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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 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 of incorporation) (I.R.S. Employer Identification No.)
345 Los Coches Street, Milpitas, California 95035
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 262-6700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value Per Share
Rights To Purchase Series A Participating Preferred Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing price as reported on The NASDAQ National Market
on November 30, 1999) was $273,321,328. Shares of voting stock held by each
officer and director and by each stockholder affiliated with a director have
been excluded from this calculation because such persons may be deemed to be
affiliates. This determination of officer or affiliate status is not necessarily
a conclusive determination for other purposes. The number of outstanding shares
of the Registrant's Common Stock as of November 30, 1999 was 49,927,337.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held February 24, 2000 are incorporated by reference into
Part III of this Form 10-K.
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* For purposes of this Form 10-K the Registrant has indicated its fiscal year
as ending on September 30th. The Registrant operates on a
fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to
September 30th.
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FORWARD LOOKING INFORMATION
Certain statements in this Annual Report on Form 10-K for Read-Rite Corporation
("Read-Rite" or the "Company") include forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These statements include, but are not
limited to, the Company's expectation that the industry trend toward fewer
average head gimbal assemblies ("HGAs") per headstack assembly ("HSA") and
competitive pricing pressures will continue into fiscal 2000; the Company's
expectation that giant magnetoresistive ("GMR") products will be sold in the
volumes anticipated by the Company in fiscal 2000; the Company's expectation
that manufacturing cycle time will be further reduced in fiscal 2000; the
Company's expectation that it will achieve and maintain acceptable yields on its
GMR programs; 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 approximately $80 million in capital equipment
during fiscal 2000, including the potential acquisition of certain assets
through operating leases; The Company's belief that with either renegotiation of
its existing credit facilities, negotiation of new credit facilities with other
lenders, or issuance of additional equity securities or other financial
instruments, will provide the Company with sufficient funding for 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 belief that
the Company is Year 2000 ready, 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 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; the anticipated trend of
increases in areal density may not occur; 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, if unsuccessful, the Company's ability to
negotiate new credit facilities with other lenders or issue additional equity
securities or other financial instruments; 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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PART I
ITEM 1. BUSINESS
GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") is one of the world's
largest independent suppliers of magnetic recording heads for the hard disk
drive (HDD) market. The Company designs, manufactures and markets magnetic
recording heads as head gimbal assemblies ("HGAs") and incorporates multiple
HGAs into headstack assemblies ("HSAs"). Read-Rite's products are sold primarily
for use in 3.5" form factor HDDs. The Company also supplies magnetoresistive
("MR") tape heads for tape drives including multi-channel heads for the super
digital linear tape (SDLT) drive market.
During fiscal 1999, the Company supplied HGAs in volume for 16 different disk
drive products to 5 customers, and supplied HSAs in volume for 48 different disk
drive products to 4 customers. In comparison, during fiscal 1998, the Company
supplied HGAs in volume for 24 different disk drive products to 6 customers, and
supplied HSAs in volume for 50 different disk drive products to 4 customers.
During fiscal 1999, the Company sold approximately 68.7 million HGAs (including
HGAs incorporated into HSAs), and approximately 15.4 million HSAs. HGAs and HSAs
accounted for approximately 97% of the Company's net sales during fiscal 1999.
Read-Rite also produces thin film MR tape heads for use in QIC tape drives in
the 4 gigabyte ("GB") to 10 GB range per cartridge. During fiscal 1999, the
Company supplied QIC tape heads in volume for 9 different tape drive products to
4 customers. Tape heads accounted for approximately 2% of the Company's net
sales during fiscal 1999.
The Company's net sales to its largest customers during fiscal 1999 and fiscal
1998 were as follows (as a percentage of net sales):
<TABLE>
<CAPTION>
CUSTOMERS 1999 1998
- --------- ---- ----
<S> <C> <C>
Western Digital 37% 49%
Maxtor 32% 25%
Samsung 19% 15%
All Others 12% 11%
---- ----
100% 100%
---- ----
</TABLE>
The Company's principal wafer manufacturing facility is located in Fremont,
California with a secondary wafer fabrication facility at Read-Rite SMI
Corporation ("Read-Rite SMI"), the Company's joint venture in Japan with
Sumitomo Metal Industries, Ltd. ("SMI") near Osaka, Japan. The Company has its
primary slider fabrication and HGA assembly facilities in Bangkok, Thailand, and
its primary HSA assembly facilities in Manila, the Philippines and Bangkok,
Thailand. The Company manufactures wafers for tape heads at its Milpitas
facility, and performs device fabrication, assembly and test operations in the
Philippines.
Read-Rite was incorporated in California in 1981 and reincorporated in Delaware
in 1985.
For a discussion of certain significant risk factors associated with the
Company's business, see "Certain Additional Business Risks."
COMPANY STRATEGY
Personal computer ("PC") end-user demand and non-PC computer applications such
as network servers (intranet and internet), workstations, mainframes, video on
demand, voicemail, consumer appliances and multimedia services are driving the
computer industry's demand for greater performance and higher data storage
capacity. From fiscal 1994 to the end of fiscal 1999, the capacity for a single
disk, 3.5" drive increased from approximately 270 megabytes ("MB") to greater
than 10 GB. The rapid introduction of new, higher performance products, shorter
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product life cycles and the trend toward fewer heads per drive places
significant pricing pressure on hard disk drives and drive components, including
recording heads. In addition, during fiscal 1998 and continuing into fiscal
1999, the sub $700 PC market emerged. Users in the sub $700 PC market typically
require less storage capacities, therefore lower number of heads per drive than
that for the office desktop computers. The Company expects growth in the sub
$700 PC market and the trend for lower number of heads per drive to continue in
the foreseeable future.
To be competitive in this demanding environment, the Company must collaborate
closely with its customers as well as its technology partners in media, channel
electronics and capital equipment to ensure critical development projects
proceed in a timely and coordinated manner. The Company must continually design
new product platforms to accommodate a broad range of customer requirements
while efficiently utilizing engineering efforts and minimizing manufacturing
costs. In addition, it is critical that the Company achieve continuous and
timely design-in qualifications to become one of the primary suppliers for
customer programs. Although disk drive manufacturers commonly qualify more than
one supplier, early design-in wins are important in order to become one of the
primary suppliers. Given shorter and shorter product life cycles, it is critical
to work towards becoming a primary supplier on customer programs.
During fiscal 1999 and continuing into fiscal 2000, the Company had made
significant progress in attaining technology leadership as demonstrated by
achieving four world-records in magnetic recording areal-density, reducing MR
manufacturing cycle times and, increasing its customer base with its new GMR
products. More details on these subjects will be included in subsequent sections
regarding the Products, Manufacturing, Customers and Technologies.
In fiscal 1999, the Company experienced a net loss of approximately $155.7
million, compared to a net loss of $319.7 million in fiscal 1998 and a net
income of $76.2 million in fiscal 1997. Continued competitive pricing pressure,
industry trends toward fewer HGAs per HSA, short product life cycles, and the
industry's quicker than expected transition from MR to GMR technology
contributed to the Company's net loss. The losses from operations, the
requirement for continued investment in capital and the forecasted growth in
working capital have all combined to force a renegotiation of the Company's
current bank credit facility. The Company is not in any payment default under
the current facility and has continued to pay all interest charges and fees
associated with this facility on its scheduled due dates. In October 1999, the
Company repaid $25 million of its $150 million credit facility and reduced the
size of the revolver portion of its credit facility to $75 million. In
connection with this repayment, the banks agreed to waive compliance on certain
financial covenants through December 31, 1999. As of December 29, 1999, the
Company had repaid another $25 million of its credit facility and reduced the
size of the revolver to $50 million. In response to this repayment, the banks
agreed to a fourth waiver/amendment that can extend to February 25, 2000. As a
result of the Company not being in compliance with certain financial ratios
required by the lender and the short term nature of the waivers and amendments,
the Company reclassified certain long-term debt to current liabilities. The
Company's independent auditors have included a going concern emphasis paragraph
in the audit report highlighting the Company's historical operating losses and
debt covenant violations. If an amendment or restructuring of the current credit
facility is successful, the Company will seek to have the auditors reissue an
opinion without the going-concern emphasis paragraph. There can be no assurance
the Company will be able to renegotiate the credit facility on terms acceptable
for the Company, and the borrowings could become immediately payable, nor can
the Company guarantee that the auditors will reissue an opinion without the
going-concern paragraph. See item 7 in Liquidity and Capital Resources.
PRODUCTS
An HGA consists of a magnetic recording head attached to a flexure, or
suspension arm, and a wire/tubing, trace assembly or flex cable assembly. A
number of HGAs can be combined with an actuator for positioning the HGAs, a coil
assembly and a flexible circuit assembly to form an HSA. The remaining principal
components of HDDs rigid disk drives are disks, a motor/spindle assembly for
rotating the disk, control electronics and firmware. The rigid disks, or media,
are coated with a thin layer of magnetic material and attached to the
motor/spindle assembly, which rotates the disks at high speed within a sealed
enclosure. The heads, attached to and positioned by the movable actuator, "fly"
above both sides of each disk.
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The position of the heads is controlled by the drive electronics based on a
servo pattern previously written on the surface of at least one disk. The heads
record or retrieve data from tracks in the magnetic layer of each disk. HDDs are
used in computer systems to record, store and retrieve digital information. Most
computer applications require access to a greater volume of data than can
economically be stored in the random access memory of the computer's central
processing unit (commonly known as "semiconductor" memory). This information can
be stored on a variety of storage devices, including HDDs, both fixed and
removable, flexible disk drives, magnetic tape drives, optical disk drives and
semiconductor memory. HDDs currently provide access to large volumes of
information faster than optical disk drives, flexible disk drives or magnetic
tape drives and at substantially lower cost per GB than high-speed semiconductor
memory.
Computer systems of all types increasingly use dedicated backup storage
peripherals to archive and protect large volumes of data. Tape drives are
hardware devices which enable the most cost effective data backup solution,
combining performance, capacity, and reliability. The principal elements of tape
drives are magnetic read/write heads, electronics for read/write, tape motion
control and guidance, system interface functions, and the tape cartridge.
HEAD GIMBAL ASSEMBLIES
Disk drive manufacturers purchase from the Company either fully assembled HSAs,
or purchase HGAs separately and assemble, or have assembled, their own HSAs. The
Company supplied HGAs in volume for 16 different disk drive products to 5
customers during fiscal 1999. Direct sales of HGAs accounted for approximately
16% of the Company's net sales for fiscal 1999, compared to 11% of the Company's
net sales for fiscal 1998. During fiscal 1999, the Company manufactured in
volume three types of heads for HDDs: inductive thin film, magnetoresistive
("MR") thin film, and giant magnetoresistive ("GMR") thin film.
MR thin film heads are produced with manufacturing processes adapted from
semiconductor manufacturing operations. Thin films of highly permeable magnetic
material are deposited on a non-magnetic substrate to form the magnetic core,
and electrical coils are electroplated in a pattern which has been imprinted
through photolithographic techniques. This process facilitates miniaturization,
reduces electrical inductance and enhances manufacturing precision.
MR thin film heads consist of a magnetoresistive read element and an inductive
write element. The MR read element incorporates certain materials whose
electrical resistances change in a magnetic field. In the read mode, as the MR
head flies over a previously written region on the disk, the magnetic field
generated by the directionally magnetized region causes a change in electrical
resistance. This change can be sensed or read by the drive's electronic
circuitry. MR heads have the ability to read data at lower media velocities and
narrower track widths than inductive heads. The ability to read at lower media
velocities improves performance as disk drives become smaller, because the
surface velocity of a disk turning at the same number of revolutions per minute
is reduced as the diameter of the disk decreases. Narrower track widths enable
higher density magnetic recording, resulting in greater capacity per square
inch.
The Company manufactured HGAs utilizing the GMR effect, a phenomenon involving
large changes in electrical resistance that occur in specific materials
sandwiched in a number of very thin layers of metals. GMR recording heads are
significantly more sensitive than conventional inductive and MR recording heads,
allowing them to read data from computer disks and other storage media at higher
densities and smaller track widths. In August 1999, the Company announced a
significant data storage breakthrough and demonstrated GMR heads at an areal
density of 26.5 billion bits per square inch, or over 38 GB per 3.5-inch
platter. High data rates of 230 - 500 million bits per second, with a read
sensitivity as high as 6.5 millivolts per micron were achieved in this world
record setting demonstration. In November 1999, the Company announced another
data storage breakthrough with demonstrated GMR heads at areal density of 36
billion bits per square inch, or over 50 GB per 3.5-inch platter. The
performance of the fully integrated GMR pico read/write heads enable these
products to be designed into high end drives for the internet server market, the
mobile computing market, emerging consumer applications, as well as drives for
the desktop market.
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During fiscal 1999, the Company continued the transition of its product
development and manufacturing efforts from MR technology to GMR technology and
has installed state-of-the-art deposition equipment to meet the challenge of
producing the very thin layers required by GMR technology. Currently the Company
produces Spin Valve-GMR recording heads supporting 10.2 GB per 3.5-inch disk. In
fiscal 1999, the Company shipped HGAs with GMR technology in volume to 2
customers, accounting for approximately 2% of the Company's net sales. The
Company anticipates that over 80% of its products shipped during fiscal 2000
will incorporate GMR technology.
HEADSTACK ASSEMBLIES
The Company has been supplying HSAs since fiscal 1992 as part of its strategy to
supply higher value products to its customers. In fiscal 1999, the Company
assembled substantially all of its HSAs (other than prototypes) at its
facilities in Thailand and the Philippines.
The Company supplied inductive thin film, MR thin film, and GMR thin film HSAs
in volume for 48 different disk drive products to 4 customers during fiscal
1999. HSAs accounted for approximately 81% of the Company's net sales during
fiscal 1999, compared to 86% of the Company's net sales during fiscal 1998.
TAPE HEADS
Since fiscal 1994, the Company has been supplying MR tape heads for use in QIC
tape drives as part of its strategy to diversify its product offerings, and is
the leading independent producer of MR tape heads for use in QIC tape drives in
the 4GB to 10GB range per cartridge. During fiscal 1999, the Company supplied
QIC tape heads in volume for 9 different tape drive products to 4 customers.
Tape heads accounted for approximately 2% of the Company's net sales for the
year.
In anticipation of the customer demand for greater capacity, faster transfer
rates and the continued migration of tape drives from ferrite head technology to
thin film head technology, the Company is developing magnetoresistive thin film
multi-channel tape heads. These thin film heads are fabricated through a batch
photolithographic method that allows for very small track dimensions and precise
alignment of the multiple channels in the head. The multiple channels allow
parallel track recording which enables higher data transfer rates, while the
photolithographic tolerances and alignment combined with magnetoresistive read
performance allows smaller track widths and higher recording densities, creating
higher capacities. These magnetoresistive thin film multi-channel tape heads
include electronic lapping guides which are utilized in the manufacturing
process to produce uniformity in the MR stripe heights based on Read-Rite's
internally developed lapping processes and equipment. Two individual
multi-channel read/write clusters are aligned together to provide
read-while-write data verification required by most high capacity tape drives
used for server backup.
During fiscal 1999, Read-Rite was in the developmental phase of
magnetoresistive, multi-channel thin film tape heads for Quantum Corporation's
SDLT tape drive and Benchmark Tape System's DLT1 tape drive. The Company
anticipates that with the introduction of these new multi-channel products in
addition to the continued Travan business, the net sales from tape heads in
fiscal 2000 will increase substantially from its fiscal 1999 level.
MANUFACTURING
Read-Rite's operating results are highly dependent upon its ability to produce
large volumes of magnetic recording heads at acceptable manufacturing yields.
The Company's manufacturing process for thin film heads is divided into four
main areas: wafer fabrication, slider fabrication/wafer slicing, HGA assembly
and testing, and HSA assembly and testing. For tape heads, the Company's
manufacturing process consists of wafer fabrication, wafer slicing, assembly and
testing.
WAFER FABRICATION
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The Company presently fabricates wafers at its Fremont and Milpitas, California
facilities and at Read-Rite SMI's facility near Osaka, Japan (See Item 1:
Strategic Alliance with Sumitomo). The Company's Fremont facility produces 6"
square wafers (versus 4" square wafers currently produced in its Milpitas
facility and at Read-Rite SMI), increasing the unyielded per wafer slider count
from approximately 6,500 nanosliders per 4" wafer to over 16,000 nanosliders and
28,000 picosliders per 6" wafer. During fiscal 1999, the Company's Fremont
facility produced approximately 55% of the Company's total slider output. The
Company has completed the transition of its wafer fabrication facility to GMR
technology in order to meet the specifications and demand for increased
production of GMR products. The Company's Fremont facility serves as the primary
wafer supply for GMR, MR and remaining inductive products, with the Milpitas
facility serving as the primary wafer supply for tape head products.
SLIDER FABRICATION/WAFER SLICING
The Company machines or slices wafers (other than for prototypes) primarily at
its Thailand facilities. The machining process is accomplished in five phases.
First, diamond saws cut the wafer into rows, or bars, of sliders. Second, the
rows are lapped to the proper throat and stripe height using an automated,
multi-stage lapping process. Third, the Company uses photolithography and
reactive ion etching processes to define and shape the air bearing surfaces of
the individual sliders in each row. Fourth, the rows are cut into individual
sliders. Finally, the sliders are coated with a protective diamond like coating.
HGA ASSEMBLY AND TESTING
The Company presently performs volume HGA assembly and testing at its Thailand
facilities. In HGA assembly, either wire elements, trace assemblies or flexible
circuitry are used in the process. Wire elements are attached to bond pads on
the slider and the slider is then bonded to the stainless steel
flexure/suspension, while trace assemblies or flexible circuitry is attached to
bond pads on the slider after the slider is bonded to the stainless steel
flexure/suspension. The Company then tests the head's read/write capability (for
example: signal strength, pulse shape, over-write and error rate) and the
circuit integrity of the magnetic elements. In fiscal 1999, the Company started
the transition to integrated suspensions such as Trace Suspension Assemblies
(TSA) for its GMR products. TSA suspensions integrate into the suspension a thin
electrical conductor that connect directly with the recording head. The integral
etched cooper leads of the TSA suspension are pre-positioned on the suspension
assembly from the head region through the length of the suspension and, in some
cases, along the actuator. By eliminating the manual labor required to attach
heads to suspension in the conventional suspension assembly, the Company
believes the use of TSA suspensions in its GMR products will increase overall
consistencies and improve production yield of the Company's GMR products.
The Company typically tests its HGAs before shipment to ensure the HGAs meet
customer specifications. Despite such testing, however, customers may return
defective lots if, due to different testing equipment or procedures, damage in
shipment or other factors, they determine that a previously agreed upon
percentage of the HGAs in the lot do not meet specifications. As the Company
continues to advance along the process learning curve as it relates to GMR HGA
production, manufacturing yields are expected to increase during fiscal 2000.
However, there can be no assurance that the Company will be able to achieve
component cost levels, manufacturing yields and productivity levels necessary to
achieve adequate GMR HGA margins.
HSA ASSEMBLY AND TESTING
As previously noted, the Company assembled substantially all of its HSAs (other
than prototypes) in fiscal 1999 at its facilities in Thailand and the
Philippines. HSAs can consist of up to 30 or more total parts. The HGAs, the
actuator coil and a flexible printed circuit cable are mounted on the actuator
such that the heads can be positioned within the disk drive. The HSA also
includes a read/write preamplifier and head selection circuit, and may include
other miscellaneous parts, such as bearings, a voice coil, and a connector,
depending on the design of the customer's disk drive.
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The HSA business carries certain risks and demands in addition to those of the
HGA business. Among those risks are lower gross margins, increased exposure to
inventory obsolescence due to the larger number of parts required for an HSA and
the fact that each HSA program requires unique components with long lead-time
purchasing cycles, and varying product life spans between different HSA models.
Additionally, the Company has experienced lower manufacturing yields and higher
costs during the production of its GMR products in comparison to its MR products
primarily due to the process learning curve associated with the introduction of
the newer technology. As the Company continues to advance along the process
learning curve as it relates to GMR HSA production, manufacturing yields are
expected to increase during fiscal 2000. However, there can be no assurance that
the Company will be able to achieve component cost levels, manufacturing yields
and productivity levels necessary to achieve adequate GMR HSA margins.
TAPE HEADS
After the Company's tape head wafers are fabricated in its Milpitas facility,
they are high-speed probed for their electronic characteristics, and mapped for
later sorting. The wafers are sliced into rows and subsequently sliced into
individual elements by a subcontractor in China.
After the tape wafers are sliced and sorted into individual, probed good, MR
devices, they are shipped from the subcontractor to Read-Rite's Philippines
facility. The devices are assembled into a body and tape support structure and
subsequently contoured to create a "Tape Bearing Surface" over which the
magnetic tape media is passed. After contouring, a flexible cable is attached
and this assembly is mounted into a customer unique carriage. The final unit is
dynamically tested and mechanically inspected prior to shipping. The Company
performs all of its tape head assembly operations at its facilities in the
Philippines.
PROCESS IMPROVEMENT
In fiscal 1999, the Company focused substantial time and resources on improving
the flow of product throughout the Company's manufacturing process. From the
Company's wafer fabrication facility in Fremont, California to its HGA and HSA
manufacturing facilities in Bangkok, Thailand and Manila, the Philippines, the
Company worked towards reducing manufacturing cycle time -- the time required
for the Company's product to be manufactured. The Company's manufacturing cycle
time was significantly reduced during fiscal 1999. The Company also focused on
the improvement of its inventory turnover rate -- which indicates the number of
times the Company's inventory "turns over" during the year. The Company's gross
inventory turnover rate increased from 14.0 at the end of fiscal year 1998 to
16.6 at the end of fiscal 1999. The Company has also developed a more automated
process for attaching recording heads to suspension gimbals. This process was
implemented during the last quarter of fiscal 1999. These improvements allowed
the Company to be more responsive to the requirements of its customers. In
addition, by decreasing manufacturing cycle time and increasing inventory
turnover rate, less investment in inventory is required, allowing the Company to
focus resources in other areas. The Company expects to continue to improve in
these areas in fiscal 2000; however, there can be no assurance this will be
achieved. Failure to further reduce manufacturing throughput time and/or failure
to increase inventory turnover rate may have a material adverse effect on the
Company's business, operating results and financial condition.
