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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000*
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)
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<S> <C>
DELAWARE 94-2770690
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
44100 OSGOOD ROAD, FREMONT, CALIFORNIA 94539
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 683-6100
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 common stock held by non-affiliates of
the Registrant (based on the closing price as reported on The NASDAQ National
Market on November 30, 2000) was $379,464,531. Shares of voting stock held by
each officer and director, and by each stockholder affiliated with a director
and by each person holding more than 5% of the outstanding common stock 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, 2000 was 117,891,893.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held February 20, 2001 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
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. Certain
statements contained in this report are not purely historical including, without
limitation, statements regarding our expectations, beliefs, intentions or
strategies regarding the future that are forward-looking. These statements
include those discussed in Item 1, Business, "Developments During Fiscal Year
2000," "Products," "Manufacturing," "Customers, Marketing and Sales,"
"Competition," and "Product and Technologies Under Development;" in Item 3,
Legal Proceedings; in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Liquidity and Capital Resources," and
elsewhere in this report. In this report, the words "anticipate," "believe,"
"expect," "intend," "future" and similar expressions also identify
forward-looking statements. We make these forward-looking statements based upon
information available on the date of this report, and we have no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those forward-looking statements contained in this report as a
result of a number of factors including, but not limited to, those set forth in
the section entitled "Certain Additional Business Risks" and elsewhere in this
report.
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PART I
ITEM 1. BUSINESS
DEVELOPMENTS DURING FISCAL YEAR 2000
The Company achieved significant milestones in fiscal year 2000 --
technology leadership, substantial GMR market share growth, improved
manufacturing efficiencies, financial stability, and product diversification by
leveraging our core competencies.
The Company's record-setting areal density demonstrations throughout the
year -- from over 50 GB per platter in November 1999, to over 70 GB per platter
in March 2000, to over 88 GB per platter in October 2000 -- using production
processes and production tools, enabled the Company to establish a technology
leadership position in GMR head design. The Company, in turn, was able to
capture GMR market share across our customer base during the fiscal year,
beginning the year with 1 million GMR heads being shipped in Q1 and closing the
fiscal year shipping over 18 million GMR heads in Q4. Our decision to
restructure our offshore operations, including the closure of RRSMI and the
consolidation of our HSA operations to one site in Thailand, resulted in
substantially lower costs. These cost savings, coupled with productivity
improvements in our wafer fabrication and capital expenditures focused on our
back-end assembly processes, enabled us to quickly ramp volume production and
further improve our cost structure. As a result of these cost savings, the
Company reported a positive gross margin in the fourth quarter of fiscal year
2000.
The balance sheet of the Company also dramatically improved in fiscal year
2000 as a result of the March 2000 exchange offer and the subsequent conversion
of these 10% exchange notes to equity which, when combined with the total
elimination of the U.S. bank debt, resulted in the Company reducing the debt on
its September 30, 1999 balance sheet by over $452 million as of the first
quarter of fiscal 2001. The infusion of capital in connection with a number of
private placements by the State of Wisconsin Investment Board, the Company's
largest shareholder, and by a subsidiary of Tyco International, enabled the
Company to completely pay off its credit facility on December 1, 2000.
Finally, in connection with the Company's longstanding goal of leveraging
its expertise and core competencies, the Company established a new subsidiary,
Scion Photonics, Inc., with a $25 million investment by the Company's minority
partners, Tyco Ventures and Integral Capital, to compete in the burgeoning
market for fiber optics telecommunications products.
We believe these fiscal year 2000 achievements, discussed in greater detail
in the balance of this report, position the Company well for future growth and a
return to profitability in fiscal year 2001.
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 sells 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 HDDs for desktop devices and for high performance enterprise HDDs
used in network and mainframe applications. 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 2000, the Company supplied HGAs in volume for 23 different
disk drive products to six customers, and supplied HSAs in volume for 22
different disk drive products to four customers. In comparison, during fiscal
1999, the Company supplied HGAs in volume for 16 different disk drive products
to five customers, and supplied HSAs in volume for 48 different disk drive
products to four customers. During fiscal 2000, the Company sold approximately
64.6 million HGAs (including HGAs incorporated into HSAs), and 10.5 million
HSAs. HGAs and HSAs accounted for approximately 94% of the Company's net sales
during fiscal 2000.
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Read-Rite also produces thin film MR tape heads for use in quarter-inch
cartridge ("QIC") tape drives in the 4 gigabyte ("GB") to 20 GB range per
cartridge. During fiscal 2000, the Company supplied QIC tape heads in volume for
seven different tape drive products to three customers. The Company also
introduced new tape head products into the multi-channel markets during fiscal
2000. Tape heads accounted for approximately 4% of the Company's net sales
during fiscal 2000.
The Company's net sales to its largest customers during fiscal 2000, fiscal
1999 and fiscal 1998 were as follows (as a percentage of net sales):
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2000 1999 1998
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Customers
Maxtor.................................................... 40% 32% 25%
Western Digital........................................... 20% 37% 49%
Samsung................................................... 19% 19% 15%
Quantum................................................... 12% -- 3%
All Others................................................ 9% 12% 8%
--- --- ---
100% 100% 100%
--- --- ---
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The above figures for fiscal 2000 include both direct shipments and
shipments to third parties who sub-assemble products on behalf of these
customers.
The Company's principal wafer manufacturing facility is located in Fremont,
California. The location of the Company's primary slider fabrication and HGA and
HSA assembly facilities are in Bangkok, Thailand. The Company manufactures
wafers for tape heads in Milpitas, California, and performs device fabrication,
assembly and test operations for these tape products in Manila, the Philippines.
Read-Rite was incorporated in California in 1981 and reincorporated in
Delaware in 1985. In September 2000, the company formed a new subsidiary, Scion
Photonics, Inc., which is a Delaware corporation.
For a discussion of certain significant risk factors associated with the
Company's business, see "Certain Additional Business Risks."
COMPANY STRATEGY
HDD Recording Head Strategies
Personal computer ("PC") end-user demand and non-PC computer applications
such as network servers (intranet and internet), workstations, mainframes, video
on demand, voicemail, digital cameras, set top boxes, personal video recorders,
game stations and other consumer appliances and multimedia services are driving
demand for greater performance and higher data storage capacity. From fiscal
1994 to the end of fiscal 2000, the capacity for a single disk, 3.5" drive
increased from approximately 270 megabytes ("MB") to more than 20 gigabytes
("GB"). The rapid introduction of new, higher performance products, shortened
product life cycles and the trend toward fewer heads per drive continues to
place significant challenges on hard disk drives and drive component
manufacturers, including recording head manufacturers. The Company expects 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, suspension assemblies and capital equipment
manufacturers 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 continually achieve timely design-in qualifications in
order to become one of the primary suppliers for customer programs. Although
disk drive manufacturers typically qualify more than one supplier, early
design-in wins are important in order to become one of the primary volume
suppliers for these customer programs. Given product life cycles of only six to
nine months, it is critical to work towards becoming an early volume supplier on
these programs.
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During fiscal 2000, the Company made significant progress in increasing
magnetic recording areal-density, reducing GMR manufacturing cycle times, and
increasing its customer base. The hard disk drive segment's gross margin became
profitable during the fourth fiscal quarter of 2000 and the Company expects it
to be profitable in the first fiscal quarter of 2001 and throughout fiscal 2001.
Tape Head Strategies
With the increasing need to be able to back-up data for network servers and
mission critical applications, we see the tape head market as one that can also
be profitable for the Company. Given this, the Company has been supplying MR
tape heads for use in QIC tape drives as part of its strategy to diversify its
product offerings from the HDD market since 1994, and is now the leading
independent producer of MR tape heads for use in QIC tape drives.
In addition to QIC heads, the Company recently introduced and began volume
shipments of Multi-Channel MR tape heads to two customers: Benchmark Tape
Systems and Quantum Corporation. These Multi-Channel MR tape heads have smaller
track widths, multiple channels, higher data densities and read-while-write
verification to address the higher performance requirements needed by tape
storage products used in server backup applications. In an effort to further
diversify its product mix, in April 2000, the Company announced an agreement
with Quantum Corporation to manufacture Data Control Modules for Quantum
Corporation's SuperDLT tape product. The Company anticipates that with the
volume ramp of these new multi-channel products and the manufacturing of the
Data Control Modules, the net sales from tape heads in fiscal 2001 will increase
from its fiscal 2000 level. The Company also believes that the tape head segment
will turn profitable during Fiscal 2001.
Scion Photonics Strategies
In September 2000, the Company announced the formation of a new company,
Scion Photonics, Inc. ("Scion"). Additional cash investment was obtained from
Tyco Ventures, a subsidiary of Tyco International Ltd., and Integral Capital
Partners in October 2000. The Company's contribution to the subsidiary included
its wafer fabrication facility in Milpitas, California, technical and management
resources, and know-how and experience in thin-film technology and materials
science. Scion Photonics' business charter is to design, manufacture and market
high-performance optical components, such as custom and standard Dense
Wavelength Division Multiplexers (DWDM), to the fiber optics communications
market. The Company believes its core competencies in wafer processing,
high-volume, high-precision manufacturing and assembly of recording heads will
position Scion well in this emerging growth area. As of November 30, 2000,
Read-Rite owned approximately 80% of the voting equity of Scion.
The Company will support Scion's entry into the fiber optic market by
providing back-end component, module and sub-system assembly services in fiscal
2001. Additionally, the Company plans on providing these types of services, with
the marketing and optical assistance from Scion, to other fiber optic
communication companies by leveraging the Company's existing manufacturing
infrastructure and its focus on cost and yield management to grow this segment
of its business.
Other Diversification Strategies
The Company is continually researching other areas to diversify the
resources of the Company into areas that leverage the Company's expertise, core
competencies, its large and growing patent portfolio and other assets and
intellectual property belonging to the Company. The Company currently has a
dedicated team of engineers and management actively pursuing other
diversification opportunities. The Company plans on announcing these efforts
when sufficient progress has been obtained.
Financing Strategies
In fiscal 2000, the Company experienced a net loss of approximately $124.8
million, compared to a net loss of $155.7 million in fiscal 1999 and a net loss
of $319.7 million in fiscal 1998. Continued competitive pricing pressures,
restructuring of its facilities, industry trends toward fewer HGAs per HSA,
shortened
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product life cycles, and excess capacity throughout the industry were major
contributors to the Company's net loss. However, in the fourth quarter of
FY2000, the Company reported a positive gross margin from operations.
In this regard, the Company's financial strategy in fiscal 2000 was to
improve its balance sheet and to position the Company to be able to generate
sufficient cash flow from operations during fiscal 2001 to pursue its strategies
for the HDD market, tape head business, diversification into optical components
and other business opportunities, and continue to invest in R&D and necessary
capital improvements. We believe we have successfully executed this strategy and
will have sufficient cash flow from operations in fiscal 2001 to pursue the
Company's strategic and operational initiatives.
One aspect of this strategy was to reduce the cash flow associated with the
$345 million of 6.5% convertible subordinated notes. In March 2000, the Company
completed an exchange for $325.2 million of the outstanding 6.5% convertible
notes for $162.6 million of 10% new convertible subordinated notes, and issued
an additional $61.2 million of the new 10% notes. Through September 30, 2000,
approximately $36.3 million of the 10% convertible notes were voluntarily
converted to equity by the noteholders. On October 19, 2000, the Company
completed the automatic conversion of all remaining outstanding 10% subordinated
convertible notes to equity. The conversion of this debt to equity is expected
to save the Company approximately $5 million in interest expense per quarter, or
approximately $80 million over the remaining life of the notes.
The other principal component of this strategy was to reduce or eliminate
the credit facility with the Company's U.S. bank group. At the beginning of the
fiscal 2000, this debt was $142 million. On December 1, 2000, the Company
completed its repayment of the entire amount due under this facility.
PRODUCTS
The Company's primary products are head gimbal assemblies ("HGAs"),
headstack assemblies ("HSAs"), and components and modules for tape storage
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, a coil assembly and a flexible
circuit assembly to form an HSA. The remaining principal components of rigid
disk drives are disks, a motor/spindle assembly for rotating the disk, control
electronics and firmware. The rigid disks, or media, are coated with a thin
layer of magnetic material and attached to the motor/spindle assembly, which
rotates the disks at high speed within a sealed enclosure. The heads, attached
to and positioned by the movable actuator, "fly" above both sides of each disk.
The position of the heads is controlled by the drive electronics and the heads
record or retrieve data from tracks in the magnetic layer of each disk. HDDs are
used in systems to record, store and retrieve digital information. Most
applications require access to a greater volume of data than can economically be
stored in the random access memory of the 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 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 that 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 the read/write operations,
tape motion and guidance control, system interface functions and the tape
cartridge.
