-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tl5DRT0D/LuMuWvquk5kyec7TJBZfLAe5V/7ibWNufbZnVw4FaBStTYTT1VBIwO7 UbP+X0xbzLdMMH9M1jfaqw== 0000889810-97-000076.txt : 19970305 0000889810-97-000076.hdr.sgml : 19970305 ACCESSION NUMBER: 0000889810-97-000076 CONFORMED SUBMISSION TYPE: DFAN14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970304 SROS: NYSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: READ RITE CORP /DE/ CENTRAL INDEX KEY: 0000819480 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 942770690 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: DFAN14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19512 FILM NUMBER: 97550469 BUSINESS ADDRESS: STREET 1: 345 LOS COCHES ST CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4082626700 MAIL ADDRESS: STREET 1: 345 LOS COCHES STREET CITY: MILPITAS STATE: CA ZIP: 95035 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MAGNETICS CORP CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 951950506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: DFAN14A BUSINESS ADDRESS: STREET 1: 75 ROBIN HILL RD CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8056835353 MAIL ADDRESS: STREET 1: 75 ROBIN HILL ROAD CITY: GOLETA STATE: CA ZIP: 93117 DFAN14A 1 SCHEDULE 14A INFORMATION (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [ ] [ ] Preliminary Proxy Statement [ ] Confidential , for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [X] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 READ-RITE CORPORATION - --------------------------------------------------------------------------- (NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) APPLIED MAGNETICS CORPORATION - --------------------------------------------------------------------------- (NAME OF PERSON(S) FILING PROXY STATEMENT IF OTHER THAN REGISTRANT) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and 0-11 1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------ 2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------ 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------ 4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------ 5) Total fee paid: ------------------------------------------------------------------ - 1 - [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: ------------------------------------------------------------------ 2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------ 3) Filing Party: ------------------------------------------------------------------ 4) Date Filed: ------------------------------------------------------------------ - 2 - [LOGO] [LOGO] APPLIED MAGNETICS CORPORATION READ-RITE CORPORATION A POWERFUL COMBINATION FOR INVESTORS, CUSTOMERS AND THE INDUSTRY - 3 - Preface This document contains certain forward looking statements with respect to the financial condition, results of operations and business of Applied Magnetics Corporation and, assuming the consummation of the proposed business combination, a combined Applied Magnetics/Read-Rite Corporation. In addition, the ability of Applied Magnetics to realize increases in operating income resulting from potential cost savings is also subject to the following uncertainties, among others: (a) the ability to integrate the Applied Magnetics and Read-Rite management and R&D and operations functions on a timely basis, if at all: and (b) the ability to eliminate duplicative functions while maintaining acceptable performance levels. Further information on other factors which could affect the financial results of Applied Magnetics after the proposed business combination is included in filings by Applied Magnetics with the Securities and Exchange Commission, (the "Commission"), including a registration statement on Form S-4 filed with the Commission on February 24, 1997, and the Commission filings incorporated by reference therein. - 4 - Applied Magnetics and certain other persons named below may solicit proxies or consents to (i) remove all six of the present members of the Board of Directors (the "Read-Rite Board") of Read-Rite Corporation ("Read-Rite") and any person or persons elected or designated by any of such directors to fill any vacancy