<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER:000-27586
HMT TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3084354
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
1055 PAGE AVENUE, FREMONT, CA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (510) 490-3100
WEB PAGE ADDRESS: WWW.HMTT.COM
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(TITLE OF EACH CLASS) (NAME OF EXCHANGE ON WHICH REGISTERED)
COMMON STOCK, PAR VALUE $0.001 NASDAQ NATIONAL MARKET
5 3/4% CONVERTIBLE SUBORDINATED NOTES, NASDAQ SMALLCAP MARKET
DUE 2004
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
----------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 31, 1997 the aggregate market value of Common Stock held by
non-affiliates was approximately $426.1 million. For purposes of this
computation, shares held by directors and officers of the registrant have been
excluded. Such exclusion of shares held by directors and officers is not
intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
As of June 25, 1997, 41,535,789 shares of the registrant's common stock,
par value $0.001 per share, which is the only class of common stock of the
registrant, were outstanding. The Company's stock is traded on the Nasdaq
National Market (HMTT).
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed not later than July
29, 1997.
<PAGE> 2
HMT TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1. Business........................................................................... 4
Item 2. Properties......................................................................... 21
Item 3. Legal Proceedings.................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders................................ 21
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......... 22
Item 6. Selected Consolidated Financial Data............................................... 23
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations.............................................................. 24
Item 8. Consolidated Financial Statements and Supplementary Data........................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 29
Item 11. Executive Compensation............................................................. 29
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 29
Item 13. Certain Relationships and Related Transactions..................................... 29
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K........................................................................... 37
</TABLE>
3
<PAGE> 3
PART I
ITEMS 1, 2, 3 AND 4.
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
HMT Technology Corporation ("HMT" or the "Company") is an independent
supplier of high-performance thin film disks for high-end, high-capacity hard
disk drives, which in turn are used in high-end PCs, network servers and
workstations. HMT was incorporated in Delaware in 1988 as a subsidiary of
Hitachi Metals, Ltd. ("Hitachi Metals") to acquire certain assets and certain
liabilities of the thin film division of Xidex Corporation, which had been
producing thin film disks since 1983. Since completing the acquisition, the
Company has continued to supply thin film disks to manufacturers of hard disk
drives.
The disks currently being shipped by the Company are primarily for disk
drives with storage capacities ranging from 2.0 to 10.0 gigabytes ("GB") (using
two to 12 disks), and substantially all have coercivity levels of 2000 Oe or
higher. Since March 1994, the Company has focused on addressing the needs of the
high-end, high-capacity segment of the disk drive market. HMT believes that its
recent operating results reflect its success in meeting these needs and that its
future growth and success depend on its ability to continue to develop and
market products that enable its customers to produce high-performance disk
drives for high-end data storage applications. The Company provides a range of
magnetic density points (coercivities), glide heights and disk thicknesses to
match the design and performance requirements of each particular customer. The
Company's principal customers currently include Maxtor Corporation ("Maxtor"),
Samsung Electronic Company Limited ("Samsung"), Iomega Coporation ("Iomega"),
Western Digital Corporation ("Western Digital"), Micropolis Corporation
("Micropolis") and Quantum Corporation ("Quantum").
INDUSTRY BACKGROUND
The Disk Drive Market
Market demand for disks and disk drives has been growing steadily,
stimulated by demand for new computers, upgrades to existing computers and the
growing use of sophisticated network servers. The introduction of increasingly
powerful microprocessors and more memory intensive software, combined with the
development and growth of multimedia computing applications and Internet usage,
have stimulated demand for PCs in both the home and business markets. According
to International Data Corporation ("IDC"), worldwide shipments of PCs were 59
million units in 1995 and 69 million units in 1996, and are projected to reach
approximately 117 million units in 2000. In addition, the PC server market,
driven by the trend toward networking applications and the expansion of the
Internet, is expected to grow substantially through the year 2000.
The combined demand from the PC and PC server markets has resulted in
strong growth in unit shipments of disk drives. According to IDC, worldwide
shipments of hard disk drives were 105 million units in 1996 and are projected
to be 132 million units in 1997 and 223 million units in 2000. According to IDC,
the worldwide market for hard disk drives was approximately $23 billion in 1996.
Strong overall demand for disk drives has also stimulated the growth of the thin
film disk market. According to Trend Focus, there were 340 million thin film
disks produced in 1996 with an estimated market value of $4.0 billion. Trend
Focus projects that the total market for thin film disks will reach 725 million
units in 2000, with an estimated market value of $7.9 billion.
4
<PAGE> 4
The applications being developed for PCs require greater storage capacity
and, as a result, have sharply increased the demand for high-capacity disk
drives. Users purchasing newer PCs for business and home are commonly attracted
by the availability of greater processing power, larger databases, multimedia
and other memory intensive applications and more sophisticated operating
systems, such as Windows 95 or Windows NT. Increasing use of the Internet and
on-line data, including image storage and retrieval, have further stimulated the
demand for storage capacity. The disk drive industry has responded to this
demand with significant technology and product advances. As a result, mean
storage capacity per disk drive has increased from 213 megabytes ("MB") in 1993
to 690 MB in 1995 to 2.7 GB in 1997. Meanwhile, the average number of disks per
drive has remained relatively constant at about 2.5 disks. While storage
capacity has grown, the cost per MB has fallen from $1.26 in 1993 to $0.32 in
1995 and to $0.10 in 1997. Today's market continues to generate pressure for
advances to facilitate these trends in computing, especially at the high-end.
Thus, the Company believes that success in the disk drive market has depended
and for the foreseeable future will depend on the ability of the disk drive
manufacturer, together with its suppliers of critical components, such as thin
film disks, to keep pace with these advances.
Additionally, removable-media storage devices, including removable hard
disk drives, have received increased attention in the data storage market.
Removable hard disk drives utilize cartridges incorporating thin film disks and
combine the high-capacity and rapid access of hard disk drives with the benefits
of removability. These devices can be used peripherally to increase the storage
capacity for PCs.
Disk Drive Technology
The basic elements of the disk drive, sized to fit various industry form
factors, have remained essentially the same since hard disk drives were first
introduced. The principal components of a hard disk drive are disks, heads,
spindle and actuator mechanics and electronics. Each disk drive typically
contains from one to ten disks that are attached to a spindle/motor assembly
within a sealed enclosure. The electronics control the spinning of the disk, the
positioning of the head and the writing and retrieval of data stored on the
disk. The recording head is a small magnetic transducer that, when the disk is
spinning, "flies" just above the disk surface. Data are written on
circumferential tracks on the disk when the electronic channel sends current
pulses to the head. The head converts these pulses to magnetic fields that cause
the magnetic layer within the disk and under the recording head to become
magnetized, oriented in the direction of the head's magnetic field. Reversing
the current in the head reverses the direction of the magnetic field on the
disk. During the read-back process, as the head scans over the disk, magnetic
flux from the disk's magnetic layer is picked up by the head and induces an
electrical current which is converted into voltage. The output signal voltage is
then transformed into digital data by the read channel electronics. The
following diagram illustrates the principal components of a typical hard disk
drive:
[DIAGRAM -- of a typical hard disk drive with arrows identifying
key components: disks, spindle, recording head, and electronics.]
Major improvements in disk drive performance have been based on
technological advances in the principal components. In a typical disk drive
today, the spindle/motor assembly rotates the disk at 5,200 to 10,000
revolutions per minute. The head reads and writes data onto the spinning disk
while flying at a height of 0.7 to 1.7 microinches (0.018 to 0.04 micron) at
data transfer rates of 70 to 130 megabits per second. The combination of modern
head and disk technologies enables this drive to store data on 5,000 to 8,000
circumferential tracks per radial inch on the disk with 100,000 to 160,000 bits
of data per inch along each track.
Thin Film Disk Technology
A thin film disk is composed of a substrate, generally aluminum, coated
with thin films capable of storing information in the form of magnetic patterns.
The manufacturing of thin film disks is a multi-step process using processes
similar to those used for the production of silicon wafers for semiconductors.
The manufacturing process involves the deposition of extremely thin, uniform
layers of magnetic film onto a substrate using a sputtering process, by either a
static or in-line system, similar to that used to coat silicon wafers. The basic
process consists of many interrelated steps and requires an extremely clean
environment. Minor deviations in the manufacturing process, minute impurities in
materials used, particulate contamination or other problems can cause
significant numbers of disks to be rejected, thereby causing significant yield
loss.
The most significant technological challenges facing disk manufacturers
today are associated with market demand for increased storage capacity and
durability. An effective implementation of thin film technology to meet these
challenges must address various performance-related characteristics, including
magnetics, glide height, durability and static friction ("stiction").
