<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-19512
---------------
READ-RITE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2770690
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
345 LOS COCHES STREET, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS) (ZIP CODE)
(408) 262-6700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On January 14, 2000, 49,928,817 shares of the registrant's common stock were
issued and outstanding.
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Condensed Statements of Operations -- Three Months Ended
December 31, 1999 and 1998................................................................. 3
Consolidated Condensed Balance Sheets -- December 31, 1999 and
September 30, 1999......................................................................... 4
Consolidated Condensed Statements of Cash Flows -- Three Months Ended
December 31, 1999 and 1998................................................................. 5
Notes to Consolidated Condensed Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 21
Item 6. Exhibits and Reports on Form 8-K............................................................. 22
Signature.................................................................................... 22
Exhibit 27.1 -- Financial Data Schedule......................................................
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Net sales .......................................................... $ 114,492 $ 230,188
Cost of sales ...................................................... 145,619 195,327
--------- ---------
GROSS MARGIN ..................................................... (31,127) 34,861
Research and development ........................................... 19,147 23,732
Selling, general and administrative ................................ 6,581 7,289
--------- ---------
Total operating expenses ......................................... 25,728 31,021
--------- ---------
OPERATING INCOME (LOSS) .......................................... (56,855) 3,840
Interest expense ................................................... 8,845 7,368
Interest income and other, net ..................................... 4,592 (1,048)
--------- ---------
Loss before provision for income taxes and minority interest...... (61,108) (4,576)
Provision for income taxes ......................................... -- 48
--------- ---------
Loss before minority interest .................................... (61,108) (4,624)
Minority interest in net loss of consolidated subsidiary ........... (3,633) (5,746)
--------- ---------
NET INCOME (LOSS) ................................................ $ (57,475) $ 1,122
========= =========
Earnings (loss) per share:
Basic ............................................................ $ (1.15) $ 0.02
Diluted .......................................................... $ (1.15) $ 0.02
Shares used in per share computations:
Basic ............................................................ 49,834 49,027
Diluted .......................................................... 49,834 50,671
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
3
<PAGE> 4
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999(a)
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents ........................................ $ 53,599 $ 80,547
Short-term investments ........................................... 60,568 145,856
Accounts receivable, net ......................................... 76,994 45,981
Inventories ...................................................... 42,425 31,186
Prepaid expenses and other current assets ........................ 6,567 6,049
----------- -----------
Total current assets ................................... 240,153 309,619
Property, plant and equipment .................................... 1,245,802 1,236,880
Less: Accumulated depreciation ................................... 807,031 779,691
----------- -----------
Property, plant and equipment, net ............................. 438,771 457,189
Other assets ..................................................... 16,598 17,682
----------- -----------
TOTAL ASSETS ........................................... $ 695,522 $ 784,490
=========== ===========
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY
Short-term borrowing ............................................. $ 10,784 $ 10,521
Accounts payable ................................................. 83,123 71,397
Accrued compensation and benefits ................................ 27,835 26,052
Other accrued liabilities ........................................ 35,347 35,346
Current portion of long-term debt and capital lease obligations .. 105,866 147,589
----------- -----------
Total current liabilities .............................. 262,955 290,905
Convertible subordinated notes ................................... 345,000 345,000
Other long-term debt and capital lease obligations ............... 15,900 16,668
Other long-term liabilities ...................................... 5,771 5,781
----------- -----------
Total liabilities ...................................... 629,626 658,354
----------- -----------
Minority interest in consolidated subsidiary ..................... 38,294 41,927
Preferred stock, $0.0001 par value ............................... -- --
Common stock, $0.0001 par value .................................. 5 5
Additional paid-in capital ....................................... 370,118 369,274
Accumulated deficit .............................................. (341,783) (284,308)
Accumulated other comprehensive loss ............................. (738) (762)
----------- -----------
Total stockholders' equity ............................. 27,602 84,209
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY AND STOCKHOLDERS' EQUITY .................. $ 695,522 $ 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> 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................................... $ (57,475) $ 1,122
Adjustments required to reconcile net income (loss) to cash provided
by operations:
Depreciation and amortization ...................................... 44,729 44,578
Minority interest in net loss of consolidated subsidiary ........... (3,633) (5,746)
Changes in assets and liabilities:
Accounts receivable ................................................ (31,013) (36,530)
Inventories ........................................................ (11,239) (10,373)
Prepaid expenses and other current assets .......................... (518) 1,028
Accounts payable and accrued liabilities ........................... 13,484 10,999
Other assets and liabilities, net .................................. 613 4,667
--------- ---------
NET CASH PROVIDED BY/ (USED IN) OPERATING ACTIVITIES ............... (45,052) 9,745
--------- ---------
INVESTING ACTIVITIES
Capital expenditures ................................................. (25,531) (20,581)
Maturities of available-for-sale investments ......................... 218,331 163,838
Purchase of available-for-sale investments ........................... (133,043) (163,666)
--------- ---------
NET CASH PROVIDED BY/ (USED IN) INVESTING ACTIVITIES ............... 59,757 (20,409)
--------- ---------
FINANCING ACTIVITIES
Payment of other long-term debt and capital lease obligations ........ (42,491) (888)
Proceeds from short-term borrowing ................................... -- 9,490
Proceeds from issuance of common stock ............................... 838 2,444
--------- ---------
NET CASH PROVIDED BY/ (USED IN) FINANCING ACTIVITIES ............... (41,653) 11,046
--------- ---------
Net increase (decrease) in cash and cash equivalents ................. (26,948) 382
Cash and cash equivalents at beginning of period ..................... 80,547 62,444
--------- ---------
Cash and cash equivalents at end of period ........................... $ 53,599 $ 62,826
========= =========
Supplemental disclosures of non-cash activities:
Issuance of common stock under 401(k) plan ......................... $ 6 $ --
Supplemental disclosures of cash flow information:
Interest paid ...................................................... $ 3,988 $ 1,593
Income taxes paid (refunded) ....................................... $ (1,101) $ 213
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
Read-Rite Corporation ("Read-Rite" or the "Company") maintains a
fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to
September 30. The first quarters of fiscal 2000 and 1999 ended on December 26,
1999, and December 27, 1998, 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. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
In the opinion of management, all adjustments (including all normal
recurring adjustments) considered necessary for a fair presentation of the
interim periods presented have been included. The interim results are not
necessarily indicative of the operating results expected for the full fiscal
year ending September 30, 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 $125 million secured
credit facility with its lenders. In October 1999, the Company repaid $25
million on its credit facility and reduced the size of the revolving portion of
the credit facility to $75 million. In connection with this repayment the banks
agreed to waive compliance on certain financial covenants through December 31,
1999. As of the end of fiscal Q1 2000, the outstanding balance under the
facility was $101.3 million. During the first week of the second fiscal quarter,
the company reduced the revolving portion of its credit facility by $25 million,
to $50 million. In connection with this reduction, the banks agreed to a fourth
waiver and amendment which can extend to February 25, 2000. Due to the
short-term nature of this waiver, the debt under the credit facility has been
reclassified from long-term debt to current liabilities. The Company is not in
payment default under this credit facility and has continued to pay all
principal, interest charges and other fees. The Company is currently negotiating
with its lenders for another waiver, forebearance and fifth amendment which will
extend to May 25, 2000, which can be further extended to August 25, 2000 under
certain conditions. The Company expects to repay an additional $15 million of
the revolving portion of the credit facility in connection with this proposed
waiver. However, there can be no assurance that the Company will be able to
obtain a waiver extending beyond February 25, 2000. Further, under the terms of
the credit facility, the banks have the right to block the scheduled March 1,
2000 interest payment to the holders of the $345.0 million 6.5% convertible
subordinated notes.
