the
Guarantors each acknowledge that this waiver is a material inducement to enter
into a business relationship, that each has already relied on the waiver in
entering into this Guaranty, and that each will continue to rely on the waiver
in their related future dealings. The Agent, each Bank, the Issuing Bank and the
Guarantors further warrant and represent that each has reviewed this waiver with
its legal counsel, and that each knowingly and voluntarily waives its jury trial
rights following consultation with legal counsel. THE WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS GUARANTY, THE LOAN AGREEMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING THERETO. In the event of litigation, this Guaranty may be filed as a
written consent to a trial by the court.
(b) Consent to Jurisdiction; Venue. All judicial proceedings brought
against any Guarantor with respect to this Guaranty and the Loan Agreements may
be brought in any state or federal court of competent jurisdiction in the City
of Los Angeles or San Francisco in the State of California, or, to the extent
that actions may be required upon this Guaranty in the courts of any foreign
jurisdiction in connection with enforcement proceedings commenced by the Agent
in such foreign jurisdiction relating to any Collateral, to the courts of any
foreign jurisdiction, and by execution and delivery of this Agreement, the
Guarantors accept for themselves and in connection with their properties,
generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts, and irrevocably agree to be bound by any judgment rendered thereby in
connection with this Guaranty. The Guarantors irrevocably waive any right they
may have to assert the doctrine of forum non conveniens or to object to venue to
the extent any proceeding is brought in accordance with this paragraph. Nothing
herein shall affect the right of the Agent, the Issuing Bank or any Bank to
bring proceedings against the Guarantors in courts of any jurisdiction.
SECTION 19. Entire Agreement; Amendments and Waivers.
(a) Entire Agreement. This Guaranty and the other Loan Agreements
constitute the entire agreement of the parties with respect to the matters set
forth herein and supersede any prior agreements, commitments, drafts,
communications, discussions and understandings, oral or written, with respect
thereto. There are no conditions to the full effectiveness of this Guaranty.
(b) Amendments and Waivers. Except to the extent otherwise provided in
the Credit Agreement, this Guaranty may not be amended except by a writing
signed by the Guarantors, the Agent, the Issuing Bank and the Majority Banks, or
the Guarantor and the Agent (with the written consent of the Issuing Bank and
the Majority Banks). No waiver of any rights of the Agent, the Issuing Bank and
the Banks under any provision of this Guaranty or consent to any departure by
the Guarantors therefrom shall be effective unless in writing and signed by the
Agent, the Issuing Bank and the Majority Banks, or the Agent (with the written
consent of the Issuing Bank and the Majority Banks). Any such amendment, waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
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SECTION 20. Limitation on Liability. No claim shall be made by any
Guarantor or their Affiliates against the Agent, the Issuing Bank or any of the
Banks or any of their respective employees, officers, directors or agents for
any special, indirect, exemplary, consequential or punitive damages in respect
of any breach or wrongful conduct (whether or not the claim therefor is based on
contract, tort or duty imposed by law), in connection with, arising out of or in
any way related to the transactions contemplated by this Guaranty or the other
Loan Agreements or any act or omission or event occurring in connection
therewith; and each Guarantor hereby waives, releases and agrees not to sue upon
any such claim for any such damages, whether or not accrued and whether or not
known or suspected to exist in its favor.
SECTION 21. Knowing and Explicit Waivers. EACH GUARANTOR ACKNOWLEDGES
THAT IT HAS EITHER OBTAINED THE ADVICE OF LEGAL COUNSEL OR HAS HAD THE
OPPORTUNITY TO OBTAIN SUCH ADVICE IN CONNECTION WITH THE TERMS AND PROVISIONS OF
THIS GUARANTY. EACH GUARANTOR ACKNOWLEDGES AND AGREES THAT EACH OF THE WAIVERS
AND CONSENTS SET FORTH HEREIN, INCLUDING THOSE CONTAINED IN SECTIONS 3 THROUGH
6, ARE MADE WITH FULL KNOWLEDGE OF THEIR SIGNIFICANCE AND CONSEQUENCES.
ADDITIONALLY, EACH GUARANTOR ACKNOWLEDGES AND AGREES THAT BY EXECUTING THIS
GUARANTY, IT IS WAIVING CERTAIN RIGHTS, BENEFITS, PROTECTIONS AND DEFENSES TO
WHICH IT MAY OTHERWISE BE ENTITLED UNDER APPLICABLE LAW, INCLUDING UNDER THE
PROVISIONS OF THE CALIFORNIA CIVIL CODE AND CALIFORNIA CODE OF CIVIL PROCEDURE
REFERRED TO IN SECTION 5, AND THAT ALL SUCH WAIVERS HEREIN ARE EXPLICIT, KNOWING
WAIVERS. THE GUARANTORS FURTHER ACKNOWLEDGE AND AGREE THAT THE AGENT, THE
ISSUING BANK AND THE BANKS ARE RELYING ON SUCH WAIVERS IN CREATING THE
GUARANTEED OBLIGATIONS, AND THAT SUCH WAIVERS ARE A MATERIAL PART OF THE
CONSIDERATION WHICH THE AGENT, THE ISSUING BANK AND THE BANKS ARE RECEIVING FOR
CREATING THE GUARANTEED OBLIGATIONS.
SECTION 22. Severability. Whenever possible, each provision of this
Guaranty shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this Guaranty
shall be prohibited by or invalid under any such law or regulation in any
jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform
to the minimum requirements of such law or regulation, or, if for any reason it
is not deemed so modified, it shall be ineffective and invalid only to the
extent of such prohibition or invalidity without affecting the remaining
provisions of this Guaranty, as the case may be, or the validity or
effectiveness of such provision in any other jurisdiction.
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IN WITNESS WHEREOF, the Guarantors have executed this Guaranty,
as of the date first above written.
GUARANTORS
SUNWARD TECHNOLOGIES, INC.
By
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Title
-------------------------------
Address
--------------------------
---------------------------------
---------------------------------
Attn:
----------------------------
Fax No.:
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SUNWARD TECHNOLOGIES, CALIFORNIA
By
-------------------------------
Title
-------------------------------
Address
--------------------------
---------------------------------
---------------------------------
Attn:
----------------------------
Fax No.:
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STOCK PLEDGE AND CHARGE AGREEMENT
THIS STOCK PLEDGE AND CHARGE AGREEMENT (this "Agreement"), dated
as of ___________, 1998, is made among Read-Rite Corporation, a Delaware company
(the "Borrower"), Sunward Technologies, Inc., a Delaware company (the
"Subsidiary") (the Borrower and the Subsidiary each a "Pledgor" and collectively
the "Pledgors"), the Banks (as defined below), the Designated Issuer (as defined
below) and Canadian Imperial Bank of Commerce, New York Agency, as agent for the
Banks (in such capacity, the "Agent") (the Banks, Designated Issuer, Issuing
Bank and Agent each a "Pledgee" and collectively the "Pledgees").
The Borrower, certain financial institutions as lenders (the
"Banks") Canadian Imperial Bank of Commerce, New York Agency, as issuer of
letters of credit for the account of the Borrower (in such capacity, the
"Designated Issuer") and the Agent are parties to a Credit Agreement dated as of
October 2, 1997 (as amended, modified, renewed or extended from time to time,
the "Credit Agreement").
The Subsidiary is a subsidiary of the Borrower and is party to
that certain Continuing Guaranty dated as of even date herewith between certain
subsidiaries of the Borrower, in favor of the Agent, the Banks, the Designated
Issuer and any other Issuing Bank (as amended, modified, renewed or extended
from time to time, the "Guaranty").
It is a condition to the obligations of the Banks, the
Designated Issuer and the Agent under the Credit Agreement that the Pledgors
enter into this Agreement and pledge to the Agent, the Banks and Issuing Bank
their shareholdings in the companies identified in Schedule 1 (each a "Company"
and collectively the "Companies").
Accordingly, the parties hereto agree as follows:
SECTION 1. Definitions; Interpretation.
(a) Terms Defined in Credit Agreement. All capitalized terms
used in this Agreement (including the recitals) and not otherwise defined herein
shall have the meanings assigned to them in the Credit Agreement.
(b) Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"Additional Collateral" means, (i) with respect to Companies
listed in Section A or C of Schedule 1, any and all (A) additional shares of
capital stock or other equity securities of such Companies, whether certificated
or uncertificated, (B) warrants, options or other rights entitling a Pledgor to
acquire any interest in capital stock or other equity securities of such
Companies, (C) securities, property, interest, dividends and other payments and
distributions issued as an addition to, in redemption of, in renewal or exchange
for, in substitution or upon conversion of, or otherwise on account of, the
Pledged Shares or such additional shares of capital stock or other equity
securities, and (D) cash and non-cash proceeds of the Pledged Shares and
1.
<PAGE> 54
any of the foregoing, in each case from time to time received or receivable by,
or otherwise paid or distributed to or acquired by, any of the Pledgors; and
(ii) with respect to any Company listed in Section B of Schedule 1, (A) 65% of
all additional capital stock or other equity securities of such Companies,
whether certificated or uncertificated, (B) 65% of all warrants, options or
other rights entitling a Pledgor to acquire any interest in capital stock or
other equity securities of such Companies, (C) securities, property, interest,
dividends and other payments and distributions issued as an addition to, in
redemption of, in renewal or exchange for, in substitution or upon conversion
of, or otherwise on account of, the Pledged Shares or such additional capital
stock or other equity securities provided that the Pledged Shares and such
Additional Collateral shall not thereafter exceed 65% of the total share capital
of the relevant company, and (D) cash and non-cash proceeds of the Pledged
Shares and any of the foregoing, in each case from time to time received or
receivable by, or otherwise paid or distributed to or acquired by, any of the
Pledgors.
"Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy" as in effect from time to time.
"Default" means any of the following:
(i) Representations and Warranties. Any representation
or warranty by any Pledgor under or in connection with this Agreement or the
other Loan Agreements to which it is a party shall prove to have been incorrect
in any material respect when made or deemed made.
(ii) Failure by Pledgors to Perform Certain Covenants.
Any Pledgor shall fail to perform or observe any term, covenant or agreement
contained in subsections (b), (c) or (d) of Section 3 or subsections (d), (e),
(f), (g), (h), or (i) of Section 5 of this Agreement.
(iii) Failure by Pledgors to Perform Other Covenants.
Any Pledgor shall fail to perform or observe any other term, covenant or
agreement contained in this Agreement and such failure shall remain unremedied
or uncured for thirty days after the Chief Executive Officer, Chief Financial
Officer, Controller, Assistant Controller or Treasurer of any Grantor knows of
such failure (whether by notice from the Agent, the Banks, the Designated Issuer
or otherwise).
(i) (A) Any Pledgor shall commence any case, proceeding
or other action (1) under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect to
it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or (2) seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its assets, or any Pledgor shall make a
general assignment for the benefit of its creditors; or (B) there shall be
commenced against any Pledgor any case, proceeding or other action of a nature
referred to in clause (A) above which (1) results in the entry of an order for
relief or any such adjudication or appointment or (2) remains undismissed,
undischarged or unbonded for a period of sixty (60) consecutive days; or (C)
there shall be commenced against any Pledgor any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process
2.
<PAGE> 55
against all or any substantial part of its assets which results in the entry of
an order for any such relief which shall not have been vacated, discharged, or
stayed or bonded pending appeal within sixty (60) consecutive days from the
entry thereof; or (D) any Pledgor shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (A), (B) and (C) above; or (E) any Pledgor shall generally not,
or shall be unable to, or shall admit in writing its inability to, pay its debts
as they become due; or (F) any Pledgor shall cease to be Solvent.
(iv) Dissolution, Etc. Any Pledgor or any of its Subsidiaries
(including any of the Companies) shall (A) liquidate, wind up or dissolve (or
suffer any liquidation, winding-up or dissolution), except to the extent
expressly permitted by the Credit Agreement, (B) suspend its operations other
than in the ordinary course of business, or (C) take any corporate action to
authorize any of the actions or events set forth above in this subsection (v).
(v) Collateral. (A) This Agreement or any of the other
Collateral Documents, or any certificates, documents, agreements or other
instruments executed in connection herewith or therewith shall for any reason be
revoked or invalidated, or otherwise cease to be in full force and effect, or
(B) any Pledgor or any other Person shall contest in any manner the validity or
enforceability thereof or deny that it has any further liability or obligation
hereunder or thereunder, or (C) there shall be a material adverse effect on the
ability of any Pledgor to perform its obligations under this Agreement or the
other Collateral Documents, or there shall be a material adverse change in the
value of the Collateral or the priority of the Agent's, the Issuing Bank's or
any Bank's lien therein, or (D) there shall be any levy upon, seizure or
attachment of the Pledged Collateral or Additional Collateral or any part
thereof.
(vi) Default under Credit Agreement. Any "Event of Default" as
defined in the Credit Agreement shall occur.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Insolvency Proceeding" with respect to any Pledgor means any case,
action or proceeding described in paragraph (iv) of the definition of Default.
"Material Adverse Effect" with respect to any Person means, a material
adverse effect (i) on the business operations, prospects, properties, assets or
condition (financial or otherwise) of such Person and its Subsidiaries taken as
a whole, or (ii) on the ability of such Person to perform, or any of the Banks,
the Issuing Bank or the Agent to enforce, the obligations of such Person under
this Agreement or any of the other Loan Agreements.
"Pledged Collateral" has the meaning set forth in Section 3(a).
"Pledged Shares" means (i) all of the issued and outstanding shares of
capital stock, whether certificated or uncertificated, of the Companies listed
in Section A of Schedule 1 and (ii) 65% of the issued and outstanding shares of
capital stock, whether certificated or uncertificated, of the Companies listed
in Section B of Schedule 1 and (iii) 50% plus one share of the issued and
outstanding shares of capital stock, whether certificated or uncertificated, of
the Company listed in Section C of Schedule 1.
3.
<PAGE> 56
"Secured Obligations" means the indebtedness, liabilities and other
obligations of the Pledgors to the Agent, the Issuing Bank and the Banks under
or in connection with the Credit Agreement, the Guaranty, and any of the other
Collateral Documents and Loan Agreements. The terms "indebtedness,"
"liabilities," and "obligations" are used in their most comprehensive sense and
include any and all advances, debts, obligations and liabilities, (including
interest which, but for the filing of a petition in any Insolvency Proceeding
against a Pledgor would have accrued on such obligation, whether or not a claim
is allowed against such Pledgor for such interest in any such Insolvency
Proceeding) whether now existing or hereafter arising, whether voluntary or
involuntary and whether due or to become due, absolute or contingent, liquidated
or unliquidated, determined or undetermined and whether recovery upon such
indebtedness, liabilities and obligations may be or hereafter becomes
unenforceable or shall be an allowed or disallowed claim under the Bankruptcy
Code or other applicable law.
"Securities Act" means the Securities Act of 1933, as amended.
"Solvent" means, as to any Person at any time, that (i) the fair value
of the property of such Person is greater than the amount of such Person's
liabilities (including disputed, contingent and unliquidated liabilities) as
such value is established and liabilities evaluated for purposes of Section
101(31) of the Bankruptcy Code, (ii) the present fair saleable value of the
property of such Person is not less than the amount that will be required to pay
the probable liability of such Person on its debts as they become absolute and
matured, (iii) such Person is able to realize upon its property and pay its
debts and other liabilities (including disputed, contingent and unliquidated
liabilities) as they mature in the normal course of business, (iv) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of California; provided, however, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of the security interest in any Pledged Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of California, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
(c) Terms Defined in UCC. Where applicable and except as otherwise
defined herein, terms used in this Agreement shall have the meanings assigned to
them in the UCC.
(d) Interpretation. The rules of interpretation set forth in Section
1.02 of the Credit Agreement shall be applicable to this Agreement and are
incorporated herein by this reference.
SECTION 2. Agency. Each of the Banks and the Issuing Bank hereby
appoints the Agent to act on their behalf and exercise all rights, powers and
privileges which they may have by virtue of this Agreement. The Agent is hereby
granted the power to exercise all rights
4.
<PAGE> 57
assigned to it by this Agreement and all rights or powers reasonably incidental
thereto. The exercise of the agency under this Agreement shall be governed by
the provisions of the Credit Agreement and the Agent shall be entitled hereunder
to the same rights, benefits, immunities, exculpations and indemnities provided
to the Agent under the Credit Agreement.
SECTION 3. Security Interest.
(a) Grant of Security Interest. As continuing security for the payment
and performance of the Secured Obligations, each of the Pledgors hereby charges
by way of first fixed charge, pledges, assigns, transfers, hypothecates, sets
over and grants to the Agent, for itself and on behalf of and for the ratable
benefit of the Pledgees, a charge and security interest in, all of such
Pledgor's respective right, title and interest in, to and under (i) the Pledged
Shares and the Additional Collateral and any certificates and instruments now or
hereafter representing the Pledged Shares and the Additional Collateral, (ii)
all rights, interests and claims with respect to the Pledged Shares and
Additional Collateral, including under any and all related agreements,
instruments and other documents, and (iii) all books, records and other
documentation of such Pledgor related to the Pledged Shares and Additional
Collateral, in each case whether presently existing or owned or hereafter
arising or acquired and wherever located (collectively, the "Pledged
Collateral").
