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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER: 0-19512
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READ-RITE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2770690
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS) (ZIP CODE)
(408) 262-6700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On April 30, 1999, 49,667,313 shares of the registrant's common stock were
issued and outstanding.
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<TABLE>
<CAPTION>
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements...............................................................
Consolidated Condensed Statements of Operations -- Three Months and Six Months
Ended March 31, 1999 and 1998.................................................... 3
Consolidated Condensed Balance Sheets -- March 31, 1999 and
September 30, 1998............................................................... 4
Consolidated Condensed Statements of Cash Flows -- Six Months Ended
March 31, 1999 and 1998.......................................................... 5
Notes to Consolidated Condensed Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................................... 22
Signature.......................................................................... 22
Exhibit 27.1 -- Financial Data Schedule............................................
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 206,187 $ 187,072 $ 436,375 $ 448,443
Cost of sales 194,932 217,486 390,259 564,624
--------- --------- --------- ---------
Gross margin 11,255 (30,414) 46,116 (116,181)
Research & development 23,783 23,906 47,515 45,637
Selling, general & administrative 7,504 9,234 14,793 18,730
--------- --------- --------- ---------
Total operating expenses 31,287 33,140 62,308 64,367
--------- --------- --------- ---------
Operating loss (20,032) (63,554) (16,192) (180,548)
Interest income (expense) and other, net (6,498) (6,410) (14,914) (13,259)
--------- --------- --------- ---------
Loss before income taxes and
minority interest (26,530) (69,964) (31,106) (193,807)
Provision (benefit) for income taxes (139) 50 (91) (24,719)
Minority interest in net loss of
consolidated subsidiary (6,973) (7,843) (12,719) (15,988)
--------- --------- --------- ---------
Net loss $ (19,418) $ (62,171) $ (18,296) $(153,100)
========= ========= ========= =========
Loss per share:
Basic $ (0.39) $ (1.29) $ (0.37) $ (3.17)
Diluted $ (0.39) $ (1.29) $ (0.37) $ (3.17)
Shares used in per share computations:
Basic 49,168 48,323 49,097 48,305
Diluted 49,168 48,323 49,097 48,305
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, SEPTEMBER 30,
1999 1998(a)
----------- -------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents ....................................... $ 98,659 $ 62,444
Short-term investments .......................................... 53,266 46,038
Accounts receivable, net ........................................ 93,154 110,337
Inventories ..................................................... 65,678 52,367
Prepaid expenses and other current assets ....................... 8,779 10,061
----------- -----------
Total current assets .................................. 319,536 281,247
Property, plant and equipment ................................... 1,223,051 1,250,055
Less: Accumulated depreciation .................................. 697,068 676,422
----------- -----------
Property, plant and equipment, net ............................ 525,983 573,633
Intangible and other assets ..................................... 18,748 24,920
----------- -----------
TOTAL ASSETS .......................................... $ 864,267 $ 879,800
=========== ===========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Short-term borrowing ............................................ $ 22,602 $ 7,399
Accounts payable ................................................ 91,708 89,857
Accrued compensation and benefits ............................... 27,484 28,943
Other accrued liabilities ....................................... 37,367 42,365
Current portion of long-term debt and
capital lease obligations ..................................... 16,698 15,065
----------- -----------
Total current liabilities ............................. 195,859 183,629
Convertible subordinated notes .................................. 345,000 345,000
Other long-term debt and capital lease obligations .............. 45,071 43,248
Other long-term liabilities ..................................... 30,047 31,978
----------- -----------
Total liabilities ..................................... 615,977 603,855
----------- -----------
Minority interest in consolidated subsidiary .................... 29,297 42,016
Preferred stock, $0.0001 par value .............................. -- --
Common stock, $0.0001 par value ................................. 5 5
Additional paid-in capital ...................................... 366,576 363,176
Accumulated deficit ............................................. (146,890) (128,593)
Accumulated other comprehensive loss ............................ (698) (659)
----------- -----------
Total stockholders' equity ............................ 218,993 233,929
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARY AND
STOCKHOLDERS' EQUITY ................................. $ 864,267 $ 879,800
=========== ===========
</TABLE>
- ----------
(a) The information in this column was derived from the Company's audited
consolidated balance sheet included on Form 10-K as of September 30, 1998.