CUSTOMERS, MARKETING AND SALES
The Company's largest customers during fiscal 1999 were Western Digital, Maxtor,
and Samsung, representing 37%, 32%, and 19%, respectively, of the Company's net
sales for the period. Given the small number of high performance disk drive and
QIC tape drive manufacturers who require an independent source of HGA, HSA or
tape head supply, the Company expects its dependence on a relatively limited
number of customers to continue. Moreover, customers in the disk drive industry
have been increasingly moving towards limiting their number of suppliers of
recording heads per program, as well as focusing their own efforts on fewer and
larger new programs. Thus, the Company expects it will be increasingly important
to successfully achieve design-in wins for all major programs for its primary
customers. As a result, the loss of any customer, a significant decrease in
orders from one or more
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large customers, or the failure to achieve a design-in win or wins on particular
customer programs would have a material adverse effect on the Company's
business, financial condition and results of operations.
During fiscal 1999, the Company sold prototype and some production level
shipments from its headquarters located in Milpitas, California. All other sales
to customers, exclusive of Read-Rite SMI sales, were conducted by the Company's
wholly owned subsidiary, Read-Rite International, through its Singapore branch.
Read-Rite SMI sells to Japanese customers from its facility near Osaka, Japan.
The Company's total foreign net sales accounted for 99%, 98% and 98% of net
sales during fiscal 1999, 1998 and 1997, respectively. See Note 15 in Notes to
Consolidated Financial Statements.
Disk drive and tape drive manufacturers offer a variety of products with
differing design, performance and cost characteristics. Magnetic recording head
vendors, such as the Company, work with manufacturers to determine the
performance characteristics required for the heads to be used in new designs and
develop customized HGAs and HSAs for each program. Head vendors seek to have
their heads "designed in" to a particular program and to be qualified as a
primary supplier for new programs. The development and commencement of
production of head products for new programs involves major expenditures for
product design, production engineering and capital equipment. Production
processes must also be adjusted to accommodate the unique specifications of each
new design. As manufacturers introduce new programs, the Company must seek to
qualify its heads in these new programs, requiring continual significant
expenditures of time and resources. Additionally, these new programs typically
require the development of new head technologies or enhancements to existing
platforms to address ever-higher performance criteria. These conditions place a
significant burden on the Company to properly assess the developments in the
industry and to market and sell products successfully to changing or emerging
market leaders.
Throughout fiscal 1999, the Company continued its focus on strong customer
support, improved service and quality programs to strengthen its customer
relationships. The Company has implemented, and is continuing to implement, a
series of programs to enhance customer satisfaction. The Company has business
units to provide dedicated customer support teams that are responsive to the
specific needs of each customer. The teams provide focused improvements in new
product introductions, including design support, early availability of advanced
samples, prototype production, and volume manufacturing ramps. Further, to meet
its customers' time-to-market goals, the Company strives to anticipate its
customers' requirements through use of the Company's strategic technology plan
to translate customer requirements into product platform specifications and to
develop short, medium and long-term strategies for achieving those
specifications. This customer focus and close collaboration helps facilitate
early design-in wins and improves the Company's ability to timely reach volume
production.
The Company continues to seek close technical collaboration with its customers
during the design phase of new programs to facilitate integration of the
Company's products into such programs, to improve the Company's ability to
rapidly reach high manufacturing volumes, and to position the Company to be a
primary supplier of HGAs, HSAs and tape heads for new programs. Read-Rite
believes that winning early design-in qualifications is critical, particularly
in light of the rapid migration toward higher volume disk drive programs and the
shorter life cycles of such products. Failure by the Company to execute
consistently on product design-ins has and may continue to have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
The disk drive industry is intensely competitive, both at the drive level and
the component level, and is characterized by short product life cycles and
substantial price declines over the useful life of a product. Accordingly, the
Company believes that the most important competitive factors in its industry are
timely delivery of 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 Metal and Yamaha have been
aggressively competing for business in the United States and in Japan,
specifically targeting the market for GMR. In November 1999, Yamaha announced
its
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exit from the HDD recording heads market effective in March, 2000. The Company's
domestic competitors are Applied Magnetics Corporation, Headway Technologies and
IBM. On January 2000, Applied Magnetics Corporation filed for protection under
Chapter 11 of the Bankruptcy Code and effectively ceased operations. 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 HDDs, and the Company
believes WD presently purchases a material percentage of its MR and GMR head
requirements from IBM. The Company's competitive position could be materially
and adversely affected if more of these competitors are successful in marketing
GMR products in the merchant market in volume quantities at competitive pricing.
In its HSA business, the Company has competed in the past against other merchant
HSA manufacturers such as Kaifa and TDK/SAE in China, and Tandon in India. There
may also be certain government incentives in their respective countries that
could reduce their operating costs and continue to decrease selling price. The
Company is currently working with HSA manufacturers such as Kaifa and Tandon to
outsource a portion of the Company's HSA business to take advantage of these HSA
manufacturers' low cost structure. 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. If the Company is not successful in generating a positive
operating margin from the HSA manufacturing operations in the near term, it will
need to take appropriate steps to align its cost structure and cash flows
accordingly.
Finally, the development of new technologies, such as pico sliders and GMR heads
will continue to be demanded by customers in fiscal 2000. Additionally, other
manufacturers may already have or may develop more advanced GMR technology or
GMR production capability than the Company. 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.
PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
The Company's current research and development efforts are principally directed
towards the development of next generation products and technologies related to
the Company's HGA, HSA and tape head businesses, enhancement of existing
products, and manufacturing process developments to improve product performance
and manufacturing yields.
In response to the disk drive market's demand for higher performance products,
the Company has and continues to aggressively pursue a range of new and emerging
technologies to increase the areal density capability of its products. Areal
density is a measure of storage capacity per square inch on the recording
surface of a disk. For ease of reference, this measure is commonly converted to
gigabytes ("GB") per 3.5" disk. During fiscal 1999, the Company continued to
execute its primary strategic objective of becoming the technology leader for
GMR HGAs and HSAs. Responding to the industry's rapid shift to GMR technology,
which occurred during the second half of fiscal 1999, the Company accelerated
its existing GMR transition strategy while maintaining volume shipments of its
MR products. By the fourth quarter of fiscal 1999, the Company qualified for
volume shipment of its GMR products with its major customers.
MR heads consist of thin film inductive write structures and MR read structures
that take advantage of magnetic properties in certain metals to achieve
significantly higher storage capacities. GMR heads use similar technology as MR
heads, but incorporate a magnetically sensitive resistor called Spin Valve to
further increase storage and retrieval capacities without increasing the size of
the storage medium. The Company began the year with volume shipment of MR heads
at 3.0 GB per 3.5" disk, and subsequently qualified for volume shipment of GMR
heads at 5.2 GB through 8.7 GB per 3.5" disk. During fiscal 1999, the Company
sold approximately 64.4 million MR HGAs
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(including HGAs incorporated in HSAs) to 4 customers, increasing net sales of MR
products to $646.6 million, compared to net sales of MR products of $590.0
million during fiscal 1998. The Company expects that MR products, which
accounted for approximately 90% of the Company's net sales during fiscal 1999,
will account for a substantially lower percentage of net sales during fiscal
2000 as the Company transitions to GMR technology. The Company expects customer
demand to shift from MR to GMR products during fiscal 2000, and that GMR
products will account for a majority of its net sales during fiscal 2000.
The Company has focused and will continue to focus on technology advancements,
customer satisfaction and cost efficiency. During fiscal 1999, the Company
continued development of improved process technologies, including the transition
from nano to pico form factor in its wafer fabrication, slider manufacturing and
HGA assembly processes. This transition will enable the Company to miniaturize
the size of magnetic recording head sliders, therefore increasing the Company's
plant capacity. The Company also continued to develop its existing spin valve
GMR products for higher areal density, as evidenced by the Company's record
setting data storage demonstration in August and November 1999. The Company has
developed an automated process for attaching recording heads to suspension
gimbals and has successfully implemented two wireless technologies into its HGA
process, Trace Suspension Assembly (TSA) and Flex on Suspension (FOS). In
addition, the Company has made significant progress in developing new
technologies such as microactuator and Chip on Base (COB), for high areal
density and data rate applications. The Company has also designed a unique
co-located piezoelectric based HGA microactuator. The COB activity is focused on
testing the second generation preamp chips geared for data rates above 700
Mb/sec. Failure to successfully design and manufacture products utilizing these
new technologies may have a material adverse effect on the Company's business,
financial condition and results of operations.
During fiscal 1999, 1998 and 1997, the Company's research and development
expenses were $92.2 million, $92.3 million and $65.0 million respectively.
The Company's tape head unit has launched development programs for certain
customers of multi-channel MR tape heads in an effort to penetrate the digital
linear tape ("DLT") drive market. As announced by the Company, specific
development agreements have been signed with Quantum for their super DLT product
and Benchmark for their DLT1 product.
There can be no assurance that the Company will be successful in developing any
of these new technologies or that, if successful, it will be able to obtain
qualifications in customer programs or transition the technologies into
commercially viable volume production.
BACKLOG
The Company's sales are generally made pursuant to short-term purchase orders
rather than long-term contracts. In addition, the Company believes it is common
practice for disk drive manufacturers to place orders in excess of requirements
and to change or cancel outstanding purchase orders in response to rapidly
shifting business conditions. See also "Certain Additional Business Risks" and
other risk factors discussed elsewhere in this report. Accordingly, the Company
does not believe its backlog is an accurate measure of net sales or operating
results for any future period.
STRATEGIC ALLIANCE WITH SUMITOMO
In June 1991, the Company established a strategic alliance with Sumitomo Metal,
Incorporated ("SMI"), a leading Japanese industrial company, including an
investment by SMI in the Company and the establishment by the two companies of a
joint venture, Read-Rite SMI ("RRSMI"), in Japan. During fiscal 1999, RRSMI
operated primarily as a wafer fabrication facility to manufacture products for
the customers of Read-Rite Corporation.
The Company has a majority voting interest in RRSMI, and RRSMI's charter
documents provide for a simple majority vote of the Board of Directors of RRSMI
on all matters in the ordinary course of business. In the case of a
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shareholder vote due to the lack of the required vote by the Board of Directors,
a simple majority shareholder vote is required.
The Company and RRSMI have cross-licensed all of their respective inductive thin
film, MR, spin valve, and GMR technologies owned or developed during the term of
the original joint venture agreement relating to the manufacture of thin film
heads for disk drives. RRSMI has the exclusive right to distribute products of
either RRSMI or the Company to customers for integration into disk drives in
Japan and to Japanese customers for integration into rigid disk drives
throughout the remainder of the world other than North America. The Company has
the exclusive right to distribute products of either the Company or RRSMI for
integration into HDDs in North America and throughout the rest of the world,
other than in Japan or by Japanese customers outside North America.
Under the Company's joint venture agreement with SMI both parties share pro rata
in funding the working capital requirements of RRSMI. Both parties to the joint
venture agreed that due to the losses that were being incurred at RRSMI, it was
important to increase the equity position of RRSMI. Accordingly, during the
third quarter of fiscal 1999, SMI and Read-Rite each contributed an additional
capital infusion of $28.3 million to RRSMI. This infusion had no impact on the
Company's percentage ownership interest of RRSMI.
Although the Company believes RRSMI provides important advantages to the
Company, there can be no assurance that there will be market demand in Japan for
thin film heads manufactured by RRSMI. For example, though RRSMI is currently a
supplier for Quantum/MKE on certain GMR programs, there can be no assurance that
RRSMI will continue to be successful in the qualification on future Quantum/MKE
GMR programs. If the Company is not successful in generating a positive
operating margin from RRSMI in the near term, it will need to take appropriate
steps to align its cost structure, cash flows, and equity position accordingly.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Read-Rite regards elements of its manufacturing processes, product designs, and
equipment as proprietary and seeks to protect its proprietary rights through a
combination of employee and third party non-disclosure agreements, internal
procedures and patent protection. The Company has approximately 133 U.S. and
additional foreign patents, generally having terms of 20 years from their filing
dates, and many additional U.S. and foreign applications pending. In addition,
Read-Rite has a variety of licenses and cross-licenses with other companies
within the industry such as IBM, Seagate and TDK for certain uses of those
companies' respective patents.
Read-Rite believes that its success depends on the innovative skills and
technical competence of its employees and upon proper protection of its
intellectual properties. Despite Read-Rite's protective measures, there can be
no assurance that such measures will be adequate to protect its proprietary
rights or that the Company's competitors will not independently develop or
patent technologies that are equivalent or superior to the Company's technology.
The Company has, from time to time, been notified of claims that it may be
infringing patents owned by others. To the extent the Company receives
additional claims of infringement from others in the future, where necessary or
desirable, the Company may seek licenses under patents which it is allegedly
infringing. Although patent holders commonly offer such licenses, no assurance
can be given that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. Defending a claim of infringement or
the failure to obtain a key patent license from a third party could cause the
Company to incur substantial liabilities and/or to suspend the manufacture of
the products utilizing the patented invention.
EMPLOYEES
As of November 30, 1999, the Company had 14,701 employees, including 1,388 in
the United States, 8,664 in Thailand, 4,243 in the Philippines, 371 at Read-Rite
SMI, 31 at the Company's sales and customer support offices in Singapore, and 4
in Malaysia. Read-Rite believes its future success will depend in large part
upon its ability to continue to attract, retain, train and motivate highly
skilled and dedicated employees. None of the Company's employees are currently
represented by a labor union.
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ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state, local and foreign
regulations relating to the use, storage, discharge and disposal of hazardous
materials used during its manufacturing process, to the treatment of water used
in manufacturing, and to air quality management. In addition to obtaining
necessary permits for expansion, the Company must also comply with expanded
regulations on its existing operations as they are imposed. Although the Company
has not, to date, suffered any material adverse effects in complying with
applicable environmental regulations, public attention has increasingly been
focused on the environmental impact of manufacturing operations which use
hazardous materials. It is the Company's intention to comply with all federal,
state and local environmental, health and safety laws and regulations, or to
obtain all necessary permits required under such regulations.
The Company is not aware of any fines, penalties or lawsuits that could subject
the Company to significant liability and financial penalties (possibly resulting
in suspension of production), restrict the Company's ability to expand or
operate at its locations in California, Thailand, Japan and the Philippines,
restrict the Company's ability to establish additional operations in other
locations, or require the Company to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations. Moreover, while
the Company has invested significant resources in safety procedures, training,
treatment equipment and systems and other measures designed to minimize the
possibility of an accidental hazardous discharge, any such discharge could
result in significant liability and clean-up expenses which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company uses a significant amount of water in its manufacturing process.
Although the Company is currently under no specific water use restrictions,
future drought conditions could cause the state or local authorities to mandate
higher fees and/or reductions in water usage allocations. In such event, any
such reductions could restrict the Company's level of production and adversely
affect the Company's business, financial condition and results of operations.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in its quarterly and annual
operating results in the past, and the Company's future operating results could
vary substantially from quarter to quarter. The Company's operating results for
a particular quarter or longer periods can be materially and adversely affected
by numerous factors, such as increased competition or execution issues leading
to a failure by the Company to obtain "design-in wins" on one or more customer
programs; delayed product introductions or capacity constraints on certain
technologies; decreased demand for or decreased average selling prices for the
Company's products; low product manufacturing yields; changes in product mix and
increased operating costs associated with the ramp-up of production as capacity
is added or under-utilization of capacity if demand is less than anticipated;
increased material costs or material or equipment unavailability; and
disruptions in domestic or foreign operations.
The Company's net sales are generally made pursuant to individual purchase
orders that may be changed or canceled by customers on short notice, often
without material penalties. Changes or cancellations of product orders could
result in under-utilization of production capacity and inventory write-offs. For
example, in the last three quarters of fiscal 1999, in fiscal 1998, and in the
second half of fiscal 1996, the Company experienced delays and cancellation of
orders, reduced average selling prices, inventory and equipment write-offs,
increased unit costs due
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to under-utilization of production capacity, and as a consequence, experienced a
significant reduction in net sales and gross margin and incurred significant
losses.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; RISK OF REDUCED ORDERS
The Company is a component supplier dependent upon a limited number of customers
in a volatile industry characterized by rapid technological change, short
product life cycles, intense competition and steady price erosion. In addition,
demand for the Company's products is highly variable and thus difficult to
predict accurately. This variability was demonstrated as follows: 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 1.3 GB per 3.5-inch disk recording head product due
to a significant and abrupt reduction in demand for this product; in fiscal 1998
generally due to industry conditions; in the last three quarters of fiscal 1999,
when the industry made a faster transition to GMR than anticipated and the
Company had limited "design-ins wins" for its GMR products with our customers.
In each case, these demand variations materially and adversely affected the
Company's business, financial condition and results of operations.
The Company's largest customers are Western Digital, Maxtor, and Samsung,
representing 37%, 32% and 19%, respectively, of the Company's net sales during
fiscal 1999. The Company produced HGAs in volume for 5 customers; HSAs in volume
for 4 customers and tape drive products in volume for 4 customers during fiscal
1999. Given the small number of high performance disk drive and tape drive
manufacturers who require an independent source of HGA, HSA or tape head supply,
the Company will continue to be dependent upon a limited number of customers. As
demonstrated by the significant reduction in the level of the Company's business
in the last three quarters of fiscal 1999, in fiscal 1998 and late in fiscal
1996, as well as the Company's unsuccessful attempt to qualify for shipment of
its first generation GMR products with our major customers, 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.
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. This agreement, along with the Company's heads
not being qualified as the primarily supplier with certain WD programs,
significantly reduced the Company's net sales to WD in fiscal 1999. With timely
qualifications, the Company anticipates an increase in sales to WD in fiscal
2000 compared to fiscal 1999. However, there can be no assurance such sales will
occur. 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.
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RAPID TECHNOLOGICAL CHANGE; TRANSITION TO MR AND GMR TECHNOLOGY
Technology changes rapidly in the Company's industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, in November 1997, the Company responded to
the disk drive industry's continuing rapid shift to MR technology by
accelerating implementation of its existing strategies to transition fully to MR
production while reducing its build plan for its advanced inductive thin film
1.3 GB per 3.5-inch disk recording head product due to a significant reduction
in demand for this product. As a result, the Company incurred a special charge
during the first quarter of fiscal 1998 of $114.8 million, primarily for the
write-off of equipment and inventory associated with the phase-out of advanced
inductive technologies. In the third quarter of fiscal year 1999, the Company
incurred a restructuring charge of $37.7 million for the write-off of equipment
associated with the Company's transition to GMR technology and the decrease in
customer demand.
During fiscal 1997, the Company's primary net sales were derived from thin film
inductive and MR products, which required substantial investments in product
development and manufacturing equipment and facilities to effectively extend the
performance of these products to compete with new products supporting higher
areal densities. To maintain its market position, the Company must continually
and timely improve its wafer fabrication, slider fabrication, HGA and HSA
technologies and facilities to meet industry demands, at competitive costs. As
the Company's customers continue to move towards fewer, larger programs, and as
competition for this increasingly limited number of large volume programs
continues to increase, the failure by the Company to execute on technologies
necessary to consistently obtain qualification on any of such volume programs
will have a material adverse effect on the Company's business, financial
condition and results of operations.
During fiscal 1999, the Company shipped 64.4 million MR heads (including heads
in HSAs) for 47 disk drive programs to 5 customers, accounting for approximately
90% of net sales during the period. The Company intends to continue investing
significant resources in GMR product development and manufacturing equipment.
The Company anticipates majority of its sales for fiscal 2000 will be derived
from sales of GMR products. There can be no assurance, however, that the Company
will be successful in timely and cost effectively developing and manufacturing
MR and GMR heads at acceptable manufacturing yields and as necessary to achieve
consistent design-in wins on customers' new product programs.
SUBSTANTIAL CAPITAL EXPENDITURES
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed significant
production capacity to support new technologies and increased demand for its
products. The Company made capital expenditures during fiscal 1999 of $101.0
million, compared to $186.2 million during fiscal 1998, and plans to spend
approximately $80 million during fiscal 2000. The Company has acquired certain
capital assets through operating leases during fiscal 1999 and may continue to
do so in fiscal 2000. As of September 30, 1999, total commitments for
construction or purchase of capital equipment were approximately $49 million.
There can be no assurance that the Company's net sales will increase
sufficiently to absorb such additional costs, and that there will not be
periods, such as during fiscal 1996, in fiscal 1998, and the last three quarters
of fiscal 1999, when net sales declined quarter to quarter.
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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, experience 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 positions and anticipated foreign
currency denominated expenditures, as substantially all of the Company's foreign
sales are denominated in U.S. dollars.
COMPLEX MANUFACTURING PROCESSES
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss, and in some cases,
cause production to be suspended. Manufacturing yields for new products
initially tend to be lower as the Company completes product development and
commences volume manufacturing, and thereafter typically increase as the Company
ramps to full production. The Company's forward product pricing reflects this
assumption of improving manufacturing yields and, as a result, material
variances between projected and actual manufacturing yields have a direct effect
on the Company's gross margin and profitability. The difficulty of forecasting
manufacturing yields accurately and maintaining cost competitiveness through
improving manufacturing yields will continue to be magnified by ever increasing
process complexity of manufacturing GMR products. Further, the compression of
product life cycles requires the Company to produce new products at higher
volume and acceptable manufacturing yields without, in many cases, reaching the
longer-term, higher volume manufacturing cycle, which is 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 in the supply of certain components or supplies can severely and
adversely affect the Company's production and results of operations. The Company
has limited alternative sources of certain key materials such as wafer
substrates, photoresist, wires and suspensions and frequently must rely on a
single equipment supplier for a given equipment type due to lack of viable
alternatives or to insure process consistency. Furthermore, the suppliers are
generally determined in advance by the Company's 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
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commitments the Company must make to support its customers' programs and the
Company's limited remedies in the event of program cancellations, if a customer
cancels or materially reduces one or more product programs, or should a customer
experience financial difficulties, the Company may be required to take
significant inventory charges which, in turn, could materially and adversely
affect the Company's business, financial condition and results of operations.
While the Company has taken certain charges and provided inventory write-downs,
there can be no assurance that the Company will not be required to take
additional inventory write-downs in the future due to the Company's inability to
obtain necessary product qualifications, or due 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 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 typically have very short life
cycles. Finally, in response to rapidly shifting business conditions, the
Company's customers have generally sought to limit 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 has implemented this inventory
management tool with several of 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.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock is expected to continue to be
subject to wide fluctuations in response to quarter to quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, qualifications of volume shipment programs from
major customers, general conditions in the disk drive and computer industries,
and other events or factors. In addition, stock markets have experienced extreme
price volatility in recent years. This volatility has had a substantial effect
on the market price of securities issued by many high technology companies, in
many cases for reasons unrelated to the operating performance of the specific
companies, and the Company's common stock has experienced volatility not
necessarily related to announcements of Company performance. Broad market
fluctuations may adversely affect the market price of the Company's common
stock.
