FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RDRT)") else Response.Write("(NASDAQ: RDRT)") end if %>
345 Los Coches St.
Milpitas, CA 95035
408-262-6700
http://www.readrite.com

ALEXANDRIA, Va., October 25, 1996 /FOOLWIRE/ -- Read-Rite Corporation reported on October 23 sales of $195.4 million for the fourth quarter of fiscal 1996 ended September 29, 1996, compared to the $288.7 million reported in the comparable period of fiscal 1995. This level of revenues was a little bit better than the company has expected going into the quarter. The company posted a net loss of $63.9 million, compared to net income of $46.7 million in the fourth quarter of fiscal 1995. Loss for the fourth quarter was $1.37 per share based on 46.7 million shares, compared to a profit of 95 cents per share based on 49.0 million shares in the fourth quarter of fiscal 1995. These results include charges totaling $27.0 million primarily associated with a write-off of fixed assets supporting older recording head technologies being phased-out, as well as restructuring the company's operations in the Philippines including a workforce reduction of some 5,000 employees and consolidation of its facilities there. In total, the force reduction included 5,700 employees, or 22% of the company's workforce. Excluding these charges, Read-Rite's net loss for the fourth quarter would have been $36.9 million and 79 cents per share, respectively.

For fiscal 1996, sales were $991.1 million, compared to the $1.003 billion reported for fiscal 1995. Read-Rite posted a net loss for fiscal 1996 of $43.0 million, compared to net income of $123.6 million reported for fiscal 1995. Loss for fiscal 1996 was 92 cents per share based on 46.8 million shares, compared to a profit of $2.60 per share based on 47.6 million shares in fiscal 1995. Fiscal 1996 results include second, third and fourth quarter charges totaling $52 million, of which $9 million was a research and development expense for the company's acquisition of in-process research and development related to planar recording head technology. Excluding these charges, the company would have reported net income for fiscal 1996 of $9 million and a profit of 19 cents per share, respectively.

"As we previously announced, the fourth quarter of fiscal 1996 was a financially difficult quarter for Read-Rite," said Cyril J. Yansouni, chairman and chief executive officer. "We exited the metal-in-gap (MIG) recording head business and continued to incur high start-up costs associated with several major advanced inductive products and our new magnetoresistive (MR) products, and were unable to cover fixed costs as a direct result of lower volume and under utilized capacity during the quarter," he stated. "However, we exited the fourth quarter in a stronger position with our advanced inductive and MR manufacturing capacity and technologies," he added. During the quarter the company shipped more than 2 million MR heads and shipped approximately 1.5 million advanced inductive heads with undershoot reduction, utilizing both ion milling and focused ion-beam manufacturing processes.

Also during the fourth quarter, Read-Rite provided customers with samples of its planar technology recording heads and demonstrated an areal density of 1.5 GB per 3.5 inch platter with its planar recording heads in a pico-size form factor.

"We enter the first quarter of fiscal 1997 having achieved major design-wins at our key customers and with significant orders for both Read-Rite's advanced inductive and MR recording heads," said Mr. Yansouni. "We continue to install additional capacity to build these products, and are working diligently to improve yields while at the same time reduce our operating costs. Based on our production plans, we have an opportunity to increase unit shipments and revenues sequentially for the first quarter of fiscal 1997, as compared to the fourth quarter of fiscal 1996," Mr. Yansouni stated.

ADDITIONAL OPERATING COMMENTS

Facilities in the Philippines are being consolidated on one site, which will focus on thin-film head stack assemblies and planar technology.

Customer mix for the quarter: Western Digital, 45.3%; Quantum, 26.7%; Maxtor, 12%; Iomega, 8.9%; and others each below five percent. Product mix was: Head stack assemblies, 62.8% of revenue, head gimble assemblies, 34.3%; with tape business making up the balance. Unit sales breakdown: 19.5 million HGAs; 2.9 million HSAs.

The company has moved to volume production on advanced inductive heads with areal density from 620 Mbit/square inch to 800 Mbit/square inch. From a design point of view, the 1996 problems are firmly behind the company. The challenge now is to ramp these products.

The 2 million MR head shipments exceeded expectations of 1.4-1.5 million units and the company is participating in more and more MR head programs with customers.

Engineering samples of planar heads are now shipping and the company is executing well here. Planar pico heads are now achieving 1.5 GB on 3 1/2 inch platters. Several very important customer designs are committed to the technology. The company has deployed significant capital devoted to the various leading-edge technologies technologies.

The company is now back in a strong competitive position and is participating in a record number of designs, both in PCs and in the enterprise sector of storage. Entering Q1 1997, the company has the opportunity to increase both unit shipments and revenues and leverage its increasing strengths outlined above.

ADDITIONAL FINANCIAL COMMENTS

The company's exit from the metal-in-gap business reduced revenues by $43.2 million since the June, 1996 quarter. The loss at the gross margin line includes the majority of the charges the company took during the quarter.