Head Gimbal Assemblies
Disk drive manufacturers either purchase from the Company fully assembled
HSAs, or purchase HGAs separately and assemble, or have assembled, their own
HSAs. The Company supplied HGAs in volume for 23 different disk drive products
to 6 customers during fiscal 2000. Direct sales of HGAs accounted for
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approximately 40% of the Company's net sales for fiscal 2000, compared to 16%
and 11% of the Company's net sales for fiscal 1999 and fiscal 1998,
respectively. During fiscal 2000, the Company's giant magnetoresistive ("GMR")
thin film heads for HDDs, both in the form of HGAs and HSAs, amounted to 87% of
total net sales.
During fiscal 2000, as reflected above, the Company completed the
transition of its product development and manufacturing efforts from MR
technology to GMR technology and installed state-of-the-art deposition equipment
to meet the challenge of producing the very thin layers required by GMR
technology. In November 1999, the Company announced that it demonstrated areal
density of 36 gigabits per square inch, or over 50 billion bytes per 3.5-inch
platter. Again in March 2000, the Company announced that it had broken through
the 50 gigabit per square inch areal density barrier, demonstrating 50.2 billion
bits per square inch, or over 70 billion bytes per 3.5-inch platter. More
recently, in November 2000, the Company reported another areal density record of
63.2 gigabit per square inch, or over 88 billion bytes per 3.5-inch platter.
Currently the Company produces GMR recording heads, in high volume,
supporting 20 GB per 3.5-inch disk. In fiscal 2000, the Company shipped HGAs
with GMR technology in volume to six customers, accounting for approximately 87%
of the Company's net sales. The Company anticipates that in fiscal 2001 an even
higher percentage of net sales will be derived from products shipped
incorporating 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.
The Company supplied inductive thin film, MR thin film, and GMR thin film
HSAs in volume for 22 different disk drive products to four customers during
fiscal 2000. HSAs accounted for approximately 54% of the Company's net sales
during fiscal 2000, compared to 81% and 86% of the Company's net sales during
fiscal 1999 and fiscal 1998, respectively.
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 4 GB to 20 GB range per cartridge. During fiscal 2000, the Company
supplied QIC tape heads in volume for seven different tape drive products to
three customers.
In addition to QIC heads, the Company introduced and began volume shipments
of Multi-Channel MR tape heads to two customers: Benchmark Tape Systems and
Quantum Corporation. These Multi-Channel MR tape heads have smaller track
widths, multiple channels, higher data densities and read-while-write
verification to address the higher performance requirements from tape storage
products used in server backup. In April 2000, the Company also announced an
agreement with Quantum Corporation to manufacture the Data Control Module for
Quantum Corporation's SuperDLT tape product.
The Company anticipates that with the volume ramp of these new
multi-channel products and the manufacturing of Data Control Modules, the net
sales from tape heads in fiscal 2001 will increase from its fiscal 2000 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.
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Wafer Fabrication
The Company presently fabricates wafers at facilities in Fremont and
Milpitas, California. The Company's Fremont facility produces 6" square wafers.
The Company has completed the transition of its Fremont 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 the remaining inductive products. The
Milpitas facility, now part of Scion Photonics, serves as the primary wafer
supply for tape head products and fiber optic wafers. The Company's tape head
business unit is now a tenant of Scion Photonic's wafer fab.
Slider Fabrication/Wafer Slicing
The Company machines or slices wafers (other than for prototype parts)
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
and individually tested.
HGA Assembly and Testing
The Company presently performs HGA assembly and testing at its Thailand
facilities. In HGA assembly, either wire elements or trace assemblies are used
in the process. The slider is bonded to the stainless steel flexure/suspension,
then the trace assembly is attached to bond pads on the slider. 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 2000, the Company was in the final stages of completing the
planned transition to integrated suspensions such as Trace Suspension Assemblies
("TSA") for its GMR products. TSA suspensions integrate into the suspension by a
thin electrical conductor that connects directly with the recording head. The
integral etched copper 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 has increased
overall consistency and improved production yield of the Company's GMR products.
The transition to TSA suspensions is now complete except on specific customer
programs where the specifications define a non-integrated suspension to be used.
The Company typically tests its HGAs before shipment to ensure the HGAs
meet customer specifications. Despite such testing, however, customers may
return defective lots or heads 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 produce GMR HGAs, manufacturing
yields are expected to increase during fiscal 2001.
HSA Assembly and Testing
The Company presently assembles its HSAs (other than prototypes) at its
facilities in Thailand and through third party contractors. 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,
and a connector, depending on the design of the customer's disk drive.
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. The Company
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continues to improve GMR HSA production manufacturing yields and expects to
increase yields further during fiscal 2001.
Tape Heads
After the Company's tape head wafers are fabricated in Milpitas, they are
tested 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, tested, 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.
For Data Control Modules, the Company assembles the module including a head
assembly. This unit is dynamically tested prior to shipment. The Company
performs all of its tape head and DCM assembly operations at its facilities in
the Philippines.
Process Improvement
In fiscal 2000, 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 facilities 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 has also developed a more automated
process for assembling recording heads. 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 the product yields, less investment in
inventory is required, allowing the Company to focus its capital resources in
other areas. The Company expects to continue to improve in these areas in fiscal
2001.
CUSTOMERS, MARKETING AND SALES
The Company's largest customers during fiscal 2000 were Maxtor, Western
Digital, Samsung, and Quantum, representing 40%, 20%, 19%, and 12%,
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 the number of suppliers for each 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
merger or consolidation of two or more of its customers, a significant decrease
in orders from one or more large customers, or the failure to achieve early
design-in win or wins on particular customer programs could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's total foreign net sales accounted for 97%, 99% and 98% of net
sales during fiscal 2000, 1999 and 1998, respectively. See Note 13 in Notes to
Consolidated Financial Statements for information regarding segments and sales
to various geographical regions which information is hereby incorporated by
reference into this Item 1.
Throughout fiscal 2000, the Company continued its focus on strong customer
support, improved service and quality programs to strengthen its customer
relationships. The Company has dedicated business units to provide 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
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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 technology roadmap 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 also continues to maintain 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, as it did on the 20GB per
platter HDD designs, is critical, particularly in light of the rapid migration
toward higher volume disk drive programs and the shortened life cycles of such
products.
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 manufacturing efficiencies 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.
While competition remains intense, there has been a dramatic change in the
competitive landscape of independent recording head companies over the last
year. In January 2000, Applied Magnetics Corporation filed for protection under
Chapter 11 of the Bankruptcy code and effectively ceased operations. In March
2000, Yamaha exited the HDD recording head market. In April 2000, SAE, a
subsidiary of TDK, purchased Headway Technologies, then an independent
U.S.-based supplier of GMR heads. As a result, the Company's only remaining
domestic merchant market competitor is IBM, and in Japan the Company's primary
competitors are TDK and Alps. In addition to IBM, it should be noted that
Fujitsu, Seagate and Hitachi also have "captive" or internal recording head
manufacturing capability and have significantly greater financial and marketing
resources than the Company, and those companies could decide to make their
products available in the merchant market.
In its HSA business, the Company has competed in the past against other
merchant HSA manufacturers such as Kaifa and SAE in China, and Tandon in India.
The Company is currently working with HSA manufacturers such as Kaifa to
outsource a portion of the Company's HSA business and to optimize the Company's
asset utilization and existing installed capacity. The HSA business is less
capital intensive than the thin film HGA business and entry into the HSA
manufacturing business thus requires less capital than entry into the HGA
business.
Finally, the development of new technologies will continue to be demanded
by customers in fiscal 2001. 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 could 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 generations of products and
technologies related to the Company's HGA, HSA, tape head businesses, and fiber
optic businesses, enhancement of existing products, and manufacturing process
developments to improve product performance and manufacturing yields.
8
<PAGE> 11
In response to the disk drive market's demand for higher performance
products, the Company has pursued 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 2000, we believe the
Company achieved its strategic objective of technology leadership for GMR HGA
and HSA designs.
The Company began the year with volume shipment of MR heads at 8.7 GB per
3.5" disk, and subsequently qualified for volume shipment of GMR heads at 10, 15
and 20 GB per 3.5" disk. During fiscal 2000, the Company sold approximately 62.8
million HGAs (including HGAs incorporated in HSAs) to six customers. The Company
has completed the transition to GMR and expects that GMR products, which
accounted for approximately 87% of the Company's net sales during fiscal 2000,
to increase above that level during fiscal 2001.
The Company has focused and will continue to focus on technology
advancements, customer satisfaction and cost efficiency. During fiscal 2000, the
Company completed the transition from nano to pico form factor in its wafer
fabrication, slider manufacturing and HGA assembly processes. This transition
enabled the Company to miniaturize the size of magnetic recording head sliders,
therefore increasing the Company's plant capacity. The Company demonstrated
areal density of greater than 70 GB per 3.5" disk in fiscal 2000. The Company
also demonstrated 1 Gb/sec. transfer rate, the highest to date in the industry.
The Company has developed an automated process for assembling recording heads.
In addition, the Company has made significant progress in developing new
technologies such as microactuators 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. 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 2000, 1999 and 1998, the Company's research and development
expenses were approximately $65.0 million, $92.2 million and $92.3 million,
respectively. Fiscal 2000 expenses were reduced mainly by the elimination of the
redundant efforts at RRSMI, which discontinued R&D activities at the end of
March 2000.
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. Specific development agreements have been
signed with Quantum for their super DLT product and Benchmark for their DLT1
product.
The Company is continually researching other areas to diversify the
resources of the Company that leverage the large patent portfolio and other
intellectual property of the Company. The Company currently has a dedicated team
of engineers and management actively pursuing other diversification
opportunities. The Company plans on announcing these efforts when sufficient
progress has been obtained.
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.
9
<PAGE> 12
TERMINATION OF JOINT VENTURE WITH SUMITOMO
In April 2000, the Company announced the dissolution of RRSMI, its joint
venture in Japan with Sumitomo Metal Industries, Ltd. ("Sumitomo" or "SMI").
With the continued productivity improvements and more efficient capacity
utilization at the Fremont wafer fab, the Company found it necessary to close
the RRSMI wafer fab in Osaka, Japan in order to reduce costs and better focus
its technical resources in one wafer fab. See Item 7, 2000 Restructuring Costs.
During fiscal 2000, RRSMI operated primarily as an R&D center and wafer
fabrication facility to manufacture products for the customers of Read-Rite
Corporation. Production ceased at RRSMI's wafer fab and the liquidation process
began during the third quarter of fiscal 2000. The liquidation of RRSMI was
completed during the first quarter of fiscal 2001.
In connection with the closure of RRSMI, so as to continue providing
support to the Company's customers and suppliers in Japan, the Company has
established a sales office in Japan -- Read-Rite Japan.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Read-Rite highly 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 154 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 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 upon 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 that 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, 2000, the Company had 11,621 employees, including 1,336
in the United States, 9,542 in Thailand, 697 in the Philippines, 20 at Read-Rite
Japan, 20 at the Company's sales and customer support offices in Singapore, four
in Korea, and two 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.
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 that use
hazardous materials. It is the Company's intention to comply
10
<PAGE> 13
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 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
affected 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, the Company experienced
delays and cancellation of orders, reduced average selling prices, inventory and
equipment write-offs, and increased unit costs due to under-utilization of
production capacity. As a consequence, the Company 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 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-in wins" for its GMR
products with its customers. Demand variations such as these can materially and
adversely affect the Company's business, financial condition and results of
operations.
11
<PAGE> 14
The Company's largest customers are Maxtor, Western Digital, Samsung and
Quantum, representing 40%, 20%, 19% and 12%, respectively, of the Company's net
sales during fiscal 2000. The Company produced HGAs in volume for six customers;
HSAs in volume for four customers and tape drive products in volume for three
customers during fiscal 2000. 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. 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.
In addition, 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, in October 2000, Quantum
announced a merger of its HDD unit into Maxtor. Other acquisitions or
significant transactions by the Company's customers leading to further
consolidation, vertical integration or other material agreements could also
materially and adversely affect the Company's business, financial condition and
results of operations.
Rapid Technological Change
Technology changes rapidly in the Company's industry. These rapid changes
require the Company 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 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 from MR to GMR technology.
During fiscal 2000, the Company shipped 60.6 million GMR heads (including
heads in HSAs) for 22 disk drive programs to five customers, accounting for
approximately 87% of net sales during the period. The Company intends to
continue investing significant resources in GMR product development and
manufacturing equipment. The Company anticipates that a majority of its sales
for fiscal 2001 will be derived from sales of new GMR products. There can be no
assurance, however, that the Company will be successful in timely and cost
effectively developing and manufacturing new 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 2000 of
approximately $93.6 million, compared to $101.0 million during fiscal 1999, and
plans to spend $90 - 100 million during fiscal 2001, which excludes capital
requirements for Scion Photonics. As of September 30, 2000, total commitments
for construction or purchase of capital equipment were approximately $50
million.
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
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<PAGE> 15
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, 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.