EXECUTIVE OFFICERS
The Company's executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Cyril J. Yansouni 57 Chairman of the Board of Directors and Chief Executive Officer
Alan S. Lowe 37 President and Chief Operating Officer
Michael A. Klyszeiko 60 Executive Vice President, Operations
Peter G. Bischoff 59 Executive Vice-President and Co-President, Read-Rite SMI
John T. Kurtzweil 43 Senior Vice President and Chief Financial Officer
James Murphy 40 Senior Vice President, Customer Business Units
Mark Re 39 Senior Vice President, Research and Development
Sherry F. McVicar 47 Vice President, Human Resources
</TABLE>
There are no family relationships among directors or executive officers of the
Company.
18
<PAGE> 19
Mr. Yansouni has served as Chief Executive Officer and Chairman of the Board of
Directors of the Company since March 1991. Prior to joining the Company, Mr.
Yansouni was with Unisys Corporation, a manufacturer of computer systems, from
December 1988 to February 1991, where he served in various senior management
capacities, most recently as an Executive Vice President. From October 1986 to
December 1988, Mr. Yansouni was President of Convergent Technologies, a
manufacturer of computer systems, which was acquired by Unisys in December 1988.
From 1967 to 1986, Mr. Yansouni was at Hewlett-Packard Company. During that
time, he served in a variety of technical and management positions, most
recently as Vice President and General Manager of the Personal Computer Group.
Mr. Yansouni received his M.S. degree in electrical engineering from Stanford
University and his B.S. degree in electrical engineering and mechanical
engineering from the University of Louvain, Belgium. Mr. Yansouni is also a
director of Informix Software, Inc. and PeopleSoft, Inc., both software
companies.
Mr. Lowe has served as President and Chief Operating Officer since May 1997. He
joined Read-Rite in 1989 in a sales position and also served as Vice President,
Sales from November 1991 to August 1994, as Vice President of Customer Programs
from August 1994 to November 1995, and as Senior Vice President, Customer
Programs from November 1995 to October 1996. Mr. Lowe was Senior Vice President,
Customer Business Units, from October 1996 to March 1997. Prior to joining the
Company, he was sales manager for Microcom Corporation, a data communications
hardware and software company, in 1989, and held various sales positions at IBM
from 1985 to 1989. Mr. Lowe holds B.A. degrees in Computer Science and Business
Economics from the University of California, Santa Barbara.
Mr. Klyszeiko has been Executive Vice President, Operations, since November
1995. He joined Read-Rite in 1988 as Vice President, Planning and Logistics and
also served as Vice President, Manufacturing from January 1990 to October 1992,
Senior Vice President of Customer Programs from October 1992 to September 1994,
and Senior Vice President, Read-Rite International from September 1994 to
November 1995. Prior to joining the Company, he served at Advanced Micro Devices
as Director of Materials and Systems Planning. He was with VLSI Technology
during 1983 and 1984 as Director of Materials and served in various positions at
Fairchild Camera and Instrument from 1966 to 1983. Mr. Klyszeiko holds a B.A.
degree in business from the University of Vermont. Mr. Klyszeiko has announced
his intention to retire during fiscal 2000.
Mr. Bischoff, a co-founder of the Company, has served as Executive Vice
President since March 1996. He has also served as Executive Vice President,
Research and Development, from February 1994 to March 1996, and Senior Vice
President, Research and Development, from February 1983 to February 1994. Since
July 1991, he has also served as Executive Vice President of Read-Rite SMI, and
since July 1998, served as Co-President of Read-Rite SMI. He served an
apprenticeship in electrochemistry in Pforzheim, Germany and received his B.A.
degree in management from Saint Mary's College. Mr. Bischoff retired from
Read-Rite Corporation as of October 1999.
Mr. Kurtzweil joined the Company in August 1995 as Corporate Controller, and
became the Company's Vice President of Finance and Chief Financial Officer in
November 1995. Mr. Kurtzweil was promoted to Senior Vice President of Finance,
Legal and Information Systems Group in August 1999, as well as retaining the
title and duties of the Company's Chief Financial Officer. Mr. Kurtzweil joined
the Company from Maxtor Corporation where he held a number of finance positions
including Finance Director, Director of Far East Finance based in Singapore, and
Corporate Controller of a wholly owned subsidiary. He was with Maxtor
Corporation from July 1988 to August 1995. He also held finance positions with
Honeywell Incorporated from May 1978 to July 1988. Mr. Kurtzweil received his
B.A. degree in Accounting from Arizona State University and a M.B.A. from the
University of St. Thomas in St. Paul, Minnesota. He is a Certified Public
Accountant and also a Certified Management Accountant. Mr. Kurtzweil is also a
Director and Vice-Chairman for the International Disk Drive and Equipment
Manufacturers Association, a HDD trade association.
Mr. Murphy has been Senior Vice President, Customer Business Units since August
1997. Mr. Murphy joined the Company in April 1991 as a Strategic Accounts
Manager. He was promoted to Director of Sales in Asia in 1993 and to Vice
President of Sales worldwide in 1995. Following the Company's reorganization
into customer business units in 1996, he was named Vice President and General
Manager for the Company's largest customer. Prior to joining the Company, he
held a variety of sales and marketing positions at IBM from 1982 through 1991.
Mr. Murphy holds a B.S. degree in Finance from the University of Santa Clara.
19
<PAGE> 20
Dr. Re has served as Senior Vice President of Research and Development,
responsible for all research and development operations, since April 1998. Prior
to joining the Company, he served at IBM, where he held various senior
managerial positions, most recently Director of recording head development
engineering. At IBM, he managed magnetoresistive (MR) and giant magnetoresistive
(GMR) recording head development. Dr. Re has over 35 articles published in
scientific and engineering publications, and has more than 10 patents to his
credit involving magnetic recording technologies. He holds a Ph.D. and a M.S.
degree in Electrical and Computer Engineering from Carnegie Mellon University in
Pittsburgh, Pennsylvania, and a bachelor's degree in Electrical Engineering from
Northwestern University in Evanston, Illinois.
Ms. McVicar joined the Company in April 1991 as Vice President, Human Resources.
Prior to joining the Company, she was Vice President, Human Resources at Unisys
from January 1989 to April 1991 and held the same position at Convergent
Technologies from December 1987 until its merger into Unisys in December 1988.
Ms. McVicar was also Vice President, Human Resources at Qume, a manufacturer of
computer products, from 1976 to December 1987. She received her B.A. degree in
education and labor relations from Hofstra University and her M.S. degree in
education and labor relations from Queens College.
ITEM 2. PROPERTIES
The Company leases approximately 182,000 square feet at its campus in Milpitas,
California, which serves as the Company's corporate headquarters and also houses
wafer fabrication, prototype manufacturing and research and development
facilities. The primary leases for these properties expire at various times from
July 2001 to June 2010. The Company will attempt to sub-lease excess capacity in
its Milpitas location in fiscal 2000.
The Company also leases two facilities in Fremont, California of approximately
189,000 and 57,000 square feet, respectively, which primarily house wafer
fabrication, research and development and various administrative functions. The
initial leases for these facilities expire in February 2003 and April 2002,
respectively, with three 5-year renewal options and one 5-year renewal option,
respectively. The 57,000 square feet facility was not fully utilized as of
September 30, 1999 and the Company will attempt to sub-lease the facility in
fiscal 2000.
The Company owns a seven-acre site near Bangkok, Thailand with two facilities
totaling 380,000 square feet used for slider fabrication and HGA manufacturing.
These properties and certain additional collateral owned by the Company's wholly
owned subsidiary, RRT, secure loans obtained by RRT from the Industrial Finance
Corporation of Thailand in fiscal 1993. In addition, the Company leases a 20,000
square foot warehouse in Thailand; the lease for this facility expired in
October 1999. The Company did not renew the lease.. During fiscal 1996, RRST
acquired an approximately 97,000 square foot manufacturing facility adjacent to
RRT's existing facilities.
The Company has a long-term land lease on a 13-acre site near Penang, Malaysia,
and owns a 176,000 square foot HSA manufacturing facility on that site. As a
result of the Company's decision to cease manufacturing operations in Malaysia,
the Company has leased the facility but still has it available for sale.
The Company owns a 5.3-acre site near Manila with a 189,000 square foot
manufacturing facility. During fiscal 1998, the Company constructed an
additional 176,000 square foot facility on this 5.3-acre site. Furthermore, the
Company has purchased an approximately 5.3 acre parcel of land for manufacturing
purposes adjacent to the original 5.3-acre site. In addition, the Company had a
lease option on a 73,000 square feet facility near Manila. In November 1999, the
Company sold this option to the landlord.
Read-Rite SMI leases from Sumitomo a 92,000 square foot wafer fabrication and
research and development office facility near Osaka, Japan. This lease expires
in November 2001.
The Company leases an office in Singapore totaling approximately 4,200 square
feet for sales and customer support. The lease expires in March 2001.
20
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
In December 1996, a purported class action complaint was filed in the Superior
Court of the State of California, Santa Clara County, by Joan D. Ferrari and
Mark S. Goldman against the Company and certain of its officers and directors
(the "Ferrari State Action"). The complaint in the Ferrari State Action alleges
that during a purported class period of April 19, 1995 -- January 22, 1996,
defendants made materially false and misleading statements concerning the
Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. In May 1997, the Superior
Court entered an order (1) sustaining the demurrers of certain defendants to the
California Corporations Code cause of action and overruling the demurrers of
Read-Rite Corporation and certain other defendants to that same cause of action;
and (2) sustaining the demurrers of all defendants as to the remaining causes of
action.
In January 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). In May 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by James C. Nevius and William Molair against the Company and certain
of its officers and directors (the "Nevius Federal Action"). The court
consolidated the Ferrari Federal Action and the Nevius Federal Action into one
action, In re Read-Rite Corp. Securities Litigation (the "Consolidated Action"),
and plaintiffs thereafter filed a consolidated complaint. The consolidated
complaint alleges that from April 19, 1995 -- January 22, 1996 (the "Ferrari
Class Period") and from of March 2, 1996 -- June 19, 1996 (the "Nevius Class
Period"), defendants made false and misleading statements about the Company's
business condition and prospects. The consolidated complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5, and seeks damages of an unspecified amount. In August 1998, the court in
the Consolidated Action granted defendants motion to dismiss but granted
plaintiffs leave to file an amended complaint. In January 1999, plaintiffs filed
their amended complaint. In March 1999 defendants moved to dismiss that amended
complaint with prejudice. In June 1999 the court heard oral argument on
defendants' motion to dismiss. That motion is currently under judicial
consideration.
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.
Accordingly, both on its own behalf and pursuant to indemnification agreements
between the Company and the named individual defendants, the Company intends to
continue to defend each of these actions vigorously. Failure by the Company to
obtain a favorable resolution of the claims set forth in any of these actions
could have a material adverse effect on the Company's business, results of
operations and financial condition. Currently, the amount of such material
adverse effect cannot be reasonably estimated.
Except as so noted, the Company is not a party, nor is its property subject, to
any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on The NASDAQ National Market under
the symbol "RDRT" since the Company's initial public offering on October 18,
1991. The following table sets forth for the periods indicated the high and low
closing sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------------- -------------
<S> <C> <C>
Fiscal year ending September 30, 1999
First Quarter $ 16-15/16 $ 6-1/16
Second Quarter 19-11/16 6-1/8
Third Quarter 8 5-35/64
Fourth Quarter 6-7/8 4-1/32
Fiscal year ending September 30, 1998
First Quarter 26-13/16 15-3/8
Second Quarter 17-9/16 12-3/8
Third Quarter 15-1/4 6-13/16
Fourth Quarter 9-17/32 5-1/2
</TABLE>
At November 30, 1999, there were approximately 1,589 record holders of the
Company's Common Stock.
The Company has never paid cash dividends on its capital stock. In addition, the
Company's bank line of credit prohibits payment of cash dividends without prior
bank approval. The Company currently intends to retain any earnings for use in
its business and does not anticipate paying cash dividends in the foreseeable
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with Management's Discussion
and Analysis and the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
1999(1) 1998(2) 1997(3) 1996(4) 1995
------------- ------------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales $ 716,460 $ 808,622 $ 1,162,050 $ 991,118 $1,003,040
Gross margin (23,265) (132,780) 238,806 103,654 264,040
Operating income (loss) (182,315) (352,910) 119,713 7,789 177,846
Net income (loss) (155,715) (319,747) 76,179 (42,986) 123,565
Basic net income (loss) per share (3.16) (6.59) 1.61 (0.92) 2.69
Diluted net income (loss) per share (3.16) (6.59) 1.56 (0.92) 2.60
Total assets $ 784,490 $ 879,800 $ 1,301,481 $ 908,672 $ 939,457
Long-term obligations 361,668 388,248 403,871 172,037 137,406
</TABLE>
(1) Fiscal 1999 includes a restructuring charge of approximately $37.7 million
to reflect the Company's decision to reduce workforce and capacities to
reflect current industry conditions, and to write-down excess and obsolete
equipment related to the transition from magnetoresistive ("MR") technology
to giant magnetoresistive ("GMR") technology.
22
<PAGE> 23
(2) Fiscal 1998 includes a special charge of approximately $114.8 million to
cost of sales, primarily for the write-off of equipment and inventory
associated with the industry's rapid shift away from advanced inductive
technology to MR technology and the Company's decision to accelerate its
existing MR transition strategy. In addition, fiscal 1998 includes a
restructuring charge of approximately $93.7 million to reflect the
Company's decision to cease the Company's manufacturing operations in
Malaysia and write-off excess equipment at the Company's other
manufacturing locations.
(3) The fourth quarter of fiscal 1997 results include post-closing charges of
approximately $12.2 million to selling, general and administrative expense
and $2.6 million to cost of sales to establish a reserve for accounts
receivable, inventory and equipment exposures related to the bankruptcy of
Micropolis, a customer of the Company.
(4) Fiscal 1996 includes approximately $11.2 million of severance, relocation
and other charges, approximately $9.0 million for research and development
charges for the acquisition of planar technology, and approximately $24.1
million for the write-down of capital assets, approximately $7.0 million
associated with end-of-life inventory and approximately $0.7 million in
other charges, for a total of $52.0 million for the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, the Company experienced a net loss of approximately $155.7
million, compared to a net loss of $319.7 million in fiscal 1998 and a net
income of $76.2 million in fiscal 1997. Continued competitive pricing pressure,
industry trends of fewer HGAs per HSA, short product life cycles, and the
industry's quicker than anticipated transition from MR to GMR technology
contributed to the Company's net loss for the year.
As of September 30, 1999, the Company had cash and investments of $226.4
million, total assets of $784.5 million and debt and capital lease obligations
of $509.3 million.
During fiscal 1999, the Company generated $76.3 million in cash from operations.
The positive cash flow from operating activities was primarily attributed to
depreciation and amortization expense of $191.0 million, the non-cash portion of
restructuring cost of $29.7 million, a net decrease in accounts receivable of
$64.4 million, and a decrease in net inventories of $21.2 million, partially
offset by the decrease in accounts payable, accrued liabilities, and income
taxes payable of $28.2 million. However, the Company anticipates increased cash
requirements to fund accounts receivable and inventories in fiscal 2000.
Accounts receivable, net decreased $64.4 million due to lower net sales during
fiscal 1999, and an improvement in days sales outstanding.
Inventories decreased during fiscal 1999, generating $21.2 million in cash. The
decrease was partially due to lower net sales as compared to fiscal 1998.
Inventory turns increased significantly in fiscal 1999 as the Company continued
to focus on cycle time reduction.
Accounts payable, accrued liabilities, and income taxes payable decreased by
$28.2 million during fiscal 1999, of which $24.3 million was due to income tax
accruals no longer required as a result of audit and statute closures.
23
<PAGE> 24
The Company's business is highly capital intensive. During fiscal 1999, the
Company incurred capital expenditures of approximately $101.0 million. Capital
expenditures have primarily been made to upgrade/replace existing equipment in
Thailand, the Philippines, and the wafer production in the United States and
Japan, to support new manufacturing processes and new technologies, such as GMR.
The Company's plan for capital equipment purchases during fiscal 2000 is
approximately $80 million; however, to the extent yields for the Company's
products are lower than expected, demand for such products exceed Company
expectations, or the Company's manufacturing process requirements change
significantly, such expenditures may increase. Conversely, if demand is less
than anticipated, or if the Company is unable to obtain adequate financing for
such capital equipment purchases, the planned capital equipment purchases may
decrease. As of September 30, 1999, total commitments for construction or
purchase of capital equipment were approximately $49 million. The Company
expects to fund such commitments from available cash and cash equivalents, or
other future financing activities.
In connection with the joint venture with Sumitomo, SMI converted $28.3 million
of RRSMI debt to RRSMI equity during fiscal 1999. During fiscal 2000, the
Company and Sumitomo expect to fund RRSMI equally for any working capital
requirements that exceed RRSMI's cash, cash equivalent and short-term investment
balances at September 30, 1999. RRSMI's balance sheet at September 30, 1999
included cash, cash equivalents and short-term investments of $9.6 million, and
total assets of $97.2 million.
Proceeds provided by financing activities were $142.7 million, of which proceeds
from the revolving line of credit were $100 million, proceeds from the term loan
were $45.0 million, borrowings by Read-Rite Philippines, Inc. ("RRPI") were
$12.0 million, borrowings by Read-Rite (Thailand) Company Limited ("RRT") were
$10.0 million, proceeds by issuance of common stock were $5.3 million,
short-term borrowings from SMI were $3.1 million. These proceeds were partially
offset by payments under debt obligations of $61.0 million. Additionally, $28.3
million of RRSMI debt was converted to RRSMI equity by Sumitomo Metal,
Incorporated, the minority interest shareholder. This infusion had no impact on
the ownership interest of RRSMI, the joint venture between SMI and the Company.
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. With semi-annual interest payments of $11.2
million due on March 1 and September 1 of each year. The Notes are subordinated
in right of payment to all existing and future senior debt of the Company and
may be redeemed at the option of the Company subsequent to September 2000. As of
September 30, 1999, the entire $345 million represented by the Notes was
outstanding.
As of September 30, 1999, the Company had a $150 million secured credit facility
("Credit Facility") with a syndicate of financial institutions. The facility,
which expires on October 2, 2001, consists of a $50 million term loan and a $100
million revolving line of credit. As of September 30, 1999, $42.5 million of the
term loan was outstanding and the entire $100 million revolving line of credit
had been drawn down. The term loan provides for quarterly principal payments,
beginning January 1999 and continuing through October 2001. The facility is
secured by the assets of the Company and 65% of the stock of the Company's
international subsidiaries. Borrowings under the revolving credit facility are
based upon eligible receivables and cash balances of the Company. The term loan
provides for interest payments which vary based on the London Interbank Offered
Rate ("LIBOR"), plus an applicable margin. Additionally, the terms of the
facility require the Company to maintain certain financial ratios and observe a
series of additional covenants, and prohibit the Company from paying dividends
without prior bank approval. As of September 30, 1999, the Company was not in
compliance with certain financial covenants. In October 1999, the Company repaid
$25 million of its credit facility and reduced the size of the revolver to $75
million. In connection with this repayment, the banks agreed to waive compliance
on certain financial covenants through December 31, 1999. As of December 29,
1999, the Company had repaid another $25 million of its credit facility and
reduced the size of the revolver to $50 million. In response to this repayment,
the banks agreed to a fourth waiver/amendment that can extend to February 25,
2000. Currently, the Company is not in payment default under this credit
facility as all interest charges and fees associated with this facility have
been paid on the scheduled due dates. To date, the lender has not accelerated
any principal payment under the credit facility. As a result of the short term
nature of the last two waivers/amendments to the bank facilities, the Company
has reclassified this portion of its long-term debt to current liabilities.
24
<PAGE> 25
There can be no assurance the Company will be successful in obtaining an
additional waiver or amendment and the borrowing could become immediately
payable. If the Company is not successful in amending the bank facility on terms
acceptable for the Company, the Company will likely need to raise additional
funds to restructure its debt obligations to operate its business for the
long-term. However, the Company believes that its ability to control
expenditures and its ability to secure financing through the combination of
renegotiating its existing credit facilities, negotiating a new credit facility
with other lenders, issuing additional equity securities or other financial
instruments on terms which could be highly dilutive to current shareholders will
be sufficient to fund its operations through fiscal 2000. In addition, if the
Company is not successful in generating positive operating margin from the HSA
manufacturing operations in the near term, it will need to take appropriate
steps to align its cost structure and cash flows accordingly. Furthermore, if
the Company is not successful in generating a positive operating margin from
RRSMI in the near term, it will need to take appropriate steps to align its cost
structure, cash flows and equity position accordingly.
If industry conditions remain unfavorable or worsen, 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 may
increase. Conversely, if industry demand increases significantly such that the
Company's capital requirements exceed management's current estimates, the
Company may likewise need to raise additional capital. The Company could seek to
raise such capital through additional bank facilities, debt or equity offerings,
or other sources. 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.
NET SALES
The following tables set forth certain sales information for the Company's
customers and HGA / HSA product mix as a percentage of net sales, for the three
fiscal years ended September 30, 1999:
<TABLE>
<CAPTION>
Customers 1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Western Digital 37% 49% 51%
Maxtor 32% 25% 13%
Samsung 19% 15% 5%
Quantum -- 3% 18%
All Others 12% 8% 13%
--------- --------- ----------
100% 100% 100%
--------- --------- ----------
HGA / HSA Product Mix
HGA 16% 11% 31%
HSA 81% 86% 67%
Tape and other 3% 3% 2%
--------- --------- ----------
100% 100% 100%
--------- --------- ----------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales were $716.5 million during fiscal 1999, an 11.4% decrease from net
sales of $808.6 million during fiscal 1998. The decrease in the Company's net
sales for fiscal 1999 compared to fiscal 1998 was due to lower average selling
price ("ASP") for both HGA unit sales and HSA unit sales, the industry's quicker
than anticipated transition from MR to GMR technology, which caused the Company
to miss design wins on certain GMR programs, and the continued industry-wide
trend towards fewer heads per disk drive. Despite these unfavorable conditions,
the
25
<PAGE> 26
Company experienced growth in unit sales volume in fiscal 1999 compared to
fiscal 1998. Unit sales of HGAs and HSAs increased by 39.3% and 5.5%,
respectively, in 1999 compared to fiscal 1998.
Net sales of MR products were $646.6 million, or 90% of total net sales, in
fiscal 1999, compared to $590.0 million, or 73% of net sales, in fiscal 1998.