The company believes that start-up costs with its advanced inductive products and MR heads will diminish in coming quarter. R&D was 23% higher for the year as the company acquired its planar technology and continued with other projects. SG&A was flat with last quarter and down $1.2 million from last year's Q4 and is tightly under control. Interest expense and other income was $3.1 for the quarter, down from last quarter because of increased borrowing. Read-Rite expects net interest expense to be $2.5-3.0 million per quarter going forward.

The company's cash decline was due to equipment capital expenditures and the loss from operations. Accounts/receivable were reduced to 39 days sales outstanding, from $111.3 million last quarter to $90.1 million in Q4. Inventory was reduced to $58 million from $82.5 million in June to inventory write-downs and cost controls exhibited in an increase in inventory turns (before charges to cost of goods sold). Inventory turned 14+ times, up from 11+ times in Q3. All categories of inventory declined, resulting in inventories of: raw materials, $12; work-in-process, $33.4; and finished goods, $12.5 million.

Fixed asset addition for the quarter amounted to $69.3 million and $268.7 million for the fiscal year. Depreciation and amortization for the quarter equaled $30.6 million, up from $28.8 million in Q3. Current liabilities decreased to $196.1 million from $222.7 million from Q3. This decline is consistent with the decline in inventories. Long term debt at the end of Q4 was $172 million, down $6 million from last quarter.

QUESTION AND ANSWER SESSION

On inductive volume vs. MR throughout the industry, it depends on where costs are and what capacity looks like. The company is planning on 40-45% MR in 1997, 35-40% inductive, and the remaining 25% planar as inductive shifts to planar. By the end of 1997 and into 1998, production will be mostly planar and MR and in 1999, MR.

The company's business model has always been to run at 25% gross margin, which it hopes to achieve by the end of 1997.

Cash flow forecasts for 1997: Depreciation will increase $2-2.5 million per quarter (Q4 was $30 million); capital expenditures, something less than $250 million for the year.

The company has always competed in a market with touch competition and will focus its energies on turning out quality products in future environments rather than fixating on specific competitors such as IBM and Seagate, should those companies get into the merchant market.

The company would like to spend 4-4.5% of revenues on SG&A and R&D, respectively, going forward.

Chairman Cyril Yansouni commented that products ramps are no longer "ramps, but cliffs." The challenge facing the company is not design, as they are participating in so many programs, but is found in ramping quickly and profitably to huge volumes.

Tax rate for fiscal 1997 should be around 30% but will start at a higher level and descend to 25% by the end of the year. For Read-Rite SMI, the minority interest in subsidiary line in the owners' equity portion of the balance sheet should normalize this year, starting next quarter.

When the company is leading the market, average selling price can stay up because they are selling more high-end product and vice-versa. If the company can stay with or lead the market on quality of products, then average selling price will stay firm or will increase due to product mix favoring high-end products.

Unit volume was 19.5 million and half a million units were MIG. For all practical purposes, the company is out of the MIG business.

MR pricing by the end of the year should be around $10. At this point, Read-Rite is sold out on the high-demand product.

The company expects to see more adoption of planar technology and believes that planar can be very cost competitive in volume.

Etched air bearing is a growing part of the company's head technology compared to machined air bearing. Production bottlenecks are not found in the ion etching part of the process but are in the undershoot part of manufacturing.

Though there are no problems which loom large for planar production, the company will move forward with small quantities for the next two months or so to get a handle on that and get to know the process much better.

Though the stated goal on cap. ex. is somewhat lower than last year's number, the company will try to come in even below that as they would like to retain all the flexibility they can in short product cycles. At the same time that they are able to re-use certain components of thin film head lines, they also need to spend money on new testers and other production equipment to produce what the market demands. In all, then, the company will stay flexible but will have to see what the market is telling them on what they cap. ex. needs to be.

Japanese competitors are almost withdrawing from advanced inductive while Read-Rite is keeping its options open there at the same time that it is competing head-on in MR.

At this point, the company is shipping MR to customers other than Quantum.

All of Read-Rite's MKE business is booked under Read-Rite SMI and much of the Quantum business is done through MKE.

The company might be part of Quantum's stated heads and HSAs shortages -- Read Rite is ramping as quickly as possible.

MKE sources from multiples suppliers, including Yamaha and TDK. The company believes that its share of MKE business is somewhere around 25%.

Last quarter's customer breakout: Western Digital, 48.5%; Quantum, 27.4%; Maxtor, 10.7%; and Iomega was about 1%. Backlog was strong going into the quarter, but backlog is not highly meaningful as the market situation can change so quickly.

Much of the MR head shipments were made in the latter part of the quarter -- it may see an order of magnitude increase for Q1. The company is no stranger to production ramps, though.

There are no major competitors in the planar business. The company believes that the head can compete on price and on customer designs, since it's an inductive technology, if MR costs stay where they think they will over the next year and into the year following that.

Significant volume should be seen out of the California facility this quarter.

The model for operating expense is 8.5% of sales.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.