(b) Delivery of Pledged Shares. The Pledgors each hereby agree to
deliver to the Agent (for the account of the Pledgees), at the address and to
the Person to be designated by the Agent, the certificates representing the
Pledged Shares, which shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer, sold contract
note or other instruments of assignment in blank, all in form and substance
satisfactory to the Agent.
(c) Delivery of Additional Collateral. If any of the Pledgors shall
become entitled to receive or shall receive any Additional Collateral, such
Pledgor shall accept any such Additional Collateral as the agent for the Agent,
shall hold it in trust for the Agent, shall segregate it from other property or
funds of such Pledgor, and shall deliver all Additional Collateral and all
certificates, instruments and other writings representing such Additional
Collateral forthwith to the Agent (for the account of the Pledgees), at the
address and to the Person to be designated by the Agent, which shall be in
suitable form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer, sold contract note or other instruments of assignment
in blank, all in form and substance satisfactory to the Agent, as the Agent
shall request, to be held by the Agent (for the account of the Pledgees) subject
to the terms hereof, as part of the Pledged Collateral. Upon accepting any such
Additional Collateral hereunder, the Agent shall promptly send a notification to
the relevant Pledgor describing the Additional Collateral accepted and held as
part of the Pledged Collateral hereunder, which notification shall be deemed to
be a Schedule to this Agreement and may be attached hereto.
(d) Transfer of Security Interest Other Than by Delivery. If for any
reason Pledged Collateral cannot be delivered to or for the account of the Agent
as provided in subsections (b) and (c), the Pledgors shall promptly take such
other steps as shall be requested from time to time by the Agent to effect a
transfer of a perfected first priority security interest in and pledge and
charge of the Pledged Collateral to the Agent, the Issuing Bank and the Banks
5.
<PAGE> 58
pursuant to the UCC. To the extent practicable, the Borrower shall thereafter
deliver the Pledged Collateral to or for the account of the Agent as provided in
subsections (b) and (c).
(e) Continuing Security Interest. The Pledgors agree that this Agreement
shall create a continuing security interest in, pledge and charge of the Pledged
Collateral which shall remain in effect notwithstanding any intermediate payment
or settlement of accounts or other matters whatsoever until terminated in
accordance with Section 24.
(f) Reinstatement of Security. Any discharge or other termination and
any composition or arrangement which the Pledgors may effect with the Agent, the
Issuing Bank and the Banks shall be deemed to be made subject to the express
condition that it will be void and the security interests deemed reinstated if
any payment or security which the Agent, the Issuing Bank or the Banks may have
received or may receive from any person in respect of the Secured Obligations is
avoided, invalidated or set aside or if any order is made in respect thereof
under any enactment relating to insolvency.
(g) Read-Rite SMI. It is the intent of the parties hereto that the
security interest created by this Agreement in respect of the shareholdings in
Read-Rite SMI be treated as, and this Agreement shall be deemed to create in
respect of Read-Rite SMI, a pledge (Shichiken) for the purposes of Japanese law.
To the extent that the remedies or powers granted pursuant to this Agreement
against a Japanese issuer of Pledged Collateral are inconsistent with the
remedies or powers of a pledgee under a pledge (Shichiken) under Japanese law
and such inconsistency would invalidate the pledge (Shichiken) under Japanese
law, such remedies or powers shall be limited to those which will not invalidate
such pledge (Shichiken) under Japanese law. Nothing in this subsection is
intended, and this subsection shall not be treated as limiting or otherwise
affecting, any of the Pledgees' respective rights, interests, powers or remedies
with respect to any Companies other than Read-Rite SMI.
SECTION 4. Representations and Warranties. Each of the Pledgors jointly
and severally represents and warrants to the Issuing Bank, each Bank and the
Agent that:
(a) Valid Issuance of Pledged Collateral. All the Pledged Shares have
been, and upon issuance any Additional Collateral will be, duly and validly
issued, and are and will be fully paid and non-assessable.
(b) Ownership of Pledged Collateral. With respect to the Pledged Shares
the Pledgors are, and with respect to any Additional Collateral the Pledgors
will be, the legal record and beneficial owners thereof, and have and will have
good and marketable title thereto, subject to no Lien except for the pledge,
charge and security interest created by this Agreement.
(c) Approvals. No authorizations, approvals or consents and no notice to
or filing with any governmental authority or other regulatory body are required
for (i) the pledge and charging of the Pledged Collateral, (ii) the exercise by
the Agent of voting and other rights relating to the Pledged Collateral, (iii)
the perfection of the security interest created hereby (other than filing of UCC
financing statements and registration with the Hong Kong Companies Registry
where necessary) or (iv) the enforcement of any rights or remedies hereunder.
6.
<PAGE> 59
(d) Options, Warrants, Etc. No securities convertible into or
exchangeable for any shares of capital stock of any of the Companies, or any
options, warrants or other commitments entitling any Person to purchase or
otherwise acquire any shares of capital stock of any of the Companies, are
issued and outstanding.
(e) Transfer Restrictions. Except as set forth in the Second Disclosure
Letter, there are no restrictions on, or approvals required for, the
transferability of the Pledged Collateral to the Agent or with respect to the
foreclosure, transfer or disposition thereof by the Agent.
(f) Shareholders Agreements. Except as set forth in the Second
Disclosure Letter, there are no shareholders agreements, voting trusts, proxy
agreements or other agreements or understandings which affect or relate to the
voting or giving of written consents with respect to any of the Pledged
Collateral. The Pledgors have delivered to the Agent complete and accurate
copies of all Articles of Association, Memoranda of Incorporation and other
constitutional documents of each of the Companies.
(g) No Violation of Securities Laws. None of the Pledged Shares has been
transferred in violation of the securities registration, securities disclosure
or similar laws of any jurisdiction to which such transfer may be subject.
(h) Location of Chief Executive Office. Details of the chief executive
office and principal place of business of each Pledgor, locations of all books
and records concerning the Pledged Collateral and the federal taxpayer
identification numbers of each Pledgor, are set forth in the Second Disclosure
Letter.
(i) Other Financing Statements. Other than (i) financing statements
disclosed to the Agent and (ii) financing statements in favor of the Agent on
behalf of the Issuing Bank and the Banks, no effective financing statement
naming any Pledgor as debtor, assignor, grantor, mortgagor, pledgor or the like
and covering all or any part of the Pledged Collateral is on file in any filing
or recording office in any jurisdiction.
(j) Enforceability; Priority of Security Interest. This Agreement (i),
subject to any registration required with the Hong Kong Companies Registry,
creates an enforceable perfected and first priority security interest in and
pledge of the Pledged Collateral upon delivery thereof pursuant to Section 3(b),
and (ii) will create an enforceable perfected and first priority security
interest in and pledge of the Additional Collateral upon delivery thereof
pursuant to Section 3(c) (or upon the taking of such other action with respect
thereto as may be requested by the Agent pursuant to Section 3(d)), in each case
securing the payment and performance of the Secured Obligations.
The Pledgors jointly and severally agree that the foregoing
representations and warranties shall be deemed to have been made by them on the
date of each delivery of Pledged Collateral hereunder and on the date on which
representations and warranties are deemed repeated under the Credit Agreement.
SECTION 5. Covenants. So long as any of the Secured Obligations remain
unsatisfied or any Bank shall have any Commitment, the Pledgors jointly and
severally agree that:
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(a) Defense of Pledged Collateral. The Pledgors will, at their own
expense, appear in and defend any action, suit or proceeding which purports to
affect their title to, or right or interest in, the Pledged Collateral or the
charge and security interest of the Agent, the Issuing Bank and the Banks
therein and the pledge to the Agent and the Issuing Bank and the Banks thereof.
(b) Preservation of Collateral. The Pledgors will do and perform all
reasonable acts that may be necessary and appropriate to maintain, preserve and
protect the Pledged Collateral.
(c) Compliance with Laws, Etc. The Pledgors will comply with all laws,
regulations and ordinances relating in a material way to the possession,
maintenance and control of the Pledged Collateral.
(d) Location of Books and Chief Executive Office. The Pledgors will: (i)
keep all books and records pertaining to the Pledged Collateral at the locations
set forth in the Second Disclosure Letter; and (ii) give at least 30 days' prior
written notice to the Agent of (A) any changes in any such location where books
and records pertaining to the Pledged Collateral are kept, or (B) any change in
the location of any of the Pledgors' chief executive offices or principal places
of business.
(e) Change in Name, Identity or Structure. The Pledgors will give at
least 30 days' prior written notice to the Agent of (i) any change in any of
their names or federal taxpayer identification numbers, (ii) any changes in,
additions to or other modifications of their trade names and trade styles, and
(iii) any changes to the identity or structure of any Pledgor which in any
manner might make any financing statement filed hereunder incorrect or
misleading.
(f) Disposition of Pledged Collateral. None of the Pledgors will
surrender or lose possession of (other than to the Agent or, with the prior
consent of the Agent, to a depositary or financial intermediary), exchange,
sell, convey, assign or otherwise dispose of or transfer the Pledged Collateral
or any right, title or interest therein.
(g) Liens. None of the Pledgors will create, incur or permit to exist
any Liens upon or with respect to the Pledged Collateral, other than the
security interest of and pledge and charge to the Agent created by this
Agreement or permitted by the Credit Agreement.
(h) Shareholders Agreements. None of the Pledgors will enter into any
shareholders agreement, voting trust, proxy agreement or other agreement or
understanding which affects or relates to the voting or giving of written
consents with respect to any of the Pledged Collateral.
(i) Issuance of Additional Shares. None of the Pledgors will consent to
or approve, or allow any of the Companies to consent to or approve, the issuance
to any Person of any additional shares of any class of capital stock of any
Company, or of any securities convertible into or exchangeable for any such
shares, or any warrants, options or other rights to purchase or otherwise
acquire any such shares, except as permitted under the Credit Agreement.
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<PAGE> 61
(j) Notices. The Pledgors will deliver promptly to the Agent all reports
and notices received by the Pledgors from the Companies in respect of any of the
Pledged Collateral.
(k) Notification and Registration of Pledge and Charge of Shares. (i)
The Pledgor will cause to be delivered to each of the Companies forthwith a
notification of the pledge and charge of the Pledged Collateral in form and
substance satisfactory to the Agent. (ii) The Pledgors will procure that within
45 days from the date of this Agreement, the managing director of each of the
Companies will acknowledge the pledge and charge of shares in a writing in form
and substance satisfactory to the Agent and will record a notation on the
register of shareholders or similar records maintained by such Company of such
pledge and charge in favor of the Agent, the Issuing Bank and the Banks. (iii)
The Pledgor will cause to be registered in the Hong Kong Companies Registry a
copy of this Agreement in accordance with the requirements of Hong Kong law when
necessary.
(l) Further Assurances. The Pledgors will promptly, upon the written
request from time to time of the Agent, execute, acknowledge and deliver, and
file and record, all such financing statements and other documents and
instruments, and take all such action, as shall be reasonably necessary to carry
out the purposes of this Agreement.
(m) Additional Companies. The Pledgors will promptly notify the Agent of
any additional subsidiaries formed or otherwise acquired by any of the Pledgors
and, to the extent required by the Agent, promptly cause the stock of such
entity held by the Pledgors to be pledged hereunder. Nothing in this paragraph
shall require a Pledgor to pledge more than 65% of the aggregate issued capital
stock of any foreign incorporated subsidiary.
SECTION 6. Administration of the Pledged Collateral.
(a) Distributions and Voting Prior to a Default. Unless a Default shall
have occurred: (i) the Pledgors shall be entitled to receive and retain for
their own account any cash dividend on or other cash distribution, if any, in
respect of the Pledged Collateral; and (ii) the Pledgors shall have the right to
vote the Pledged Collateral and to retain the power to control the direction,
management and policies of the Companies to the same extent as the Pledgors
would if the Pledged Collateral were not pledged pursuant to this Agreement;
provided, that the Pledgors shall not be entitled to receive (A) cash paid,
payable or otherwise distributed in redemption of, or in exchange for or in
substitution of, any Pledged Collateral, or (B) dividends and other
distributions paid or payable in cash in respect of any Pledged Collateral in
connection with a partial or total liquidation or dissolution of any Company or
in connection with a reduction of capital, capital surplus or paid-in-surplus or
any other type of recapitalization involving any Company; and provided further,
that no vote shall be cast or consent, waiver or ratification given or action
taken which would have the effect of impairing the position or interest of the
Agent or the Banks in respect of the Pledged Collateral or which would alter the
voting rights with respect to the stock of any Company or be inconsistent with
or violate any provision of this Agreement, the Credit Agreement or any other
Loan Agreement. If applicable, the Pledgors shall be deemed the beneficial owner
of all Pledged Collateral for purposes of Sections 13 and 16 of the Exchange Act
and agree to file all reports required to be filed by beneficial owners of
securities thereunder. The Agent shall execute and deliver (or cause to be
executed and delivered) to the Pledgors all such proxies and other instruments
as the Pledgors may reasonably request for the
9.
<PAGE> 62
purpose of enabling the Pledgors to exercise the voting and other rights which
they are entitled to exercise pursuant to this subsection (a) and to receive the
distributions which they are authorized to receive and retain pursuant to this
subsection (a).
(b) General Authority upon a Default. Upon and after the occurrence of
any Default:
(i) the Agent shall be entitled to receive all distributions and
payments of any nature with respect to the Pledged Collateral, to be held by the
Agent as part of the Pledged Collateral;
(ii) the Agent shall have the right following prior written
notice to the Pledgors to vote or consent to take any action with respect to the
Pledged Shares and exercise all rights of conversion, exchange, subscription or
any other rights, privileges or options pertaining to the Pledged Collateral as
if the Agent were the absolute owner thereof;
(iii) the Agent shall have the right, for and in the name, place
and stead of the Pledgors, to execute endorsements, assignments, sold contract
notes or other instruments of conveyance or transfer with respect to all or any
of the Pledged Collateral, to endorse any checks, drafts, money orders and other
instruments relating thereto, to sue for, collect, receive and give acquittance
for all moneys due or to become due in connection with the Pledged Collateral
and otherwise to file any claims, take any action or institute, defend, settle
or adjust any actions, suits or proceedings with respect to the Pledged
Collateral, execute any and all such other documents and instruments, and do any
and all such acts and things, as the Agent may deem necessary or desirable to
protect, collect, realize upon and preserve the Pledged Collateral, to enforce
the Agent's, the Issuing Bank's or the Banks' rights with respect to the Pledged
Collateral and to accomplish the purposes of this Agreement; and
(iv) the Pledgors shall procure the full satisfaction of any
transfer restrictions listed in the Second Disclosure Letter applicable to any
of the transfers of any of the Pledged Collateral referred to in this Section,
including, but not limited to, the obtaining of any relevant approval of the
directors of any Company to which the Pledged Shares relate.
(c) Distributions to Be Held for Agent. Distributions and other payments
which are received by the Pledgors but which they are not entitled to retain as
a result of the operation of subsection (a) or (b) shall be held in trust for
the benefit of the Agent, be segregated from the other property or funds of the
Pledgor, and be forthwith paid over or delivered to the Agent in the same form
as so received.
(d) Certain Other Administrative Matters. At any time and from time to
time, the Agent may cause any of the Pledged Collateral to be transferred into
its name or into the name of its nominee or nominees (subject to the revocable
rights specified in subsection (a)). The Agent shall at all times have the right
to exchange uncertificated Pledged Collateral for certificated Pledged
Collateral, and to exchange certificated Pledged Collateral for certificates of
larger or smaller denominations, for any purpose consistent with this Agreement.
(e) Appointment of Agent as Attorney-in-Fact. For the purpose of
enabling the Agent to exercise its rights under this Section 6 or otherwise in
connection with this Agreement,
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each of the Pledgors hereby (i) constitutes and appoints the Agent (and any of
the Agent's officers, employees or agents designated by the Agent) its true and
lawful attorney-in-fact, with full power and authority to execute any notice,
assignment, endorsement or other instrument or document, and to do any and all
acts and things for and on behalf of the such Pledgor, which the Agent may deem
necessary or desirable to protect, collect, realize upon and preserve the
Pledged Collateral, to enforce the Agent's or the Banks' rights with respect to
the Pledged Collateral and to accomplish the purposes hereof, and (ii) effective
upon and during the continuation of a Default, revokes all previous proxies with
regard to the Pledged Collateral and appoints the Agent as its proxyholder with
respect to the Pledged Collateral to attend and vote at any and all meetings of
the shareholders of the Companies held on or after the date of this proxy and
prior to the termination hereof, with full power of substitution to do so and
agrees, if so requested, to execute or cause to be executed appropriate proxies
therefor. Each such appointment is coupled with an interest and irrevocable so
long as the Banks have any Commitments or the Secured Obligations have not been
paid and performed in full. Each of the Pledgors hereby ratifies, to the extent
permitted by law, all that the Agent shall lawfully and in good faith do or
cause to be done by virtue of and in compliance with this Section 6.
SECTION 7. Agent Performance of Pledgor Obligations. The Agent may
perform or pay any obligation which the Pledgors have agreed to perform or pay
under or in connection with this Agreement, and the Pledgors shall reimburse the
Agent on demand for any amounts paid by the Agent pursuant to this Section 7.
