<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission file number: 0-19512
_______________
READ-RITE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2770690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Los Coches Street, Milpitas, California 95035
(Address of principal executive office) (Zip code)
(408) 262-6700
(Registrant's telephone number, including area code)
_______________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
On August 6, 2000, 61,957,208 shares of the registrant's common stock were
issued and outstanding.
================================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -- Three Months and Nine Months
Ended June 30, 2000 and 1999....................................................................... 3
Consolidated Condensed Balance Sheets -- June 30, 2000 and
September 30, 1999................................................................................. 4
Consolidated Condensed Statements of Cash Flows -- Nine Months Ended
June 30, 2000 and 1999............................................................................. 5
Notes to Consolidated Condensed Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 22
Item 4. Submission of Matters to a Vote of Stockholders...................................................... 22
Item 6. Exhibits and Reports on Form 8-K..................................................................... 23
Signature............................................................................................ 23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 140,904 $ 174,766 $ 409,883 $ 611,141
Cost of sales - on net sales 152,628 193,421 470,978 583,680
Cost of sales - special 3,955 -- 8,142 --
charges
------------- -------------- ------------- --------------
Gross margin (loss) (15,679) (18,655) (69,237) 27,461
Research & development 14,951 24,677 53,220 72,192
Selling, general & 5,289 7,045 18,980 21,838
administrative
Restructuring costs 8,033 37,685 130,119 37,685
------------- -------------- ------------- --------------
Total operating expenses 28,273 69,407 202,319 131,715
------------- -------------- ------------- --------------
Operating loss (43,952) (88,062) (271,556) (104,254)
Interest income (expense) (6,594) (5,905) (17,678) (20,819)
and other, net
------------- -------------- ------------- --------------
Loss before income taxes,
minority
interest and extraordinary (50,546) (93,967) (289,234) (125,073)
item
Provision (benefit) for -- (25,879) -- (25,970)
income taxes
Minority interest in net
loss of
consolidated subsidiary (34) (10,793) (48,234) (23,512)
------------- -------------- ------------- --------------
Loss before extraordinary (50,512) (57,295) (241,000) (75,591)
item
Extraordinary item - Gain on
debt conversion, net of no -- -- 158,720 --
taxes
------------- -------------- ------------- --------------
Net loss ($50,512) ($57,295) ($82,280) ($75,591)
============= ============== ============= ==============
Earnings (loss) per basic
and diluted share
before extraordinary item ($0.88) ($1.16) ($4.60) ($1.53)
Basic and diluted net loss
per share ($0.88) ($1.16) ($1.57) ($1.53)
============= ============== ============= ==============
Shares used in per share
computations:
Basic and diluted 57,081 49,540 52,326 49,245
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
3
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
2000 1999
---------- ----------
(Unaudited) (a)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 46,470 $ 80,547
Short-term investments................................................................... 34,078 145,856
Accounts receivable, net................................................................. 62,699 45,981
Inventories.............................................................................. 32,419 31,186
Prepaid expenses and other current assets................................................ 7,396 6,049
---------- ----------
Total current assets........................................................... 183,062 309,619
Property, plant and equipment............................................................ 1,236,866 1,236,880
Less: Accumulated depreciation........................................................... 936,819 779,691
---------- ----------
Property, plant and equipment, net..................................................... 300,047 457,189
Other assets............................................................................. 16,444 17,682
---------- ----------
TOTAL ASSETS................................................................... $ 499,553 $ 784,490
========== ==========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing..................................................................... $ -- $ 10,521
Accounts payable......................................................................... 68,906 71,397
Accrued compensation and benefits........................................................ 25,489 26,052
Other accrued liabilities................................................................ 38,529 34,909
Accrued restructuring charges............................................................ 12,669 437
Current portion of long-term debt and capital lease obligations.......................... 50,249 147,589
---------- ----------
Total current liabilities...................................................... 195,842 290,905
Convertible subordinated notes........................................................... 222,228 345,000
Other long-term debt and capital lease obligations....................................... 30,350 16,668
Other long-term liabilities.............................................................. 4,929 5,781
---------- ----------
Total liabilities.............................................................. 453,349 658,354
---------- ----------
Minority interest in consolidated subsidiary............................................. 11,997 41,927
Stockholders' equity:
Common stock, $0.0001 par value.......................................................... 5 5
Additional paid-in capital............................................................... 400,850 369,274
Accumulated deficit...................................................................... (366,587) (284,308)
Accumulated other comprehensive income (loss)............................................ (61) (762)
---------- ----------
Total stockholders' equity..................................................... 34,207 84,209
---------- ----------
TOTAL LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY.......................................... $ 499,553 $ 784,490
========== ==========
</TABLE>
__________
(a) The information in this column was derived from the Company's audited
consolidated balance sheet included on Form 10-K as of September 30, 1999.
See accompanying notes to the consolidated condensed financial statements.
4
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------------
2000 1999
<S>
--------- ----------- <C>
OPERATING ACTIVITIES
Net loss.............................................................................. $ (82,280) $ (75,591)
Adjustments required to reconcile net loss to cash provided
by (used in) operations:
Depreciation and amortization....................................................... 125,182 141,800
Extraordinary gain from debt conversion............................................. (158,720) --
Non-cash portion of restructuring and special charges............................... 118,829 29,732
Interest expense paid in common stock............................................... 9,033 --
Minority interest in net loss of consolidated subsidiary............................ (48,234) (23,512)
Changes in assets and liabilities:
Accounts receivable................................................................. (16,718) 30,439
Inventories......................................................................... (9,375) 10,253
Prepaid expenses and other current assets........................................... (1,347) 1,843
Accounts payable and accrued liabilities............................................ 15,460 (20,735)
Other assets and liabilities, net................................................... 40 2,160
--------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................. (48,130) 96,389
--------- -----------
INVESTING ACTIVITIES
Capital expenditures.................................................................. (76,428) (74,469)
Maturities of available-for-sale investments.......................................... 473,209 1,480,554
Purchase of available-for-sale investments............................................ (361,431) (1,545,912)
--------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................. 35,350 (139,827)
--------- -----------
FINANCING ACTIVITIES
Payment of other long-term debt and capital lease obligations......................... (103,658) (54,980)
Proceeds from long-term debt.......................................................... 74,177 122,000
Proceeds from short-term borrowing.................................................... 2,546 20,933
Proceeds from issuance of common stock................................................ 5,638 6,069
--------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................. (21,297) 94,022
--------- -----------
Net increase (decrease) in cash and cash equivalents.................................. (34,077) 50,584
Cash and cash equivalents at beginning of period...................................... 80,547 62,444
--------- -----------
Cash and cash equivalents at end of period............................................ $ 46,470 $ 113,028
========= ===========
Supplemental disclosures of non-cash activities:
Issuance of common stock under 401(k) plan.......................................... $ 495 $ 792
Conversion of debt to common stock.................................................. $ 21,371 $ --
Conversion of joint venture debt to minority interest............................... $ 18,304 $ 28,332
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General
Read-Rite Corporation ("Read-Rite" or the "Company") maintains a fifty-
two/fifty-three week fiscal year cycle ending on the Sunday closest to September
30. The third quarters of fiscal 2000 and 1999 ended on July 2, 2000, and June
30, 1999, respectively. To conform to the Company's fiscal year ends, the
Company must add a fifty-third week to every fifth or sixth fiscal year.
