<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-19512
---------------
READ-RITE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2770690
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS) (ZIP CODE)
(408) 262-6700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On July 14, 1999, 49,675,744 shares of the registrant's common stock were
issued and outstanding.
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements...............................................................
Consolidated Condensed Statements of Operations -- Three Months and Nine Months
Ended June 30, 1999 and 1998..................................................... 3
Consolidated Condensed Balance Sheets -- June 30, 1999 and
September 30, 1998............................................................... 4
Consolidated Condensed Statements of Cash Flows -- Nine Months Ended
June 30, 1999 and 1998........................................................... 5
Notes to Consolidated Condensed Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................................... 23
Signature.......................................................................... 23
Exhibit 27.1 -- Financial Data Schedule............................................
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 174,766 $ 184,247 $ 611,141 $ 632,690
Cost of sales - on net sales 193,421 198,996 583,680 648,820
Cost of sales - special charges 0 0 0 114,800
--------- --------- --------- ---------
Gross margin (18,655) (14,749) 27,461 (130,930)
Research & development 24,677 23,353 72,192 68,990
Selling, general & administrative 7,045 8,556 21,838 27,286
Restructuring cost 37,685 93,728 37,685 93,728
--------- --------- --------- ---------
Total operating expenses 69,407 125,637 131,715 190,004
--------- --------- --------- ---------
Operating loss (88,062) (140,386) (104,254) (320,934)
Interest expense 7,989 7,301 22,262 22,266
Interest income and other, net 2,084 2,795 1,443 4,501
--------- --------- --------- ---------
Loss before income taxes and
minority interest (93,967) (144,892) (125,073) (338,699)
Provision (benefit) for income taxes . (25,879) 74 (25,970) (24,645)
Minority interest in net loss of
consolidated subsidiary (10,793) (7,816) (23,512) (23,804)
--------- --------- --------- ---------
Net loss ($ 57,295) ($137,150) ($ 75,591) ($290,250)
========= ========= ========= =========
Loss per share:
Basic ($ 1.16) ($ 2.82) ($ 1.53) ($ 5.99)
Diluted ($ 1.16) ($ 2.82) ($ 1.53) ($ 5.99)
Shares used in per share computations:
Basic 49,540 48,702 49,245 48,437
Diluted 49,540 48,702 49,245 48,437
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
3
<PAGE> 4
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, SEPTEMBER 30,
1999 1998(a)
--------- --------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................. $ 113,028 $ 62,444
Short-term investments.................................... 111,396 46,038
Accounts receivable, net.................................. 79,898 110,337
Inventories............................................... 42,114 52,367
Prepaid expenses and other current assets................. 8,218 10,061
--------- --------
Total current assets............................ 354,654 281,247
Property, plant and equipment............................. 1,222,186 1,250,055
Less: Accumulated depreciation............................ 743,298 676,422
--------- --------
Property, plant and equipment, net...................... 478,888 573,633
Other assets.............................................. 18,510 24,920
--------- --------
TOTAL ASSETS.................................... $ 852,052 $879,800
========= ========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Short-term borrowing...................................... $ -- $ 7,399
Accounts payable.......................................... 89,271 89,857
Accrued compensation and benefits......................... 30,481 28,943
Other accrued liabilities................................. 44,862 42,365
Current portion of long-term debt and capital lease
obligations............................................... 19,477 15,065
--------- --------
Total current liabilities....................... 184,091 183,629
Convertible subordinated notes............................ 345,000 345,000
Other long-term debt and capital lease obligations........ 105,856 43,248
Other long-term liabilities............................... 5,863 31,978
--------- --------
Total liabilities............................... 640,810 603,855
--------- --------
Minority interest in consolidated subsidiary.............. 46,836 42,016
Preferred stock, $0.0001 par value........................ -- --
Common stock, $0.0001 par value........................... 5 5
Additional paid-in capital................................ 369,245 363,176
Accumulated deficit....................................... (204,184) (128,593)
Accumulated other comprehensive loss...................... (660) (659)
--------- --------
Total stockholders' equity...................... 164,406 233,929
--------- --------
TOTAL LIABILITIES, MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARY AND STOCKHOLDERS'
EQUITY......................................... $ 852,052 $879,800
========= ========
</TABLE>
- ----------
(a) The information in this column was derived from the Company's audited
consolidated balance sheet included on Form 10-K as of September 30, 1998.
See accompanying notes to the consolidated condensed financial statements.
4
<PAGE> 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------
1999 1998
OPERATING ACTIVITIES
<S> <C> <C>
Net loss ................................................. $ (75,591) $ (290,250)
Adjustments required to reconcile net loss to
cash provided by operations:
Depreciation and amortization .......................... 141,800 187,361
Non-cash portion of restructuring costs ................ 29,732 77,205
Minority interest in net loss of consolidated subsidiary (23,512) (23,804)
Other, net ............................................. -- 2,804
Changes in assets and liabilities:
Accounts receivable .................................... 30,439 89,178
Inventories ............................................ 10,253 31,618
Prepaid expenses and other current assets .............. 1,843 2,385
Accounts payable, accrued liabilities and income taxes
payable (20,735) (64,753)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .... 94,229 (11,744)
----------- -----------
INVESTING ACTIVITIES
Capital expenditures ..................................... (74,469) (156,216)
Maturities of available-for-sale investments ............. 1,480,554 418,426
Purchase of available-for-sale investments ............... (1,545,912) (319,913)
Other assets and liabilities, net ........................ 2,160 (2,901)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .................. (137,667) (60,604)
----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt and capital
lease obligations ....................................... 22,000 --
Payments under long-term debt and capital lease
obligations ............................................. (9,980) (6,843)
Proceeds from borrowings under line of credit ............ 100,000 --
Payment under line of credit ............................. (45,000) --
Proceeds from short-term borrowings ...................... 20,933 --
Proceeds from issuance of common stock ................... 6,069 5,789
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .... 94,022 (1,054)
----------- -----------
Net increase (decrease) in cash and cash equivalents ..... 50,584 (49,914)
Cash and cash equivalents at beginning of period ......... 62,444 118,589
----------- -----------
Cash and cash equivalents at end of period ............... $ 113,028 $ 68,675
=========== ===========
Supplemental disclosures of non-cash activities:
Conversion of long-term debt to minority
interest in subsidiary ................................ $ 28,332 $ --
Issuance of common stock under 401(k) plan ............. $ 792 $ 2,579
Supplemental disclosures of cash flow information:
Interest paid during the period ........................ $ 16,657 $ 15,649
Income taxes paid (refunded) during the period ......... $ (324) $ 200
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") maintains a
fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to
September 30. The third quarters of fiscal 1999 and 1998 ended on June 27, 1999,
and June 28, 1998, respectively. To conform to the Company's fiscal year ends,
the Company must add a fifty-third week to every sixth or seventh fiscal year;
however, both fiscal 1999 and fiscal 1998 are 52-week years. For convenience,
the accompanying financial statements have been shown as ending on the last day
of the calendar month.