SECTION 8. Agent's Duties. Notwithstanding any provision contained in
this Agreement, the Agent shall have no duty to exercise any of the rights,
privileges or powers afforded to it and shall not be responsible to the Pledgors
or the Banks or any other Person for any failure to do so or delay in doing so.
Beyond the exercise of reasonable care to assure the safe custody of the Pledged
Collateral while held hereunder and the accounting for moneys actually received
by the Agent hereunder, the Agent shall have no duty or liability to exercise or
preserve any rights, privileges or powers pertaining to the Pledged Collateral.
SECTION 9. Remedies.
(a) Remedies. Upon the occurrence of any Default, the Agent shall have,
in addition to all other rights and remedies granted to it in this Agreement,
the Credit Agreement or any other Loan Agreement, all rights and remedies of a
secured party under the UCC and other applicable laws (including, without
limitation, the laws of the jurisdictions of incorporation of the Companies).
Without limiting the generality of the foregoing, the Pledgors agree that any
item of the Pledged Collateral may be sold for cash or on credit or for future
delivery without assumption of any credit risk, in any number of lots at the
same or different times, at any exchange, brokers' board or elsewhere, by public
or private sale, and at such times and on such terms, as the Agent shall
determine (including, without limitation, by public or to the extent permitted
by local laws, private auction pursuant to the provision of the laws of the
jurisdictions of incorporation of the Companies); provided, however, that the
Pledgors shall be credited with the net proceeds of sale only when such proceeds
are finally collected by the Agent. Each of the Pledgors hereby agrees that the
sending of notice by ordinary mail, postage prepaid, to the address of such
Pledgor in accordance with Section 11, of the place and time of any public sale
or of the time after which any private sale or other intended disposition is to
be made, shall be
11.
<PAGE> 64
deemed reasonable notice thereof if such notice is sent ten days prior to the
date of such sale or other disposition or the date on or after which such sale
or other disposition may occur, provided that the Agent may provide the Pledgors
shorter notice or no notice, to the extent permitted by the UCC or other
applicable law. The Pledgors recognize that the Agent may be unable to make a
public sale of any or all of the Pledged Collateral, by reason of prohibitions
contained in applicable securities laws or otherwise, and expressly agree that a
private sale to a restricted group of purchasers for investment and not with a
view to any distribution thereof shall be considered a commercially reasonable
sale. The Agent and each of the Banks shall have the right upon any such public
sale, and, to the extent permitted by law, upon any such private sale, to
purchase the whole or any part of the Pledged Collateral so sold, free of any
right or equity of redemption, which right or equity of redemption the Pledgors
hereby release to the extent permitted by law.
(b) Application of Proceeds. The cash proceeds actually received from
the sale or other disposition or collection of Pledged Collateral, and any other
amounts of the Pledged Collateral (including any cash contained in the Pledged
Collateral) the application of which is not otherwise provided for herein, shall
be applied as provided in Section 8 of the Guaranty or Section 2.02 of the
Credit Agreement. Any surplus thereof which exists after payment and performance
in full of the Secured Obligations shall be promptly paid over to the Pledgors
or otherwise disposed of in accordance with the UCC or other applicable law. The
Pledgors shall remain liable to the Agent, the Issuing Bank and the Banks for
any deficiency which exists after any sale or other disposition or collection of
Pledged Collateral.
SECTION 10. Certain Waivers. Each of the Pledgors waives, to the fullest
extent permitted by law, (i) any right of redemption with respect to the Pledged
Collateral, whether before or after sale hereunder, and all rights, if any, of
marshalling of the Pledged Collateral or other collateral or security for the
Secured Obligations; (ii) any right to require the Agent, the Issuing Bank or
the Banks (A) to proceed against any Person, (B) to exhaust any other collateral
or security for any of the Secured Obligations, (C) to pursue any remedy in the
Agent's, the Issuing Bank's or any of the Banks' power, or (D) to make or give
any presentments, demands for performance, notices of nonperformance, protests,
notices of protests or notices of dishonor in connection with any of the Pledged
Collateral; and (iii) all claims, damages, and demands against the Agent, the
Issuing Bank or the Banks arising out of the repossession, retention, sale or
application of the proceeds of any sale of the Pledged Collateral.
SECTION 11. Notices. All notices and other communications provided for
hereunder shall, unless otherwise stated herein, be in writing (including by
facsimile) and shall be mailed, sent or delivered (i) if to the Agent, the
Issuing Bank or any Bank, at or to its address or facsimile number provided in
Section 9.02 of the Credit Agreement, and (ii) if to a Pledgor, at or to its
address or facsimile number set forth below its name on the signature page
hereof, or at or to such other address or facsimile number as such party shall
have designated in a written notice to the other party. All such notices and
communications shall be effective at the time and in the manner provided for in
Section 9.02 of the Credit Agreement.
SECTION 12. No Waiver; Cumulative Remedies. No failure on the part of
the Agent, the Issuing Bank or any Bank to exercise, and no delay in exercising,
any right, remedy, power or privilege hereunder or under any other Loan
Agreements shall operate as a waiver
12.
<PAGE> 65
thereof, nor shall any single or partial exercise of any such right, remedy,
power or privilege preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights and remedies
under this Agreement and the other Loan Agreements are cumulative and not
exclusive of any rights, remedies, powers and privileges that may otherwise be
available to the Agent, the Issuing Bank or any Bank.
SECTION 13. Costs and Expenses; Indemnification; Other Charges.
(a) Costs and Expenses. The Pledgors jointly and severally agree to pay
on demand:
(i) the reasonable out-of-pocket costs and expenses of the Agent
and any of its Affiliates, and the reasonable fees and disbursements of counsel
to the Agent (including allocated costs of internal counsel), in connection with
the negotiation, preparation, execution, delivery and administration of this
Agreement, and any amendments, modifications or waivers of the terms thereof,
and the custody of the Pledged Collateral;
(ii) all reasonable title, appraisal (including the allocated
cost of internal appraisal services), survey, audit, consulting, search,
recording, filing and similar costs, fees and expenses incurred or sustained by
the Agent or any of its Affiliates in connection with this Agreement or the
Pledged Collateral; and
(iii) all costs and expenses of the Agent, its Affiliates, the
Issuing Bank and the Banks, and the fees and disbursements of counsel (including
the allocated costs of internal counsel), in connection with the enforcement or
attempted enforcement of, and preservation of any rights or interest under, this
Agreement, any out-of-court workout or other refinancing or restructuring or in
any bankruptcy case, and the protection, sale or collection of, or other
realization upon, any of the Pledged Collateral, including any and all losses,
costs and expenses sustained by the Agent, the Issuing Bank and any Bank as a
result of any failure by any of the Pledgors to perform or observe its
obligations contained herein.
(b) Indemnification. In addition, whether or not the transactions
contemplated by the Loan Agreements shall be consummated, the Pledgors hereby
agree to indemnify the Agent, the Issuing Bank, each Bank and any officers,
directors, employees or agents thereof (each an "Indemnified Person"), against
and hold each of them harmless from any and all liabilities, obligations,
losses, claims, damages, penalties, actions, judgments, suits, costs, expenses
or disbursements of any kind or nature whatsoever, including the reasonable fees
and disbursements of counsel to an Indemnified Person (including allocated costs
of internal counsel), which may be imposed on, incurred by, or asserted against
any Indemnified Person, (i) in any way relating to or arising out of this
Agreement or any other Loan Agreement, the Secured Obligations, the Collateral
Documents or the transactions contemplated hereby or thereby, or (ii) with
respect to any investigation, litigation or other proceeding relating to any of
the foregoing, irrespective of whether the Indemnified Person shall be
designated a party thereto (the "Indemnified Liabilities"); provided that the
Pledgors shall not be liable to any Indemnified Person for any portion of such
Indemnified Liabilities to the extent they are found by a final decision of a
court of competent jurisdiction to have resulted from such Indemnified Person's
gross negligence or willful misconduct. If and to the extent that the foregoing
indemnification is for any reason held
13.
<PAGE> 66
unenforceable, each Pledgor jointly and severally agrees to make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
(c) Defense. The Pledgors shall have the option to, and at the request
of any Indemnified Person shall, direct and control the defense of the
Indemnified Person in such proceedings, employing legal counsel selected by such
Pledgor and acceptable to the Indemnified Person, and pay the fees and expenses
of any legal counsel.
(d) Other Charges. The Borrower agrees to indemnify the Agent, the
Issuing Bank and each of the Banks against and hold each of them harmless from
any and all present and future stamp, transfer, documentary and other such
taxes, levies, fees, assessments and other charges made by any jurisdiction by
reason of the execution, delivery, performance and enforcement of this
Agreement.
(e) Interest. Any amounts payable to the Agent, the Issuing Bank or any
Bank under this Section 13 or otherwise under this Agreement if not paid upon
demand shall bear interest from the date of such demand until paid in full, at
the rate of interest then applicable to Base Rate Loans under the Credit
Agreement.
SECTION 14. Survival. All covenants, agreements, representations and
warranties made in this Agreement shall survive the execution and delivery of
this Agreement, and shall continue in full force and effect so long as any Bank
has any Commitment or any Secured Obligations remain unsatisfied.
Notwithstanding the foregoing, the obligations of the Pledgors under Section 13
shall survive the satisfaction of the Secured Obligations and the termination of
the Commitments.
SECTION 15. Benefits of Agreement. This Agreement is entered into for
the sole protection and benefit of the Agent, the Issuing Bank and each Bank and
their respective successors and assigns, and no other Person (other than the
Indemnified Persons) shall be a direct or indirect beneficiary of, or shall have
any direct or indirect cause of action or claim in connection with, this
Agreement. The Agent, the Issuing Bank and the Banks, by their acceptance of
this Agreement shall not have any obligations under this Agreement to any Person
other than the Pledgors, and such obligations shall be limited to those
expressly stated herein.
SECTION 16. Binding Effect. This Agreement shall be binding upon the
Pledgors and their respective successors and assigns, and inure to the benefit
of and be enforceable by the Agent, the Issuing Bank and each Bank and their
respective successors, endorsees, transferees and assigns.
SECTION 17. Assignment. None of the Pledgors shall have the right to
assign or transfer their respective rights and obligations hereunder without the
prior written consent of the Banks. Each Bank may, without notice to or consent
by the Pledgors, sell, assign, transfer or grant participations in all or any
portion of such Bank's rights and obligations hereunder in connection with any
sale, assignment, transfer or grant of a participation by such Bank under
Section 9.06 of the Credit Agreement of or in its rights and obligations
thereunder and under the other Loan Agreements. Each Pledgor agrees that in
connection with any such sale, assignment,
14.
<PAGE> 67
transfer or grant by any Bank, and to the extent permitted by the Credit
Agreement with respect to any such sale, assignment, transfer or grant, such
Bank may deliver to the prospective participant or assignee financial statements
and other relevant information relating to the Pledgors and their Subsidiaries.
In the event of any grant of a participation, the participant shall be entitled
to the benefits of Section 13.
SECTION 18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA, EXCEPT AS
REQUIRED BY MANDATORY PROVISIONS OF LAW AND TO THE EXTENT THE VALIDITY OR
PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR THE REMEDIES HEREUNDER, IN
RESPECT OF ANY PLEDGED COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION
OTHER THAN CALIFORNIA.
(a) Waiver of Jury Trial. THE AGENT, THE PLEDGORS, THE ISSUING BANK AND
EACH BANK HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE
LOAN AGREEMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF
THE LOAN AGREEMENTS. The scope of this waiver is intended to be all encompassing
of any and all disputes that may be filed in any court and that relate to the
subject matter of this transaction, including contract claims, tort claims,
breach of duty claims, and all other common law and statutory claims. The Agent,
each Bank, the issuing Bank and the Pledgors each acknowledge that this waiver
is a material inducement to enter into a business relationship, that each has
already relied on the waiver in entering into this Agreement, and that each will
continue to rely on the waiver in their related future dealings. The Agent, each
Bank, the Issuing Bank and the Pledgors further warrant and represent that each
has reviewed this waiver with its legal counsel, and that each knowingly and
voluntarily waives its jury trial rights following consultation with legal
counsel. THE WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN AGREEMENTS OR
TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING THERETO. In the event of
litigation, this Agreement may be filed as a written consent to a trial by the
court.
(b) Consent to Jurisdiction; Venue. All judicial proceedings brought
against any Pledgors with respect to this Agreement and the Loan Agreements may
be brought in any state or federal court of competent jurisdiction in the City
of Los Angeles or San Francisco in the State of California, or to the extent
that actions may be required upon this Agreement in the courts of any foreign
jurisdiction in connection with the enforcement proceedings in such foreign
jurisdiction relating to any Pledged Collateral commenced by the Agent, to the
courts of any foreign jurisdiction and by execution and delivery of this
Agreement, the Pledgors accept for themselves and in connection with their
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts, and irrevocably agree to be bound by any judgment rendered
thereby in connection with this Agreement. The Pledgors irrevocably waive any
right they may have to assert the doctrine of forum non conveniens or to object
to venue to the extent any proceeding is brought in accordance with this
paragraph. Nothing herein shall
15.
<PAGE> 68
affect the right of the Agent, Issuing Bank or any Bank to bring proceedings
against the Pledgors in courts of any jurisdiction.
SECTION 19. Entire Agreement; Amendments and Waivers.
(a) Entire Agreement. This Agreement and the other Loan Agreements
constitute the entire agreement of the parties with respect to the matters set
forth herein and supersede any prior agreements, commitments, drafts,
communications, discussions and understandings, oral or written, with respect
thereto. There are no conditions to the full effectiveness of this Agreement.
(b) Amendments and Waivers. Except to the extent otherwise provided in
the Credit Agreement, this Agreement may not be amended except by a writing
signed by the Pledgors, the Agent, the Issuing Bank and the Majority Banks, or
the Pledgors and the Agent (with the written consent of the Issuing Bank and the
Majority Banks). No waiver of any rights of the Agent, the Issuing Bank and the
Banks under any provision of this Agreement or consent to any departure by the
Pledgors therefrom shall be effective unless in writing and signed by the Agent,
the Issuing Bank and the Majority Banks, or the Agent (with the written consent
of the Issuing Bank and the Majority Banks). Any such amendment, waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 20. Limitation on Liability. No claim shall be made by any
Pledgors or their Affiliates against the Agent, the Issuing Bank or any of the
Banks or any of their respective employees, officers, directors or agents for
any special, indirect, exemplary, consequential or punitive damages in respect
of any breach or wrongful conduct (whether or not the claim therefor is based on
contract, tort or duty imposed by law), in connection with, arising out of or in
any way related to the transactions contemplated by this Agreement or the other
Loan Agreements or any act or omission or event occurring in connection
therewith; and each Pledgors hereby waives, releases and agrees not to sue upon
any such claim for any such damages, whether or not accrued and whether or not
known or suspected to exist in its favor.
SECTION 21. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only to
the extent of such prohibition or invalidity without affecting the remaining
provisions of this Agreement, or the validity or effectiveness of such provision
in any other jurisdiction.
SECTION 22. Counterparts and Signatures. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
This Agreement shall be binding upon the Pledgors upon their execution and
delivery of this Agreement to the Agent, without the need of any signature by
the Agent, the Designated Issuer or any of the Banks. The failure of any of the
Agent, the Designated Issuer or any of the Banks to execute this Agreement shall
not affect the validity or enforceability hereof.
16.
<PAGE> 69
SECTION 23. No Inconsistent Requirements. The Pledgors acknowledge that
this Agreement and the other Loan Agreements may contain covenants and other
terms and provisions variously stated regarding the same or similar matters, and
agree that all such covenants, terms and provisions are cumulative and all shall
be performed and satisfied in accordance with their respective terms.
SECTION 24. Termination. Upon termination of the Commitments of the
Banks, surrender of all Letters of Credit and payment and performance in full of
all Secured Obligations (other than inchoate indemnity obligations), this
Agreement shall terminate and the Agent shall promptly redeliver to the Pledgors
any of the Pledged Collateral in the Agent's possession and shall execute and
deliver to the Pledgors such documents and instruments reasonably requested by
the Pledgors as shall be necessary to evidence termination of all security
interests given by the Pledgors to the Agent hereunder; provided, however, that
the obligations of the Pledgors under Section 13 shall survive such termination.
[Remainder of page intentionally left blank]
17.
<PAGE> 70
IN WITNESS WHEREOF, the parties hereto have duly executed this
Stock Pledge and Charge Agreement, as of the date first above written.
<TABLE>
<S> <C>
THE PLEDGORS
READ-RITE CORPORATION
By:
------------------------------------------
Title:
----------------------------------------
Address:
---------------------------------------
----------------------------------------------
----------------------------------------------
Attn:
------------------------------------------
Fax No.:
--------------------------------------
SEALED with the Common Seal of ) SUNWARD TECHNOLOGIES INC.
SUNWARD TECHNOLOGIES INC. )
in the presence of __________________ )
and SIGNED by ) By:
-------------------------------------------
Title:
- --------------- --------------- ----------------------------------------
Title: Title: Address:
Witness:________________________ --------------------------------------
Address:________________________ ----------------------------------------------
Attn:
Occupation:_____________________ -----------------------------------------
Fax No.:
--------------------------------------
AGENT:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY, as Agent
By:
------------------------------------------
Title:
----------------------------------------
</TABLE>
[Counterpart Signature Page to Stock Pledge and Charge Agreement]
<PAGE> 71
BANKS:
CIBC INC.