The Company is investigating and has received proposals for other financing
options. In connection with these financing activities, the Company is filing
concurrently with this Form 10-Q 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
is also offering additional 10% subordinated convertible notes for cash. The
company intends to complete the exchange offering prior to March 30, 2000 and
intends to ask the banks to withdraw the payment blockage notice, if any.
However, there can be no assurances that the banks will comply with the
Company's request. Should the banks not comply with this request, the
non-payment of interest would trigger an event of default under the convertible
subordinated notes. Furthermore, if the Company is not successful in either
obtaining an additional waiver or in amending the bank facility beyond February
25, 2000, the borrowings under this facility could become immediately payable
and the Company will likely need to raise additional funds to restructure its
debt obligations to operate its business for the long-term. This restructuring
of the debt obligations could include negotiation of a new credit facility with
other lenders, issuance of additional equity securities or financial instruments
on terms which could be highly dilutive to current shareholders, or a
combination of these options. In addition, if the Company is not successful in
aligning its cost structure and cash flows in the near term, it may need to take
actions that could result in charges that could have a material adverse effect
on the Company's financial statements.
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.
6
<PAGE> 7
NOTE 2. INVENTORIES
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
----------- -------------
<S> <C> <C>
Raw material................ $ 5,095 $ 5,692
Work-in-process............. 32,585 19,624
Finished goods.............. 4,745 5,870
------- --------
Total inventories. $42,425 $ 31,186
======= ========
</TABLE>
NOTE 3. CALCULATION OF EARNINGS PER SHARE
The basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of employee stock options and incremental common shares
attributable to the assumed conversion of the Company's convertible subordinated
debentures, unless they are antidilutive.
For the period in which the Company had a net loss, the basic and diluted
net loss per share was computed using only the weighted average number of shares
of common stock outstanding during the period.
The following table presents the calculation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1999 1998
-------- --------
IN THOUSANDS, EXCEPT
PER SHARE DATA
<S> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE COMPUTATION
Numerator:
Net income (loss) ....................................................... $(57,475) $ 1,122
-------- --------
Denominator:
Weighted average number of common shares outstanding during the period .. 49,834 49,027
-------- --------
Basic net income (loss) per share ......................................... $ (1.15) $ 0.02
======== ========
DILUTED NET INCOME (LOSS) PER SHARE COMPUTATION
Numerator:
Net income (loss) ....................................................... $(57,475) $ 1,122
-------- --------
Denominator:
Weighted average number of common shares outstanding during the period .. 49,834 49,027
Incremental common shares issuable under stock option plans
after applying treasury stock method, net of tax benefit ............. -- 1,644
-------- --------
Total ..................................................................... 49,834 50,671
-------- --------
Diluted net income (loss) per share ....................................... $ (1.15) $ 0.02
======== ========
</TABLE>
For the three-month period ended December 31, 1999, incremental common
shares attributable to the issuance of shares under stock option plans (after
applying the treasury stock method, net of tax benefit) of approximately 422,159
shares and assumed conversion of the Company's convertible subordinated
debentures of 8.6 million shares for the three months ended December 31, 1999,
were not included in the diluted earnings per share computation because the
effect would be antidilutive.
NOTE 4. CUSTOMER CONCENTRATION
The Company's three largest customers, Maxtor, Samsung, and Western Digital
accounted for 83% of net sales during the three-month period ended December 31,
1999. Given the small number of disk drive and tape drive manufacturers, 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, will have a material adverse effect on the Company's
business, financial condition, and results of operations.
NOTE 5. RESTRUCTURING COSTS
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
7
<PAGE> 8
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 quarter 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 December 31, 1999, majority of the Company's restructuring
activities had been completed.