Accordingly, fiscal 2000 is a fifty-three week fiscal year and the additional
week is included in the quarter ended April 2, 2000. For convenience, the
accompanying financial statements have been shown as ending on the last day of
the calendar month.
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with principles generally accepted in the United
States for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by principles generally accepted in the
United States for annual financial statements. In the opinion of management, all
adjustments (including all normal recurring adjustments) considered necessary
for a fair presentation of the interim periods presented have been included.
The interim results are not necessarily indicative of the operating results
expected for the full fiscal year ending September 30, 2000. The accompanying
unaudited financial statements should be read in conjunction with the Company's
audited financial statements included in its 1999 Annual Report on Form 10-K.
The financial statements have been prepared on a going concern basis. The
Report of Independent Auditors on the Company's financial statements for the
year ended September 30, 1999 included in Form 10-K contained an explanatory
paragraph, which indicated substantial doubt about the Company's ability to
continue as a going concern. The Company has incurred operating losses and is
out of compliance with certain financial covenants of its secured credit
facility with its lenders. As of June 30, 2000, the outstanding balance of the
credit facility was $42.5 million, and is classified as a current liability. The
Company and the banks have agreed to waive compliance on certain financial
covenants through September 15, 2000. The Company is currently not in payment
default under this credit facility and has continued to pay all principal,
interest charges and other fees as they become due. However, there can be no
assurance that the Company will be able to obtain additional waivers extending
beyond September 15, 2000. The Company has signed a commitment letter for a
refinancing option and has begun the documentation process. There can be no
assurance the Company can obtain required financing on terms and conditions
acceptable or favorable to the Company. Failure to obtain additional financing
on terms and conditions acceptable to the Company may have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company will continue its efforts to align its cost structure and cash
flow in the near term.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999.
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. All registrants are expected to
apply the accounting and disclosures described in SAB 101. The Company is still
assessing the impact of SAB 101 on its consolidated results of operations,
financial position and cash flows. The Company is required to adopt SAB 101 in
the first quarter of fiscal 2001.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company is
still assessing the impact of FIN 44 on its consolidated results of operations,
financial position, and cash flows.
6
<PAGE>
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000 and will be adopted by the Company
for its fiscal year 2001. The Company is still assessing the impact of the
adoption of SFAS 133 on its financial statements and related results.
Note 2. Inventories
Inventories consisted of the following at (in thousands):
June 30, September 30,
2000 1999
------- -------
Raw material................ $ 3,574 $ 5,692
Work-in-process............. 26,755 19,624
Finished goods.............. 2,090 5,870
------- -------
Total inventories......... $32,419 $31,186
======= =======
Note 3. Net Income (Loss) Per Share
-----------------------------------
Basic income (loss) per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of employee stock options and incremental common shares
attributable to the assumed conversion of the Company's convertible subordinated
debentures, unless they are antidilutive.
For periods in which the Company had a net loss before extraordinary item, the
basic and diluted net loss per share is computed using only the weighted average
number of shares of common stock outstanding during the period.
As of June 30, 2000, incremental common shares attributable to the issuance of
384,597 shares under stock option plans and the assumed conversion of the
Company's convertible subordinated debentures of 45 million shares were not
included in the diluted earnings per share computation because the effect would
be antidilutive.
Note 4. Customer Concentration
The Company's four largest customers accounted for 89% of net sales during the
nine-month period ended June 30, 2000. Given the small number of disk drive and
tape drive manufacturers who require an independent source of recording head
supply, the Company will continue to be dependent upon a limited number of
customers. The loss of any large customer, or a significant decrease in sales
orders from one or more large customers, has had and could continue to have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Companies four largest customers are Maxtor, Quantum,
Samsung and Western Digital.
Note 5. Cost of Sales Special Charges
During the three- and nine-month periods ended June 30, 2000, the Company
wrote-off $4.0 million and $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 re-location of those
operations to Thailand. Factory efficiency improvements made the closure and
consolidation of the Company's wafer fab and assembly operations necessary to
align the Company's cost structure with current industry conditions.
Note 6. Restructuring Costs - Fiscal Year 2000
During the three- and nine-month periods ended June 30, 2000, the Company
incurred restructuring costs of $8.0 million and $130.1 million, respectively.
With continued productivity improvements and more efficient capacity utilization
at the Company's Fremont wafer fab, the Company's efforts to reduce fixed costs,
and to better focus its technical resources in one wafer fab location, the
Company will dissolve 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
7
<PAGE>
suppliers in that area. The transition to the Fremont wafer fab of the products
currently designed and manufactured in Japan should be completed by the fourth
quarter of the current fiscal year.
In addition, the Company has 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
provide a faster response to customer changes through improvement in
manufacturing cycle time. The Company's tape head operations remains 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>
Q2 Restructuring charge $ 113,567 $ 678 $ 7,055 $ 786 $ 122,086
Write-off and Write-downs (110,567) - - (120) (110,687)
---------------------------------------------------------------------------
Reserve balance as March 31, 2000 3,000 678 7,055 666 11,399
Q3 Restructuring charge - 7,833 - 200 8,033
Cash charges (111) (5,279) (779) (594) (6,763)
---------------------------------------------------------------------------
Reserve balance as of June 30, 2000 $ 2,889 $ 3,232 $ 6,276 $ 272 $ 12,669
---------------------------------------------------------------------------
</TABLE>
Total restructuring charge incurred was $130.1 million, of which $74.0 million
was related to the dissolution of the Company's joint venture with SMI in Japan.
The $74.0 million restructuring charge incurred by the dissolution was for the
write-off and disposition of equipment ($63.9 million), payments for future
lease commitments ($7.0 million), severance ($2.3 million) and other expenses
associated with the restructuring ($0.8 million). The fair value of the assets
written down was determined based upon salvage value, as no further uses were
identified. Approximately 3,710 employees and 120 contractors were terminated.
Of the 3,830 terminations, approximately 3,420 and 215 were engaged in
manufacturing activities in Japan and the Philippines.
Restructuring charges related to severance are taken during the period the
employees are notified, therefore, $8.0 million of severance related payments
were charged in Q3 of the current fiscal year. The net effect, after minority
interest, for the total restructuring charge is $93.1 million, of which $37.0
million is related to the dissolution of RRSMI.
The Company anticipates the fiscal year 2000 restructuring effort will be
substantially complete by the end of fiscal 2000 and will produce an estimated
annual cost savings of $60-80 million.
Note 7. Restructuring Costs - 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 include a
write-down of excess and obsolete equipment of $29.7 million due to the
transition to giant magnetoresistive ("GMR") technology, $4.5 million for
severance payments to terminated employees, $3.1 million for payment of lease
obligations and $0.4 million for other expenses associated with the
restructuring. The fair value of the assets written down was determined based
upon salvage value, as no further uses were identified. Approximately 1,600
employees and 900 contractors were terminated, of which approximately 1,300 and
800 were engaged in manufacturing activities in Thailand and the Philippines,
respectively.