- Magnetics. Coercivity, a measure of the magnetic strength of the disk,
is expressed in Oersted ("Oe"). The coercivity of the
5
<PAGE> 5
disk is determined by the types of disk substrate and thin film
materials used, substrate surface conditions before disk sputtering,
and the conditions that exist during the sputtering process, including
temperature, vacuum and possible sources of disk contamination. As
areal density increases, higher coercivity is needed to permit sharper
transitions between magnetized regions. This allows each bit of data
to be stored in a smaller area, and therefore more data can be stored
in the same disk area. Advanced drive designs currently require
coercivities in the range of 2000 to 2400 Oe, compared to a range of
950 to 1200 Oe seven years ago. The Company believes that most
high-end disk drive manufacturers will require coercivities of 2400 Oe
and above by the end of 1997. HMT currently manufactures and sells
disks in commercial quantities with coercivities ranging from 2000 to
2400 Oe, with more than 50% of the Company's revenues during the three
months ended March 31, 1997 deriving from disks with coercivities of
2200 Oe and above. The Company is also currently producing small
quantities of disks for use in customer development programs with
coercivities of up to 3000 Oe.
- Glide Height. The glide height of the disk is the measure of the
height at which the head can fly over the disk without hitting
anything and is a standard used in the specification of the disk. The
actual flying height of the head in the disk drive is higher than the
glide height to provide a margin for safety. Glide height depends on
the smoothness and flatness of the disk surface. The lower the disk
head flies above the disk surface, the more accurately the head can
read the magnetic signal, allowing a smaller magnetized region to
store each bit of data and thereby contributing to increases in areal
density. While the current industry standard glide height is 1.5
microinches, the Company expects that glide heights will decrease to
1.0 microinches by the end of 1997. The Company currently manufactures
and sells disks in commercial quantities with glide heights of 1.5
microinches to 1.0 microinches.
- Durability Through Start/Stop Cycles. In most hard disk drives, the
head and disk come into contact when the disk drive is turned off and
the head rests directly on the inner diameter of the disk. To prevent
wear on the disk, a protective overcoat is deposited over the magnetic
layer of the disk. However, the thickness of this overcoat must be
minimized because this layer increases the distance of the head from
the magnetic layer, thereby reducing the strength of the magnetic
signal reaching the head. Customer specifications typically require
60,000 start/stop cycles for desktop PCs.
- Stiction. Stiction is the static friction that occurs when two smooth
surfaces come into contact. In the case of hard disk drives, an
extremely smooth disk surface enables lower glide heights and can
enhance durability by reducing the friction which occurs when the head
contacts the disk. However, if a disk is too smooth, stiction will
cause the head to adhere to the disk surface when the drive is turned
on and off, causing irreparable damage to the hard disk drive. Disk
manufacturers minimize this problem primarily through texturizing the
disk surface in a controlled manner.
Disk manufacturers cannot simply address each performance characteristic
discretely because the interplay among characteristics significantly impacts the
overall performance of the disk. For example, a protective overcoat that yields
a highly durable disk may well reduce the disk's potential storage capacity.
Challenges Facing the Disk Drive Industry
Despite technological advances in components, including thin film disks,
and the prospects for continued data storage market growth, disk drive
manufacturers face a demanding marketplace. A strong competitive position is
best achieved through continual innovation. Improvements in product performance
characteristics, designed to meet the growing demands for increased storage
capacity, play an integral part in allowing the manufacturer to generate
acceptable gross margins. However, in the highly competitive disk drive
industry, other manufacturers have generally been able to develop comparable
products within a relatively short time. The likelihood of rapidly decreasing
profitability over the life cycle of any given product provides a strong
incentive for manufacturers to innovate. This results in extremely short product
cycles, currently estimated to be from nine to twelve months.
Disk drive manufacturers participating in the high-end, high-capacity disk
drive market segment can realize higher gross margins by successfully addressing
the need for drives capable of supporting today's demand for high-performance,
value-added computing products. In this segment, which supplies products
incorporated into high-end PCs, network servers and workstations, users are less
price sensitive than typical home PC consumers because they have a more
compelling need for a value-added product. Because of the short product cycles
and the significant technology improvements incorporated into each new
generation of high performance disk drives, the need to be in the forefront of
technological advances is particularly great for companies competing in this
segment.
Disk drive manufacturers can produce higher capacity products by putting
more disks in a drive or coupling a number of drives together in an array. These
approaches are limited by form factor constraints and technical complexity.
These are also relatively high
6
<PAGE> 6
cost solutions since the drive manufacturer is adding more componentry. A more
cost-effective solution is to develop a product that can store more data using
the same number of components. Thus, disk drive manufacturers generally have
relied on the development of new head technologies and of thin film disks with
improved areal density characteristics to support generational advances in
storage capacity and performance.
THE HMT APPROACH
HMT focuses on providing value added technological solutions that meet the
demands of the high-end, high-capacity disk drive market. The Company develops,
manufactures and sells technologically advanced products designed to provide
improved performance, principally through achieving higher coercivities and
lower glide heights. The Company seeks to be a supplier to disk drive
manufacturers with a proven record for technological leadership because these
customers have the greatest ability to fully exploit the value of
technologically superior disks. By working with such high-end customers and
their head vendors, HMT can influence leading edge disk drive designs and earn a
strong position as a supplier of disks for these products.
STRATEGY
The key elements of HMT's strategy are as follows:
- Establish and Maintain Leadership in High-End Product Technology. The
Company focuses its development resources principally on performance
improvements for disks sold to the high-end, high-capacity segment of
the disk drive industry. In order to improve product performance
characteristics, including magnetics, glide height, durability and
stiction, HMT is continually engaged in efforts to enhance its
proprietary technologies and processes. For example, efforts in the
alloy and process development area, focusing largely on non-precious
metal alloys, are directed toward improving disk coercivity above the
3000 Oe level.
- Develop Collaborative Relationships with Leading Head and Disk Drive
Manufacturers. The Company works closely with head manufacturers
developing new technologies, including TRI-PAD compatible and MR-head
ready disks. This collaboration enables the parties to develop
compatible products that can be effectively incorporated together into
leading edge disk drives. HMT also seeks to establish strong
relationships with its customers, enabling the Company to participate
in establishing technological and design requirements for new
products. The Company believes that close technical collaboration with
its customers and their other suppliers during the design phase of new
disk drives facilitates integration of the Company's products into new
disk drives, improves the Company's ability to reach cost effective
high volume manufacturing rapidly and enhances the likelihood that the
Company will become a primary supplier of thin film disks for high
performance disk drive products.
- Develop Advanced Manufacturing Processes to Support Volume Production.
HMT develops advanced manufacturing processes directly on
state-of-the-art production equipment. Developing manufacturing
processes for new products directly on active production lines during
the research and development phase increases the likelihood that the
Company can quickly and efficiently transition to high volume
commercial production of new products. The ability to implement new
processes quickly also helps the Company meet its customers'
increasingly rapid time-to-market demands and advances its goal of
having its products designed into its customers' disk drives.
- Expand Manufacturing Capacity. The Company recently completed
construction of a new 124,000 square foot production facility at its
Fremont, California site. The administrative office areas and four
production scale sputtering lines were brought into service during the
fourth quarter of fiscal 1997. The Company plans to install up to 12
additional production scale sputtering lines in this new facility. In
addition, the Company completed the expansion of its facility in
Eugene, Oregon during fiscal 1997, commencing volume production of
aluminum substrates and nickel-plated and polished substrates at that
site. The Company expects that added capacity will enable it to
improve its ability to meet the demands of current customers and
position it to take advantage of additional market opportunities.
- Maintain Strict Quality Control of Manufacturing Process. HMT believes
that its close attention to quality control results in a consistent
product and high production yields and is key to its success.
Attention to quality has the dual benefit of producing high
performance disks and lowering the Company's cost of production. In
addition, product quality is an essential factor in the supplier
certification process of disk drive manufacturers.
PRODUCTS
7
<PAGE> 7
The Company provides a range of magnetic density points (coercivities),
glide heights and disk thicknesses. HMT currently manufactures and sells disks
in commercial quantities with substantially all having coercivities levels of
2000 Oe or higher and glide heights of 1.5 microinches or less. The Company is
also currently producing small quantities of disks for use in customer
development programs with coercivities of up to 3000 Oe.
The Company's product mix continually shifts as technological advances are
implemented in anticipation of demand for disks with improved performance
characteristics and the Company transitions production from less technologically
sophisticated disks still in active use. For example, during the three months
ended March 31, 1995, 1800 Oe and below products comprised 95.0% of total units
shipped. In the three months ended March 31, 1997, substantially all products
shipped were 2000 Oe and above, with more than 50% of the units shipped having
coercivities of 2200 Oe and above.
The Company's disks are currently used by seven disk drive manufacturers in
more than 10 different 3 1/2-inch disk drive products. Currently, these disks
are used in fixed disk drives that have capacities ranging from 2.0 GB to 10 GB
with storage capacity per disk ranging from 750 MB to 1.5 GB and removable disk
drives that have capacities of approximately 1.0 GB with storage capacity per
disk of approximately 500 MB. The Company has the technological capability to
produce disks to fit standard form factors of 5 1/4-inches and below, although
it currently produces only 3 1/2-inch disks.
MANUFACTURING AND QUALITY
HMT believes that its internally developed proprietary and patented
manufacturing processes and state-of-the-art equipment, to which it has made
proprietary modifications, combined with its extensive expertise, currently
provide HMT with a technological advantage over competing independent thin film
disk manufacturers. HMT's expertise, processes and equipment also allow it to
develop new proprietary processes in response to customers' requirements for
improved product performance and to integrate new technologies into the
manufacturing process rapidly. The Company's production lines can be installed,
modified or expanded on a cost efficient basis. The use of a modular strategy
facilitates incremental capacity increases, efficient adaptation of
manufacturing equipment for new product processes and achievement of high volume
manufacturing capacity for new products on a timely basis.