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 shortening 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 Company's
customers generally determine the suppliers in advance. Accordingly, capacity
constraints, production failures or restricted allocations by the Company's
suppliers could have a material adverse effect on the Company's own production,
and its business, financial condition and results of operations.
Inventory Risks
Due to the cyclical nature of and rapid technological change in the hard
disk drive industry, the Company's inventory is subject to substantial risk. To
address these risks, the Company monitors its inventories on a periodic basis
and provides inventory write-downs intended to cover inventory risks. However,
given the Company's dependence on a few customers and a limited number of
product programs for each customer, the magnitude of the commitments the Company
must make to support its customers' programs and the Company's limited remedies
in the event of program cancellations, if a customer cancels or materially
reduces one or more product programs, or experiences financial difficulties, the
Company may be required to take significant inventory charges, which, in turn,
could materially and adversely affect the Company's
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<PAGE> 16
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.
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>
Alan S. Lowe.............................. 38 President and Chief Executive Officer
John T. Kurtzweil......................... 44 Senior Vice President and Chief Financial
Officer
James Murphy.............................. 41 Senior Vice President, Customer Business Units
Mark Re, Ph.D. ........................... 40 Senior Vice President, Research and Development
Sherry F. McVicar......................... 48 Vice President, Human Resources
</TABLE>
There are no family relationships among directors or executive officers of
the Company.
Mr. Lowe became President and Chief Executive Officer in June 2000 when he
was promoted to CEO by the Company's Board to succeed Cyril J. Yansouni, who
retired as CEO but remains Chairman of the Board of Directors of the Company.
Mr. Lowe 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
and was President and Chief Operating Officer from May 1997 to June 2000.
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
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 and Director of Far East
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<PAGE> 17
Finance based in Singapore. He was with Maxtor Corporation from July 1988 to
August 1995. Prior to that, he had spent 10 years with Honeywell Corporation.
Mr. Kurtzweil is also a Director and Chairman of the Board for the International
Disk Drive and Equipment Manufacturers Association, a Data Storage 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.
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.
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 postion 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.
ITEM 2. PROPERTIES
The Company leases a facility in Fremont, California of approximately
189,000 square feet, which serves as the Company's corporate headquarters and
houses wafer fabrication, research and development and various administrative
functions. The initial lease for these facilities expires in February 2003 with
three 5-year renewal options.
The Company and its subsidiary, Scion, also lease approximately 182,000
square feet at its campus in Milpitas, California, to serve as its development
and wafer fabrication facility. The primary leases for these properties expire
at various times from July 2001 to June 2010.
The Company owns a seven-acre site near Bangkok, Thailand with three
facilities totaling 477,000 square feet used for slider fabrication, HGA
manufacturing and HSA 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.
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. The Company has leased the facility and has executed a purchase and sale
agreement with the current tenant. Escrow is expected to close in the third
fiscal quarter of 2001.
The Company owns a 5.3-acre site near Manila with a 365,000 square foot
manufacturing facility. Furthermore, the Company has purchased a 5.3-acre parcel
of land for manufacturing purposes adjacent to the original 5.3-acre site. The
company currently assembles only tape heads and related products at this site
and intends to either lease a portion of the site, or the entire site during
fiscal 2001 to help offset the fixed expenses associated with maintaining the
site.
The Company also leases offices in Singapore, Osaka, Japan and Seoul, Korea
for sales and customer support.
ITEM 3. LEGAL PROCEEDINGS
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of
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<PAGE> 18
its officers and directors (the "Ferrari State Action"). The complaint in the
Ferrari State Action alleges that during a purported class period of April 19,
1995 to January 22, 1996, defendants made false and misleading statements
concerning the Company's business condition and prospects. The plaintiffs in the
Ferrari State Action seek damages of an unspecified amount. By Order dated May
16, 1997, the court sustained the demurrer of certain defendants to the entire
complaint, and sustained the demurrer of the remaining defendants to certain
causes of action. The remaining cause of action in the Ferrari State Action
alleges violation of the California Corporations Code. On July 7, 1997, the
remaining defendants answered the complaint. On November 14, 2000, defendants
filed a motion for judgment on the pleadings seeking to use the federal action's
final judgment (see below) to extinguish the state claims under the doctrine of
res judicata. A hearing on the motion is scheduled for January 22, 2001.
On January 16, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by Ferrari
and Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendants made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains similar
factual allegations as the Ferrari State Action, and alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5. The plaintiffs in the Ferrari Federal Action ("Ferrari Plaintiffs") also
seek damages of an unspecified amount.
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2 to June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10b-5. The plaintiffs in the Nevius Federal Action ("Nevius
Plaintiffs") seek damages of an unspecified amount.
On December 22, 1997, the Court consolidated the Ferrari Federal Action and
the Nevius Federal Action (the "Consolidated Federal Action"). On March 2, 2000,
the court dismissed the Ferrari Plaintiffs' claims without leave to amend, and
dismissed the Nevius Plaintiffs' claims with leave to amend. On October 13,
2000, the court ordered that the Ferrari Plaintiffs' and Nevius Plaintiffs'
complaint be dismissed without leave to amend and that the action be dismissed
with prejudice. The Nevius Plaintiffs and Ferrari Plaintiffs filed notices of
appeal on October 27, 2000 and November 9, 2000, respectively.
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. The Company believes that
the final disposition of the claims set forth in these actions will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
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
Not applicable.
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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, 2000
First Quarter............................................. $ 5 15/16 $3 15/32
Second Quarter............................................ 6 7/16 2 25/32
Third Quarter............................................. 4 3/4 1 7/8
Fourth Quarter............................................ 11 9/16 2 1/8
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
</TABLE>
At November 30, 2000, there were approximately 1,549 holders of record 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."
17
<PAGE> 20
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>
2000(1) 1999(2) 1998(3) 1997(4) 1996(5)
--------- --------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales....................... $ 555,860 $ 716,460 $ 808,622 $1,162,050 $991,118
Gross margin.................... (61,054) (23,265) (132,780) 238,806 103,654
Operating income (loss)......... (274,062) (182,315) (352,910) 119,713 7,789
Net income (loss)............... (124,829) (155,715) (319,747) 76,179 (42,986)
Basic net income (loss) per
share......................... $ (2.26) $ (3.16) $ (6.59) $ 1.61 $ (0.92)
Diluted net income (loss) per
share......................... (2.26) (3.16) (6.59) 1.56 (0.92)
Total assets.................... $ 493,348 $ 784,490 $ 879,800 $1,301,481 $908,672
Long-term obligations........... 232,712 361,668 388,248 403,871 172,037
</TABLE>
---------------
(1) Fiscal 2000 includes a restructuring charge of approximately $120.8 million,
primarily for the write-down of equipment and severance payments associated
with the closure of the Company's joint venture wafer fab in Japan and the
closure of its head stack assembly operation in the Philippines. Fiscal 2000
also includes a special charge of approximately $8.1 million of excess and
obsolete inventories as part of the above closures. In addition, fiscal 2000
includes an extraordinary gain from debt conversion of approximately $158.7
million, partially offset by debt conversion expenses of approximately $29.3
million.
(2) 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.
(3) 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.
(4) 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.
(5) Fiscal 1996 includes approximately $11.2 million of severance, relocation
and other charges, $9.0 million for research and development charges for the
acquisition of planar technology, and $24.1 million for the write-down of
capital assets, $7.0 million associated with end-of-life inventory and $0.7
million in other charges, for a total of $52.0 million for the year.
18
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and investments of $64.5
million, total assets of $493.3 million and total liabilities of $434.1 million.
During fiscal 2000, the Company used $67.7 million in cash from operations.
The decrease in cash flow from operating activities was primarily attributed to
the $124.8 million net loss, increase in accounts receivable of $41.9 million, a
non-cash extraordinary gain on debt conversion of $158.6 million partially
offset by depreciation and amortization expenses of $163.9 million, non-cash
portion of restructuring costs of $106.6 million and $29.3 million related to
early extinguishment of convertible bonds.
Accounts receivable, net increased $41.9 million due to higher sales during
the month of September of fiscal year 2000 when compared to fiscal year 1999. In
September 2000, shipments and revenues increased significantly as the Company
was ramping production to meet anticipated demand for its GMR products. In
September 1999, the Company was in transition from MR to GMR products, resulting
in lower revenues. There have been no significant changes in payment terms with
any of its major customers.
Inventories increased slightly during fiscal 2000 by $3.0 million. The
increase in inventory was a result of growing revenues at end of the year and
the build-up of inventory to meet the increasing anticipated demand for its GMR
products for the first quarter of fiscal year 2001. The Company continues to
focus on improvements in cycle time and inventory turns; however, due to the
increase in inventory to meet upcoming demand, the inventory turns decreased
slightly when compared to previous year.
Accounts payable, accrued liabilities, and income taxes payable decreased
by $3.8 million during fiscal 2000, of which $29.3 million was accrued interest
for the make whole provision on the 10% subordinated convertible notes which
were automatically converted to equity on October 19, 2000.
The Company's business is highly capital intensive. During fiscal 2000, the
Company incurred capital expenditures of approximately $93.6 million. Capital
expenditures have primarily been made to upgrade or replace existing equipment
in Thailand and for wafer production in the United States, to support new
manufacturing processes and new technologies, such as GMR. The Company's plan
for capital equipment purchases during fiscal 2001 is approximately $90 - 100
million, excluding any capital requirements for Scion; 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, 2000, total commitments
for construction or purchase of capital equipment were approximately $50
million. The Company believes that it will have sufficient positive cash flows
from operations, access to the capital leasing market, access to the public debt
market and also access to the private and public equity markets to fund such
commitments.
During fiscal year 2000, the Company decided to re-align its worldwide
operations with market conditions and to improve productivity of the Company's
manufacturing facilities. It made the decision to dissolve its joint venture
RRSMI with Sumitomo, to close its wafer fabrication operations in Japan (RRSMI),
and to cease its head stack operations in the Philippines. This resulted in a
restructuring charge of approximately $120.8 million, comprised of $107.4
million to write off or write down facilities and equipment, $7.1 million for
lease commitments, $6.2 million for severance and benefits for terminated
employees, and $0.1 million for other expenses associated with the restructuring
plan. The net effect, after minority interest, for the total restructuring
charge is $88.6 million. Thus, $32.2 million of minority interest is related to
the dissolution of RRSMI. The restructuring has lowered the Company's fixed
costs and is expected to provide a faster response to customer changes through
improvement in manufacturing cycle time. The Company estimates the restructuring
will produce an annual cost savings of $80 million.
In connection with the joint venture with Sumitomo, SMI converted $19.3
million of RRSMI debt to RRSMI equity during fiscal 2000. During fiscal 2000,
the Company and Sumitomo agreed to dissolve the joint
19
<PAGE> 22
venture and agreed to fund RRSMI equally to complete the dissolution. RRSMI's
balance sheet at September 30, 2000 included cash and cash equivalents of $11.9
million, and total assets of $14.7 million.
Net proceeds used in financing activities were $0.7 million, of which
proceeds from the March 2000 note exchange netted $54.2 million, borrowings by
Read-Rite (Thailand) Company Limited ("RRT") were $20.0 million; proceeds from
issuance of common stock were $35.4 million comprised of approximately $17.2
million from State of Wisconsin Investment Board, $15.0 million from Tyco, and
$3.2 million from employee stock purchases; short-term borrowings from SMI were
$8.8 million. These proceeds were offset by payments under debt obligations of
$119.0 million.
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("6.5%
Notes"). Principal is due September 2004 with semi-annual interest payments due
on March 1 and September 1 of each year. The 6.5% 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, 2000, approximately $19.8 million represented by the 6.5% Notes
were outstanding.
In March 2000, the Company completed an exchange of $325.2 million of the
outstanding 6.5% Notes for $162.6 million of 10% convertible subordinated notes
("10% Notes"), and sold an additional $61.2 million of the 10% Notes for
additional working capital needs and for fees related to the conversion. The 10%
Notes are due September 2004 with semi-annual interest payments due March 1 and
September 1 of each year; interest can be paid in cash or stock at the option of
the Company. The 10% Note holders can convert the notes to stock at any time for
$4.51 per share. As of September 30, 2000, 10% Note holders had voluntarily
converted approximately $36.3 million of the outstanding 10% Notes to equity,
and approximately $187.5 million represented by the 10% Notes were outstanding.
The Company had the right to automatically convert the 10% Notes to stock if
certain conditions relating to the Company's closing stock price are met. On
September 29, 2000, the Company announced that these conditions were met and
that it would exercise its right of automatic conversion.
As of September 30, 2000, the Company had $28.8 million in borrowings under
a secured credit facility. The terms of the credit 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, 2000, the Company was not in compliance with
certain financial covenants required by the credit facility.
Events Occurring Subsequent to September 30, 2000 Affecting Liquidity and
Capital Resources
Subsequent to September 30, 2000, the Company completed several financing
transactions that significantly improved its financial position and liquidity.