The following table reflects the 1999 restructuring charge:
<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 - - 146 (146) -
Cash charges - - (206) (15) (221)
-------------- --------- ----------- --------- ---------
Reserve balance as of
December 31, 1999 $ - $ - $ 31 $ 185 $ 216
============== ========= =========== ========= =========
</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 6. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Net income (loss) .................................................... $(57,475) $ 1,122
Change in unrealized gain (loss) on available-for-sale investments ... 24 (6)
-------- --------
Comprehensive income (loss) .......................................... $(57,451) $ 1,116
======== ========
</TABLE>
8
<PAGE> 9
NOTE 7. CURRENT LIABILITIES
At the end of the first quarter of fiscal 2000, the Company had a $125
million secured credit facility ("Credit Facility") with a syndicate of
financial institutions. The facility, which expires on October 2, 2001, consists
of a $50 million term loan and a $75 million revolving line of credit, of which
$40.0 million of the term loan and $61.3 million revolving line of credit were
outstanding as of the end of the fiscal Q1 2000 quarter. The term loan provides
for quarterly principal payments, beginning January 1999 and continuing through
October 2001. The facility is secured by the assets of the Company and 65% of
the stock of the Company's international subsidiaries. Borrowings under the
revolving credit facility are based upon eligible receivables and cash balances
of the Company. The credit facility provides for interest payments which vary
based on 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
first quarter of fiscal year 2000 resulted in the Company not maintaining
certain financial covenants required by the credit facility. In October 1999,
the Company repaid $25 million of its credit facility and reduced the size of
the revolving portion of its credit facility to $75 million as noted above. In
connection with this repayment, the banks agreed to waive compliance with
certain financial covenants through December 31, 2000. During the first week of
the second fiscal quarter, the Company agreed to reduce the size of the
revolving portion of its credit facility by $25 million, to $50 million. In
response to this reduction, the banks agreed to a fourth waiver and amendment
that can extend to February 25, 2000. Currently, the Company is not in payment
default under this credit facility as all interest charges and fees associated
with this facility have been paid on the scheduled due dates. However, as a
result of the short-term nature of the waivers/amendments to the bank
facilities, the Company reclassified this portion of its long-term debt to
current liabilities at the end of Q1 2000.
NOTE 8. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information" in fiscal 1999. The new standard revises the way operating segments
are reported. The Company operates and tracks its results in two operating
segments, hard disk drive and tape head. The Company designs, develops,
manufactures and markets head gimbal assemblies, headstack assemblies, tape
heads, and tape head assemblies for the hard disk drive and tape drive markets.
The Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS 131.
Net sales to unaffiliated customers by operating segments were as follows
(amount in thousands):
<TABLE>
<CAPTION>
Three Month Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Hard disk drive $108,369 $224,698
Tape head 6,123 5,489
-------- --------
Total net sales $114,492 $230,188
======== ========
</TABLE>
Profit/loss from unaffiliated customers by operating segments were as follows
(amount in thousands):
<TABLE>
<CAPTION>
Three Month Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Hard disk drive $(57,476) $ 2,506
Tape head 1 (1,384)
-------- --------
Total net income $(57,475) $ 1,122
======== ========
</TABLE>
NOTE 9. LEGAL PROCEEDINGS
9
<PAGE> 10
In December 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 -- January
22, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. In May 1997, the Superior
Court entered an order (1) sustaining the demurrers of certain defendants to the
California Corporations Code cause of action and overruling the demurrers of
Read-Rite Corporation and certain other defendants to that same cause of action;
and (2) sustaining the demurrers of all defendants as to the remaining causes of
action.
In January 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). In May 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by James C. Nevius and William Molair against the Company and certain
of its officers and directors (the "Nevius Federal Action").The court
consolidated the Ferrari Federal Action and the Nevius Federal Action into one
action, In re Read-Rite Corp. Securities Litigation (the "Consolidated Action"),
and plaintiffs thereafter filed a consolidated complaint. The consolidated
complaint alleges that from April 19, 1995 -- January 22, 1996 (the "Ferrari
Class Period") and from of March 2, 1996 -- June 19, 1996 (the "Nevius Class
Period"), defendants made false and misleading statements about the Company's
business condition and prospects. The consolidated complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5, and seeks damages of an unspecified amount. In August 1998, the court in
the Consolidated Action granted defendants motion to dismiss but granted
plaintiffs leave to file an amended complaint. In January 1999, plaintiffs filed
their amended complaint. In March 1999 defendants moved to dismiss that amended
complaint with prejudice. In June 1999 the court heard oral argument on
defendants' motion to dismiss. That motion is currently under judicial
consideration.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes that the Company and the
individual defendants have meritorious defenses in the above-described actions.
Accordingly, both on its own behalf and pursuant to indemnification agreements
between the Company and the named individual defendants, the Company intends to
continue to defend each of these actions vigorously. Failure by the Company to
obtain a favorable resolution of the claims set forth in any of these actions
could have a material adverse effect on the Company's business, results of
operations and financial condition. Currently, the amount of such material
adverse effect cannot be reasonably estimated.
Except as so noted, the Company is not a party, nor is its property subject,
to any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
Certain statements in this Quarterly Report on Form 10-Q for Read-Rite
Corporation ("Read-Rite" or the "Company") include forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These statements include, but
are not limited to, the Company's expectation that the industry trend toward
fewer average head gimbal assemblies ("HGAs") per headstack assembly ("HSA") and
competitive pricing pressures will continue during fiscal 2000; the Company's
expectation that giant magnetoresistive ("GMR") products will be sold in the
volume anticipated by the Company in fiscal 2000; the Company's expectation that
manufacturing cycle time will be further reduced in fiscal 2000; the Company's
expectation that it will achieve and maintain acceptable yields on its GMR
programs; the Company's expectation that selling, general and administrative
expenses will not increase significantly in absolute dollars in the near-term;
the Company's plan to acquire approximately $80 million in capital equipment
during fiscal 2000, including the potential acquisition of certain assets
through operating leases; the Company's belief that with either renegotiations
of its existing credit facilities, negotiation of new credit facilities with
other lenders, or issuance of additional equity securities or other financial
instruments will provide the Company with sufficient funding for its operations
for the next twelve months; the Company plans to pursue opportunities to
continue to improve the efficiency of its operations; and the Company's belief
that the Company and the individual defendants in the purported class actions
(collectively, the "Actions") described in Part II, Item 1 "Legal Proceedings,"
have meritorious defenses in such Actions. Actual results for future periods
could differ materially from those projected in such forward-looking statements.
Some factors which could cause future actual results to materially differ
from the Company's recent results or those projected in the forward-looking
statements include, but are not limited to: failure by the Company to timely,
effectively and continuously execute on GMR product development; failure to
obtain necessary customer qualifications on new programs; failure to timely and
cost-effectively introduce those programs into manufacturing, and failure to
achieve and maintain acceptable production yields on those programs;
introduction of competitors' products more quickly or cost effectively than the
Company; constraints on supplies of raw materials or components limiting the
Company's ability to maintain or increase production; the anticipated trend of
increases in areal density may not occur; significant increases or decreases in
demand for the Company's products, cancellation or rescheduling of customer
orders, changes to the Company's product mix, and changes in business conditions
affecting the Company's financial position or results of operations which
significantly increase the Company's working capital needs; the Company's
inability to obtain or generate sufficient capital to fund its research and
development expenses, capital expenditures and other working capital needs; the
Company's ability to obtain waivers or amendments to the bank covenants in its
current credit facilities or, if unsuccessful, the Company's ability to
negotiate new credit facilities with other lenders or issue additional equity
securities or other financial instruments; or failure by the Company to obtain
favorable resolution of the claims set forth in the Actions. For a more detailed
discussion of certain risks associated with the Company's business, see
"Business Risks." The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of such
statements.