In the opinion of management, all adjustments (including all normal recurring
adjustments) considered necessary for a fair presentation of the interim periods
presented have been included. The interim results are not necessarily indicative
of the operating results expected for the full fiscal year ending September 30,
1999. The accompanying unaudited financial statements should be read in
conjunction with the Company's audited financial statements included in its 1998
Annual Report on Form 10-K.
NOTE 2. INVENTORIES
Inventories are stated at the lower of standard cost or market. Cost is
computed on a currently adjusted standard basis, which approximates actual cost
on a first-in, first-out method. 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.
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
------- -----------
<S> <C> <C>
Raw material .............. $ 6,844 $ 8,653
Work-in-process ........... 20,379 39,516
Finished goods ............ 14,891 4,198
------- -------
Total inventories $42,114 $52,367
======= =======
</TABLE>
NOTE 3. CALCULATION OF EARNINGS (LOSS) PER SHARE
The basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of employee stock options and incremental common shares
attributable to the assumed conversion of the Company's convertible subordinated
debentures, unless they are antidilutive.
For periods in which the Company had a net loss, the basic and diluted net
loss per share was computed using only the weighted average number of shares of
common stock outstanding during the period.
6
<PAGE> 7
The following table presents the calculation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
BASIC NET LOSS PER SHARE COMPUTATION
Numerator:
Net loss $ (57,295) $(137,150) $ (75,591) $(290,250)
--------- --------- --------- ---------
Denominator:
Weighted average number of common shares
outstanding during the period 49,540 48,702 49,245 48,437
--------- --------- --------- ---------
Basic net loss per share $ (1.16) $ (2.82) $ (1.53) $ (5.99)
========= ========= ========= =========
DILUTED NET LOSS PER SHARE COMPUTATION
Numerator:
Net loss $ (57,295) $(137,150) $ (75,591) $(290,250)
--------- --------- --------- ---------
Denominator:
Weighted average number of common shares
outstanding during the period 49,540 48,702 49,245 48,437
========= ========= ========= =========
Diluted net loss per share $ (1.16) $ (2.82) $ (1.53) $ (5.99)
========= ========= ========= =========
</TABLE>
For the three and nine months ended June 30, 1999, incremental common shares
attributable to the issuance of shares under stock option plans (after applying
the treasury stock method, net of tax benefit) of approximately 326,000 shares
and 1,294,000 shares, respectively, and assumed conversion of the Company's
convertible subordinated debentures of 8.6 million shares for the three and nine
months ended June 30, 1999, were not included in the diluted earnings per share
computation because the effect would be antidilutive.
NOTE 4. CUSTOMER CONCENTRATION
The Company's three largest customers, Maxtor, Samsung and Western Digital,
accounted for 89% of net sales during the nine month period ended June 30, 1999.
Given the small number of disk drive and tape drive manufacturers who require an
independent source of recording head supply, the Company will continue to be
dependent upon a limited number of customers. The loss of any large customer, or
a significant decrease in sales orders from one or more large customers, has had
and will continue to have a material adverse effect on the Company's business,
financial condition, and results of operations.
NOTE 5. 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,
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 accelerating its MR
transition strategy and significantly reducing 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 based upon salvage value, as no
further uses were identified.
NOTE 6. RESTRUCTURING COSTS - FISCAL YEAR 1999
During the quarter ended June 30, 1999, the Company incurred restructuring
costs of $37.7 million primarily associated with down-sizing the Company's
workforce and capacities to reflect current industry conditions. The charges
include the write-down of excess and obsolete equipment of $29.7 million due to
the transition to Giant Magnetoresistive ("GMR") technology, $4.5 million for
severance payments to terminated employees, $3.1 million for payment of lease
obligations and $0.4 million for other expenses associated with the
restructuring. The fair value of the assets written down was determined based
upon salvage value, as no further uses were identified. Approximately 1,600
employees and 900 contractors were terminated, of which approximately 1,300 and
800 were engaged in manufacturing activities in Thailand and the Philippines,
respectively. The following table reflects the 1999 restructuring charge:
7
<PAGE> 8
<TABLE>
<CAPTION>
Facilities and Lease
Equipment Severance Commitments Other Total
--------- --------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Restructuring Charge $ 29,732 $ 4,451 $ 3,104 $ 398 $ 37,685
Write-Off and Write-Downs (29,732) -- -- -- (29,732)
Cash Charges -- (4,451) (2,764) (32) (7,247)
-------- -------- -------- -------- -------
Reserve Balances as of
June 30, 1999 $ -- $ -- $ 340 $ 366 $ 706
======== ======== ======== ======== ========
</TABLE>
The 1999 restructuring charge is not a continuation of the 1998 restructuring
charge as the 1998 charge was primarily due to the Company's decision to cease
operations in Malaysia. Subsequent to the 1998 charge, industry conditions
worsened and demand for the Company's products continued to decline. The
continued decrease in demand caused excess capacities in the Company's
manufacturing plants. These industry conditions, and the Company's transition to
GMR technology, caused the company to take this restructuring charge in 1999.
See "Business Risks". The Company believes that its current capacity and
headcount levels are now more closely aligned with anticipated operating levels.
However, if current industry conditions do not improve, or the Company does not
achieve timely customer qualifications on new products, additional actions will
be necessary in the near term.
NOTE 7. RESTRUCTURING COSTS - FISCAL YEAR 1998
During the third quarter of fiscal 1998, the Company recorded restructuring
costs 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 manufacturing operations in
Malaysia and the write-off of excess equipment at the Company's other
manufacturing locations. The assets disposed of in Malaysia include
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. As of March 31, 1999, all of the restructuring activities
had been completed for the 1998 restructuring charge, and there was no balance
remaining in the reserve. The following table reflects the 1998 restructuring
charge:
<TABLE>
<CAPTION>
Facilities and
Equipment Goodwill Severance Other Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Original Restructuring Estimate $ 69,955 $ 7,250 $ 9,960 $ 6,563 $ 93,728
Non-Cash Write-Off 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 as of September 30, 1998 -- -- 730 2,496 3,226
Additional Charges -- -- (730) (2,496) (3,226)
-------- -------- -------- -------- --------
Reserve Balances as of March 31, 1999 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The components of the "Other" expenses in the restructuring table above include
cancellation of purchase orders, write-down of excess inventory, cost of
disposal of obsolete equipment, various professional fees, cancellation of
service agreements, and utilities and facilities maintenance for the Malaysian
factory.
8
<PAGE> 9
NOTE 8. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (57,295) $(137,150) $ (75,591) $(290,250)
Change in unrealized gain (loss) on
available-for-sale investments 37 664 (1) (548)
--------- --------- --------- ---------
Comprehensive income (loss) $ (57,258) $(136,486) $ (75,592) $(290,798)
--------- --------- --------- ---------
</TABLE>
Accumulated other comprehensive loss presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain on available-for-sale investments and the foreign currency translation
adjustments.