- In October 2000, the Company completed the automatic conversion of all
remaining 10% subordinated convertible notes to common stock. As of
September 30, 2000, approximately $187.5 million of the Company's 10%
convertible subordinated notes were outstanding. The automatic conversion
called for the face value of the notes to be converted to common stock at
$4.51 per share, and it also included a "make whole" provision that
guaranteed interest for a minimum of two years, which was also paid in
common stock. The fair value of the make whole interest paid to
bondholders was approximately $29.3 million. Approximately 45.3 million
shares of common stock were issued in October 2000 in conjunction with
the conversion and "make whole" provision.
- In November 2000, the Company received a cash investment of $18.9 million
in a private placement of approximately 2.7 million shares of common
stock to the State of Wisconsin Investment Board.
- In October and December 2000, the Company repaid the remaining balance of
$28.8 million under the secured term loan. The Company was not in
compliance with certain financial covenants required by the Credit
Facility.
20
<PAGE> 23
The following pro forma balance sheet data is presented as if the preceding
subsequent events had taken place on September 30, 2000:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
ACTUAL PRO FORMA
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and investments.............................. $ 64,462 $ 54,612
Current assets.................................... $192,104 $182,254
Total assets...................................... $493,348 $477,234
Current portion of long term debt................. $ 39,849 $ 11,099
Current liabilities............................... $196,262 $136,361
Long-term liabilities............................. $237,814 $ 50,304
Minority interest................................. $ 19,341 $ 19,341
Stockholders' equity.............................. $ 39,931 $271,228
Common stock outstanding.......................... 69,014 117,014
</TABLE>
In addition, in October 2000, Scion Photonics, Inc., a subsidiary of the
Company, received a $25 million cash investment from Tyco Ventures, a subsidiary
of Tyco International Ltd., and Integral Partners, in exchange for approximately
20% of the outstanding stock of Scion Photonics, Inc. These funds are restricted
for the operations and capital requirements of Scion Photonics, Inc.
The Company believes that it will have sufficient positive cash flows from
operations to meet planned operating requirements during fiscal 2001. The
Company has restructured its operations and believes that it has improved its
ability to control expenditures. However, there can be no assurance the Company
will be successful in generating the cash required to meet operating
requirements. If industry conditions become unfavorable, the Company does not
consistently achieve timely customer qualifications on new product programs, or
the Company is unsuccessful at ramping up volume production on new products at
acceptable yields, the Company's working capital needs 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. If these events were to
occur the Company believes that it has sufficient access to the capital leasing
market, additional bank facilities, access to the public debt market and access
to the private and public equity markets to ensure adequate operating liquidity
through fiscal 2001. 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. If required, financing alternatives
available to the Company may be highly dilutive to current shareholders.
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.
21
<PAGE> 24
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, 2000:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Customers
Maxtor.................................................... 40% 32% 25%
Western Digital........................................... 20% 37% 49%
Samsung................................................... 19% 19% 15%
Quantum................................................... 12% -- 3%
All Others................................................ 9% 12% 8%
--- --- ---
100% 100% 100%
--- --- ---
HGA/HSA Product Mix
HGA....................................................... 40% 16% 11%
HSA....................................................... 54% 81% 86%
Other..................................................... 6% 3% 3%
--- --- ---
100% 100% 100%
--- --- ---
</TABLE>
The figures in fiscal 2000 include both direct shipments and shipments to
third parties who sub-assemble products on behalf of these customers.
Fiscal 2000 Compared to Fiscal 1999
Net sales were $555.9 million during fiscal 2000, a 22.4% decrease from net
sales of $716.5 million during fiscal 1999. The decrease in the Company's net
sales for fiscal 2000 compared to fiscal 1999 was due to lower average selling
prices ("ASPs") for both HGA units and HSA units and the continued industry-wide
trend towards fewer heads per disk drive, partially offset by an increase in HGA
unit sales. The Company experienced a 111.9% growth in unit sales of HGAs and a
31.6% decline in unit sales of HSAs in fiscal 2000 compared to fiscal 1999. An
HSA sells for approximately four times the ASP of an HGA.
Net sales of MR/GMR products were $501.9 million, or 90% of total net
sales, in fiscal 2000, compared to $646.6 million, or 90% of net sales, in
fiscal 1999. Advanced inductive products represented $19.4 million, or 3% of net
sales, in fiscal 2000, compared to $33.9 million, or 5% of net sales, in fiscal
1999.
The decrease in net sales was mainly attributable to overall lower ASPs
during fiscal 2000 for HGA and HSA products. ASPs for HGAs and HSAs products
decreased by 8% and 24%, respectively, in fiscal 2000, compared to fiscal 1999.
The decrease in ASPs for HSAs were due to fewer HGAs per HSA as a result of
increased areal-density in low cost PCs, and the continued fierce HDD
competitive pricing environment. However, the Company experienced an improvement
in ASPs during the fourth quarter of fiscal 2000.
The Company's product mix continued to be predominately HSAs, as net sales
of HSAs and HGAs accounted for approximately 54% and 40%, respectively, of net
sales during fiscal 2000, compared to approximately 81% and 16%, respectively,
of net sales during fiscal 1999. The Company expects this fiscal 2000 product
mix shift from HSAs to HGAs to continue in fiscal 2001. The Company's sales
continue to be primarily focused in the 3.5" disk form factor market, accounting
for 87%, 96% and 91% of the Company's net sales during fiscal 2000, 1999 and
1998, 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 2000 and 1999. The Company's three largest customers accounted for 79%,
88%, and 89% of the Company's net sales during fiscal 2000, 1999 and 1998,
respectively.
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
22
<PAGE> 25
lower ASPs ("ASP") for both HGA units and HSA units, 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
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's sales were primarily focused in
the 3.5" disk form factor market, accounting for 97% and 96% of the Company's
net sales during fiscal 1999 and 1998, respectively.
For a discussion of certain risks associated with the Company's business,
see "Certain Additional Business Risks."
GROSS MARGIN
The Company's gross margins are primarily influenced by ASPs, the level of
unit sales in relation to fixed costs, manufacturing yields, 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 2000 Compared to Fiscal 1999
The Company's negative gross margin, expressed as a percentage of net
sales, was (11.0)% of net sales during fiscal 2000, compared to a negative gross
margin of (3.2%) of net sales during fiscal 1999. The increase in the negative
gross margin percentage during fiscal 2000 was affected by a charge of $8.1
million included in cost of sales related to the write-off of excess or obsolete
inventories as part of the closure of the Company's wafer fab in Japan, the
closure of head stack assembly operations in the Philippines and the relocation
of those operations to Thailand. Without the special charge, the adjusted gross
loss during fiscal 2000 was (9.5)%. The increase in negative gross margin
percentage (excluding the special charges) from (3.2)% in fiscal 1999 to (9.5)%
in fiscal 2000 was primarily due to the impact of lower ASPs for both HGA and
HSA products, partially offset by higher unit sales in HGAs, and a shift of
product mix from HSA to HGA.
During the fourth quarter of fiscal 2000, a positive gross margin of $8.2
million was achieved primarily due to an increase in ASPs, improvement in
manufacturing yields, and higher unit volumes. The Company anticipates this
trend to continue in fiscal 2001.
23
<PAGE> 26
Fiscal 1999 Compared to Fiscal 1998
The Company's negative gross margin, expressed as a percentage of net
sales, was (3.2)% of net sales during fiscal 1999, compared to a gross loss of
(16.4)% of net sales during fiscal 1998. The decrease in the negative gross
margin percentage 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 negative gross margin during fiscal 1998 was (2.2)%. The increase in
negative 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.
For a discussion of certain risks associated with the Company's business,
see "Certain Additional Business Risks."
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal 2000 Compared to Fiscal 1999
Research and development ("R&D") expenses were $65.0 million during fiscal
2000, a 29.5% decrease from R&D expenses of $92.2 million during fiscal 1999.
The decrease in R&D expenses was attributable to the Company's decision to
terminate its wafer fabrication operations in Japan during the later half of
fiscal 2000, and continued cost containment efforts. The Company is fully
committed to, and continues to invest a significant portion of its resources
for, its 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 remain materially consistent in fiscal 2001 as
a continued benefit of the elimination of duplicate R&D efforts at RRSMI.
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 2000, there was no customer
development funding; whereas, $2.8 million of development funding was offset
against R&D expenses in fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
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 invested 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.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 2000 Compared to Fiscal 1999
Selling, general & administrative ("SG&A") expenses were $27.2 million
during fiscal 2000, a 7% decrease from SG&A expenses of $29.2 million during
fiscal 1999. The decrease in SG&A expenses was mainly due to the reduction of
the reserve for accounts receivable exposures related to the bankruptcy of a
customer, Micropolis, in fiscal 1997. The Company expects that SG&A expenses
will increase slightly during fiscal 2001.
Fiscal 1999 Compared to Fiscal 1998
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.
24
<PAGE> 27
RESTRUCTURING COSTS
2000 Restructuring Costs
During fiscal 2000, the Company incurred a restructuring charge of $120.8
million. The restructuring costs reflect the Company's strategy to align the
worldwide operations with market conditions and to improve productivity of the
Company's manufacturing facilities. The restructuring costs were primarily
associated with the Company's decision to close its wafer fabrication operations
in Japan and cease its head stack operations in the Philippines. The
restructuring costs consisted of $107.4 million to write off or write down
facilities and equipment, $7.1 million for lease commitments, $6.2 million for
severance and benefits for terminated employees, and $0.1 million for other
expenses associated with the restructuring plan. In connection with the
restructuring plan, the Company expected a workforce reduction of approximately
3,700 employees and 100 contractors, of which approximately 200 and 3,400 were
engaged in manufacturing in activities in Japan and the Philippines,
respectively. The Company anticipates the restructuring effort will produce an
annual cost savings of $80 million.
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.
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
improve the productivity of 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 2000 Compared to Fiscal 1999
Interest expense was $33.1 million during fiscal 2000, compared to $31.9
million during fiscal 1999. The increase in interest expense during fiscal 2000
was primarily due to an increase in average outstanding debt resulting from the
Company's $61.2 million issuance of new 10% convertible notes offset by the 2
for 1 exchange of 6.5% convertible notes for 10% convertible notes. The
conversion of this debt to equity will save the Company approximately $5 million
in interest expense per quarter, or approximately $80 million over the remaining
life of the 10% Notes.
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
25
<PAGE> 28
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.
DEBT CONVERSION EXPENSES
During fiscal 2000, the Company incurred debt conversion expenses of $29.3
million relating to the make whole interest provision on the automatic
conversion to equity of the outstanding 10% subordinated convertible notes.
INTEREST INCOME AND OTHER, NET
Fiscal 2000 Compared to Fiscal 1999
Interest income and other, net was $11.1 million during fiscal 2000,
compared to $4.1 million during fiscal 1999. The increase in interest income and
other, net during fiscal 2000 was primarily due to gains on the sale of
equipment, used manufacturing supplies and an option on leased property in the
Philippines, reductions in overall foreign exchange losses offset by a reduction
in interest income resulting from lower cash balances throughout the year.
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.
PROVISION FOR INCOME TAXES
Fiscal 2000 Compared to Fiscal 1999
There was no income tax provision during fiscal 2000, compared to the
income tax benefit rate of 12.4% during fiscal 1999. The income tax benefit rate
during fiscal 1999 was primarily attributable to the revaluation of tax
accounts.
The Company's deferred tax assets relate to potential tax benefits in the
United States. Based on the Company's recent history of losses in the U.S., the
lack of carryback availability and the uncertainty of future profits, the
Company has provided a full valuation allowance against these assets.
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.
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.
ITEM 7A. QUANTITATIVE AND 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
26
<PAGE> 29
borrowings. The following table summarizes the fair value for the Company's
interest rate sensitive instruments as of September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Available-for sale investments......................... $ 40,968 $212,417
Variable rate borrowings............................... $ 65,250 $163,933
Fixed rate borrowings.................................. $496,501 $146,639
</TABLE>
A hypothetical one percentage point decrease in interest rates would result
in an approximate $0.3 million and a $6.3 million adverse change in the net fair
value of the Company's interest rate sensitive securities as of the end of
fiscal 2000 and 1999, respectively. This potential change in fair value is based
on sensitivity analyses performed on the Company's financial positions at
September 30, 2000 and 1999. Actual results may differ materially.
As of September 30, 2000, the fair value of the Company's 10% convertible
subordinated notes is approximately $480 million and is classified as fixed rate
borrowings. Because of the notes' conversion features, the fair value of these
securities is primarily based upon the market price of the Company's common
stock.