LIQUIDITY AND CAPITAL RESOURCES
As of the end of Q1 fiscal 2000, the Company had cash and investments of
$114.2 million, total assets of $695.5 million and total liabilities of $629.6
million.
For the three months ended December 31, 1999, the Company used $45.1 million
in cash from operations. The negative cash flow from operating activities was
primarily attributed to a net loss from operations of $57.5 million, a net
increase in accounts receivable of $31.0 million, and an increase in net
inventory of $11.2 million, partially offset by depreciation and amortization
expense of $44.7 million and an increase in accounts payable and accrued
liabilities of $13.5 million.
Accounts receivable, net increased $31.0 million due to higher net sales
during the three months ended December 31, 1999 and a greater percentage of net
sales toward to latter half of the fiscal quarter as compared to the three month
period ended September 30, 1999.
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Net inventories increased by $11.2 million during the three months ended
December 31, 1999. The increase was primarily due to increased manufacturing
activity (work-in-process inventory) and higher forecasted unit shipments for
the second fiscal quarter of fiscal 2000 as compared to the first quarter of
fiscal 2000.
Accounts payable and accrued liabilities increased by $13.5 million during
the three months ended December 31, 1999. The increase was mainly due to a
higher percentage of material purchased during the latter half of the fiscal
quarter as compared to the three-month period ended September 30, 1999.
The Company's business is highly capital intensive. During the three months
ended December 31, 1999, the Company incurred capital expenditures of
approximately $25.5 million. Capital expenditures have primarily been made to
upgrade and replace existing equipment in Thailand, the Philippines, and the
wafer production in the United States and Japan, to support new manufacturing
processes and new technologies, such as GMR. The Company's plan for capital
equipment purchases during fiscal 2000 is approximately $80 million; however, to
the extent yields for the Company's products are lower than expected, demand for
such products exceed Company expectations, or the Company's manufacturing
process requirements change significantly, such expenditures may increase.
Conversely, if demand is less than anticipated, or if the Company is unable to
obtain adequate financing for such capital equipment purchases, the planned
capital equipment purchases may decrease. As of December 31, 1999, total
commitments for construction or purchase of capital equipment were approximately
$45.8 million. The Company expects to fund such commitments from available cash
and cash equivalents, or other future financing activities.
During fiscal 2000, the Company and Sumitomo Metal Industries, Ltd. ("SMI")
expect to fund RRSMI equally for any working capital requirements that exceed
RRSMI's cash, cash equivalent and short-term investment balances at December 31,
1999. RRSMI's balance sheet at December 31, 1999 included cash, cash equivalents
and short-term investments of $7.2 million, and total assets of $97.0 million.
Cash used in financing activities was $41.7 million, of which payments on
the revolving line of credit were $38.7 million, payments on the term loan were
$2.5 million, and other payments on debt of $1.2 million, partially offset by
proceeds from issuance of common stock of $0.8 million.
In August 1997, the Company completed a public offering of $345 million
aggregate principal amount of 6.5% convertible subordinated notes ("Notes").
Principal is due September 2004 with semi-annual interest payments of $11.2
million due on March 1 and September 1 of each year. The Notes are subordinated
in right of payment to all existing and future senior debt of the Company and
may be redeemed at the option of the Company subsequent to September 2000. As of
December 31, 1999, the entire $345 million represented by the Notes was
outstanding.
At the end of the first quarter of fiscal 2000, the Company had a $125
million secured credit facility ("Credit Facility") with a syndicate of
financial institutions. The facility, which expires on October 2, 2001, consists
of a $50 million term loan and a $75 million revolving line of credit, of which
$40.0 million of the term loan and $61.3 million revolving line of credit were
outstanding as of the end of fiscal Q1 2000. The term loan provides for
quarterly principal payments, beginning January 1999 and continuing through
October 2001. The facility is secured by the assets of the Company and 65% of
the stock of the Company's international subsidiaries. Borrowings under the
revolving credit facility are based upon eligible receivables and cash balances
of the Company. The credit facility provides for interest payments which 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 quarter of fiscal year 2000 resulted in the Company not maintaining
certain financial covenants required by the credit facility. In October 1999,
the Company repaid $25 million of its credit facility and reduced the revolving
portion of the credit facility to $75 million. In connection with this
repayment, the banks agreed to waive compliance on certain financial covenants
through December 31, 2000. During the first week of the second fiscal quarter,
the Company agreed to reduce the size of the revolving portion of its credit
facility by $25 million, to $50 million. In response to this reduction, the
banks agreed to a fourth waiver and amendment that can extend to February 25,
2000. The Company is currently negotiating with its lenders for another waiver,
forebearance and fifth amendment which will extend to May 25, 2000, which can be
further extended to August 25, 2000 under certain conditions. The Company
expects to repay an additional $15 million of the revolving portion of the
credit facility in connection with this proposed waiver. The banks have the
right to block the scheduled March 1, 2000 interest payment to the holders of
the $345 million 6.5% convertible subordinated notes. 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. As
a result of the short-term nature of the waivers/amendments to the bank
facilities, the Company had reclassified this portion of its long-term debt to
current liabilities at the end of Q1 2000.
The Company is investigating and has received proposals for other financing
options. In connection with these financing activities, the Company is filing
concurrently with this Form 10-Q a Registration Statements 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
is also offering additional 10% subordinated convertible notes for cash. The
company intends to complete the exchange offering prior to March 30, 2000 and
intends to ask the banks to withdraw the payment blockage notice, if any.