By:
-----------------------------------------
Title:
--------------------------------------
ABN AMRO BANK N.V.
By:
-----------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
FLEET NATIONAL BANK
By:
-----------------------------------------
Title:
--------------------------------------
KEYBANK, N.A.
By:
-----------------------------------------
Title:
--------------------------------------
THE LONG TERM CREDIT BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
MELLON BANK
By:
-----------------------------------------
Title:
--------------------------------------
[Counterpart Signature Page to Stock Pledge and Charge Agreement]
<PAGE> 72
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
THE SUMITOMO BANK LIMITED,
SAN FRANCISCO BRANCH
By:
-----------------------------------------
Title:
--------------------------------------
THE INDUSTRIAL BANK OF JAPAN LIMITED,
SAN FRANCISCO AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
BANKBOSTON, N.A.
By:
-----------------------------------------
Title:
--------------------------------------
BANQUE NATIONALE DE PARIS
By:
-----------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
[Counterpart Signature Page to Stock Pledge and Charge Agreement]
<PAGE> 73
ROYAL BANK OF CANADA
By:
-----------------------------------------
Title:
--------------------------------------
WELLS FARGO BANK, N.A.
By:
-----------------------------------------
Title:
--------------------------------------
THE DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF COMMERCE,
NEW YORK AGENCY
By:
-----------------------------------------
Title:
--------------------------------------
[Counterpart Signature Page to Stock Pledge and Charge Agreement]
<PAGE> 74
SCHEDULE 1
to the Stock Pledge and Charge Agreement
PLEDGED SHARES
Section A - Fully Pledged Interests
<TABLE>
<CAPTION>
Pledgor's Percentage of
Pledged Percentage Pledgor's
Pledgor Company Shares Certificate No. Holding Holding Pledged
------- ------- ------ --------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Read-Rite Sunward 1,000 2 100% 100%
Corporation Technologies
Inc. (Delaware)
Read-Rite Sunward 10 1 100% 100%
Corporation Technologies
California
(California)
</TABLE>
Section B - Limited Pledged Interests
<TABLE>
<CAPTION>
Pledgor's Percentage of
Pledged Percentage Pledgor's
Pledgor Company Shares Certificate No. Holding Holding Pledged
------- ------- ------ --------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Read-Rite Read-Rite 65 005 100% 65%
Corporation International
(Cayman Islands)
Read-Rite Read-Rite 1,300,000 40 100% 65%
Corporation Thailand, Ltd.
(Thailand)
Sunward Sunward 4,693,000 15 100% 65%
Technologies Inc. Technologies
International
Limited, (Hong
Kong)
</TABLE>
1.
<PAGE> 75
Section C - Restricted Pledged Interests
<TABLE>
<CAPTION>
Pledgor's Percentage of
Pledged No. of Percentage Pledgor's Holding
Pledgor Company Shares Certificate No. Shares Holding Pledged
------- ------- ------ --------------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Read-Rite Read-Rite SMI 28,327 1A 0002 1 50% plus 2 shares 100% less 1
Corporation (Japan) 1B 0001 10 share
1B 0002 10
1B 0003 10
1C 0001 100
1C 0002 100
1C 0003 100
1C 0004 100
1D 0001 1,000
1D 0002 1,000
1D 0003 1,000
1D 0004 1,000
1D 0005 1,000
1E 0001 10,000
1E 0002 10,000
2B 0001 10
2B 0002 10
2B 0003 10
2C 0001 100
2C 0002 100
2D 0001 1,000
3A 0001 1
3A 0002 1
3A 0003 1
3A 0004 1
3A 0005 1
3A 0006 1
3B 0001 10
3B 0002 10
3B 0003 10
3B 0004 10
3B 0005 10
3B 0006 10
3C 0001 100
3C 0002 100
3C 0003 100
3C 0004 100
3C 0005 100
3C 0006 100
3D 0001 1,000
</TABLE>
2.
<PAGE> 76
3.
<PAGE> 77
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated as of
__________, 1998 is made between the corporations listed on Schedule 1 hereto
(each a "Grantor" and together the "Grantors") and Canadian Imperial Bank of
Commerce, New York Agency, as agent for the Banks referred to below (in such
capacity, the "Agent").
Read-Rite Corporation (the "Borrower"), certain financial
institutions as lenders (the "Banks"), Canadian Imperial Bank of Commerce, New
York Agency, as issuer of letters of credit for the account of the Borrower (in
such capacity, the "Designated Issuer") and the Agent are parties to a Credit
Agreement dated as of October 2, 1997 (as amended, modified, renewed or extended
from time to time, the "Credit Agreement").
The Grantors other than the Borrower are subsidiaries of the
Borrower and receive substantial direct and indirect benefits from the
extensions of credit and issuance of Letters of Credit for the Borrower under
the Credit Agreement. Such Grantors (other than the Borrower) are party to that
certain Continuing Guaranty dated as of even date herewith in favor of the
Agent, the Banks, the Designated Issuer and any other Issuing Bank (as amended,
modified, renewed or extended from time to time the "Guaranty").
It is a condition precedent to the borrowings and the issuance
of Letters of Credit under the Credit Agreement that the Grantors enter into
this Agreement and grant to the Agent, for itself and for the ratable benefit of
the Issuing Bank and the Banks, the security interests hereinafter provided to
secure the obligations of the Grantors described below.
Accordingly, the parties hereto agree as follows:
SECTION 1 Definitions; Interpretation.
(a) Terms Defined in Credit Agreement. All capitalized terms used in
this Agreement (including the recitals above) and not otherwise defined herein
shall have the meanings assigned to them in the Credit Agreement.
(b) Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:
"Account Control Agreement" means any account control agreement or other
agreement with any securities intermediary granting control with respect to any
Investment Property for purposes of UCC Section 9115.
"Accounts" means any and all accounts of the Grantors, whether now
existing or hereafter acquired or arising, and in any event includes all
accounts receivable, contract rights,
<PAGE> 78
rights to payment and other obligations of any kind owed to any of the Grantors
arising out of or in connection with the sale or lease of merchandise, goods or
commodities or the rendering of services or arising from any other transaction,
however evidenced, and whether or not earned by performance, all guaranties,
indemnities and security with respect to the foregoing, and all letters of
credit relating thereto, in each case whether now existing or hereafter acquired
or arising.
"Assigned Agreements" means, to the extent assignable, the
Joint Venture Agreement dated as of June 14, 1991 between the Borrower and
Sumitomo Metal Industries, Inc., (as supplemented, amended, modified, renewed or
extended from time to time) including (i) all rights of the Borrower to receive
moneys and other payments and distributions due or to become due thereunder or
with respect thereto, (ii) all rights of the Borrower to receive proceeds of any
insurance, indemnity, warranty, letter of credit or guaranty with respect
thereto, (iii) all claims of the Borrower for damages arising out of any breach
or default thereunder or in respect thereof; and (iv) the right of the Borrower
to terminate, amend, supplement, renew or modify any such agreement, contract,
instrument or other document, to perform thereunder and to compel performance
and otherwise exercise all rights and remedies thereunder or in respect thereof.
"Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy" as in effect from time to time.
"Books" means all books, records and other written, electronic
or other documentation in whatever form maintained now or hereafter by or for
the Grantors in connection with the ownership of their respective assets or the
conduct of their respective businesses or evidencing or containing information
relating to the Collateral, including: (i) ledgers; (ii) records indicating,
summarizing, or evidencing the Grantors' assets (including Inventory and Rights
to Payment), business operations or financial condition; (iii) computer programs
and software; (iv) computer discs, tapes, files, manuals, spreadsheets; (v)
computer printouts and output of whatever kind; (vi) any other computer prepared
or electronically stored, collected or reported information and equipment of any
kind; and (vii) any and all other rights now or hereafter arising out of any
contract or agreement between any Grantor and any service bureau, computer or
data processing company or other Person charged with preparing or maintaining
any of the Grantors' books or records or with credit reporting, including with
regard to the Grantors' Accounts.
"Chattel Paper" means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.
"Collateral" has the meaning set forth in Section 2.
"Default" means any of the following:
(i) Representations and Warranties. Any representation or
warranty by any Grantor under or in connection with the Loan Agreements to which
it is a party shall prove to have been incorrect in any material respect when
made or deemed made.
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(ii) Failure by Grantors to Perform Certain Covenants. Any
Grantor shall fail to perform or observe any term, covenant or agreement
contained in subsections (a) or (b) of Section 3 or subsections (d), (e), (f),
(i), (j), (l), or (r) of Section 5 of this Agreement.
(iii) Failure by Grantors to Perform Other Covenants. Any
Grantor shall fail to perform or observe any other term, covenant or agreement
contained in this Agreement and such failure shall remain unremedied or uncured
for thirty days after the Chief Executive Officer or Chief Financial Officer,
Controller, Assistant Controller or Treasurer of any Grantor knows of such
failure (whether by notice from the Agent, the Banks, the Designated Issuer or
otherwise).
(iv) (A) Any Grantor shall commence any case, proceeding or
other action (1) under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, or (2) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or any Grantor shall make a general assignment
for the benefit of its creditors; or (B) there shall be commenced against any
Grantor any case, proceeding or other action of a nature referred to in clause
(A) above which (1) results in the entry of an order for relief or any such
adjudication or appointment or (2) remains undismissed, undischarged or unbonded
for a period of sixty (60) consecutive days; or (C) there shall be commenced
against any Grantor any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all or
any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) consecutive days from the entry thereof;
or (D) any Grantor shall take any action in furtherance of, or indicating its
consent to, approval of, or acquiescence in, any of the acts set forth in clause
(A), (B) and (C) above; or (E) any Grantor shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as they
become due; or (F) any Grantor shall cease to be Solvent.
(v) Dissolution, Etc. Any Grantor or any of its Subsidiaries
shall (i) liquidate, wind up or dissolve (or suffer any liquidation, winding-up
or dissolution), except to the extent expressly permitted by the Credit
Agreement, (ii) suspend its operations other than in the ordinary course of
business, or (iii) take any corporate action to authorize any of the actions or
events set forth above in this subsection (v).
(vi) Collateral. (A) This Agreement or any of the other
Collateral Documents, or any certificates, documents, agreements or other
instruments executed in connection herewith or therewith shall for any reason be
revoked or invalidated, or otherwise cease to be in full force and effect, or
(B) any Grantor or any other Person shall contest in any manner the validity or
enforceability thereof or deny that it has any further liability or obligation
hereunder or thereunder, or (C) there shall be a material adverse effect on the
ability of any Grantor to perform its obligations under this Agreement or the
other Collateral Documents, or there shall be a material adverse change in the
aggregate value of the Collateral or the priority of the Agent's, Issuing Bank's
or any Bank's lien therein, or (D) there shall be any levy upon, seizure or
attachment of the Collateral or any part thereof.
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(vii) Default under Credit Agreement. Any "Event of Default"
as defined in the Credit Agreement shall occur.
"Deposit Account" means any demand, time, savings, passbook or
like account now or hereafter maintained by or for the benefit of any Grantor
with a bank, savings and loan association, credit union or like organization
(including the Agent and each Bank) and all funds and amounts therein, whether
or not restricted or designated for a particular purpose.
"Documents" means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
any Grantor, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to any Grantor for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired or arising.
"Equipment" means all now existing or hereafter acquired
equipment of the Grantors in all of its forms, wherever located, and in any
event includes any and all machinery, furniture, equipment, furnishings and
fixtures in which any Grantor now or hereafter acquires any right, and all other
goods and tangible personal property (other than Inventory), including tools,
parts and supplies, automobiles, trucks, tractors and other vehicles, computer
and other electronic data processing equipment and other office equipment,
computer programs and related data processing software, and all additions,
substitutions, replacements, parts, accessories, and accessions to and for the
foregoing, now owned or hereafter acquired, and including any of the foregoing
which are or are to become fixtures on real property.
"Financing Statements" has the meaning set forth in Section 3.
"General Intangibles" means all general intangibles of the
Grantor, now existing or hereafter acquired or arising, and in any event
includes: (i) all tax and other refunds, rebates or credits of every kind and
nature to which any Grantor is now or hereafter may become entitled; (ii) all
good will, choses in action and causes of action, whether legal or equitable,
whether in contract or tort and however arising; (iii) all Intellectual Property
Collateral; (iv) all interests in limited and general partnerships and limited
liability companies; (v) all rights of stoppage in transit, replevin and
reclamation; (vi) all licenses, permits, consents, indulgences and rights of
whatever kind issued in favor of or otherwise recognized as belonging to any
Grantor by any governmental authority or regulatory body; and (vii) all
indemnity agreements, guaranties, insurance policies and other contractual,
equitable and legal rights of whatever kind or nature; in each case whether now
existing or hereafter acquired or arising.
"Instruments" means any and all negotiable instruments and
every other writing which evidences a right to the payment of money, wherever
located and whether now existing or hereafter acquired.
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"Intellectual Property Collateral" means the following
properties and assets owned or held by any Grantor or in which any Grantor
otherwise has any interest, now existing or hereafter acquired or arising:
(i) all patents and patent applications, domestic or foreign,
all licenses relating to any of the foregoing and all income and royalties with
respect to any licenses (including, without limitation, such patents, patent
applications and patent licenses as described in the Second Disclosure Letter),
all rights to sue for past, present or future infringement thereof, all rights
arising therefrom and pertaining thereto and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof;
(ii) all copyrights and applications for copyright, domestic
or foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship (including, without limitation, the
copyrights and copyright applications described in the Second Disclosure
Letter), all rights, claims and demands in any way relating to any such
copyrights or works, including royalties and rights to sue for past, present or
future infringement, and all rights of renewal and extension of copyright;
(iii) all state (including common law), federal and foreign
trademarks, service marks and trade names, and applications for registration of
such trademarks, service marks and trade names, all licenses relating to any of
the foregoing and all income and royalties with respect to any licenses
(including, without limitation, such marks, names, applications and licenses as
described in the Second Disclosure Letter), whether registered or unregistered
and wherever registered, all rights to sue for past, present or future
infringement or unconsented use thereof, all rights arising therefrom and
pertaining thereto and all reissues, extensions and renewals thereof;
(iv) all trade secrets, trade dress, trade styles, logos,
other source of business identifiers, mask-works, mask-work registrations,
mask-work applications, software, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, algorithms, formulae, databases, quality control procedures, product,
service and technical specifications, operating, production and quality control
manuals, sales literature, drawings, specifications, blue prints, descriptions,
inventions, name plates and catalogs; and
(v) the entire goodwill of or associated with the businesses
now or hereafter conducted by any Grantor connected with and symbolized by any
of the aforementioned properties and assets.
"Inventory" means any and all of the Grantors' inventory in
all of its forms, wherever located, whether now owned or hereafter acquired, and
in any event includes all goods (including goods in transit) which are held for
sale, lease or other disposition, including those held for display or
demonstration or out on lease or consignment or to be furnished under a contract
of service, or which are raw materials, work in process, finished goods or
materials used or consumed in any Grantor's business, and the resulting product
or mass, and all repossessed,
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returned, rejected, reclaimed and replevined goods, together with all parts,
components, supplies and other materials used or usable in connection with the
manufacture, production, packing, shipping, advertising, selling or furnishing
of such goods; and all other items hereafter acquired by any Grantor by way of
substitution, replacement, return, repossession or otherwise, and all additions
and accessions thereto, and any Document representing or relating to any of the
foregoing at any time.
"Investment Property" means any and all investment property of
the Grantors, including all securities, whether certificated or uncertificated,
security entitlements, securities accounts, commodity contracts and commodity
accounts, and all financial assets held in any securities account or otherwise,
wherever located, and whether now existing or hereafter acquired or arising.
"Insolvency Proceeding" with respect to any Grantor, means any
case, action or proceeding described in paragraph (iv) of the definition of
Default.
"Letter of Credit Proceeds" means any and all proceeds of
written letters of credit.
"Material Adverse Effect" with respect to any Person means, a
material adverse effect (i) on the business operations, prospects, properties,
assets or condition (financial or otherwise) of such Person and its Subsidiaries
taken as a whole, or (ii) on the ability of such Person to perform, or any of
the Banks, the Issuing Bank or the Agent to enforce, the obligations of such
Person under this Agreement or any of the other Loan Agreements.
"Proceeds" means whatever is receivable or received from or
upon the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of any
Grantor, including, without limitation, "proceeds" as defined at UCC Section
9306, any and all proceeds of any insurance, indemnity, warranty or guaranty
payable to or for the account of any Grantor from time to time with respect to
any of the Collateral, any and all payments (in any form whatsoever) made or due
and payable to any Grantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental authority or regulatory body (or any Person
acting under color of governmental authority), any and all other amounts from
time to time paid or payable under or in connection with any of the Collateral
or for or on account of any damage or injury to or conversion of any Collateral
by any Person, any and all other tangible or intangible property received upon
the sale or disposition of Collateral, and all proceeds of proceeds.
"Rights to Payment" means all Accounts and any and all rights
and claims to the payment or receipt of money or other forms of consideration of
any kind in, to and under all Chattel Paper, Documents, General Intangibles,
Instruments, Investment Property, Assigned Agreements and Proceeds.