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, 2000
---------------------------------------------
NOTIONAL AVERAGE *ESTIMATED
AMOUNT CONTRACT RATE FAIR VALUE
---------- --------------- ------------
(IN THOUSANDS, EXCEPT AVERAGE CONTRACT RATE)
<S> <C> <C> <C>
Foreign currency forward exchange contracts to
purchase foreign currencies:
Philippine peso................................. $ 2,827 45.75 $0
Thai baht....................................... $34,694 41.58 $0
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------------------------
NOTIONAL AVERAGE *ESTIMATED
AMOUNT CONTRACT RATE FAIR VALUE
---------- --------------- ------------
(IN THOUSANDS, EXCEPT AVERAGE CONTRACT RATE)
<S> <C> <C> <C>
Foreign currency forward exchange contracts to
purchase foreign currencies:
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>
---------------
* Estimated fair value is equivalent to unrealized net gain (loss) on existing
contracts.
27
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------
2000 2000 1999
---------- ----------- ---------
PRO FORMA*
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 64,462 $ 54,612 $ 80,547
Short-term investments................................ -- -- 145,856
Accounts receivable, net of allowance of $1,826 in
2000 and $2,594 in 1999............................ 87,840 87,840 45,981
Inventories........................................... 34,199 34,199 31,186
Prepaid expenses and other current assets............. 5,603 5,603 6,049
--------- --------- ---------
Total current assets.......................... 192,104 182,254 309,619
Property, plant, and equipment, net..................... 285,053 285,053 457,189
Intangible and other assets............................. 16,191 9,927 17,682
--------- --------- ---------
Total assets.................................. $ 493,348 $ 477,234 $ 784,490
========= ========= =========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing.................................. $ -- $ -- $ 10,521
Accounts payable...................................... 72,995 72,995 71,397
Accrued compensation and benefits..................... 24,797 24,797 26,052
Accrued interest payable.............................. 31,671 520 4,090
Other accrued liabilities............................. 26,950 26,950 31,256
Current portion of long-term debt and capital lease
obligations........................................ 39,849 11,099 147,589
--------- --------- ---------
Total current liabilities..................... 196,262 136,361 290,905
Convertible subordinated notes.......................... 207,312 19,802 345,000
Other long-term debt and capital lease obligations...... 25,400 25,400 16,668
Other long-term liabilities............................. 5,102 5,102 5,781
--------- --------- ---------
Total liabilities............................. 434,076 186,665 658,354
--------- --------- ---------
Commitments and contingencies
Minority interest in consolidated subsidiary............ 19,341 19,341 41,927
Stockholders' equity:
Preferred stock, $0.0001 par value; 4,000 shares
authorized, none issued............................ -- -- --
Common stock, $0.0001 par value; 160,000 shares
authorized, 69,014 and 49,675 issued in 2000 and
1999, respectively (117,014 pro forma)............. 7 11 5
Additional paid-in capital............................ 449,800 681,093 369,274
Accumulated deficit................................... (409,137) (409,137) (284,308)
Accumulated other comprehensive loss.................. (739) (739) (762)
--------- --------- ---------
Total stockholders' equity.................... 39,931 271,228 84,209
--------- --------- ---------
Total liabilities, minority interest in
consolidated subsidiary and stockholders'
equity...................................... $ 493,348 $ 477,234 $ 784,490
========= ========= =========
</TABLE>
---------------
* Refer to Note 16 for the basis of presentation of the pro forma balance sheet
information.
See accompanying notes to the consolidated financial statements.
28
<PAGE> 31
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales............................................... $ 555,860 $ 716,460 $ 808,622
Cost of sales -- on net sales........................... 608,772 739,725 826,602
Cost of sales -- special charges........................ 8,142 -- 114,800
--------- --------- ---------
Gross margin (loss)..................................... (61,054) (23,265) (132,780)
Operating expenses:
Research and development.............................. 64,995 92,211 92,265
Selling, general and administrative................... 27,220 29,154 34,137
Restructuring costs................................... 120,793 37,685 93,728
--------- --------- ---------
Total operating expenses...................... 213,008 159,050 220,130
--------- --------- ---------
Operating loss.......................................... (274,062) (182,315) (352,910)
Interest expense........................................ 33,053 31,910 29,648
Debt conversion expenses................................ 29,349 -- --
Interest income and other, net.......................... 11,106 4,143 7,126
--------- --------- ---------
Loss before provision (benefit) for income taxes,
minority interest, and extraordinary item............. (325,358) (210,082) (375,432)
Provision (benefit) for income taxes.................... -- (25,946) (24,577)
--------- --------- ---------
Loss before minority interest........................... (325,358) (184,136) (350,855)
Minority interest in net loss of consolidated
subsidiary............................................ (41,895) (28,421) (31,108)
--------- --------- ---------
Loss before extraordinary item.......................... (283,463) (155,715) (319,747)
Extraordinary item -- gain on conversion of debt........ 158,634 -- --
--------- --------- ---------
Net loss................................................ $(124,829) $(155,715) $(319,747)
========= ========= =========
Loss per basic and diluted share before extraordinary
item.................................................. $ (5.13) $ (3.16) $ (6.59)
Extraordinary income per share.......................... 2.87 -- --
--------- --------- ---------
Basic and diluted net loss per common share............. $ (2.26) $ (3.16) $ (6.59)
========= ========= =========
Shares used in basic and diluted per common share
computation........................................... 55,220 49,352 48,513
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
2000 1999 1998
--------- ----------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss............................................... $(124,829) $ (155,715) $(319,747)
Adjustments required to reconcile net loss to cash
provided by operations:
Depreciation......................................... 161,003 187,254 223,980
Amortization......................................... 2,916 3,246 5,077
Extraordinary gain from debt conversion.............. (158,634) -- --
Non-cash portion of restructuring costs.............. 106,601 29,732 77,205
Minority interest in net income (loss) of
consolidated subsidiary........................... (41,895) (28,421) (31,108)
Deferred income taxes................................ (55) (24,331) (24,988)
(Gain)/loss on disposal of fixed assets.............. (3,389) 312 1,261
Interest expense paid in common stock................ 9,510 -- --
Other non-cash expenses.............................. 546 720 2,194
Changes in assets and liabilities:
Accounts receivable............................... (41,859) 64,356 68,378
Inventories....................................... (3,013) 21,181 39,120
Prepaid expenses and other current assets......... 446 4,012 4,934
Accounts payable, accrued liabilities and income
taxes payable................................... (3,792) (28,222) (55,068)
Accrued debt conversion expenses.................. 29,349 -- --
Other assets and liabilities, net...................... (566) 2,126 (1,650)
--------- ----------- ---------
Net cash provided by (used in) operating
activities................................. (67,661) 76,250 (10,412)
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (93,621) (101,002) (186,223)
Maturities of available-for-sale investments........... 589,909 1,499,555 675,541
Purchase of available-for-sale investments............. (444,053) (1,599,373) (542,071)
--------- ----------- ---------
Net cash provided by (used in) investing
activities................................. 52,235 (200,820) (52,753)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowing..................... 8,788 31,454 6,952
Proceeds from issuance of notes........................ 54,177 -- --
Proceeds from other long-term debt..................... 20,000 167,000 --
Payment of other long-term debt and capital lease
obligations.......................................... (119,008) (61,056) (5,761)
Proceeds from issuance of common stock, net............ 35,384 5,275 5,829
--------- ----------- ---------
Net cash provided by (used in) financing
activities................................. (659) 142,673 7,020
--------- ----------- ---------
Net increase (decrease) in cash and cash equivalents... (16,085) 18,103 (56,145)
Cash and cash equivalents at beginning of period....... 80,547 62,444 118,589
--------- ----------- ---------
Cash and cash equivalents at end of period............. $ 64,462 $ 80,547 $ 62,444
========= =========== =========
Supplemental disclosures of non-cash activities:
Conversion of joint venture debt by minority
shareholder....................................... $ 19,309 $ 28,332 $ --
Conversion of debt to common stock................... 35,111 -- --
Supplemental disclosures of cash flow information:
Interest paid during the year........................ 22,511 30,789 28,751
Income taxes paid (refunded) during the year......... (1,087) (312) 232
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE> 33
CONSOLIDATED STATEMENT 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, 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
---------
Components of comprehensive loss:
Net loss..................................... -- -- -- (124,829) -- (124,829)
Change in unrealized gain/(loss) on
available-for-sale investments, net of
income taxes of $0......................... -- -- -- -- 23 23
---------
Total comprehensive loss..................... (124,806)
---------
Issuance of common stock under stock option
plans...................................... 269 -- 1,749 -- -- 1,749
Issuance of common stock under employee stock
purchase plan.............................. 500 -- 1,474 -- -- 1,474
Issuance of common stock under 401(K)plan.... 111 -- 507 -- -- 507
Issuance of common stock as payment of note
interest................................... 1,983 -- 9,510 -- -- 9,510
Issuance of common stock under note
conversions................................ 8,419 1 35,110 -- -- 35,111
Issuance of common stock through private
placements................................. 8,057 1 32,160 -- -- 32,161
Compensation expense on options issued to
non-employees.............................. -- -- 16 -- -- 16
------ --- -------- --------- ----- ---------
Balance at September 30, 2000................ 69,014 $ 7 $449,800 $(409,137) $(739) $ 39,931
====== === ======== ========= ===== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE> 34
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
2000 were to six major disk drive manufacturers whose corporate headquarters are
located 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 Scion Photonics
and Read-Rite SMI ("RRSMI"), the Company's joint venture in Japan with Sumitomo
Metal Industries, Ltd ("SMI"), which began liquidation proceedings in fiscal
2000. 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 RRSMI. The
Company owns 50% plus two shares of the voting stock, a majority interest of
RRSMI. All decisions made by RRSMI in the ordinary course of business do not
require minority shareholder approval.
The Company maintains a 52/53-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
2000 had 53 weeks and ended on October 1. Fiscal years 1999 and 1998 each
comprised 52 weeks and ended on September 26 and September 27, respectively. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
Certain amounts in fiscal 1999 and 1998 financial statements have been
reclassified to conform to the fiscal 2000 presentation.
Although the Company experienced net losses in fiscal 2000, 1999 and 1998,
the Company has restructured its operations (see Note 9) and its debt (see Note
15). In addition, the Company believes it has established a technological
leadership position in its industry. As such, the Company believes that it will
have sufficient positive cash flow from operations to meet planned operating
requirements during fiscal 2001.
However, if industry conditions become unfavorable, the Company does not
consistently achieve timely customer qualifications on new product programs, or
the Company is unsuccessful at ramping up volume production on new products at
acceptable yields, the Company's working capital needs 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. If either of these events
were to occur, the Company believes that it has sufficient access to the capital
leasing market, additional bank facilities, access to the public debt market and
access to the private and public equity markets to ensure adequate operating
liquidity through fiscal 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
REVENUE RECOGNITION
The Company generally recognizes revenue when title passes, and provides
currently for the estimated costs to rework products that may be returned under
warranty claims. The Company does not grant customers the right to return
products, except under warranty claims. For direct shipments to customers, the
Company recognizes revenue based upon the transfer of title and risk of loss as
defined under the shipping terms. The
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company also stores its inventory in warehouses (JIT hubs) that are located
close to the customer's manufacturing facilities. Revenue is recognized on sales
from JIT hubs upon the transfer of title and risk of loss upon the customer's
acknowledgement of the receipt of the goods. The Company does not recognize
revenue on products shipped to subcontractors under arrangements that require
the Company to repurchase the goods at a later date.
EARNINGS (LOSS) PER SHARE
Basic earnings per share is based on the weighted average number of shares
of common stock outstanding during the period. The effects of the assumed
conversion of common stock equivalents are not included in the diluted loss per
share calculation as the effect would be antidilutive. (See Note 7 for
calculation of net loss per share.)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with insignificant
interest rate risk that are readily convertible to cash and have maturities of
three months or less from the date of purchase 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. Cash
equivalents consist of money market funds, commercial paper and government
agency obligations. The fair market value, based on quoted market prices, of
cash equivalents and short-term investments is substantially equal to their
carrying value at September 30, 2000 and 1999.
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 until their disposition. 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.
Inventories consisted of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Raw material............................................. $ 2,803 $ 5,692
Work-in-process.......................................... 26,659 19,624
Finished goods........................................... 4,737 5,870
------- -------
Total inventories.............................. $34,199 $31,186
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
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 20 years for
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Property, plant and equipment, net consisted of the following at September
30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Land................................................ $ 8,694 $ 10,291
Building............................................ 106,757 133,313
Equipment........................................... 921,470 992,977
Furniture and fixtures.............................. 12,479 24,803
Leasehold improvements.............................. 79,763 75,496
---------- ----------
Property, plant and equipment....................... 1,129,163 1,236,880
Less: Accumulated depreciation...................... 844,110 779,691
---------- ----------
Total property, plant and equipment,
net..................................... $ 285,053 $ 457,189
========== ==========
</TABLE>
INTANGIBLE AND OTHER ASSETS
The net deferred costs associated with the Company's convertible
subordinated notes offering and exchange, as further discussed in Note 4, "Debt
and Capital Lease Obligations," were approximately $6.6 million and $6.3 million
at September 30, 2000 and 1999, respectively. Accumulated amortization was
approximately $5.5 million and $2.7 million at September 30, 2000 and 1999,
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
("R&D") fully or partially funded by other parties. R&D expenses under such
projects were offset as incurred to the extent development funds were provided.
