I too was wondering what, if any, effect the rumor of a sale of the RRSMI unit would have on RDRT. So I did some researching from Read-Rite's most recent Form 10-K. Items copied from the 10-K are in Italics:
sec.gov
Read-Rite SMI Corporation ("Read-Rite SMI"), the Company's joint venture in Japan with Sumitomo Metal Industries, Ltd. ("Sumitomo"), operates a wafer manufacturing facility near Osaka, Japan, and sells its wafers to the Company and to its Thailand subsidiary, Read-Rite SMI (Thailand) Co., Ltd. ("RRST").
More details about the joint venture
STRATEGIC ALLIANCE WITH SUMITOMO
In June 1991, the Company established a strategic alliance with Sumitomo, a leading Japanese industrial company, including an investment by Sumitomo in the Company and the establishment by the two companies of a joint venture, Read-Rite SMI, in Japan. Substantially all of Read-Rite SMI's sales during fiscal 1998 and fiscal 1997 were to the Company and to MKE, a subcontractor to and partner of Quantum.
In December 1993, the Company and Sumitomo invested an additional $2.8million and $9.2 million, respectively, in Read-Rite SMI as part of a series of agreements pursuant to which Read-Rite SMI licensed from the Company the Company's MR technology, sublicensed from the Company the technology licensed from KME in the fourth quarter of fiscal 1993, and agreed to share with the Company certain ongoing MR technology research and development costs. In September 1996, the Company and Read-Rite SMI amended their principal license agreement to include additional technologies, including spin valve and GMR, and to eliminate royalty provisions which were replaced by an ongoing cost sharing arrangement allowing the parties to share equitably in their collective research and development expenditures.
Further investments in Read-Rite SMI beyond current amounts are expected to be borne equally by the Company and Sumitomo.
The Company has retained a majority voting interest in Read-Rite SMI; however, prior to the first quarter of fiscal 1998, all material corporate actions required a supermajority vote of Read-Rite SMI's Board of Directors, and thus the consent of both the Company and Sumitomo. During the first quarter of
fiscal 1998, the Company and Sumitomo revised their various agreements and RRSMI's charter documents to provide for a simple majority vote of the Board of Directors of Read-Rite SMI on all matters except for certain non-ordinary course of business matters requiring a supermajority. In the case of a shareholder vote
due to the lack of the required vote by the Board of Directors, a simple majority shareholder vote is required.
As a result of the June 1991, December 1993 and September 1996 transactions, the Company and Read-Rite SMI have cross-licensed all of their respective inductive thin film, MR, spin valve, and GMR technologies owned or developed during the term of the original joint venture agreement relating to
the manufacture of thin film heads for disk drives. Read-Rite SMI has the exclusive right to distribute products of either Read-Rite SMI or the Company to customers for integration into disk drives in Japan and to Japanese customers for integration into rigid disk drives throughout the remainder of the world other than North America. The Company has the exclusive right to distribute products of either the Company or Read-Rite SMI for integration into rigid disk drives in North America and throughout the rest of the world, other than in Japan or by Japanese customers outside North America.
What do they Produce?
Wafer Fabrication
The Company presently fabricates wafers at its Fremont and Milpitas, California facilities and at Read-Rite SMI's facility near Osaka, Japan. The Company's Fremont facility produces 6" square wafers (versus 4" square wafers currently produced in its Milpitas facility and at Read-Rite SMI), increasing the unyielded per wafer slider count from approximately 6,500 per 4" wafer to over 16,600 nanosliders per 6" wafer, and during fiscal 1998 produced approximately 66% of the Company's total slider output. During fiscal 1998, the Company transitioned its wafer fabrication facility almost entirely to MR technology in order to meet the specifications and demand for increased production of MR products, as inductive products reached end-of-life. The Company's Fremont facility serves as the primary wafer supply for MR and remaining inductive products, with the Milpitas facility serving as the primary wafer supply for tapehead products.
At the end of fiscal 1998 and continuing into fiscal 1999, the Company's Fremont facility has begun transitioning from fabricating wafers using MR technology to GMR technology. While GMR technology has many similarities to MR technology, there are critical differences. These differences require additional
investments be made in capital equipment due to the tighter manufacturing tolerances which result from using GMR technology.
So the RRSMI facility is not getting the GMR upgrades and is producing the lower unyielded 4" round rather than the 6" square wafers. Seems like the only other place that RDRT is using that wafer size is in the DLT tape head operations in Milpitas. I wonder if this is a logical operation for QNTM's SDLT tape heads? With 6,500 sliders coming from a 4" round versus 16,600 coming from the 6" square wafers, it could be that the RRSMI facility is not needed at all. I would also assume that the switch to Pico from Nano will increase those unyielded numbers even higher since Pico takes less space than Nano.
What's been happening to RRSMI?
In the first quarter of fiscal 1998, Singapore Technologies, Pte. Ltd. ("Singapore Technologies") liquidated Micropolis Ltd. ("Micropolis"), a wholly owned Singapore Technologies subsidiary. Immediately prior to this unexpected announcement, the Company anticipated Micropolis would account for approximately 1.5% of the Company's net sales during the first quarter of fiscal 1998. In addition, in fiscal 1998, Read-Rite SMI lost significant market share of its principal customer, Quantum/Matsushita Kotobuki Electronics ("MKE").