See accompanying notes to the consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .................................................... $(18,296) $(153,100)
Adjustments required to reconcile net loss to cash
provided by operations:
Depreciation and amortization ............................. 97,366 139,532
Minority interest in net loss of consolidated subsidiary .. (12,719) (15,988)
Other, net ................................................ 11 (25,420)
Changes in assets and liabilities:
Accounts receivable ....................................... 17,183 53,916
Inventories ............................................... (13,311) 30,199
Prepaid expenses and other current assets ................. 1,282 (512)
Accounts payable and accrued liabilities .................. (4,458) (24,490)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 67,058 4,137
--------- ---------
INVESTING ACTIVITIES
Capital expenditures ........................................ (48,220) (125,990)
Maturities of available-for-sale investments ................ 417,813 258,919
Purchase of available-for-sale investments .................. (425,041) (143,781)
Other assets and liabilities, net ........................... 2,546 (4,387)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ..................... (52,902) (15,239)
--------- ---------
FINANCING ACTIVITIES
Payment of other long-term debt and capital lease obligations 3,456 (5,722)
Proceeds from short-term borrowing .......................... 15,203 --
Proceeds from issuance of common stock ...................... 3,400 3,214
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ....... 22,059 (2,508)
--------- ---------
Net increase (decrease) in cash and cash equivalents ........ 36,215 (13,610)
Cash and cash equivalents at beginning of period ............ 62,444 118,589
--------- ---------
Cash and cash equivalents at end of period .................. $ 98,659 $ 104,979
========= =========
Supplemental disclosures of non-cash activities:
Issuance of common stock under 401(k) plan ................ $ -- $ 512
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") maintains a
fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to
September 30. The second quarters of fiscal 1999 and 1998 ended on March 28,
1999, and March 29, 1998, respectively. To conform to the Company's fiscal year
ends, the Company must add a fifty-third week to every sixth or seventh fiscal
year; however, both fiscal 1999 and fiscal 1998 are 52-week years. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
In the opinion of management, all adjustments (including all normal recurring
adjustments) considered necessary for a fair presentation of the interim periods
presented have been included. The six month period ended March 31, 1998,
included a special charge to cost of sales of $114.8 million, primarily for the
write-off of equipment and inventory associated with the phase-out of advanced
inductive technologies. The interim results are not necessarily indicative of
the operating results expected for the full fiscal year ending September 30,
1999. The accompanying unaudited financial statements should be read in
conjunction with the Company's audited financial statements included in its 1998
Annual Report on Form 10-K.
NOTE 2. INVENTORIES
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
Raw material .. .............. $11,187 $ 8,653
Work-in-process .............. 33,488 39,516
Finished goods ............... 21,003 4,198
------- -------
Total inventories .. $65,678 $52,367
======= =======
</TABLE>
NOTE 3. CALCULATION OF EARNINGS PER SHARE
The basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of employee stock options and incremental common shares
attributable to the assumed conversion of the Company's convertible subordinated
debentures, unless they are antidilutive.
For the period in which the Company had a net loss, the basic and diluted net
loss per share was computed using only the weighted average number of shares of
common stock outstanding during the period.
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The following table presents the calculation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
BASIC NET LOSS PER SHARE COMPUTATION
Numerator:
Net loss $ (19,418) $ (62,171) $ (18,296) $(153,100)
--------- --------- --------- ---------
Denominator:
Weighted average number of common shares
outstanding during the period 49,168 48,323 49,097 48,305
--------- --------- --------- ---------
Basic net loss per share $ (0.39) $ (1.29) $ (0.37) $ (3.17)
========= ========= ========= =========
DILUTED NET LOSS PER SHARE COMPUTATION
Numerator:
Net loss $ (19,418) $ (62,171) $ (18,296) $(153,100)
--------- --------- --------- ---------
Denominator:
Weighted average number of common shares
outstanding during the period 49,168 48,323 49,097 48,305
--------- --------- --------- ---------
Diluted net loss per share $ (0.39) $ (1.29) $ (0.37) $ (3.17)
========= ========= ========= =========
</TABLE>
For the three and six months ended March 31, 1999, 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 1,912,000 shares
and 1,778,000 shares, respectively, and assumed conversion of the Company's
convertible subordinated debentures of 8.6 million shares for the three and six
months ended March 31, 1999, were not included in the diluted earnings per share
computation because the effect would be antidilutive.
NOTE 4. CUSTOMER CONCENTRATION
The Company's three largest customers accounted for 88% of net sales during
the six month period ended March 31, 1999. Given the small number of disk drive
and tape drive manufacturers who require an independent source of recording head
supply, the Company will continue to be dependent upon a limited number of
customers. The loss of any large customer, or a significant decrease in sales
orders from one or more large customers, has had and will continue to have a
material adverse effect on the Company's business, financial condition, and
results of operations.
NOTE 5. RESTRUCTURING COSTS
During fiscal year 1998, the Company incurred restructuring costs 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. This restructuring activity was substantially complete
as of March 31, 1999.
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NOTE 6. COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of the beginning of the three
month period ending December 31, 1998. SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components, however,
it has no impact on the Company's net loss or total stockholders' equity.
The components of comprehensive income (loss), net of related tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (19,418) $ (62,171) $ (18,296) $(153,100)
Change in unrealized gain (loss) on
available-for-sale investments (32) (195) (38) (1,212)
--------- --------- --------- ---------
Comprehensive income (loss) $ (19,450) $ (62,366) $ (18,334) $(154,312)
========= ========= ========= =========
</TABLE>
Accumulated other comprehensive loss presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain on available-for-sale investments and the foreign currency translation
adjustments.