No development funding offset R&D expenses in fiscal 2000. 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 Financial Accounting Standards Board ("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. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
-- Deferral of the Effective Date of FAS 133, which deferred the effective date
of SFAS 133 until fiscal years beginning after June 15, 2000. The impact of
adopting SFAS 133 is not material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB 101 is effective for years beginning
after December 15, 1999 and is required to be effective beginning in the fourth
quarter of fiscal 2001. SAB 101 is not expected to have a significant effect on
the Company's financial statements.
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCY REMEASUREMENT
All foreign operations have 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 the rate
in effect at the date of transaction. Statements of operations are remeasured at
the average exchange rates during the year. Gains and losses from foreign
currency remeasurement are included in current operations.
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.
The Company manages 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, which also includes remeasurement gains and
losses. These amounted to a net foreign exchange loss of approximately $0.4
million and $4.8 million in fiscal 2000 and 1999, respectively, and a net
foreign exchange gain of approximately $2.6 million during fiscal 1998.
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 loss and net loss per share amounts
have been disclosed in Note 8, Employee Stock and Benefit Plans.
NOTE 2. FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
At September 30, 2000 all of the Company's available-for-sale securities
were held in money market funds with fair market values that approximated cost.
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-sales
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>
There were no gross realized gains or losses in any category of investment
during fiscal 2000, 1999 and 1998.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments at
September 30 were as follows (in thousands/U.S. dollars):
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Foreign currency forward contracts to purchase foreign
currencies:
Philippine peso..................................... $ 2,827 $12,957 $ 9,014
Thai baht........................................... 34,694 20,645 19,073
Japanese yen........................................ -- 39,000 14,800
Singapore dollar.................................... -- 988 --
</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>
2000 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 64,462 $ 64,462 $ 80,547 $ 80,547
Short-term investments.................. -- -- 145,856 145,856
Convertible subordinated notes.......... 207,312 496,501 345,000 146,315
Other long-term debt.................... 65,249 65,249 164,257 164,257
</TABLE>
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income, net of related
tax is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<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 2000, 1999 and 1998, respectively.... -- (23) 80
----- ----- -----
Accumulated other comprehensive income (loss).............. $(739) $(762) $(659)
===== ===== =====
</TABLE>
NOTE 4. DEBT AND CAPITAL LEASE OBLIGATIONS
SHORT-TERM BORROWING
Short-term borrowing as of September 30, 1999 consisted of a Japanese yen
denominated loan from a related party, SMI, to Read-Rite SMI of approximately
$10.5 million.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
2000 1999
-------- --------
<S> <C> <C>
Convertible subordinated notes due 2004 at 6.5%........ $ 19,802 $345,000
Convertible subordinated notes due 2004 at 10%......... 187,510 --
Secured term loan due 2001 at ABR Base + 3%............ 28,750 42,500
Secured borrowing under revolving line of credit due
2001 at LIBOR + 2%................................... -- 100,000
Secured loans due 2004 at LIBOR + 2.75%................ 20,000 --
Secured loan due 2003 at LIBOR + 3.5%.................. 7,500 9,500
Secured loan due 2004 at SIBOR + 3.5%.................. 8,999 11,399
Capital lease obligations and other.................... -- 858
-------- --------
Total debt and capital lease obligations..... 272,561 509,257
Less: current portion.................................. 39,849 147,589
-------- --------
Total long-term debt and capital lease
obligations................................ $232,712 $361,668
======== ========
</TABLE>
At September 30, 2000, 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>
<S> <C>
2001...................................................... $ 39,849
2002...................................................... 11,100
2003...................................................... 9,600
2004...................................................... 212,012
--------
Total future minimum principal payments on
long-term debt and capital lease
obligations................................... $272,561
========
</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. There were no capital leases in fiscal 2000. At September 30,
1999, total assets under capital leases and accumulated depreciation of assets
under capital leases were approximately $4.4 million and $3.9 million,
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 ("6.5%
Notes"), due September 2004. Interest is paid semi-annually in March and
September. The 6.5% 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 6.5% Notes are convertible at any time
at a conversion rate of 24.8524 shares per $1,000 principal amount of 6.5% Notes
(equivalent to approximately $40.24 per share), subject to adjustment. Upon a
change in ownership control of the Company, the holders of the 6.5% 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, 2000 and 1999, $19.8 million and $345.0 million of the 6.5%
Notes were outstanding, respectively.
In March 2000, an exchange offer was completed whereby the Company offered
to issue 10% convertible subordinated notes ("10% Notes") due September 2004 in
exchange for its 6.5% Notes. Holders of the 6.5% Notes were offered the
opportunity to receive $1,000 principal amount of a 10% Note for each $2,000
principal of 6.5% Notes redeemed. Approximately $325.2 million of the existing
6.5% Notes were exchanged for $162.6 million of new 10% Notes resulting in an
extraordinary gain of $158.6 million (net of no tax and net of
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
debt issuance costs written off totaling approximately $5 million). In addition,
the Company sold an additional $61.2 million of the 10% Notes for cash and
payment of fees related to the exchange. Interest is paid semi-annually in March
and September. The 10% Notes are subordinated in right of payment to all
existing and future senior debt of the Company and any existing notes. The 10%
Notes may be redeemed at the option of the Company at any time prior to
maturity. The Company has an option to elect automatic conversion of the 10%
Notes if the stock price has averaged 200% of the conversion price for at least
20 trading days during a 30 trading day period. If the automatic conversion
occurs on or prior to March 5, 2002, the Company is obligated to pay in cash or
stock, at its option, an amount equal to two years of interest less any interest
already paid prior to the automatic conversion. In conjunction with meeting the
criteria to elect automatic conversion and the Company's decision to do so in
September 2000, the Company accrued approximately $29.3 million related to the
"make whole" provision. The 10% Notes are convertible at any time by the
noteholder at a conversion rate of 221.72949 shares per $1,000 principal amount
of 10% Notes (equivalent to approximately $4.51 per share), subject to
adjustment. As of September 30, 2000, approximately $187.5 million of the 10%
Notes were outstanding. (See Note 15.)
SECURED TERM LOAN AND LINE OF CREDIT
As of September 30, 2000 and 1999, the Company had a $28.8 million and
$142.5 million, respectively, in borrowings under a secured credit facility. As
of September 30, 2000 and 1999, $28.8 million and $42.5 million of the term loan
was outstanding and $0 and $100 million was outstanding on a revolving line of
credit, respectively. The terms of the credit facility require the Company to
maintain certain financial ratios. The loss incurred by the Company during
fiscal year 2000 and 1999 resulted in the Company not maintaining certain
financial covenants required by the credit facility. As a result, the amount due
under the credit facility has been classified as a current liability. On
December 1, 2000, the Company repaid the balance of the remaining debt and
terminated this facility. (See Note 15.)
NOTE 5. COMMITMENTS
PURCHASE COMMITMENTS
Purchase commitments for construction or purchase of plant and equipment
for the Company totaled approximately $50 million at September 30, 2000.
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 $9,859,000,
$14,095,000 and $10,697,000 during fiscal years 2000, 1999 and 1998,
respectively.
At September 30, 2000, the future minimum payments under operating leases
were as follows (in thousands):
<TABLE>
<S> <C>
2001....................................................... $ 8,335
2002....................................................... 5,476
2003....................................................... 2,605
2004....................................................... 1,104
2005....................................................... 1,094
After 2005................................................. 5,103
-------
Total future minimum payments on operating
leases......................................... $23,717
=======
</TABLE>
The Company has options on certain leases that would extend the lease term
for between two and 15 years. These options are not reflected in the future
minimum payments as they have not been exercised.
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company subleases a portion of its facilities to non-related parties.
The effect of this sublease income has been netted against the future minimum
payments shown above. The effect of the income in fiscal 2001 and 2002 is
estimated at $1.2 million and $0.4 million, respectively.
NOTE 6. INCOME TAXES
PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ -- $(11,086) $ --
State............................................. -- 152 153
Foreign........................................... -- (12,709) 258
------- -------- --------
-- (23,643) 411
------- -------- --------
Deferred:
Federal........................................... -- (1,993) (21,308)
State............................................. -- (311) (3,680)
------- -------- --------
-- (2,304) (24,988)
------- -------- --------
Provision (benefit) for income taxes................ $ -- $(25,947) $(24,577)
------- -------- --------
</TABLE>
DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
and net operating loss carryforwards 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>
2000 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory........................................... $ 1,062 $ 566
Accrued compensation and other benefits............. 4,635 5,834
Basis difference in fixed assets.................... -- 2,840
Net operating loss carryforwards.................... 69,277 142,926
Deferred rental payments............................ 64 156
Charitable contribution carryforwards............... 1,022 884
Investment and intangible valuation................. 2,239 2,142
Deferred revenue.................................... 309 297
Other............................................... 129 461
-------- ---------
Total deferred tax assets, gross............ 78,737 156,105
Valuation allowance for deferred tax assets........... (72,626) (156,105)
-------- ---------
Total deferred tax assets, net.............. 6,111 --
-------- ---------
Deferred tax liabilities:
Basis difference in fixed assets.................... 6,111 --
-------- ---------
Total deferred tax liabilities.............. 6,111 --
-------- ---------
Total deferred taxes, net................... $ -- $ --
======== =========
</TABLE>
The Company's valuation allowance for deferred tax assets decreased by
$83,479,000 during fiscal 2000 and increased by $47,002,000 during fiscal 1999,
respectively. Approximately $35,718,000 of the Company's
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
valuation allowance for deferred assets at September 30, 2000 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>
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) computed at federal
statutory rate................................. $(113,876) $(73,528) $(131,401)
Net foreign earnings subject to taxes at lower
rates.......................................... (4,538) (7,651) (295)
Losses for which no current year benefit is
available...................................... 113,358 80,026 109,347
Reversal of previously provided taxes............ -- (24,691) --
Other............................................ 5,056 (103) (2,228)
--------- -------- ---------
Provision (benefit) for income taxes............. $ -- $(25,947) $ (24,577)
========= ======== =========
</TABLE>
Pretax loss from foreign operations was approximately $248,533,000,
$165,525,000 and 275,825,000 during fiscal 2000, 1999 and 1998, respectively.
The Company enjoys tax holidays with respect to its two operations in Thailand,
which will expire in fiscal 2001 and 2003, and in the Philippines, which will
expire in fiscal 2003. The impact of these holidays decreased the net loss by
approximately $4,538,000 ($0.08 basic and diluted net loss per share) during
fiscal 2000, $7,651,000 ($0.15 basic and diluted net loss per share) during
fiscal 1999 and $295,000 ($0.07 basic and diluted net loss per share) during
fiscal 1998. At September 30, 2000, accumulated pretax loss of approximately
$286,166,000 was incurred outside the United States and no federal tax benefit
has been provided on these losses. A foreign tax credit of approximately
$34,439,000 would be available to offset federal tax upon repatriation of future
foreign earnings.
The Company's net operating losses were primarily incurred in the United
States. At September 30, 2000, the Company had a federal net operating loss
carryforward of approximately $198,590,000 for United States federal tax return
purposes, expiring in the following fiscal years (in thousands):
<TABLE>
<CAPTION>
EXPIRING IN FISCAL YEAR NET OPERATING LOSS
----------------------- ------------------
<S> <C>
2010................................................ $ 23,715
2011................................................ 14,718
2012................................................ 19,524
2018................................................ 91,553
2019................................................ 49,080
--------
$198,590
========
</TABLE>
Based on the Company's recent history of losses in the United States, the
lack of carryback availability and the uncertainty of future profits, the
Company has provided a full valuation allowance against these assets.
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share for the years ended September 30.
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator for basic and diluted
Net loss...................................... $(124,829) $(155,715) $(319,747)
--------- --------- ---------
Denominator:
Weighted average number of common shares
outstanding during the period --
Denominator for basic and diluted.......... 55,520 49,352 48,513
--------- --------- ---------
Basic and diluted net loss per common share..... $ (2.26) $ (3.16) $ (6.59)
========= ========= =========
</TABLE>
The effects of the assumed conversion of common stock equivalents were not
included in the diluted loss per share computation as the effect would be
antidilutive for fiscal 2000. Refer to Note 15 for a description of subsequent
events which increased the number of common shares outstanding.
NOTE 8. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
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. To improve employee
retention, the Company offered several accelerated vesting schedules on new
grants during fiscal year 2000 ranging from 100% vesting after six months, to
25% vesting per six months of employment. 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
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. In October 1999 and February 2000, the 1998 plan was
amended by the Board of Directors to increase the number of shares reserved for
issuance by 1,000,000 and 3,000,000 shares, respectively.