NOTE 9. LONG-TERM LIABILITIES
In April 1999, the Company drew down $100.0 million on its revolving line of
credit, and paid back $45.0 million during the June quarter. Subsequent to the
end of the June 30, 1999 quarter, the Company drew down $45.0 million, the
remaining portion of its revolving credit facility. The loan is secured by the
assets of Read-Rite Corporation 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 Read-Rite Corporation. The
terms of the loan require the Company to maintain certain financial ratios,
observe a series of additional covenants, and prohibit the Company from paying
dividends without prior bank approval. The Company was in compliance with all
covenants under the credit facility for the three month period ended June 30,
1999. However, given the current industry conditions, the Company expects to be
in violation of certain financial covenants at the end of the 1999 fiscal year
and will need to seek a waiver or amendment to cure such non-compliance. There
can be no assurance the Company will be successful in obtaining such a waiver or
amendment and the $100.0 million line of credit and $42.5 million term loan
could become immediately payable.
In June 1999, the Company's wholly owned subsidiary, Read-Rite Philippines,
Inc. (RRPI) completed a five-year $12.0 million refinance with one of its
financial institutions. The loan is secured by certain facilities and equipment
of RRPI. The loan provides for quarterly interest and principal payments
beginning September 1999, with interest based upon SIBOR (Singapore Interbank
Offered Rate) plus an applicable margin. In the three month period ended March
31, 1999, the Company's wholly owned subsidiary, Read-Rite (Thailand) Company
limited ("RRT"), completed a four-year $10.0 million refinance with Industrial
Finance Corporation of Thailand ("IFCT"). The IFCT loan is secured by certain
facilities of RRT and is guaranteed by the Company. The IFCT term loan provides
for semi-annual interest and principal payments, beginning in September 1999,
with interest varying based on Singapore Interbank Offer Rate ("SIBOR") plus an
applicable margin.
NOTE 10. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari ("Ferrari") and Mark S. Goldman ("Goldman") against the Company and
certain of its officers and directors (the "Ferrari State Action"). The
complaint in the Ferrari State Action alleges that during a purported class
period of April 19, 1995 to January 22, 1996, defendants made false and
misleading statements concerning the Company's business condition and prospects.
The plaintiffs in the Ferrari State Action seek damages of an unspecified
amount. By an Order dated May 16, 1997, the court sustained the dismissal of
certain defendants to the entire complaint, and sustained the dismissal of the
remaining defendants to certain causes of action. The remaining cause of action
in the Ferrari State Action allege violation of the California Corporations
Code. On July 7, 1997, the defendants remaining after the May 16,1997 Order
answered the complaint.
9
<PAGE> 10
On January 16, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by Ferrari
and Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendants made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, to June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On December 22, 1997, the Court consolidated the Ferrari Federal Action and
the Nevius Federal Action (the "Consolidated Federal Action"). On January 29,
1998, plaintiffs filed a consolidated complaint in the Consolidated Action. On
August 12, 1998, the court granted defendants' motion to dismiss the
consolidated complaint but granted plaintiffs leave to amend. On January 11,
1999, plaintiffs filed a first amended complaint. On March 2, 1999, defendants
moved to dismiss the first amended complaint with prejudice. Oral argument on
defendants' motion to dismiss was held on June 7, 1999, but no ruling has yet
been rendered by the court on that motion. There has been no discovery to date
in the federal actions and no trial is scheduled in any of these actions.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions (the Ferrari State Action
and the Consolidated Federal Action). 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 11. TAX BENEFIT
During the quarter ended June 30, 1999, the Company recorded a tax benefit of
$25.9 million. The tax benefit was primarily attributable to the elimination of
tax accruals no longer required as a result of tax audit and statute closures
during the quarter.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These statements include, but
are not limited to, the Company's expectation that the industry trend towards
fewer heads per hard disk drive and competitive pricing pressure will continue
into fiscal 2000; the Company's expectation that it will report a net loss for
fiscal 1999; the Company's expectation that magnetoresistive ("MR") products
will account for a majority of net sales during fiscal 1999; the Company's
expectation that manufacturing cycle time will be further reduced in fiscal
1999; the Company's expectation that selling, general and administrative
expenses will not increase significantly in absolute dollars in the near-term;
the Company's plan to acquire less than $120.0 million on capital equipment
during fiscal 1999, including the potential acquisition of certain assets
through operating leases; the Company's belief that its liquid assets, credit
facilities and cash expected to be generated from operations will be sufficient
to fund its operations for the next twelve months; the Company plans to pursue
opportunities to continue to improve the efficiency of its operations; the
Company's plan to have its critical internal systems to be Year 2000 compliant
by October 1, 1999, the first day of the Company's fiscal year 2000; and the
Company's belief that the Company and the individual defendants in the purported
class actions (collectively, the "Actions") described in Part II, Item 1 "Legal
Proceedings," have meritorious defenses in such Actions. Actual results for
future periods could differ materially from those projected in such
forward-looking statements.
Some factors which could cause future actual results to materially differ
from the Company's recent results or those projected in the forward-looking
statements include, but are not limited to: failure by the Company to timely,
effectively and continuously execute on Giant MR ("GMR") product development;
failure to obtain necessary customer qualifications on new programs; failure to
timely and cost-effectively introduce those programs into manufacturing, and
failure to achieve and maintain acceptable production yields on those programs;
introduction of competitors' products more quickly or cost effectively than the
Company; constraints on supplies of raw materials or components limiting the
Company's ability to maintain or increase production; significant increases or
decreases in demand for the Company's products, cancellation or rescheduling of
customer orders, changes to the Company's product mix, and changes in business
conditions affecting the Company's financial position or results of operations
which significantly increase the Company's working capital needs; the Company's
inability to obtain or generate sufficient capital to fund its research and
development expenses, capital expenditures and other working capital needs; the
Company's ability to obtain waivers or amendments to the bank covenants in its
current credit facilities; 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
"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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<PAGE> 12
RESULTS OF OPERATIONS
NET SALES
Net sales were $174.8 million and $611.1 million for the three and nine month
periods ended June 30, 1999, respectively, compared to net sales of $184.2
million and $632.7 million for the comparable periods in fiscal 1998. Net sales
for the current three month period ending June 30, 1999, decreased due to lower
average selling prices ("ASPs") for both head gimbal assembly ("HGA") unit sales
and headstack assembly ("HSA") unit sales as compared to the comparable period
in fiscal 1998. The negative impact of lower ASPs on net sales in the current
three month period was partially offset by higher unit sales volume for both HGA
and HSA.
The decrease in the Company's net sales for the first nine months of fiscal
1999 compared to the comparable period in fiscal 1998 was attributable to a
substantial decrease in ASPs for HGAs and HSAs. HGA and HSA pricing were lower
due to competitive pricing pressure in the disk drive industry and components
industry. Further, the number of HGAs per HSA decreased 12.0% in the current
nine month period compared to the comparable nine month period in fiscal 1998.
This negative impact on net sales from competitive pricing pressure and lower
HGAs per HSA was partially offset by significant increases in HGA and HSA unit
sales. The Company expects the trend towards fewer heads per disk drive and
competitive pricing pressure to continue into fiscal 2000.