8
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NOTE 7. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 to January
22, 1996, defendants made false and misleading statements concerning the
Company's business condition and prospects. The plaintiffs in the Ferrari State
Action seek damages of an unspecified amount. By Order dated May 16, 1997, the
court sustained the demurrer of certain defendants to the entire complaint, and
sustained the demurrer of the remaining defendants to certain causes of action.
The remaining cause of action in the Ferrari State Action alleges violation of
the California Corporations Code. On July 7, 1997, the remaining defendants
answered the complaint.
On January 16, 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 complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendants made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, to June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On December 22, 1997, the Court consolidated the Ferrari Federal Action and
the Nevius Federal Action (the "Consolidated Federal Action"). On January 29,
1998, plaintiffs filed a consolidated complaint in the Consolidated Action. On
August 12, 1998, the court granted defendants' motion to dismiss the
consolidated complaint with leave to amend. On January 11, 1999, plaintiffs
filed a first amended complaint. On March 2, 1999, defendants moved to dismiss
the first amended complaint with prejudice. A hearing on that motion is
scheduled for June 7, 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 both of these actions (the Ferrari State Action and the Consolidated
Federal action), 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.
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NOTE 8. SUBSEQUENT EVENTS
On April 20, 1999, the Company drew down the entire $100 million under its
revolving line of credit.
On April 26, 1999, the Company announced it would record restructuring
charges of approximately $25 to $30 million against operating income in the
third quarter of fiscal 1999. These charges reflect steps the Company is taking
to align worldwide operations with current market conditions and to improve the
productivity of its operations and the efficiency of its development efforts.
The restructuring charge is comprised of approximately $5 million for reduction
of personnel due to consolidation of certain operations, approximately $18 to
$23 million for the write off or write down of equipment, intangibles and other
assets, and approximately $2 million for various other expenses. In connection
with the restructuring charges, the Company had a workforce reduction of
approximately 2,500 employees. All of those employees will be terminated by the
end of May 1999. The Company anticipates that the implementation of the
restructuring plan will be substantially complete by the end of June 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These statements include, but
are not limited to, the Company's expectation that the trend towards fewer heads
per hard disk drive and competitive pricing pressure will continue through
fiscal 1999; the Company's expectation that it will report a net loss for fiscal
1999; the Company's expectation that magnetoresistive ("MR") products will
account for a majority of net sales during fiscal 1999; the Company's
expectation that manufacturing cycle time will be further reduced in fiscal
1999; the Company's expectation that selling, general and administrative
expenses will not increase significantly in absolute dollars in the near-term;
the Company's plan to spend less than $120 million on capital expenditures
during Fiscal 1999, however, certain assets may be acquired through operating
leases; the Company's belief that its liquid assets, credit facilities and cash
expected to be generated from operations will be sufficient to fund its
operations for the next twelve months; the Company plans to pursue opportunities
to continue to improve the efficiency of its operations; 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 II, Item 1 "Legal Proceedings,"
have meritorious defenses in such Actions. Actual results for future periods
could differ materially from those projected in such forward-looking statements.
Some factors which could cause future actual results to materially differ
from the Company's recent results or those projected in the forward-looking
statements include, but are not limited to: failure by the Company to timely,
effectively and continuously execute on MR and Giant MR ("GMR") product
development; failure to obtain necessary customer qualifications on new
programs; failure to timely and cost-effectively introduce those programs into
manufacturing, and failure to achieve and maintain acceptable production yields
on those programs; introduction of competitors' products more quickly or cost
effectively than the Company; constraints on supplies of raw materials or
components limiting the Company's ability to maintain or increase production;
significant increases or decreases in demand for the Company's products,
cancellation or rescheduling of customer orders, changes to the Company's
product mix, and changes in business conditions affecting the Company's
financial position or results of operations which significantly increase the
Company's working capital needs; the Company's inability to obtain or generate
sufficient capital to fund its research and development expenses and other
working capital needs; the Company's ability to maintain its bank covenants; 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.
10
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RESULTS OF OPERATIONS
NET SALES
Net sales were $206.2 million and $436.4 million for the three and six month
periods ended March 31, 1999, respectively, compared to net sales of $187.1
million and $448.4 million for the comparable periods in fiscal 1998. Net sales
for the current three month period ending March 31, 1999, increased due to
higher head gimbal assembly ("HGA") unit sales and headstack assembly ("HSA")
unit sales as compared to the comparable period in fiscal 1998. The higher
volume in the current three month period was offset by significantly lower HGA
and HSA average selling prices ("ASPs").