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 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 another
cancellation and re-issuance 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 cancellations and re-issuances of options.
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 OUTSTANDING FOR FUTURE GRANT
-------- ------------------ ----------------
<S> <C> <C> <C>
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
Additional shares reserved.............. -- -- 4,000,000
Granted................................. $ 3.60 8,872,043 (8,872,043)
Exercised............................... $ 6.50 (269,254) --
Canceled................................ $ 6.35 (3,288,173) 3,288,173
----------- -----------
Balance at September 30, 2000............. $ 6.23 14,243,306 1,819,841
=========== ===========
</TABLE>
At September 30, 2000, 1999 and 1998, there were exercisable options
outstanding under the above mentioned option plans to purchase an aggregate of
approximately 5,647,227, 3,898,688 and 1,035,000 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, 2000, 758,760 options had been
exercised, and 429,277 options were exercisable.
STOCK OPTIONS OUTSTANDING AND STOCK OPTIONS EXERCISABLE
The following table summarizes information about options outstanding at
September 30, 2000:
<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 - $ 3.53 4,306,855 8.60 $ 2.74 522,377 $ 0.75
$ 3.63 - $ 7.50 4,290,365 9.20 $ 4.27 835,504 $ 4.62
$ 7.56 3,254,947 5.52 $ 7.56 2,808,137 $ 7.56
$ 7.81 - $26.75 2,770,494 7.24 $11.66 1,903,236 $12.56
$32.75 - $37.13 49,922 5.00 $36.16 7,250 $36.37
---------- ---- ------ --------- ------
14,672,583 7.82 $ 6.06 6,076,504 $ 8.18
========== ==== ====== ========= ======
</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
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000, there were 1,151,331 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, a portion 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. Of the
Company contribution, 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, 2000,
there were 203,847 shares available for issuance.
PRO FORMA EMPLOYEE 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 loss
and loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss.............................. $(135,903) $(171,815) $(349,847)
Pro forma basic and diluted loss per share...... $ (2.46) $ (3.49) $ (7.21)
</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 2000,
1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield..................................... None None None
Expected volatility................................ 0.94 0.75 0.66
Risk free interest rate............................ 5.8% 6.0% 4.5%
Expected lives -- stock options granted............ 2.2 years 3.1 years 1.9 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>
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
Weighted average exercise price -- stock options granted... $3.60 $7.81 $11.57
Weighted average fair value -- stock options granted....... $1.92 $5.27 $ 4.28
Weighted average exercise price -- employee stock purchase
plan..................................................... $2.94 $5.81 $15.09
Weighted average fair value -- employee stock purchase
plan..................................................... $1.70 $3.28 $ 6.59
</TABLE>
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
In connection with a private placement of common stock in fiscal 2000, the
Company issued warrants for the purchase of 2,857,142 shares of its common stock
at an exercise price of $7.375 per share. These warrants may be exercised at any
time prior to September 1, 2001. All warrants were outstanding at September 30,
2000.
NOTE 9. RESTRUCTURING COSTS
FISCAL YEAR 2000
During the second and third quarters of fiscal 2000, the Company recorded
total restructuring charges of $130.1 million. Due primarily to greater proceeds
from the sale of assets and lower severance payments than anticipated, the
Company revised its estimate for restructuring costs to approximately $120.8
million in the fourth fiscal quarter. With continued productivity improvements
and more efficient capacity utilization at the Company's Fremont wafer fab,
combined with the Company's efforts to reduce fixed costs and to better focus
its technical resources in one wafer fab location, the Company dissolved its
joint venture, Read-Rite SMI ("RRSMI"), with Sumitomo Metals Industries, Ltd.
("SMI") in Japan. The Company has established a product engineering, sales and
procurement office in Japan to continue to support its customers and suppliers
in that area. The transition to the Fremont wafer fab of the products previously
designed and manufactured in Japan was completed by the fourth quarter of fiscal
2000.
In addition, the Company closed its Philippine head stack operations,
bringing all head gimbal assembly and head stack operations into the Company's
Thailand facility. This action has lowered the Company's fixed costs and
provided a faster response to customer changes through improvement in
manufacturing cycle time. The Company's tape head operations remain in the
Philippines.
The following table reflects the total restructuring charge in fiscal 2000
(amount in thousands):
<TABLE>
<CAPTION>
FACILITIES AND LEASE
EQUIPMENT SEVERANCE COMMITMENTS OTHER TOTAL
-------------- --------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Restructuring charge............... $ 113,567 $ 8,511 $ 7,055 $ 986 $ 130,119
Write-off and write-downs.......... (106,481) -- -- (120) (106,601)
Cash charges/adjustments........... (950) (6,185) (7,055) 737 (13,453)
Change in estimate................. (6,136) (2,326) -- (864) (9,326)
--------- ------- ------- ----- ---------
Reserve balance, September 30,
2000............................. $ -- $ -- $ -- $ 739 $ 739
========= ======= ======= ===== =========
</TABLE>
Total restructuring charge of $120.8 million was comprised of $107.4
million for the write-off and disposition of equipment utilized in Japan and the
Philippines, $7.1 million for future lease commitments in Japan, $6.2 million
severance in Japan and the Philippines, and $0.1 million for other expenses
associated with the restructuring in Japan and the Philippines. The fair value
of the assets written down was determined based upon salvage value, as no
further uses were identified. Approximately 3,700 employees and 100 contractors
were terminated. Of the 3,800 terminations, approximately 200 and 3,400 were
engaged in manufacturing activities in Japan and the Philippines, respectively.
The net effect, after minority interest, for the total restructuring charge is
$88.6 million, of which $32.2 million is related to the dissolution of RRSMI.
The Company anticipates the fiscal year 2000 restructuring effort will be
completed by the end of the first quarter of fiscal 2001.
FISCAL YEAR 1999
During the quarter ended June 30, 1999, the Company incurred restructuring
costs of $37.7 million primarily associated with downsizing the Company's
workforce and capacities to reflect industry conditions. The charges included 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,
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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.
During the first half of fiscal 2000, the Company revised its estimate of
costs required to fully implement the restructuring plan. Based on actual lease
commitment charges incurred through December 31, 1999, the Company estimated
future costs for lease commitments would be more than previously estimated and
other expenses related to the restructuring plan would be less than the previous
estimate. Accordingly, the Company reallocated amounts between these two
categories. As of June 30, 2000, all of the Company's restructuring activities
relating to the fiscal 1999 restructuring had been completed.
The following table reflects the 1999 restructuring charge (amount in
thousands):
<TABLE>
<CAPTION>
FACILITIES AND LEASE
EQUIPMENT SEVERANCE COMMITMENTS OTHER TOTAL
-------------- --------- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Restructuring charge................ $ 29,732 $ 4,451 $ 3,104 $ 398 $ 37,685
Write-off and write-downs........... (29,732) -- -- -- (29,732)
Cash charges........................ -- (4,451) (3,013) (52) (7,516)
-------- ------- ------- ----- --------
Balance, September 30, 1999......... -- -- 91 346 437
Change in reserve estimate.......... -- -- 331 (331) --
Cash charges........................ -- -- (422) (15) (437)
-------- ------- ------- ----- --------
Balance, December 31, 1999.......... $ -- $ -- $ -- $ -- $ --
======== ======= ======= ===== ========
</TABLE>
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, Read-Rite SMI ("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 payments to terminated
employees ($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.
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
46
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
through September 30, 1998, the Company estimated 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:
<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 --
-------- ------- ------- ------- --------
Balances as of September 30, 1998.... $ -- $ -- $ 730 $ 2,496 $ 3,226
Cash Charges......................... -- -- (730) (2,496) (3,226)
-------- ------- ------- ------- --------
Balances as of September 30, 1999.... $ -- $ -- $ -- $ -- $ --
======== ======= ======= ======= ========
</TABLE>
NOTE 10. SPECIAL CHARGES
In fiscal 2000, the Company wrote off $8.1 million of excess or obsolete
inventories as part of the closure of the Company's wafer fab in Japan and the
closure of head stack assembly operations in the Philippines and the relocation
of those operations to Thailand.
NOTE 11. LITIGATION
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 to January
22, 1996, defendants made false and misleading statements concerning the
Company's business condition and prospects. The plaintiffs in the Ferrari State
Action seek damages of an unspecified amount. By Order dated May 16, 1997, the
court sustained the demurrer of certain defendants to the entire complaint, and
sustained the demurrer of the remaining defendants to certain causes of action.
The remaining cause of action in the Ferrari State Action alleges violation of
the California Corporations Code. On July 7, 1997, the remaining defendants
answered the complaint. On November 14, 2000, defendants filed a motion for
judgment on the pleadings seeking to use the federal action's final judgment
(see below) to extinguish the state claims under the doctrine of res judicata. A
hearing on the motion is scheduled for January 22, 2001.
On January 16, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by Ferrari
and Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendants made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains similar
factual allegations as the Ferrari State Action, and alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5. The plaintiffs in the Ferrari Federal Action ("Ferrari Plaintiffs") also
seek damages of an unspecified amount.
On May 19, 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by James C. Nevius
and William Molair against the Company and certain of its officers and directors
(the "Nevius Federal Action"). The Nevius Federal Action alleges that defendants
made false and misleading statements about the Company's business condition and
prospects during a purported class period of March 2 to June 19, 1996, and
alleges violations of Sections 10(b) and 20(a) of the
47
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the Nevius
Federal Action ("Nevius Plaintiffs") seek damages of an unspecified amount.
On December 22, 1997, the Court consolidated the Ferrari Federal Action and
the Nevius Federal Action (the "Consolidated Federal Action"). On March 2, 2000,
the court dismissed the Ferrari Plaintiffs' claims without leave to amend, and
dismissed the Nevius Plaintiffs' claims with leave to amend. On October 13,
2000, the court ordered that the Ferrari Plaintiffs' and Nevius Plaintiffs'
complaint be dismissed without leave to amend and that the action be dismissed
with prejudice. The Nevius Plaintiffs and Ferrari Plaintiffs filed notices of
appeal on October 27, 2000 and November 9, 2000, respectively.
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. The Company believes that
the final disposition of the claims set forth in these actions will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
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 12. 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>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Maxtor...................................................... 40% 37% 49%
Western Digital............................................. 20% 32% 25%
Samsung..................................................... 19% 19% 15%
Quantum..................................................... 12% -- 3%
All Others.................................................. 9% 12% 8%
--- --- ---
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.
NOTE 13. 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 three
operating segments, hard disk drive (HGA/HSA), tape drives and fiber optics. The
Company designs, develops, manufactures and markets head gimbal assemblies,
headstack assemblies and tape heads for the hard disk drive and tape drive
markets. The Company also designs and manufactures high performance optical
components. The Chief Executive Officer has been identified as the Chief
Operating Decision Maker as defined by SFAS 131.
48
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
HGA/HSA............................................ $532,284 $698,488 $792,590
Other.............................................. 23,576 17,972 16,032
-------- -------- --------
Total net sales.......................... $555,860 $716,460 $808,622
======== ======== ========
</TABLE>
Loss from unaffiliated customers by operating segments was as follows
(amount in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
HGA/HSA......................................... $(120,832) $(146,249) $(311,511)
Other........................................... (3,997) (9,466) (8,236)
--------- --------- ---------
Total net income...................... $(124,829) $(155,715) $(319,747)
========= ========= =========
</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
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Singapore.......................................... $163,916 $312,764 $375,625
Malaysia........................................... 74,015 182,230 282,789
Korea.............................................. 95,355 129,074 119,257
Hong Kong.......................................... 85,937 27,066 1,215
Others............................................. 136,637 65,326 29,736
-------- -------- --------
Total net sales.......................... $555,860 $716,460 $808,622
======== ======== ========
</TABLE>
Net long-lived assets by geographic region were as follows (amount in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
United States...................................... $144,125 $183,136 $233,628
Thailand........................................... 122,107 126,458 176,530
Philippines........................................ 18,578 83,763 94,334
Japan.............................................. 136 63,370 68,324
Others............................................. 107 462 817
-------- -------- --------
Total long-lived assets.................. $285,053 $457,189 $573,633
======== ======== ========
</TABLE>
49
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. 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>
2000(1)(2)(3)
Net sales....................................... $114,492 $154,487 $140,904 $145,977
Gross margin (loss)............................. $(31,127) $(22,431) $(15,679) $ 8,183
Net income (loss)............................... $(57,475) $ 25,708 $(50,512) $(42,549)
Basic net income (loss) per share............... $ (1.15) $ 0.51 $ (0.88) $ (0.66)
Diluted net income (loss) per share............. $ (1.15) $ 0.51 $ (0.88) $ (0.66)
1999(4)
Net sales....................................... $230,188 $206,187 $174,766 $105,319
Gross margin (loss)............................. $ 34,861 $ 11,255 $(18,655) $(50,726)
Net income (loss)............................... $ 1,122 $(19,418) $(57,295) $(80,124)
Basic net income (loss) per share............... $ 0.02 $ (0.39) $ (1.16) $ (1.62)
Diluted net income (loss) per share............. $ 0.02 $ (0.39) $ (1.16) $ (1.62)
</TABLE>
---------------
(1) The second quarter 2000 results include an extraordinary gain of
approximately $158.7 million. Also, the second quarter results include a
restructuring charge of approximately $122.1 million, primarily for the
write-down of equipment and severance payments associated with the closure
of the Company's joint venture wafer fab in Japan and the closure of its
head stack assembly operation in the Philippines. In addition, the second
quarter results include a special charge of approximately $4.2 million of
excess and obsolete inventories as part of the above closures. See Note 4
and Note 9.