Manufacturing Process
The Company's manufacturing process is briefly summarized as follows:
Chamfer, Grind, Bake and Wash. The initial input to the production of a
thin film disk is an aluminum blank that can be procured from a number of
sources. To create specialized aluminum alloy substrates, HMT chamfers the
inner and outer edges of the blank, and bakes the chamfered blank to bring
out surface roughness. HMT then grinds the blank to achieve required gauge
thickness and flatness, remove surface defects, and improve surface finish.
HMT then washes the blank to remove particles. HMT currently produces these
substrates through in house manufacturing, but may from time to time
purchase a portion of its requirements from independent vendors.
Plate, Polish, Texture and Wash. Aluminum substrates are plated with
electroless Nickel-Phosphorous alloy, a non-magnetic layer critical to
corrosion resistance that strengthens the disk and improves durability. The
Company currently performs most of its nickel plating in-house. Disks are
then polished to produce a mirror smooth surface. Polishing enhances the
nickel surface, reducing its roughness, while maintaining the overall
flatness of the disk. The Company's texturizing process, a highly automated
patented process, produces a controlled roughness on the disk's surface to
improve its stiction characteristics. The final step in these front-end
processes is washing to present a clean disk surface. Subsequent processes
occur in class 10 clean rooms only.
Sputter, Dip Lube and Kiss Buff. The sputter process uses equipment and
a process, similar to that used in silicon wafer fabrication, in which
layers of materials are deposited on the disk through a vacuum sputtering
process. The chrome and magnetic layers determine the magnetic properties
of the disk. The carbon layer is a protective overcoat. After sputtering, a
microscopic layer of lubrication is applied to the disk's surface to
improve durability and reduce surface friction. After lubrication, a
surface finishing step is applied, commonly referred to as kiss buff or
tape burnish.
Glide/Certify. In the test and certification process each finished disk
is electronically screened and certified as acceptable based on the
customer's specifications. A robotically controlled tester electronically
tests for glide performance. The tester then writes information onto the
disk, reads it back and erases it, simulating performance in the customer's
disk drive. Each disk is tested
8
<PAGE> 8
for parametrics, errors in the read/erase process and surface defects.
The conversion of a specialized aluminum alloy substrate into a final
product requires three to five days.
THE THIN FILM DISK PRODUCTION PROCESS
[DIAGRAM -- A flow chart summarizing the principal steps
in the process flow and the corresponding disk layers
created during the thin film disk production process.]
Quality Assurance
HMT has a dedicated quality assurance group. The Company believes that its
quality assurance program allows it to realize superior product yields and
consistently produce a quality product. Because a high quality product is
critical to achieving strong operating results and high customer satisfaction,
HMT's emphasis on this area will remain a top priority. The organization
consists of four separate groups:
- Application Engineering. The Application Engineering group is
responsible for reviewing customer requirements and specifications by
conducting specification reviews and soliciting customer and internal
manufacturing feedback. Other functions include correlating and
evaluating the results of HMT and customer testing, generating
standards and performing source audits.
- Supplier Quality Engineering. Because quality assurance is a critical
aspect of the Company's strategy, the emphasis on quality must extend
to the supplier level. The Supplier Quality Engineering group is
responsible for ensuring incoming product quality through auditing
suppliers, reviewing process data, establishing internal
specifications and creating quality procedures and practices. The
group also establishes material specifications, supplier benchmarking
and standards for qualification of the supplier base.
- Reliability and Process Engineering. The Reliability and Process
Engineering group is responsible for performing ongoing reliability
testing, process improvement testing and new product development
testing. Specific functions involve statistical process control
analysis, gauge repeatability and reproducibility studies, equipment
calibration, process qualification improvements and in-process quality
audits.
- Customer Support. The Customer Support group acts as liaison between
the customer and the Company's manufacturing organization. All
customer concerns and issues are handled through the group. Other
responsibilities include corrective action requests, non-conforming
material reviews, return material authorizations and document control.
Manufacturing Facilities and Capacity
The Company's manufacturing facilities, distribution center and
administrative offices are located in Fremont, California. The Company's Fremont
facility received ISO 9001 certification in May 1996. The Company operates 18
production scale sputtering lines for production and development of products. A
typical sputtering line consists of one sputtering machine and associated
equipment, such as texturizers, lubricators, glide testers and certifiers. The
Company's facilities, which currently operate seven days a week, 24 hours per
day, are close to full capacity. The Company recently completed construction of
a new 124,000 square foot production facility at its Fremont, California site.
Four production scale sputtering lines in this new facility were brought into
service during the fourth quarter of fiscal 1997. The Company plans to install
up to 12 additional production scale sputtering lines in this new facility. In
addition, the Company completed the expansion of its facility in Eugene, Oregon
during fiscal 1997, commencing volume production of aluminum substrates and
nickel-plated and polished substrates at that site.
Because the Company has been operating at close to full capacity, further
growth in the Company's net sales will depend on the continued successful
expansion by the Company of its manufacturing capacity. There can be no
assurance that the Company will be able to successfully increase capacity and
the failure to do so could have a material adverse effect of the Company's
business, operating results and financial condition.
TECHNOLOGY
The Company believes that there are a number of factors that are key to
establishing and maintaining an advanced technology
9
<PAGE> 9
position. The Company is optimizing non-precious metal alloys, based on a
cobalt/chromium/tantalum alloy, for future products with coercivities that can
support foreseeable demand for increased storage capacity using relatively
inexpensive materials. The Company also has extensive expertise in the
deposition of these and other alloys onto disks. The Company uses
state-of-the-art static sputtering machines in the development and production of
disks. Static machines differ from in-line, pallet machines used by some other
disk manufacturers in a number of important respects. Static sputtering machines
process one stationary disk at a time, allowing for greater control of alloy
deposition and minimizing spatial and temperature variation; use isolated
process chambers, permitting the manufacturer to control and optimize each
process step separately; and do not require a pallet, reducing the risk of
contamination of the disk surface during processing. The Company has further
enhanced the performance of sputtering equipment supplied by vendors through
internally developed, proprietary and patented modifications.
The Company believes its unique tribology approach, which minimizes
detrimental interaction between the head and disk, is another area of strength.
The method involves balancing the inter-relationship between texturizing, carbon
overcoating and lubrication. The Company's patented graded zone texture process
allows the Company to produce a rougher texture at the disk's inner diameter,
while creating a smoother surface on the remainder of the disk. This process
provides increased protection where the head most often comes into contact with
the disk, while also minimizing the distance between the head and the disk
magnetics in other regions of the disk where data is stored and read. A
nitrogen-containing carbon overcoat offers superior wear resistance. Application
of the Company's in-house blended lubricant results in disks that can withstand
an extreme range of temperature and humidity conditions. These additional layers
must be thick enough to achieve the desired protection of the disk and thin
enough to minimize the distance between the head and the magnetic layer of the
disk. The Company believes that its application of these technologies, with
particular attention to the inter-relationship between the technologies and
their combined effect on disk performance, have enabled it to develop
competitive high-capacity disks.
The Company also devotes considerable resources to developing disks for
drives utilizing new head technology. Head technology, traditionally based on
flying inductive heads that combine the read and write function within one head,
is undergoing significant evolution. Two important new technologies, proximity
recording and MR-heads, have emerged and over time are expected to replace
traditional inductive technology. The Company believes that proximity recording,
such as TRI-PAD or similar technology, which is an extension of current
inductive technology that, by design, allows a portion of the head to have
intermittent contact with the disk, will be an important technology for the next
several years. MR-head technology segregates the read and write function to
different elements of the head. By physically disconnecting the writing and
readback processes each can be individually tuned for optimized performance. The
Company expects that the superior performance offered by MR technology will make
it the dominant head technology of the future. In order to take advantage of the
technological potential of these new head technologies and enable the Company to
play a role in setting design specifications for the disk drive product, HMT
works directly with head manufacturers to develop compatible disks. The Company
has demonstrated the ability to produce disks for the new head formats through
the use of non-precious metal alloys, modified equipment and optimized
processes.
The Company believes that its materials science expertise and ongoing
commitment to developing new technologies is critical to remaining competitive
and achieving desired operating results. The Company expects its research and
development effort to remain focused on alloy and process development, substrate
finish and texture, overcoat development, and compatibility with advanced
recording concepts. As it has done in the past, the Company intends to conduct
many of its development programs directly on active production lines,
facilitating transition to high volume commercial production and minimizing
development expense. During the fiscal years 1995, 1996 and 1997, the Company
incurred $3.1 million, $3.8 million, and $5.8 million, respectively, of research
and development expenses. The Company believes that its future success depends
on its ability to continue to enhance its existing products and to develop new
products.