Accordingly, Quantum/MKE did not represent a significant percentage of the Company's net sales during fiscal 1998, which materially and adversely affected the business, financial condition and results of operations of Read-Rite SMI and thus the Company. For a discussion of additional risk factors associated with the Company's customer base, see "Certain Additional Business Risks." (see paragraph below)
Although the Company believes Read-Rite SMI provides important advantages to the Company, there can be no assurance that there will continue to be strong market demand in Japan for thin film heads manufactured by independent suppliers, that Read-Rite SMI will be successful in supplying heads to Quantum/MKE, or that Read-Rite SMI will be successful in further penetrating the Japanese market. For example, though Read-Rite SMI was a supplier for Quantum/MKE on certain previous MR programs, Read-Rite SMI is not currently a supplier on Quantum/MKE's disk programs. Though Read-Rite SMI will continue to seek qualification on Quantum/MKE's disk programs, there can be no assurance that Read-Rite SMI will be successful in regaining market share at Quantum/MKE. The failure of Read-Rite SMI to participate in current and future Quantum/MKE programs or to obtain additional customers has had and may continue to have a material adverse effect on the Company's business, financial condition and results of operations.
So the QNTM blow-out caused the units in RRSMI to be down. But the Company has a goal of getting QNTM as a direct customer since QNTM closed down MKE. Given the number of qualifications in process by RDRT at QNTM and the improving relationship including the SDLT project, I would assume that if RDRT is successful that this could be a net positive for RDRT.
How many employees are at RRSMI?
As of September 30, 1998, the Company had 18,257 employees, including 1,879 in the United States, 10,562 in Thailand, 5,200 in the Philippines, 155 in Malaysia, 438 at Read-Rite SMI, and 23 at the Company's sales and customer support offices in Singapore. Read-Rite believes its future success will depend in large part upon its ability to continue to attract, retain, train and motivate highly skilled and dedicated employees. None of the Company's employees are currently represented by a labor union.
RRSMI has 2.4% of the total Company headcount.
Facilities involved at RRSMI?
Read-Rite SMI leases from Sumitomo an approximately 92,000 square foot wafer fabrication and research and development office facility near Osaka, Japan. This lease expires in November 2001.
Looks like the lease is up in about a year and half.
Some Balance Sheet information in the footnotes:
In December 1993, the Company and Sumitomo invested an additional $2.8 million and $9.2 million, respectively, in Read-Rite SMI to support Read-Rite SMI's development of MR technology. During fiscal 1999, the Company and Sumitomo expect to fund Read-Rite SMI equally for any working capital requirements that exceed Read-Rite SMI's cash, cash equivalent and short-term investment balances at September 30, 1998. Read-Rite SMI's balance sheet at September 30, 1998 included cash, cash equivalents and short-term investments of $10.9 million, and total assets of $141.2 million.
SHORT-TERM BORROWING
Short-term borrowing at September 30, 1998 consists of a Japanese Yen denominated loan from a related party, Sumitomo, to Read-Rite SMI of approximately $7,399,000.
An attachment to the Form 10-K was the changes to the loan agreement for the line of credit, which included two changes related to RRSMI:
1.3.15 Section 6.02(j)(viii) is amended to read in its entirety as follows:
(viii) Investments in Read-Rite SMI made prior to October 2,
1997; and additional Investments in Read-Rite SMI, and loans and
guaranties of debt of Read-Rite SMI, not in excess of $40,000,000 in the
aggregate.
1.3.18 Section 6.02(l) of the Credit Agreement is amended to read in its
entirety as follows:
(l) Acquisitions: Acquire or permit any Subsidiary (other than
Read-Rite SMI) to acquire (an "Acquisition") any assets or any business
as a going concern, whether through purchase of assets, merger or
otherwise, if the consideration for such Acquisition (except for equity
securities of Borrower or such Subsidiary) exceeds $10,000,000;
provided, that, if EBITDA for the Borrower in any two consecutive fiscal
quarters ending after December 1998 exceeds $50,000,000 in each such
quarter, then, notwithstanding the foregoing part of this clause,
Acquisitions will be permitted provided that the aggregate value of
consideration (in whatever form) for any such Acquisition when
aggregated with the consideration (in whatever form) for all
Acquisitions made in the twelve month period preceding the Acquisition
in question does not exceed 25% of the Consolidated Tangible Net Worth
of the Borrower (determined as at the date of the Acquisition in
question).
So I read that as RDRT can invest up to another $20.6 ($40 - $2.8 - $9.2 - $7.399) million into RRSMI under the loan agreement. Wonder if RRSMI is being set-up as a near to Fujitsu production site for meeting their head needs? Or maybe a SDLT tape production? Why would the new bank covenants allow more investment if this unit was going away? Why would those same covenants allow RRSMI to be outside of the acquisition limitations?
I probably raised more questions than answered. But I know more about what RRSMI is. It appears to not be the primary technology and might represent excess capacity, or it could be the next lanuching point for an expanded customer base. I guess we'll have to wait for an announcement from RDRT.....
Any thoughts would be welcomed.
Later, (-8 Dennis 8-)
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