or newly created directorship; (ii) amend Section 3.2 of Article III of Read-Rite's By-laws (the "Read-Rite By-laws") to fix the number of directors of Read-Rite at two; (iii) elect two nominees of Applied Magnetics as directors of Read-Rite; and (iv) repeal each provision of the Read-Rite By-laws or amendments thereto adopted subsequent to December 20, 1996 and prior to the effectiveness of any of the foregoing proposals. The participants in this solicitation may include Applied Magnetics; the directors of Applied Magnetics (Craig D. Crisman, Harold R. Frank, Herbert M. Dwight, Jr., Dr. R.C. Mercure, Jr. and Jerry E. Goldress); the following executive officers or employees of Applied Magnetics (Peter Altavilla, Paul Frank and Steve Beal). As of the date of this communication, Applied Magnetics is the owner of 200 shares of Read-Rite Common Stock ("Shares"). Other than as set forth herein, as of the date of this communication, neither Applied Magnetics nor any of its directors, executive officers or other representatives or employees of Applied Magnetics, or other persons known to Applied Magnetics, who may solicit proxies or consents has any securities holdings in Read-Rite. Applied Magnetics disclaims beneficial ownership of any securities of Read-Rite held by any pension plan or other employee benefit plan of Applied Magnetics or by any affiliate of Applied Magnetics. Applied Magnetics further disclaims beneficial ownership of any securities of Read-Rite held by Applied Magnetics or any of its subsidiaries for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business. Applied Magnetics has retained Gleacher NatWest, Inc. ("Gleacher NatWest") and Montgomery Securities as its financial advisors in connection with the proposed transaction with Read-Rite. Although Gleacher NatWest and Montgomery Securities do not admit that they or any of their directors, officers, employees or affiliates are a "participant," as defined in Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended, or that such Schedule 14A requires the disclosure of certain information concerning Gleacher NatWest or Montgomery Securities, Gleacher NatWest and Montgomery Securities may assist Applied Magnetics in this solicitation. Gleacher NatWest and Montgomery Securities engage in a full range of investment banking services. As of the most recent practicable date prior to the date hereof as such information was available, neither Gleacher NatWest nor Montgomery Securities held any Shares. At the close of business on February 27, 1997, Montgomery Securities had a short position of 12,900 Shares in Read-Rite. Each of Gleacher NatWest and Montgomery Securities disclaims beneficial ownership of any Shares held by such firm or any of its subsidiaries for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business. The following employees of Gleacher NatWest may assist Applied Magnetics in this solicitation: Charles Phillips, John Huwiler and David Kerko. The following employees of Montgomery Securities may assist Applied Magnetics in this solicitation: Paul Fox, Peter Stoneberg, Harry Plant, David Locala and David DeRuff. Except as disclosed above, to the knowledge of Applied Magnetics, none of Applied Magnetics, the directors or executive officers of Applied Magnetics, the employees or other representatives of Applied Magnetics has any interest, direct or indirect, by securities holding or otherwise, in Read-Rite. - 5 - Table of Contents Tab --- Overview I Disk Drive Market Opportunity II Market Drive Product Road Map III Applied Magnetics: Myth vs. Reality IV Financial Highlights V Applied Magnetics Corporation's Proposed Merger With Read-Rite Corporation VI Comparison of Applied Magnetics and Read-Rite VII - 6 - =========================================================================== OVERVIEW =========================================================================== - 7 - Combined, Applied Magnetics and Read-Rite Offer Investors Powerful Earnings Potential [Graph showing the FY 1998 estimated earnings per share for Applied Magnetics standalone, Read-Rite standalone and combined.] FY 1988 EPS ----------- Applied Magnetics