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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
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[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)
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)
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.
AMENDED FILING OF FORM 10-K FOR 1998 CHANGES TO CERTAIN INFORMATION
This amendment is being filed for the sole purpose of amending certain
information under Part II of Form 10-K for 1998: Item 7 Management's Discussion
and Analysis of Financial Condition and Results of Operations Gross Margin -
Fiscal 1997 Compared to Fiscal 1996 (pp. 21), Restructuring Costs (pp. 22), and
Liquidity and Capital Resources (pp. 24); the Consolidated Statement of
Operations (pp. 29); and the Notes to the Consolidated Financial Statements (pp.
32-47). All other information in the originally filed Form 10-K was presented as
of athe December 22, 1998 filing date, or earlier as indicated, and has not been
updated in this amended filing.
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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):
<TABLE>
<CAPTION>
CUSTOMERS 1998 1997
- --------- ------------
<S> <C> <C>
Western Digital................................ 49% 51%
Maxtor......................................... 25% 13%
Samsung........................................ 15% 5%
Quantum........................................ 3% 18%
All Others..................................... 8% 13%
---- ----
100% 100%
</TABLE>
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 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
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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 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
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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 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
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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.
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
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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.
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
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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.
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.
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
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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 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
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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.
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
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<PAGE> 11
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 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.
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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 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.
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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.
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 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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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 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>
Cyril J. Yansouni................ 56 Chairman of the Board of Directors and Chief Executive 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
</TABLE>
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<TABLE>
<S> <C> <C>
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 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
15
<PAGE> 16
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 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
16
<PAGE> 17
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) 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.
17
<PAGE> 18
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
----------- --------
Fiscal year ending September 30, 1998
<S> <C> <C>
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."
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.
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<PAGE> 19
(4) Fiscal 1994 includes merger costs of $2.4 million.
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 (46.4) 9.7 0.4
taxes and minority interest................
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
------ ------ -----
Customers
<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%
---- ---- ----
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 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.
19
<PAGE> 20
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 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
20
<PAGE> 21
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 fiscal
1996 gross margin included special charges which totaled approximately $42.3
million. During the second half of fiscal 1996, the Company experienced a sudden
reduction in certain customer programs, and a rapid shift in the marketplace to
newer technology products, which forced the MIG technology programs the Company
had been producing to become obsolete. The nature of these charges were 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 at
the Company's Philippines location. In addition, during the second half of
fiscal 1996, the Company consolidated the San Diego operations of Sunward
technologies to Northern California. Excluding these charges, fiscal 1996 gross
margin was 14.7% which is more comparable to the fiscal 1997 gross margin of
20.6%. The increase in gross margin is the result of two factors. The first
factor was the overall increase in ASP's during fiscal 1997, which was primarily
driven by the introduction of new MR technology related products. The second
factor was the increase in total unit sales in relation to fixed costs, which
lead to a decrease in overall cost per unit of both inductive and MR related
products as the Company was able to more fully utilized 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.
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
21
<PAGE> 22
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 manufacturing
operations, $10.0 million for severance 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 other
expenses associated with the restructuring plan. The Company expects to make
additional cash payments of approximately $3.2 million for employee severance
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
22
<PAGE> 23
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."
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
23
<PAGE> 24
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 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, consisting primarily of the loss of $319.7 million for 1998.
Cash used in operating activities also included a reduction in accounts payable
of $32.5 million and income taxes payable of $25.7 million. The reduction in
accounts payable is primarily a result of lower materials purchase volumes with
vendors which was driven by lower net sales. In addition, cash used in operating
activities in 1998 was partially offset by a decrease of $68.4 million in our
accounts receivable balance and a decrease of $39.1 million in inventories. The
decrease in accounts receivable was primarily due to net sales decreasing 45% in
the fourth quarter of 1998 as compared to the fourth quarter of 1997. The
decrease in inventories reflected a significant reduction in unit quantity
resulting from reductions in manufacturing cycle times and decreased production
volumes. Cash used in operating activities was also offset by 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
24
<PAGE> 25
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 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.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
25
<PAGE> 26
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,
IN MILLIONS 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
-------- -------- -------- -------- ------- ---------- -------- -------------
<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 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
26
<PAGE> 27
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
Foreign currency forward exchange contracts: -------- ------------- ----------
<S> <C> <C> <C>
Philippine Peso................................. $ 9,014 43.76 $ 12
Thai Baht....................................... $ 19,073 40.30 $ 636
Japanese Yen.................................... $ 14,800 134.62 $ (18)
</TABLE>
27
<PAGE> 28
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
========== ==========
</TABLE>
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
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.