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 estimates
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.
8
<PAGE>
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)
---------------------------------------------------------------------------
Reserve balances as of
September 30, 1999 - - 91 346 437
Change in reserve estimate - - 331 (331) -
Cash charges - - (422) (15) (437)
---------------------------------------------------------------------------
Reserve balances as of
March 31, 2000 $ - $ - $ - $ - $ -
---------------------------------------------------------------------------
</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.
Note 8. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of related tax, are as
follows (amount in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <S>
Net income (loss) $ (50,512) $ (57,295) $ (82,280) $ (75,591)
Change in unrealized gain/(loss) on
available-for-sale investments 427 37 701 (1)
------------------------ ------------------------
Comprehensive income/(loss) $ (50,085) $ (57,258) $ (81,579) $ (75,592)
======================== ========================
</TABLE>
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain on available-for-sale investments and the foreign currency translation
adjustments.
Note 9. Debt
The Company has a $42.5 million secured credit facility ("Credit Facility") with
a syndicate of financial institutions. At June 30, 2000, $32.5 million of the
term loan and $10.0 million revolving line of credit were outstanding. The term
loan provides for quarterly principal payments and this facility is secured by
the assets of the Company and 65% of the stock of the Company's international
9
<PAGE>
subsidiaries. Borrowings under the revolving credit facility are based upon
eligible receivable and cash balances of the Company. The credit facility
provides for interest payments that vary based on a Base Rate plus an applicable
margin. Additionally, the terms of the facility require the Company to maintain
certain financial ratios, observe a series of additional covenants, and prohibit
the Company from paying dividends without prior bank approval. The losses
incurred by the Company in 1999 and the cumulative losses for the first nine
months of fiscal year 2000 resulted in the Company not maintaining certain
financial covenants required by the credit facility. During the three months
ended June 30, 2000, the Company repaid $5.0 million on the revolver portion of
its credit facility, bringing the total repayment since Q3 of fiscal 1999 to
$98.7 million. In response to these repayments, in May 2000, the Company and
the banks agreed to a Waiver, Forbearance and Sixth Amendment to Credit
Facility, which terminated on July 26, 2000. Subsequent to the quarter ended
June 30, 2000, the Company and the banks agreed to a Waiver, Forbearance and
Seventh Amendment to Credit Facility, which terminates September 15, 2000.
Currently, the Company is not in payment default under this credit facility as
all interest charges and fees associated with this facility have been paid on
the scheduled due dates. However, as a result of the short-term nature of the
waiver/amendment to the bank facilities, the Company has classified this secured
credit facility as a current liability.
In February 2000, the Company filed a Registration Statement on Form S-4 to
offer to exchange $172.5 million of 10% convertible subordinated notes for its
outstanding $345 million of 6.5% convertible subordinated notes. The Company
also offered additional 10% subordinated convertible notes for cash. The
exchange offering was completed on March 15, 2000 and approximately $325.2
million in aggregate principal value of the Company's 6.5% convertible
subordinated notes, or approximately 94% of the total, were tendered in the
exchange offer for $162.6 million of the new 10% subordinated convertible notes.
In addition, the Company received approximately $54.2 million in cash from the
issuance of new 10% convertible subordinated notes. Interest on the 10%
subordinated convertible notes is payable in cash or, at the Company's option,
in common stock at a rate of 10% per year, payable on March 1 and September 1 of
each year until maturity on September 1, 2004. The new 10% convertible
subordinated notes are senior to the 6.5% convertible subordinated notes. As of
June 30, 2000, 3,768,148 shares of common stock had been issued upon conversion
of $30.4 million of the 10% convertible subordinated notes. This exchange offer
also gives the Company the option to automatically convert the 10% convertible
exchange notes on or prior to maturity if the common stock price has exceeded
200% of the conversion price of $4.51 for at least 20 trading days during a 30-
day trading period ending five trading days prior to the notice of automatic
conversion. By completing the exchange offer, long-term debt related to the
subordinated convertible notes was reduced by approximately $108.4 million. The
following table reflects the current year's activities for the 6.5% and 10%
convertible notes (amount in thousands):
<TABLE>
<CAPTION>
6.5% Convertible Notes 10% Convertible Notes Total
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of September 30, 1999 $ 345,000 $ - $ 345,000
Exchange of notes (325,198) 162,599 (162,599)
Cash offer & underwriter's shares - 61,198 61,198
Amount converted to equity during Q2 - (5,595) (5,595)
Amount converted to equity during Q3 - (15,776) (15,776)
-----------------------------------------------------------------------------
Balance as of June 30, 2000 $ 19,802 $ 202,426 $ 222,228
-----------------------------------------------------------------------------
</TABLE>
During the second quarter ended March 31, 2000, the Company completed a four-
year $20 million loan agreement with Industrial Finance Corporation of Thailand
("IFCT"). The Company received approximately $10.5 million during the quarter
ended June 30, 2000, bringing the total outstanding balance to $20 million.
The loan will mature on March 15, 2004 and has scheduled principal payments due
in installments beginning March 15, 2001 with interest payable every six months.
The interest rate is based on the London Interbank Offered Rate ("LIBOR") plus
an applicable margin. The loan is secured by various fixed assets of Read-Rite
(Thailand) Company Limited ("RRT") and a guarantee by Read-Rite Corporation.
Note 10. Segment Information
The Company has two operating segments, hard disk drive and tape head.
However, only the hard disk drive segment is a reportable segment under the
criteria of SFAS No. 131. The Company designs, develops, manufactures and
markets head gimbal assemblies, headstack assemblies, tape heads, and tape head
assemblies for the hard disk drive and tape drive markets. The CEO
10
<PAGE>
evaluates performance and allocates resources based on revenue and gross profit
from operations. Gross profit from operations is defined as revenue less cost of
sales. The Company does not evaluate or allocate assets or depreciation by
operating segment, nor does the CEO evaluate segments on these criteria. The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS 131.
Note 11. Legal Proceedings
On December 11, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 to January
22, 1996, defendants made false and misleading statements concerning the
Company's business condition and prospects. The plaintiffs in the Ferrari State
Action seek damages of an unspecified amount. By Order dated May 16, 1997, the
court sustained the demurrer of certain defendants to the entire complaint, and
sustained the demurrer of the remaining defendants to certain causes of action.
The remaining cause of action in the Ferrari State Action alleges violation of
the California Corporations Code. On July 7, 1997, the remaining defendants
answered the complaint.