The decrease in the Company's net sales for the first six months of fiscal
1999 compared to the comparable period in fiscal 1998 was primarily attributable
to a substantial decrease in ASPs for HGAs and HSAs. HGA and HSA pricing was
lower due to competitive pricing pressure in the disk drive industry and
components industry. This competitive pricing pressure was offset by significant
increases in HGA and HSA unit sales. Further, the number of HGAs per HSAs
decreased 14.4% in the current six month period compared to the comparable six
month period in fiscal 1998. The Company expects the trend towards fewer heads
per disk drive and competitive pricing pressure to continue through fiscal 1999.
For the six month period ended March 31, 1999, a substantial majority of the
Company's net sales were derived from MR products which is consistent with the
Company's strategy to transition its production to MR recording heads in the
prior fiscal year. Net sales generated from MR products (including Tape Head)
increased to $412.9 million for the six month period ended March 31, 1999, from
net sales of $262.0 million for the comparable period in fiscal 1998. The
Company's largest volume MR product platform for the six month period ended
March 31, 1999, consisted of recording heads for 4.3 Gigabyte ("GB") per
3.5-inch disk applications. This increase in net sales of MR products was more
than offset, however, by the decrease in net sales of inductive products. Net
sales generated from inductive products decreased to $21.2 million for the six
month period ended March 31, 1999, from net sales of $179.6 million for the
comparable period in fiscal 1998. The Company expects that MR products will
account for a majority of net sales during fiscal 1999.
Read-Rite shipped 19.3 million and 42.0 million recording heads (including
recording heads shipped in HSAs and Tape Head), and 4.3 million and 8.5 million
HSAs, for the three and six month periods ended March 31, 1999, respectively. In
fiscal 1998, the Company shipped 15.0 million and 37.4 million recording heads,
and 3.3 million and 7.4 million HSAs, for the three and six month periods ended
March 31, 1998, respectively. The Company's product mix continued to be
predominately made up of HSAs, as net sales of HSAs accounted for 79% and 78% of
total net sales for the three and six month periods ended March 31, 1999,
respectively, compared to 87% and 83% of total net sales for the comparable
periods in fiscal 1998.
The Company's three largest customers accounted for 86% and 88% of net sales
for the three and six month periods ended March 31, 1999, respectively, compared
to 92% and 86% of net sales for the comparable periods in fiscal 1998. For a
discussion of certain risks associated with the Company's business, see "Certain
Additional Business Risks."
GROSS MARGIN
The Company's gross margin is primarily influenced by average unit sales
prices, the level of unit sales in relation to fixed costs, manufacturing
yields, product mix (newer products and HGAs typically generate a higher gross
margin than older products and HSAs) and material costs. The relative impact of
each of these factors fluctuates from time to time. Periodically, the Company's
gross margin also reflects charges for inventory and fixed asset obsolescence
related to products or technologies that have reached their end of life. For
example, the Company incurred a special charge to cost of sales of $114.8
million during the three month period ended December 31, 1997, primarily for the
write-off of equipment and inventory associated with the phase-out of advanced
inductive technologies.
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HSAs typically have a lower gross margin as a percentage of sales, than HGAs.
HSAs typically consist of two or more HGAs and a variety of purchased components
which the Company assembles into a single unit. The cost of the purchased
components comprises a significant percentage of the total cost of the HSA. The
gross margin on such purchased components is substantially lower than the gross
margin on HGAs produced by the Company. The combination of the respective gross
margin on HGAs and non-HGA components and associated labor and overhead included
in HSAs typically produces a lower aggregate gross margin as a percentage of
sales, on HSA net sales compared to HGA net sales.
The Company's gross margin was 5.5% and 10.6% of net sales for the three and
six month periods ended March 31, 1999, compared to gross margin (loss) of
(16.3%) and (25.9%) of net sales, for the comparable periods in fiscal 1998. The
improvement in gross margin during the three month period ended March 31, 1999,
compared to the comparable period in fiscal year 1998, was primarily
attributable to an increase in total unit sales in relation to fixed costs, a
product mix slightly less weighted towards HSAs, and higher manufacturing
yields. The improvement in gross margin during the six month period ended March
31, 1999, in comparison to the same period in fiscal 1998 was primarily
attributable to a special charge of $114.8 million to cost of sales, for the
write-off of equipment and inventory associated with the phase-out of advanced
inductive technologies during the first quarter of fiscal 1998. Excluding this
special charge, gross margin (loss) was (0.3%) of net sales during the six month
period ending March 31, 1998. In addition, the Company's operational excellence
program and improved manufacturing yields have improved both HGA and HSA
manufacturing costs.
For the three and six month periods ended March 31, 1999, the Company has
incurred lower fixed costs as a result of the closure of manufacturing
operations in Malaysia during the latter half of calendar year 1998 and has
substantially reduced worldwide manufacturing headcount through layoffs and
attrition. In addition, the Company, through its operational excellence program,
is accelerating efforts to gain improvements in productivity, cycle times and
asset utilization in its wafer fabrication facilities and HGA and HSA
manufacturing operations. Furthermore, the Company continues to evaluate
opportunities to streamline its manufacturing operations to further reduce its
manufacturing costs. For a discussion of certain risks associated with the
Company's business, see "Certain Additional Business Risks."