Standalone $6.22 (+44% Growth) Read-Rite Standalone $3.20 (+55% Growth) Combined $7.44(1) Note: All figures based on most recent street estimates. Growth percentages based on 1998 vs. 1997 estimates. (1) Includes $145 million of pretax synergies: $100 million cost savings and $45 million gross margin improvement assumed. - 8 - The Technology Sector Has Performed Poorly Since Applied Magnetics Launched Its Offer Offer Premium (Based on 2/21/97 Prices) 33% 2/21/97 2/28/97 % Change ------- ------- -------- Stock Prices (1): APM 55 1/4 38 1/2 (30.3%) RDRT 28 1/8 30 5/8 8.9% Peer Group Index (2) 100.0 91.1 (8.9%) Nasdaq Composite -- -- (1.9) Recent declines in APM's stock price do not reflect: > the underlying value of APM's standalone earnings potential or > cost saving synergies and enhanced earnings power of a combined APM and RDRT (1) Closing bid. (2) Peer group includes: QNTM, KMAG, HMTT, STMD, SEG, WDC and HTCH. - 9 - APM has Produced Superior Financial Performance and Created Substantial Shareholder Value Since the Installation of a New Management Team in 1994 [Two graphs. The first is APM's stock price from 1/1/94 through 2/21/97. The second graph is Applied Magnetics' quarterly revenues and earnings before interest and taxes over the same time period.] Stock Price ----------- (Price/Share) 2/10/94 5.00 3/25/94 7.00 5/10/94 5.50 6/22/94 4.50 8/04/94 4.50 9/16/94 4.25 10/28/94 3.875 12/12/94 2.25 1/25/95 3.375 3/09/95 2.75 4/21/95 4.00 6/05/95 5.50 7/18/95 8.375 8/29/95 10.50 10/11/95 15.375 11/22/95 15.00 1/08/96 17.375 2/20/96 16.25 4/02/96 15.625 5/15/96 20.125 6/27/96 10.375 8/09/96 12.875 9/23/96 17.00 11/04/96 21.375 12/17/96 28.375 1/30/97 58.00 Revenues EBIT -------- ---- ($ in Millions) 94Q2 $ 69.8 $ (8.5) 94Q3 70.3 (14.9) 94Q4 64.6 (19.0) 95Q1 55.4 (10.8) 95Q2 64.9 (3.8) 95Q3 79.9 5.9 95Q4 92.4 7.5 96Q1 94.7 8.5 96Q2 86.7 9.4 96Q3 74.0 3.8 96Q4 89.3 14.1 97Q1 121.6 33.4 - 10 - Applied Magnetics Has Strong Potential - Standalone or Combined with Read-Rite ________________ [ ]> Continue to add capacity [ APM Standalone ]> Continue to develop [ FY 1998E: ] advanced technology as ____________----------------> [ $6.22 EPS ] market demands [ ] [________________] [ APM ] [ Today ] [ FY1997E: ] [ $4.32EPS ] [___________] ----------------> ________________ [ ]> APM/RDRT adds production [ Combined with ] capacity immediately [ RDRT ]> Significant potential [ FY 1998E: ] for cost savings [ $7.44 EPS ]> Increased scale in [________________] consolidating industry > Product mix OEM customers need > Enhances R&D leverage for new products Note: APM FY 1997 EPS estimate based on most recent Street estimates fully taxed. - 11 - The APM Investment Opportunity > Strong market forces driving greater demand for storage > APM has advanced thin film and MR technology > APM's advanced thin film and MR products address the fastest growing segments of the head market > APM Management team has proven its operating capability by delivering a dramatic financial turnaround > APM managment has dramatically increased shareholder value > Opportunity to invest today to participate in current APM standalone value and recognize future potential of RDRT with APM's proven management team > RESULT: $7.44 EPS in FY 1998! - 12 - APM, Currently Trading at a Significantly P/E Discount Despite its Superior Financial Performance, Should Appeal to Both Growth and Value Investors P/E Multiples (1) 1997E 1998E ----- ----- Applied Magnetics 8.9x 6.2x Read-Rite 14.8 9.6 Peer Group (2) 13.3 9.3 Applied Magnetics P/E Premium/(Discount) to: Read-Rite (40%) (35%) Peer Group (2) (33%) (33%) (1) Based on closing prices on February 28, 1997 (APM=$38.50, RDRT=$30.69). (2) Peer group includes: QNTM, KMAG, HMTT, SEG, WDC and HTCH. - 13 - =========================================================================== Disk Drive Market Opportunity =========================================================================== - 14 - Product Overview > Both APM and RDRT manufacture recording heads for Hard Disk Drives, which are supplied as . Head Gimbal [Diagram of hard disk drive and Assemblies ("HGAs") its components, recording head slider, head gimbal