On January 16, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by Ferrari
and Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). The complaint in the Ferrari Federal Action alleges
that during a purported class period of April 19, 1995 to January 22, 1996,
defendants made false and misleading statements concerning the Company's
business condition and prospects. The Ferrari Federal Action contains 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 May 8, 2000
the Nevius plaintiffs filed a Second Amended Complaint, and on May 31,
defendants moved to dismiss that complaint. That motion is scheduled to be
heard on September 18, 2000.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes that the Company and
the individual defendants have meritorious defenses in the above-described
actions. Accordingly, both on its own behalf and pursuant to indemnification
agreements between the Company and the named individual defendants, the Company
intends to continue to defend each of these actions vigorously. Failure by the
Company to obtain a favorable resolution of the claims set forth in any of these
actions could have a material adverse effect on the Company's business, results
of operations and financial condition. Currently, the amount of such material
adverse effect cannot be reasonably estimated.
Except as so noted, the Company is not a party, nor is its property subject,
to any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the
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Securities Exchange Act of 1934, as amended, and are subject to the "safe
harbor" created by those sections. These statements include, but are not limited
to, the Company's expectation that the trend towards fewer average head gimbal
assemblies ("HGA") per headstack assembly ("HSA") and competitive pricing
pressure will continue through fiscal 2000 and into fiscal 2001; the Company's
expectation that GMR products will account for a majority of net sales during
fiscal 2000; the Company's expectation that manufacturing cycle time will be
further reduced in fiscal 2000; the Company's expectation that it will achieve
and maintain acceptable yields on its GMR programs; the Company's expectation
that selling, general and administrative expenses will not increase
significantly in absolute dollars in the near term; the Company's plan to
acquire approximately $90 million in capital equipment during fiscal 2000,
including potential acquisition of certain assets through operating leases; the
Company's belief that with either renegotiation of its existing credit
facilities, negotiation of new credit facilities with other lenders, or issuance
of additional equity securities or other financial instruments will provide the
Company with sufficient funding for its operations for the next twelve months;
the Company's expectation that the 2000 restructuring will result in an annual
cost savings of $60-80 million; the Company plans to pursue opportunities to
continue to improve the efficiency of its operations, and the Company's belief
that the Company and the individual defendants in the purported class actions
(collectively, the "Actions") described in Part II, Item 1 "Legal Proceedings,"
have meritorious defenses in such Actions. Actual results for future periods
could differ materially from those projected in such forward-looking statements.
Some factors that could cause future actual results to materially differ from
the Company's recent results or those projected in the forward-looking
statements include, but are not limited to: failure by the Company to timely,
effectively and continuously execute on GMR product development; failure to
obtain necessary customer qualifications on new programs; failure to timely and
cost-effectively introduce those programs into manufacturing, and failure to
achieve and maintain acceptable production yields on those programs;
introduction of competitors' products more quickly or cost effectively than the
Company; constraints on supplies of raw materials or components limiting the
Company's ability to maintain or increase production; significant increases or
decreases in demand for the Company's products, cancellation or rescheduling of
customer orders, changes to the Company's product mix, and changes in business
conditions affecting the Company's financial position or results of operations
which significantly increase the Company's working capital needs; the Company's
inability to obtain or generate sufficient capital to fund its research and
development expenses and other working capital needs; the Company's ability to
obtain waivers or amendments to the bank covenants in its current credit
facilities or, if unsuccessful, the Company's ability to negotiate new credit
facilities with other lenders or issue additional equity securities or other
financial instruments; or failure by the Company to obtain favorable resolution
of the claims set forth in the Actions. For a more detailed discussion of
certain risks associated with the Company's business, see "Certain Additional
Business Risks." The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of such
statements.
Liquidity and Capital Resources
As of the end of Q3 fiscal 2000, the Company had cash and investments of $80.5
million, total assets of $499.6 million and total liabilities of $453.3 million.
For the nine months ended June 30, 2000, the Company used $48.1 million of
cash in operations. The negative cash flow from operating activities was
primarily attributed to a net loss from operations of $82.3 million, a non-cash
extraordinary gain on the conversion of the 6.5% subordinated notes of $158.7
million, minority interest in the net loss of consolidated subsidiary of $48.2
million, a net increase in accounts receivable of $16.7 million and a net
increase in inventory of $9.4 million, partially offset by depreciation and
amortization expenses of $125.2 million, non-cash portion of restructuring and
special charges of $118.9 million, and an increase in accounts payable and
accrued liabilities of $15.5 million.
In February 2000, the Company filed a Registration Statement on Form S-4 to
offer to exchange $172.5 million of 10% convertible subordinated notes for its
outstanding $345.0 million of 6.5% convertible subordinated notes. The Company
also offered additional 10% subordinated convertible notes for cash. The
exchange offering was completed on March 15, 2000. Approximately $325.2
million in aggregate principal value of the company's 6.5% convertible
subordinated notes due 2004, or approximately 94% of the total, were tendered in
the exchange offer. As the result of this debt conversion, the Company
recognized $158.7 million of extraordinary gain, net of no taxes, in the fiscal
quarter ended March 31, 2000.
In addition, the Company received approximately $54.2 million in cash from the
issuance of new 10% convertible subordinated notes to bondholders who
participated in the exchange. Interest on the 10% subordinated convertible
notes is payable in cash or, at the Company's option, in common stock, on March
1 and September 1 of each year until maturity on September 1, 2004. The exchange
offer gives the Company the option to automatically convert the exchange notes
on or prior to maturity if the common stock price has
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exceeded 200% of the conversion price of $4.51 for at least 20 trading days
during a 30-day trading period ending five trading days prior to the notice of
automatic conversion.
As of June 30, 2000, approximately $21.4 million of the 10% subordinated
convertible notes have converted to equity, approximately $202.4 million of the
10% convertible subordinated notes were outstanding and approximately $19.8
million of the 6.5% convertible subordinated notes were outstanding.
Accounts receivable, net increased by $16.7 million due to higher net sales
during the three months ended June 30, 2000, as compared to the three-month
period ended September 30, 1999. There was no significant change in days sales
outstanding, a financial ratio to measure accounts receivable turnover rate, in
Q2 fiscal 2000 as compared to Q4 fiscal 1999.
Net inventories, net of write-offs related to restructuring, increased by $9.4
million during the nine months ended June 30, 2000. The increase was primarily
due to higher manufacturing activity (work-in-process) to meet the demand of the
next generation GMR products. This increase was partially offset by reductions
in both raw materials and finished goods.
Accounts payable and accrued liabilities increased by $15.5 million during the
nine months ended June 30, 2000. The increase was mainly due to higher
production volume for the second half of the fiscal quarter ended June 30, 2000,
as compared to the comparable period in the fourth quarter of fiscal 1999 and an
increase in accrued interest on the outstanding bonds payable on September 1,
2000, as well as longer payment terms with vendors.
For the nine months ended June 30, 2000, the Company received $35.4 million in
net cash from its investing activities. The Company received $112 million in
cash from net sales of "available-for-sale" investments. The Company's
business is highly capital intensive. During the nine months ended June 30,
2000, the Company incurred capital expenditures of approximately $76.4 million.
Capital expenditures have primarily been made to upgrade and replace existing
equipment in Thailand and for wafer production in the United States to support
new manufacturing processes and new technologies. The Company's plan for
capital equipment purchases during fiscal 2000 is approximately $90 million.