"Secured Obligations" means the indebtedness, liabilities and
other obligations of the Grantors to the Agent, the Issuing Bank and the Banks
under or in connection with the Credit Agreement, the Notes, the Letters of
Credit, the Guaranty and the other Loan Agreements including all unpaid
principal of the Loans, all unreimbursed drawings under Letters of Credit,
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all interest accrued thereon, all fees due under the Credit Agreement,
Collateral Documents and other Loan Agreements and all other amounts payable by
the Grantors to the Agent, the Issuing Bank and the Banks thereunder or in
connection therewith. The terms "indebtedness" "liability" and "obligations" are
used in their most comprehensive sense and include any and all advances, debts,
obligations and liabilities now existing or hereafter arising (including
interest which but for the filing of a petition in any Insolvency Proceeding
against a Grantor would have accrued on such obligations, whether or not a claim
is allowed against such Grantor for such interest in any such Insolvency
Proceeding), whether voluntary or involuntary and whether due or to become due,
absolute or contingent, liquidated or unliquidated, determined or undetermined
and whether recovery upon such indebtedness, liabilities and obligations may be
or hereafter becomes unenforceable or shall be an allowed or disallowed claim
under the Bankruptcy Code or other applicable law.
"Solvent" means, as to any Person at any time, that (i) the
fair value of the property of such Person is greater than the amount of such
Person's liabilities (including disputed, contingent and unliquidated
liabilities) as such value is established and liabilities evaluated for purposes
of Section 101(31) of the Bankruptcy Code, (ii) the present fair saleable value
of the property of such Person is not less than the amount that will be required
to pay the probable liability of such Person on its debts as they become
absolute and matured, (iii) such Person is able to realize upon its property and
pay its debts and other liabilities (including disputed, contingent and
unliquidated liabilities) as they mature in the normal course of business, (iv)
such Person does not intend to, and does not believe that it will, incur debts
or liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
"UCC" means the Uniform Commercial Code as the same may, from
time to time, be in effect in the State of California; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of the security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of California, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
(c) Terms Defined in UCC. Where applicable and except as
otherwise defined herein, terms used in this Agreement shall have the meanings
assigned to them in the UCC.
(d) Interpretation. The rules of interpretation set forth in
Section 1.02 of the Credit Agreement shall be applicable to this Agreement and
are incorporated herein by this reference.
SECTION 2 Security Interest.
(a) Grant of Security Interest. As security for the payment
and performance of the Secured Obligations, each of the Grantors hereby pledges,
hypothecates and grants to the
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Agent, for itself and on behalf of and for the ratable benefit of the Issuing
Bank and the Banks, a security interest in all of such Grantor's respective
right, title and interest in, to and under the following property, wherever
located and whether now existing or owned or hereafter acquired or arising
(collectively, the "Collateral"): (i) all Accounts; (ii) all Assigned
Agreements; (iii) all Chattel Paper; (iv) all Deposit Accounts; (v) all
Documents; (vi) all Equipment; (vii) all General Intangibles; (viii) all
Instruments; (ix) all Inventory; (x) all Investment Property; (xi) all Books;
(xii) all Letter of Credit Proceeds ; and (xiii) all products and Proceeds of
any and all of the foregoing.
(b) Grantors Remains Liable. Anything herein to the contrary
notwithstanding, (i) the Grantors shall remain liable under any contracts,
agreements and other documents included in the Collateral (including all the
Assigned Agreements), to the extent set forth therein, to perform all of their
duties and obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Agent of any of the rights hereunder
shall not release any Grantor from any of its duties or obligations under such
contracts, agreements and other documents included in the Collateral, and (iii)
the Agent shall not have any obligation or liability under any contracts,
agreements and other documents included in the Collateral by reason of this
Agreement, nor shall the Agent be obligated to perform any of the obligations or
duties of the Grantors thereunder or to take any action to collect or enforce
any such contract, agreement or other document included in the Collateral
hereunder.
(c) Exceptions. Notwithstanding the foregoing provisions of
this Section 2, the grant of a security interest as provided herein shall not
extend to, and the term "Collateral" shall not include, any General Intangibles
of a Grantor (whether owned or held as licensee or lessee, or otherwise), to the
extent that (i) such General Intangibles are not assignable or capable of being
encumbered as a matter of law or under the terms of the license or lease
applicable thereto (but solely to the extent that any such restriction shall be
enforceable under applicable law against an assignee), without the consent of
the licensor or lessor thereof and (ii) such consent has not been obtained;
provided, however, that the foregoing grant of security interest shall extend
to, and the term "Collateral" shall include, (A) any General Intangible which is
an Account or a Proceed of, or otherwise related to the enforcement or
collection of, any Account, or goods which are the subject of any Account, (B)
any and all Proceeds of any General Intangibles which are otherwise excluded to
the extent that the assignment or encumbrance of such Proceeds is not so
restricted, and (C) upon obtaining the consent of any such licensor or lessor
with respect to any such otherwise excluded General Intangibles, such General
Intangibles as well as any and all Proceeds thereof that might have theretofore
have been excluded from such grant of a security interest and the term
"Collateral."
(d) Continuing Security Interest. The Grantors agree that this
Agreement shall create a continuing security interest in the Collateral which
shall remain in effect until terminated in accordance with Section 24.
(e) Pledged Stock. Nothing in this Section 2 shall be deemed
to create or require the creation of a security interest in the capital stock of
any foreign incorporated subsidiaries of the Grantors (taken together with any
security interest created by the Pledge Agreement) greater than 65% of the then
outstanding capital stock of each of such subsidiaries.
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SECTION 3 Perfection Procedures.
(a) Financing Statements. The Grantors shall execute and
deliver to the Agent concurrently with the execution of this Agreement, and at
any time and from time to time thereafter, all financing statements,
continuation financing statements, termination statements, security agreements,
chattel mortgages, assignments, filings with the Patent and Trademark Office and
Copyright Office (and their foreign equivalents if the Agent requests), fixture
filings, warehouse receipts, documents of title, affidavits, reports, notices,
schedules of account, letters of authority and all other documents and
instruments, in form satisfactory to the Agent (the "Financing Statements"), and
take all other action, as the Agent may request, to perfect and continue
perfected, maintain the priority of or provide notice of the Agent's security
interest in the Collateral and to accomplish the purposes of this Agreement.
(b) Notice of Security Interest. In accordance with Section
9302(1)(g) of the California UCC, written notice of the security interest of the
Agent, for itself and on behalf of and for the ratable benefit of the Issuing
Bank and the Banks, in each Deposit Account maintained with a Bank is hereby
given to such Bank. The Grantors agree to make joint notifications with the
Agent to any bank or financial institution holding any Deposit Account, whether
within or outside California, and otherwise take such steps as the Agent may
require to perfect or continue the perfection of the security interest created
hereby in any Deposit Account.
(c) Certain Agents. Any third person at any time and from time
to time holding all or any portion of the Collateral shall be deemed to, and
shall, hold the Collateral as the agent of, and as pledge holder for, the Agent.
At any time and from time to time, the Agent may give notice to any third person
holding all or any portion of the Collateral that such third person is holding
the Collateral as the agent of, and as pledge holder for, the Agent.
SECTION 4 Representations and Warranties. Each of the Grantors
jointly and severally represents and warrants to the Issuing Bank, each Bank and
the Agent that:
(a) Location of Chief Executive Office and Collateral. The
Grantors' chief executive offices and principal places of business are located
at the addresses set forth in the Second Disclosure Letter, all other locations
where any of the Grantors conduct business or Collateral is kept and the federal
taxpayer identification numbers of each Grantor are set forth in the Second
Disclosure Letter.
(b) Locations of Books. All locations where Books pertaining
to the Rights to Payment are kept, including all equipment necessary for
accessing such Books and the names and addresses of all service bureaus,
computer or data processing companies and other Persons keeping any Books or
collecting Rights to Payment for the Grantors, are set forth in the Second
Disclosure Letter.
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(c) Trade Names and Trade Styles. All trade names and trade
styles under which any Grantor presently conducts its business operations are
set forth in the Second Disclosure Letter, and, except as set forth in the
Second Disclosure Letter, no Grantor has, at any time in the last six years: (i)
been known as or used any other corporate, trade or fictitious name; (ii)
changed its name; (iii) been the surviving or resulting corporation in a merger
or consolidation; or (iv) acquired through asset purchase or otherwise any
business of any Person.
(d) Ownership of Collateral. Each Grantor is, and, except as
permitted by Section 5(i), will continue to be, the sole and complete owner of
the Collateral relative to it (or, in the case of after-acquired Collateral, at
the time such Grantor acquires rights in such Collateral, will be the sole and
complete owner thereof), free from any Lien other than Permitted Liens.
(e) Enforceability; Priority of Security Interest. (i) This
Agreement creates a security interest which is enforceable against the
Collateral in which the Grantors now have rights and will create a security
interest which is enforceable against the Collateral in which the Grantors
hereafter acquire rights at the time the any such Grantor acquires any such
rights; and (ii) the Agent has a perfected and first priority security interest
in the Collateral in which the Grantors now have rights, and will have a
perfected and first priority security interest in the Collateral in which the
Grantors hereafter acquire rights at the time any such Grantor acquires any such
rights, in each case securing the payment and performance of the Secured
Obligations.
(f) Other Financing Statements. Other than (i) Financing
Statements disclosed to the Agent; and (ii) Financing Statements in favor of the
Agent on behalf of the Issuing Bank and the Banks, no effective Financing
Statement naming any Grantor as debtor, assignor, grantor, mortgagor, pledgor or
the like and covering all or any part of the Collateral is on file in any filing
or recording office in any jurisdiction.
(g) Rights to Payment.
(i) The Rights to Payment represent valid, binding and
enforceable obligations of the account debtors or other Persons obligated
thereon, created in accordance with all applicable laws and represent
undisputed, bona fide transactions completed in accordance with the terms and
provisions contained in any documents related thereto, and are and will be
genuine, free from Liens, and not subject to any adverse claims, counterclaims,
setoffs, defaults, disputes, defenses, discounts, retainages, holdbacks or
conditions precedent of any kind of character, except to the extent reflected by
the Borrower's reserves for uncollectible Rights to Payment or to the extent, if
any, that such account debtors or other Persons may be entitled to normal and
ordinary course trade discounts, returns, adjustments and allowances, or as
otherwise disclosed to the Agent and the Banks in writing;
(ii) to the best of the Grantors' knowledge and belief, all
account debtors and other obligors on the Rights to Payment are Solvent and
generally paying their debts as they come due, and the Grantors have no
knowledge of any fact or circumstance which would impair the validity or
collectibility of any of the Rights to Payment;
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(iii) no Grantor has assigned any of its rights under the
Rights to Payment except as provided in this Agreement or as set forth in the
other Loan Documents; and
(iv) all statements made, all unpaid balances and all other
information in the Books and other documentation relating to the Rights to
Payment are true and correct and in all respects what they purport to be.
(h) Inventory. No Inventory is stored with any bailee,
warehouseman or similar Person or on any premises leased to a Grantor, nor has
any Inventory been consigned to any Grantor or consigned by any Grantor to any
Person or is held by any Grantor for any Person under any "bill and hold" or
other arrangement, except as set forth in the Second Disclosure Letter.
(i) Intellectual Property.
(i) The Second Disclosure Letter sets forth all material
patents, copyrights, trademarks, service marks or trade names owned or licensed
or used by the Grantors and all application or registrations pending in respect
of the same and all such rights are subsisting and have not been adjudged
invalid or unenforceable in whole or in part;
(ii) all maintenance fees required to be paid on account of
any patents have been timely paid for maintaining such patents in force, and, to
the best of the Grantors' knowledge, each of the patents listed in the Second
Disclosure Letter is valid and enforceable and the Borrower has notified the
Agent in writing of all prior art (including public uses and sales) of which it
is aware;
(iii) to the best of the Grantors' knowledge after due
inquiry, no material infringement or unauthorized use presently is being made of
any Intellectual Property Collateral by any Person;
(iv) except as set forth in the Borrower's filings with the
S.E.C. made on or after January 1, 1997, and available electronically to the
public from the S.E.C. on or prior to June 30, 1998, the Grantors own or are
licensed or otherwise have the right to use (or could obtain such ownership or
licenses or rights on terms not materially adverse to the Grantors) all
Intellectual Property Collateral, without conflict with the rights of any other
Person, except where any failure to have any such ownership, license or other
rights, or any such conflict could not reasonably be expected to have a Material
Adverse Effect.
(j) Equipment.
(i) None of the Equipment or other Collateral is affixed to
real property, except Collateral with respect to which the Grantors have
supplied the Agent with all information and documentation necessary to make all
fixture filings required to perfect and protect the priority of the Agent's
security interest in all such Collateral which may be fixtures as against all
Persons having an interest in the premises to which such property may be
affixed; and
(ii) none of the Equipment is leased from or to any Person,
except as set forth in the Second Disclosure Letter.
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(k) Deposit Accounts. The names and addresses of all financial
institutions at which the Grantors maintain their Deposit Accounts, and the
account numbers and account names of such Deposit Accounts, are set forth in the
Second Disclosure Letter.
(l) Investment Property; Instruments. All securities accounts
of the Grantors and other Investment Property of the Grantors are set forth in
the Second Disclosure Letter, and all Instruments held by the Grantors are also
set forth in the Second Disclosure Letter. No Account Control Agreements exist
with respect to any Investment Property other than any Account Control
Agreements in favor of the Agent.
SECTION 5 Covenants. So long as any of the Secured Obligations
remain unsatisfied or any Bank shall have any Commitment, each of the Grantors
agrees that:
(a) Defense of Collateral. The Grantors will appear in and
defend any action, suit or proceeding which may affect to a material extent
their respective title to, or right or interest in, or the Agent's right or
interest in, the Collateral.
(b) Preservation of Collateral. The Grantors will maintain or
cause to be maintained in good repair, working order and condition all
Collateral to the extent required by the Credit Agreement.
(c) Compliance with Insurance Policies. The Grantors will
comply with all policies of insurance, relating in a material way to the
possession, operation, maintenance and control of the Collateral.
(d) Location of Books and Chief Executive Office. The Grantors
will: (i) keep all Books pertaining to the Rights to Payment at the locations
set forth in the Second Disclosure Letter; and (ii) give at least 30 days' prior
written notice to the Agent of (A) any changes in any such location where Books
pertaining to the Rights to Payment are kept, including any change of name or
address of any service bureau, computer or data processing company or other
Person preparing or maintaining any Books or collecting Rights to Payment for
the Grantors or (B) any change in the location of any of the Grantors' chief
executive offices or principal places of business.
(e) Location of Collateral. The Grantors will keep the
Collateral in a jurisdiction in which the Agent and the Banks shall have a
perfected security interest in the Collateral and not remove the Collateral
outside such jurisdictions (other than disposals of Collateral permitted by
subsection (i) below) except (x) for transfers made upon at least 30 days' prior
written notice to the Agent to another jurisdiction within the United states or
(y) for the transfer outside the United States in the ordinary course of
business to wholly-owned Subsidiaries of equipment having an aggregate book
value not exceeding $15,000,000 over the term of the Credit Agreement.
(f) Change in Name, Identity or Structure. The Grantors will
give at least 30 days' prior written notice to the Agent of (i) any change in
any Grantor's name or its federal taxpayer identification number, (ii) any
changes in, additions to or other modifications of any Grantor's trade names and
trade styles set forth in the Second Disclosure Letter, and (iii) any
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changes in its identity or structure in any manner which might make any
Financing Statement filed hereunder incorrect or misleading.
(g) Maintenance of Records. The Grantors will keep separate,
accurate and complete Books with respect to the Collateral.
(h) Invoicing of Sales. The Grantors will invoice all of their
respective sales upon forms customary in the industry and maintain proof of
delivery and customer acceptance of goods.
(i) Disposition of Collateral. None of the Grantors will
surrender or lose possession of (other than to the Agent), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein, except to the extent permitted by the Credit Agreement; provided that
no such disposition or transfer of Investment Property or Instruments shall be
permitted while any Default exists.
(j) Expenses. The Borrower will pay all expenses of
protecting, storing, warehousing, insuring, handling and shipping the
Collateral.
(k) Leased Premises. At the Agent's request, the Borrower will
use its reasonable commercial efforts to obtain from each Person from whom the
Borrower leases any premises at which any Collateral is at any time present such
subordination, waiver, consent and estoppel agreements as the Agent may require,
in form and substance satisfactory to the Agent.
(l) Instruments, Investment Property, Etc. Upon the request of
the Agent, the Grantors will (i) immediately deliver to the Agent, or an agent
designated by it, appropriately endorsed or accompanied by appropriate
instruments of transfer or assignment, all Instruments, Documents, Chattel Paper
and certificated securities with respect to any Investment Property, all letters
of credit, and all other Rights to Payment at any time evidenced by promissory
notes, trade acceptances or other instruments, (ii) cause any securities
intermediaries to show on their books that the Agent is the entitlement holder
with respect to any Investment Property, and/or obtain Account Control
Agreements in favor of the Agent from such securities intermediaries, in form
and substance satisfactory to the Agent, with respect to any Investment
Property, as requested by Agent, (iii) mark all Documents and Chattel Paper with
such legends as the Agent shall reasonably specify, and (iv) obtain consents
from any letter of credit issuers with respect to the assignment to the Agent of
any Letter of Credit Proceeds.