The increase in MR product net sales was more than offset by the decrease in
sales of advanced inductive products. Advanced inductive products represented
$33.9 million, or 5% of net sales, in fiscal 1999, compared to $218.6 million,
or 27% of net sales, in fiscal 1998.
The Company's net sales decrease was attributable to overall lower ASPs during
fiscal 1999 for MR HGA and HSA products. ASPs for MR HGAs and HSAs products
decreased by 15% and 25%, respectively, in fiscal 1999, compared to fiscal 1998.
The substantial decrease in ASPs for MR HSAs were due to the transition from MR
to GMR technology, fewer HGAs per HSA as a result of increased areal-density in
low cost PCs, and the fierce HDD competitive pricing environment. Unit sales
volume increased for the Company's MR products as the Company continued to phase
out its advanced inductive products. Unit sales volume for MR HGA and HSA
products increased by 99% and 42%, respectively, compared to fiscal 1998.
The Company's product mix continued to be predominately HSAs, as net sales of
HSAs and HGAs accounted for approximately 81% and 16%, respectively, of net
sales during fiscal 1999, compared to approximately 86% and 11%, respectively,
of net sales during fiscal 1998. The Company expects this shift of product mix
from HSA to HGA to continue in fiscal 2000. The Company's sales continue to be
primarily focused in the 3.5" disk form factor market, accounting for 97%, 96%,
and 91% of the Company's net sales during fiscal 1999, 1998, and 1997,
respectively.
The Company's customer base remains highly concentrated, as the substantial
majority of net sales were to six major storage device manufacturers during
fiscal 1999 and 1998. The Company's three largest customers accounted for 88%,
89%, and 82% of the Company's net sales during fiscal 1999, 1998, and 1997,
respectively.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales were $808.6 million during fiscal 1998, a 30.4% decrease from net
sales of $1,162.1 million during fiscal 1997. The decrease in the Company's net
sales for fiscal 1998 compared to fiscal 1997 was due to a general industry
slowdown in demand coupled with a large oversupply of disk drive inventory; the
abrupt phase-out of advanced inductive recording heads and the accelerated
transition to MR technology; the disk drive industry's trend towards fewer
suppliers of recording heads on each program which contributed to the Company's
inability to achieve design wins on certain customer programs; and an
industry-wide trend towards a reduction in the numbers of heads per disk drive.
The Company's net sales decrease was attributable to overall decreases in both
unit sales and ASP during fiscal 1998. Decreased unit sales of advanced
inductive products and MR HGAs was offset somewhat by increased unit sales of MR
HSAs. ASPs for advanced inductive HSA products and MR HGA products decreased
substantially during fiscal 1998. During fiscal 1997, ASPs for MR HSA products
were typically greater than that of advanced inductive HSA products. Thus, while
ASPs for MR HSA products decreased significantly during fiscal 1998, the impact
on overall HSA ASPs for fiscal 1998 compared to fiscal 1997 was not significant.
Net sales of MR products increased significantly in fiscal 1998 as the Company
accelerated its strategy to fully transition to MR recording head technology
production. Net sales of MR products were $590.0 million, or 73% of total net
sales, in fiscal 1998, as compared to $279.8 million, or 24% of net sales, in
fiscal 1997. The increase in MR product net sales was more than offset by the
decrease in sales of advanced inductive products. Advanced inductive products
were $218.6 million, or 27% of total net sales, in fiscal 1998, as compared to
$880.9 million, or 76% of total net sales, in fiscal 1997.
For a discussion of certain risks associated with the Company's business, see
"Certain Additional Business Risks."
26
<PAGE> 27
GROSS MARGIN
The Company's gross margins are primarily influenced by ASPs, the level of unit
sales in relation to fixed costs, manufacturing yields, and product mix. The
relative impact 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 HSA
typically produce a lower aggregate gross margin, as a percentage of sales, on
HSA net sales compared to HGA net sales.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's gross margin was (3.2)% of net sales during fiscal 1999, compared
to a gross margin of (16.4)% of net sales during fiscal 1998. The increase in
gross margin during fiscal 1999 was primarily due to a fiscal 1998 charge of
$114.8 million included in cost of sales related to the Company's decision to
accelerate its transition to MR technology. Without the special charge, the
adjusted gross margin during fiscal 1998 was (2.2)%. The decrease in gross
margin from (2.2)% in fiscal 1998 to (3.2)% in fiscal 1999 was primarily due to
the impact of lower ASPs for both HGA and HSA products, partially offset by
higher unit sales and lower average fixed costs per unit, and a shift of product
mix from HSA to HGA.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's gross margin was (16.4)% of net sales during fiscal 1998, compared
to a gross margin of 20.6% of net sales during fiscal 1997. The significant
decrease in gross margin during fiscal 1998 was primarily due to a decrease in
unit sales in relation to fixed costs, less favorable product mix, lower average
selling prices for HGA products and the special charge incurred during fiscal
1998.
The overall decrease in unit sales in relation to fixed costs was due to
decreased unit sales of advanced inductive and MR products (see "Net Sales").
The decreased level of unit sales lead to high per unit costs as the Company was
not able to fully utilize its production equipment. The decrease in unit sales
and the Company's decision to accelerate its existing MR transition strategy
caused the Company to incur a special charge of approximately $114.8 million in
cost of sales during the first quarter of fiscal 1998. This special charge was
primarily for the write-off of equipment and inventory. In addition, the
Company's product mix of HGA net sales to HSA net sales changed to fewer HGA net
sales from fiscal 1997 to fiscal 1998 (HGAs typically generate higher gross
margins than HSAs). Average selling prices for HGA products decreased
significantly from fiscal 1997 to 1998 as the Company's MR products matured.
For a discussion of certain risks associated with the Company's business, see
"Certain Additional Business Risks."
RESEARCH AND DEVELOPMENT EXPENSES
FISCAL 1999 COMPARED TO FISCAL 1998
Research and development ("R&D") expenses were $92.2 million during fiscal 1999,
compared to the R&D expenses of $92.3 million during 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. The Company expects the
investment in R&D to decrease slightly in fiscal 2000 as the Company continues
its cost containment efforts.
27
<PAGE> 28
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 fiscal 1999, $2.8 million of development
funding was offset against R&D expenses. During fiscal 1998, $8.6 million of
development funding was offset against R&D expenses.
FISCAL 1998 COMPARED TO FISCAL 1997
R&D expenses were $92.3 million during fiscal 1998, a 42.0% increase over R&D
expenses of $65.0 million during fiscal 1997. The substantial increase in R&D
expenses during fiscal 1998 was attributable to increased development efforts in
MR, GMR and other emerging technologies to address the disk drive industry's
rapidly changing requirements.
From time to time, the Company has engaged in fully or partially funded research
and development for certain existing or potential customers. R&D expenses under
such projects were offset as incurred to the extent development funds were
provided. During 1998, $8.6 million of R&D expenses were offset by development
funding. During 1997, R&D expenses were offset by development funding of $2.3
million.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
FISCAL 1999 COMPARED TO FISCAL 1998
Selling, general & administrative ("SG&A") expenses were $29.2 million during
fiscal 1999, a 14% decrease from SG&A expenses of $34.1 million during fiscal
1998. The decreases in SG&A expenses were mainly due to the Company's decision
to terminate its 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.
FISCAL 1998 COMPARED TO FISCAL 1997
SG&A expenses were $34.1 million during fiscal 1998, a 37.0% decrease from SG&A
expenses of $54.1 million during fiscal 1997. Fiscal year 1997 SG&A expenses
included a post-closing charge of $12.2 million during the fourth quarter of
fiscal 1997 to establish a reserve for accounts receivable exposures related to
the bankruptcy of a customer, Micropolis. After consideration of this reserve,
SG&A expenses in fiscal 1998 were $34.1 million, an 18.6% or $7.8 million
decrease from $41.9 million in fiscal 1997. This decrease is due primarily to
specific cost reduction efforts initiated in fiscal 1998 to lower SG&A expenses.
These efforts included but were not limited to reducing the number of employees
in SG&A through both attrition and specific headcount reduction efforts.
RESTRUCTURING COSTS
1999 RESTRUCTURING COSTS
During the third quarter of fiscal 1999, the Company incurred a restructuring
charge 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 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. 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. This restructuring is
expected to produce an estimated annual cost savings of $25 million.
1998 RESTRUCTURING COSTS
During the third quarter of fiscal 1998, the Company incurred a restructuring
charge of $93.7 million. The restructuring costs reflect the Company's strategy
to align worldwide operations with market conditions and to
28
<PAGE> 29
improve the productivity of the Company's manufacturing facilities. The
restructuring costs were primarily associated with the Company's decision to
cease its manufacturing operations in Malaysia and the write-off of excess
equipment at the Company's other manufacturing locations.
The restructuring costs consisted of $70.0 million to write-off or write-down
facilities and equipment, $7.2 million to write off goodwill associated with the
Company's original purchase of its Malaysian manufacturing operations, $10.0
million for severance and benefits for terminated employees, and $6.5 million
for other expenses associated with the restructuring plan. In connection with
the restructuring plan, the Company expected a workforce reduction of
approximately 4,300 full-time manufacturing employees. As of September 30, 1998,
approximately 4,200 employees had been terminated and cash payments totaling
approximately $13.3 million had been made for employee severance and benefits
and other expenses associated with the restructuring plan. In fiscal 1999, the
Company completed the remaining restructuring activities under the plan.
INTEREST EXPENSE
FISCAL 1999 COMPARED TO FISCAL 1998
Interest expense was $31.9 million during fiscal 1999, compared to $29.6 million
during fiscal 1998. The increase in interest expense during fiscal 1999 was
primarily due to an increase in average outstanding debt resulting from the
Company's $100 million borrowing on the revolving portion of the credit facility
as well as refinancing of the Company's debt in Thailand and the Philippines.
FISCAL 1998 COMPARED TO FISCAL 1997
Interest expense was $29.6 million during fiscal 1998, compared to $15.7 million
during fiscal 1997. The increase in interest expense during fiscal 1998 was
primarily due to the increased debt from the Company's $345 million convertible
subordinated notes, which were issued in August 1997, offset by the repayment in
August 1997 of the Company's 7.53% $100 million senior notes.
INTEREST INCOME AND OTHER, NET
FISCAL 1999 COMPARED TO FISCAL 1998
Interest income and other, net was $4.1 million during fiscal 1999, compared to
$7.1 million during fiscal 1998. The decrease in interest income and other, net
during fiscal 1999 was primarily due to foreign exchange losses related to the
fluctuation of the Japanese yen and other foreign currency exchange balance
sheet exposure.
FISCAL 1998 COMPARED TO FISCAL 1997
Interest income and other, net was $7.1 million during fiscal 1998, compared to
$8.6 million during fiscal 1997. The decrease in interest income and other, net
during fiscal 1998 was due to higher foreign exchange losses in fiscal year 1998
as compared to fiscal 1997. These losses were due primarily to foreign exchange
losses related to the Malaysian ringgit which were partially offset by foreign
exchange gains related to the Japanese yen. The foreign exchange losses in
fiscal year 1998 was partially offset by higher interest income on higher
average cash balances during fiscal year 1998 as compared to fiscal year 1997.
PROVISION FOR INCOME TAXES
FISCAL 1999 COMPARED TO FISCAL 1998
The federal, state and foreign tax benefit rate was 12.4% during fiscal 1999,
compared to 6.5% during fiscal 1998. The increase in the combined tax benefit
rate during fiscal 1999 was primarily attributable to the revaluation of tax
accounts.
29
<PAGE> 30
The Company's deferred tax assets relate to potential tax benefits in the United
States and Japan. Based on the Company's recent history of losses in the U.S.
and Japan, the lack of carryback availability and the uncertainty of future
profits in these jurisdictions, the Company has provided a full valuation
allowance against these assets.
The Company did not provide for U.S. federal income taxes on undistributed
earnings of foreign subsidiaries, which it intends to permanently reinvest in
those operations, for any of the three fiscal years in the period ended
September 30, 1999. See also Note 7 in Notes to Consolidated Financial
Statements.
FISCAL 1998 COMPARED TO FISCAL 1997
The federal, state and foreign tax benefit rate was 6.5% during fiscal 1998,
compared to a combined tax rate of 26.0% during fiscal 1997. The decrease in the
combined rate during fiscal 1998 was primarily due to a different jurisdictional
mix of profits and losses as well as an increase in the valuation allowance
related to the tax benefit of certain foreign losses.
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 Year 2000 ready.
The Company believes its HGA and HSA products are transparent to Year 2000
requirements. With respect to the Company's products, Year 2000 ready, 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 November, 1999 (completed)
Detailed assessment, remediation and unit testing..... FY 1998 November, 1999 (completed)
Integration testing................................... FY 1998 November, 1999 (completed)
Deployment............................................ FY 1998 November, 1999 (completed)
</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 11,592 objects. The Company has evaluated
these objects for date usage and Y2K readiness and either remedied, disposed of,
or replaced those found to be non-compliant. If the evaluation of the object
found that the object uses no dates, or was already Y2K ready, or if the object
had been made ready through replacement or upgrades, it was deemed to be
complete. As of November, 1999, 11,592 objects, or 100%, were deemed complete.
The Company does not believe it is legally responsible for costs incurred by
customers related to ensuring such customers' or end-users' Year 2000 readiness.
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 ready. The Company has received assurances of Year 2000 readiness 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,
30
<PAGE> 31
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 readiness 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 ready.
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 ready. 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 readiness 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 proceeded
simultaneously, and all of the Company's critical internal systems are deemed
Year 2000 ready. 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.
The costs incurred by the Company during fiscal 1999, related to its Year 2000
readiness program were less than $1.8 million and cumulatively to date have been
less than $2.1 million. The Company currently expects that the total cost of its
Year 2000 readiness programs, excluding redeployed resources, will not exceed
$2.7 million. 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 ready. 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 readiness 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 has developed 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).
As of January 2000, the Company has not experienced any major incidents related
to Year 2000 issues. The Company will continue to monitor all systems for Year
2000 related concerns.
31
<PAGE> 32
ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE MARKET RISK
The primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields, without significantly
increasing risk. To achieve this objective, the Company primarily invests in A1
or P1 debt securities with maturities of less than one year. Because of the
short duration to maturity, the Company does not have significant interest rate
exposure on its available-for-sale investment portfolio. The Company is also
exposed to interest rate risk on its fixed rate and variable rate borrowings.
Because of the periodic reset of the interest rate on variable rate debt, the
Company does not have significant interest rate exposure on this type of debt.
The Company is exposed to interest rate changes on its fixed rate borrowings.
The following table summarizes the fair value for the Company's interest rate
sensitive instruments as of September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Available-for sale investments $ 212,417 $ 80,087
Variable rate borrowings $ 163,933 $ 57,371
Fixed rate borrowings $ 146,639 $ 183,792
</TABLE>
A hypothetical one percentage point decrease in interest rates would result in
an approximate $6.3 million and $9.0 million adverse change in the net fair
value of the Company's interest rate sensitive securities as of the end of
fiscal 1999 and 1998, respectively. This potential change in fair value is based
on sensitivity analyses performed on the Company's financial positions at
September 30, 1999 and 1998. Actual results may differ materially.
FOREIGN CURRENCY MARKET RISK
A substantial majority of the Company's revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, the Company does enter into
these transactions in other foreign currencies, primarily Japanese yen,
Philippine peso, and Thai baht. To protect against reductions in value and the
volatility of future cash flows caused by changes in foreign exchange rates, the
Company has established quarterly expense hedging programs using currency
forward contracts. The Company's hedging programs reduce, but do not always
entirely eliminate, the impact of foreign currency exchange rate movements. The
following table presents the notional amount, average contract rate, and the
estimated fair value of foreign currency forward contracts outstanding as of
September 30 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------
Notional Average *Estimated
In thousands, except average contract rate Amount Contract Rate Fair Value
- --------------------------------------------------------------------------------------------------------------
Foreign currency forward exchange contracts to purchase foreign currencies:
<S> <C> <C> <C>
Philippine peso $ 12,957 40.78 $ 0
Thai baht $ 20,645 41.04 $ 0
Singapore dollar $ 988 1.71 $ 0
Japanese yen $ 39,000 103.08 $ 0
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------
Notional Average *Estimated
In thousands, except average contract rate Amount Contract Rate Fair Value
- --------------------------------------------------------------------------------------------------------------
Foreign currency forward exchange contracts to purchase foreign currencies:
<S> <C> <C> <C>
Philippine peso $ 9,014 43.76 $ 12
Thai baht $ 19,073 40.30 $636
Japanese yen $ 14,800 134.62 $(18)
</TABLE>
*Estimated fair value is equivalent to unrealized net gain (loss) on existing
contracts.
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80,547 $ 62,444
Short-term investments 145,856 46,038
Accounts receivable, net of allowance of $2,594 in 1999 and
$5,637 in 1998 45,981 110,337
Inventories 31,186 52,367
Prepaid expenses and other current assets 6,049 10,061
--------- ---------
Total current assets 309,619 281,247
Property, plant and equipment, net 457,189 573,633
Intangible and other assets 17,682 24,920
--------- ---------
Total assets $ 784,490 $ 879,800
========= =========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing $ 10,521 $ 7,399
Accounts payable 71,397 89,857
Accrued compensation and benefits 26,052 28,943
Income taxes payable 218 380
Other accrued liabilities 35,128 41,985
Current portion of long-term debt and capital lease obligations 147,589 15,065
--------- ---------
Total current liabilities 290,905 183,629
Convertible subordinated notes 345,000 345,000
Other long-term debt and capital lease obligations 16,668 43,248
Other long-term liabilities 5,781 31,978
--------- ---------
Total liabilities 658,354 603,855
--------- ---------
Commitments and contingencies
Minority interest in consolidated subsidiary 41,927 42,016
Stockholders' equity:
Preferred stock, $0.0001 par value; 4,000 shares authorized,
none issued -- --
Common Stock, $0.0001 par value; 160,000 shares authorized,
49,675 and 48,764 issued in 1999 and 1998, respectively 5 5
Additional paid-in capital 369,274 363,176
Accumulated deficit (284,308) (128,593)
Accumulated other comprehensive loss (762) (659)
--------- ---------
Total stockholders' equity 84,209 233,929
--------- ---------
Total liabilities, minority interest in consolidated
subsidiary and stockholders' equity $ 784,490 $ 879,800
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 34
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 716,460 $ 808,622 $1,162,050
Cost of sales - on net sales 739,725 826,602 923,244
Cost of sales - special charges -- 114,800 --
---------- ---------- ----------
Gross margin (23,265) (132,780) 238,806
Operating expenses:
Research and development 92,211 92,265 64,995
Selling, general and administrative 29,154 34,137 54,098
Restructuring costs 37,685 93,728 --
---------- ---------- ----------
Total operating expenses 159,050 220,130 119,093
---------- ---------- ----------
Operating income (loss) (182,315) (352,910) 119,713
Interest expense 31,910 29,648 15,699
Interest income and other, net 4,143 7,126 8,627
---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes and minority interest (210,082) (375,432) 112,641
Provision (benefit) for income taxes (25,946) (24,577) 29,311
---------- ---------- ----------
Income (loss) before minority interest (184,136) (350,855) 83,330
Minority interest in net income (loss) of consolidated
subsidiary (28,421) (31,108) 7,151
---------- ---------- ----------
Net income (loss) $ (155,715) $ (319,747) $ 76,179
========== ========== ==========
Basic net income (loss) per common share $ (3.16) $ (6.59) $ 1.61
========== ========== ==========
Diluted net income (loss) per common share $ (3.16) $ (6.59) $ 1.56
========== ========== ==========
Number of shares used in per common share computation:
Basic 49,352 48,513 47,444
========== ========== ==========
Diluted 49,352 48,513 48,775
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (155,715) $ (319,747) $ 76,179
Adjustments required to reconcile net income (loss)
to cash provided by operations:
Depreciation 187,254 223,980 166,043
Amortization 3,246 5,077 2,338
Bad debt provision -- -- 12,301
Non-cash portion of restructuring costs 29,732 77,205 --
Minority interest in net income (loss) of consolidated
subsidiary (28,421) (31,108) 7,151
Deferred income taxes (24,331) (24,988) 18,958
Loss on disposal of fixed assets 312 1,261 898
Other non-cash expenses 720 2,194 3,281
Changes in assets and liabilities:
Accounts receivable 64,356 68,378 (98,530)
Inventories 21,181 39,120 (34,094)
Prepaid expenses and other current assets 4,012 4,934 (6,472)
Accounts payable, accrued liabilities and
income taxes payable (28,222) (55,068) 42,059
Other assets and liabilities, net 2,126 (1,650) (6,369)
----------- ----------- -----------
Net cash provided by (used in) operating activities 76,250 (10,412) 183,743
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (101,002) (186,223) (272,768)
Maturities of available-for-sale investments 1,499,555 675,541 540,390
Purchase of available-for-sale investments (1,599,373) (542,071) (654,009)
----------- ----------- -----------
Net cash used in investing activities (200,820) (52,753) (386,387)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowing 31,454 6,952 --
Proceeds from convertible subordinated debt, net -- -- 336,025
Proceeds from other long-term debt 167,000 -- --
Payment of other long-term debt and capital lease obligations (61,056) (5,761) (116,177)
Proceeds from issuance of common stock, net 5,275 5,727 15,822
Repurchase of common stock -- 102 --
----------- ----------- -----------
Net cash provided by (used in) financing activities 142,673 7,020 235,670
----------- ----------- -----------
Effect of foreign currency exchange rate changes on cash -- -- 3,272
Net increase (decrease) in cash and cash equivalents 18,103 (56,145) 36,298
Cash and cash equivalents at beginning of period 62,444 118,589 82,291
----------- ----------- -----------
Cash and cash equivalents at end of period $ 80,547 $ 62,444 $ 118,589
=========== =========== ===========
Supplemental disclosures of non-cash activities:
Conversion of long-term debt by minority shareholder $ 28,332 $ -- $ --
Issuance of common stock under 401k plan 819 2,801 2,611
Supplemental disclosures of cash flow information:
Interest paid during the year 30,789 28,751 14,423
Income taxes paid (refunded) during the year (312) 232 12,641
</TABLE>
See accompanying notes to the consolidated financial statements.