However, there can be no assurances that the banks will comply with the
Company's request. Should the banks not comply with this request, the
non-payment of interest would trigger an event of default under the convertible
subordinated notes. Furthermore, if the Company is not successful in obtaining
an additional waiver or amending the bank facility beyond February 25, 2000, the
borrowings under this facility could become immediately payable and the Company
will likely need to raise additional funds to restructure its debt obligations
to operate its business for the long-term. This restructuring of debt
obligations could include negotiation of a new credit facility with other
lenders, issuance of additional equity securities or financial instruments on
terms which could be highly dilutive to current shareholders, or a combination
of these options. In addition, if the Company is not successful in aligning its
cost structure and cash flows in the near term, it may need to take actions that
could result in charges that could have a material adverse effect on the
Company's financial statements.
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If industry conditions remain unfavorable or worsen, the Company does not
consistently achieve timely customer qualifications on new product programs, or
the Company is unsuccessful at ramping up volume production on new products at
acceptable yields, the Company's working capital and other capital needs may
increase. Conversely, if industry demand increases significantly such that the
Company's capital requirements exceed management's current estimates, the
Company may likewise need to raise additional capital. The Company could seek to
raise such capital through additional bank facilities, debt or equity offerings,
or other sources. There can be no assurance, however, that any such required
financing will be available when needed on terms and conditions acceptable or
favorable to the Company, if at all. In addition, if the Company is not
successful in generating a positive operating margin from the HSA manufacturing
operations in the near term, it will need to take appropriate steps to align its
cost structure and cash flows accordingly. Furthermore, if the Company is not
successful in generating a positive operating margin from RRSMI in the near
term, it will need to take appropriate steps to align its cost structure, cash
flows and equity position accordingly.
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 $114.5 million for the three-month period ended December 31,
1999, compared to net sales of $230.2 million for the comparable period in
fiscal 1999. Net sales for the first quarter of fiscal 2000 were adversely
impacted by lower unit sales; the disk drive industry's trend towards fewer
heads per disk drive; and competitive pricing pressure in the hard disk drive
market.
The decrease in the Company's net sales for the first quarter of fiscal
2000 compared to the comparable period in fiscal 1999 was primarily attributable
to a substantial decrease in unit sales. Read-Rite shipped 11.1 million and 22.7
million recording heads (including recording heads shipped in HSAs and Tape
Heads), and 2.8 million and 4.3 million HSAs, for the three month periods ended
December 31, 1999, and December 31, 1998, respectively. The decrease in unit
shipments was the result of the Company's limited participation on its
customers' first generation GMR products and a reduction in the number of HGAs
per HSA. The Company's product mix continued to be predominately made up of
HSAs, as net sales of HSAs accounted for 75% of total net sales for the
three-month period ended December 31, 1999, compared to
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77% of total net sales for the comparable period in fiscal 1999. Net sales of
HGAs accounted for 17% of total net sales for the three-month period ended
December 31, 1999, compared to 20% of total net sales for the comparable period
in fiscal 1999. The Company expects a shift of product mix from HSA's to more
HGA's in fiscal 2000.
The disk drive industry's trend towards fewer heads per disk drive continued
in fiscal 2000. The average number of HGAs in HSAs for the three-month period
ended December 31, 1999 was 2.76, compared to the comparable period in fiscal
1999 of 3.74. This reduction in the number of heads per disk drive resulted in a
substantial decrease in ASPs for the Company's HSA products. The Company
expects the trend towards fewer heads per disk drive to continue through fiscal
2000.
The Company's ASPs for HGAs and HSAs decreased substantially for the first
quarter in fiscal 2000 as compared to the comparable period in fiscal 1999. ASPs
decreased approximately 8.4% for HGAs and approximately 26.4% for HSAs, compared
to the comparable three month period in fiscal 1999. HGA and HSA pricing was
lower due to competitive pricing pressure in the disk drive industry and the
industry trend towards fewer heads per disk drive. Unit sales for both HGA and
HSA products decreased approximately 52.8% and 34.1%, respectively, compared to
the comparable three-month period in fiscal 1999. The Company expects the
competitive pricing pressure to continue through fiscal 2000.
For the three month period ended December 31, 1999, 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.
Net sales generated from GMR products increased to $82.7 million for the
three-month period ended December 31, 1999, from net sales of $0.2 million for
the comparable period in fiscal 1999. The Company's largest volume GMR product
platform for the three-month period ended December 31, 1999, consisted of
recording heads for 9.1 and 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 MR products. Net sales generated from MR products
decreased to $21.1 million for the three-month period ended December 31, 1999,
from net sales of $217.6 million for the comparable period in fiscal 1999. The
Company expects that GMR products will account for more than 80% of net sales
during fiscal 2000.
The Company's three largest customers, Maxtor, Samsung, and Western Digital
accounted for 83% of net sales for the three month period ended December 31,
1999, compared to 89% of net sales for the comparable period 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 of 27.2% of net sales for the three-month
period ended December 31, 1999, compared to a gross margin of 15.1% of net
sales, for the comparable period in fiscal 1999. The decline in gross margin 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 $19.1 million for the three
month period ended December 31, 1999, a decrease from R&D expenses of $23.7
million for the comparable period in fiscal 1999. The decrease in R&D for the
current period was attributable to the Company's continued cost containment
efforts to align its cost structure with current industry conditions. The
Company expects a modest decrease in R&D expenses to continue in fiscal 2000.
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From time to time, the Company has engaged in fully or partially funded R&D
for certain existing or potential customers. R&D funding under such projects is
offset as expenses are incurred. During the three month period ended December
31, 1999, no development funding was offset against R&D expenses. Funded R&D for
the comparable period in fiscal 1999 was $0.8 million.
Selling, general & administrative ("SG&A") expenses were $6.6 million for
the three month period ended December 31, 1999, a decrease from SG&A expenses of
$7.3 million for the comparable period in fiscal 1999. The decrease in SG&A
expenses for the current period was due to the reduction in the Company's
worldwide headcount in the third quarter of fiscal 1999, and continued cost
containment efforts. The Company plans to continue its SG&A cost containment
efforts.
NON-OPERATING EXPENSES
Interest expense was $8.8 million for the three month period ended December
31, 1999, an increase over interest expense of $7.4 million for the comparable
period in fiscal 1999. The increase in interest expense for the current period
was primarily due to higher average debt balance and higher interest rate on
outstanding debts.