28
<PAGE> 29
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net sales ..................................... $ 808,622 $1,162,050 $991,118
Cost of sales - on net sales .................. 826,602 923,244 845,164
Cost of sales - special charges ............... 114,800 -- 42,300
---------- ---------- ---------
Gross margin .................................. (132,780) 238,806 103,654
Operating expenses:
Research and development .................... 92,265 64,995 43,221
Purchased technology ........................ -- -- 9,000
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.
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
------------ ------------ --------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
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.
30
<PAGE> 31
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.
31
<PAGE> 32
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.
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
32
<PAGE> 33
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. It is the Company's
policy to write-off inventory on hand in excess of six months forecasted sales
volumes to cover estimated exposures. Adjustments may be made to take into
account the product life cycles, which can range from 6 to 12 months, the
maturity of the product as to whether it is newly introduced or is approaching
its end of life, and the impact of competitor announcements. The Company
believes that six months is an appropriate period for sales forecasts and
inventory exposure calculations because it is difficult to accurately forecast
for a specific product beyond this time frame due to potential introduction of
products by competitors, technology obsolescence or fluctuations in demand.
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.
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
33
<PAGE> 34
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 Japanese Yen to the U.S.
dollar. The change in the functional currency was primarily made in response to
a significant decrease in sales invoices denominated in Japanese yen. The ending
foreign currency translation adjustment of $739,000 remains as a component of
retained earnings and the translated amounts for non-monetary assets and
minority interest as of September 30, 1997 became the accounting basis for those
assets for subsequent periods.
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
34
<PAGE> 35
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>
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>
<S> <C> <C>
1998 1997
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>
35
<PAGE> 36
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.
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>
36
<PAGE> 37
At September 30, 1998, the future minimum principal payments on long-term
debt and capital lease obligations were as follows (in thousands):
<TABLE>
<CAPTION>
<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.
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.
37
<PAGE> 38
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>
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.
38
<PAGE> 39
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 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.
The Company's net operating losses were primarily incurred in two tax
jurisdictions, the United States and Japan. At September 30, 1998, the Company
had a federal net operating loss carryforward of approximately $243,628,000 for
United States federal tax return purposes, expiring in the following fiscal
years (in thousands):
<TABLE>
<CAPTION>
Net Operating Loss Expiring in Fiscal Year
<S> <C>
$ 17,709 2002
12,064 2003
3,740 2004
12,313 2005
1,907 2007
13,124 2008
8,426 2009
37,325 2010
14,645 2011
19,560 2012
102,815 2018
------------------
$ 243,628
==================
</TABLE>
At September 30, 1998, the Company also had a net operating loss
carryforward of approximately $31,813,000 for Japanese income tax return
purposes, expiring in fiscal year 2003.
Based on the Company's recent history of losses in the U.S. and Japan, the
lack of carryback availability and the uncertainty of future profits in these
jurisdictions, the Company has provided a full valuation allowance against these
assets.
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
---------- --------- ----------
BASIC NET (LOSS) PER SHARE COMPUTATION
Numerator:
<S> <C> <C> <C>
Net (loss) income ....................................... $(319,747) $ 76,179 $ (42,986)
--------- --------- ---------
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
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 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.
40
<PAGE> 41
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.
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
----------------------------------------
WEIGHTED OPTIONS EXERCISABLE
------------------------
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>
41
<PAGE> 42
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
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.
42
<PAGE> 43
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. The acquired pseudo-contact planar technology
was intended to extend the life of advanced inductive recording technologies.
Additional research and development expenditures to continue the development of
the pseudo-contact planar technology in 1996 and 1997 were $5.4 million and $5.6
million, respectively. No revenues were generated from sales of products
incorporating the acquired technology as the Company abandoned the further
development of pseudo-contact planar technology in favor of magnetoresistive
("MR") technology in the second half of fiscal 1997. The allocation of the
purchase price related to technology in the development stage was approximately
$9.0 million and was expensed during fiscal 1996. 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 assets disposed of
in Malaysia included manufacturing equipment for assembly and test operations,
and related facilities and leasehold improvements. The assets disposed of in
other manufacturing locations primarily relate to manufacturing equipment for
slider fabrication, assembly and test processes that were considered to be
excess or obsolete. The fair value of the assets was determined based upon
salvage value, as no further uses were identified.