(m) Deposit Accounts and Securities Accounts. The Grantors
will give the Agent prompt notice of the establishment of any new Deposit
Account and any new securities account with respect to any Investment Property.
At no time after 30 days after the Second Amendment Date shall the aggregate
amount held in Deposit Accounts or securities accounts which are not Designated
Accounts or accounts satisfying the requirements of clause (i)(B) of the
definition of "Eligible Cash Equivalents" exceed $5,000,000.
(n) Inventory. The Grantors will not store any Inventory with
a bailee, warehouseman or similar Person or on premises leased to the Grantors,
nor dispose of any Inventory on a bill-and-hold, guaranteed sale, sale and
return, sale on approval, consignment or
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similar basis, nor acquire any Inventory from any Person on any such basis,
without in each case giving the Agent prior written notice thereof.
(o) Intellectual Property Collateral. The Grantors will:
(i) not enter into any agreement (including any license or
royalty agreement) pertaining to any Intellectual Property Collateral, except
for non-exclusive licenses in the ordinary course of business, without in each
case the prior written consent of the Agent;
(ii) except to the extent that such action or inaction would
be permitted under sub-paragraph (iv) below, not allow or suffer any
Intellectual Property Collateral to become abandoned, nor any registration
thereof to be terminated, forfeited, expired or dedicated to the public;
(iii) at the same time as the Borrower is required to deliver
financial statements to the Agent under the Credit Agreement, give the Agent
notice of any registrations or applications any Grantor may make or obtain to
any new patents, copyrights or other new Intellectual Property Collateral; and
(iv) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all continuations,
continuations-in-part, applications for reissue, applications for certificate of
correction and like matters as shall be appropriate in accordance with prudent
business practice, and promptly and timely pay any and all maintenance, license,
registration and other fees, taxes and expenses incurred in connection with any
Intellectual Property Collateral.
(p) Notices, Reports and Information. The Grantors will
promptly (i) notify the Agent of any other modifications of or additions to the
information contained in the Second Disclosure Letter; (ii) notify the Agent of
any material claim made or asserted against the Collateral by any Person and of
any change in the composition of the Collateral or other event which could
materially adversely affect the value of the Collateral or the Agent's Lien
thereon; (iii) furnish to the Agent such statements and schedules further
identifying and describing the Collateral and such other reports and other
information in connection with the Collateral as the Agent may reasonably
request, all in reasonable detail; and (iv) upon request of the Agent make such
demands and requests for information and reports as the Grantors are entitled to
make in respect of the Collateral.
(q) Read-Rite International Accounts Receivable. The Borrower
will procure that there is put in place within 30 days of the date of the
Agreement and thereafter maintained a first priority perfected security interest
in favor of the Borrower in all accounts receivable of Read-Rite International
in order to secure all obligations of Read-Rite International to the Borrower.
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(r) Assigned Agreements. The Borrower will (i) furnish to the
Agent promptly upon receipt thereof copies of (A) all amendments or
modifications to the Assigned Agreements entered into by the Borrower and (B)
all material notices, requests and other documents received by the Borrower in
respect of the Assigned Agreements; (ii) perform and observe in all material
respects all terms and provisions of the Assigned Agreements to be performed or
observed by it, maintain the Assigned Agreements in full force and effect,
enforce the Assigned Agreements in accordance with their terms, and take all
such action to such end as may from time to time be reasonably requested by the
Agent; and (iii) not without the prior consent of the Agent (A) cancel or
terminate any of the Assigned Agreements or consent to or accept any
cancellation or termination thereof, (B) amend or otherwise modify in any
material respect the Assigned Agreements or give any material consent, waiver or
approval thereunder, (C) waive any material default under or breach of the
Assigned Agreements, or (D) take any other action in connection with the
Assigned Agreements that would impair the value of the interest or rights of the
Borrower thereunder or that would impair the security interest or rights of the
Agent, the Issuing Bank and the Banks.
SECTION 6 Rights to Payment.
(a) Collection of Rights to Payment. Until the Agent exercises
its rights hereunder to collect Rights to Payment, the Grantors shall endeavor
in the first instance diligently to collect all amounts due or to become due on
or with respect to the Rights to Payment. Upon and after the occurrence of any
Default, all remittances received by any Grantor shall be held in trust for the
Agent and, in accordance with the Agent's instructions, remitted to the Agent or
deposited to an account with the Agent in the form received (with any necessary
endorsements or instruments of assignment or transfer).
(b) Investment Property and Instruments. At the request of the
Agent, upon and after the occurrence of any Default, the Agent shall be entitled
to receive all distributions and payments of any nature with respect to any
Investment Property or Instruments, and all such distributions or payments
received by any Grantor shall be held in trust for the Agent and, in accordance
with the Agent's instructions, remitted to the Agent or deposited to an account
with the Agent in the form received (with any necessary endorsements or
instruments of assignment or transfer). Following the occurrence of a Default
any such distributions and payments with respect to any Investment Property held
in any securities account shall be held and retained in such securities account,
in each case as part of the Collateral hereunder. Additionally, the Agent shall
have the right, upon the occurrence of a Default, to vote and to give consents,
ratifications and waivers with respect to any Investment Property and
Instruments, and to exercise all rights of conversion, exchange, subscription or
any other rights, privileges or options pertaining thereto, as if the Agent were
the absolute owner thereof; provided that the Agent shall have no duty to
exercise any of the foregoing rights afforded to it and shall not be responsible
to the Grantors or any other Person for any failure to do so or delay in doing
so.
SECTION 7 Authorization; Agent Appointed Attorney-in-Fact. The
Agent shall have the right to, in the name of each Grantor, or in the name of
the Agent or otherwise, without notice to or assent by any Grantor, and each
Grantor hereby constitutes and appoints the Agent (and any of the Agent's
officers or employees or agents designated by the Agent) as such
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Grantor's true and lawful attorney-in-fact, with full power and authority
(subject to the proviso below) to:
(i) sign any of the Financing Statements which must be
executed or filed to perfect or continue perfected, maintain the priority of or
provide notice of the Agent's security interest in the Collateral;
(ii) take possession of and endorse any notes, acceptances,
checks, drafts, money orders or other forms of payment or security and collect
any Proceeds of any Collateral;
(iii) sign and endorse any invoice or bill of lading relating
to any of the Collateral, warehouse or storage receipts, drafts against
customers or other obligors, assignments, notices of assignment, verifications
and notices to customers or other obligors;
(iv) notify the U.S. Postal Service and other postal
authorities to change the address for delivery of mail addressed to any Grantor
to such address as the Agent may designate;
(v) receive, open and dispose of all mail addressed to any
Grantor;
(vi) send requests for verification of Rights to Payment to
the customers or other obligors of any Grantor, and establish with any Person
lockbox or similar arrangements for the payment of the Rights to Payment; and
(vii) contact, or direct any Grantor to contact, (A) all
account debtors and other obligors on the Rights to Payment and (B) any Person
maintaining lockbox or similar arrangements for the payment of Rights of
Payment, and instruct such account debtors and other Persons to make all
payments directly to the Agent;
(viii) assert, adjust, sue for, compromise or release any
claims under any policies of insurance;
(ix) exercise dominion and control over, and refuse to permit
further withdrawals from, Deposit Accounts maintained with the Agent, any Bank
or any other bank, financial institution or other Person;
(x) ask, demand, collect, receive and give acquittances and
receipts for any and all Rights to Payment, enforce payment or any other rights
in respect of the Rights to Payment and other Collateral, grant consents, agree
to any amendments, modifications or waivers of the agreements and documents
governing the Rights to Payment and other Collateral, and otherwise file any
claims, take any action or institute, defend, settle or adjust any actions,
suits or proceedings with respect to the Collateral, as the Agent may deem
necessary or desirable to maintain, preserve and protect the Collateral, to
collect the Collateral or to enforce the rights of the Agent with respect to the
Collateral;
(xi) execute any and all applications, documents, papers and
instruments necessary for the Agent to use the Intellectual Property Collateral
and grant or issue any
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exclusive or non-exclusive license or sublicense with respect to any
Intellectual Property Collateral;
(xii) execute any and all endorsements, assignments or other
documents and instruments necessary to sell, lease, assign, convey or otherwise
transfer title in or dispose of the Collateral;
(xiii) execute and deliver to any securities intermediary or
other Person any entitlement order, Account Control Agreement or other notice,
document or instrument which the Agent may deem necessary of advisable to
maintain, protect, realize upon and preserve the Investment Property and the
Agent's security interest therein; and
(xiv) execute any and all such other documents and
instruments, and do any and all acts and things for and on behalf of the
Grantors, which the Agent may deem necessary or advisable to maintain, protect,
realize upon and preserve the Collateral and the Agent's security interest
therein and, following a Default, to otherwise accomplish the purposes of this
Agreement.
The Agent agrees that, except upon and after the occurrence of a Default, it
shall not exercise the power of attorney, or any rights granted to the Agent,
pursuant to clauses (ii) through (xiii). The foregoing power of attorney is
coupled with an interest and irrevocable so long as the Banks have any
Commitments or the Secured Obligations have not been paid and performed in full.
Each Grantor hereby ratifies, to the extent permitted by law, all that the Agent
shall lawfully and in good faith do or cause to be done by virtue of and in
compliance with this Section 7.
SECTION 8 Agent Performance of Grantor Obligations. The Agent
may perform or pay any obligation which any Grantor has agreed to perform or pay
under or in connection with this Agreement, and the Grantors shall reimburse the
Agent on demand for any amounts paid by the Agent pursuant to this Section 8.
SECTION 9 Agent's Duties. Notwithstanding any provision
contained in this Agreement, the Agent shall have no duty to exercise any of the
rights, privileges or powers afforded to it and shall not be responsible to any
Grantor or the Banks or any other Person for any failure to do so or delay in
doing so. Beyond the exercise of reasonable care to assure the safe custody of
Collateral in the Agent's possession and the accounting for moneys actually
received by the Agent hereunder, the Agent shall have no duty or liability to
exercise or preserve any rights, privileges or powers pertaining to the
Collateral.
SECTION 10 Remedies.
(a) Remedies. Upon the occurrence of any Default, the Agent
shall have, in addition to all other rights and remedies granted to it in this
Agreement, the Credit Agreement or any other Loan Agreements, all rights and
remedies of a secured party under the UCC and other applicable laws. Without
limiting the generality of the foregoing, each of the Grantors agree that:
(i) The Agent may peaceably and without notice enter any
premises of any Grantor, take possession of any Collateral, remove or dispose of
all or part of the Collateral on
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any premises of any Grantor or elsewhere, or, in the case of Equipment, render
it nonfunctional, and otherwise collect, receive, appropriate and realize upon
all or any part of the Collateral, and demand, give receipt for, settle, renew,
extend, exchange, compromise, adjust, or sue for all or any part of the
Collateral, as the Agent may determine.
(ii) The Agent may require the Grantors to assemble all or any
part of the Collateral and make it available to the Agent, at any place and time
designated by the Agent.
(iii) The Agent may use or transfer any of the Grantors'
respective rights and interests in any Intellectual Property Collateral, by
license, by sublicense (to the extent permitted by an applicable license) or
otherwise, on such conditions and in such manner as the Agent may determine.
(iv) The Agent may secure the appointment of a receiver of the
Collateral or any part thereof (to the extent and in the manner provided by
applicable law).
(v) The Agent may withdraw (or cause to be withdrawn) any and
all funds from any Deposit Accounts or securities accounts.
(vi) The Agent may sell, resell, lease, use, assign, transfer
or otherwise dispose of any or all of the Collateral in its then condition or
following any commercially reasonable preparation or processing (utilizing in
connection therewith any of the Grantors' assets, without charge or liability to
the Agent therefor) at public or private sale, by one or more contracts, in one
or more parcels, at the same or different times, for cash or credit or for
future delivery without assumption of any credit risk, all as the Agent deems
advisable; provided, however, that the Grantors shall be credited with the net
proceeds of sale only when such proceeds are finally collected by the Agent. The
Agent and each of the Banks shall have the right upon any such public sale, and,
to the extent permitted by law, upon any such private sale, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption, which right or equity of redemption the Grantors hereby release, to
the extent permitted by law. The Grantors hereby agree that the sending of
notice by ordinary mail, postage prepaid, to the address and in the manner
provided for in Section 12 of the place and time of any public sale or of the
time after which any private sale or other intended disposition is to be made,
shall be deemed reasonable notice thereof if such notice is sent five days prior
to the date of such sale or other disposition or the date on or after which such
sale or other disposition may occur, provided that the Agent may provide a
Grantor shorter notice or no notice, to the extent permitted by the UCC or other
applicable law. The Grantors recognize that the Agent may be unable to make a
public sale of any or all of the Investment Property, by reason of prohibitions
contained in applicable securities laws or otherwise, and expressly agree that a
private sale to a restricted group of purchasers for investment and not with a
view to any distribution thereof shall be considered a commercially reasonable
sale.
(b) License. For the purpose of enabling the Agent to exercise
its rights and remedies under this Section 10 or otherwise in connection with
this Agreement, each of the Grantors hereby grants to the Agent an irrevocable,
non-exclusive and assignable license (exercisable without payment or royalty or
other compensation to any Grantor) to use, license or sublicense any
Intellectual Property Collateral.
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(c) Application of Proceeds. The cash proceeds actually
received from the sale or other disposition or collection of Collateral, and any
other amounts received in respect of the Collateral the application of which is
not otherwise provided for herein, shall be applied as provided in Section 8 of
the Guaranty or Section 2.02 of the Credit Agreement. Any surplus thereof which
exists after payment and performance in full of the Secured Obligations shall be
promptly paid over to the Grantors or otherwise disposed of in accordance with
the UCC or other applicable law. The Grantors shall remain liable to the Agent,
the Issuing Bank and the Banks for any deficiency which exists after any sale or
other disposition or collection of Collateral.
SECTION 11 Certain Waivers. The Grantors waive, to the fullest
extent permitted by law, (i) any right of redemption with respect to the
Collateral, whether before or after sale hereunder, and all rights, if any, of
marshalling of the Collateral or other collateral or security for the Secured
Obligations; (ii) any right to require the Agent, the Issuing Bank or the Banks
(A) to proceed against any Person, (B) to exhaust any other collateral or
security for any of the Secured Obligations, (C) to pursue any remedy in the
Agent's, the Issuing Bank's or any of the Banks' power, or (D) to make or give
any presentments, demands for performance, notices of nonperformance, protests,
notices of protests or notices of dishonor in connection with any of the
Collateral; and (iii) all claims, damages, and demands against the Agent, the
Issuing Bank or the Banks arising out of the repossession, retention, sale or
application of the proceeds of any sale of the Collateral.
SECTION 12 Notices. All notices and other communications
provided for hereunder shall, unless otherwise stated herein, be in writing
(including by facsimile) and shall be mailed, sent or delivered (i) if to the
Agent, the Issuing Bank or any Bank, at or to its address or facsimile number
provided in Section 9.02 of the Credit Agreement, and (ii) if to a Grantor, at
or to its address or facsimile number set forth below its name on the signature
page hereof, or at or to such other address or facsimile number as such party
shall have designated in a written notice to the other party. All such notices
and communications shall be effective at the time and in the manner provided for
in Section 9.02 of the Credit Agreement.
SECTION 13 No Waiver; Cumulative Remedies. No failure on the
part of the Agent, the Issuing Bank or any Bank to exercise, and no delay in
exercising, any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
remedy, power or privilege preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights and remedies
under this Agreement and the other Loan Agreements are cumulative and not
exclusive of any rights, remedies, powers and privileges that may otherwise be
available to the Agent, the Issuing Bank or any Bank.
SECTION 14 Costs and Expenses; Indemnification; Other Charges.
(a) Costs and Expenses. The Grantors jointly and severally
agrees to pay on demand:
(i) the reasonable out-of-pocket costs and expenses of the
Agent and any of its Affiliates, and the reasonable fees and disbursements of
counsel to the Agent (including allocated costs of internal counsel), in
connection with the negotiation, preparation, execution,
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delivery and administration of this Agreement, and any amendments, modifications
or waivers of the terms thereof, and the custody of the Collateral;
(ii) all title, appraisal (including the allocated costs of
internal appraisal services), survey, audit, consulting, search, recording,
filing and similar fees, costs and expenses incurred or sustained by the Agent
or any of its Affiliates in connection with this Agreement or the Collateral;
provided that, so long as no Default has occurred and is continuing, Grantors
shall not be responsible for the cost of an appraisal of any particular asset
more than once in any twelve consecutive month period: and
(iii) all costs and expenses of the Agent, its Affiliates, the
Issuing Bank and the Banks, and the fees and disbursements of counsel (including
the allocated costs of internal counsel), in connection with the enforcement or
attempted enforcement of, and preservation of any rights or interests under,
this Agreement, any out-of-court workout or other refinancing or restructuring
or in any bankruptcy case, and the protection, sale or collection of, or other
realization upon, any of the Collateral, including all expenses of taking,
collecting, holding, sorting, handling, preparing for sale, selling, or the
like, and other such expenses of sales and collections of Collateral, and any
and all losses, costs and expenses sustained by the Agent, the Issuing Bank and
any Bank as a result of any failure by any of the Grantors to perform or observe
its obligations contained herein.