Interest income and other, net was $4.6 million for the three month period
ended December 1999, compared to $($1.0) million for the comparable period in
fiscal 1999. The increase in interest income and other, net in the current three
month period was due to the sale of an option on certain real-estate, the gain
on the sale of certain real-estate in the U.S. and a higher average investment
balance and higher interest rate earned on investments. The increase is also due
to a net currency exchange loss of $2.3 million, partially offset by $1.1
million in interest income in the comparable period in fiscal 1999.
The Company did not provide for an income tax benefit during the three month
period ended December 31, 1999 and 1998 primarily due to losses in the U.S. and
foreign jurisdictions for which no current benefit is available.
YEAR 2000 READINESS DISCLOSURE
As of January 2000, the Company has completed all year 2000 readiness work
and has not experienced any major incidents related to Year 2000 issues. The
Company will continue to monitor all systems for Year 2000 related concerns. The
costs incurred by the Company during fiscal 2000, related to its Year 2000
readiness program were less than $ 0.3 million and cumulative cost to date have
been less than $ 2.4 million.
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.
The key risk factors facing the Company today relate to its transition to GMR
technology, its ability to ship GMR in volume to its customers to their
schedules and maintaining its liquidity during this transition.
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, 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, material or equipment
unavailability, and disruptions in domestic or foreign operations. 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, increased unit costs due to
under-utilization of production capacity, and as a consequence, experienced a
significant reduction in net sales, gross margin, and net income.
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RAPID TECHNOLOGICAL CHANGE; TRANSITION TO MR AND GMR TECHNOLOGY
Technology changes rapidly in the Company's industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. Failure to smoothly transition from old
technologies or to anticipate and execute on new technologies can have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, in November 1997, the Company responded to
the disk drive industry's rapid shift to MR technology by accelerating its
transition to MR production. As a result, the Company incurred a special charge
during the first quarter of fiscal 1998 of $114.8 million, primarily for the
write-off of equipment and inventory associated with the phase-out of advanced
inductive technologies. In the third quarter of fiscal year 1999, the Company
incurred a restructuring charge of $37.7 million for the write-off of equipment
associated with the Company's transition to GMR technology and 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 fewer,
larger programs, and as competition for this increasingly limited number of
large volume programs continues to increase, the failure by the Company to
execute on technologies necessary to consistently obtain qualification on any of
such volume programs will have a material adverse effect on the Company's
business, financial condition and results of operations.
During fiscal 2000, the Company intends to continue investing significant
resources in GMR product development and manufacturing equipment. The Company
anticipates the majority of its sales for fiscal 2000 will be derived from sales
of GMR products. There can be no assurance, however, that the Company will be
successful in timely and cost effectively developing and manufacturing 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 as follows:
In the second half of fiscal 1996 when significant orders were canceled and/or
rescheduled by certain customers with little or no advanced warning; late in the
first quarter of fiscal 1998 as the Company significantly reduced its build plan
for its advanced inductive thin film 1.3 GB per 3.5-inch disk recording head
product due to a significant and abrupt reduction in demand for this product; in
fiscal 1998 due to a general downturn in the disk drive industry; in the latter
half of fiscal 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. In each case, these demand variations materially and
adversely affected the Company's business, financial condition and results of
operations.
The Company's largest customers are Maxtor, Samsung, and Western Digital,
each represented over 10% of the Company's net sales during the three-month
period ended December 31, 1999. The Company produced HGAs in volume for 5
customers; HSAs in volume for 4 customers and tape drive products in volume for
4 customers during the three-month period ended December 31, 1999. Given the
small number of high performance disk drive and tape drive manufacturers who
require an independent source of HGA, HSA or tape head supply, the Company will
continue to be dependent upon a limited number of customers. 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, in fiscal 1998 and late in fiscal 1996.
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
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production capability, could also materially and adversely affect the Company's
business, financial condition and results of operations. In 1994, Quantum, a
principal customer of the Company with no previous magnetic recording head
capacity, acquired Digital Equipment Corporation's recording head and disk drive
operations. In May 1997, Quantum further announced the formation of a joint
venture with its primary manufacturing partner in Japan, MKE, to manufacture MR
recording heads for rigid disk drives. According to the announcement, this new
venture took over Quantum's existing recording head operations and was owned 51%
by MKE. In October 1998, Quantum and MKE announced that the joint venture was
dissolved, but MKE retained the slider fabrication and HGA assembly factory. MKE
is currently still operating this facility. As such, there are no assurances MKE
will not re-enter the wafer fabrication business and become a full line
manufacturer, which could impact the Company's ability to supply HGAs to Quantum
again in the future.
Finally, in 1998, WD and IBM announced a hard disk drive component supply and
technology licensing agreement. This agreement, along with the Company's heads
not being qualified as the primarily supplier on certain WD programs,
significantly reduced the Company's net sales to WD in fiscal 1999. With
timely qualifications, the Company anticipates an increase in HGA sales to WD in
fiscal 2000 compared to fiscal 1999. However, there can be no assurance such
sales will occur. Other acquisitions or significant transactions by the
Company's customers leading to further consolidation, vertical integration or
other material agreements could also materially and adversely affect the
Company's business, financial condition and results of operations.
COMPETITION
The disk drive industry is intensely competitive, both at the drive level
and the component level, and is characterized by short product life cycles and
substantial price declines over the useful life of a product. Accordingly, the
Company believes that the most important competitive factors in its industry are
timely delivery of new technologies and pricing for products incorporating such
technology. Other significant factors are customer support, product quality, and
the ability to reach volume production rapidly. Failure to execute with respect
to any of these factors would likely have a material adverse effect on the
Company's net sales and gross margin.