10
<PAGE> 10
CUSTOMERS, SALES AND SUPPORT
The Company sells its products directly to independent OEM disk drive
manufacturers for incorporation primarily into hard disk drives which are
marketed under the manufacturers' own labels. The following table sets forth the
percentage of net sales attributable to sales to the Company's principal
customers in fiscal 1997, fiscal 1996 and fiscal 1995:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Maxtor..................... 40.7% 40.5% 73.7%
Samsung.................... 19.8 0.1 0.3
Iomega..................... 12.2 2.4 -
Western Digital............ 11.9 35.8 5.9
</TABLE>
The Company's other customers during fiscal 1997 included Micropolis,
Quantum, and Hewlett Packard. Iomega utilizes the disks in its removable media
hard disk drives. Due to cessation of its high-end manufacturing operations,
Quantum's high-end products are now being manufactured by Matsushita Kotobuki
Electronics Industries ("MKE"), and the Company is currently shipping products
to MKE. Due to the rapid and frequent development of new disk drive products, it
is common in the industry for the relative mix of customers and products to
change rapidly, even from quarter to quarter.
The Company has generally sold its products to customers pursuant to
purchase orders and similar short-term arrangements. In June 1996, the Company
entered into a long-term supply agreement with Maxtor covering the supply of
disks to Maxtor through June, 2001. While this agreement contemplates a
significant increase in the purchases of disks by Maxtor from current levels, it
is subject to a number of conditions and qualifications; and there can be no
assurance that Maxtor will in fact remain a significant customer during the term
of the agreement.
The Company believes that close technical collaboration with its customers
and their other suppliers during the design phase of new disk drives facilitates
integration of the Company's products into new disk drives, improves the
Company's ability to rapidly reach cost effective high volume manufacturing and
enhances the likelihood that the Company will become a primary supplier of thin
film disks for new disk drive products. However, the design-in process is
ongoing and recurs frequently, and the Company must compete for participation in
each new product program, even those of existing customers.
The Company's customer sales and service efforts are an integral part of
maintaining strong customer relations. The sales and service organization
processes requests from customers concerning product needs and acts to mobilize
the Company's resources to fulfill customer requests.
Although the Company has broadened its customer base, there are a
relatively small number of disk drive manufacturers, and the Company expects
that its dependence on a few customers will continue in the future.
Additionally, there is the possibility that one or more of the Company's
customers could develop or expand their ability to produce thin film disks
internally and, as a result, could reduce the level of purchases or cease
purchasing from the Company or could sell thin film disks in competition with
the Company. There has also been a trend toward consolidation in the disk drive
industry that the Company expects to continue. If any of the Company's customers
or competitors were to combine and rationalize suppliers and competitive product
lines, the Company's business, results of operations and financial condition
could be materially adversely affected.
BACKLOG
The Company's sales are generally made pursuant to purchase orders that are
subject to cancellation, modification, quantity reductions or rescheduling
without significant penalties. Customers typically provide the Company with
forecasts of expected requirements for the next three to six months and submit
purchase orders 60 to 90 days in advance of shipment dates. Because these
purchase orders may be modified or rescheduled by customers on short notice and
without penalty, the Company does not believe that its backlog as of any
particular date should be considered indicative of sales for any future period.
11
<PAGE> 11
COMPETITION
Competitors in the thin film disk industry fall into three groups: U.S.
non-captive manufacturers, Japan-based manufacturers and U.S. captive
manufacturers. Historically each of these groups has supplied approximately
one-third of the worldwide thin film disk unit output. The Company's primary
U.S. non-captive competitors are Akashic Memories Corporation, a subsidiary of
Kubota, Inc. ("Akashic"), Komag, Incorporated ("Komag") and StorMedia
Incorporated ("StorMedia"). Japan-based competitors include Fuji Electric
Company Limited ("Fuji"), Mitsubishi Kasei Corporation ("Mitsubishi"), Showa
Denko K.K. ("Showa Denko") and Hoya Corporation ("Hoya"). Certain of these
companies have significantly greater financial, technical and marketing
resources than the Company. In addition, U.S. captive manufacturers, which
include certain computer manufacturers, as well as disk drive manufacturers such
as Seagate, an affiliate of Maxtor and Western Digital, manufacture disks or
plan to manufacture disks for their internal use as part of their vertical
integration programs. These companies could increase their internal production
and reduce or cease purchasing from independent disk suppliers such as the
Company. In the event of an oversupply of disks, these customers are likely to
utilize their internal capacity prior to purchasing disks from independent
manufacturers such as the Company. Moreover, while captive manufacturers have,
to date, sold only nominal quantities of thin film disks in the open market,
there can be no assurance that such companies will not in the future do so in
direct competition with the Company. Furthermore, there can be no assurance that
other current and potential customers will not acquire or develop capacity to
produce thin film disks for internal use, or that disk manufacturing capacity
will not exceed demand. Any such changes could have a material adverse effect on
the Company's business, operating results and financial condition. Announcement
or implementation of any of the following by the Company's competitors could
have a material adverse effect on the Company's business, operating results and
financial condition: changes in pricing, product introductions, increases in
production capacity, changes in product mix and technological innovation.
The market for thin film disk products is highly competitive, and the
Company expects competition to increase in the future. The Company believes that
the principal competitive factors affecting this market include performance,
quality, delivery capability and price. The Company believes that its products
compete favorably in the high-end segment of the market that it serves,
especially with respect to performance and quality. The thin film disk industry
is characterized by short product life cycles, ranging from nine to twelve
months. As a result, the Company must continually anticipate, and adapt its
products to meet, demand for increased storage capacity. There can be no
assurance that in the future the Company will be able to manufacture products on
a timely basis with the quality and features necessary in order to remain
competitive. In addition, the development of technologically innovative products
requires substantial investments in research and development. Specifically, the
thin film disk industry is characterized by intense price competition. While the
Company believes that consumers in the high-end high-capacity segment of the
market in which the Company operates are less sensitive to price, the Company
has experienced pricing pressures in the past, and there can be no assurance
that the Company will not experience increased price competition in the future.
Pricing pressure has included, and may in the future include, demands for
discounts, long-term supply commitments and extended payment terms. Any increase
in price competition could have a material adverse effect on the Company's
business, operating results and financial condition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
its success will depend more upon the innovation, technological expertise and
marketing abilities of its employees. There can be no assurance that the Company
will be able to protect its technology adequately or that competitors will not
be able to develop similar technology independently. The Company has 33 patents
and 16 pending patent applications in the United States. In addition, the
Company has nine foreign patents. Patents may not be issued with respect to the
Company's pending patent applications, and its issued patents may not be
sufficiently broad to protect the Company's technology. No assurance can be
given that any patent issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide adequate
protection to the Company's products. In addition, the Company has only limited
patent rights outside the United States and the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
The Company may from time to time be notified by third parties that it may
be infringing patents owned by such third parties. If necessary, the Company may
have to seek a license under such patents or modify its products and processes
in order to avoid infringement of such patents. There can be no assurance that
such a license would be available on acceptable terms, if at all, or that the
Company could so avoid infringement of such patents, in which case the Company's
business, operating results and financial condition could be materially
adversely affected.
On December 16, 1996, Virgil L. Hedgcoth filed a lawsuit against the Company
and several other entities in the Federal District
12
<PAGE> 12
Court for the Northern District of California. In Hedgcoth v. Hitachi, Ltd., et
al., Mr. Hedgcoth alleges that certain HMT disks infringe patents allegedly
owned by him (the "Hedgcoth Patents"). The complaint seeks an injunction and
unspecified damages, which are sought to be trebled. The Company has filed a
counterclaim seeking a declaratory judgment that the Hedgcoth Patents are
invalid and unenforceable and that they are not infringed by the HMT disks. The
Company does not believe that the litigation Mr. Hedgcoth has pursued will have
a material adverse effect on the Company's business, operating results or
financial condition; however, this forward looking statement is subject to risks
and uncertainties, including those described in "Risk Factors--Intellectual
Property and Proprietary Rights" .
Litigation may be necessary to enforce the Company's patents, copyrights or
other intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or claims for indemnification resulting
from infringement claims by third parties. Such litigation, even if successful,
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition.
SOURCES OF SUPPLY
The Company relies on a limited number of suppliers for many materials used
in its manufacturing processes, including substrates, texturizers, plating
chemicals, abrasive tapes and slurries, certifier heads, sputter targets and
certain other materials. In general, the Company seeks to have two or three
suppliers for its requirements; however, there can be no assurance that the
Company can secure more than one source for all of its materials requirements in
the future or that its suppliers will be able to meet the Company's requirements
on a timely basis or on acceptable terms. Shortages have occurred in the past
and there can be no assurance that shortages will not occur in the future, or
that materials will not be available only with longer lead times. Moreover,
changing suppliers for certain materials, such as lube or buffing tape, would
require that the product be requalified with each customer. Requalification
could prevent an early design-in, or could prevent or delay continued
participation in disk drive programs for which the Company's products have been
qualified. In addition, long lead times are required to obtain many materials.