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(ACCUMULATED ACCUMULATED
COMMON COMMON ADDITIONAL DEFICIT) OTHER TOTAL
STOCK STOCK PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 46,771 $ 5 $ 336,113 $ 114,975 $ 2,706 $ 453,799
---------
Components of comprehensive
income:
Net income -- -- -- 76,179 -- 76,179
Change in unrealized gain on
available-for-sale
investments,
net of income taxes of $0 -- -- -- -- 683 683
Foreign currency translation
adjustment, net of deferred
tax liability of $408 -- -- -- -- (3,441) (3,441)
---------
Total comprehensive income 73,421
---------
Issuance of common stock under
stock option plans 924 -- 11,498 -- -- 11,498
Issuance of common stock under
employee stock purchase plan 326 -- 4,324 -- -- 4,324
Issuance of common stock under
401(K) plan 112 -- 2,611 -- -- 2,611
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 48,133 5 354,546 191,154 (52) 545,653
---------
Components of comprehensive income:
Net loss -- -- -- (319,747) -- (319,747)
Change in unrealized gain on
available-for-sale
investments,
net of income taxes of $0 -- -- -- -- (607) (607)
---------
Total comprehensive loss (320,354)
---------
Issuance of common stock under
stock option plans 104 -- 921 -- -- 921
Issuance of common stock under
employee stock purchase plan 332 -- 5,010 -- -- 5,010
Issuance of common stock under
401(K) plan 200 -- 2,801 -- -- 2,801
Repurchase of common stock (5) -- (102) -- -- (102)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 48,764 5 363,176 (128,593) (659) 233,929
---------
Components of comprehensive loss:
Net loss -- -- -- (155,715) -- (155,715)
Change in unrealized gain/(loss)
on available-for-sale investments,
net of income taxes of $0 -- -- -- -- (103) (103)
---------
Total comprehensive loss (155,818)
---------
Issuance of common stock under
stock option plans 206 -- 1,902 -- -- 1,902
Issuance of common stock under
employee stock purchase plan 581 -- 3,373 -- -- 3,373
Issuance of common stock under
401(K) plan 124 -- 819 -- -- 819
Issuance of common stock under
service awards -- -- 4 -- -- 4
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 49,675 $ 5 $ 369,274 $(284,308) $ (762) $ 84,209
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Read-Rite Corporation (the "Company") designs, manufactures and markets magnetic
recording heads and head stack assemblies for storage device manufacturers. The
substantial majority of the Company's net sales during fiscal 1999 were to five
major disk drive manufacturers whose corporate headquarters primarily reside in
the United States.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority-owned subsidiaries, including Read-Rite SMI, the
Company's joint venture in Japan with Sumitomo Metal Industries, Ltd ("SMI").
Intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority stockholder's proportionate share of
the equity in the net assets and in the net income or loss of Read-Rite SMI. The
Company owns 50% plus two shares of the voting stock of Read-Rite SMI. All
decisions made by Read-Rite SMI in the ordinary course of business do not
require minority shareholder approval.
The Company maintains a fifty-two/fifty-three week fiscal year cycle ending on
the Sunday closest to September 30. To conform the Company's fiscal year ends, a
fifty-third week must be added to every sixth or seventh fiscal year. Fiscal
years 1999, 1998 and 1997 each comprised 52 weeks and ended on September 26,
September 27, September 28, respectively. For convenience, the accompanying
financial statements have been shown as ending on the last day of the calendar
month.
Certain amounts in fiscal 1998 and 1997 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
The financial statements have been prepared on a going concern basis. The
Company has incurred operating losses in fiscal years 1998 and 1999 and is not
in compliance with certain financial covenants required by certain credit
facilities. The Company is not in payment default under these credit facilities
and has continued to pay all interest charges and other fees associated with
this facility on scheduled due dates. The outstanding balance under this secured
credit agreement as of September 30, 1999 amounted to $142.5 million. In October
1999, the Company repaid $25 million of its credit facility and reduced the size
of the revolver to $75 million. In connection with this repayment, the banks
agreed to waive compliance on certain financial covenants through December 31,
1999. As of December 29, 1999, the Company had repaid another $25 million of its
credit facility and reduced the size of the revolver to $50 million. In response
to this repayment, the banks agreed to a fourth waiver/amendment that can extend
to February 25, 2000. The Company is currently negotiating with its lender for
additional waivers and attempting to restructure its credit facility. There can
be no assurance that the Company will be able to obtain such waivers to its
credit facility on terms acceptable by the Company. If the Company is not
successful in amending the bank facility, the borrowings could become
immediately payable and the Company will likely need to raise additional funds
to restructure its debt obligations to operate its business for the long-term.
This restructuring of the debt obligations could include negotiation of a new
credit facility with other lenders, issuance of additional equity securities or
financial instruments on terms which could be highly dilutive to current
shareholders, or a combination of these options. In addition, if the Company is
not successful in aligning its cost structure and cash flows in the near term,
it may need to take actions that could result in charges that could have a
material effect on the financial statements.
USE OF ESTIMATES
37
<PAGE> 38
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.
The Company is a custom component supplier dependent on a limited number of
customers in a single, volatile industry characterized by short product life
cycles, rapid technological change and obsolescence of inventory and related
production equipment. Management develops sales forecasts based upon the
expected production requirements of its primary customers; however such
forecasts are subject to modifications, cancellations and rescheduling. The
Company has provided write-downs for potentially excess or obsolete inventories
and production equipment. The Company believes these write-downs are adequate to
cover any losses incurred upon disposition. However, it is reasonably possible
that actual sales may differ materially from the sales forecast in the near
term, which could result in additional obsolescence or impairment.
The Company has periodically recorded restructuring charges. The actual results
with respect to restructuring charges could have a material unfavorable impact
on the Company's financial position and results of operations if the actual
expenditures to implement the restructuring plan are greater than current
estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment and provides currently for
the estimated costs to rework products that may be returned for not meeting
customer specifications.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share includes
the effect of stock options outstanding during the period and assumes the
conversion of the Company's convertible subordinated notes for the period of
time such notes were outstanding, if such stock options and convertible notes
are dilutive.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with insignificant interest
rate risk and original maturities of three months or less to be cash
equivalents. Investments with original maturities greater than three months and
remaining maturities less than one year are classified as short-term
investments. As of September 30, 1999, the Company did not hold any investments
with remaining maturities greater than one year. Investments consist primarily
of A1 and P1, or equivalently rated financial instruments.
The Company classifies its entire investment portfolio as available-for-sale.
Available-for-sale securities are carried at fair value, based on quoted market
prices, with unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive income within stockholders' equity. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income and other, net.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out method) or market. It is the Company's policy to
write-off inventory on hand in excess of six months forecasted sales volumes.
Adjustments may be made to take into account the product life cycles, which can
range from 6 to 12 months, the maturity of the product as to whether it is newly
introduced or is approaching its end of life, and the impact of competitor
announcements. The Company believes that six months is an appropriate period for
sales forecasts and inventory exposure calculations because it is difficult to
accurately forecast for a specific product beyond this time frame due to
potential introduction of products by competitors, technology obsolescence or
fluctuations in demand.
PROPERTY, PLANT AND EQUIPMENT
38
<PAGE> 39
Property, plant and equipment are stated at cost. The depreciation for property,
plant and equipment is provided primarily on a straight-line basis over the
estimated useful lives of the assets. The estimated useful lives range from one
to ten years for tooling, equipment and furniture and fixtures, and primarily
twenty years for buildings. Leasehold improvements are amortized over the useful
lives of the improvements or the remaining lease term, whichever is shorter.
Amortization of assets recorded under capital leases is included with
depreciation expense. The Company evaluates property, plant and equipment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). In accordance
with SFAS 121, the carrying value of property, plant and equipment is reviewed
if the facts and circumstances suggest that property, plant and equipment may be
permanently impaired. If this review indicates an asset's carrying value is not
recoverable, the asset's carrying value is reduced to its estimated fair value.
INTANGIBLE AND OTHER ASSETS
The net deferred costs associated with the Company's convertible subordinated
notes offering, as further discussed in Note 5, "Debt and Capital Lease
Obligations," were $6,330,879 and $7,618,515 at September 30, 1999 and 1998,
respectively. Accumulated amortization was $2,676,621 and $1,388,985 at
September 30, 1999 and 1998, respectively, and the net deferred costs are being
amortized to interest expense on a straight-line basis over the term of the
notes.
RESEARCH AND DEVELOPMENT EXPENSES
From time to time, the Company has engaged in research and development fully or
partially funded by other parties. R&D expenses under such projects were offset
as incurred to the extent development funds were provided. R&D expenses were
offset by development funding of $2.8 million and $8.6 million in fiscal 1999
and 1998, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000 and will be adopted by the Company
for its fiscal year 2001. The Company is in the process of assessing the impact
of SFAS 133 on its financial statements.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT
During fiscal 1999 and 1998, all foreign operations had the U.S. dollar as the
functional currency. As such, monetary assets and liabilities are remeasured at
the year-end exchange rates. Certain non-monetary assets and liabilities are
remeasured using historical rates. Statements of operations are remeasured at
the average exchange rates during the year. Gains and losses from foreign
currency remeasurement are included in interest income and other, net.
On October 1, 1997, the Company changed the functional currency of its Japanese
based joint venture, Read-Rite SMI, from the local yen currency to the U.S.
dollar to reflect the significance of predominately U.S. dollar based revenues.
The ending foreign currency translation adjustment of $739,000 will remain as a
component of accumulated other comprehensive income and the translated amounts
for non-monetary assets as of September 30, 1997 have become the accounting
basis for those assets for subsequent periods.
During fiscal 1997, Read-Rite SMI's assets and liabilities were translated at
year-end exchange rates, and statements of operations were translated at the
average exchange rates during the year. Gains or losses arising from the
translation of foreign currency denominated assets and liabilities were included
as a component of accumulated other comprehensive income.
39
<PAGE> 40
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange and option contracts
to manage exposure related to certain foreign currency commitments, certain
foreign currency denominated balance sheet positions and anticipated foreign
currency denominated expenditures. The Company does not enter into derivative
financial instruments for speculative or trading purposes.
During fiscal 1999, the Company managed foreign currency exposure for the Thai
baht, Singapore dollar, Philippine peso and Japanese yen. Realized and
unrealized gains and losses on foreign currency forward contracts are not
deferred and are recorded in interest income and other, net. Interest income and
other, net, includes realized and unrealized gains and losses on foreign
currency forward contracts and remeasurement gains and losses. These amounted to
a net foreign exchange loss of $4,769,000 in fiscal 1999 and a net foreign
exchange gain of $2,574,000 and $3,579,000 during fiscal 1998 and 1997,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations. In accordance
with Statement of Financial Accounting Standard No. 123, "Accounting for Stock-
Based Compensation", pro forma net income and net income per share amounts have
been disclosed in Note 9, Employee Stock and Benefit Plans.
NOTE 2. FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at September 30,
1999 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money market funds $ 34,391 $ -- $ -- $ 34,391
Time Deposits 5,318 -- -- 5,318
Commercial paper 56,754 -- (26) 56,728
Corporate bonds 15,127 3 -- 15,130
Auction rate preferred stocks 100,850 -- -- 100,850
-------- -------- -------- --------
Total available-for-sale securities $212,440 $ 3 $ (26) $212,417
======== ======== ======== ========
Included in cash equivalents $ 66,561
Included in short-term investments 145,856
--------
Total available-for-sale securities $212,417
========
</TABLE>
The following is a summary of available-for-sale securities at September 30,
1998 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money market funds $29,067 $ -- $ -- $29,067
Commercial paper 4,981 -- -- 4,981
Certificates of deposit 5,058 -- -- 5,058
Auction rate preferred stocks 40,901 80 -- 40,981
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C> <C> <C> <C>
------- ----- ------ -------
Total available-for-sale securities $80,007 $ 80 $ -- $80,087
======= ===== ====== =======
Included in cash equivalents $34,049
Included in short-term investments 46,038
-------
Total available-for-sale securities $80,087
=======
</TABLE>
There were no material gross realized gains or losses in any category of
investment during fiscal 1999, 1998, and 1997. The unrealized gain, net of tax,
is reported as a component of accumulated other comprehensive income within
stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments at September
30 were as follows (in thousands/U.S. dollars):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Foreign currency forward contracts to purchase foreign currencies:
Philippine peso $12,957 $ 9,014 $17,128
Thai baht 20,645 19,073 45,622
Japanese yen 39,000 14,800 --
Singapore dollar 988 -- 3,111
Malaysian ringgit -- -- 51,139
Currency swap agreement:
Japanese yen -- -- 30,000
Foreign currency forward contracts to
sell foreign currencies:
Thai baht -- -- 3,231
Malaysian ringgit -- -- 4,435
Foreign currency option to buy foreign currencies:
Japanese yen -- -- 6,000
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies using
current market rates. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. Fair values of cash and cash
equivalents and short-term investments approximate amortized cost due to the
short period of time to maturity. The fair value of other long-term debt
approximates the recorded value due to floating interest rates. The fair value
of the convertible subordinated notes is determined based on quoted market
value.
Estimated fair values of financial instruments outstanding at September 30 were
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1999 1998 1998
-------- --------- --------- ----------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 80,547 $ 80,547 $ 62,444 $ 62,444
Short-term investments 145,856 145,856 46,038 46,038
Convertible subordinated notes 345,000 146,315 345,000 182,850
Other long-term debt 164,257 164,257 57,641 57,641
Foreign currency forward contracts -- -- 630 630
</TABLE>
41
<PAGE> 42
NOTE 3. SUPPLEMENTAL FINANCIAL STATEMENT DATA
INVENTORIES
Inventories consisted of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw material $ 5,692 $ 8,653
Work-in-process 19,624 39,516
Finished goods 5,870 4,198
------- -------
Total inventories $31,186 $52,367
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following at September 30
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 10,291 $ 10,903
Building 133,313 94,257
Equipment 992,977 1,046,011
Furniture and fixtures 24,803 12,991
Leasehold improvements 75,496 85,893
---------- ----------
Property, plant and equipment 1,236,880 1,250,055
Less: Accumulated depreciation 779,691 676,422
---------- ----------
Total property, plant and equipment, net $ 457,189 $ 573,633
========== ==========
</TABLE>
NOTE 4. COMPREHENSIVE INCOME (LOSS)
As of October 1, 1998, the Company adopted the Statement of Financial Accounting
Standard No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however adoption of this Statement had no material impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive income. Prior to
adoption, unrealized gains or losses related to foreign currency translation
adjustments were reported as a separate component of shareholders' equity.
The components of accumulated other comprehensive income, net of related tax is
as follow:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Foreign currency translation adjustment $(739) $(739) $(739)
Unrealized gain (loss) on available-for-sale
investments, net of tax of $0 in 1999, 1998,
and 1997, respectively (23) 80 687
------ ------ ------
Accumulated other comprehensive income (loss) $(762) $(659) $ (52)
====== ====== ======
</TABLE>
NOTE 5. DEBT AND CAPITAL LEASE OBLIGATIONS
SHORT-TERM BORROWING
Short-term borrowing as of September 30, 1999 and 1998 consisted of a Japanese
yen denominated loan from a related party, SMI, to Read-Rite SMI of $10,521,000
and $7,399,000, respectively.
42
<PAGE> 43
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Convertible subordinated notes due 2004 at 6.5% $345,000 $345,000
Secured term loan due 1999-2001 at LIBOR + 2% 42,500 50,000
Secured borrowing under revolving line of credit due 100,000 --
2001 at LIBOR + 2%
Secured loans due 1998-2000 at LIBOR + 2.5% -- 6,672
Secured loan due 2003 at LIBOR + 4.545% 9,500 --
Secured loan due 2004 at SIBOR + 3.0% 11,399 --
Capital lease obligations and other 858 1,641
-------- --------
Total debt and capital lease obligations 509,257 403,313
Less: current portion 147,589 15,065
-------- --------
Total long-term debt and capital lease obligations $361,668 $388,248
======== ========
</TABLE>
At September 30, 1999, the future minimum principal payments on long-term debt
based on the contractual maturity dates and capital lease obligations were as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 18,839
2001 28,068
2002 111,650
2003 3,900
2004 346,800
---------
Total future minimum principal payments on long-term debt and
capital lease obligations $ 509,257
=========
</TABLE>
Obligations under capital leases represent the present value of future minimum
lease payments under various lease arrangements. The Company typically has an
option to purchase the leased assets at the end of the lease term for the fair
market value. Obligations under the lease agreements are collateralized by the
assets leased. Total assets under capital leases were approximately $4,413,664
and $4,431,139 at September 30, 1999 and 1998, respectively. Accumulated
depreciation of assets under capital leases was approximately $3,858,184 and
$1,088,987 at September 30, 1999 and 1998, respectively.
CONVERTIBLE SUBORDINATED NOTES
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004. Interest is paid semi-annually in March and
September. The Notes are subordinated in right of payment to all existing and
future senior debt of the Company and may be redeemed at the option of the
Company subsequent to September 2000. The Notes are convertible at any time at a
conversion rate of 24.8524 shares per $1,000 principal amount of Notes
(equivalent to approximately $40.24 per share), subject to adjustment. Upon a
change in ownership control of the Company, the holders of the Notes will have
the right to require the Company to purchase all or part of their notes at 100%
of the principal amount, plus accrued interest. The repurchase price is payable
in cash or, subject to certain requirements, in shares of common stock. As of
September 30, 1999, the entire $345 million represented by the Notes was
outstanding.
SECURED TERM LOAN AND LINE OF CREDIT
As of September 30, 1999, the Company had a $150 million credit facility, which
is secured by the assets of the Company and 65% of the stock of the Company's
international subsidiaries. The $150 million credit facility, which expires on
October 2, 2001, includes a $50 million term loan and a $100 million revolving
line of credit. As of September 30, 1999, $42.5 million of the term loan was
outstanding and $100 million was outstanding on the
43
<PAGE> 44
revolving line of credit. Borrowings under the revolving credit facility are
based upon eligible receivables and cash balances of the Company.
The terms of the credit facility require the Company to maintain certain
financial ratios. The loss incurred by the Company during fiscal year 1999
resulted in the Company not maintaining certain financial covenants required by
the credit facility. As a result, $128.8 million of the amount due under the
credit facility has been classified as current liability. To date, the Company
is not in payment default under this credit facility as all interest charges and
fees associated with this credit facility has been paid on their scheduled due
date. In October 1999, the Company repaid $25 million of its credit facility and
reduced the size of the revolver to $75 million. In connection with this
repayment, the banks agreed to waive compliance on certain financial covenants
through December 31, 1999. As of December 29, 1999, the Company had repaid
another $25 million of its credit facility and reduced the size of the revolver
to $50 million. In response to this repayment, the banks agreed to a fourth
waiver/amendment that can extend to February 25, 2000. Currently, the Company is
negotiating with its lenders for additional waiver and attempting to restructure
the existing credit facility. See Note 1.
NOTE 6. COMMITMENTS
PURCHASE COMMITMENTS
Purchase commitments for construction or purchase of plant and equipment for the
Company totaled approximately $49 million at September 30, 1999.
OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2010
and contain various provisions for rental adjustments including, in certain
cases, a provision based on increases in the consumer price index. Rental
expense under these leases and other cancelable operating leases was
$14,095,000, $10,697,000 and $10,100,000 during fiscal years 1999, 1998 and
1997, respectively.
At September 30, 1999, the future minimum payments under operating leases were
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $14,772
2001 14,563
2002 6,616
2003 2,270
2004 939
After 2004 5,982
-------
Total future minimum payments on operating leases $45,142
=======
</TABLE>
NOTE 7. INCOME TAXES
Provision For Income Taxes
The provision (benefit) for income taxes consists of the following for the years
ended September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $(11,086) $ -- $ --
State 152 153 155
Foreign (12,709) 258 10,198
-------- -------- --------
(23,643) 411 10,353
Deferred:
Federal (1,993) (21,308) 16,166
State (311) (3,680) 2,792
-------- -------- --------
(2,304) (24,988) 18,958
-------- -------- --------
Provision (benefit) for income taxes $(25,947) $(24,577) $ 29,311
======== ======== ========
</TABLE>
44
<PAGE> 45
DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows for the years
ended September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory $ 566 $ 990
Accrued compensation and other benefits 5,834 5,280
Basis difference in fixed assets 2,840 --
Net operating loss carryforwards 142,926 100,445
Deferred rental payments 156 575
Charitable contribution carryforwards 884 726
Investment and intangible valuation 2,142 492
Deferred revenue 297 --
Other 461 595
--------- ---------
Total deferred tax assets, gross 156,105 109,103
Valuation allowance for deferred tax assets (156,105) (109,103)
--------- ---------
Total deferred tax assets, net -- --
--------- ---------
Deferred tax liabilities:
Basis difference in fixed assets -- 2,304
--------- ---------
Total deferred tax liabilities -- 2,304
--------- ---------
Total deferred tax liabilities, net $ -- $ 2,304
========= =========
</TABLE>
The Company's valuation allowance for deferred tax assets increased by
$47,002,000 and $56,012,000 during fiscal 1999 and 1998, respectively.
Approximately $35,392,000 of the Company's valuation allowance for deferred
assets at September 30, 1999 is related to income tax benefits for stock option
deductions, which will be credited to stockholders' equity when realized.
PROVISION FOR INCOME TAXES RECONCILIATION
The reconciliation of the provision for income taxes, with the amount computed
by applying the statutory federal income tax rate, is as follows for the years
ended September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) computed at federal
statutory rate $ (73,528) $(131,401) $ 39,425
State income tax (benefit), net of federal benefit
(charge) (103) (2,228) 1,916
Net foreign earnings subject to taxes at lower rates (7,651) (295) (20,503)
Benefit of losses offset by valuation allowance 38,453 53,937 8,473
Losses for which no current year benefit is available 41,573 55,410 --
Reversal of previously provided taxes (24,691) -- --
--------- --------- ---------
Provision (benefit) for income taxes $ (25,947) $ (24,577) $ 29,311
========= ========= =========
</TABLE>
Pretax loss from foreign operations was approximately $165,525,000 and
$275,825,000 during fiscal 1999 and 1998, respectively, and pretax income from
foreign operations was approximately $125,203,000 during fiscal 1997. The
Company enjoys tax holidays with respect to its two operations in Thailand,
which will expire in fiscal 2001 and 2002 and in the Philippines, which will
expire in fiscal 2002. The impact of these holidays decreased the net
45
<PAGE> 46
loss by approximately $8,900,000 ($0.18 basic and diluted net loss per share)
during fiscal 1999 and $370,000 ($0.01 basic and diluted net loss per share)
during fiscal 1998 and increased net income by approximately $7,500,000 ($0.16
basic net income per share, $0.15 diluted net income per share) during fiscal
1997. At September 30, 1999, accumulated pretax loss of approximately
$37,525,000 was incurred outside the United States and no federal tax benefit
has been provided on these losses. A foreign tax credit of approximately
$34,387,000 would be available to offset federal tax upon repatriation of future
foreign earnings.