Japanese competitors such as TDK, Alps, Hitachi Metal and Yamaha have been
aggressively competing for business in the United States and in Japan,
specifically targeting the market for GMR. In November 1999, Yamaha announced
its exit from the HDD recording heads market effective in March, 2000. The
Company's domestic competitors are Applied Magnetics Corporation, Headway
Technologies and IBM. On January 7, 2000, Applied Magnetics Corporation filed
for protection under Chapter 11 of the Bankruptcy Code and effectively ceased
operations. Fujitsu, IBM, Seagate and other disk drive manufacturers with
"captive" or internal recording head manufacturing capability generally have
significantly greater financial, technical and marketing resources than the
Company, and have made or may make their products available in the merchant
market. For example, one of the Company's largest customers, Western Digital
Corporation ("WD") announced an agreement in June 1998 with IBM under which IBM
would supply WD with GMR heads and other components for WD's manufacture of
desktop HDDs. The Company's competitive position could be materially and
adversely affected if more of these competitors are successful in marketing GMR
products in the merchant market in volume quantities at competitive pricing.
In its HSA business, the Company has competed in the past against other
merchant HSA manufacturers such as Kaifa and TDK/SAE in China, and Tandon in
India. There may also be certain government incentives in their respective
countries that could reduce their operating costs which could lead these
competitors to continue to decrease HSA selling prices. The Company is currently
working with HSA manufacturers such as Kaifa and Tandon to outsource a portion
of the Company's HSA business to take advantage of these HSA manufacturers' low
cost structure. Further, the HSA business is less capital intensive than the
thin film HGA business; entry into the HSA manufacturing business thus requires
less capital than entry into the HGA business. Accordingly, there can be no
assurance that the Company will be able to compete successfully with its
customers' own HSA capacity, or with existing or new HSA manufacturers. If the
Company is not successful in generating a positive operating margin from the HSA
manufacturing operations in the near term, it will need to take appropriate
steps to align its cost structure and cash flows accordingly.
Finally, the development and advancement of technologies, such as pico
sliders, GMR and 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
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utilize the Company's products. The Company's competitive position will likely
be materially and adversely affected if a competitor precedes the Company in the
successful introduction of improved or new technologies or products.
SUBSTANTIAL CAPITAL EXPENDITURES AND WORKING CAPITAL NEEDS
The Company's business is highly capital intensive. To maintain its market
position, the Company must anticipate demand for its products and the path of
new technologies so that production capacity, both in terms of amount and the
proper technologies, will be in place to meet customers' needs. Accurate
capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Company's plant and equipment expenditures have
long lead times, thus requiring major commitments well in advance of actual
requirements. The Company's underestimation or overestimation of its capacity
requirements, or failure to successfully and timely put in place the proper
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has made substantial capital expenditures and installed
significant production capacity to support new technologies and increased demand
for its products. The Company made capital expenditures in fiscal 1999 of $101.0
million, and plans to acquire approximately $80.0 million in capital equipment
in fiscal 2000, and may acquire certain of those capital assets through capital
or operating leases. As of December 31, 1999, total commitments for construction
or purchase of capital equipment were approximately $ 45.8 million. There can be
no assurance that the Company's net sales will increase sufficiently to absorb
such additional expenditures, and that there will not be periods when net sales
decline quarter to quarter. Furthermore, within this volatile industry, the
Company must be ever vigilant on its capital expenditures, especially towards
avoiding duplication of equipment requirements in the Company's wafer fabs in
Fremont, California, and Osaka, Japan and its HSA facilities in the Philippines
and Thailand.
COMPLEX MANUFACTURING PROCESSES
The Company's manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss, and in some cases,
cause production to be suspended. Manufacturing yields for new products
initially tend to be lower as the Company completes product development and
commences volume manufacturing, and thereafter typically increase as the Company
ramps to full production. The Company's forward product pricing reflects this
assumption of improving manufacturing yields and, as a result, material
variances between projected and actual manufacturing yields have a direct effect
on the Company's gross margin and profitability. The difficulty of forecasting
manufacturing yields accurately and maintaining cost competitiveness through
improving manufacturing yields will continue to be magnified by ever increasing
process complexity of manufacturing GMR products. Further, the compression of
product life cycles requires the Company to produce new products at higher
volume and acceptable manufacturing yields without, in many cases, reaching the
longer-term, higher volume manufacturing cycle, which is conducive to higher
manufacturing yields and declining costs.
DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS
As a high technology company in a narrowly defined industry, the Company is
often dependent upon a limited number of suppliers and subcontractors, and in
some cases on single sources, for critical components or supplies. Limitation on
or interruption in the supply of certain components or supplies can severely and
adversely affect the Company's production and results of operations. The Company
has limited alternative sources of certain key materials such as wafer
substrates, wires and advanced 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 limited number of suppliers, customers, and
customer product programs, 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.
18
<PAGE> 19
The result of the inventory charges could materially and adversely affect the
Company's business, financial condition and results of operations. While the
Company has taken certain charges and provided inventory write-downs, there can
be no assurance that the Company will not be required to take additional
inventory write-downs in the future due to the Company's inability to obtain
necessary product qualifications, or due to further cancellations by customers.
The Company manufactures custom products for a limited number of customers.
Because its products are custom-built, the Company typically cannot shift raw
materials, work-in-process or finished goods from customer to customer, or from
one product program to another for a particular customer. However, to enable its
customers to get products to market quickly and to address its customers' demand
requirements, the Company must invest substantial resources and make significant
materials commitments, often before obtaining formal customer qualifications and
generally before the market prospects for its customers' products are clear.
Moreover, given the rapid pace of technology advancement in the disk drive
industry, the disk drive products that do succeed typically have very short life
cycles. Finally, in response to rapidly shifting business conditions, the
Company's customers have generally sought to limit purchase order commitments to
the Company, and have done so by employing what is known in the industry as JIT
(Just-in-Time) hubs. If the customer does not have demand from their end
customer, they will not pull the inventory from the JIT hub and thus the Company
may be left with excess and or obsolete inventory, which increases inventory
risk. To help offset this risk, the Company has implemented this inventory
management tool with several of its suppliers. Certain customers have on
occasion canceled or materially modified outstanding purchase orders with the
Company without significant penalties. For example, the Company experienced
significant cancellations during the first two quarters of fiscal 1998, as a
result of which the Company incurred charges for inventory obsolescence, which
materially and adversely affected the Company's operating results.