OPERATING EXPENSES
Research and development ("R&D") expenses were $23.8 million and $47.5
million for the three and six month periods ended March 31, 1999, respectively,
compared to R&D expenses of $23.9 million and $45.6 million for the comparable
period in fiscal 1998. The Company continues to invest a significant portion of
its resources for development efforts in GMR and other emerging technologies to
address the disk drive industry's rapidly advancing technology requirements. In
absolute dollars, the Company has maintained its investment in R&D over the
comparable three and six month periods but expects this investment to decrease
slightly as the Company continues its cost containment efforts. From time to
time, the Company has engaged in fully or partially funded R&D for certain
existing or potential customers. R&D funding under such projects is offset as
expenses are incurred. During the three and six month periods ended March 31,
1999, approximately $2.0 million and $2.8 million, respectively, of development
funding was offset against R&D expenses. Funded R&D for the comparable periods
in fiscal 1998 were $2.4 million and $4.3 million, respectively.
Selling, general & administrative ("SG&A") expenses were $7.5 million and
$14.8 million for the three and six month periods ended March 31, 1999,
respectively, a decrease from SG&A expenses of $9.2 million and $18.7 million
for the comparable periods in fiscal 1998. The decreases in SG&A expenses for
the current periods were due to the termination of the Company's manufacturing
operations in Malaysia during the later half of fiscal 1998, the reduction in
its worldwide headcount through layoffs and attrition during fiscal 1998, and
continued cost containment efforts. The Company plans to continue its SG&A cost
containment efforts.
NON-OPERATING EXPENSES
Interest expense was $6.9 million and $14.3 million for the three and six
month periods ended March 31, 1999, respectively, a decrease over interest
expense of $7.7 million and $15.0 million for the comparable periods in fiscal
1998. The decreases in interest expense for the current periods were primarily
due to the decrease in the average long-term debt outstanding as a result of
scheduled repayments on debt, and lower interest rates in the current periods.
However, interest expense will increase in future quarters as a result of the
Company's draw down of the entire $100 million under its revolving line of
credit on April 20, 1999.
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<PAGE> 13
Interest income and other, net was $0.4 million and ($0.6 million) for the
three and six month periods ended March 31, 1999, compared to $1.3 million and
$1.7 million for the comparable periods in fiscal 1998. The decreases in
interest income and other, net for the current periods were primarily due to
foreign exchange losses, lower interest income due to lower average investment
balances, and lower interest rates on short-term investments, partially offset
by higher royalty income.
During the six month period ended March 31, 1999, the Company recorded a tax
benefit rate of 0.3%, which consisted primarily of certain foreign tax benefit
net of state franchise tax expense. The Company recorded a tax benefit rate of
12.8% for the six month period ended March 31, 1998. The decrease in the tax
benefit rate during the six month period ended March 31, 1999, was primarily due
to losses in the U.S. and foreign jurisdictions for which no current benefit is
available.
On April 26, 1999, the Company announced it would record restructuring
charges of approximately $25 to $30 million against operating income in the
third quarter of fiscal 1999. These charges reflect steps the Company is taking
to align worldwide operations with current market conditions and to improve the
productivity of its operations and the efficiency of its development efforts.
The restructuring charge is comprised of approximately $5 million for reduction
of personnel due to consolidation of certain operations, approximately $18 to
$23 million for the write off or write down of equipment, intangibles and other
assets, and approximately $2 million for various other expenses. In connection
with the restructuring charges, the Company had a workforce reduction of
approximately 2,500 employees. All of those employees will be terminated by the
end of May 1999. The Company anticipates that the implementation of the
restructuring plan will be substantially complete by the end of June 1999.
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 HGA and HSA products are
transparent to Year 2000 requirements. With respect to the Company's products,
Year 2000 capable, as used herein, means 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 table below indicates the phases of the Year 2000 Project related to the
Company's critical and priority internal systems and the expected time frames.
<TABLE>
<CAPTION>
PHASES OF THE PROJECT START DATE END DATE
--------------------- ---------- --------
<S> <C> <C> <C>
High level assessment of systems................... FY 1998 Q4 FY 98 (actual)
Detailed assessment, remediation and unit testing.. FY 1998 Q4 FY 99 (expected)
Deployment......................................... FY 1998 Q4 FY 99 (expected)
Integration testing................................ FY 1998 Q4 FY 99 (expected)
</TABLE>
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<PAGE> 14
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 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 simultaneously, and the Company intends to have its critical internal
systems Year 2000 compliant 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 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
manufacturing, engineering, facilities, finance and human resource systems are
deemed to be Year 2000 compliant as of March 31, 1999.