assembly . Head Stack and head stack assembly] Assemblies ("HSAs") > The technologies used to manufacture heads include . Metal in Gap (MIG) . Thin Film . Planar . Magnetoresistive (MR) - 15 - The Recording Head Manufacturing Process and Resulting Yields 100 HGA - Equivalent Starts WAFER Goleta, CA Yield: 82 --> ROW Goleta, CA 68 --> SLIDER Penang, Malaysia 42 --> HGA Sub-Assembly Malaysia, Korea, China 38 --> HGA Test ---> Ship to Customer Malaysia, Korea 34 --> HSA Malaysia, Korea, Ireland 33 --> Ship to Customer - 16 - Drivers of Data Storage Demand Growth Database Applications/ Datawarehousing Graphical Internet ________________ Multimedia Web Sites [ ] Data Types [ Storage Demand ] [ Growth ] [_________________] Disk Arrays E-mail Proliferation Overall Computer Growth Memory Intensive (Home and Office) Software Applications - 17 - Unit Growth of PCs Continues... [Graph of PC shipments in millions of units from 1993- 1999 estimated] (Millions) 1993 38.8 1994 47.4 1995 61.2 1996 73.5 1997E 87.1 1998E 100.8 1999E 118.0 CAGR: 1993-99 20% 1996-99 17% (1) (1) Market research estimates range from 17-20% Source: Applied Magnetics and Trend-Focus - 18 - ...While Storage Requirements Propel Strong Growth in Disk Drive Units [Graph of total disk drive unit shipments in millions of units from 1994-1997 estimated) (Millions) 1993 52.1 1994 69.1 1995 88.3 1996 106.0 1997E 131.4 1998E 173.4 1999E 211.2 CAGR: 26% Source: Applied Magnetics and Trend-Focus - 19 - ...Resulting in More Heads Per Average Drive and... [Graph of the average number of heads per disk drive shipped from 1994-1997 estimated] 1994 5.0 1995 5.8 1996 6.0 1997E 6.3 Source: Applied Magnetics and Trend-Focus - 20 - ...An Even Faster Rate of Growth of Head Unit Shipments [Graph of the number of heads shipped in millions of units from 1993-1997 estimated] (Millions) 1993 259 1994 345 (+33%) 1995 525 (+52%) 1996 639 (+22%) 1997E 830 (+30%) CAGR: 35% Source: Trend-Focus - 21 - Technology Advances are Driving Up Storage Capacity per Disk... [Graph of the average number of megabytes of storage per 3.5 inch disk drive shipped from 1993-1997 estimated] (Megabytes per 3.5" Disk) 1993 170 1994 270 1995 420 1996 670 1997E 1,080 Source: Applied Magnetics - 22 - ...And Driving Down Prices, Which Drives Demand, But... [Graph of the average cost (in cents) to the consumer of a megabyte of storage on a 3.5 inch disk from 1993- 1997 estimated] ($ per Megabyte) 1993 $0.68 1994 0.43 1995 0.27 1996E 0.16 1997E 0.10 ...Requires Intense, Cost-Focused Management. 38% per Year Cost Reduction Source: Applied Magnetics - 23 - ============================================================================== Market Driven Product Road Map ============================================================================== - 24 - Market Driven Product Strategy > Overall Philosophy - Deliver products which meet today's customer price/performance needs and provide superior gross margins > Exploit advanced thin film head technology to develop industry leading data storage capacity at superior price points: . Presently in commercial volume with 1.3GB per disk . Presently qualifying 1.6GB per disk advanced thin film product with six OEMs . Sample 2.1GB per disk advanced thin film product in 3/97 > Provide cost-effective advanced thin film products as a solution for our desktop market: . Desktop producers will continue to adopt MR more slowly than the notebook/workstation segments due to price/performance and volume availability > Continue to expand MR capacity consistent with customer adoption roadmaps . APM's & RDRT's major customer today is 90% thin film - 25 - APM Is Successfully Making Product Transitions [Graph of the percentage breakdown of APM's actual and estimated production of heads with varying capacities from the first quarter of fiscal 1996 through the fourth quarter of fiscal 1997 estimated] Q1 FY1996 Q2 FY1996 Q3 FY1996 Q4 FY1996 - --------- --------- --------- --------- 540/670MB 100% 540/670MB 99% 540/670MB 69% 540/670MB 20% 850 MB 1% 850MB 30% 850MB 64% 1080MB 1% 1080MB 16% Q1 FY1997E Q2 FY1997E Q3 FY1997E Q4 FY1997E - ---------- ---------- ---------- ---------- 850MB 