However, to the extent yields for the Company's products are lower than
expected, demand for such products exceed Company expectations, or the Company's
manufacturing process requirements change significantly, such expenditures may
increase. Conversely, if demand is less than anticipated, or if the Company is
unable to obtain adequate financing for such capital equipment purchases, the
planned capital equipment purchases may decrease. As of June 30, 2000, total
commitments for construction or purchase of capital equipment were approximately
$20.4 million. The Company expects to fund such commitments from available cash
and cash equivalents, or other future financing activities.
Cash used in financing activities was $21.3 million for the nine months ended
June 30, 2000, of which payments on the revolving line of credit were $91.3
million, payments on the term loan were $10.0 million, and other payments on
debt were $2.1 million, partially offset by proceeds from the new 10%
convertible subordinated notes of $54.2 million, additional borrowings from
Industrial Finance Corporation of Thailand ("IFCT") of $20.0 million, proceeds
from short-term borrowings of $2.5 million, and issuance of common stock of $5.6
million. Additionally, $18.3 million of Read-Rite SMI ("RRSMI") debt was
converted to RRSMI equity by Sumitomo Metal, Incorporated ("SMI"), the minority
interest shareholder. This infusion had no impact on the ownership interest of
RRSMI, the joint venture between SMI and the Company.
At the end of the third quarter of fiscal 2000, the Company had a $42.5
million secured credit facility ("Credit Facility") with a syndicate of
financial institutions. At June 30, 2000, $32.5 million of the term loan and
$10.0 million revolving line of credit were outstanding. The term loan provides
for quarterly principal payments and the facility is secured by the assets of
the Company and 65% of the stock of the Company's international subsidiaries.
The credit facility provides for interest payments that vary based on Base Rate
plus an applicable margin. Additionally, the terms of the facility require the
Company to maintain certain financial ratios and observe a series of additional
covenants, and prohibit the Company from paying dividends without prior bank
approval. The losses incurred by the Company in 1999 and the first, second and
third quarters of fiscal year 2000 resulted in the Company not maintaining
certain financial covenants required by the credit facility. In May 2000, the
Company and the banks agreed to a Waiver, Forbearance and Sixth Amendment to
Credit Facility, which terminated July 26, 2000. Subsequent to quarter end, on
July 26, 2000, the Company and the banks agreed to a Waiver, Forbearance and
Seventh Amendment to Credit Facility, which terminates September 15, 2000.
Currently, the Company is not in payment default under this credit facility as
all interest charges and fees associated with this facility have been paid on
the scheduled due dates. However, there can be no assurance that the Company
will be able to obtain additional waivers extending beyond September 15, 2000.
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During the second quarter ended March 31, 2000, the Company completed a four-
year loan agreement for $20 million with Industrial Finance Corporation of
Thailand ("IFCT"). The Company has received the entire $20 million available
from the loan. The loan will mature on March 15, 2004 and has scheduled
principal payments due in installments beginning March 15, 2001 with interest
payable every six months. Interest rate is based on the London Interbank
Offered Rate ("LIBOR") plus an applicable margin. The loan is secured by
various fixed assets of Read-Rite ("Thailand") Company Limited ("RRT") and a
guarantee by Read-Rite Corporation.
The Company has signed a commitment letter for a $40 million secured credit
facility with a closing date anticipated this quarter. This credit facility will
be used to repay the existing secured creditors, and for additional operating
capital. There can be no assurance that the Company can complete the
negotiations and obtain required financing on terms and conditions acceptable or
favorable to the Company by the proposed due date, nor can the Company guarantee
that this date can be extended. Failure to obtain additional financing by the
due date and on terms and conditions acceptable to the Company may have a
material adverse effect on the Company's business, financial condition, and
results of operations.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The Credit Facility
currently prohibits payment of cash dividends.
Results of Operations
Net Sales
Net sales were $140.9 million and $409.9 million for the three- and nine-month
periods ended June 30, 2000, respectively, compared to net sales of $174.8
million and $611.1 million for the comparable periods in fiscal 1999. Net sales
for the current three-month period ended June 30, 2000 were lower due to the
Company's restructuring and utilization of third party HSA partners, lower unit
sales for head stack assemblies ("HSAs"), and competitive pricing pressure in
the hard disk drive and component industry.
The decrease in the Company's net sales for the first nine months of fiscal
2000 compared to the comparable period in fiscal 1999 was primarily attributable
to a substantial decrease in unit sales volume and average selling price
("ASPs") for HGAs and HSAs. Read-Rite shipped 17.8 million and 46.2 million
recording heads (including recording heads shipped in HSAs and Tape Heads), and
2.0 million and 8.7 million HSAs, for the three- and nine-month periods ended
June 30, 2000, respectively. In fiscal 1999, the Company shipped 16.1 million
and 58.1 million recording heads, and 4.0 million and 12.6 million HSAs, for the
three- and nine-month periods ended June 30, 1999, respectively. Unit shipments
for the three-month period ended June 30, 2000, increased primarily due to a
substantial increase in sales to Quantum as compared to the comparable period in
fiscal 1999. The decrease in unit shipments for the first nine months of fiscal
2000 compared to a comparable period in fiscal 1999 was the result of the
Company's limited participation on its customers' first generation GMR products
during the first quarter of fiscal 2000 and the overall reduction in the number
of heads per disk drive. HGA and HSA ASPs decreased for the first nine months
of fiscal 2000 due to competitive pricing pressure in the disk drive and
components industries and the trend towards fewer heads per disk drive. The
number of HGAs per HSA decreased in the current nine-month period compared to
the comparable nine-month period in fiscal 1999. The trend towards fewer HGAs
per HSA is the main reason for the decrease in HSA ASPs.
For the nine-month period ended June 30, 2000, a substantial majority of the
Company's net sales were derived from GMR products, which is consistent with the
Company's strategy to transition its production to GMR recording heads. After
being a limited participant of the first generation GMR products, the Company
continued a successful recovery in Q3 fiscal 2000 in obtaining customer
qualifications of the industry's next generation GMR products. Net sales
generated from GMR products increased to $346.9 million for the nine-month
period ended June 30, 2000, from net sales of $2.8 million for the comparable
period in fiscal 1999. The Company's largest volume GMR product platform for the
nine-month period ended June 30, 2000 consisted of recording heads for 10.2
Gigabyte ("GB") per 3.5-inch disk applications. This increase in net sales of
GMR products was more than offset, however, by the decrease in net sales of
Magnetoresistive ("MR") products. Demand for MR products reduced substantially
as the disk drive industry transitioned from MR technology to GMR technology.
Net sales generated from MR products decreased to $18.3 million for the nine-
month period ended June 30, 2000, from net sales of $562.0 million for the
comparable period in fiscal 1999.
The Company's product mix continued to shift from HSAs to HGAs, as net sales
of HSAs accounted for 42% and 62% of total net sales for the three and nine-
month periods ended June 30, 2000, respectively, compared to 88% and 81% of
total net sales for the
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comparable periods in fiscal 1999. Net sales of HGAs accounted for 51% and 31%
of total sales for the three- and nine-month periods ended June 30, 2000,
respectively, compared to 8% and 16% of total net sales for the comparable
periods in fiscal 1999. As discussed in the "Gross Margin" section, HGAs
typically have a higher gross margin, as a percentage of sales, than HSAs. The
Company expects this positive shift of product mix from HSAs to HGAs to continue
into the fourth quarter of fiscal 2000.