(b) Indemnification. In addition, whether or not the
transactions contemplated by the Loan Agreements shall be consummated, each
Grantor hereby agrees to indemnify the Agent, the Issuing Bank, each Bank and
any officers, directors, employees or agents thereof (each an "Indemnified
Person"), against and hold each of them harmless from any and all liabilities,
obligations, losses, claims, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever, including the
reasonable fees and disbursements of counsel to an Indemnified Person (including
allocated costs of internal counsel), which may be imposed on, incurred by, or
asserted against any Indemnified Person, (i) in any way relating to or arising
out of this Agreement or any other Loan Agreement, the Secured Obligations, the
Collateral Documents or the transactions contemplated hereby or thereby, or (ii)
with respect to any investigation, litigation or other proceeding relating to
any of the foregoing, irrespective of whether the Indemnified Person shall be
designated a party thereto (the "Indemnified Liabilities"); provided that no
Grantor shall be liable to any Indemnified Person for any portion of such
Indemnified Liabilities to the extent they are found by a final decision of a
court of competent jurisdiction to have resulted from such Indemnified Person's
gross negligence or willful misconduct. If and to the extent that the foregoing
indemnification is for any reason held unenforceable, each Grantor jointly and
severally agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
(c) Defense. The Grantors shall have the option to, and at the
request of any Indemnified Person shall, direct and control the defense of the
Indemnified Person in such proceedings, employing legal counsel selected by such
Grantor and acceptable to the Indemnified Person, and pay the fees and expenses
of any legal counsel.
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(d) Interest. Any amounts payable to the Agent, the Issuing
Bank or any Bank under this Section 14 if not paid upon demand shall bear
interest from the date of such demand until paid in full, at the rate of
interest then applicable to Base Rate Loans under the Credit Agreement.
(e) Right of Set-Off. Upon (i) the occurrence and during the
continuance of any Default, each Bank and the Issuing Bank is hereby authorized
at any time and from time to time, without notice to any Grantor (any such
notice being expressly waived by the Grantors), to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Bank to or for the credit
or the account of any of the Grantors against any and all of the obligations of
the Grantors now or hereafter existing under this Agreement, irrespective of
whether or not such Bank shall have made any demand upon the Borrower or any
other Grantor under the Loan Agreements and although such obligations may be
contingent and unmatured. Each Bank shall promptly notify the Grantors (through
the Agent) after any such set-off and application made by it; provided, however,
that the failure to give such notice shall not affect the validity of such
setoff and application. The rights of the Issuing Bank and Banks under this
Section 14 are in addition to other rights and remedies (including other rights
of set-off) which the Issuing Bank and Banks may have.
(f) Other Charges. Each of the Grantors agrees to indemnify
the Agent, the Issuing Bank and each of the Banks against and hold each of them
harmless from any and all present and future stamp, transfer, documentary and
other such taxes, levies, fees, assessments and other charges made by any
jurisdiction by reason of the execution, delivery, performance and enforcement
of this Agreement.
SECTION 15 Survival. All covenants, agreements,
representations and warranties made in this Agreement shall survive the
execution and delivery of this Agreement, and shall continue in full force and
effect so long as any Bank has any Commitment or any Secured Obligations remain
unsatisfied. Notwithstanding the foregoing, the obligations of the Grantors
under Section 14 shall survive the satisfaction of the Secured Obligations and
the termination of the Commitments.
SECTION 16 Benefits of Agreements This Agreement is entered
into for the sole protection and benefit of the Agent, the Issuing Bank and each
Bank and their respective successors and assigns, and no other Person (other
than any Indemnified Person specified herein) shall be a direct or indirect
beneficiary of, or shall have any direct or indirect cause of action or claim in
connection with, this Agreement. The Agent and the Banks, by their acceptance of
this Agreement, shall not have any obligations under this Agreement to any
Person other than the Grantors, and such obligations shall be limited to those
expressly stated herein.
SECTION 17 Binding Effect; Assignment.
(a) Binding Effect. This Agreement shall be binding upon the
Grantors and their respective successors and assigns, and inure to the benefit
of and be enforceable by the Agent, the Issuing Bank and each Bank and their
respective successors, endorsees, transferees and assigns.
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(b) Assignment. The Grantors shall not have the right to
assign or transfer their respective rights and obligations hereunder without the
prior written consent of the Banks. Each Bank may, without notice to or consent
by the Grantors, sell, assign, transfer or grant participations in all or any
portion of such Bank's rights and obligations hereunder in connection with any
sale, assignment, transfer or grant of a participation by such Bank under
Section 9.06 of the Credit Agreement of or in its rights and obligations
thereunder and under the other Loan Agreements. Each Grantor agrees that in
connection with any such sale, assignment, transfer or grant by any Bank, such
Bank may deliver to the prospective participant or assignee financial statements
and other relevant information relating to the Grantors and their Subsidiaries.
In the event of any grant of a participation, the participant (i) shall be
deemed to have a right of setoff under Section 14 in respect of its
participation to the same extent as if it were such "Bank;" and (ii) shall also
be entitled to the benefits of Section 14.
SECTION 18 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT
GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE.
(a) Waiver of Jury Trial. THE AGENT, THE GRANTORS, THE ISSUING
BANK AND EACH BANK HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY
OF THE LOAN AGREEMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT
MATTER OF THE LOAN AGREEMENTS. The scope of this waiver is intended to be all
encompassing of any and all disputes that may be filed in any court and that
relate to the subject matter of this transaction, including contract claims,
tort claims, breach of duty claims, and all other common law and statutory
claims. The Agent, each Bank, the issuing Bank and the Grantors each acknowledge
that this waiver is a material inducement to enter into a business relationship,
that each has already relied on the waiver in entering into this Agreement, and
that each will continue to rely on the waiver in their related future dealings.
The Agent, each Bank, the Issuing Bank and the Grantors further warrant and
represent that each has reviewed this waiver with its legal counsel, and that
each knowingly and voluntarily waives its jury trial rights following
consultation with legal counsel. THE WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT,
THE LOAN AGREEMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING THERETO. In
the event of litigation, this Agreement may be filed as a written consent to a
trial by the court.
(b) Consent to Jurisdiction; Venue. All judicial proceedings
brought against any Grantor with respect to this Agreement and the Loan
Agreements may be brought in any state or federal court of competent
jurisdiction in the City of Los Angeles or San Francisco in the State of
California, or, to the extent that actions may be required upon this Agreement
in the courts of any foreign jurisdiction in connection with enforcement
proceedings commenced by the Agent in such foreign jurisdiction relating to any
Collateral, to the courts of any foreign jurisdiction, and by execution and
delivery of this Agreement, the Grantors accept for themselves and in connection
with their properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts, and irrevocably agree to be bound by any
judgment rendered
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thereby in connection with this Agreement. The Grantors irrevocably waive any
right they may have to assert the doctrine of forum non conveniens or to object
to venue to the extent any proceeding is brought in accordance with this
paragraph. Nothing herein shall affect the right of the Agent, the Issuing Bank
or any Bank to bring proceedings against the Grantors in courts of any
jurisdiction.
SECTION 19 Entire Agreement; Amendments and Waivers.
(a) Entire Agreement. This Agreement and the other Loan
Agreements constitute the entire agreement of the parties with respect to the
matters set forth herein and supersede any prior agreements, commitments,
drafts, communications, discussions and understandings, oral or written, with
respect thereto. There are no conditions to the full effectiveness of this
Agreement.
(b) Amendments and Waivers. Except to the extent otherwise
provided in the Credit Agreement, this Agreement may not be amended except by a
writing signed by the Grantors, the Agent, the Issuing Bank and the Majority
Banks, or the Grantors and the Agent (with the written consent of the Issuing
Bank and the Majority Banks). No waiver of any rights of the Agent, the Issuing
Bank and the Banks under any provision of this Agreement or consent to any
departure by the Grantors therefrom shall be effective unless in writing and
signed by the Agent, the Issuing Bank and the Majority Banks, or the Agent (with
the written consent of the Issuing Bank and the Majority Banks). Any such
amendment, waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION 20 Limitation on Liability. No claim shall be made by
any Grantor or their Affiliates against the Agent, the Issuing Bank or any of
the Banks or any of their respective employees, officers, directors or agents
for any special, indirect, exemplary, consequential or punitive damages in
respect of any breach or wrongful conduct (whether or not the claim therefor is
based on contract, tort or duty imposed by law), in connection with, arising out
of or in any way related to the transactions contemplated by this Agreement or
the other Loan Agreements or any act or omission or event occurring in
connection therewith; and each Grantor hereby waives, releases and agrees not to
sue upon any such claim for any such damages, whether or not accrued and whether
or not known or suspected to exist in its favor.
SECTION 21 Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only to
the extent of such prohibition or invalidity without affecting the remaining
provisions of this Agreement, as the case may be, or the validity or
effectiveness of such provision in any other jurisdiction.
SECTION 22 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute but one and the same agreement.
23
<PAGE> 100
SECTION 23 No Inconsistent Requirements. The Grantors
acknowledge that this Agreement and the other Loan Agreements may contain
covenants and other terms and provisions variously stated regarding the same or
similar matters, and agree that all such covenants, terms and provisions are
cumulative and all shall be performed and satisfied in accordance with their
respective terms.
SECTION 24 Termination. Upon the termination of the
Commitments of the Banks, the surrender of the Letters of Credit and payment and
performance in full of all Secured Obligations (except inchoate indemnity
obligations), this Agreement shall terminate and the Agent shall promptly
execute and deliver to the Grantors such documents and instruments reasonably
requested by the Grantors as shall be necessary to evidence termination of all
security interests given by the Grantors to the Agent hereunder; provided,
however, that the obligations of the Grantors under Section 14 shall survive
such termination.
24
<PAGE> 101
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
[Remainder of page intentionally left blank]
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<PAGE> 102
THE GRANTORS
READ-RITE CORPORATION
By:
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Title:
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Address:
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Attn.:
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Fax No.:
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SUNWARD TECHNOLOGIES, INC.
By:
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Title:
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Address:
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Attn.:
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Fax No.:
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SUNWARD TECHNOLOGIES, CALIFORNIA
By:
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Title:
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Address:
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Attn.:
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Fax No.:
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<PAGE> 103
THE AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE, NEW
YORK AGENCY, as Agent
By:
----------------------------------------
Title:
-------------------------------------
27
<PAGE> 104
SCHEDULE 1
to the Security Agreement
GRANTORS
Read-Rite Corporation
Sunward Technologies, Inc.
Sunward Technologies, California
S1-1.
<PAGE> 105
INTELLECTUAL PROPERTY SECURITY AGREEMENT
THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT (this
"Agreement"), dated as of __________, 1998, is made between the corporations
listed on Schedule 1 hereto (each a "Grantor" and collectively the "Grantors")
and Canadian Imperial Bank of Commerce, New York Agency as agent for the Banks
referred to below (in such capacity the "Agent").
Read-Rite Corporation (the "Borrower"), certain financial
institutions as lenders (the "Banks"), Canadian Imperial Bank of Commerce, New
York Agency, as issuer of letters of credit for the account of the Borrower (in
such capacity, the "Designated Issuer") and the Agent are parties to a Credit
Agreement dated as of October 2, 1997 (as amended, modified, renewed or extended
from time to time, the "Credit Agreement").
The Grantors, other than the Borrower, are subsidiaries of the
Borrower and receive substantial direct and indirect benefits from the
extensions of credit and issuance of Letters of Credit for the Borrower under
the Credit Agreement. Such Grantors are party to that certain Continuing
Guaranty entered in favor of the Agent, the Banks, the Designated Issuer and any
other Issuing Bank and dated as of even date herewith (as amended, modified,
renewed or extended from time to time the "Guaranty"). All the Grantors are
party to that certain Security Agreement dated of even date herewith between the
Grantors and the Agent (as such agreement as amended, modified, renewed or
extended from time to time the "Security Agreement").
It is a condition precedent to the borrowings and the issuance
of Letters of Credit under the Credit Agreement that the Grantors enter into
this Agreement and grant to the Agent, for itself and for the ratable benefit of
the Issuing Bank and the Banks, the security interests in certain of their
intellectual property rights hereinafter provided to secure the obligations of
the Grantors described below. The Grantors have agreed to execute and deliver
this Agreement to Agent for filing by Agent with the United States Patent and
Trademark Office (the "PTO") and United States Copyright Office (the "Copyright
Office") (and any other relevant recording systems in any domestic or foreign
jurisdiction) as further evidence of and to effectuate such grant of a security
interest in such intellectual property rights.
Accordingly, Grantors and Agent hereby agree as follows:
SECTION 1 Definitions; Interpretation. All capitalized terms
used in this Agreement and not otherwise defined herein shall have the meanings
assigned to them in the Security Agreement and the rules of construction set out
in the Security Agreement shall be equally applicable hereto.
SECTION 2 Grant of Security Interest.
As a continuing security for the payment and performance of
the Obligations, the Grantors hereby grant and convey a security interest in and
mortgage to Agent of all of their
<PAGE> 106
respective rights, title and interests in, to and under the following property,
whether now existing or owned or hereafter acquired, developed or arising
(collectively, the "Intellectual Property Collateral"):
(i) all intellectual property rights of any nature or
character including, without limitation, and whether domestic or foreign: (i)
all patents and patent applications, all licenses relating to any of the
foregoing and all income and royalties with respect to any licenses, all rights
to sue for past, present or future infringement thereof, all rights arising
therefrom and pertaining thereto and all reissues, divisions, continuations,
renewals, extensions and continuations-in-part thereof; (ii) all copyrights and
applications for copyright, together with the underlying works of authorship
(including titles), whether or not the underlying works of authorship have been
published and whether said copyrights are statutory or arise under the common
law, and all other rights and works of authorship, all rights, claims and
demands in any way relating to any such copyrights or works, including royalties
and rights to sue for past, present or future infringement, and all rights of
renewal and extension of copyright; (iii) all state (including common law),
federal and foreign trademarks, service marks and trade names, and applications
for registration of such trademarks, service marks and trade names, all licenses
relating to any of the foregoing and all income and royalties with respect to
any licenses, whether registered or unregistered and wherever registered, all
rights to sue for past, present or future infringement or unconsented use
thereof, all rights arising therefrom and pertaining thereto and all reissues,
extensions and renewals thereof; and (iv) all trade secrets, trade dress, trade
styles, logos, other source of business identifiers, mask-works, mask-work
registrations, mask-work applications, software, confidential information,
customer lists, license rights, advertising materials, operating manuals,
methods, processes, know-how, algorithms, formulae, databases, quality control
procedures, product, service and technical specifications, operating, production
and quality control manuals, sales literature, drawings, specifications, blue
prints, descriptions, inventions, name plates and catalogs (the foregoing rights
and interests collectively, the "Intellectual Property Rights") and including,
without limitation, those Intellectual Property Rights listed, from time to
time, on the Exhibits to this Agreement; and
(ii) the entire goodwill of or associated with the businesses
now or hereafter conducted by Grantors connected with and symbolized by any of
the aforementioned properties and assets; and
(iii) all products and proceeds at any time of any and all of
the foregoing including products of products and proceeds of proceeds.
Notwithstanding the foregoing provisions of this Section 2,
the grant of a security interest as provided herein shall not extend to, and the
term "Intellectual Property Collateral" shall not include, any General
Intangibles of a Grantor (whether owned or held as licensee or lessee, or
otherwise), to the extent that (i) such General Intangibles are not assignable
or capable of being encumbered as a matter of law or under the terms of the
license or lease applicable thereto (but solely to the extent that any such
restriction shall be enforceable under applicable law against an assignee),
without the consent of the licensor or lessor thereof and (ii) such consent has
not been obtained; provided, however, that the foregoing grant of security
interest shall extend to, and the term "Intellectual Property Collateral" shall
include, (A) any General Intangible which is an Account or a Proceed of, or
otherwise related to the enforcement or
2
<PAGE> 107
collection of, any Account, or goods which are the subject of any Account, (B)
any and all Proceeds of any General Intangibles which are otherwise excluded to
the extent that the assignment or encumbrance of such Proceeds is not so
restricted, and (C) upon obtaining the consent of any such licensor or lessor
with respect to any such otherwise excluded General Intangibles, such General
Intangibles as well as any and all Proceeds thereof that might have theretofore
have been excluded from such grant of a security interest and the term
"Intellectual Property Collateral."