For the nine month period ended June 30, 1999, a substantial majority of the
Company's net sales were derived from MR products which is consistent with the
Company's strategy to transition its production to MR recording heads in the
prior fiscal year. Net sales generated from MR products (including Tape Head)
increased to $579.2 million for the nine month period ended June 30, 1999, from
net sales of $429.7 million for the comparable period in fiscal 1998. The
Company's largest volume MR product platform for the nine month period ended
June 30, 1999 consisted of recording heads for the 4.3 Gigabyte ("GB") per
3.5-inch disk applications. This increase in net sales of MR products was more
than offset, however, by the decrease in net sales of advanced inductive
products. Net sales generated from inductive products decreased to $27.5 million
for the nine month period ended June 30, 1999, from net sales of $203.0 million
for the comparable period in fiscal 1998.
Read-Rite shipped 16.1 million and 58.1 million recording heads (including
recording heads shipped in HSAs and Tape Head), and 4.0 million and 12.6 million
HSAs, for the three and nine month periods ended June 30, 1999, respectively. In
fiscal 1998, the Company shipped 15.2 million and 52.6 million recording heads
(including recording heads shipped in HSAs and Tape Head), and 3.6 million and
11.0 million HSAs, for the three and nine month periods ended June 30, 1998,
respectively. The Company's product mix continued to be predominately made up of
HSAs, as net sales of HSAs accounted for 88% and 81% of total net sales for the
three and nine month periods ended June 30, 1999, respectively, compared to 90%
and 86% of total net sales for the comparable periods in fiscal 1998.
The Company's three largest customers accounted for 92% and 89% of net sales
for the three and nine month periods ended June 30, 1999, respectively, compared
to 93% and 88% of net sales for the comparable periods in fiscal 1998. For a
discussion of certain risks associated with the Company's business, see
"Business Risks."
GROSS MARGIN
The Company's gross margin is primarily influenced by average unit sales
prices, the level of unit sales in relation to fixed costs, manufacturing
yields, and product mix. The relative impact of each of these factors fluctuates
from time to time. HSAs typically have a lower gross margin, as a percentage of
sales, than HGAs. HSAs typically consist of two or more HGAs and a variety of
purchased components, which the Company assembles into a single unit. The cost
of the purchased components comprises a significant percentage of the total cost
of the HSA. The gross margin on such purchased components is substantially lower
than the gross margin on HGAs produced by the Company. The combination of the
respective gross margins on HGAs and non-HGA components and associated labor and
overhead included in HSAs typically produce a lower aggregate gross margin, as a
percentage of sales, on HSA net sales compared to HGA net sales.
The Company's gross margin was (10.7%) and 4.5% of net sales for the three
and nine month periods ended June 30, 1999, compared to gross margin of (8.0%)
and (20.7%) of net sales, for the comparable periods in fiscal 1998. The decline
in gross margin during the three month period ended June 30, 1999, compared to
the comparable period in fiscal year 1998, was primarily attributable to a
substantial decrease in ASPs for HGAs and HSAs. HGA and HSA pricing were lower
due to competitive pricing pressure in the disk drive and components industry.
The improvement in gross margin during the nine month period ended June 30,
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<PAGE> 13
1999, in comparison to the same period in fiscal 1998 was primarily attributable
to a special charge of $114.8 million to cost of sales, for the write-off of
equipment and inventory associated with the phase-out of advanced inductive
technologies during the first quarter of fiscal 1998. Excluding this special
charge, gross margin was (2.5%) of net sales during the nine month period ending
June 30, 1998. In addition, the improved gross margin during the nine month
period ended June 30, 1999 was attributable to the Company's continued focus on
productivity, cycle time reduction, asset utilization, and to higher
manufacturing yields which had a positive impact on both HGA and HSA
manufacturing costs.
For the three and nine month periods ended June 30, 1999, the Company has
incurred lower fixed costs as a result of the closure of its manufacturing
operations in Malaysia during the fourth quarter of the 1998 fiscal year, and
has substantially reduced worldwide manufacturing headcount through layoffs and
attrition. In addition, the Company, through its operational excellence program,
is accelerating efforts to gain improvements in productivity, cycle times and
asset utilization in its wafer fabrication facilities and HGA and HSA
manufacturing operations. Furthermore, the Company continues to evaluate
opportunities to streamline its manufacturing operations to further reduce its
manufacturing costs. For a discussion of certain risks associated with the
Company's business, see "Business Risks."
OPERATING EXPENSES
Research and development ("R&D") expenses were $24.7 million and $72.2
million for the three and nine month periods ended June 30, 1999, respectively,
compared to R&D expenses of $23.4 million and $69.0 million for the comparable
period in fiscal 1998. The Company continues to invest a significant portion of
its resources for development efforts in GMR and other emerging technologies to
address the disk drive industry's rapidly advancing technology requirements. In
absolute dollars, the Company has maintained its investment in R&D over the
comparable three and nine month periods but expects this investment to decrease
slightly as the Company continues its cost containment efforts. From time to
time, the Company has engaged in fully or partially funded R&D for certain
existing or potential customers. R&D funding under such projects is offset as
expenses are incurred. During the three and nine month periods ended June 30,
1999, $0 and $2.8 million of development funding was offset against R&D
expenses. Funded R&D for the comparable periods in fiscal 1998 were $2.3 million
and $6.9 million, respectively.
Selling, general & administrative ("SG&A") expenses were $7.0 million and
$21.8 million for the three and nine month periods ended June 30, 1999,
respectively, a decrease from SG&A expenses of $8.6 million and $27.3 million
for the comparable periods in fiscal 1998. The decreases in SG&A expenses for
the three and nine month periods ended June 30, 1999, as compared to the
comparable periods in fiscal 1998 were due to the termination of the Company's
manufacturing operations in Malaysia during the later half of fiscal 1998, the
reduction in the Company's worldwide headcount through layoffs and attrition
during fiscal 1999, and continued cost containment efforts. The Company plans to
continue its SG&A cost containment efforts.
RESTRUCTURING COSTS
During the three-month period ended June 30, 1999, the Company incurred
restructuring costs of $37.7 million. The restructuring costs were primarily
associated with down-sizing the Company's workforce and capacities to reflect
current industry conditions. The charges include the write-down of excess and
obsolete equipment of $29.7 million due to the transition to Giant
Magnetoresistive ("GMR") technology, $4.5 million for severance payment to
terminated employees, $3.1 million for payment of lease obligations and $0.4
million for other expenses associated with the restructuring. Approximately
1,600 employees and 900 contractors were terminated, of which approximately
1,300 and 800 were engaged in manufacturing activities in Thailand and the
Philippines, respectively.
During the three-month period ended June 30, 1998, the Company incurred
restructuring costs of $93.7 million. The restructuring costs reflect the
Company's strategy to align worldwide operations with market conditions and to
improve the productivity of the Company's manufacturing facilities. The
restructuring costs were primarily associated with the Company's decision to
significantly reduce and ultimately cease its manufacturing operations in
Malaysia and the write-off of excess equipment at the Company's other
manufacturing locations.
The 1998 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 Malaysia manufacturing
operations, $10.0 million for severance and benefits for terminated employees,
and $6.5 million for other expenses associated with the restructuring plan. As
of March 31, 1999, all of the 1998 restructuring activities were completed, and
there was no balance remaining in the reserve.