The Company's four largest customers, Maxtor, Quantum, Samsung and Western
Digital accounted for an aggregate of 89% of net sales for both the three- and
nine-month periods ended June 30, 2000, respectively, compared to 92% and 89% of
net sales for the comparable periods in fiscal 1999. For a discussion of
certain risks associated with the Company's business, see "Certain Additional
Business Risks."
Gross Margin
The Company's gross margin is primarily influenced by average unit sales
prices, the level of unit sales in relation to fixed costs, manufacturing
yields, product mix and material costs. The relative impact of each of these
factors fluctuates from time to time. HSAs typically have a lower gross margin,
as a percentage of sales, than HGAs. HSAs typically consist of one or more HGAs
and a variety of purchased components, which the Company assembles into a single
unit. The cost of the purchased components comprises a significant percentage
of the total cost of the HSA. The gross margin on such purchased components is
substantially lower than the gross margin on HGAs produced by the Company. The
combination of the respective gross margins on HGAs and non-HGA components and
associated labor and overhead included in HSAs typically produce a lower
aggregate gross margin, as a percentage of sales, on HSA net sales compared to
HGA net sales.
The Company's gross margin (loss) was (11.1%) and (16.9%) of net sales for the
three- and nine-month periods ended June 30, 2000, compared to gross margin of
(10.7%) and 4.5% of net sales, for the comparable periods in fiscal 1999. The
Company incurred special charges to cost of sales of $4.0 million and $8.1
million for the three- and nine-month periods ended June 30, 2000, respectively.
These special charges are related to the Company's effort to consolidate its
wafer fab and HSA operations. Without these special charges, the gross margin
(loss) would be (8.3%) and (14.9%) of net sales for the three- and nine-month
periods ended June 30, 2000. The decline in gross margin for the three- and
nine-month periods ended June 30, 2000 as compared to the comparable periods in
fiscal 1999 was attributable to lower unit sales, which resulted in the under
utilization of the Company's facilities and higher fixed costs per unit, and the
substantial decrease in ASPs for HGAs and HSAs. For further detail, see "Net
Sales" section of this report.
Operating Expenses
Research and development ("R&D") expenses were $15.0 million and $53.2 million
for the three- and nine-month periods ended June 30, 2000, respectively,
compared to R&D expenses of $24.7 million and $72.2 million for the comparable
period in fiscal 1999. The decrease in R&D expenses can be attributed to the
Company's continued cost containment efforts to align its cost structure with
current industry conditions and the improved operational efficiencies. With the
consolidation of the Company's wafer fab and R&D operations in Q3 of fiscal
2000, the Company expects the quarterly R&D expenses to continue approximately
at its present rate for the remainder of fiscal 2000.
From time to time, the Company has engaged in fully or partially funded R&D
for certain existing or potential customers. R&D funding under such projects is
offset as expenses are incurred. During the nine-month period ended June 30,
2000, no development funding was offset against R&D expenses, compared to funded
R&D of $2.8 million for the comparable period in fiscal 1999.
Selling, general & administrative ("SG&A") expenses were $5.3 million and
$19.0 million for the three- and nine-month periods ended June 30, 2000,
respectively, a decrease from SG&A expenses of $7.0 million and $21.8 million
for the comparable periods in fiscal 1999. The decreases in SG&A expenses can be
attributed to the reduction in the Company's worldwide headcount in the third
quarter of fiscal 2000, a reversal of an accrued liability for potential
Micropolis bankruptcy claims and continued cost containment efforts. The
Company plans to continue its SG&A cost containment efforts.
Restructuring Costs
During the three- and nine-month periods ended June 30, 2000, the Company
incurred restructuring costs of $8.0 million and $130.1 million, respectively.
With continued productivity improvements and more efficient capacity utilization
at the Company's
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Fremont wafer fab, the Company's efforts to reduce fixed costs, and to better
focus its technical resources in one wafer fab location, the Company will
dissolve its joint venture, Read-Rite SMI ("RRSMI"), with Sumitomo Metals
Industries, Ltd. ("SMI") in Japan. The Company will establish 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 currently designed and manufactured in Japan is expected to be
completed by the fourth quarter of the current fiscal year.
In addition, the Company has closed its Philippine head stack operations,
bringing all head gimbal assembly and head stack operations into the Company's
Thailand facility. These actions are expected to lower the Company's fixed
costs and provide a faster response to customer changes through improvement in
manufacturing cycle time. The Company's tape head operations will remain in the
Philippines.
In the three-month period ended June 30, 2000, the Company incurred
restructuring costs of $8.0 million which were primarily for severance payments
to terminated employees who were notified in Q3. For the second quarter of
fiscal 2000, the total restructuring costs of $122.1 million included the write-
down of excess and obsolete equipment of $113.5 million, of which $3.0 million
of cash charges are related to the equipment disposal and restoration of
facilities to its original state, $0.7 million are for severance payments to
terminated employees, $7.1 million are for the payment of lease obligations and
$1.0 million are 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 3,710 employees and 120 contractors
were terminated. Of the 3,830 terminations, approximately 3,420 and 215 were
engaged in manufacturing activities in Japan and the Philippines, respectively.
Total restructuring charge incurred in the first nine months of fiscal 2000
was $130.1 million, of which $74.0 million was related to the dissolution of the
Company's joint venture with SMI in Japan. The net effect, after minority
interest, for the total restructuring charge is $93.1 million, of which $37.0
million is related to the dissolution of RRSMI.
The Company anticipates the fiscal year 2000 restructuring effort will be
substantially complete by the end of fiscal 2000 and will produce an estimated
annual cost savings of $60-80 million.
Non-Operating Expenses
Interest expense was $8.6 million and $25.2 million for the three- and nine-
month periods ended June 30, 2000, respectively, an increase over interest
expense of $8.0 million and $22.3 million for the comparable periods in fiscal
1999. The increase in interest expense for the current periods was mainly due to
higher interest rate on outstanding debts.
Interest income and other, net was $2.0 million and $7.5 million for the
three- and nine-month periods ended June 30, 2000, compared to $2.1 million and
$1.4 million for the comparable periods in fiscal 1999. The increases in
interest income and other, net for the nine-month period ended June 30, 2000
were primarily due to the gain on sale of an option on certain real estate and
the gain on the sale of certain real estate in the U.S. The increases were also
due to the lower foreign currency exchange loss incurred in the three- and nine-
month periods ended June 30, 2000, compared to the comparable periods in fiscal
1999.
The Company did not provide for an income tax benefit during the three- and
nine-month period ended June 30, 2000, compared to a tax benefit of $25.9
million for the comparable periods in fiscal 1999. A tax benefit was not
recorded for the current period primarily due to losses in the U.S. and foreign
jurisdictions for which no current benefit is available.