Regardless of whether these materials are available from established or new
sources of supply, these lead times could impede the Company's ability to
quickly respond to changes in demand and product requirements. Furthermore, a
significant increase in the price of one or more of these materials could
adversely affect the Company's business, operating results and financial
condition. While the Company has implemented procedures to monitor the quality
of the materials received from its suppliers, there can be no assurance that
materials will meet the Company's specifications and will not adversely impact
manufacturing yields or cause other production problems. For example, in the
quarter ended March 31, 1995, the Company's operating results were adversely
affected by chlorine contamination of its thin film disk products that it
believes resulted from chlorine contamination of disk carriers provided by one
of its suppliers. In addition, there are only a limited number of providers for
thin film disk manufacturing equipment, such as sputtering machines, glide
testers and certifiers, and ordering additional equipment for replacement or
expansion requires long lead times, limiting the rate and flexibility of
capacity expansion. Any limitations on, or delays in, the supply of materials or
equipment could disrupt the Company's production volume and could have a
material adverse effect on the Company's business, operating results and
financial condition.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
environmental laws and regulations, which govern the Company's use, handling,
storage, transportation, disposal, emission and discharge of hazardous materials
and wastes, the pre-treatment and discharge of process waste waters and its
emission of air pollutants. The Company has from time to time been notified of
minor violations of environmental laws and regulations. These violations have
been corrected in all material respects without undue expense. Additionally,
existing waste water treatment facilities and air emission control devices are
being upgraded to accommodate increased production and more restrictive
environmental discharge levels. Environmental laws and regulations, however, may
become more stringent over time, and there can be no assurance that the
Company's failure to comply with either present or future laws or regulations,
which may become more stringent, would not subject the Company to significant
compliance expenses, production suspension or delay, restrictions on expansion
or the acquisition of costly equipment.
EMPLOYEES
As of March 31, 1997, the Company had 1,211 full-time employees, with 1,055
in manufacturing, 54 in research and development, 40 in quality assurance and 62
in administration and marketing. The Company believes it generally has good
relations with its
13
<PAGE> 13
employees. None of the Company's employees are represented by a labor union, and
the Company has never experienced a work stoppage. The Company believes that
attracting and motivating skilled technical personnel is vital to its success.
Although competition for such personnel is intense, the Company believes that it
has not historically experienced difficulties in attracting personnel that are
significantly different from those experienced by its competitors.
RECAPITALIZATION TRANSACTION
On November 30, 1995 the Company effected a leveraged recapitalization (the
"Leveraged Recapitalization"). The Leveraged Recapitalization and related
transactions consisted of: (i) the repurchase by the Company from Hitachi Metals
of shares of Common Stock representing all the outstanding capital stock of the
Company for an aggregate purchase price of $52.1 million in cash; (ii) the
recapitalization of the Company through the issuance of 21,968,057 shares of
Common Stock for an aggregate purchase price of approximately $0.7 million,
5,900,000 shares of Series A Preferred Stock ("Series A Preferred Stock") for an
aggregate purchase price of approximately $59.0 million, $47.0 million of
subordinated promissory notes ("Subordinated Notes") and $60.0 million in senior
debt with associated warrants to purchase 701,344 shares of Common Stock at an
exercise price of $0.0003 per share and (iii) the grant of options to purchase
11,451,865 shares of Common Stock under the 1995 Management Stock Option Plan
("Management Plan") and 1995 Stock Option Plan ("Stock Plan" and collectively
with the Management Plan, "Stock Plans"). The purchasers of the Company's
securities in the Leveraged Recapitalization included certain investment funds
affiliated with Summit Partners, L.P. ("Summit Partners") and certain other
investment funds, the Company's management and employees and Hitachi Metals. The
terms of the Leveraged Recapitalization were determined through negotiations
between Hitachi Metals and Summit Partners, who, prior to the Leveraged
Recapitalization, did not have any affiliation with the Company. Pursuant to
these negotiations, the shares of Common Stock were valued at $0.03 per share.
The Series A Preferred Stock was valued at $10.00 per share, and the
Subordinated Notes were valued at face value. The values of these securities
were confirmed by a third party appraisal.
The Leveraged Recapitalization has been accounted for as a
recapitalization, and accordingly, no change in the accounting basis of the
Company's assets has been made.
As of November 30, 1995 (immediately prior to the Leveraged
Recapitalization), the Company had $98.5 million in assets and $122.7 million in
liabilities. Immediately following the Leveraged Recapitalization, the Company
had $110.9 million in assets, $132.1 million in liabilities (including a $60.0
million senior bank term loan and $47.0 million of Subordinated Notes) and $59.0
million of Series A Preferred Stock. See "Certain Relationships and Related
Transactions -- Leveraged Recapitalization."
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
the following risk factors should be considered carefully in evaluating the
Company and its business. This Annual Report on Form 10-K contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results historically have been, and may
continue to be, subject to significant quarterly and annual fluctuations. As a
result, the Company's operating results in any quarter may not be indicative of
its future performance. Factors affecting operating results include: market
acceptance of new products; timing of significant orders; changes in pricing by
the Company or its competitors; timing of product announcements and product
transitions by the Company, its customers or its competitors; order
cancellations, modifications and quantity adjustments and shipment
reschedulings; changes in product mix; manufacturing yields; the level of
utilization of the Company's production capacity; increases in production and
engineering costs associated with initial manufacture of new products; and
changes in the cost of or limitations on the availability of materials. The
impact of these and other factors on the Company's revenues and operating
results in any future period cannot be forecasted with certainty. The Company's
expense levels are based, in part, on its expectations as to future revenues.
Because the Company's sales are generally made pursuant to purchase orders that
are subject to cancellation, modification, quantity reduction or rescheduling on
short notice and without significant penalties, the Company's backlog as of any
particular date may not be indicative of sales for any future period, and such
changes could cause the Company's net sales to fall below expected levels. If
revenue levels are below expectations, operating results are likely to be
materially
14
<PAGE> 14
adversely affected. Net income, if any, and gross margins may be
disproportionately affected by a reduction in net sales because a
proportionately smaller amount of the Company's expenses varies with its
revenues.
The Company derives substantially all of its net sales from the sale
of thin film disks to a small number of customers. The Company typically
supplies disks in volume for a limited number of disk drive products at any one
time, and these products have an extremely short life cycle. Due to the rapid
technological change and frequent development of new disk drive products, it is
common in the industry for the relative mix of customers and products to change
rapidly, even from quarter to quarter. Generally, new products have higher
average selling prices than more mature products. Therefore, the Company's
ability to introduce new products in a timely fashion is an important factor in
its continued success. Moreover, manufacturing yields and production capacity
utilization impact the Company's operating results. New products often have
lower manufacturing yields and are produced in lower quantities than more mature
products. Manufacturing yields generally improve as the product matures and
production volumes increase. Manufacturing yields also vary depending on the
complexity and uniqueness of product specifications. The ability to adjust
manufacturing procedures to reduce costs and improve manufacturing yields and
productivity during a product's life is limited, and many adjustments can only
be implemented in connection with new product introductions or upgrades. Small
variations in manufacturing yields and productivity can have a significant
impact on operating results. Furthermore, because the thin film disk industry is
capital intensive and requires a high level of fixed costs, operating results
are also extremely sensitive to changes in volume. Substantial advance planning
and commitment of financial and other resources is necessary for expansion of
manufacturing capacity, while the Company's sales are generally made pursuant to
purchase orders that are subject to cancellation, modification, quantity
reduction or rescheduling without significant penalties. The impact of any of
the foregoing factors could have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; LENGTHY SALES CYCLE
During fiscal 1997, the Company shipped most of its thin film disks
to four customers: Maxtor, Samsung, Iomega and Western Digital. Aggregate
shipments to Maxtor, Samsung, Iomega and Western Digital represented 40.7%,
19.8% 12.2% and 11.9%, respectively, of net sales in fiscal 1997. There are a
relatively small number of disk drive manufacturers, and the Company expects
that its dependence on a few customers will continue in the future. Loss of or a
reduction in orders from one or more of the Company's customers could result in
a substantial reduction in net sales and operating results. Because many of the
Company's expense levels are based, in part, on its expectations as to future
revenues, decreases in net sales may result in a disproportionately greater
negative impact on operating results. The Company's success will therefore
depend on the success of its key customers. One or more of the Company's
customers could develop or expand their ability to produce thin film disks
internally and, as a result, could reduce the level of purchases or cease
purchasing from the Company or could sell thin film disks in competition with
the Company. For example, one of the Company's customers, Western Digital,
manufactures thin film disks for its own use and an affiliate of another
customer, Maxtor, recently began to do so. There has also been a trend toward
consolidation in the disk drive industry, which the Company expects to continue.
For example, in February 1996, two leading disk drive manufacturers, Seagate
Technology, Inc. ("Seagate") and Conner Peripherals, Inc., combined to form the
world's largest disk drive manufacturing company. In addition, during the second
calendar quarter of 1996, Hewlett-Packard announced its intentions to exit the
disk drive business. Also, due to cessation of its high-end manufacturing
operations, Quantum's high-end products are now being made by MKE. If any of the
Company's customers or competitors were to combine and reduce suppliers and
competitive product lines, the Company's business, operating results and
financial condition could be materially adversely affected.
The Company has generally sold its products to customers pursuant to
purchase orders and similar short-term arrangements. In June 1996, the Company
entered into a long-term supply agreement with Maxtor covering the supply of
disks to Maxtor through June 2001. While this agreement contemplates a
significant increase in the purchases of disks by Maxtor from current levels, it
is subject to a number of conditions and qualifications; and there can be no
assurance that Maxtor will in fact remain a significant customer during the term
of the agreement.