INTERNATIONAL OPERATIONS
The Company's production process is also labor intensive. As a result, the
Company conducts substantially all of its HGA machining, assembly and test
operations, HSA assembly and tape head assembly operations offshore, and is thus
subject to the many risks associated with contracting with foreign vendors and
suppliers and with the ownership and operation of foreign manufacturing
facilities, including obtaining requisite governmental permits and approvals,
currency exchange fluctuations and restrictions, variable or higher tax rates,
expiration of tax holidays, political instability, changes in government
policies relating to foreign investment and operations, cultural issues, labor
problems, trade restrictions, transportation delays and interruptions, and
changes in tariff and freight rates. The Company has from time to time
experienced labor organization activities at certain of its foreign operations,
most recently during the first quarter of fiscal 1997, but none of the Company's
employees are currently represented by a union. There can be no assurance,
however, that the Company will continue to be successful in avoiding work
stoppages or other labor issues in the future.
In addition, several countries where the Company has operations, including
Japan, Thailand and the Philippines, experience fluctuations in the value of
their currencies relative to the U.S. dollar. The Company is unable to predict
what effect, if any, these factors will have on its ability to manufacture
products in these markets. The Company enters into foreign currency forward and
option contracts in an effort to manage exposure related to certain foreign
currency commitments, certain foreign currency denominated balance sheet
positions and anticipated foreign currency denominated expenditures, as
substantially all of the Company's foreign sales are denominated in U.S.
dollars.
The Company continues to operate its joint venture in Japan, RRSMI. The
joint venture's objective is to capture business in the Japanese market. The
future of the joint venture depends on its ability to succeed in this market
place. It is possible that if RRSMI is not successful in generating a positive
operating margin in the near term, the Company will need to take appropriate
steps to align its cost structure, cash flows and equity position accordingly.
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.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to the form 10-K for the year ended September 30, 1999.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the "Ferrari State Action"). The complaint in the Ferrari State
Action alleges that during a purported class period of April 19, 1995 -- January
22, 1996, defendants made materially false and misleading statements concerning
the Company's business condition and prospects, in violation of the California
Corporations Law, the California Civil Code (those sections prohibiting fraud),
and the California Business and Professions Code. The plaintiffs in the Ferrari
State Action seek damages of an unspecified amount. In May 1997, the Superior
Court entered an order (1) sustaining the demurrers of certain defendants to the
California Corporations Code cause of action and overruling the demurrers of
Read-Rite Corporation and certain other defendants to that same cause of action;
and (2) sustaining the demurrers of all defendants as to the remaining causes of
action.
In January 1997, a purported class action complaint was filed in the United
States District Court for the Northern District of California by Ferrari and
Goldman against the Company and certain of its officers and directors (the
"Ferrari Federal Action"). In May 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by James C. Nevius and William Molair against the Company and certain
of its officers and directors (the "Nevius Federal Action"). The court
consolidated the Ferrari Federal Action and the Nevius Federal Action into one
action, In re Read-Rite Corp. Securities Litigation (the "Consolidated Action"),
and plaintiffs thereafter filed a consolidated complaint. The consolidated
complaint alleges that from April 19, 1995 -- January 22, 1996 (the "Ferrari
Class Period") and from of March 2, 1996 -- June 19, 1996 (the "Nevius Class
Period"), defendants made false and misleading statements about the Company's
business condition and prospects. The consolidated complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5, and seeks damages of an unspecified amount. In August 1998, the court in
the Consolidated Action granted defendants motion to dismiss but granted
plaintiffs leave to file an amended complaint. In January 1999, plaintiffs filed
their amended complaint. In March 1999 defendants moved to dismiss that amended
complaint with prejudice. In June 1999 the court heard oral argument on
defendants' motion to dismiss. That motion is currently under judicial
consideration.
There has been no discovery to date in the federal actions and no trial is
scheduled in any of these actions. The Company believes that the Company and the
individual defendants have meritorious defenses in the above-described actions.
Accordingly, both on its own behalf and pursuant to indemnification agreements
between the Company and the named individual defendants, the Company intends to
continue to defend each of these actions vigorously. Failure by the Company to
obtain a favorable resolution of the claims set forth in any of these actions
could have a material adverse effect on the Company's business, results of
operations and financial condition. Currently, the amount of such material
adverse effect cannot be reasonably estimated.
Except as so noted, the Company is not a party, nor is its property subject,
to any material pending legal proceedings other than ordinary routine litigation
incidental to the Company's business. The Company does not believe such routine
litigation, taken individually or in the aggregate, will have a material adverse
effect on the Company's business, financial condition or results of operations.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: January 27, 2000 /s/ John T. Kurtzweil
-----------------------------------------
John T. Kurtzweil
Senior Vice President, Finance and
Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule (electronic filing only)
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1999 SEP-30-2000
<PERIOD-START> OCT-01-1998 OCT-01-1998 OCT-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999 DEC-31-1999
<CASH> 62,826 80,547 53,599
<SECURITIES> 45,860 145,856 60,568
<RECEIVABLES> 152,487 48,576 78,901
<ALLOWANCES> 5,620 2,594 1,907
<INVENTORY> 62,740 31,186 42,425
<CURRENT-ASSETS> 327,326 309,619 240,153
<PP&E> 1,269,209 1,236,880 1,245,802
<DEPRECIATION> 718,368 779,691 807,031
<TOTAL-ASSETS> 897,703 784,490 695,522
<CURRENT-LIABILITIES> 206,349 290,905 262,955
<BONDS> 385,543 361,668 360,900
0 0 0
0 0 0
<COMMON> 5 5 5
<OTHER-SE> 237,484 84,204 27,597
<TOTAL-LIABILITY-AND-EQUITY> 897,703 784,490 659,522
<SALES> 230,188 716,460 114,492
<TOTAL-REVENUES> 230,188 716,460 114,492
<CGS> 195,327 739,725 145,619
<TOTAL-COSTS> 195,327 739,725 145,619
<OTHER-EXPENSES> 31,021 159,050 25,728
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 7,368 31,910 8,845
<INCOME-PRETAX> 1,170 (181,661) (57,475)
<INCOME-TAX> 48 (25,946) 0
<INCOME-CONTINUING> 1,122 (155,715) (57,475)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,122 (155,715) (57,475)
<EPS-BASIC> 0.02 (3.16) (1.15)
<EPS-DILUTED> 0.02 (3.16) (1.15)
</TABLE>