The Company's net operating losses were primarily incurred in two tax
jurisdictions, the United States and Japan. At September 30, 1999, the Company
had a federal net operating loss carryforward of approximately $277,482,000 for
United States federal tax return purposes, expiring in the following fiscal
years (in thousands):
<TABLE>
<CAPTION>
Net Operating Loss Expiring in Fiscal Year
------------------ -----------------------
<S> <C> <C>
$ 16,841 2002
12,064 2003
3,740 2004
12,313 2005
1,907 2007
8,683 2008
8,426 2009
37,464 2010
14,718 2011
19,524 2012
91,553 2018
50,249 2019
--------
$277,482
========
</TABLE>
At September 30, 1999, the Company also had a net operating loss carryforward of
approximately $110,501,000 for Japanese income tax return purposes, expiring in
fiscal years 2003 to 2004.
Based on the Company's recent history of losses in the United States and Japan,
the lack of carryback availability and the uncertainty of future profits in
these jurisdictions, the Company has provided a full valuation allowance against
these assets.
NOTE 8. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share for the years ended September 30.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
- ------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Numerator for basic and diluted
Net income (loss) $(155,715) $(319,747) $ 76,179
--------- --------- ---------
Denominator:
Weighted average number of common
shares outstanding during the period --
Denominator for basic 49,352 48,513 47,444
Incremental common shares issuable
under stock option plans after applying
treasury stock method, net of tax benefit -- -- 1,331
--------- --------- ---------
Denominator for diluted 49,352 48,513 48,775
========= ========= =========
Basic net income (loss) per common share $ (3.16) $ (6.59) $ 1.61
========= ========= =========
Diluted net income (loss) per common share $ (3.16) $ (6.59) $ 1.56
========= ========= =========
</TABLE>
46
<PAGE> 47
Incremental common shares attributable to the issuance of shares under stock
option plans (after applying the treasury stock method, net of tax benefit) of
approximately 1,052,000 shares and assumed conversion of the Company's
convertible subordinated notes of 8.6 million shares were not included in the
diluted loss per share computation as the effect would be antidilutive.
NOTE 9. EMPLOYEE STOCK AND BENEFIT PLANS
STOCK PURCHASE RIGHTS
In fiscal 1997, the Company implemented a plan to protect stockholders' rights
in the event of a proposed takeover of the Company. Under the plan, each share
of the Company's outstanding common stock carries one right to purchase one
one-thousandth of a share of the Company's Series "A" Participating Preferred
Stock (the "Right") at an exercise price of $150. The Right enables the holder
to purchase common stock of Read-Rite or of the acquiring company ten days after
a person or group publicly announces it has acquired or has tendered an offer
for 20% or more of the Company's outstanding common stock. The Rights are
redeemable by the Company at $0.001 per Right at any time on or before the tenth
day following acquisition by a person or group of 20% or more of the Company's
common stock. If prior to redemption of the Rights, a person or group acquires
20% or more of the Company's common stock, each Right not owned by a holder of
20% or more of the common stock (or an affiliate of such holder) will entitle
the holder to purchase, at the Right's then current exercise price, that number
of shares of common stock of the Company having a market value at that time of
twice the Right's exercise price. The Rights expire in March 2007.
EMPLOYEE STOCK OPTION PLANS
The Company has granted stock options to purchase its common stock to key
employees under three option plans, the Amended and Restated 1987 Stock Option
Plan (the "1987 Plan"), the 1995 Stock Option Plan (the "1995 Plan"), and the
1998 Non-Statutory Stock Option Plan (the "1998 Plan"). Options granted
generally have exercise prices equal to the fair market value as of the date of
grant. However, under the plans the Company's Board of Directors has authority
to grant nonstatutory stock options at not less than 85% of the fair market
value as of the date of grant. Options granted under these plans generally vest
over four years and have a ten-year term, such that vesting occurs at the rate
of 25% per year, starting one year from the date of grant. The 1995 Plan was
approved by the Company's stockholders in February 1996, with 3,000,000 shares
of common stock reserved for issuance thereunder; the 1995 Plan also provides
that approximately 1,400,000 shares under the 1987 Plan, plus any shares made
available due to cancelled options under the 1987 Plan, be rolled over into the
1995 Plan. In February 1998, the 1995 Stock Plan was amended by the Company's
stockholders to increase the number of shares reserved for issuance by an
additional 2,250,000 shares. In July 1998, the 1995 Plan was amended to permit
stock option grants to non-employee directors of the Company. As of July 1,
1998, non-employee directors were granted options to purchase 4,000 shares
annually. In February 1998, the Company's Board of Directors approved the 1998
Plan and reserved 2,000,000 shares of common stock for issuance thereunder.
DIRECTOR STOCK OPTION PLAN
In May 1991, the Company's Board of Directors approved a Director Option Plan
(the "Director Plan") and reserved 150,000 shares of common stock for issuance
pursuant to the Director Plan. In February 1998, the Director Plan was amended
by the Company's stockholders to increase the number of shares reserved for
issuance by an additional 150,000 shares. The Director Plan provides for the
granting of stock options to non-employee directors of the Company. Under the
Director Plan, upon joining the Board and on each date of re-election
thereafter, each non-employee director automatically receives an option to
purchase 6,000 shares of the Company's common stock at an exercise price equal
to fair market value on the date of grant. Options granted under the Director
Plan vest
47
<PAGE> 48
immediately. Non-employee directors of the company may also choose to receive
stock options in lieu of cash compensation for their retainer. Shares are fully
vested on the date of grant.
STOCK OPTION REPRICING
In the third quarter of fiscal 1998, the Company's Board of Directors approved
the cancellation and reissuance of outstanding options under the Company's
Employee Stock Option Plans. Under the program, employees with outstanding
options at exercise prices in excess of $13.6875 per share, were given the
choice of retaining these options or of obtaining in substitution, new options
for the same number of shares. The new options were exercisable at a price of
$13.6875 per share, the fair market value of the stock on the reissue date. The
new options maintained the vesting schedule and the term established by the
original options, subject to a six-month blackout period on exercise, which
expired on October 2, 1998. Employees with a position of Vice President or
above, were subject to a one-year blackout period on exercise of their options,
which expired on April 2, 1999.
During the fourth quarter of fiscal year 1998, the Company approved the
cancellation and reissuance of the outstanding options. Under the program,
holders of outstanding options with an exercise price in excess of $7.5625 per
share were granted new options and the old options were cancelled, unless the
employee elected not to participate in the program. Replacement options were
issued with the same vesting schedules and term as the old options, subject to a
one-year blackout period for all employees on exercise which expired on August
4, 1999. The CEO of the Company was not eligible to participate in this
repricing. The number of options shown as granted and canceled in the table
below reflects these re-issuances of options.
STOCK OPTION ACTIVITY
Stock option activity under the employee and director option plans was as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED
AVERAGE
EXERCISE NUMBER OF AVAILABLE
PRICE SHARES FOR GRANT
-------- ------------ ----------
<S> <C> <C> <C>
Balance at September 30, 1996 $18.05 5,335,850 3,805,467
Granted $21.20 2,462,383 (2,462,383)
Exercised $13.16 (873,517) --
Canceled $22.21 (522,738) 499,096
----------- ----------
Balance at September 30, 1997 $21.40 6,401,978 1,842,180
Additional shares reserved -- -- 4,400,000
Granted $11.57 12,852,085 (12,852,085)
Exercised $ 8.85 (104,267) --
Canceled $18.05 (11,379,492) 11,379,492
----------- ----------
Balance at September 30, 1998 $ 9.62 7,770,304 4,769,587
Granted $ 7.79 2,601,424 (2,601,424)
Exercised $ 9.15 (205,793) --
Canceled $10.85 (1,237,245) 1,235,548
----------- ----------
Balance at September 30, 1999 $ 8.90 8,928,690 3,403,711
=========== ==========
</TABLE>
At September 30, 1999, 1998 and 1997, there were exercisable options outstanding
under the above mentioned option plans to purchase an aggregate of approximately
3,898,688, 1,035,000, and 2,374,000 shares, respectively.
In fiscal 1991, the Company granted to the Chief Executive Officer an option,
independent of an option plan, to purchase 1,188,037 shares of common stock at
$0.33 per share. As of September 30, 1999, 758,760 options had been exercised,
and 429,277 options were exercisable.
48
<PAGE> 49
STOCK OPTIONS OUTSTANDING AND STOCK OPTIONS EXERCISABLE
The following table summarizes information about options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICES SHARES YEARS) PRICE SHARES PRICE
- -------------------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.33 - $7.50 1,752,637 7.49 $ 4.99 550,486 $ 1.44
$7.56 4,719,023 6.64 $ 7.56 3,039,305 $ 7.56
$ 7.81 - $13.50 2,010,043 8.36 $ 9.49 296,662 $11.08
$13.69 - $36.13 870,264 6.63 $18.23 435,512 $19.18
$37.13 6,000 6.11 $37.13 6,000 $37.13
---------- ----------- --------- ---------- --------
9,357,967 7.17 $ 8.51 4,327,965 $ 8.29
========== =========== ========= ========== ========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") under
which all eligible employees may acquire common stock at a price per share equal
to the lesser of 85% of the closing sales price of the stock at the beginning or
at the end of each offering period. In February 1999, stockholders approved an
additional reserve of 2,000,000 shares to the plan, and restricted the number of
shares issued in each six month offering period to a maximum of 250,000 shares,
with the exception of the 10/1/98-4/30/99 offering period, (a seven month
offering period) which was capped at 350,000 shares. Offering periods effective
May 1, 1999 have a six-month duration commencing on May 1 and November 1 of each
year. The Board of Directors has reserved a total of 3,500,000 shares under this
plan and, at September 30, 1999, there were 1,650,984 shares available for
purchase.
401(k) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") under which
eligible U.S. employees may contribute, on a pre-tax basis, between 2% and 15%
of their total annual income from the Company, excluding bonuses and subject to
a maximum aggregate annual contribution imposed by the Internal Revenue Code.
The Company sponsors a "stock match" program pursuant to which the Company
contributes shares of the Company's Common Stock to the 401(k) Plan. Each
participating employee receives shares with a market value equal to $1.50 for
each $1.00 contributed by such employee up to the lesser of (i) $1,500 in Common
Stock, or (ii) 100 shares of Common Stock per participant per year. 25% of the
shares contributed to each employee's account vests immediately, and the balance
vests 25% for each year of service to the Company, with full credit given for
prior service. The Board of Directors has reserved 1,200,000 shares under the
401(k) Plan and, at September 30, 1999, there were 314,405 shares available for
issuance.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Had compensation expense for the Company's plans
been determined based on the fair value at the grant date for awards using the
Black-Scholes option valuation model, the Company's net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
49
<PAGE> 50
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- -------
<S> <C> <C> <C>
Pro forma net income (loss) $(171,815) $(349,847) $65,379
Pro forma basic earnings (loss) per share $ (3.49) $ (7.21) $ 1.38
Pro forma diluted earnings (loss) per share $ (3.49) $ (7.21) $ 1.39
</TABLE>
The fair value of each option grant and issuance under the stock purchase plan
are estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for grants made in 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.75 0.66 0.63
Risk free interest rate 6.0% 4.5% 5.9%
Expected lives - stock options granted 3.1 years 1.9 years 3.1 years
Expected lives - employee stock purchase plan 0.5 years 0.5 years 0.5 years
</TABLE>
The weighted average exercise price and weighted average fair value of stock
options granted and shares granted under the Company's Employee Stock Purchase
Plan are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Weighted average exercise price - stock options granted $7.81 $11.57 $21.20
Weighted average fair value - stock options granted $5.27 $ 4.28 $ 9.80
Weighted average exercise price - employee stock purchase plan $5.81 $15.09 $17.99
Weighted average fair value - employee stock purchase plan $3.28 $ 6.59 $ 7.08
</TABLE>
NOTE 10. 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 industry conditions. The charges include a 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:
<TABLE>
<CAPTION>
Facilities and Lease
Equipment Severance Commitments Other Total
-------------- --------- ----------- ----- --------
<S> <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) (3,013) (52) (7,516)
-------------- --------- ------------ ----- --------
Reserve Balances as of
September 30, 1999 $ -- $ -- $ 91 $346 $ 437
</TABLE>
50
<PAGE> 51
Total restructuring charge incurred during the third quarter of fiscal year 1999
was $37.7 million, of which $15.6 million was related to the restructuring of
the Company's subsidiary, RRSMI. The $15.6 million restructuring charge incurred
by RRSMI was for the write-off of equipment ($12.6 million), lease commitments
($2.4 million) and severance ($0.6 million). These restructuring costs were
associated with the Company's transition to giant magnetoresistive technology as
well as a decrease in customer demand.
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.
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 result in charges that could
have a material adverse impact on the Company's financial position and results
from operations.
NOTE 11. RESTRUCTURING COSTS - FISCAL YEAR 1998
During the third quarter of fiscal 1998, the Company recorded restructuring
charges of $93.7 million. These charges reflected the Company's strategy to
align worldwide operations with market conditions and to improve the
productivity of the Company's manufacturing operations. The restructuring
charges were primarily associated with the Company's decision to cease the
Company's manufacturing operations in Malaysia and the write-off of excess
equipment at the Company's other manufacturing locations. The assets disposed of
in Malaysia included manufacturing equipment for assembly and test operations,
and related facilities and leasehold improvements. The assets disposed of in
other manufacturing locations primarily relate to manufacturing equipment for
slider fabrication, assembly and test processes that were considered to be
excess or obsolete. The fair value of the assets was determined based upon
salvage value, as no further uses were identified.
The restructuring charges consisted of $70.0 million to write-off or write-down
facilities and equipment, $7.2 million to write-off goodwill associated with the
Company's original purchase of its Malaysia manufacturing operations, $10.0
million for severance for terminated employees, and $6.5 million for other
expenses associated with the restructuring plan. Approximately 4,300 employees
were terminated, of which approximately 4,100 were engaged in manufacturing
activities in Malaysia.
During the fourth quarter of fiscal 1998, the Company revised its estimate of
costs required to fully implement the restructuring plan. Based on actual
employee terminations and actual cash charges incurred through September 30,
1998, the Company estimates future costs for employee severance would be less
than previously estimated and other expenses related to the restructuring plan
would be more than the previous estimate. Accordingly, the Company reallocated
amounts between these two categories. As of September 30, 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 summarizes the Company's restructuring activity for the 1998
restructuring charge:
51
<PAGE> 52
<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
Cash Charges -- -- (730) (2,496) (3,226)
-------------- -------- --------- ------- ----------
Reserve Balances as of September 30, 1999 $ -- $ -- $ -- $ -- $ --
-------------- -------- --------- ------- ----------
</TABLE>
NOTE 12. SPECIAL CHARGES
During November 1997, the Company was informed by its customers that primarily
all of its inductive head programs were to be terminated. As a result,
approximately $59.4 million of inventories, which were being built by the
Company in anticipation of customer orders, immediately became obsolete. The
Company responded to the industry's rapid shift to magnetoresistive ("MR")
technology, by accelerating its existing 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
base upon salvage value, as no further uses were identified.
NOTE 13. LITIGATION
In December 1996, a purported class action complaint was filed in the Superior
Court of the State of California, Santa Clara County, by Joan D. Ferrari and
Mark S. Goldman against the Company and certain of its officers and directors
(the "Ferrari State Action"). The complaint in the Ferrari State Action alleges
that during a purported class period of April 19, 1995 -- January 22, 1996,
defendants made materially false and misleading statements concerning the
Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. In May 1997, the Superior
Court entered an order (1) sustaining the demurrers of certain defendants to the
California Corporations Code cause of action and overruling the demurrers of
Read-Rite Corporation and certain other defendants to that same cause of action;
and (2) sustaining the demurrers of all defendants as to the remaining causes of
action.
In January 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). In May 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by James C. Nevius and William Molair against the Company and certain
of its officers and directors (the "Nevius Federal Action").The court
consolidated the Ferrari Federal Action and the Nevius Federal Action into one
action, In re Read-Rite Corp. Securities Litigation (the "Consolidated Action"),
and plaintiffs thereafter filed a consolidated complaint. The consolidated
complaint alleges that from April 19, 1995 -- January 22, 1996 (the "Ferrari
Class Period") and from of March 2, 1996 -- June 19, 1996 (the "Nevius Class
Period"), defendants made false and misleading statements about the Company's
business condition
52
<PAGE> 53
and prospects. The consolidated complaint alleges violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and seeks
damages of an unspecified amount. In August 1998, the court in the Consolidated
Action granted defendants motion to dismiss but granted plaintiffs leave to file
an amended complaint. In January 1999, plaintiffs filed their amended complaint.
In March 1999 defendants moved to dismiss that amended complaint with prejudice.
In June 1999 the court heard oral argument on defendants' motion to dismiss.
That motion is currently under judicial consideration.
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.
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 14. CONCENTRATION OF CREDIT RISK
The Company's customer base is concentrated with a small number of storage
device manufacturers. Financial instruments that potentially subject the Company
to concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluation of its customer's financial condition and, generally, requires no
collateral from its customers.
Principal customers for years ended September 30 were as follows (as a
percentage of net sales):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Western Digital 37% 49% 51%
Maxtor 32% 25% 13%
Samsung 19% 15% 5%
Quantum -- 3% 18%
All Others 12% 8% 13%
---- ---- ----
100% 100% 100%
---- ---- ----
</TABLE>
The Company places its cash equivalents and short-term investments in investment
grade, short-term debt instruments and limits the amount of credit exposure to
any one commercial issuer.
In November 1997, Micropolis, a Singapore Technologies wholly owned subsidiary
and customer of the Company, announced it would be filing for bankruptcy. As a
result of the announced bankruptcy, the Company established a reserve for
Micropolis related accounts receivable, inventory and equipment exposures
resulting in charges to the fourth quarter of fiscal 1997 of $12.2 million to
selling, general and administrative expense and $2.6 million to cost of sales.
During fiscal 1998, the Company wrote off $9.3 million of the Micropolis related
accounts receivables and all of the Micropolis related inventory and equipment.
NOTE 15. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information" in
fiscal 1999. The new standard revises the way operating segments are reported.
The Company operates and tracks its results in two operating segments, hard disk
drive and tape head. The Company designs, develops, manufactures and markets
head gimbal assemblies, headstack
53
<PAGE> 54
assemblies and tape heads for the hard disk drive and tape drive markets. The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS 131.
Enterprise-wide information is provided in accordance with SFAS 131.
Geographical revenue information is based on the customer's ship-to location.
Long-lived assets consist of property, plant and equipment. Property, plant and
equipment information is based on the physical location of the assets at the end
of each fiscal year.
Net sales to unaffiliated customers by operating segments were as follows
(amount in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
HGA/HSA $698,488 $792,590 $1,145,055
Tape head 17,972 16,032 16,995
-------- -------- ----------
Total net sales $716,460 $808,622 $1,162,050
======== ======== ==========
</TABLE>
Profit/loss from unaffiliated customers by operating segments were as follows
(amount in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 1999 1998 1997
--------- --------- -------
<S> <C> <C> <C>
HGA/HSA $(146,249) $(311,511) $79,576
Tape head (9,466) (8,236) (3,397)
--------- --------- -------
Total net income $(155,715) $(319,747) $76,179
========= ========= =======
</TABLE>
The Company does not segregate long-lived assets by operating segments.
Net sales to unaffiliated customers by country were as follows (amount in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
Singapore $312,764 $375,625 $ 584,124
Malaysia 182,230 282,789 393,880
Korea 129,074 119,257 61,449
Others 92,392 30,951 122,597
-------- -------- ----------
Total net sales $716,460 $808,622 $1,162,050
======== ======== ==========
</TABLE>
Net long-lived assets by geographic region were as follows (amount in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States $183,136 $233,628 $266,652
Thailand 126,458 176,530 239,745
Philippines 83,763 94,334 57,244
Japan 63,370 68,324 65,420
Malaysia 39 0 42,625
Others 423 817 1,144
-------- -------- --------
Total long-lived assets $457,189 $573,633 $672,830
======== ======== ========
</TABLE>
The End
54
<PAGE> 55
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly results of operations for
the years ended September 30 (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999(1)
Net sales $ 230,188 $ 206,187 $ 174,766 $ 105,319
Gross margin $ 34,861 $ 11,255 $ (18,655) $ (50,726)
Net (loss) $ 1,122 $ (19,418) $ (57,295) $ (80,124)
Basic net loss per share $ 0.02 $ (0.39) $ (1.16) $ (1.62)
Diluted net loss per share $ 0.02 $ (0.39) $ (1.16) $ (1.62)
1998(2)(3)
Net sales $ 261,371 $ 187,072 $ 184,247 $ 175,932
Gross margin $ (85,767) $ (30,414) $ (14,749) $ (1,851)
Net income $ (90,929) $ (62,171) $(137,150) $ (29,496)
Basic net income per share $ (1.88) $ (1.29) $ (2.82) $ (0.61)
Diluted net income per share $ (1.88) $ (1.29) $ (2.82) $ (0.61)
</TABLE>
(1) The third quarter results include a restructuring charge of approximately
$37.7 million associated with down-sizing the Company's workforce and
capacities to reflect industry conditions and the write-down of excess and
obsolete equipment related to the transition from MR technology to GMR
technology. See Note 10
(2) The first quarter results include a special charge of approximately $114.8
million to cost of sales, primarily for the write-off of equipment and
inventory associated with the industry's rapid shift away from advanced
inductive technology to MR technology and the Company's decision to
accelerate its existing MR transition strategy. See Note 12.
(3) The third quarter results include a restructuring charge of approximately
$93.7 million to reflect the Company's decision to significantly reduce and
ultimately cease the Company's manufacturing operations in Malaysia and
write-off excess equipment at the Company's other manufacturing locations.
See Note 11.
55
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Read-Rite Corporation
We have audited the accompanying consolidated balance sheets of Read-Rite
Corporation as of September 30, 1999 and 1998, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended September 30, 1999. Our audits also included the
financial statement schedule listed in the index at item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Read-Rite Corporation at September 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that Read-Rite
Corporation will continue as going concern. As more fully described in Note 1,
the Company has incurred operating losses and is out of compliance with certain
financial covenants of loan agreements with its lenders. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
San Jose, California
October 22, 1999, except for the
sixth paragraph of Note 1, as to
which the date is December 29, 1999.