Qualifying thin film disks for incorporation into a new disk drive
product requires the Company to work extensively with the customer and the
customer's other suppliers to meet product specifications. Therefore, customers
often require a significant number of product presentations and demonstrations,
as well as substantial interaction with the Company's senior management, before
making a purchasing decision. Accordingly, the Company's products typically have
a lengthy sales cycle, which can range from six to 12 months, during which the
Company may expend substantial financial resources and management time and
effort with no assurance that a sale will result.
15
<PAGE> 15
EXPANSION OF CAPACITY
Because the Company has been operating at close to full capacity,
growth, if any, in the Company's net sales depends on the successful expansion
by the Company of its manufacturing capacity. The Company recently completed
construction of a new 124,000 square foot production facility at its Fremont,
California site. The administrative office areas and four production scale
sputtering lines were brought into service during the fourth quarter of fiscal
1997. The Company plans to install up to 12 additional production scale
sputtering lines in this new facility. In addition, the Company completed the
expansion of its facility in Eugene, Oregon during fiscal 1997, commencing
volume production of aluminum substrates and nickel-plated and polished
substrates at that site. The Company currently expects to spend in excess of
$200 million over the next twelve months for expansion of production capacity, a
substantial majority of which will be spent on the Company's Fremont, California
facility. Any delay in the completion of any of these expansion programs could
have a material adverse effect on the Company's business, results of operations
and financial condition.
INTENSE COMPETITION
The market for the Company's products is highly competitive, and the
Company expects competition to continue in the future. Certain of the Company's
competitors have significantly greater financial, technical and marketing
resources than the Company. There can be no assurance that in the future the
Company will be able to develop and manufacture products on a timely basis with
the quality and features necessary in order to remain competitive. Competitors
in the thin film disk industry fall into three groups: U.S. non-captive
manufacturers, Japan-based manufacturers and U.S. captive manufacturers.
Historically, each of these groups has supplied approximately one-third of the
worldwide thin film disk unit output. The Company's primary U.S. non-captive
competitors are Akashic, Komag and StorMedia. Japan-based competitors include
Fuji, Mitsubishi, Showa Denko and Hoya. In addition, U.S. captive manufacturers,
which include certain computer manufacturers, as well as disk drive
manufacturers such as Seagate, Western Digital and an affiliate of Maxtor,
manufacture disks or plan to manufacture disks for their internal use as part of
their vertical integration programs. These companies could increase their
internal production and reduce or cease purchasing from independent disk
suppliers such as the Company. In the event of an oversupply of disks, these
customers are likely to utilize their internal capacity prior to purchasing
disks from independent suppliers such as the Company. Moreover, while captive
manufacturers have, to date, sold only nominal quantities of thin film disks in
the open market, there can be no assurance that such companies will not in the
future do so in direct competition with the Company. Furthermore, there can be
no assurance that other current and potential customers will not acquire or
develop capacity to produce thin film disks for internal use. Any such changes
could have a material adverse effect on the Company's business, operating
results and financial condition. Announcement or implementation of any of the
following by the Company's competitors could have a material adverse effect on
the Company's business, operating results and financial condition: changes in
pricing, product introductions, increases in production capacity, changes in
product mix and technological innovation. Specifically, the thin film disk
industry is characterized by intense price competition. The Company has
experienced pricing pressures in the past, and there can be no assurance that
the Company will not experience increased price competition in the future.
Pricing pressure has included, and may in the future include, demands for
discounts, long-term supply commitments and extended payment terms. Any increase
in price competition could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company and certain of its competitors are currently engaged in
substantial efforts to increase disk manufacturing capacity in light of the
apparent imbalance between current levels of demand for disks and existing
industry capacity. These efforts should result in significant additional
capacity in the industry within the next one to two years. To the extent that
these efforts result in industry capacity in excess of levels of demand, the
Company could experience increased levels of competition, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
16
<PAGE> 16
MANAGEMENT OF GROWTH
The Company has experienced a period of rapid expansion in its
operations, including the organization and management of a significant expansion
in manufacturing capacity that has placed, and may continue to place, a
significant strain on the Company's management and other resources. The
Company's status as a public company since its March 1996 initial public
offering has placed additional demands on the Company's management, including
its finance and accounting organization. The Company's ability to manage its
operations effectively will require it to continue to improve its operational,
financial and management information systems, and to train, motivate and manage
its employees. If the Company's management is unable to manage its operations
effectively, the Company's business, operating results and financial condition
could be adversely affected.
DEPENDENCE ON INTENSELY COMPETITIVE AND CYCLICAL HARD DISK DRIVE INDUSTRY
The Company's operating results are dependent on current and
anticipated demand for high-end, high-capacity hard disk drives, which in turn
depend on the demand for high-end PCs, network servers and workstations. The
disk drive industry is cyclical and historically has experienced periods of
oversupply and reduced production levels, resulting in significantly reduced
demand for thin film disks, as well as pricing pressures. The effect of these
cycles on suppliers, including thin film disk manufacturers, has been magnified
by hard disk drive manufacturers' practice of ordering components, including
thin film disks, in excess of their needs during periods of rapid growth, which
increases the severity of the drop in the demand for components during periods
of reduced growth or contraction. In recent years, the disk drive industry has
experienced significant growth, providing the Company with the opportunity to
expand its capacity. There can be no assurance that such growth will continue,
that the level of demand will not decline, or that future demand will be
sufficient to support existing and future capacity. A decline in demand for hard
disk drives would have a material adverse effect on the Company's business,
operating results and financial condition. Additionally, the hard disk drive
industry is intensely competitive, and, in the past, some disk drive
manufacturers have experienced substantial financial difficulties. To date, the
Company has not incurred significant bad debt expense. However, there can be no
assurance that the Company will not face greater difficulty in collecting
receivables or be required to offer more liberal payment terms in the future,
particularly in a period of reduced demand. Any failure to collect or delay in
collecting receivables could have a material adverse effect on the Company's
business, operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE
The thin film disk industry has been characterized by rapid
technological development and short product life cycles. Product life cycles
typically range from nine to twelve months. As a result, the Company must
continually anticipate, and adapt its products to meet, demand for increased
storage capacity. Although the Company is continually developing new products
and production techniques, there can be no assurance that the Company will be
able to anticipate technological advances in disk drives and develop products
incorporating such advances in a timely manner or to compete effectively against
its competitors' new products. In addition, there can be no assurance that
customers will certify the Company's products for inclusion in new disk drive
products. The Company anticipates continued changes in the requirements of the
disk drive industry and thin film disk manufacturing technologies, and there can
be no assurance that the future technological innovations will not reduce demand
for thin film disks. The Company's business, operating results and financial
condition will be materially adversely affected if the Company's efforts are not
successful, if the technologies that the Company has chosen not to develop prove
to be competitive alternatives or if any trend develops toward technology that
would replace thin film disks as a storage medium.
DEPENDENCE ON SUPPLIERS
The Company relies on a limited number of suppliers for many
materials used in its manufacturing processes, including aluminum blanks,
substrates, texturizers, plating chemicals, abrasive tapes and slurries,
certifier heads, sputter targets and certain other materials. In general, the
Company seeks to have two or three suppliers for its requirements; however,
there can be no assurance that the Company can secure more than one source for
all of its materials requirements in the future or that its suppliers will be
able to meet the Company's requirements on a timely basis or on acceptable
terms. Shortages have occurred in the past and there can be no assurance that
shortages will not occur in the future, or that materials will be available
without longer lead times. Moreover, changing suppliers for certain materials,
such as lube or buffing tape, would require that the product be requalified with
each customer. Requalification could prevent an early design-in, or could
prevent or delay continued participation in disk drive programs for which the
Company's products have been qualified. In addition, long lead times are
required to obtain many materials. Regardless of whether these materials are
available from established or new sources of supply, these lead times could
impede the Company's ability to quickly respond to changes in demand and product
requirements. Furthermore, a significant increase in the price of one or more of
these materials could adversely affect the Company's business, operating results
and financial condition. In addition, there are only a limited number of
providers for thin film disk
17
<PAGE> 17
manufacturing equipment, such as sputtering machines, glide testers and
certifiers, and ordering additional equipment for replacement or expansion
requires long lead times, limiting the rate and flexibility of capacity
expansion. Any limitations on, or delays in, the supply of materials or
equipment could disrupt the Company's production volume and could have a
material adverse effect on the Company's business, operating results and
financial condition.
While the Company has implemented procedures to monitor the quality
of the materials received from its suppliers, there can be no assurance that
materials will meet the Company's specifications and will not adversely impact
manufacturing yields or cause other production problems. Minor variations from
the Company's specifications could have a disproportionately adverse impact on
manufacturing yields. For example, in the quarter ended March 31, 1995, the
Company's operating results were materially adversely affected by chlorine
contamination of its thin film disk products that it believes resulted from
chlorine contamination of disk carriers provided by one of its suppliers.