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<PAGE> 14
The Company believes that its current capacity and headcount levels are now
more closely aligned with anticipated operating levels. However, if current
industry conditions do not improve, or the Company does not achieve timely
customer qualifications on new products, additional actions will be necessary in
the near term. Such actions could have a material adverse effect on the
Company's financial condition and results of operations.
NON-OPERATING EXPENSES
Interest expense was $8.0 million and $22.3 million for the three and nine
month periods ended June 30, 1999, respectively, compared to interest expense of
$7.3 million and $22.3 million for the comparable periods in fiscal 1998. The
increase in interest expense for the current period was mainly due to the higher
average borrowings under a $100 million revolving line of credit.
Interest income and other, net was $2.1 million and $1.4 million for the
three and nine month periods ended June 30, 1999, compared to $2.8 million and
$4.5 million for the comparable periods in fiscal 1998. The decreases in
interest income and other, net for the current periods were primarily due to
foreign exchange losses, partially offset by higher interest income due to
higher average investments, and by higher royalty income.
During the quarter ended June 30, 1999, the Company recorded a tax benefit of
$25.9 million. The tax benefit was primarily attributable to the elimination of
tax accruals no longer required as a result of tax audit and statute closures
during the quarter.
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 with it. The Company has a program to assess the
capability of its products to determine whether or not they are in Year 2000
compliance. The Company believes its HGA and HSA products are transparent to
Year 2000 requirements. With respect to the Company's products, Year 2000
capable, as used herein, means that when used properly and in conformity with
the product information provided by the Company, the Company's products will
accurately read and write from the disk or from, into and between the twentieth
and twenty-first centuries, including leap year calculations, provided that all
other technologies and products used in combination with the Read-Rite products
are in Year 2000 compliance.
The table below indicates the phases of the Year 2000 Project related to the
Company's critical and priority internal systems and the expected time frames.
<TABLE>
<CAPTION>
PHASES OF THE PROJECT START DATE END DATE
--------------------- ---------- -------------------
<S> <C> <C>
High level assessment of systems .................. FY 1998 Q4 FY 98 (actual)
Detailed assessment, remediation and unit testing.. FY 1998 Q4 FY 99 (expected)
Integration testing ............................... FY 1998 Q4 FY 99 (expected)
Deployment ........................................ FY 1998 Q4 FY 99 (expected)
</TABLE>
An object, as used herein, is defined as any unit such as manufacturing and
networking equipment, computer hardware, off-the-shelf or customized software, a
facility or security system or any other asset used in business operations. The
Company has identified a total of 10,722 objects. The Company will evaluate for
date usage and Y2K compliance, and either remedy, dispose of, or replace if
found to be non-compliant. If the evaluation of the object finds that the object
uses no dates, or is already Y2K compliant, or if the object has been made
compliant through replacement or upgrades, it is deemed to be complete. As of
June 30, 1999, 7,544 objects, or 70%, were deemed complete. The Company is also
88% complete on those objects that are considered critical to delivery of
product to its customers.
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
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<PAGE> 15
compliance from a number of those customers. The Company anticipates that
substantial litigation may be brought against vendors, including the Company,
for 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' who fail to remedy their own Year 2000 issue.
To date the Company has received assurances of Year 2000 compliance from a
number of those contacted. Most of the suppliers under existing contracts with
the Company are under no contractual obligation to provide such information to
the Company. The Company is taking steps with respect to new supplier agreements
to ensure that the suppliers' products and internal systems are Year 2000
compliant.
In fiscal 1998, an outside consulting group performed a high level assessment
on the Company's internal systems. This high level assessment identified all
critical and non-critical internal systems and the resources required to ensure
these systems are Year 2000 compliant. With this assessment, the Company has
developed and initiated a comprehensive program to address both Year 2000
readiness in its internal systems and with its customers and suppliers. The
Company's program has been designed to address its most critical internal
systems first and to gather information regarding the Year 2000 compliance of
products supplied to it and into which the Company's products are integrated.
The Company has formed internal teams to address Year 2000 readiness at each of
its manufacturing locations. Detailed assessment and remediation, deployment,
and integration testing of the Company's internal systems are proceeding
simultaneously, and the Company intends to have its critical internal systems
Year 2000 compliant by October 1, 1999, the first day of the Company's fiscal
year 2000. These activities are intended to encompass all major categories of
systems in use by the Company, including manufacturing, engineering, sales,
finance and human resources and will involve both the uses of internal resources
and outside consultants. Certain of the Company's manufacturing, engineering,
facilities, finance and human resource systems are deemed to be Year 2000 ready
as of June 30, 1999.
The costs incurred by the Company during the nine month period ended June 30,
1999, related to its Year 2000 readiness program were less than $2.0 million and
cumulatively to date have been less than $2.5 million. The Company currently
expects that the total cost of its Year 2000 readiness programs, excluding
redeployed resources, will not exceed $4 million over the current fiscal year.
The total cost estimate does not include potential costs related to any
customer, vendor 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 for its vendors, customers, and financial
institutions) or that it will implement its changes in an efficient and timely
manner or that any new systems will be adequate to support the Company's
operations. Problems with installation or initial operation of the changed
systems or replacements could cause substantial management difficulties in
operations planning, financial reporting and management and thus could have a
material adverse effect on the Company's business, financial condition and
results of operations. The cost of bringing the Company's systems into Year 2000
compliance is not expected to have a material effect on the Company's financial
condition or results of operations.
While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of changes in or
replacements of information systems, or a failure to fully identify all Year
2000 dependencies in the Company's systems and in the systems of its suppliers,
customers and financial institutions, could have material adverse effect on the
Company's business, financial condition and results of operations. Therefore,
the Company is developing contingency plans for continuing operations in the
event such problems arise. The information set forth above, and elsewhere in
this quarterly report, related to Year 2000 issues constitutes a "Year 2000
Readiness Disclosure" as such term is defined by the Year 2000 Information and
Readiness Disclosure Act of 1998, enacted October 19, 1998 (Public Law 105-271,
112 Stat.2386).
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and short-term
investments of $224.4 million, total assets of $852.1 million and total
long-term debt and capital leases, including the current portion of $470.3
million. Total cash, cash
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<PAGE> 16
equivalents and short-term investments increased $115.9 million for the nine
months ending June 30, 1999, which includes cash from operations of $94.2
million.
Accounts receivable, net decreased $30.4 million for the nine months ended
June 30, 1999 due to lower net sales in the second half of the quarter ending
June 30, 1999 as compared to the second half of the quarter ending September 30,
1998, and more favorable collection terms from two major customers.
Inventories decreased for the nine months ending June 30, 1999 generating
$10.3 million in cash. This decrease was due to lower net sales in the second
half of the quarter ending June 30, 1999 as compared to the second half of the
quarter ending September 30, 1998. Inventory turns increased significantly in
the June quarter of fiscal 1999 as compared to the September quarter of fiscal
1998 due to the Company's continued focus on cycle time reduction.
Accounts payable, accrued liabilities, and income taxes payable decreased by
$20.7 million for the nine months ending June 30, 1999, of which $24.3 million
was due to income tax accruals no longer required as a result of audit and
statute closures.