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 for terminated employees, and $6.5
million for other expenses associated with the restructuring plan. Approximately
4,300 employees were terminated, of which approximately 4,100 were engaged in
manufacturing activities in Malaysia.
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 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.
The following table summarizes the Company's restructuring activity for the
year ended September 30, 1998:
<TABLE>
<CAPTION>
FACILITIES
AND OTHER
EQUIPMENT GOODWILL SEVERANCE EXPENSES TOTAL
<S> <C> <C> <C> <C> <C>
Restructuring Charge.................... $ 69,955 $ 7,250 $ 9,960 $ 6,563 $ 93,728
Write-offs and write-downs.............. (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>
43
<PAGE> 44
NOTE 11. SPECIAL CHARGES
During November 1997, the Company was informed by its customers that
primarily all of its inductive head programs were to be terminated. As a result,
approximately $59.4 million of inventories, which were being built by the
Company in anticipation of customer orders, immediately became obsolete. The
Company responded to the industry's rapid shift to magnetoresistive ("MR")
technology, by deciding to accelerate its existing MR transition strategy and to
significantly reduce its production of advanced inductive products. As a result,
the Company incurred, during the first quarter of fiscal 1998, a special charge
to cost of sales of approximately $114.8 million, primarily for the write-off of
equipment ($54.9 million) and inventory ($59.4 million) associated with the
phase-out of advanced inductive technologies. The equipment disposed of
primarily related to inductive wafer fabrication, test, and assembly equipment
that was considered to be obsolete. The fair value of the assets was determined
base upon salvage value, as no further uses were identified.
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 $6.0 million 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 $9.0
million related to the purchase of in-process research and development.
In response to sudden reductions in certain customer programs 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 $37.0 million 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. The asset disposed of
primarily related to manufacturing for assembly and test processes that were
considered to be excess or obsolete. The fair value of the assets was determined
based upon salvage value, as no further uses were identified.
The following table summarizes the Company's Special Charges activity for
the year ended September 30, 1996:
<TABLE>
<CAPTION>
WRITE-OFF
1996 SPECIAL CHARGES OF
FACILITIES WRITE-OFF
AND OF OTHER
EQUIPMENT INVENTORY SEVERANCE EXPENSES TOTAL
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Consolidation of San Diego Operations... $ 1,100 $ -- $ 4,900 $ -- $ 6,000
Obsolescence of MIG technology.......... 24,100 7,000 5,200 700 37,000
--------- -------- --------- -------- ---------
Total................................... $ 25,200 $ 7,000 $ 10,100 $ 700 $ 43,000
======== ======== ======== ======== =========
</TABLE>
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.
44
<PAGE> 45
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 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.
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>
45
<PAGE> 46
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
----------- ----------- ------------ -----------
YEAR ENDED SEPTEMBER 30, 1998
<S> <C> <C> <C> <C>
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.
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
--------- --------- --------- ---------
1998(1)(2)
<S> <C> <C> <C> <C>
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>
46
<PAGE> 47
(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.
47
<PAGE> 48
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
48
<PAGE> 49
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.
49
<PAGE> 50
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
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
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(23)* 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.
50
<PAGE> 51
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
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(23)* 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.
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(23) 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
51
<PAGE> 52
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
October 2, 1997
10.57(23)* 1998 Stock Plan and form of Stock Option Agreement
10.58(23)* 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(23) Financial Data Schedule
- ----------
* 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.
(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.
52
<PAGE> 53
(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.
53
<PAGE> 54
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 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Milpitas, State of California, on this 29th day of
September, 1999.
Read-Rite Corporation
By: /s/ JOHN T. KURTZWEIL
------------------------------------
John T. Kurtzweil,
Senior Vice President, Finance and
Chief Financial Officer
54
<PAGE> 55
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
---------- ----------- ------------ ------------- ----------
September 30, 1998
<S> <C> <C> <C> <C> <C>
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.
55
<PAGE> 56
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
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(23)* 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
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
56
<PAGE> 57
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
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(23)* 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.
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(23) 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(23)* 1998 Stock Plan and form of Stock Option Agreement
10.58(23)* 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(23) Financial Data Schedule
- ----------
* 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.
57
<PAGE> 58
(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.
(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
58
<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, 333-52379,
and 333-74645; 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/A) for the year ended
September 30, 1998.
/s/ ERNST & YOUNG LLP
San Jose, California
September 23, 1999