NEED FOR ADDITIONAL FINANCING
The disk media business is capital intensive, and the Company
believes that in order to remain competitive, it will need significant
additional financing resources over the next several years for capital
expenditures, working capital, and research and development. Among other things,
the Company's customers prefer suppliers that can meet a substantial portion of
their volume requirements, so the Company will need to expand its manufacturing
capacity to remain competitive. The Company currently expects to spend in excess
of $200 million on capital expenditures directed toward expansion of production
capacity over the next twelve months. The Company believes that it will be able
to fund planned expenditures over the next twelve months from a combination of
funds available under its revolving credit facility, cash flow from operations
and existing cash balances. If it were to accelerate or increase the scope of
its facilities expansion, the Company could require additional capital prior to
that time. As of March 31, 1997, the Company had approximately $71.8 million in
working capital, including approximately $44.2 million in cash and cash
equivalents. In addition, the Company's operations generated cash flow of $90.7
million during the year ended March 31, 1997.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Although the Company attempts to protect its intellectual property
rights through patents, copyrights, trade secrets and other measures, there can
be no assurance that the Company will be able to protect its technology
adequately or that competitors will not be able to develop similar technology
independently. Patents may not be issued with respect to the Company's pending
patent applications, and its issued patents may not be sufficiently broad to
protect the Company's technology. No assurance can be given that any patent
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide adequate protection to the
Company's products. In addition, the Company has only limited patent rights
outside the United States, and the laws of certain foreign countries may not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States.
The Company may from time to time be notified by third parties that
it may be infringing patents owned by such third parties. If necessary, the
Company may have to seek a license under such patent or modify its products and
processes in order to avoid infringement of such patents. There can be no
assurance that such a license would be available on acceptable terms, if at all,
or that the Company could so avoid infringement of such patents, in which case
the Company's business, operating results and financial condition could be
materially adversely affected.
On December 16, 1996, Virgil L. Hedgcoth filed a lawsuit against the
Company and several other entities in the Federal District Court for the
Northern District of California. In Hedgcoth v. Hitachi, Ltd., et al., Mr.
Hedgcoth alleges that certain HMT disks infringe patents allegedly owned by him
(the "Hedgcoth Patents"). The complaint seeks an injunction and unspecified
damages, which are sought to be trebled. The Company has filed a counterclaim
seeking a declaratory judgment that the Hedgcoth Patents are invalid and
unenforceable and that they are not infringed by the HMT disks. The Company does
not believe that the litigation Mr. Hedgcoth has pursued will have a material
adverse effect on the Company's business, operating results or financial
condition.
Litigation may be necessary to enforce the Company's patents,
copyrights or other intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or claims for
indemnification resulting from infringement claims by third parties. Such
litigation, even if successful, could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
18
<PAGE> 18
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part
upon the continued contributions of its officers and personnel, many of whom
would be difficult to replace. The Company does not have employment agreements
with any employee. The loss of its officers or other key personnel, who are
critical to the Company's success, could have a material adverse effect on the
business, operating results and financial condition of the Company. In addition,
the Company's future operating results depend in part upon its ability to
attract, train, retain and motivate other qualified management, technical,
manufacturing, sales and support personnel for its operations. Competition for
such personnel is intense, especially since many of the Company's competitors
are located near the Company's facilities in Fremont, California. Among the
competitive factors in attracting personnel are compensation and benefits,
equity incentives and geographic location. There can be no assurance that the
Company will be successful in attracting or retaining such personnel. The loss
of the services of existing personnel as well as the failure to recruit
additional personnel could materially adversely effect the Company's business,
operating results and financial condition.
DEPENDENCE ON FREMONT MANUFACTURING FACILITIES; ENVIRONMENTAL ISSUES
The Company's Fremont facilities, which currently account for all of
its finished products, are located near major earthquake faults. Disruption of
operations for any reason, including power failures, work stoppages or natural
disasters such as fire, floods or earthquakes, would cause delays in, or an
interruption of, production and shipment of products, which could materially
adversely affect the Company's business, operating results and financial
condition.
The Company's operations and manufacturing processes are subject to
certain environmental laws and regulations, which govern the Company's use,
handling, storage, transportation, disposal, emission and discharge of hazardous
materials and wastes, the pre-treatment and discharge of process waste waters
and its emission of air pollutants. The Company has from time to time been
notified of minor violations of environmental laws and regulations. These
violations have been corrected in all material respects without undue expense.
Additionally, existing waste water treatment facilities and air emission control
devices are being upgraded to accommodate increased production and more
restrictive environmental discharge levels. Environmental laws and regulations,
however, may become more stringent over time, and there can be no assurance that
the Company's failure to comply with either present or future laws or
regulations, which may become more stringent, would not subject the Company to
significant compliance expenses, production suspension or delay, restrictions on
expansion or the acquisition of costly equipment.
RISKS OF INTERNATIONAL SALES
In fiscal 1996 and 1997, substantially all of the Company's net sales
consisted of products delivered to customers in Asia, primarily foreign
subsidiaries of U.S. companies, and the Company anticipates that the substantial
majority of its products will be delivered to customers outside of the United
States for the foreseeable future. Accordingly, the Company's operating results
are subject to the risks of doing business in foreign jurisdictions, including
compliance with, or changes in, the law and regulatory requirements of foreign
jurisdictions, local content rules, taxes, tariffs or other barriers, and
transportation delays and other interruptions. Although presently all of the
Company's sales are made in U.S. dollars, there can be no assurance that future
international sales will not be denominated in foreign currency.
CONTROL BY EXISTING STOCKHOLDERS AND ANTI-TAKEOVER EFFECTS
Based on shares outstanding at March 31, 1997, directors, officers
and holders of 5% or more of the outstanding shares of Common Stock of the
Company owned approximately 53% of the outstanding shares of Common Stock (33%
assuming conversion of the 5 3/4% convertible subordinated notes and exercise of
all outstanding options and warrants to purchase Common Stock ). As a result,
the directors, officers and holders of 5% or more of the outstanding shares of
the Company's Common Stock, acting together, will have the ability to elect all
of the Company's directors and control most corporate actions. Certain
provisions of the Company's Amended and Restated Certificate of Incorporation,
Bylaws and Delaware law, including the provisions of Section 203 of the Delaware
General Corporation Law, which restrict the ability of a substantial stockholder
to acquire the Company, may also discourage certain transactions involving a
change in control of the Company. In addition to the foregoing, the ability of
the Board of Directors to issue "blank check" preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a change in control of the Company.
19
<PAGE> 19
SUBORDINATION AND ABSENCE OF FINANCIAL COVENANTS
The 5 3/4% Convertible Subordinated Notes due 2004 ("Convertible
Notes") are unsecured and subordinated in right of payment in full to all
existing and future indebtedness of the Company which is not expressly
subordinated in right of payment to the Convertible Notes ("Senior Debt") of the
Company. As a result of such subordination, in the event of any insolvency of
the Company, the assets of the Company will be available to satisfy obligations
on the Convertible Notes only after all Senior Debt has been paid in full, and
there may not be sufficient assets remaining to pay amounts due on any or all of
the Convertible Notes then outstanding. The Indenture dated as of January 15,
1997, between the Company and State Street Bank and Trust Company of California,
N.A., as Trustee ("Indenture") does not prohibit or limit the incurrence of
Senior Debt or the incurrence of other indebtedness and other liabilities by the
Company, and the incurrence of additional indebtedness and other liabilities by
the Company could adversely affect the Company's ability to satisfy its
obligations on the Convertible Notes. As of March 31, 1997, the Company had
approximately $5.9 million of outstanding indebtedness that constituted Senior
Debt. The Company anticipates that from time to time it will incur additional
indebtedness, including Senior Debt. Moreover, the cash flow and consequent
ability of the Company to service debt, including the Convertible Notes, may
become dependent in part upon the earnings from the business conducted by the
Company through subsidiaries and the distribution of those earnings, or upon
loans or other payments of funds by those subsidiaries, to the Company.
The Indenture does not contain any financial performance covenants.
Consequently, the Company is not required under the Indenture to meet any
financial tests such as those that measure the Company's working capital,
interest coverage, fixed charge coverage or net worth in order to maintain
compliance with the terms of the Indenture.
LIMITATIONS ON REPURCHASE UPON A DESIGNATED EVENT
If a change in control were to occur or the Common Stock of the
Company were not listed for trading at a U.S. stock exchange or approved for
trading on an established U.S. over-the-counter trading market (each a
"Designated Event"), there can be no assurance that the Company would have
sufficient financial resources, or would be able to arrange financing, to pay
the repurchase price for all Convertible Notes tendered by holders thereof. The
Company's credit agreement with respect to its senior bank revolving credit
facility prohibits the Company from repurchasing any Convertible Notes, which
would constitute an event of default under such credit agreement. Any future
credit agreements or other agreements relating to other indebtedness (including
other Senior Debt) to which the Company becomes a party may contain similar
restrictions and provisions. If the Company does not obtain a consent to any
repurchase of the Convertible Notes upon a Designated Event, the Company would
remain prohibited from repurchasing the Convertible Notes. Any failure by the
Company to repurchase the Convertible Notes when required following a Designated
Event would result in an event of default under the Indenture whether or not
such repurchase is permitted by the subordination provisions of the Indenture.
Any such default may, in turn, cause a default under Senior Debt of the Company.