Proceeds provided by financing activities were $94.0 million, of which net
proceeds from the line of credit was $55.0 million, refinancing activity from
Read-Rite (Thailand) Company Limited ("RRT") was $10.0 million, refinancing
activity from Read-Rite Philippines, Inc. ("RRPI") was $12.0 million, payment
under long-term debt and capital lease obligations was $10.0 million, proceeds
from the issuance of common stock was $6.1 million, and an infusion of $28.3
million of equity, net of reduction of short term borrowings of $7.4 million by
Sumitomo Metal, Incorporated, a minority interest shareholder.
The Company's business is highly capital intensive. During the nine months
ended June 30, 1999, the Company incurred capital expenditures of $74.5 million
and entered into operating leases for capital equipment of $12.5 million.
Capital expenditures have primarily been made to support production capacity in
Thailand and the Philippines, wafer production in the United States and Japan,
and new manufacturing processes and new technologies, such as GMR. The Company
currently estimates acquisitions of capital equipment for fiscal 1999 to be less
than $120.0 million, including assets obtained through operating leases.
Further, to the extent yields for the Company's products are lower than
expected, demand for products exceeds Company expectations, or the Company's
manufacturing process requirements change significantly, such expenditures may
increase. Conversely, if demand is less than anticipated, or if the Company is
unable to obtain adequate financing for such capital equipment purchases, the
planned capital equipment purchases may decrease. As of June 30, 1999, total
commitments for construction or purchase of capital equipment were approximately
$57.4 million. The Company expects to fund such commitments from available cash
and cash equivalents, cash flows from operations, the continued use of capital
and operating leases and the remaining $45.0 million of the credit facility,
which was drawn down in July 1999.
The Company has a $150.0 million secured credit facility ("Credit Facility")
with a syndicate of financial institutions. The facility, which expires on
October 2, 2001, consists of a $50.0 million term loan and a $100.0 million
revolving line of credit. As of June 30, 1999, $45.0 million of the term loan
and $55.0 million of the revolving line of credit were outstanding. The term
loan provides for quarterly principal payments, beginning January 1999 and
continuing through October 2001. The facility is secured by the assets of
Read-Rite Corporation and 65% of the stock of the Company's international
subsidiaries. Borrowings under the revolving credit facility are based upon
eligible receivables and cash balances of the Company. The term loan provides
for interest payments, which vary, based on the London Interbank Offered Rate
("LIBOR"), plus an applicable margin. Additionally, the terms of the facility
require the Company to maintain certain financial ratios, observe a series of
additional covenants, and prohibit the Company from paying dividends without
prior bank approval. The Company was in compliance with all the covenants under
the Credit Facility for the three month period ended June 30, 1999. However,
given the current industry conditions, the Company expects to be in violation of
certain financial covenants at the end of the 1999 fiscal year and will need to
seek a waiver or amendment to cure such non-compliance. There can be no
assurance the Company will be successful in obtaining such a waiver or amendment
and the borrowing could become immediately payable. On July 2, 1999, the Company
borrowed the remaining $45.0 million under its revolving line of credit.
In addition, in March 1999, the Company's wholly owned subsidiary, RRT,
completed a four-year $10.0 million refinance with IFCT. The IFCT loan is
secured by certain facilities of RRT and is guaranteed by the Company. The IFCT
term loan provides for semi-annual interest and principal payments, beginning in
September 1999, with interest varying based on SIBOR plus an applicable margin.
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<PAGE> 17
In June 1999, the Company's wholly owned subsidiary, RRPI completed a
five-year $12.0 million refinance with United Coconut Planters Bank. The loan is
secured by certain facilities and equipment of RRPI. The loan provides for
quarterly interest and principal payments beginning September 1999, with
interest based upon SIBOR plus an applicable margin.
The Company believes that its current level of liquid assets, credit
facilities, and cash expected to be generated from operations will be sufficient
to fund its operations for the next twelve months. However, if the Company is
unsuccessful in obtaining a waiver or amendment to the bank covenant or its
current credit facilities, industry conditions worsen further or current
industry conditions continue longer than anticipated, the Company does not
consistently achieve timely customer qualifications on new product programs, or
the Company is unsuccessful at ramping up volume production on new products at
acceptable yields, the Company's working capital and other capital needs will
increase. Conversely, if industry demand increases significantly such that the
Company's capital requirements exceed management's current estimates, the
Company may again need to raise additional capital. The Company may seek such
capital through additional bank facilities, debt or equity offerings, or other
sources. Further, the Company may elect from time to time to seek additional
financing to the extent available. There can be no assurance, however, that any
such required financing will be available when needed on terms and conditions
acceptable or favorable to the Company, if at all.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The Credit Facility
currently prohibits payment of cash dividends.
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.
The key risk factors facing the Company today relate to its transition to GMR
technology, its ability to ship GMR in volume to its customers to their
schedules and maintaining its liquidity during this transition.
RAPID TECHNOLOGICAL CHANGE
Technology changes rapidly in the Company's industry. These rapid changes
require the Company to both address obsolescence of old technologies and
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company is investing significant resources in GMR
product development and manufacturing equipment. The Company anticipates a
substantial majority of its sales for fiscal 2000 will be derived from sales of
GMR products, which had minimal sales in fiscal 1999. There can be no assurance,
however, that the Company will be successful in timely and cost effectively
developing and manufacturing GMR heads at acceptable manufacturing yields and to
achieve consistent design-in wins on new product programs. For example, in the
second half of fiscal 1999, the industry made a faster transition to GMR than
anticipated and the Company had limited design-ins at our customers. As such,
its sales will decline sequentially in the fourth fiscal quarter of 1999 and its
next heads will be the first GMR products from the Company to ship in volume to
a broader customer base. Given this, the Company currently anticipates a rebound
in sales during the first quarter of fiscal year 2000.
For the Company 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.
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. The
Company's three largest customers, Maxtor, Samsung and WD, accounted for 92% of
net sales during the three month period ended June 30, 1999, during which the
Company shipped HGAs in volume for three customers, HSA in volume for four
customers and Tape Head products in volume for four customers. Given the small
number of disk drive and tape drive manufacturers who require an independent
source of HGA, HSA or Tape Head supply, the Company will continue to be
dependent upon a limited number of customers. As
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<PAGE> 18
demonstrated by the significant reduction in the level of the Company's business
in the last three quarters of fiscal 1998, late in fiscal 1996, and in the
second half of fiscal 1993, as well as the reduction in orders for advanced
inductive products and the bankruptcy filing by Micropolis in the first quarter
of fiscal 1998, the loss of any large customer, or a significant decrease in
orders from one or more large customers, will have a material adverse effect on
the Company's business, financial condition and results of operations.
Demand for the Company's products is highly variable and thus difficult to
predict accurately. This variability was demonstrated in the second half of
fiscal 1996 when significant orders were canceled and/or rescheduled by certain
customers with little or no advanced warning, late in the first quarter of
fiscal 1998 as the Company significantly reduced its build plan for its advanced
inductive thin film 1.3GB per 3.5 inch disk recording head product due to a
significant and abrupt reduction in demand for this product, and in fiscal 1998
generally due to industry conditions. In each case, these demand variations
materially and adversely affected the Company's business, financial condition
and results of operations.