25% 850MB 12% 850MB 10% 850MB 8% 1080MB 69% 1080MB 65% 1080MB 38% 1080MB 24% 1300MB 2% 1300MB 22% 1300MB 49% 1300MB 34% 1600MB 3% 1600MB 26% 2100MB 8% Source: Applied Magnetics - 26 - Advanced Thin Film Will Continue to Provide Industry Leading Storage Capacities... [Chart outlining APM's planned advanced thin film product roadmap from the third calendar quarter of 1996 through the second calendar quarter of 1998 estimated] 1996A 1997E 1998E --------- ------------------------ ----------- Capacity/ CQ3 CQ4 CQ1 CQ2 CQ3 CQ4 CQ1 CQ2 Disk - ---- 850MB ---------------O 1080 MB ==O--------------------------------O 1300 MB ========O-----------------------------------O 1600 MB O==================O----------------------------------> 2100 MB O===================O--------------------> 2800 MB O==============O-----------> ==== Qualification Cycles - ---- Planned Volume Production ...Meeting a Market Need for Future Advanced Product Generations - 27 - APM Will Roll Out New MR Products as Customers Require [Chart outlining APM's planned MR product roadmap from the third calendar quarter of 1996 through the second calendar quarter of 1998 estimated] 1996A 1997E 1998E --------- ------------------------ ----------- Capacity/ CQ3 CQ4 CQ1 CQ2 CQ3 CQ4 CQ1 CQ2 Disk - ---- <900 MB -----------------------------------O 910/1080 MB ==============O----------------------------O 1600 MB =====================O-------------------------------> 2100 MB O=============O------------------------> 2800 MB O=============>O--> 3400 MB O=========> 4300 MB O=====> ==== Qualification Cycles - ---- Planned Volume Production - 28 - Thin Film Heads Have Substantial Cost Savings Over Comparable MR Products [Graph of the average sales price for thin film and MR heads of comparable performance from 1995-1999 estimated] Average Sales Price Comparable Performance Heads Thin Film Inductive MR ------------------- -- 1995 8.96 18.20 1996 7.95 12.97 1997E 7.04 10.42 1998E 6.71 8.83 1999E 6.57 8.00 Source: Trend-Focus - 29 - APM Has Been Shipping MR Heads into Customer Programs for Nine Months... [Graph of the percentage of thin film and MR heads that APM expects to produce between the second calendar quarter of 1997 and the second calendar quarter of 1999] Percentage of HGA Units CY 1997E CY 1998E CY 1999E ----------------- ------------------------- ---------- CQ2 CQ3 CQ4 CQ1 CQ2 CQ3 CQ4 CQ1 CQ2 --- --- --- --- --- --- --- --- --- Thin Film 90% 84% 78% 68% 57% 43% 22% 4% MR 10% 16% 22% 32% 43% 57% 78% 96% 100% ...and Has a Price/Performance, Demand Driven Transition Plan. Source: Applied Magnetics estimates. - 30 - The Facts About Applied Magnetics and Thin Film > APM is supplying in commercial volumes the highest capacity heads available - 1.3GB per disk - on advanced thin film technology > Advanced thin film heads are approximately 35% less expensive than similar capacity MR heads > MR technology offers certain technical advantages for the workstation and portable markets, but advanced thin film offers superior price/performance in the desktop market > Western Digital is in volume production on a 1.3GB per disk product using APM's advanced thin film heads > APM's advanced thin film capability has allowed it to beat Seagate and RDRT to market > Seagate is in volume with an 850MB per disk thin film product vs. APM's 1.3GB per disk offering > RDRT has consistently lagged APM to the market: APM Delivery RDRT Delivery ------------ ------------- 850MB CQ296 CQ396 1.0GB CQ396 CQ496 1.3GB CQ496 CQ297? - 31 - ============================================================================== Applied Magnetics: Myths vs. Reality ================================================================================ - 32 - Applied Magnetics: Myths vs. Reality Myth #1: "Applied Magnetics is Acquiring Read-Rite for its MR Head Technology." Reality: > APM has been shipping MR head products in volume for three quarters > APM presently is sampling MR heads in six OEM programs and is moving toward qualification > APM is ramping MR production to an annualized run rate of more than 6 million units by CQ2 1997 > APM recently began expanding wafer capacity in anticipation of its MR