SECTION 3 Further Assurances; Appointment of Agent as
Attorney-in-Fact. The Grantors at their expense shall execute and deliver, or
cause to be executed and delivered, to Agent any and all documents and
instruments, in form and substance satisfactory to Agent, and take any and all
action, which Agent may request from time to time, to perfect and continue
perfected, maintain the priority of or provide notice of Agent's security
interest in the Intellectual Property Collateral and to accomplish the purposes
of this Agreement. Agent shall have the right, in the name of the Grantors, or
in the name of Agent or otherwise, upon notice to but without the requirement of
assent by the Grantors, and the Grantors hereby constitute and appoint Agent
(and any of Agent's officers or employees or agents designated by Agent) as the
Grantors' true and lawful attorney-in-fact with full power and authority, to:
(i) sign any financing statements and documents and instruments which Agent
deems necessary or advisable to perfect or continue perfected, maintain the
priority of or provide notice of Agent's security interest in the Intellectual
Property Collateral; (ii) assert, adjust, sue for, compromise or release any
claims under any policies of insurance; and (iii) execute any and all such other
documents and instruments, and do any and all acts and things for and on behalf
of the Grantors, which Agent may deem necessary or advisable to maintain,
protect, realize upon and preserve the Intellectual Property Collateral and
Agent's security interest therein and to accomplish the purposes of this
Agreement, including (A) to defend, settle, adjust or institute any action, suit
or proceeding with respect to the Intellectual Property Collateral, (B) to
assert or retain any rights under any license agreement for any of the
Intellectual Property Collateral, including without limitation any rights of the
Grantors arising under Section 365(n) of the Bankruptcy Code, and (C) to execute
any and all applications, documents, papers and instruments for Agent to use the
Intellectual Property Collateral, to grant or issue any exclusive or
non-exclusive license or sub-license with respect to any Intellectual Property
Collateral, and to assign, convey or otherwise transfer title in or dispose of
the Intellectual Property Collateral; provided, however, that Agent agrees that,
except upon and during the continuance of a Default, it shall not exercise the
power of attorney pursuant to clauses (ii) and (iii). The power of attorney set
forth in this Section 3, being coupled with an interest, is irrevocable so long
as this Agreement shall not have terminated.
SECTION 4 Future Rights. Except as otherwise expressly agreed
to in writing by Agent, if and when any of the Grantors shall obtain rights to
any new Intellectual Property Rights, or obtain rights or benefits with respect
to any reissue, division, continuation, renewal, extension or
continuation-in-part of any Intellectual Property Rights, or any improvement of
any Intellectual Property Rights, which Intellectual Property Rights if existing
at the date hereof would be within the scope of Section 2, the provisions of
Section 2 shall automatically apply thereto. The Grantors shall give to Agent,
at the times required under Section 5 of the Security Agreement, notice of any
registrations or applications any Grantor may make or obtain to any Intellectual
Property Rights. The Grantors shall do all things deemed necessary or advisable
by Agent to ensure the validity, perfection, priority and enforceability of the
security interests of
3
<PAGE> 108
Agent in such future acquired Intellectual Property Collateral. The Grantors
hereby authorize Agent to modify, amend, or supplement the Exhibits hereto and
to reexecute this Agreement from time to time on Grantors' behalf and as their
attorney-in-fact to include any such future Intellectual Property Collateral and
to cause such reexecuted Agreement or such modified, amended or supplemented
Exhibits to be filed with the PTO and/or Copyright Office as appropriate.
SECTION 5 Agent's Duties. Notwithstanding any provision
contained in this Agreement, Agent shall have no duty to exercise any of the
rights, privileges or powers afforded to it and shall not be responsible to the
Grantors or any other Person for any failure to do so or delay in doing so.
Except for the accounting for moneys actually received by Agent hereunder or in
connection herewith, Agent shall have no duty or liability to exercise or
preserve any rights, privileges or powers pertaining to the Intellectual
Property Collateral.
SECTION 6 Agent's Rights and Remedies.
(a) Upon and during the continuation of a Default, Agent shall
have all rights and remedies available to it under this Agreement, the Security
Agreement and applicable law with respect to the security interests in any of
the Intellectual Property Collateral. Grantors agrees that such rights and
remedies include, but are not limited to, the right of Agent as a secured party
to sell or otherwise dispose of the Intellectual Property Collateral pursuant to
the UCC.
(b) The cash proceeds actually received from the sale or other
disposition or collection of Intellectual Property Collateral, and any other
amounts received in respect of the Intellectual Property Collateral the
application of which is not otherwise provided for herein, shall be applied as
provided in the Security Agreement.
SECTION 7 Security Agreement. The provisions of Sections 11
through (and including) 20 and Section 24 of the Security Agreement are
incorporated herein by reference and shall be applied as if references to the
"Collateral," and "Agreement" therein were references to the Intellectual
Property Collateral and this Agreement respectively. The Grantors acknowledge
that the rights and remedies of the Agent with respect to the security interests
in the Intellectual Property Collateral granted hereby are more fully set forth
in the Security Agreement and that such rights and remedies are cumulative.
SECTION 8 Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only to
the extent of such prohibition or invalidity without affecting the remaining
provisions of this Agreement, or the validity or effectiveness of such provision
in any other jurisdiction.
SECTION 9 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so
4
<PAGE> 109
executed shall be deemed to be an original and all of which taken together shall
constitute but one and the same agreement.
[Remainder of Page Intentionally Left Blank]
5
<PAGE> 110
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
THE GRANTORS
READ-RITE CORPORATION
By:
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Title:
-------------------------------------
Address:
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Attn.:
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Fax No.:
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SUNWARD TECHNOLOGIES, INC.
By:
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Title:
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Address:
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Attn.:
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Fax No.:
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SUNWARD TECHNOLOGIES, CALIFORNIA
By:
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Title:
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Address:
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Attn.:
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Fax No.:
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[COUNTERPART SIGNATURE PAGE TO
INTELLECTUAL PROPERTY SECURITY AGREEMENT]
<PAGE> 111
THE AGENT:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY, as Agent
By:
--------------------------------------
Title:
------------------------------------
[COUNTERPART SIGNATURE PAGE TO
INTELLECTUAL PROPERTY SECURITY AGREEMENT]
<PAGE> 112
SCHEDULE 1
to the Intellectual Property Security Agreement
GRANTORS
Read-Rite Corporation
Sunward Technologies, Inc.
Sunward Technologies, California
S1-1
<PAGE> 113
EXHIBIT A
Issued U.S. Patents of Grantors
<TABLE>
<CAPTION>
Grantor Patent No. Issue Date Inventors Title Agent
------- ---------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
</TABLE>
A-1
<PAGE> 114
EXHIBIT A
Pending Patent Applications of Grantors
<TABLE>
<CAPTION>
Grantor Application No. Filing Date Inventors Title
- ------- --------------- ----------- --------- -----
<S> <C> <C> <C> <C>
</TABLE>
A-2
<PAGE> 115
EXHIBIT B
U.S. Trademarks of Grantors
<TABLE>
<CAPTION>
Grantor Registration No. Registration Date Filing Date Registered Owner Mark
------- ---------------- ----------------- ----------- ---------------- ----
<S> <C> <C> <C> <C> <C>
</TABLE>
B-1
<PAGE> 116
EXHIBIT B
Pending U.S. Trademark Applications of Grantors
<TABLE>
<CAPTION>
Grantor Application No. Filing Date Applicant Mark
------- --------------- ----------- --------- ----
<S> <C> <C> <C> <C>
</TABLE>
B-2
<PAGE> 117
EXHIBIT C
Copyrights of Grantors
Mask-Works of Grantors
C-1
<PAGE> 118
EXHIBIT C
U.S. Copyright/Mask-Work Registrations of Grantors
<TABLE>
<CAPTION>
Grantor Copyright/Mask Work Reg. No. Date of Issue
------- ------------------- -------- -------------
<S> <C> <C> <C>
</TABLE>
C-2
<PAGE> 119
EXHIBIT C
U.S. Copyright/Mask-Works Applications of Grantors
<TABLE>
<CAPTION>
Grantor Copyright/Mask Work Application No. Date of Application
------- ------------------- --------------- -------------------
<S> <C> <C> <C>
</TABLE>
C-3
<PAGE> 120
EXHIBIT C
Copyright/Mask-Work Licenses of Grantors
<TABLE>
<CAPTION>
Grantor Copyright/Mask Work Owner Reg. No. Date of Issue
------- ------------------------- -------- -------------
<S> <C> <C> <C>
</TABLE>
C-4
<PAGE> 1
EXHIBIT 10.57
READ-RITE CORPORATION
1998 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option
Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees and Consultants,
and
- to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Read-Rite Corporation, a Delaware corporation.
<PAGE> 2
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person employed by the Company or any
Parent or Subsidiary of the Company. A Service Provider shall not cease to be an
Employee in the case of (i) any leave of absence approved by the Company or (ii)
transfers between locations of the Company or between the Company, its Parent,
any Subsidiary, or any successor. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment" by
the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant to
the Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the
<PAGE> 3
Code and the regulations promulgated thereunder.
(q) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(r) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option.
(t) "Optionee" means the holder of an outstanding Option granted
under the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1998 Nonstatutory Stock Option Plan.
(w) "Service Provider" means an Employee including an Officer,
Consultant or Director.
(x) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is two million (2,000,000) Shares. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the Board
or (ii) a Committee, which committee shall be constituted to satisfy Applicable
Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
<PAGE> 4
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted
(iii) to determine whether and to what extent Options are
granted hereunder;
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(xi) to modify or amend each Option (subject to Section 14(b)
of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or previously
granted by the Administrator;
(xiii) to determine the terms and restrictions applicable to
Options;
(xiv) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the
<PAGE> 5
date that the amount of tax to be withheld is to be determined. All elections by
an Optionee to have Shares withheld for this purpose shall be made in such form
and under such conditions as the Administrator may deem necessary or advisable;
and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers; provided,
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Officers or Directors.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect for ten (10) years, unless sooner terminated
under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
<PAGE> 6
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no
<PAGE> 7
event later than the expiration of the term of such Option as set forth in the
Option Agreement). In the absence of a specified time in the Option Agreement,
the Option shall remain exercisable for three (3) months following the
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. In the event that the Optionee ceases
to be a Service Provider as a result of the Optionee's Disability, the Optionee
may exercise his or her Option at any time within twelve (12) months from the
date of such termination, but only to the extent that the Optionee was entitled
to exercise it at the date of such termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). If,
at the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the Shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies a Service Provider, any
options held by such Optionee which are then vested or which would have
otherwise vested pursuant to such Optionee's option agreement with the Company
within twelve (12) calendar months following the date of death shall be
exercisable by the Optionee's estate or a person who acquired the right to
exercise the Option by bequest or inheritance at any time within twelve (12)
months following the date of death (but in no event later than the expiration of
the Option's specified term). To the extent that the Optionee was not entitled
to exercise an Option at the date of death pursuant to his/her option agreement
with the Company or via the acceleration provided in this Paragraph (d), or to
the extent that the Optionee's estate or a person who by bequest or inheritance
acquired the right to exercise such Option does not exercise such Option within
the time and to the extent specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Non-Transferability of Options . Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders
<PAGE> 8
of the Company, the number of shares of Common Stock covered by each outstanding
Option, and the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option, the Optionee shall fully vest in and
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (~5) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock, immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
<PAGE> 9
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of
an Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
sha1~ not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
<PAGE> 10
READ-RITE CORPORATION
1998 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, capitalized terms not otherwise defined
herein shall have the meanings assigned thereto in the Company's 1998 Stock
Plan, as amended from time to time (the "Plan").
I. NOTICE OF GRANT OF STOCK OPTION
As Optionee hereunder, you have been granted a Nonstatutory Stock Option
("NSO") to purchase Common Stock of the Company, subject to the terms and
conditions of the Plan and this Stock Option Agreement ("Agreement"), as set
forth on the Notice of Grant of Stock Options and Option Agreement to which this
Agreement is attached (the "Notice").
1. Vesting Schedule.
This Option may be exercised as follows: 100% of the Shares subject to
the Option shall cliff vest and be exercisable on October 30, 2001.
2. Termination Period.
This Option may be exercised for three (3) months after termination of
the Optionee's employment or consulting relationship with the Company. Upon the
death or Disability of the Optionee, this Option may be exercised for the period
provided in the Plan. In the event of the Optionee's change in status from
Employee to Consultant or Consultant to Employee, this Agreement shall remain in
effect. In no event shall this Option be exercised later than the
Term/Expiration Date set forth in the Notice.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice an Option to purchase the number of Shares,
as set forth in the Notice, at the exercise price per share set forth in the
Notice (the "Exercise Price"), subject to the terms and conditions of the Plan,
which is incorporated herein by reference. Subject to Section 14(b) of the Plan,
in the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Agreement, the terms and conditions of the Plan
shall prevail.
<PAGE> 11
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice and the applicable
provisions of the Plan and this Agreement. In the event of Optionee's death,
Disability or other termination of Optionee's employment or consulting
relationship, the exercisability of the Option is governed by the applicable
provisions of the Plan and this Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice (the "Exercise Notice"), which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised (the "Exercised Shares"), and such other representations and
agreements as may be required by the Company pursuant to the provisions of the
Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered
in person or by certified mail to the Secretary of the Company or to Stock
Administration. The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed
to be exercised upon receipt by the Company of such fully executed Exercise
Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with all relevant provisions
of law and the requirements of any stock exchange or quotation service upon
which the Shares are then listed. Assuming such compliance, for income tax
purposes the Exercised Shares shall be considered transferred to the Optionee on
the date the Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
<PAGE> 12
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Agreement.
6. Tax Consequences. Some of the federal and state tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
income tax and state income tax liability upon exercise of a NSO. The Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price. If
the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Agreement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This Agreement is governed by California law except for that body of
law pertaining to conflict of laws.
By your signature and the signature of the Company's
representative on the Notice, you and the Company agree that this Option is
granted under and governed by the terms and conditions of the Plan and this
Agreement. Optionee confirms that he or she has reviewed the Plan and this
Agreement in their entirety, has had an opportunity to obtain the advice of
counsel prior to executing this Agreement and fully understands all provisions
of the Plan and Agreement. Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Administrator upon
any questions relating to the Plan and Agreement. Optionee further agrees to
notify the Company upon any change in Optionee's residence address.
<PAGE> 1
EXHIBIT 10.58
SIXTH AMENDMENT TO THE
READ-RITE EMPLOYEE 401(K)
RETIREMENT SAVINGS PLAN
The Read-Rite Employee 401(k) Retirement Savings Plan (the "Plan") is amended,
effective as of July 1, 1997, as follows:
1. Section 5.6 of the Plan shall be amended in its entirety as follows:
"5.6 Forfeitures.
(a) If a Participant's Employer Matching Contribution Account
(Phase Vesting) is not 100% vested on the date the Participant terminates
employment, the portion of such subaccount which is not vested shall be
provisionally forfeited as of the employment termination date.
(b) Notwithstanding any provision in the Plan to the contrary, if
the Participant is re-employed before he or she has five (5) consecutive One
Year Breaks in Service, the number of shares and amount of cash equal to the
amount of the Participant's provisional forfeiture (unadjusted for income or
loss) shall be restored to his or her Employer contributions, in that order, but
only if the Participants repays to the Plan the amount previously distributed to
the Participant with respect to the Participant's Employee Matching Contribution
Account (Phased Vesting) within five (5) years from the date of the
Participant's re-employment date. Such a repayment by the Participant shall be
allocated to the Participant's Employer Matching Contribution Account (Phase
Vesting) and such repayment shall be fully vested and nonforfeitable.
(c) If the Plan is terminated, all rights to forfeiture
restoration shall lapse as to persons who have not resumed employment before the
Plan's termination.
(d) Provisional forfeitures shall be applied against the Empire's
Matching Contribution obligation."
IN WITNESS WHEREOF the Plan Administrative Committee hereby adopts the
Sixth Amendment to the Plan of this 27 day of June, 1997.
PLAN ADMINISTRATIVE COMMITTEE FOR
THE READ-RITE EMPLOYEE 401(k)
RETIRMENT SAVINGS PLAN
By: /s/ Lucia Brannon
---------------------------------------
Chairman, Plan Administrative Committee
<PAGE> 2
IN WITNESS WHEREOF, the undersigned , being all of the members of the
of the Read-Rite Corporation Employees 401(k) Retirement Savings Plan Committee
have executed this written consent as of the 26th day of June, 1997.
By: /s/ Lucia Brannon
---------------------------------------
Lucia Brannon
By: /s/ Sherry McVicar
---------------------------------------
Sherry McVicar
By: /s/ Rex Jackson
---------------------------------------
Rex Jackson
By: /s/ John Kurtzweil
---------------------------------------
John Kurtzweil
By: /s/ Jack Peden
---------------------------------------
Jack Peden
By: /s/ Jane Conn
---------------------------------------
Jane Conn
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 33-45085, 33-58906, 33-83760, 33-90842, 333-4064, 333-23973, and
333-52379; and Form S-3 No. 333-24183) of our report dated October 15, 1998,
with respect to the consolidated financial statements and schedule of Read-Rite
Corporation included in the Annual Report (Form 10-K) for the year ended
September 30, 1998.
/s/ ERNST & YOUNG LLP
San Jose, California
December 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 62,444
<SECURITIES> 46,038
<RECEIVABLES> 115,974
<ALLOWANCES> 5,637
<INVENTORY> 52,367
<CURRENT-ASSETS> 281,247
<PP&E> 1,250,055
<DEPRECIATION> 676,422
<TOTAL-ASSETS> 879,800
<CURRENT-LIABILITIES> 183,629
<BONDS> 388,248
0
0
<COMMON> 5
<OTHER-SE> 233,924
<TOTAL-LIABILITY-AND-EQUITY> 879,800
<SALES> 808,622
<TOTAL-REVENUES> 808,622
<CGS> 941,402
<TOTAL-COSTS> 941,402
<OTHER-EXPENSES> 220,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,648
<INCOME-PRETAX> (344,324)
<INCOME-TAX> (24,577)
<INCOME-CONTINUING> (319,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (319,747)
<EPS-PRIMARY> (6.59)
<EPS-DILUTED> (6.59)
</TABLE>