Certain Additional Business Risks
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Restructuring of Bank Facility
We are not in compliance with a number of financial covenants under our bank
facility. Our failure to comply with covenants under our bank facility has
forced us to seek to obtain short-term waivers to the bank facility, the most
recent waiver extending to September 15, 2000. We may not be able to
successfully restructure our bank facility or obtain new financing to replace
the current
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bank facility. If we are unable to sell portions of our existing assets, or sell
additional securities or enter into a new bank facility, we will not be able to
refinance the bank facility. We have currently signed a letter of intent with an
asset-based lender to obtain new financing to replace the current bank facility
and are currently proceeding with documentation. However, we can not guarantee
that we will be able to complete the asset-backed facility on acceptable terms
or at all or that we will be able to secure additional waivers on the current
bank facility beyond September 15, 2000. If our plan to restructure or replace
our existing bank facility fails, we will not be able to successfully implement
our business and financial strategy necessary to return us to profitable
operations.
Fluctuations in Operating Results
The Company has experienced substantial fluctuations in its quarterly and
annual operating results in the past, and the Company's future operating results
could vary substantially from quarter to quarter. The Company's operating
results for a particular quarter or longer periods can be materially and
adversely affected by numerous factors, such as increased competition or
execution issues leading to a failure by the Company to obtain "design-in wins"
on one or more customer programs; delayed product introductions or capacity
constraints on certain technologies; decreased demand for or decreased average
selling prices of the Company's products; low product manufacturing yields;
changes in product mix and increased operating costs associated with the ramp up
of production as capacity is added, under-utilization of capacity if demand is
less than anticipated, increased material costs, or material or equipment
unavailability; disruptions in foreign operations; and vertical integration for
one of the Company's key customers, which resulted in reduction in demand for
the Company's products. In addition, 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 and in fiscal 1998, 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, gross margin, and incurred
significant losses.
Rapid Technological Change
Technology changes rapidly in the Company's industry. These rapid changes
require the Company to both address obsolescence of old technologies and
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, in the third quarter of fiscal 1999, the
Company incurred a restructuring charge of $37.7 million for the write-off of
equipment associated with the Company's transition to GMR technology and a
decrease in customer demand.
For the Company to maintain its market position, the Company must continually,
and in a timely manner, improve its wafer fabrication, slider fabrication, HGA
and HSA technologies and facilities to meet industry demands, at competitive
costs. As the Company's customers continue to move towards larger programs, and
as competition for this limited number of large volume programs continues to
increase, the failure by the Company to execute on technologies necessary to
consistently obtain qualification on any of such volume programs will have a
material adverse effect on the Company's business, financial condition and
results of operations.
During fiscal 2000, the Company intends to continue investing significant
resources in GMR product development and manufacturing equipment, as evidenced
by the Company's data storage demonstration in April 2000 of GMR heads at an
areal density of 50.2 gigabits per square inch, or over 70 gigabits per 3.5-inch
disk. The Company expects to incorporate this advanced technology into volume
production in fiscal year 2002. The Company anticipates the majority of its
sales for fiscal 2000 and 2001 will be derived from sales of GMR products.
There can be no assurance, however, that the Company will be successful in
timely and cost effectively developing and manufacturing GMR heads at acceptable
manufacturing yields necessary to achieve consistent design-in wins on its
customers' new product programs.
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 during the
latter half of fiscal
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1999, when the industry made a faster transition to GMR than anticipated and the
Company had limited participation on its customers' first generation GMR
products. The result of these variations had a materially adverse effect on the
Company's business, financial condition and results of operations.
The Company's four largest customers, Maxtor, Quantum, Samsung and Western
Digital, accounted for an aggregate of 89% of net sales during the nine-month
period ended June 30, 2000, during which the Company shipped HGAs in volume for
four customers, HSAs in volume for four customers and tape head products in
volume for four customers. Given the small number of disk drive and tape drive
manufacturers who require an independent source of HGA, HSA or tape head supply,
the Company will continue to be dependent upon a limited number of customers.
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, as demonstrated by the
significant reduction in the level of the Company's business in the latter half
of fiscal 1999 and in fiscal 1998.
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. Vertical integration by the Company's customers, through
which a customer acquires or increases internal HGA or HSA production
capability, could also materially and adversely affect the Company's business,
financial condition and results of operations
Finally, in January 2000, Western Digital Corporation ("WD") announced its
exit from the enterprise hard disk drive business. This decision will have
minimal effect on the Company's net sales to WD, as the Company's net sales to
WD's enterprise division is less than 5% of the Company's total net sales to WD.
Other acquisitions or significant transactions by the Company's customers
leading to further consolidation, vertical integration or other material
agreements could result in a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The disk drive industry is intensely competitive, both at the drive level and
the component level, and is characterized by short product life cycles and
substantial price declines over the life of a product. Accordingly, the Company
believes that the most important competitive factors in its industry are timely
delivery of new technologies and pricing for products incorporating such
technology. Other significant factors are customer support, product quality, and
the ability to reach volume production rapidly and at an acceptable yield rates.
Failure to execute with respect to any of these factors would likely have a
material adverse effect on the Company's net sales and gross margin.
Japanese competitors such as TDK and Alps have been aggressively competing for
business in the United States and in Japan, specifically targeting the market
for GMR. In November 1999, Yamaha announced its exit from the HDD recording
head market effective in March 2000. On January 7, 2000, Applied Magnetics
Corporation filed for protection under Chapter 11 of the Bankruptcy Code and
effectively ceased operations. In April 2000, SAE announced the acquisition of
Headway Technologies. With these recent events, IBM is now the Company's sole
domestic competitor. Fujitsu, Hitachi, IBM, Seagate and other disk drive
manufactures with "captive" or internal recording head manufacturing capability
generally have significantly greater financial, technical and marketing
resources than the Company, and have made or may make their products available
in the merchant market. The Company's competitive position could be materially
and adversely affected if one or more of these competitors are successful in
marketing GMR products in the merchant market in volume quantities at
competitive pricing.
In its HSA business, the Company must compete against merchant HSA
manufacturer such as TDK/SAE in China, and must also maintain a competitive cost
structure as compared to manufacturers such as Kaifa in China and Tandon in
India. There may also be certain government incentives in their respective
countries that could reduce their operating costs, which could lead these
competitors to continue to decrease HSA selling prices. Further, the HSA
business is less capital intensive than the thin film HGA business; entry into
the HSA manufacturing business thus requires less capital than entry into the
HGA business. Accordingly, there can be no assurance that the Company will be
able to compete successfully with its customers' own HSA capacity, or with
existing or new HSA manufacturers.
Finally, the development and advancement of technologies such as spin
dependant tunneling will continue to be demanded by customers during fiscal 2000
and beyond. Additionally, other manufacturers may already have or may develop
more advanced GMR technology or GMR production capability than the Company.
Also, certain companies are developing alternative data storage technologies
such as solid-state (flash or ferroelectric) memory or optical disk drive
technologies that do not utilize the Company's
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products. The Company's competitive position will likely be materially and
adversely affected if a competitor precedes the Company in the successful
introduction of improved or new technologies or products.