56
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file its definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on February 24, 2000 pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (the "Proxy Statement") not later than 120 days
after the end of the fiscal year covered by this Report, and certain information
included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Executive Officers - See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
sections entitled "Record Date and Principal Ownership" and "Security Ownership
of Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
57
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the Company for the fiscal
year ended September 30, 1999 are included herewith:
Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Cash Flows, Consolidated Statements of
Stockholders' Equity, Notes to Consolidated Financial Statements, and Report
of Ernst & Young LLP, Independent Auditors
(2) Supplemental Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements or
notes thereto.
(3) Exhibits
<TABLE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1(16) Restated Certificate of Incorporation, as amended
3.2(16) Bylaws, as amended
4.1(16) Article X of Restated Certificate of Incorporation
(See Exhibit 3.1)
4.2(1) Amended Registration Rights Agreement, dated as of June 27, 1991
and amended August 12, 1991
4.3(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement
10.2(6)* Amended and Restated 1987 Stock Option Plan and form of Stock
Option Agreement
10.3(23)* Amended and Restated 1991 Director Option Plan (as amended and
restated October 20, 1998) and form of Option Agreement
10.4(17)* Amended and Restated 401(k) Retirement Savings Plan and Summary
Plan Description
10.5(20)* Employee Stock Purchase Plan (as amended and restated July 22,
1997)
10.6(1)* Stock Option Agreement dated February 4, 1991 between the Company
and Cyril J. Yansouni, as amended May 16, 1991
10.8(1) Series CC Preferred Stock and Convertible Subordinated Note
Purchase Agreement between the Company and Sumitomo, dated as of
June 14, 1991
10.9(9) Joint Venture Agreement dated as of June 14, 1991 between the
Company and Sumitomo Metal Industries, Ltd. ("Sumitomo")
10.10(7) First Addendum dated as of December 14, 1993 to Joint Venture
Agreement dated as of June 14, 1991 between the Company and
Sumitomo (See Exhibit 10.11)
10.11(1) License Agreement between the Company and Read-Rite SMI
Corporation ("Read-Rite SMI") dated July 18, 1991
10.12(1) Distribution Agreement between the Company and Read-Rite SMI
dated July 18, 1991
10.13(1) Distribution Agreement between Read-Rite SMI and the Company
dated July 18, 1991
10.14(7) First Addendum dated as of December 14, 1993 to the License and
Distribution Agreements between the Company and Read-Rite SMI
(See Exhibits 10.13, 10.14 and 10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI and
Sumitomo dated
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and between
Company and Sunward Technologies, Inc.
10.18(1)(4) Asset Purchase Agreement between Conner Peripherals, Inc., Conner
Peripherals Malaysia, Sdn Bhd and the Company, dated as of August
30, 1991, as amended October 26, 1991(Confidential treatment
granted as to certain portions of this exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of November
14, 1991, by and among the Company, Read-Rite International,
Maxtor Singapore Limited and Maxtor Corporation, as amended
December 20, 1991
10.20(1) License Agreement between International Business Machines
Corporation and the Company dated as of October 1, 1986
10.21(6) License Agreement dated September 14, 1993 between the Company
and Kyushu Matsushita Electric Co., Ltd. (Confidential treatment
requested for certain portions of this exhibit)
10.22(10) Cross-License Agreement dated December 31, 1994 between the
Company and Seagate Technology Inc.
10.27(5) Single Tenant Industrial Lease Agreement, dated as of August 24,
1992, between Shuwa Investments Corporation and the Company
10.28(5) Loan Agreement between The Industrial Finance Corporation of
Thailand (the "IFCT") and Read-Rite (Thailand) Co. Ltd., dated as
of September 25, 1992 and related Agreement for Pledge of
Properties, Agreement for Custodianship of Pledged Properties and
Suretyship Contract, dated as of September 30, 1992, by the
Company in favor of the IFCT
10.29(6) Loan Agreement between the IFCT and Read-Rite (Thailand) Co.
Ltd., dated as of September 24, 1993 and related Suretyship
Contract dated as of September 23, 1993 by the Company in favor
of the IFCT
10.35(13) Agreement dated as of November 1, 1995 between the Company and
Sumitomo Metal Industries, Ltd. regarding the formation of
Read-Rite SMI (Thailand) Co., Ltd.
10.36(13) Agreement and Second Addendum to License Agreement and
Distribution Agreements between the Company, Sumitomo Metal
Industries, Ltd., Read-Rite SMI Kabushiki Kaisha and Read-Rite
SMI (Thailand) Co., Ltd.
10.37(14) Agreement for Purchase and Sale of Assets by and between
Read-Rite Corporation and Censtor Corporation dated March 29,
1996
10.39(14) Lease of the Land dated April 25, 1996 between Sumitomo Bank
Leasing and Finance, Inc., as landlord, and the Company, as
tenant, together with a Deed of Trust, Financing Statement,
Security Agreement and Fixture Filing with Assignment of Rents
and Leases
10.41(23)* 1995 Stock Option Plan (as amended and restated July 1, 1998) and
form of Stock Option Agreement
10.42(15)* Years of Service Plan
10.44(17) Amendment to Lease of the Land dated April 25, 1996 between
Sumitomo Bank Leasing and Finance, Inc., as landlord, and the
Company, as tenant, together with a Deed of Trust, Financing
Statement, Security Agreement and Fixture Filing with Assignment
of Rents and Leases, dated October 15, 1996
10.47(18)* Executive Quarterly Variable Compensation Plan
10.48(18)* Read-Rite Corporation Super Bonus Plan
10.49(19)* Severance Plans
10.50(19)* Fourth and Fifth Amendments to Read-Rite Corporation's 401 (k)
Plan
10.51(19) Amended and Restated License Agreement Between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.52(19) Second Addendum to Joint Venture Agreement between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.53(20)** License Agreement, date as of January 1, 1997, between the
Read-Rite Corporation and International Business Machines
Corporation
10.54(21) Revolving Loan and Term Loan Agreement between Read-Rite
Corporation as Borrower and Financial Institutions as Banks and
Canadian Imperial Bank of Commerce as Agent, dated October 2,
1997.
10.55(22) First Amendment, dated February 5, 1998, to Credit Agreement
between Read-Rite
</TABLE>
59
<PAGE> 60
<TABLE>
<S> <C>
Corporation, the financial institutions named therein, and
Canadian Imperial Bank of Commerce as agent and designated
issuer, dated October 2, 1997
10.56(23) Second Amendment, dated August 10, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions named
therein, and Canadian Imperial Bank of Commerce as agent and
designated issuer, dated October 2, 1997
10.57(23)* 1998 Stock Plan and form of Stock Option Agreement
10.58(23)* Sixth Amendment to Read-Rite Corporation's 401(k) Plan
10.59 Third Amendment, dated September 27, 1999, to Credit Agreement
between Read-Rite Corporation, the financial institutions named
therein, and Canadian Imperial Bank of Commerce as agent and
designated issuer, dated October 2, 1997
10.60 Fourth Amendment, dated December 29, 1999, to Credit Agreement
between Read-Rite Corporation, the financial institutions named
therein, and Canadian Imperial Bank of Commerce as agent and
designated issuer, dated October 2, 1997
21.1(22) List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1(23) Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
** Confidential treatment requested for certain portions of this exhibit. In
accordance with the rules of the Commission, the confidential portions of
this exhibit have been omitted and filed separately with the Commission.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33 42570), effective October 17, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991.
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated January 10, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company's Registration Statement on Form
S-8 dated April 25, 1996.
60
<PAGE> 61
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1996.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1997.
(22) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997
(23) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1999.
(c) Exhibits
See subsection (a)(3) above.
(d) Financial Statement Schedules
See subsection (a)(1) and (2) above.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, State of California, on this 10th day of January, 2000.
Read-Rite Corporation
By: /s/ CYRIL J. YANSOUNI
------------------------
Cyril J. Yansouni, Chairman and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cyril J. Yansouni and John T. Kurtzweil,
and each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments to this report
on Form 10-K, and to file with same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CYRIL J. YANSOUNI Chief Executive Officer January 10, 2000
- -------------------------- (Principal Executive Officer)
Cyril J. Yansouni and Chairman of the Board of
Directors
/s/ JOHN T. KURTZWEIL Sr. Vice President January 10, 2000
- -------------------------- and Chief Financial Officer
John T. Kurtzweil (Principal Financial and
Accounting Officer)
/s/ WILLIAM J. ALMON Director January 10, 2000
- --------------------------
William J. Almon
/s/ MICHAEL L. HACKWORTH Director January 10, 2000
- --------------------------
Michael L. Hackworth
/s/ JOHN G. LINVILL Director January 10, 2000
- --------------------------
John G. Linvill
/s/ MATTHEW J. O'ROURKE Director January 10, 2000
- --------------------------
Matthew J. O'Rourke
/s/ DR. ROBERT M. WHITE Director January 10, 2000
- --------------------------
Dr. Robert M. White
</TABLE>
63
<PAGE> 63
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCOLLECTABLE
BALANCE AT CHARGED CASH AND NON RECEIVABLE BALANCE AT
BEGINNING OF (CREDITED) TO CASH CHARGES WRITTEN END OF
PERIOD EXPENSES AND OTHER OFF/OTHERS PERIOD
------------ ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
September 30, 1999
Allowance for doubtful accounts $ 5,637 $ -- $ 3,043(1) $ -- $ 2,594
September 30, 1998
Allowance for doubtful accounts $ 14,887 $ -- $ -- $9,250 $ 5,637
September 30, 1997
Allowance for doubtful accounts $ 2,586 $ 12,301(2) $ -- $ -- $14,887
</TABLE>
(1) Reclassified to other liabilities.
(2) In the fourth quarter of fiscal 1997, the Company incurred a charge of
$12.2 million to the allowance for doubtful accounts relating to the
bankruptcy filing of Micropolis, a customer of the Company. See Note 14 in
"Notes to Consolidated Financial Statements."
64
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1(16) Restated Certificate of Incorporation, as amended
3.2(16) Bylaws, as amended
4.1(16) Article X of Restated Certificate of Incorporation
(See Exhibit 3.1)
4.2(1) Amended Registration Rights Agreement, dated as of June 27, 1991
and amended August 12, 1991
4.3(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement
10.2(6)* Amended and Restated 1987 Stock Option Plan and form of Stock
Option Agreement
10.3(23)* Amended and Restated 1991 Director Option Plan (as amended and
restated October 20, 1998) and form of Option Agreement
10.4(17)* Amended and Restated 401(k) Retirement Savings Plan and Summary
Plan Description
10.5(20)* Employee Stock Purchase Plan (as amended and restated July 22,
1997)
10.6(1)* Stock Option Agreement dated February 4, 1991 between the Company
and Cyril J. Yansouni, as amended May 16, 1991
10.8(1) Series CC Preferred Stock and Convertible Subordinated Note
Purchase Agreement between the Company and Sumitomo, dated as of
June 14, 1991
10.9(9) Joint Venture Agreement dated as of June 14, 1991 between the
Company and Sumitomo Metal Industries, Ltd. ("Sumitomo")
10.10(7) First Addendum dated as of December 14, 1993 to Joint Venture
Agreement dated as of June 14, 1991 between the Company and
Sumitomo (See Exhibit 10.11)
10.11(1) License Agreement between the Company and Read-Rite SMI
Corporation ("Read-Rite SMI") dated July 18, 1991
10.12(1) Distribution Agreement between the Company and Read-Rite SMI
dated July 18, 1991
10.13(1) Distribution Agreement between Read-Rite SMI and the Company
dated July 18, 1991
10.14(7) First Addendum dated as of December 14, 1993 to the License and
Distribution Agreements between the Company and Read-Rite SMI
(See Exhibits 10.13, 10.14 and 10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI and
Sumitomo dated
</TABLE>
<PAGE> 65
<TABLE>
<S> <C>
July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and between
Company and Sunward Technologies, Inc.
10.18(1)(4) Asset Purchase Agreement between Conner Peripherals, Inc., Conner
Peripherals Malaysia, Sdn Bhd and the Company, dated as of August
30, 1991, as amended October 26, 1991(Confidential treatment
granted as to certain portions of this exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of November
14, 1991, by and among the Company, Read-Rite International,
Maxtor Singapore Limited and Maxtor Corporation, as amended
December 20, 1991
10.20(1) License Agreement between International Business Machines
Corporation and the Company dated as of October 1, 1986
10.21(6) License Agreement dated September 14, 1993 between the Company
and Kyushu Matsushita Electric Co., Ltd. (Confidential treatment
requested for certain portions of this exhibit)
10.22(10) Cross-License Agreement dated December 31, 1994 between the
Company and Seagate Technology Inc.
10.27(5) Single Tenant Industrial Lease Agreement, dated as of August 24,
1992, between Shuwa Investments Corporation and the Company
10.28(5) Loan Agreement between The Industrial Finance Corporation of
Thailand (the "IFCT") and Read-Rite (Thailand) Co. Ltd., dated as
of September 25, 1992 and related Agreement for Pledge of
Properties, Agreement for Custodianship of Pledged Properties and
Suretyship Contract, dated as of September 30, 1992, by the
Company in favor of the IFCT
10.29(6) Loan Agreement between the IFCT and Read-Rite (Thailand) Co.
Ltd., dated as of September 24, 1993 and related Suretyship
Contract dated as of September 23, 1993 by the Company in favor
of the IFCT
10.35(13) Agreement dated as of November 1, 1995 between the Company and
Sumitomo Metal Industries, Ltd. regarding the formation of
Read-Rite SMI (Thailand) Co., Ltd.
10.36(13) Agreement and Second Addendum to License Agreement and
Distribution Agreements between the Company, Sumitomo Metal
Industries, Ltd., Read-Rite SMI Kabushiki Kaisha and Read-Rite
SMI (Thailand) Co., Ltd.
10.37(14) Agreement for Purchase and Sale of Assets by and between
Read-Rite Corporation and Censtor Corporation dated March 29,
1996
10.39(14) Lease of the Land dated April 25, 1996 between Sumitomo Bank
Leasing and Finance, Inc., as landlord, and the Company, as
tenant, together with a Deed of Trust, Financing Statement,
Security Agreement and Fixture Filing with Assignment of Rents
and Leases
10.41(23)* 1995 Stock Option Plan (as amended and restated July 1, 1998) and
form of Stock Option Agreement
10.42(15)* Years of Service Plan
10.44(17) Amendment to Lease of the Land dated April 25, 1996 between
Sumitomo Bank Leasing and Finance, Inc., as landlord, and the
Company, as tenant, together with a Deed of Trust, Financing
Statement, Security Agreement and Fixture Filing with Assignment
of Rents and Leases, dated October 15, 1996
10.47(18)* Executive Quarterly Variable Compensation Plan
10.48(18)* Read-Rite Corporation Super Bonus Plan
10.49(19)* Severance Plans
10.50(19)* Fourth and Fifth Amendments to Read-Rite Corporation's 401(k)
Plan
10.51(19) Amended and Restated License Agreement Between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.52(19) Second Addendum to Joint Venture Agreement between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.53(20)** License Agreement, date as of January 1, 1997, between the
Read-Rite Corporation and International Business Machines
Corporation
10.54(21) Revolving Loan and Term Loan Agreement between Read-Rite
Corporation as Borrower and Financial Institutions as Banks and
Canadian Imperial Bank of Commerce as Agent, dated October 2,
1997.
10.55(22) First Amendment, dated February 5, 1998, to Credit Agreement
between Read-Rite
</TABLE>
<PAGE> 66
<TABLE>
<S> <C>
Corporation, the financial institutions named therein, and
Canadian Imperial Bank of Commerce as agent and designated
issuer, dated October 2, 1997
10.56(23) Second Amendment, dated August 10, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions named
therein, and Canadian Imperial Bank of Commerce as agent and
designated issuer, dated October 2, 1997
10.57(23)* 1998 Stock Plan and form of Stock Option Agreement
10.58(23)* Sixth Amendment to Read-Rite Corporation's 401(k) Plan
10.59 Third Amendment, dated September 27, 1999, to Credit Agreement
between Read-Rite Corporation, the financial institutions named
therein, and Canadian Imperial Bank of Commerce as agent and
designated issuer, dated October 2, 1997
10.60 Fourth Amendment, dated December 29, 1999, to Credit Agreement
between Read-Rite Corporation, the financial institutions named
therein, and Canadian Imperial Bank of Commerce as agent and
designated issuer, dated October 2, 1997
21.1(22) List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1(23) Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
** Confidential treatment requested for certain portions of this exhibit. In
accordance with the rules of the Commission, the confidential portions of
this exhibit have been omitted and filed separately with the Commission.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33 42570), effective October 17, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991.
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated January 10, 1992. (4) Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company's Registration Statement on Form
S-8 dated April 25, 1996.
<PAGE> 67
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1996.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1997.
(22) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997
(23) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998
<PAGE> 1
EXHIBIT 10.59
READ-RITE CORPORATION
WAIVER AND THIRD AMENDMENT
TO CREDIT AGREEMENT
This WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
dated as of September 27, 1999 and entered into among Read-Rite Corporation, a
Delaware corporation (the "Borrower"), the financial institutions named on the
signature pages hereof (each a "Bank" and collectively the "Banks"), Canadian
Imperial Bank of Commerce, New York Agency, as agent for the Banks (the "Agent")
and issuer of Letters of Credit (the "Designated Issuer") and is made with
reference to that certain Credit Agreement dated as of October 2, 1997 (as
amended by the First Amendment to Credit Agreement dated February 5, 1998 and
the Second Amendment to Credit Agreement dated as of August 10, 1998, the
"Credit Agreement" and the Credit Agreement, as amended by this Amendment, the
"Amended Agreement") among the Borrower, the Banks, the Designated Issuer and
the Agent. Capitalized terms used herein without definition shall have the same
meanings herein as set forth in the Amended Agreement.
RECITALS
WHEREAS, the Borrower has requested that the Banks waive certain financial
covenants and amend certain other provisions set forth in Credit Agreement.
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
A. The definition of the term "Revolving Facility" in Section 1.01 of the
Credit Agreement shall be amended by deleting the figure "$100,000,000" and
substituting therefore "$75,000,000".
B. The definition of the term "Interest Period" in Section 1.01 of the
Credit Agreement shall be amended by replacing the period at the end thereof
with a semicolon and adding the following thereafter: "; provided, however, that
the Interest Periods for the Eurodollar Rate Loans commencing on October 4, 1999
and October 20, 1999 shall end no later than November 30, 1999 and in no event
shall any Interest Period commencing after October 1, 1999 end later than
December 31, 1999.
SECTION 2. WAIVERS AND CONSENTS
<PAGE> 2
A. By their execution hereof, the Banks hereby waive compliance by the
Borrower with Section 6.02(b) to (e) inclusive of the Credit Agreement for the
period from September 30, 1999 through and including December 31, 1999. Unless
extended by the Majority Banks, this waiver shall terminate on January 1, 2000,
and on January 1, 2000 an Event of Default will exist if the Borrower is not
(and has not been) in compliance with Sections 6.02(b) to (e) of the Credit
Agreement for all periods from and after September 30, 1999. This waiver shall
be limited precisely as provided for herein and shall not be deemed to be a
waiver or modification of any other term or provision of the Credit Agreement or
to be a consent to any other transaction or further action on the part of the
Borrower or any of its Subsidiaries which would require the consent of the Banks
under the Credit Agreement.
B. By their execution hereof, notwithstanding the definition of the term
"Financial Institution" or the minimum assignment requirements in Section 9.06,
the parties hereto consent to the assignment by Foothill Partners III, L.P. to
Cerberus Partners, L.P. of a portion of its Commitment in an amount less than
$5,000,000 and to the assignment by The Long-Term Credit Bank of Japan, Ltd.,
Los Angeles Agency to General Electric Capital Corporation of its entire
Commitment. From and after the effective date of this Amendment, each of
Cerberus Partners, L.P. and General Electric Capital Corporation shall be deemed
to be a Bank for all purposes of the Credit Agreement.
SECTION 3. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of the first date (the "Third
Amendment Date") on or before October 7, 1999 upon which the following
conditions have been satisfied:
A. The Agent shall have received for each Bank counterparts hereof duly
executed on behalf of the Borrower, the Agent, and the Majority Banks (or, in
lieu of execution by the Majority Banks, notice of the approval of this
Amendment by the Majority Banks satisfactory to the Agent); and
B. An acknowledgment and amendment in the form of Exhibit A hereto duly
executed by each party to the Guaranty.
C. The Borrower shall have reduced the aggregate outstanding principal
amount of Revolving Loans to an amount not in excess of $75,000,000.
D. The Agent shall have received a copy of a board resolution of the
Borrower, in form and substance satisfactory, to the Agent authorizing the
execution, delivery and performance of this Amendment certified by the Secretary
of the Borrower as being in full force and effect on the date hereof.
<PAGE> 3
E. The Amendment Fee referred to in Section 5.C shall have been paid, and
all other fees and expenses payable by the Borrower pursuant to the Loan
Documents shall have been paid or provided for.
F. All the representations and warranties in Section 4 shall be true and
correct as of the date of this Amendment.
G. No Potential Event of Default or Event of Default shall have occurred
and be continuing on the date of this Amendment or will result from the
consummation of this Amendment (after giving effect to this Amendment).
H. The Agent shall have received, in form and substance satisfactory to
it, a certificate dated on or before the date of this Amendment certifying that
the conditions in clauses (F) and (G) have been met.
SECTION 4. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Banks to enter into this Amendment
and to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to the Agent and each Bank that the following statements
are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all requisite corporate
power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, this Amendment
and the Amended Agreement.
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of the Borrower.
C. NO CONFLICT. The execution and delivery by the Borrower of this
Amendment does not and will not contravene (i) any law or any governmental rule
or regulation applicable to the Borrower or any of its Subsidiaries, (ii) the
Certificate of Incorporation or Bylaws of the Borrower, (iii) any order,
judgment or decree of any court or other agency of government binding on the
Borrower or any of its Subsidiaries or (iv) any material agreement or instrument
binding on the Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by the Borrower of
this Amendment and the performance by the Borrower of the Amended Agreement do
not and will not require any registration with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment has been duly executed and delivered
by the Borrower and is the binding obligation of the Borrower, enforceable
against the Borrower in
<PAGE> 4
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws of general application and equitable principles relating to or affecting
creditors' rights.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT.
The representations and warranties contained in Article V of the Amended
Agreement are and will be true, correct and complete in all material respects on
and as of the date of this Amendment to the same extent as though made on and as
of such date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing as of the
date of this Amendment or will result from the consummation of the transactions
contemplated by this Amendment that would constitute an Event of Default or a
Potential Event of Default (as determined after giving effect to the amendments
made by this Amendment).