ramp > APM converted slider fabrication and HGA and HSA assembly capacity to handle MR production > APM won't over-invest in any technology before its time, especially when current technology meets customer needs and delivers superior margins and shareholder value > MR technology is widely available and could be obtained through acquisition or joint venture at a lower cost than acquiring RDRT - 33 - Applied Magnetics: Myths vs. Reality Myth #2: "MR Heads 'Better' Suit Today's Customer Needs." Reality: > APM's has high margin thin film product shipping in volume at industry leading capacities of 1.0GB and 1.3GB per disk > Applied presently is qualifying a 1.6GB per disk product and in March will sample a 2.1GB per disk 3.5" advanced thin film product > Seagate's most common MR head in volume is only 1.0GB per disk. RDRT's highest capacity MR head in commercial production gives it no higher capacity than APM's applied advanced thin film technology today > APM's advanced thin film products are far more cost effective than MR products (approximately 35% cheaper for comparable capacity) > REMEMBER: MR offers certain technical advantages to the workstation and portable market, but advanced thin film offers superior price/ performance for the desktop market (and superior gross margins to APM). - 34 - Applied Magnetics: Myths vs. Reality Myth #3: "The Thin Film Head Business Will Die Soon." Reality > Seagate and Western Digital: "MR is too expensive for the desktop." > Applied has a clear migration path for its advanced thin film products > Applied will migrate its MR business as capacity demands, as its customers require and as the margins will accretively support transition, not before then > Technology obsolescence has been greatly exaggerated before (e.g., MIG to thin film, which experienced a transition much slower than predicted) - 35 - Applied Magnetics: Myths vs. Reality Myth #4: "Read-Rite's prospects as a standalone company are bright." Reality > RDRT has failed to deliver on planar technology and has not demonstrated a cost-effective technology solution > RDRT has consistently lagged the market with new product introductions and failed to satisfy its customer requirements > RDRT has substantial underutilized capacity and a bloated cost structure > RDRT has failed to deliver acceptable financial performance CONCLUSION: READ-RITE NEEDS APPLIED MAGNETICS AND ITS MANAGEMENT - 36 - ============================================================================== Financial Highlights ============================================================================== - 37 - APM Has Substantially Increased Revenues and Margins While Dramatically Reducing Costs... [Graphs of APM's revenues, gross margin percentage, SG&A expenses (in $millions and as a percentage of revenues) and research and development expenses (in $millions and as a percentage of revenues) from fiscal year 1994-1996 and the first fiscal quarters of 1996 and 1997] FY1994 FY1995 FY1996 FY96-Q1 FY97-Q1 ------ ------ ------ ------- ------- ($ in Millions) Revenues $276 $293 $345 $ 95 $122 SG&A 17.3 7.4 6.5 1.7 2.0 (% of Revenues) 6.3% 2.5% 1.9% 1.8% 1.6% R&D 24.7 33.7 50.9 13.3 11.1 (% of Revenues) 8.9% 11.5% 14.8% 14.0% 9.1% Gross Margin (2.2%) 13.6% 27.0% 24.8% 38.3% - 38 - ...Leading to Rapidly Growing Earnings [Graph of APM's earnings per share for Fiscal year 1994 - fiscal year 1998 estimated] FY1994 FY1995 FY1996 FY97E FY98E ------ ------ ------ ----- ----- EPS $(2.39)(1) $0.08 $1.35 $4.32(2) $6.22(2) (1) New management took control near the end of FY1994. (2) Source: Most recent Street estimates. - 39 - ============================================================================== Applied Magnetics Corporation's Proposed Merger With Read-Rite Corporation ============================================================================= A Powerful Combination for Investors and the Industry - 40 - Transaction Summary Exchange Ratio 0.679 (fixed) Accounting Method Pooling of interests (Not a condition) Tax Tax-free exchange Projected Operating Cost Savings $100MM over 1st 12 months Cost of Goods Sold Savings Up to $150 Million if APM's standard costs