The costs incurred by the Company during the six month period ended March 31,
1999, related to its Year 2000 readiness program were less than $0.5 million and
cumulatively to date have been 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 current 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. The information set forth above, and elsewhere in
this quarterly report, related to Year 2000 issues constitutes a "Year 2000
Readiness Disclosure" as such term is defined by the Year 2000 Information and
Readiness Disclosure Act of 1998, enacted October 19, 1998 (Public Law 105-271,
112 Stat.2386).
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash, cash equivalents and short-term
investments of $151.9 million, total assets of $864.3 million and total
long-term debt and capital leases, including the current portion, of $406.8
million. The Company's cash generated by operating activities was $67.1 million
during the six months ended March 31, 1999, including non-cash charges of $97.4
million from depreciation and amortization. On April 26, 1999, the Company
announced it would record restructuring charges of approximately $25 to $30
million. As a result of this action, the Company expects quarterly savings of
approximately $10 to $15 million when fully implemented.
The Company's business is highly capital intensive. During the six months
ended March 31, 1999, the Company incurred capital expenditures of $48.2 million
and entered into operating leases for capital equipment of $12.5 million.
Capital expenditures have primarily been made to support production capacity in
Thailand and the Philippines, wafer production in the United States and Japan,
and new manufacturing processes and new technologies, such as GMR. The Company
currently estimates capital expenditures for fiscal 1999 to be less than $120
million. However, certain assets may be acquired through operating leases.
Further, to the extent yields for the Company's products are lower than
expected, demand for products exceeds Company expectations, or the Company's
manufacturing process requirements change significantly, such expenditures may
increase. Conversely, if demand is less than anticipated, or if the Company is
unable to obtain adequate financing for such capital equipment purchases, the
planned capital equipment purchases may decrease. As of March 31, 1999, total
commitments for construction or purchase of capital equipment were approximately
$46 million. The Company expects to fund such commitments from available cash
and cash equivalents, cash flows from operations and, if necessary, from
available credit facilities.
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 a $50 million term loan and a $100 million
revolving line of credit. As of March 31, 1999, 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. On April
20, 1999, subsequent to the quarter end, the Company drew down the entire $100
million under its revolving line of credit in order to enhance its cash
position. 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, observe a series of additional covenants, and prohibit the
Company from paying dividends without prior bank approval. The Company was in
compliance with all the covenants under the Credit Facility for the three month
period ended March 31, 1999. However, if the Company experiences a decrease in
revenues or an increase in expenses, as it did during the three month period
ended June 30, 1998, the Company could, under the terms of the Credit Facility,
be deemed in default and may need to seek waivers for any such default, or
amendments to maintain compliance with the covenants of the Credit Facility.
There can be no assurance the Company will be successful in obtaining such
waivers or amendments, if required.
In addition, in March 1999, the Company's wholly owned subsidiary, Read-Rite
(Thailand) Company Limited ("RRT"), completed a four year $10 million refinance
with Industrial Finance Corporation of Thailand ("IFCT"). The IFCT loan is
secured by certain facilities of RRT and is guaranteed by the Company. The IFCT
term loan provides for semi-annual interest and principal payments, beginning in
September 1999, with interest varying based on LIBOR plus an applicable margin.
15
<PAGE> 16
The Company believes that its current level of liquid assets, credit
facilities, and cash expected to be generated from operations will be sufficient
to fund its operations for the next twelve months. However, if industry
conditions worsen further or current industry conditions continue longer than
anticipated, the Company does not consistently achieve timely customer
qualifications on new product programs, or the Company is unsuccessful at
ramping up volume production on new products at acceptable yields, the Company's
working capital and other capital needs will increase. Conversely, if industry
demand increases significantly such that the Company's capital requirements
exceed management's current estimates, the Company may again need to raise
additional capital. The Company may seek such capital through additional bank
facilities, debt or equity offerings, or other sources. Further, the Company may
elect from time to time to seek additional financing to the extent available.
There can be no assurance, however, that any such required financing will be
available when needed on terms and conditions acceptable or favorable to the
Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The Credit Facility
currently prohibits payment of cash dividends.
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 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, during the first quarter of fiscal 1998 and the second half of fiscal
1996, the Company experienced delays and cancellation of orders, reduced average
selling prices, inventory and equipment write-offs, increased unit costs due to
under-utilization of production capacity, and as a consequence experienced a
significant reduction in net sales, gross margin, and incurred significant
losses.
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 life of a product. Accordingly, the Company
believes that the most important competitive factors in its industry are timely
delivery of new technologies and pricing for products incorporating such
technology. Other significant factors are customer support, product quality, and
the ability to reach volume production rapidly. Failure to execute with respect
to any of these factors would likely have a material adverse effect on the
Company's net sales and gross margin.