This dependence upon a limited number of customers means that acquisitions,
consolidations, or other material agreements affecting such customers could also
have a material adverse effect on the Company's business, financial condition
and operating results. For example, Seagate acquired the Tape Head operations of
AMC in fiscal 1995, completed the acquisition of Conner Peripherals, Inc. (then
a major customer of the Company) in fiscal 1996, and completed the acquisition
of Quinta Corporation, the Company's partner and sole customer for its
magneto-optical head development effort, in August 1997. Although the Company
has recently become a supplier to Seagate, Seagate has significant internal disk
and Tape Head manufacturing capacity, so there can be no assurance that the
Company will continue to be a supplier to Seagate. Vertical integration by the
Company's customers, through which a customer acquires or increases internal HGA
or HSA production capability, could also materially and adversely affect the
Company's business, financial condition and results of operations. In 1994,
Quantum, a principal customer of the Company with no previous magnetic recording
head capacity, acquired Digital Equipment Corporation's recording head and disk
drive operations. In May 1997, Quantum further announced the formation of a
joint venture with its primary manufacturing partner in Japan, MKE, to
manufacture MR recording heads for rigid disk drives. According to the
announcement, this new venture took over Quantum's existing recording head
operations and was owned 51% by MKE. In October 1998, Quantum and MKE announced
that the joint venture was dissolved, but MKE retained the slider fabrication
and HGA assembly factory. MKE is currently still operating this facility. As
such, there are no assurances MKE will not re-enter the wafer fabrication
business and become a full line manufacturer, which could impact the Company's
ability to supply HGAs to Quantum again in the future.
Finally, in 1998, WD and IBM announced a hard disk drive component supply and
technology licensing agreement. The Company does not know the precise impact
this agreement will have on the Company's future 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.
COMPETITION
The disk drive industry is intensely competitive, both at the drive level and
the component level, and is characterized by short product life cycles and
substantial price declines over the life of a product. Accordingly, the Company
believes that the most important competitive factors in its industry are timely
delivery of new technologies and pricing for products incorporating such
technology. Other significant factors are customer support, product quality, and
the ability to reach volume production rapidly. Failure to execute with respect
to any of these factors would likely have a material adverse effect on the
Company's net sales and gross margin.
Japanese competitors such as TDK, Alps, Hitachi and Yamaha have been
aggressively competing for business in the United States and in Japan, targeting
the GMR marketplace in particular. The Company's primary domestic competitors
are Applied Magnetics ("AMC"), Headway Technologies, and IBM. Fujitsu, IBM,
Seagate and other disk drive manufacturers with "captive" or internal recording
head manufacturing capability generally have significantly greater financial,
technical and marketing resources than the Company, and have made or may make
their products available in the merchant market. For example, one of the
Company's largest customers, Western Digital Corporation ("WD") announced an
agreement in June 1998 with IBM under which IBM would supply WD with GMR heads
and other components for WD's manufacture of desktop hard disk drives, and WD
presently purchases a material percentage of its MR head requirements from IBM.
The Company's competitive position could be
18
<PAGE> 19
materially and adversely affected if one or more of these competitors is
successful in marketing GMR products in the merchant market in volume quantities
at competitive pricing.
In its HSA business, the Company must compete against other merchant HSA
manufacturers such as Kaifa, Tandon and TDK/SAE. Further, the HSA business is
less capital intensive than the thin film HGA business; entry into the HSA
manufacturing business thus requires less capital than entry into the HGA
business. Accordingly, there can be no assurance that the Company will be able
to compete successfully with its customers' own HSA capacity, or with existing
or new HSA manufacturers.
Finally, new technologies such as pico sliders and GMR heads, which the
Company has developed, will support customer demand for products with areal
density capabilities significantly greater than the Company's MR head.
Additionally, other manufacturers may already have or may develop more advanced
GMR technology or GMR production capability than the Company. For example, Alps,
IBM, TDK, and Yamaha have already begun to ship GMR technology product in
volume. Also, certain companies are developing alternative data storage
technologies, such as solid-state (flash or ferroelectric) memory or optical
disk drive technologies that do not utilize the Company's products. The
Company's competitive position will likely be materially and adversely affected
if a competitor precedes the Company in the successful introduction of improved
or new technologies or products.
SUBSTANTIAL CAPITAL EXPENDITURES AND WORKING CAPITAL NEEDS
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed
significant production capacity to support new technologies and increased demand
for its products. The Company made capital expenditures in fiscal 1998 of $186.2
million, and plans to acquire less than $120.0 million in capital equipment in
fiscal 1999, and may acquire certain of those capital assets through operating
leases. As of June 30, 1999, total commitments for construction or purchase of
capital equipment were approximately $57.4 million. There can be no assurance
that the Company's net sales will increase sufficiently to absorb such
additional expenditures, and that there will not be periods when net sales
declined quarter to quarter. Furthermore, within this volatile industry, the
Company must be ever vigilant on its capital expenditures, especially towards
avoiding duplication of equipment requirements in the Company's wafer fabs in
Fremont, California, and Osaka, Japan.
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 has developed an automation process, which
it is planning on deploying into its factories in Thailand and the Philippines,
to achieve increased efficiencies over the next six months. The Company's
forward product pricing reflects this assumption of improving manufacturing
efficiencies, 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.
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
19
<PAGE> 20
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 for 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. Furthermore, our suppliers are generally
determined in advance by our customers. 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 in response 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 have done
so by employing what is known in the industry as JIT (Just-in-Time) hubs. If the
customer does not have demand from their end customer, they will not pull the
inventory from the JIT hub and thus the Company may be left with excess and or
obsolete inventory, which increases inventory risk. To help offset this risk,
the Company is also attempting to implement this inventory management tool with
its suppliers. 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 first two quarters of fiscal 1998, as a result of which the Company incurred
charges for inventory obsolescence, which materially and adversely affected the
Company's operating results.
INTERNATIONAL OPERATIONS
The Company's production process is also labor intensive. As a result, the
Company conducts substantially all of its HGA machining, assembly and test
operations, HSA assembly and Tape Head assembly operations offshore, and is thus
subject to the many risks associated with contracting with foreign vendors and
suppliers and with the ownership and operation of foreign manufacturing
facilities, including obtaining requisite governmental permits and approvals,
currency exchange fluctuations and restrictions, variable or higher tax rates,
expiration of tax holidays, political instability, changes in government
policies relating to foreign investment and operations, cultural issues, labor
problems, trade restrictions, transportation delays and interruptions, and
changes in tariff and freight rates. The Company has from time to time
experienced labor organization activities at certain of its foreign operations,
most recently during the first quarter of fiscal 1997, but none of the Company's
employees are currently represented by a union. There can be no assurance,
however, that the Company will continue to be successful in avoiding work
stoppages or other labor issues in the future.
In addition, several Asian countries, including Japan, Thailand and the
Philippines, are still experiencing fluctuations in the value of their
currencies relative to the U.S. dollar. 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
20
<PAGE> 21
positions and anticipated foreign currency denominated expenditures, as
substantially all of the Company's foreign sales are denominated in U.S.
dollars.