(2) The third quarter 2000 results include a restructuring charge of
approximately $8.0 million, primarily for the write-down of equipment and
severance payments associated with the closure of the Company's joint
venture wafer fab in Japan and the closure of its head stack assembly
operation in the Philippines. In addition, the third quarter results include
a special charge of approximately $3.9 million of excess and obsolete
inventories as part of the above closures.
(3) The fourth quarter 2000 results include debt conversion expenses of
approximately $29.3 million, as a result of the exchange offer of the
Company's outstanding 6.5% convertible notes for new 10% convertible notes,
partially offset by a reversal of excess restructuring charges of
approximately $9.3 million, primarily for the change in estimate of the cost
for the write-down of equipment and severance payments associated with the
closure of the Company's joint venture wafer fab in Japan and the closure of
its head stack assembly operation in the Philippines.
(4) The third quarter 1999 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 9.
NOTE 15. SUBSEQUENT EVENTS
In October 2000, the Company completed the automatic conversion of all
remaining 10% subordinated convertible notes to common stock. As of September
30, 2000, approximately $187.5 million of the Company's 10% convertible
subordinated notes were outstanding. The automatic conversion called for the
face value of the notes to be converted to common stock at $4.51 per share, and
it also included a "make whole" provision that guaranteed interest for a minimum
of two years, which was also paid in stock. The fair value of the make whole
interest paid to noteholders was approximately $29.3 million. Approximately 45.3
million shares of common stock were issued in October 2000 to complete the
conversion.
50
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 2000, Scion Photonics, Inc., a subsidiary of the Company,
received a $25 million cash investment from Tyco Ventures, a subsidiary of Tyco
International Ltd., and Integral Partners, in exchange for approximately 20% of
the outstanding stock of Scion Photonics, Inc. These funds are restricted for
the operations and capital requirements of Scion Photonics, Inc.
In November 2000, the Company received a cash investment of $18.9 million
in a private placement of approximately 2.7 million shares of common stock to
the State of Wisconsin Investment Board.
In December 2000, the Company repaid the remaining $28.8 million under the
secured term loan. As disclosed in Note 4, the Company was not in compliance
with certain financial covenants required by the credit facility.
NOTE 16. PRO FORMA SUBSEQUENT EVENT INFORMATION (UNAUDITED)
The unaudited pro forma balance sheet information is presented as if the
following subsequent events had taken place on September 30, 2000:
- The October 2000 automatic conversion of the $187.5 million of the
Company's 10% convertible subordinated notes to common stock and the
related payment of approximately $31.1 million of interest in common
stock,
- The November 2000 private placement of common stock for $18.9 million,
and
- The October and December 2000 repayments of the remaining balance of
$28.8 million under the secured term loan.
51
<PAGE> 54
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, 2000 and 1999, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended September 30, 2000. 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 in the United States. 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, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with generally accepted
accounting principles in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
October 30, 2000, except for Note 15,
as to which the date is December 1, 2000
52
<PAGE> 55
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 20, 2001 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.
53
<PAGE> 56
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, 2000 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
The following schedule is filed as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because 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
The following schedule is filed as part of this Form 10-K or incorporated
by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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
</TABLE>
54
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.13(1) Distribution Agreement between Read-Rite SMI and the Company
dated July 18, 1991
10.14(7) First Addendum dated as of December 14, 1993 to the License
and Distribution Agreements between the Company and
Read-Rite SMI (See Exhibits 10.13, 10.14 and 10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI
and Sumitomo dated July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and
between Company and Sunward Technologies, Inc.
10.18(1)(4)+ Asset Purchase Agreement between Conner Peripherals, Inc.,
Conner Peripherals Malaysia, Sdn Bhd and the Company, dated
as of August 30, 1991, as amended October 26, 1991
(Confidential treatment granted as to certain portions of
this exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of
November 14, 1991, by and among the Company, Read-Rite
International, Maxtor Singapore Limited and Maxtor
Corporation, as amended December 20, 1991
10.20(1) License Agreement between International Business Machines
Corporation and the Company dated as of October 1, 1986
10.21(6)+ License Agreement dated September 14, 1993 between the
Company and Kyushu Matsushita Electric Co., Ltd.
(Confidential treatment granted 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
</TABLE>
55
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.41(23)* 1995 Stock Option Plan (as amended and restated July 1,
1998) and form of Stock Option Agreement
10.42(15)* Years of Service Plan
10.44(17) Amendment to Lease of the Land dated April 25, 1996 between
Sumitomo Bank Leasing and Finance, Inc., as landlord, and
the Company, as tenant, together with a Deed of Trust,
Financing Statement, Security Agreement and Fixture Filing
with Assignment of Rents and Leases, dated October 15, 1996
10.47(18)* Executive Quarterly Variable Compensation Plan
10.48(18)* Read-Rite Corporation Super Bonus Plan
10.49(19)* Severance Plans
10.50(19)* Fourth and Fifth Amendments to Read-Rite Corporation's
401(k) Plan
10.51(19) Amended and Restated License Agreement Between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.52(19) Second Addendum to Joint Venture Agreement between Read-Rite
Corporation and Sumitomo Metal Industries, Ltd.
10.53(20)** License Agreement, date as of January 1, 1997, between the
Read-Rite Corporation and International Business Machines
Corporation
10.54(21) Revolving Loan and Term Loan Agreement between Read-Rite
Corporation as Borrower and Financial Institutions as Banks
and Canadian Imperial Bank of Commerce as Agent, dated
October 2, 1997
10.55(22) First Amendment, dated February 5, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.56(23) Second Amendment, dated August 10, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.57(23)* 1998 Stock Plan and form of Stock Option Agreement
10.58(23)* Sixth Amendment to Read-Rite Corporation's 401(k) Plan
10.59(24) 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(24) 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
10.61(25) Fifth Amendment, dated January 28, 2000, 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
10.62(26) Sixth Amendment, dated May 25, 2000, 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
10.63(26) Seventh Amendment, dated July 26, 2000, 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
10.64(26) Eighth Amendment, dated September 15, 2000, 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
</TABLE>
56
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
+ Confidential treatment granted for certain portions of this exhibit.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33 42570), effective October 17, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991.
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated January 10, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company's Registration Statement on Form
S-8 dated April 25, 1996.
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
57
<PAGE> 60
(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.
(24) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1999.
(25) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1999.
(26) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2000.
(27) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 2000.
(a) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1999.
(b) Exhibits
See subsection (a)(3) above.
(c) Financial Statement Schedules
See subsection (a)(2) above.
58
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 28, 2000
Read-Rite Corporation
By: /s/ ALAN S. LOWE
------------------------------------
Alan S. Lowe
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Alan S. Lowe 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
--------- ----- ----
<C> <C> <S>
/s/ ALAN S. LOWE President and December 20, 2000
----------------------------------------------------- Chief Executive Officer
Alan S. Lowe (Principal Executive
Officer)
/s/ JOHN T. KURTZWEIL Sr. Vice President and December 20, 2000
----------------------------------------------------- Chief Financial Officer
John T. Kurtzweil (Principal Financial and
Accounting Officer)
/s/ CYRIL J. YANSOUNI Director December 20, 2000
-----------------------------------------------------
Cyril J. Yansouni
/s/ WILLIAM J. ALMON Director December 20, 2000
-----------------------------------------------------
William J. Almon
/s/ MICHAEL L. HACKWORTH Director December 20, 2000
-----------------------------------------------------
Michael L. Hackworth
/s/ MATTHEW J. O'ROURKE Director December 20, 2000
-----------------------------------------------------
Matthew J. O'Rourke
/s/ DR. ROBERT M. WHITE Director December 20, 2000
-----------------------------------------------------
Dr. Robert M. White
</TABLE>
59
<PAGE> 62
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH AND UNCOLLECTABLE
BALANCE AT CHARGED 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, 2000
Allowance for doubtful
accounts...................... $ 2,594 $(691) $ -- $ 77 $1,826
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
</TABLE>
---------------
(1) Reclassified to other liabilities.
60
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.1(16) Restated Certificate of Incorporation, as amended
3.2(16) Bylaws, as amended
4.1(16) Article X of Restated Certificate of Incorporation (See
Exhibit 3.1)
4.2(1) Amended Registration Rights Agreement, dated as of June 27,
1991 and amended August 12, 1991
4.3(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement
10.2(6)* Amended and Restated 1987 Stock Option Plan and form of
Stock Option Agreement
10.3(23)* Amended and Restated 1991 Director Option Plan (as amended
and restated October 20, 1998) and form of Option Agreement
10.4(17)* Amended and Restated 401(k) Retirement Savings Plan and
Summary Plan Description
10.5(20)* Employee Stock Purchase Plan (as amended and restated July
22, 1997)
10.6(1)* Stock Option Agreement dated February 4, 1991 between the
Company and Cyril J. Yansouni, as amended May 16, 1991
10.8(1) Series CC Preferred Stock and Convertible Subordinated Note
Purchase Agreement between the Company and Sumitomo, dated
as of June 14, 1991
10.9(9) Joint Venture Agreement dated as of June 14, 1991 between
the Company and Sumitomo Metal Industries, Ltd. ("Sumitomo")
10.10(7) First Addendum dated as of December 14, 1993 to Joint
Venture Agreement dated as of June 14, 1991 between the
Company and Sumitomo (See Exhibit 10.11)
10.11(1) License Agreement between the Company and Read-Rite SMI
Corporation ("Read-Rite SMI") dated July 18, 1991
10.12(1) Distribution Agreement between the Company and Read-Rite SMI
dated July 18, 1991
10.13(1) Distribution Agreement between Read-Rite SMI and the Company
dated July 18, 1991
10.14(7) First Addendum dated as of December 14, 1993 to the License
and Distribution Agreements between the Company and
Read-Rite SMI (See Exhibits 10.13, 10.14 and 10.15)
10.15(1) Confidentiality Agreement between the Company, Read-Rite SMI
and Sumitomo dated July 18, 1991
10.16(5) Lease Agreement between Read-Rite SMI and Sumitomo
10.17(1) Termination Agreement, dated as of August 13, 1991 by and
between Company and Sunward Technologies, Inc.
10.18(1)(4)+ Asset Purchase Agreement between Conner Peripherals, Inc.,
Conner Peripherals Malaysia, Sdn Bhd and the Company, dated
as of August 30, 1991, as amended October 26, 1991
(Confidential treatment granted as to certain portions of
this exhibit)
10.19(2)(3) Agreement for Purchase and Sale of Assets, dated as of
November 14, 1991, by and among the Company, Read-Rite
International, Maxtor Singapore Limited and Maxtor
Corporation, as amended December 20, 1991
</TABLE>
61
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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 granted 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
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.54(21) Revolving Loan and Term Loan Agreement between Read-Rite
Corporation as Borrower and Financial Institutions as Banks
and Canadian Imperial Bank of Commerce as Agent, dated
October 2, 1997
10.55(22) First Amendment, dated February 5, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.56(23) Second Amendment, dated August 10, 1998, to Credit Agreement
between Read-Rite Corporation, the financial institutions
named therein, and Canadian Imperial Bank of Commerce as
agent and designated issuer, dated October 2, 1997
10.57(23)* 1998 Stock Plan and form of Stock Option Agreement
10.58(23)* Sixth Amendment to Read-Rite Corporation's 401(k) Plan
10.59(24) 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(24) 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
10.61(25) Fifth Amendment, dated January 28, 2000, 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
10.62(26) Sixth Amendment, dated May 25, 2000, 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
10.63(26) Seventh Amendment, dated July 26, 2000, 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
10.64(26) Eighth Amendment, dated September 15, 2000, 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.
+ Confidential treatment granted for certain portions of this exhibit.
(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.
63
<PAGE> 66
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1992.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-53900), effective November 17, 1992.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1993.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal quarter ended September 30, 1994.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1995.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996.
(15) Incorporated by reference from the Company's Registration Statement on Form
S-8 dated April 25, 1996.
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
(18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1996.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1997.
(22) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997.
(23) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998.
(24) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1999.
(25) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1999.
(26) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2000.
(27) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 2000.
64