are applied to RDRT's unit volume Total Cost Savings Used for Pro Forma Estimates $145 million Impact on APM's Shareholders: - ----------------------------- Pro Forma FY 1998 EPS $7.44 Accretion to Stand-Alone(1) 20% Impact on RDRT's Shareholders: - ------------------------------ Pro Forma FY 1998 EPS $5.05 Accretion to RDRT Stand-Alone(2) 58% (1) Based on earnings estimates of $6.22. (2) Based on earnings estimates of $3.20. - 41 - Benefits of a Combined Company Combined Company Will Have: ============================ Greater Production Capacity ---> > Higher margin product mix Superior Technology > Lower cost overhead structure Price/Performance -------------> > Lower product costs Substantial Cost Savings > Superior next generation products SG&A, R&D, COGS ---------------> > Stronger financial results Revenue Enhancement > Economies of scale Opportunities -----------------> Management team will be focused on cost control, product execution, EPS growth and shareholder value. - 42 - Why Does Read-Rite Need to Merge With Applied Magnetics? > To achieve $5.05 (=.679 exchange ratio x $7.44 combined pro forma estimate) per share for its shareholders in FY 1998, RDRT would have to: (i) Increase its operating margin to 25% (from 4% in Q1 of FY 1997) or (ii) Increase projected revenues to $2.3 billion (from $1.0 billion annualized in Q1 of FY 1997) > RDRT needs a product mix with more advanced thin film capability: . MR price/performance better suited for notebook/workstation segments . RDRT has been late on the past three generations of thin film programs . RDRT's strategy to bridge thin film and MR technologies with planar technology has failed (missed 1.6 GB product window) . RDRT could benefit from access to APM's superior air bearing technology > RDRT needs better product development execution > RDRT needs APM's maangement to benefit from the cost savings synergies available in a combination - 43 - Enhanced Earnings Potential > APM has demonstrated the ability to significantly reduce SG&A expense while strengthening its business: Fiscal Year SG&A Expense % of Revenue ----------- ------------ ------------ 1991 $27.2 7.1% 1992 25.5 8.6 1993 20.1 6.0 1994 17.3 6.2 1995 7.4 2.5 1996 6.5 1.9 > The management team at APM will apply this experience to reduce the combined company's SG&A and R&D spending. > Similarly, the APM team will utilize the same discipline to increase overall manufacturing efficiency: . Application of APM's standard costs to RDRT's unit volume would increase RDRT's pre-tax income by approximately $150 million. > Operations will benefit from the combined business' economies of scale, including increased purchashing power for: materials, components and capital equipment. > Increased manufacturing volumes may result in even further reduced unit costs. - 44 - Enhanced Earnings Potential > Management believes that significant cost savings can be achieved by eliminating redundant components of SG&A and R&D. Year Ending September 30, 1998 -------- Projected Net Income(1) $363 After-Tax Cost Savings 80(2) ---- Pro Forma Reported Net Income $443 Pro Forma Reported Earnings Per Share $6.88 Accretion to APM Standalone 11% (1) Figures based on most recent Street estimates. (2) $100 million pre-tax savings fully taxed at APM's 20% tax rate. - 45 - Enhanced Earnings Potential > Manufacturing Efficiencies: . Application of APM's standard costs to RDRT's unit volume could result in pre-tax savings of approximately $150 million. Projected FY 1998 EPS of $7.44 assumes $45 million estimated COGS savings. Pre-Tax Manufacturing Savings $15 $30 $45 $60 $75 --- --- --- --- --- % of Total Potential Savings 10% 20% 30% 40% 50% Increment to Projected Reported 1998 EPS $0.19 $0.37 $0.56 $0.75 $0.93 Accretion to APM Stand-Alone 14% 17% 20% 23% 26% - 46 - Enhanced Earnings Potential > Combining the effects of SG&A and R&D savings with manufacturing efficiencies (estimated at only 30% of total potential manufacturing efficiencies) would result in earnings per share accretion of 20% for Fiscal Year 1998. Fiscal 1998 ----------- Projected Combined Net Income (1) $363 After-Tax Cost Savings 80 After-Tax Impact of