Substantial Capital Expenditures and Working Capital Needs
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed
significant production capacity to support new technologies and increased demand
for its products. The Company made capital expenditures in fiscal 1999 of $101.0
million, and plans to spend approximately $90 million in fiscal 2000, and may
acquire certain of those capital assets through capital or operating leases. As
of June 30, 2000, total commitments for construction or purchase of capital
equipment were approximately $20.4 million. There can be no assurance that the
Company's net sales will increase sufficiently to absorb such additional costs,
and that there will not be periods when net sales declined quarter to quarter.
Complex Manufacturing Processes
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss, and in some cases,
cause production to be suspended. Manufacturing yields for new products
initially tend to be lower as the Company completes product development and
commences volume manufacturing, and thereafter typically increase as the Company
ramps to full production. The Company's forward product pricing reflects this
assumption of improving manufacturing yields, and as a result, material
variances between projected and actual manufacturing yields have a direct effect
on the Company's gross margin and profitability. The difficulty of forecasting
manufacturing yields accurately and maintaining cost competitiveness through
improving manufacturing yields will continue to be magnified by ever increasing
process complexity of manufacturing MR and GMR products, and by the compression
of product life cycles, which requires the Company to bring new products on line
faster and for shorter periods while maintaining acceptable manufacturing yields
and quality, without, in many cases, reaching the longer-term, 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 of the supply of certain components or supplies can severely and
adversely affect the Company's production and results of operations. The Company
has limited alternative sources of certain key materials such as wafer
substrates, photoresist, interconnects 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, many suppliers are
generally determined in advance by the Company's customers. Accordingly,
capacity constraints, production failures or restricted allocations by the
Company's suppliers could have a material adverse effect on the Company's own
production, and its business, financial condition and results of operations.
Inventory Risks
Due to the cyclical nature of and rapid technological change in the hard disk
drive industry, the Company's inventory is subject to substantial risk. To
address these risks, the Company monitors its inventories on a periodic basis
and provides inventory write-downs intended to cover inventory risks. However,
given the Company's dependence on a few customers and a limited number of
product programs for each customer, the magnitude of the commitments the Company
must make to support its customers' programs, and the Company's limited remedies
in the event of program cancellations, the Company may be required to take
significant inventory charges if a customer cancels or materially reduces one or
more product programs, or should a customer experience financial difficulties.
While the Company has taken certain charges and provided inventory write-downs,
there can be no assurance that the Company will
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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 their products to market quickly and to address its customers'
demand requirements, the Company must invest substantial resources and make
significant materials commitments, often before obtaining formal customer
qualifications and generally before the market prospects for its customers'
products are clear. Moreover, given the rapid pace of technology advancement in
the disk drive industry, the disk drive products that do succeed have
unpredictable, and typically very short, life cycles. Finally, in response to
rapidly shifting business conditions, the Company's customers have generally
sought to limit their purchase order commitments to the Company, and have done
so by employing what is known in the industry as JIT (Just-in-Time) hubs. If
the customer does not have demand from their end customer, they will not pull
inventory from the JIT hub and thus the Company may be left with excess and or
obsolete inventory, which increases inventory risk. To help offset this risk,
the Company has implemented the JIT inventory management tool with several of
its suppliers. Certain customers have on occasion canceled or materially
modified outstanding purchase orders with the Company without significant
penalties. For example, the Company experienced significant cancellations during
the first two quarters of fiscal 1998, as a result of which the Company incurred
charges for inventory obsolescence, which materially and adversely affected the
Company's operating results.
International Operations
The Company's production process is labor intensive. As a result, the Company
conducts substantially all of its slider machining, HGA assembly and test
operations, HSA assembly and tape head assembly operations offshore, and is thus
subject to the many risks associated with contracting with foreign vendors and
suppliers and with the ownership and operation of foreign manufacturing
facilities, including obtaining requisite governmental permits and approvals,
currency exchange fluctuations and restrictions, variable or higher tax rates,
expiration of tax holidays, political instability, changes in government
policies relating to foreign investment and operations, cultural issues, labor
problems, trade restrictions, transportation delays and interruptions, and
changes in tariff and freight rates. The Company has from time to time
experienced labor organization activities at certain of its foreign operations,
most recently during the first quarter of fiscal 1997, but none of the Company's
employees are currently represented by a union. There can be no assurance,
however, that the Company will continue to be successful in avoiding work
stoppages or other labor issues in the future.
In addition, several countries where the Company has operations, including
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, this factor will have on its ability to manufacture products in
these markets. The Company enters into foreign currency forward and option
contracts in an effort to manage exposure related to certain foreign currency
commitments, certain foreign currency denominated balance sheet positions and
anticipated foreign currency denominated expenditures, as substantially all of
the Company's foreign sales are denominated in U.S. dollars
In the second quarter of fiscal 2000, the Company announced the decision to
consolidate its wafer fab in Japan to the U.S. and its head stack operations in
the Philippines to Thailand. See the discussion under "Restructuring Costs".
Volatility of Stock Price
The trading price of the Company's common stock in the past has been subject
to wide fluctuations in response to quarter to quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the disk drive and computer
industries, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's common stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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The information contained in Part II, Item 7A of the Form 10-K for the year
ended September 30, 1999 under the heading "Quantitative & Qualitative
Disclosures About Market Risk" is hereby incorporated by reference in this Form
10-Q.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information on Legal Proceedings please see Note 11 to the Company's
consolidated financial statements on page 11 in Part I of this report on Form
10-Q, which information is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Stockholders
The Company's 2000 Annual Meeting of Stockholders was held on Thursday,
February 24, 2000 at the Company's Fremont, California manufacturing facility.
At the meeting, 49,927,337 shares were entitled to vote and 47,605,674 shares
were represented by proxy. The action items were:
(1) Election of the Board of Directors. A Board of Directors consisting of
six directors was elected to serve for the ensuing year or until their
successors are duly elected and qualified. The following nominees for
Board of Directors were elected:
Name of Nominee Votes Cast For Votes Withheld
----------------------------------------------------------
Cyril J. Yansouni 46,502,724 1,102,650
William J. Almon 46,665,245 940,129
Matthew J. O'Rourke 46,670,716 934,658
Robert M. White 46,674,594 930,780
Michael L. Hackworth 46,664,711 940,663
Alan S. Lowe 46,515,800 1,089,574
(2) Ratification of Independent Auditors. The Ratification of Independent
Auditors provides for the appointment of Ernst & Young LLP as independent
auditors for the Company for the 2000 fiscal year. The stockholders
approved the Ratification of Independent Auditors with 47,304,998 voting
in favor, 156,744 voting against and 143,632 abstaining.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.62 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 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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the third quarter of
fiscal 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
READ-RITE CORPORATION
Date: August 16, 2000 By: /s/ JOHN T. KURTZWEIL
-----------------------------------
John T. Kurtzweil
Senior Vice President, Finance and
Chief Financial Officer
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EXHIBIT INDEX
Exhibits Description
-------- -----------
10.62 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 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
27.1 Financial Data Schedule