16
<PAGE> 17
Japanese competitors such as Alps, TDK, and Yamaha have been aggressively
competing for business in the United States and in Japan, targeting the GMR
marketplace in particular. The Company's primary domestic competitors are
Applied Magnetics ("AMC"), Headway Technologies, and IBM. Fujitsu, IBM, Seagate
and other disk drive manufacturers with "captive" or internal recording head
manufacturing capability generally have significantly greater financial,
technical and marketing resources than the Company, and have made or may make
their products available in the merchant market. For example, one of the
Company's largest customers, Western Digital Corporation ("WD") announced an
agreement with IBM under which IBM would supply WD with GMR heads and other
components for WD's manufacture of desktop hard disk drives, and WD presently
purchases a material percentage of its MR head requirements from IBM. The
Company's competitive position could be materially and adversely affected if one
or more of these 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 other merchant HSA
manufacturers such as AMC, Kabool, Kaifa, Tandon and TDK/SAE. 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
HGA business. Accordingly, there can be no assurance that the Company will be
able to compete successfully with its customers' own HSA capacity, or with
existing or new HSA manufacturers.
Finally, new technologies such as pico sliders and GMR heads, which the
Company has developed or is currently developing, will 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 commercial
production. Additionally, other manufacturers may already have or may develop
more advanced GMR technology or GMR production capability than the Company. For
example, Alps, IBM, TDK, and Yamaha have been expanding their manufacturing
operations to make pico sliders and GMR heads, and it is believed that certain
of these competitors have already begun to ship GMR technology product in
volume. Also, certain companies are developing alternative data storage
technologies, such as solid-state (flash or ferroelectric) memory or optical
disk drive technologies that do not utilize the Company's products. The
Company's competitive position will likely be materially and adversely affected
if a competitor precedes the Company in the successful introduction of improved
or new technologies or products.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; RISK OF REDUCED ORDERS
The Company is a component supplier dependent upon a limited number of
customers in a volatile industry characterized by rapid technological change,
short product life cycles, intense competition and steady price erosion. In
addition, demand for the Company's products is highly variable and thus
difficult to predict accurately. This variability was demonstrated 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 three month period ended June 30,
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 significantly reduce and cease the Company's manufacturing
operations in Malaysia and the write-off of excess equipment at its other
manufacturing locations.
The Company's three largest customers, Maxtor, Samsung and WD, accounted for
86% of net sales during the three month period ended March 31, 1999, during
which the Company shipped HGAs in volume for four customers, HSAs in volume for
four customers and tape head products in volume for four customers. Given the
small number of 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 the last three
quarters of fiscal 1998, late in fiscal 1996, and in the second half of fiscal
1993, as well as the reduction in orders for advanced inductive products and the
bankruptcy filing by Micropolis in the first quarter of fiscal 1998, the loss of
any large customer, or a significant decrease in orders from one or more large
customers, will have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE> 18
This dependence upon a limited number of customers, means that 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. Although the Company
has recently become a supplier to Seagate, Seagate has significant internal disk
and tape head manufacturing capacity, so there can be no assurance that the
Company will continue to be a supplier to Seagate. Vertical integration by the
Company's customers, through which a customer acquires or increases internal HGA
or HSA production capability, could also materially and adversely affect the
Company's business, financial condition and results of operations. In 1994,
Quantum, a principal customer of the Company with no previous magnetic recording
head capacity, acquired Digital Equipment Corporation's recording head and disk
drive operations. In May 1997, Quantum further announced the formation of a
joint venture with its primary manufacturing partner in Japan, MKE, to
manufacture MR recording heads for rigid disk drives. According to the
announcement, this new venture took over Quantum's existing recording head
operations and was owned 51% by MKE. In October 1998, Quantum and MKE announced
that the joint venture was dissolved, but MKE retained the slider fabrication
and HGA assembly factory. MKE is currently still operating this facility. As
such, there are no assurances MKE will not re-enter the wafer fabrication
business and become a full line manufacturer, which could impact the Company's
ability to supply HGAs to Quantum again in the future.
Finally, in 1998, WD and IBM 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
Technology changes rapidly in the Company's industry. These rapid changes
require the Company to both address obsolescence of old technologies and
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 were Read-Rite's last generation inductive products sold for the
desktop market. The Company expects continued small sales of advanced inductive
products primarily to the removable storage market for the balance of the fiscal
year.
During fiscal 1998, 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 is investing significant resources in GMR product development and
manufacturing equipment. The Company anticipates a substantial majority of its
sales for fiscal 2000 will be derived from sales of GMR products. There can be
no assurance, however, that the Company will be successful in timely and cost
effectively developing and manufacturing GMR heads at acceptable manufacturing
yields and to achieve consistent design-in wins on new product programs.