The Company continues to operate its joint venture in Japan, RRSMI. The joint
venture's objective is to capture business in the Japanese market. The future of
the joint venture depends on its ability to succeed in this market place. It is
possible that if they are not successful, the Company would need to re-evaluate
RRSMI's future.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock in the past has been subject
to wide fluctuations in response to quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the disk drive and computer
industries, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's common stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to the Form 10-K for the year ended September 30, 1998.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari ("Ferrari") and Mark S. Goldman ("Goldman") against the Company and
certain of its officers and directors (the "Ferrari State Action"). The
complaint in the Ferrari State Action alleges that during a purported class
period of April 19, 1995 to January 22, 1996, defendants made false and
misleading statements concerning the Company's business condition and prospects.
The plaintiffs in the Ferrari State Action seek damages of an unspecified
amount. By an Order dated May 16, 1997, the court sustained the dismissal of
certain defendants to the complaint, and sustained the dismissal of the
remaining defendants to certain causes of action. The remaining cause of action
in the Ferrari State Action allege violation of the California Corporations
Code. On July 7, 1997, the defendants remaining after the May 16, 1997 Order
answered the complaint.
On January 16, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by Ferrari
and Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendants made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains virtually
identical factual allegations as the Ferrari State Action, and alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The plaintiffs in the Ferrari Federal Action also seek
damages of an unspecified amount.
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2, to June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action seek
damages of an unspecified amount.
On December 22, 1997, the Court consolidated the Ferrari Federal Action and
the Nevius Federal Action (the "Consolidated Federal Action"). On January 29,
1998, plaintiffs filed a consolidated complaint in the Consolidated Action. On
August 12, 1998, the court granted defendants' motion to dismiss the
consolidated complaint but granted plaintiffs leave to amend. On January 11,
1999, plaintiffs filed a first amended complaint. On March 2, 1999, defendants
moved to dismiss the first amended complaint with prejudice. Oral argument on
defendants' motion to dismiss was held on June 7, 1999, but no ruling has yet
been rendered by the court on that motion. There has been no discovery to date
in the federal actions and no trial is scheduled in any of these actions.
The Company believes that the Company and the individual defendants have
meritorious defenses in the above-described actions (the Ferrari State Action
and the Consolidated Federal Action). 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.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (electronic filing only)
27.2 Financial Data Schedule (electronic filing only)
27.3 Financial Data Schedule (electronic filing only)
27.4 Financial Data Schedule (electronic filing only)
27.5 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 2, 1999 /s/ JOHN T. KURTZWEIL
------------------------------------------------
John T. Kurtzweil
Senior Vice President, Finance and
Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule (electronic filing only)
27.2 Financial Data Schedule (electronic filing only)
27.3 Financial Data Schedule (electronic filing only)
27.4 Financial Data Schedule (electronic filing only)
27.5 Financial Data Schedule (electronic filing only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT JUNE 30, 1999 AND CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 113,028
<SECURITIES> 111,396
<RECEIVABLES> 85,517
<ALLOWANCES> 5,619
<INVENTORY> 42,114
<CURRENT-ASSETS> 354,654
<PP&E> 1,222,186
<DEPRECIATION> 743,298
<TOTAL-ASSETS> 852,052
<CURRENT-LIABILITIES> 184,091
<BONDS> 450,856
0
0
<COMMON> 5
<OTHER-SE> 164,401
<TOTAL-LIABILITY-AND-EQUITY> 852,052
<SALES> 174,766
<TOTAL-REVENUES> 174,766
<CGS> 193,421
<TOTAL-COSTS> 193,421
<OTHER-EXPENSES> 69,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,989
<INCOME-PRETAX> (83,174)
<INCOME-TAX> (25,879)
<INCOME-CONTINUING> (57,295)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,295)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT JUNE 30, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 68,675
<SECURITIES> 80,995
<RECEIVABLES> 105,826
<ALLOWANCES> 5,687
<INVENTORY> 59,869
<CURRENT-ASSETS> 316,986
<PP&E> 1,231,113
<DEPRECIATION> 645,936
<TOTAL-ASSETS> 929,015
<CURRENT-LIABILITIES> 209,328
<BONDS> 396,191
0
0
<COMMON> 5
<OTHER-SE> 263,217
<TOTAL-LIABILITY-AND-EQUITY> 929,015
<SALES> 184,247
<TOTAL-REVENUES> 184,247
<CGS> 198,996
<TOTAL-COSTS> 198,996
<OTHER-EXPENSES> 125,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,301
<INCOME-PRETAX> (137,076)
<INCOME-TAX> 74
<INCOME-CONTINUING> (137,150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (137,150)
<EPS-BASIC> (2.82)
<EPS-DILUTED> (2.82)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 62,444
<SECURITIES> 46,038
<RECEIVABLES> 115,974
<ALLOWANCES> 5,637
<INVENTORY> 52,367
<CURRENT-ASSETS> 281,247
<PP&E> 1,250,055
<DEPRECIATION> 676,422
<TOTAL-ASSETS> 879,800
<CURRENT-LIABILITIES> 183,629
<BONDS> 388,248
0
0
<COMMON> 5
<OTHER-SE> 233,924
<TOTAL-LIABILITY-AND-EQUITY> 879,800
<SALES> 808,622
<TOTAL-REVENUES> 808,622
<CGS> 941,402
<TOTAL-COSTS> 941,402
<OTHER-EXPENSES> 220,130
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (344,324)
<INCOME-TAX> (24,577)
<INCOME-CONTINUING> (319,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (319,747)
<EPS-BASIC> (6.59)
<EPS-DILUTED> (6.59)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT JUNE 30, 1999 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
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<DEPRECIATION> 743,298
<TOTAL-ASSETS> 852,052
<CURRENT-LIABILITIES> 184,091
<BONDS> 450,856
0
0
<COMMON> 5
<OTHER-SE> 164,401
<TOTAL-LIABILITY-AND-EQUITY> 852,052
<SALES> 611,141
<TOTAL-REVENUES> 611,141
<CGS> 583,680
<TOTAL-COSTS> 583,680
<OTHER-EXPENSES> 131,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,262
<INCOME-PRETAX> (101,561)
<INCOME-TAX> (25,970)
<INCOME-CONTINUING> (75,591)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (75,591)
<EPS-BASIC> (1.53)
<EPS-DILUTED> (1.53)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT JUNE 30, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
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<PERIOD-END> JUN-30-1998
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<CURRENT-ASSETS> 316,986
<PP&E> 1,231,113
<DEPRECIATION> 645,936
<TOTAL-ASSETS> 929,015
<CURRENT-LIABILITIES> 209,328
<BONDS> 396,191
0
0
<COMMON> 5
<OTHER-SE> 263,217
<TOTAL-LIABILITY-AND-EQUITY> 929,015
<SALES> 632,690
<TOTAL-REVENUES> 632,690
<CGS> 763,620
<TOTAL-COSTS> 763,620
<OTHER-EXPENSES> 190,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,266
<INCOME-PRETAX> (314,895)
<INCOME-TAX> (24,645)
<INCOME-CONTINUING> (290,250)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (290,250)
<EPS-BASIC> (5.99)
<EPS-DILUTED> (5.99)
</TABLE>