H. FINANCIAL CONDITION. The unaudited consolidated balance sheet of the
Borrower for the Borrower's fiscal quarter ended June 30, 1999 and the related
consolidated statements of operations and cash flow of the Borrower for the
fiscal quarter then ended, which have been previously circulated to the Banks,
fairly present in all material respects the consolidated financial condition of
the Borrower as at such date and the consolidated results of the operations of
the Borrower for the period ended on such date, all in accordance with GAAP,
consistently applied, subject to year-end adjustments and the absence of
footnotes.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
AGREEMENTS.
(i) On and after the Third Amendment Date, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like
import referring to the Credit Agreement, and each reference in the other Loan
Agreements to the "Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Agreements shall remain in full force and effect
and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall not,
except as expressly provided herein, constitute a waiver of any provision of, or
operate as a waiver of any right, power or remedy of the Agent or any Bank
under, the Credit Agreement or any of the other
<PAGE> 5
Loan Agreements nor to create any course of dealing or otherwise obligate the
Agent or the Banks to forebear or execute similar amendments or any waiver in
similar circumstances in the future.
B. COSTS AND EXPENSES. The Company covenants to pay to or reimburse the
Agent, upon demand, for all costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment, the Collateral Documents
and the documents and transactions contemplated hereby.
C. AMENDMENT FEE. The Company hereby agrees to pay to the Agent on or
before the Third Amendment Date, for the ratable benefit of those Banks who
consent to this Amendment (as evidenced by their return of a signed signature
page to Agent or Agent's counsel) by 5:00 p.m. (San Francisco time) October 6,
1999, an amendment fee (the "Amendment Fee") of 0.125% of the aggregate
Revolving Commitments and Term Commitments of such consenting Banks (after any
reduction made by this Third Amendment). The Amendment Fee shall be paid to the
Agent in immediately available funds and shall be non-refundable. The Amendment
Fee is in addition to any fees, costs, expenses or other amounts otherwise
payable pursuant to this Amendment or the Amended Agreement.
D. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
E. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
F. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Agent of a facsimile transmitted document purportedly
bearing the signature of a Bank or the Borrower shall bind such Bank or the
Borrower, respectively, with the same force and effect as the delivery of a hard
copy original. Any failure by the Agent to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document of the party whose
hard copy page was not received by the Agent.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
BORROWER:
READ-RITE CORPORATION
By:
Title:
<PAGE> 7
AGENT:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY, as Agent
By:
Title:
<PAGE> 8
BANKS:
CIBC INC.
By:
Title:
ABN AMRO BANK N.V.
By:
Title:
By:
Title:
FLEET NATIONAL BANK
By:
Title:
KEYBANK, N.A.
By:
Title:
THE LONG TERM CREDIT BANK OF JAPAN,
LTD., LOS ANGELES AGENCY
By:
Title:
<PAGE> 9
MELLON BANK
By:
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:
Title:
THE SUMITOMO BANK LIMITED,
SAN FRANCISCO BRANCH
By:
Title:
THE INDUSTRIAL BANK OF JAPAN LIMITED,
SAN FRANCISCO AGENCY
By:
Title:
BANKBOSTON, N.A.
By:
Title:
<PAGE> 10
BANQUE NATIONALE DE PARIS
By:
Title:
By:
Title:
FOOTHILL PARTNERS III, L.P.
By:
Title:
WELLS FARGO BANK, N.A.
By:
Title:
THE DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY
By:
Title:
<PAGE> 11
EXHIBIT A
TO WAIVER AND THIRD AMENDMENT
TO CREDIT AGREEMENT
September 27, 1999
The parties listed on the acknowledgment page hereof:
Re: Credit Agreement dated as of October 2, 1997
Ladies and Gentlemen:
Please refer to (i) the Credit Agreement dated as of October 2, 1997 (the
"Credit Agreement") by and among Read-Rite Corporation (the "Borrower"), the
financial institutions party thereto (the "Banks") and Canadian Imperial Bank of
Commerce, New York Agency, as agent (in such capacity, the "Agent") and (ii) the
Continuing Guaranty dated as of August 10, 1998 (the "Guaranty", which was
executed by you on such date. Pursuant to an amendment of even date herewith,
certain terms of the Credit Agreement were amended. We hereby request that you
(i) consent to the terms of the amendment, (ii) acknowledge and reaffirm all of
your obligations and undertakings under the Guaranty and (iii) acknowledge and
agree that the Guaranty, as amended by the following paragraph hereof, is and
shall remain in full force and effect in accordance with the terms thereof.
By this letter, we further agree that the Guaranty shall be amended by
adding the following clause immediately prior to the end of Section 3 thereof:
"The obligations of each of the Guarantors under this Guaranty shall be
limited to the maximum amount as will, as giving effect to all other liabilities
of such Guarantor (including, but limited to, contingent liabilities, but
excluding the liabilities of such Guarantor hereunder) and after giving effect
to any collections from or payments made by or on behalf of any other Guarantor
in respect of the Borrower under the Credit Agreement, result in the obligations
of such Guarantor under the Guaranty not constituting a fraudulent transfer or
conveyance."
<PAGE> 12
Except as modified hereby, we and you acknowledge and agree that the
Guaranty is ratified and confirmed in all respects.
Very truly yours,
CANADIAN IMPERIAL BANK OF COMMERCE,
NEW YORK AGENCY, as Agent
By:
------------------------------------
Title:
---------------------------------
ACKNOWLEDGED AND AGREED AS
OF THE DATE FIRST ABOVE WRITTEN:
GUARANTORS
SUNWARD TECHNOLOGIES, INC.
By:
--------------------------------------
Title:
-----------------------------------
SUNWARD TECHNOLOGIES, CALIFORNIA
By:
--------------------------------------
Title:
-----------------------------------
A-2
<PAGE> 1
EXHIBIT 10.60
READ-RITE CORPORATION
WAIVER AND FOURTH AMENDMENT
TO CREDIT AGREEMENT
This WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment")
is dated as of December 29, 1999 and entered into among Read-Rite Corporation, a
Delaware corporation (the "Borrower"), the financial institutions named on the
signature pages hereof (each a "Bank" and collectively the "Banks"), Canadian
Imperial Bank of Commerce, New York Agency, as agent for the Banks (the "Agent")
and issuer of Letters of Credit (the "Designated Issuer") and is made with
reference to that certain Credit Agreement dated as of October 2, 1997 (as
amended by the First Amendment to Credit Agreement dated February 5, 1998, the
Second Amendment to Credit Agreement dated as of August 10, 1998 and the Waiver
and Third Amendment to Credit Agreement dated as of September 27, 1999, the
"Credit Agreement" and the Credit Agreement, as amended by this Amendment, the
"Amended Agreement") among the Borrower, the Banks, the Designated Issuer and
the Agent. Capitalized terms used herein without definition shall have the same
meanings herein as set forth in the Amended Agreement.
RECITALS
WHEREAS, the Borrower has requested that the Banks waive certain
provisions and amend certain other provisions set forth in Credit Agreement.
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
A. The definition of the term "Revolving Facility" in Section 1.01 of
the Credit Agreement shall be amended by deleting the figure "$75,000,000" and
substituting therefore "$50,000,000".
B. The proviso at the end of the definition of the term "Interest
Period" in Section 1.01 of the Credit Agreement shall be deleted.
C. There shall be added to Section 1.01 of the Credit Agreement, in
appropriate alphabetical sequence, the following definition:
"Waiver and Fourth Amendment Termination Date": February 25,
2000, unless on or after February 4, 2000, the Majority Banks shall
have delivered to the Borrower written notice of termination of the
waivers granted pursuant to the Waiver and Fourth
<PAGE> 2
Amendment to Credit Agreement dated as of December 29, 1999, in which
event the Waiver and Fourth Amendment Termination Date shall be the
fifth Business Day following the delivery of such notice.
D. Section 2.04 of the Credit Agreement shall be amended by adding the
following sentence at the end thereof:
"Notwithstanding the foregoing, from December 29, 1999, until
the Waiver and Fourth Amendment Termination Date the Borrower may not
continue any Eurodollar Rate Loan as a Eurodollar Rate Loan or convert
any Base Rate Loan into a Eurodollar Rate Loan.
E. Section 6.01(a) of the Credit Agreement is amended by deleting
clause (v) thereof and substituting therefore the following:
(v) as soon as available, but in any event within ten days
after the end of each fiscal month, (A) a completed Borrowing Base
Certificate, (B) full and complete reports with respect to Receivables,
including information as to concentration, aging, identity of
Receivables debtors and obligors, letters of credit securing
Receivables, disputed Receivables and such other matters as Agent may
request and (C) a statement from the Depository Banks of the balances
standing to the credit of each Designated Account as of the end of such
month in form and substance satisfactory to the Agent;
F. Section 6.01(a) of the Credit Agreement is hereby further amended by
adding the following at the end thereof:
(vi) as soon as available, but in any event within fifteen
days after the end of each fiscal month, the Borrower's consolidated
balance sheet, income statement and a cash flow statement for the month
then ended and for the year-to-date; and
(vii) as soon as available, but in any event not less than ten
days prior to the beginning of each fiscal quarter, the Borrower's
consolidated projected balance sheets, income statements and cash flow
statements (A) prepared on a monthly basis for the succeeding fiscal
quarter and (B) prepared on a quarterly basis for the three fiscal
quarters thereafter.
G. Section 6.02 of the Credit Agreement is amended by adding at the end
thereof the following:
(t) Bank Meeting, Etc. The Borrower shall make a presentation
concerning its financial performance, business plan, projections and
related matters at a Bank group meeting arranged by the Agent on or
about January 12, 2000. At all times prior to the
<PAGE> 3
Waiver and Fourth Amendment Termination Date, PricewaterhouseCoopers
("PWC") shall have reasonable access to the Borrower's management to
discuss financial and operational information of the Borrower. It is
understood that, from time to time, PWC shall provide the Agent and the
Borrower with budgets in connection with its review and analysis of
such financial and operational information.
(u) Payment of Fee If the Borrower shall have not repaid all
obligations under this Agreement in full and terminated all Commitments
hereunder on or before February 25, 2000, on such date the Borrower
shall pay a fee equal to 12.5 basis points to each Bank, based on such
Bank's aggregate Revolving Commitment and Term Commitments on such
date.
(v) Amendment of Designated Account Agreements. On or before
January 20, 2000, each of the Designated Account Agreements shall be
amended to provide that the Borrower may not transfer funds from any
Designated Account to any account that is not a Designated Account
other than transfers consistent with a monthly budget to be provided to
the Agent not less than 15 days prior to the beginning of each fiscal
month.
SECTION 2. WAIVERS AND CONSENTS
A. By their execution hereof, the Banks hereby waive compliance by the
Borrower with (i) Section 6.02(a) to (e) inclusive of the Credit Agreement for
the period from September 30, 1999 through and including the Waiver and Fourth
Amendment Termination Date and (ii) Section 6.02(j)(viii) of the Credit
Agreement to the extent such provision would prohibit the Borrower from making
up to $5,000,000 of additional Investments in Read-Rite SMI from and after
December 29, 1999. Unless extended by the Majority Banks, the waiver described
in clause (i) of the preceding sentence shall terminate on the Waiver and Fourth
Amendment Termination Date, and on the Waiver and Fourth Amendment Termination
Date an Event of Default will exist if the Borrower is not (and has not been) in
compliance with Sections 6.02(a) to (e) of the Credit Agreement for all periods
from and after September 30, 1999. The waivers granted herein shall be limited
precisely as provided for herein and shall not be deemed to be a waiver or
modification of any other term or provision of the Credit Agreement or to be a
consent to any other transaction or further action on the part of the Borrower
or any of its Subsidiaries which would require the consent of the Banks under
the Credit Agreement.
SECTION 3. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of the first date (the "Fourth
Amendment Date") on or before December 31, 1999 upon which the following
conditions have been satisfied:
3
<PAGE> 4
A. The Agent shall have received for each Bank counterparts hereof duly
executed on behalf of the Borrower, the Agent, and the Majority Banks (or, in
lieu of execution by the Majority Banks, notice of the approval of this
Amendment by the Majority Banks satisfactory to the Agent); and
B. An acknowledgment and amendment in the form of Exhibit A hereto duly
executed by each party to the Guaranty.
C. The Borrower shall have reduced the aggregate outstanding principal
amount of Revolving Loans to an amount not in excess of $50,000,000.
D. The Agent shall have received a copy of a board resolution of the
Borrower, in form and substance satisfactory, to the Agent authorizing the
execution, delivery and performance of this Amendment certified by the Secretary
of the Borrower as being in full force and effect on the date hereof.
E. The Amendment Fee referred to in Section 5.C shall have been paid,
the Borrower shall have delivered to PWC a retainer in the amount of $50,000 and
all other fees and expenses payable by the Borrower pursuant to the Loan
Documents shall have been paid or provided for.
F. All the representations and warranties in Section 4 shall be true
and correct as of the date of this Amendment.
G. No Potential Event of Default or Event of Default shall have
occurred and be continuing on the date of this Amendment or will result from the
consummation of this Amendment (after giving effect to this Amendment).
H. The Agent shall have received the following for delivery to each
Bank:
(i) an update of the Borrower's performance and business plans;
(ii) projections of the Borrower's balance sheets, income statements
and cash flow statements on a month by month basis through the Maturity
Date; and
(iii) a description of the Borrower's proposed asset sales, private
placements and other equity issuances through the Maturity Date.
I. The Agent shall have received, in form and substance satisfactory to
it, a certificate dated on or before the date of this Amendment certifying that
the conditions in clauses (F) and (G) have been met.
4
<PAGE> 5
SECTION 4. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Banks to enter into this Amendment
and to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to the Agent and each Bank that the following statements
are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, this Amendment
and the Amended Agreement.
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of the Borrower.
C. NO CONFLICT. The execution and delivery by the Borrower of this
Amendment does not and will not contravene (i) any law or any governmental rule
or regulation applicable to the Borrower or any of its Subsidiaries, (ii) the
Certificate of Incorporation or Bylaws of the Borrower, (iii) any order,
judgment or decree of any court or other agency of government binding on the
Borrower or any of its Subsidiaries or (iv) any material agreement or instrument
binding on the Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by the Borrower of
this Amendment and the performance by the Borrower of the Amended Agreement do
not and will not require any registration with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment has been duly executed and
delivered by the Borrower and is the binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium or other similar laws of general application and
equitable principles relating to or affecting creditors' rights.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Article V of the
Amended Agreement are and will be true, correct and complete in all material
respects on and as of the date of this Amendment to the same extent as though
made on and as of such date, except to the extent such representations and
warranties specifically relate to an earlier date, in which case they were true,
correct and complete in all material respects on and as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing as of
the date of this Amendment or will result from the consummation of the
transactions contemplated by this
5
<PAGE> 6
Amendment that would constitute an Event of Default or a Potential Event of
Default (as determined after giving effect to the amendments made by this
Amendment).
H. FINANCIAL CONDITION. The unaudited consolidated balance sheet of the
Borrower for the Borrower's fiscal quarter ended September 30, 1999 and the
related consolidated statements of operations and cash flow of the Borrower for
the fiscal quarter then ended, which have been previously circulated to the
Banks, fairly present in all material respects the consolidated financial
condition of the Borrower as at such date and the consolidated results of the
operations of the Borrower for the period ended on such date, all in accordance
with GAAP, consistently applied, subject to year-end adjustments and the absence
of footnotes.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
AGREEMENTS.
(i) On and after the Fourth Amendment Date, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words
of like import referring to the Credit Agreement, and each reference in the
other Loan Agreements to the "Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement shall mean and be a
reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Agreements shall remain in full force and effect
and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of the Agent or any
Bank under, the Credit Agreement or any of the other Loan Agreements nor to
create any course of dealing or otherwise obligate the Agent or the Banks to
forebear or execute similar amendments or any waiver in similar circumstances in
the future.
B. COSTS AND EXPENSES. The Company covenants to pay to or reimburse the
Agent, upon demand, for all costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment, the Collateral Documents
and the documents and transactions contemplated hereby.
C. AMENDMENT FEE. The Company hereby agrees to pay to the Agent on or
before the Fourth Amendment Date, for the ratable benefit of those Banks who
consent to this Amendment (as evidenced by their return of a signed signature
page to Agent or Agent's counsel) by 3:00 p.m. (Pacific standard time) December
29, 1999, an amendment fee (the
6
<PAGE> 7
"Amendment Fee") of 0.25% of the aggregate Revolving Commitments and Term
Commitments of such consenting Banks (after any reduction made by this
Amendment). The Amendment Fee shall be paid to the Agent in immediately
available funds and shall be non-refundable. The Amendment Fee is in addition to
any fees, costs, expenses or other amounts otherwise payable pursuant to this
Amendment or the Amended Agreement.
D. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
E. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
F. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Agent of a facsimile transmitted document purportedly
bearing the signature of a Bank or the Borrower shall bind such Bank or the
Borrower, respectively, with the same force and effect as the delivery of a hard
copy original. Any failure by the Agent to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document of the party whose
hard copy page was not received by the Agent.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
BORROWER:
READ-RITE CORPORATION
By:
Title:
<PAGE> 9
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE,
NEW YORK AGENCY, as Agent
By:
Title: Managing Director,
CIBC World Markets Corp.,
AS AGENT
<PAGE> 10
BANKS:
CIBC INC.
By:
Title: Managing Director,
CIBC World Markets Corp.,
AS AGENT
ABN AMRO BANK N.V.
By:
Title:
By:
Title:
FLEET NATIONAL BANK
By:
Title:
KEYBANK, N.A.
By:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By:
Title:
<PAGE> 11
MELLON BANK
By:
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:
Title:
THE SUMITOMO BANK LIMITED,
SAN FRANCISCO BRANCH
By:
Title:
THE INDUSTRIAL BANK OF JAPAN LIMITED,
SAN FRANCISCO AGENCY
By:
Title:
<PAGE> 12
BANQUE NATIONALE DE PARIS
By:
Title:
By:
Title:
FOOTHILL PARTNERS III, L.P.
By:
Title:
CERBERUS PARTNERS, L.P.
By:
Title:
WELLS FARGO BANK, N.A.
By:
Title:
THE DESIGNATED ISSUER:
CANADIAN IMPERIAL BANK OF COMMERCE,
NEW YORK AGENCY
By:
Title: Managing Director,
CIBC World Markets Corp.,
AS AGENT
<PAGE> 13
EXHIBIT A
TO WAIVER AND FOURTH AMENDMENT
TO CREDIT AGREEMENT
December 29, 1999
The parties listed on the acknowledgment page hereof:
Re: Credit Agreement dated as of October 2, 1997
Ladies and Gentlemen:
Please refer to (i) the Credit Agreement dated as of October 2, 1997
(the "Credit Agreement") by and among Read-Rite Corporation (the "Borrower"),
the financial institutions party thereto (the "Banks") and Canadian Imperial
Bank of Commerce, New York Agency, as agent (in such capacity, the "Agent") and
(ii) the Continuing Guaranty dated as of August 10, 1998 (the "Guaranty", which
was executed by you on such date. Pursuant to an amendment of even date
herewith, certain terms of the Credit Agreement were amended. We hereby request
that you (i) consent to the terms of the amendment, (ii) acknowledge and
reaffirm all of your obligations and undertakings under the Guaranty and (iii)
acknowledge and agree that the Guaranty, as amended by the following paragraph
hereof, is and shall remain in full force and effect in accordance with the
terms thereof.
<PAGE> 14
We and you acknowledge and agree that the Guaranty is ratified and
confirmed in all respects.
Very truly yours,
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Agent
By:_________________________________________
Title: Managing Director, CIBC World Markets Corp., AS AGENT
ACKNOWLEDGED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN:
GUARANTORS
SUNWARD TECHNOLOGIES, INC.
By:_________________________________________
Title:______________________________________
SUNWARD TECHNOLOGIES, CALIFORNIA
By:_________________________________________
Title:______________________________________
A-2
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-45085, 33-58906, 33-83760, ,33-90842, 333-4064, ,333-23973,
333-52379, and 333-74645 and Form S-3 No. 333-24183) of our report dated October
22, 1999, with respect to the consolidated financial statements and schedule of
Read-Rite Corporation included in the Annual Report (Form 10-K) for the year
ended September 30, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
January 10, 2000, except
for the sixth paragraph of
Note 1, as to which the date
is December 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1999 AND CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1999 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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 80,547
<SECURITIES> 145,856
<RECEIVABLES> 48,575
<ALLOWANCES> 2,594
<INVENTORY> 31,186
<CURRENT-ASSETS> 309,619
<PP&E> 1,236,880
<DEPRECIATION> 779,691
<TOTAL-ASSETS> 784,490
<CURRENT-LIABILITIES> 290,905
<BONDS> 361,668
0
0
<COMMON> 5
<OTHER-SE> 84,204
<TOTAL-LIABILITY-AND-EQUITY> 784,490
<SALES> 716,460
<TOTAL-REVENUES> 716,460
<CGS> 739,725
<TOTAL-COSTS> 739,725
<OTHER-EXPENSES> 159,050
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,910
<INCOME-PRETAX> (210,082)
<INCOME-TAX> (25,946)
<INCOME-CONTINUING> (155,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,715)
<EPS-BASIC> (3.16)
<EPS-DILUTED> (3.16)
</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 YEAR ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 62,444
<SECURITIES> 46,038
<RECEIVABLES> 115,974
<ALLOWANCES> 5,637
<INVENTORY> 52,367
<CURRENT-ASSETS> 281,247
<PP&E> 1,250,055
<DEPRECIATION> 676,422
<TOTAL-ASSETS> 879,800
<CURRENT-LIABILITIES> 183,629
<BONDS> 388,248
0
0
<COMMON> 5
<OTHER-SE> 233,924
<TOTAL-LIABILITY-AND-EQUITY> 879,800
<SALES> 808,622
<TOTAL-REVENUES> 808,622
<CGS> 941,402
<TOTAL-COSTS> 941,402
<OTHER-EXPENSES> 220,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,648
<INCOME-PRETAX> (375,432)
<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 STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30,
1997 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,162,050
<TOTAL-REVENUES> 1,162,050
<CGS> 923,244
<TOTAL-COSTS> 923,244
<OTHER-EXPENSES> 119,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,699
<INCOME-PRETAX> 112,641
<INCOME-TAX> 29,311
<INCOME-CONTINUING> 76,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,179
<EPS-BASIC> 1.61
<EPS-DILUTED> 1.56
</TABLE>