18
<PAGE> 19
SUBSTANTIAL CAPITAL EXPENDITURES AND WORKING CAPITAL NEEDS
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed
significant production capacity to support new technologies and increased demand
for its products. The Company made capital expenditures in fiscal 1998 of $186.2
million, compared to $272.8 million in fiscal 1997, and plans to spend less than
$120 million in fiscal 1999. However, certain assets may be acquired through
operating Leases. As of March 31, 1999, total commitments for construction or
purchase of capital equipment were approximately $46 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 in fiscal 1996 and
in fiscal 1998, when net sales declined quarter to quarter. Furthermore, within
this volatile industry, the Company must be ever vigilant on its capital
expenditures, especially towards duplicating equipment requirements in the
Company's wafer fabs in Fremont, California, and Osaka, Japan.
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, Thailand and the
Philippines, have experienced significant economic downturns and significant
fluctuations 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 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.
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<PAGE> 20
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 second half of fiscal 1996 and
during the first two quarters of fiscal 1998, as a result of which the Company
incurred charges for inventory obsolescence, which materially and adversely
affected the Company's operating results.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock in the past has been subject
to wide fluctuations in response to quarter to quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the disk drive and computer
industries, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's common stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to the Form 10-K for the year ended September 30, 1998.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 to January
22, 1996, defendants made false and misleading statements concerning the
Company's business condition and prospects. The plaintiffs in the Ferrari State
Action seek damages of an unspecified amount. By Order dated May 16, 1997, the
court sustained the demurrer of certain defendants to the entire complaint, and
sustained the demurrer of the remaining defendants to certain causes of action.
The remaining cause of action in the Ferrari State Action alleges violation of
the California Corporations Code. On July 7, 1997, the remaining defendants
answered the complaint.
On January 16, 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 complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendents made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, to June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On December 22, 1997, the Court consolidated the Ferrari Federal Action and
the Nevius Federal Action (the "Consolidated Federal Action"). On January 29,
1998, plaintiffs filed a consolidated complaint in the Consolidated Action. On
August 12, 1998, the court granted defendants' motion to dismiss the
consolidated complaint with leave to amend. On January 11, 1999, plaintiffs
filed a first amended complaint. On March 2, 1999, defendants moved to dismiss
the first amended complaint with prejudice. A hearing on that motion is
scheduled for June 7, 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 both of these actions (the Ferrari State Action and the Consolidated
Federal action), 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.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 11, 1999 /s/ JOHN T. KURTZWEIL
---------------------------------------------
John T. Kurtzweil
Vice President, Finance and
Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule (electronic filing only)
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AT MARCH 31, 1998, SEPTEMBER 30, 1998, AND
MARCH 31, 1999, AND CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE
MONTHS ENDED MARCH 31, 1998, SEPTEMBER 30, 1998, AND MARCH 31, 1999 AND ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998 SEP-30-1999 SEP-30-1998 SEP-30-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998 OCT-01-1998 OCT-01-1997 OCT-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998 MAR-31-1999 MAR-31-1998 SEP-30-1998
<CASH> 98,659 104,979 98,659 104,979 62,444
<SECURITIES> 53,266 64,370 53,266 64,370 46,038
<RECEIVABLES> 98,774 132,097 98,774 132,097 115,974
<ALLOWANCES> 5,620 5,634 5,620 5,634 5,637
<INVENTORY> 65,678 61,288 65,678 61,288 52,367
<CURRENT-ASSETS> 319,536 370,943 319,356 370,943 281,247
<PP&E> 1,223,051 1,217,432 1,223,051 1,217,432 1,250,055
<DEPRECIATION> 697,068 545,492 697,068 545,492 676,422
<TOTAL-ASSETS> 864,267 1,079,860 864,267 1,079,860 879,800
<CURRENT-LIABILITIES> 195,859 215,210 195,859 215,210 183,629
<BONDS> 390,071 398,558 390,071 398,558 388,248
0 0 0 0 0
0 0 0 0 0
<COMMON> 5 5 5 5 5
<OTHER-SE> 218,988 395,061 218,988 395,061 233,924
<TOTAL-LIABILITY-AND-EQUITY> 864,267 1,079,860 864,267 1,079,860 879,800
<SALES> 206,187 187,072 436,375 448,443 808,622
<TOTAL-REVENUES> 206,187 187,072 436,375 448,443 808,622
<CGS> 194,932 217,486 390,259 564,624 941,402
<TOTAL-COSTS> 194,932 217,486 390,259 564,624 941,402
<OTHER-EXPENSES> 31,287 33,140 62,308 64,367 220,130
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 6,905 7,666 14,273 14,965 29,648
<INCOME-PRETAX> (19,557) (62,121) (18,387) (177,819) (344,324)
<INCOME-TAX> (139) 50 (91) (24,719) (24,577)
<INCOME-CONTINUING> (19,418) (62,171) (18,296) (153,100) (319,747)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (19,418) (62,171) (18,296) (153,100) (319,747)
<EPS-PRIMARY> (0.39) (1.29) (0.37) (3.17) (6.59)
<EPS-DILUTED> (0.39) (1.29) (0.37) (3.17) (6.59)
</TABLE>