Manufacturing Efficiencies (2) 36 --- $479 Pro Forma Reported EPS $7.44 Accretion to APM Stand-Alone 20% (1) Figures based on selected Street estimates. (2) Assumes 30% of total potential savings are achieved in 1998. - 47 - Read-Rite's manufacturing facilities are complementary and offer APM the ability to expand production more rapidly Applied Magnetics Read-Rite - ----------------- --------- Wafer Fabrication Goleta, California Milpitas and Fremont, California Slider Fabrication Malaysia Thailand Assembly & Test Malaysia, Korea, Malaysia, Philippines China, Ireland - 48 - ============================================================================= Comparison of Applied Magnetics and Read-Rite ============================================================================= - 49 - Applied Magnetics Has Produced Far Superior Operating Results Fiscal Year 1996 Q1 Fiscal 1997 ---------------------- ---------------------- (in Millions) Applied Applied Magnetics Read-Rite Magnetics Read-Rite --------- --------- --------- --------- Revenues $345 $991 $122 $252 Gross Profit 93 104 47 36 Gross Margin 27% 10% 39% 14% R&D 51 52 11 15 SG&A 7 44 2 11 ------ ------ ------ ------ Operating Expense % 17% 10% 11% 10% Operating Income 36 8 33 10 Operating Margin 10% 1% 27% 4% Net Income 32 (43) 32 6 Net Income Margin 9% N.M. 26% 2% Total Assets 359 909 399 919 Return on Equity 26% N.M. 82%(1) 4%(1) (1) Annualized. - 50 - Indexed Stock Price History, 12/31/93 to 2/21/97 [Graph of the indexed stock price values of Applied Magnetics, Read-Rite and a composite consisting of QNTM, KMAG, HMTT, STMD, SEG, WDC and HTCH for the period 12/31/93-2/21/97] Indexed Prices % Applied Magnetics Read-Rite Composite(1) --------- --------- ------------ 12/31/93 100.00% 100.00% 100.00% 4/19/94 100.00 79.17 106.95 8/05/94 86.36 105.83 112.36 11/21/94 56.82 110.00 115.50 3/10/95 52.27 108.33 116.37 6/27/95 125.00 177.50 180.66 10/12/95 275.00 239.17 188.36 1/30/96 261.36 130.00 228.81 5/16/96 361.36 167.50 273.18 9/03/96 265.91 81.67 203.45 12/18/96 550.00 170.83 324.17 (1) Composite includes QNTM, KMAG, HMTT, SEG, WDC HTCH. Note: All stock price figures from FacSet, 3/1/97. - 51 - Comparison of Applied Magnetics and Read-Rite [Graph of APM's and RDRT's revenues and gross margin percentage from the first quarter of fiscal 1996 through the first quarter of fiscal 1997] APM is showing significantly ...as well as consistently higher revenue growth... better gross margins. REVENUES GROSS MARGIN -------- ------------ APM RDRT APM RDRT --- ---- --- ---- ($ in Millions) ($ in Millions) FY96-Q1 95 299 25% 26% FY96-Q2 87 258 29% 19% FY96-Q3 74 238 24% 9% FY96-Q4 89 195 30% (17%) FY97-Q1 122 252 38% 14% - 52 - Comparison of Applied Magnetics and Read-Rite [Graph of APM's and RDRT's selling, general and administrative expenses ($ in Millions) and research and development expense ($ in Millions) from the fourth quarter of fiscal 1995 through the first quarter of fiscal 1997] APM operates with a lower ...while investing heavily in R&D. cost structure... SG&A EXPENSE R&D EXPENSE ------------ ----------- APM RDRT APM RDRT --- ---- --- ---- ($ in Millions) ($ in Millions) FY95-Q4 $1.7 $12.3 $10 $11 FY96-Q1 1.7 11.5 13 8 FY96-Q2 1.9 10.8 14 9 FY96-Q3 1.7 10.5 12 13 FY96-Q4 1.3 10.8 11 13 FY97-Q1 2.0 10.8 11 15 - 53 - Comparison of Applied Magnetics and Read-Rite (Q1 FY 1997) Applied Magnetics has far greater employee productivity... Applied Magnetics Read-Rite ----------------- --------- Revenues $121,627,000 $251,588,000 Employees (approx.) 7,000 20,000 Revenue Per Employee $17,375 $12,579 ...and utilizes its PP&E much more efficiently. Applied Magnetics Read-Rite ----------------- --------- Revenues $121,627,000 $251,588,000 PP&E, Net $142,920,000 $581,023,000 Revenue as a % of PP&E 85% 43% - 54 - A Powerful Combination for Investors, Customers and the Industry > $7.44 per share in FY1998 > Increased scale in consolidating industry > APM management's proven ability to execute - 55 - [LOGO] [LOGO] APPLIED MAGNETICS CORPORATION READ-RITE CORPORATION A POWERFUL COMBINATION FOR INVESTORS, CUSTOMERS AND THE INDUSTRY - 56 - -----END PRIVACY-ENHANCED MESSAGE-----