Moreover, the occurrence of a Designated Event may cause an event of default
under Senior Debt of the Company. As a result, in each case, any repurchase of
the Convertible Notes would, absent a waiver, be prohibited under the
subordination provisions of the Indenture until the Senior Debt is paid in full.
VOLATILITY OF CONVERTIBLE NOTE AND COMMON STOCK PRICES
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to a variety of factors, including quarterly variations
in operating results, announcements of technological innovations or new products
by the Company, its customers or its competitors, developments in patents or
other intellectual property rights, general conditions in the computer or disk
drive industry, and general economic and market conditions. Additionally, the
stock market in general, and the market for technology stocks in particular, has
experienced extreme price volatility in recent years. This volatility has often
had a substantial effect on the market prices of many technology companies for
reasons unrelated or disproportionate to the operating performance of such
companies. Broad market fluctuations could have a significant impact on the
market price of the Common Stock.
Various factors such as changes in prevailing interest rates or
changes in perceptions of the Company's creditworthiness could cause the market
price of the Convertible Notes to fluctuate significantly. The trading price of
the Convertible Notes could also be significantly affected by the market price
of the Common Stock, which could be subject to wide fluctuations in response to
a variety of factors, including quarterly variations in operating results,
announcements of technological innovations or new products by the Company, its
customers or its competitors, developments in patents or other intellectual
property rights, general conditions in the computer or disk drive industry and
general economic and market conditions.
20
<PAGE> 20
ITEM 2. PROPERTIES
The Company owns a 57,776 square foot building, used for manufacturing and
administration, on approximately 4.3 acres of land in Fremont, California. The
Company recently completed construction of a 124,000 square foot manufacturing
and administrative facility on an adjacent five acre parcel. The Company leases
an adjacent 50,400 square foot building used primarily for manufacturing under a
lease that expires in December 1998 with four five-year extension options. The
Company also leases a nearby 60,312 square foot building used for
administration, engineering and distribution, under a lease that expires in May
1999.
The Company also owns a 106,458 square foot building, used for manufacturing
and administration, on approximately 4.6 acres in Eugene, Oregon. The Company
leases a nearby 14,370 square foot building used for engineering and
distribution, under a lease that expires in April 2001, with a five year
extension option.
The Company's Fremont facilities, which currently account for all of its
finished disk production, are located near major earthquake faults. Disruption
of operations for any reason, including power failures, work stoppages or
natural disasters such as fire, floods or earthquakes, could materially
adversely affect the Company's business, operating results and financial
condition.
ITEM 3. LEGAL PROCEEDINGS
On December 16, 1996, Virgil L. Hedgcoth filed a lawsuit against the Company
and several other entities in the Federal District Court for the Northern
District of California. In Hedgcoth v. Hitachi, Ltd., et al., Mr. Hedgcoth
alleges that certain HMT disks infringe patents allegedly owned by him (the
"Hedgcoth Patents"). The complaint seeks an injunction and unspecified damages,
which are sought to be trebled. The Company has filed a counterclaim seeking a
declaratory judgment that the Hedgcoth Patents are invalid and unenforceable and
that they are not infringed by the HMT disks. The Company does not believe that
the litigation Mr. Hedgcoth has pursued will have a material adverse effect on
the Company's business, operating results or financial condition; however, this
forward looking statement is subject to risks and uncertainties, including those
described in "Risk Factors--Intellectual Property and Proprietary Rights".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
<PAGE> 21
PART II
ITEMS 5, 6, 7, 8 AND 9.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the calendar periods indicated, the
range of high and low closing sales prices, as reported on the Nasdaq National
Market from March 13, 1996 through March 31, 1997.
<TABLE>
<CAPTION>
PRICE RANGE
OF
COMMON STOCK
---------------------
HIGH LOW
---------- --------
FISCAL 1996
<S> <C> <C>
Fourth Quarter (beginning March 13, 1996)....... $ 11 1/2 $ 9 7/8
FISCAL 1997
First Quarter................................... $ 28 1/4 $10 1/2
Second Quarter.................................. $ 21 3/4 $ 12 3/4
Third Quarter................................... $ 21 11/16 $ 12 5/8
Fourth Quarter.................................. $ 22 $ 12 1/4
</TABLE>
As of June 25, 1997, there were approximately 242 holders of record of the
Common Stock. On June 25, 1997, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $12.9375 per share.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all future earnings for use in its
business, and does not anticipate paying cash dividends on the Common Stock in
the foreseeable future. In addition, the terms of the Company's revolving credit
facility prohibit the payment of dividends without the banks' prior approval.
See Notes 5 and 8 of Notes to Consolidated Financial Statements.
22
<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ..................................................... $ 263,209 $ 194,401 $ 72,893 $ 64,242 $ 70,987
Cost of sales ................................................. 156,277 119,803 67,539 67,648 76,237
--------- --------- --------- --------- ---------
Gross profit (loss) ........................................... 106,932 74,598 5,354 (3,406) (5,250)
--------- --------- --------- --------- ---------
Operating expenses:
Research and development .................................... 5,812 3,803 3,130 2,781 2,499
Selling, general and administrative ......................... 11,803 7,774 4,230 5,115 4,725
Recapitalization expenses ................................... -- 4,347 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses ............................. 17,615 15,924 7,360 7,896 7,224
--------- --------- --------- --------- ---------
Operating income (loss) ....................................... 89,317 58,674 (2,006) (11,302) (12,474)
Interest expense, net ......................................... 3,329 8,578 6,915 6,001 4,806
--------- --------- --------- --------- ---------
Income (loss) before income tax provision (benefit) and
extraordinary debt extinguishment costs ..................... 85,988 50,096 (8,921) (17,303) (17,280)
Income tax provision (benefit) ................................ 25,400 2,590 20 22 (224)
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs ........................................ 60,588 47,506 (8,941) (17,325) (17,056)
Extraordinary debt extinguishment costs, net of
income taxes ................................................ -- 1,127 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ............................................. 60,588 46,379 (8,941) (17,325) (17,056)
Accretion reversal (accretion) for dividends on
Mandatorily ................................................... 1,157 (1,157) -- -- --
--------- --------- --------- --------- ---------
Redeemable Series A Preferred Stock
Net income (loss) available for common stockholders ........... $ 61,745 $ 45,222 $ (8,941) $ (17,325) $ (17,056)
========= ========= ========= ========= =========
Net income (loss) available for common stockholders per
share (1)
Primary .................................................... $ 1.40 $ 1.28 $ (0.26) $ (0.50) $ (0.49)
========= ========= ========= ========= =========
Fully diluted .............................................. $ 1.35 $ 1.28 $ (0.26) $ (0.50) $ (0.49)
========= ========= ========= ========= =========
Shares used in computing per share amounts (1)
Primary .................................................... 44,185 35,224 34,822 34,822 34,822
Fully diluted .............................................. 46,027 35,224 34,822 34,822 34,822
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ................................. $ 71,827 $ 45,899 $(82,715) $(71,175) $(55,720)
Total assets .............................................. 373,389 165,786 75,936 84,104 92,432
Long-term and senior bank debt, less current
portion ................................................. -- -- 9,750 12,200 34,650
Subordinated promissory notes payable to
stockholders ............................................ -- 47,000 -- -- --
Mandatorily Redeemable Series A Preferred Stock ........... -- 60,157 -- -- --
53/4% Convertible Subordinated Notes ...................... 230,000 -- -- -- --
Total stockholders' equity (deficit) ...................... 95,442 19,524 (51,550) (46,093) (28,768)
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing per share amounts.
23
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in Item 1 under the heading entitled
"Risk Factors."
OVERVIEW
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. HMT Technology Corporation is an independent supplier of
high-performance thin film disks for high-end, high-capacity hard disk drives,
which in turn are used in high-end PCs, network servers and workstations. HMT
was incorporated in 1988 as a subsidiary of Hitachi Metals for the purpose of
acquiring certain assets and certain liabilities of the thin film division of
Xidex Corporation, which had been producing thin film disks since 1983. Since
completing the Xidex acquisition, the Company has continued to supply thin film
disks to manufacturers of hard disk drives. On November 30, 1995, the Company
effected the Leveraged Recapitalization pursuant to which the Company
repurchased from Hitachi Metals, then the sole stockholder of the Company, all
of the outstanding shares of Common Stock of the Company, and certain investment
funds, members of management and Hitachi Metals, purchased Common Stock,
Mandatorily Redeemable Series A Preferred Stock and subordinated promissory
notes. During March and April 1996, the Company sold 9,660,000 shares of Common
Stock at $10.00 per share (including exercise of the underwriters'
over-allotment option) through its initial public offering. The net proceeds
(after underwriter's discounts and commissions and other costs associated with
the initial public offering) totaled $88.7 million. In January 1997, the Company
completed a $230 million private placement of the Convertible Notes to qualified
institutional investors, resulting in net proceeds of approximately $222.5
million (after offering costs). Proceeds from the issuance of the Convertible
Notes were used to fully redeem the $59 million of Mandatorily Redeemable Series
A Preferred Stock and to prepay the $47 million principal balance of the
subordinated promissory notes issued pursuant to the Leverage Recapitalization
plus accrued interest and to fully repay $41 million in long-term borrowings
outstanding.
Beginning in fiscal 1995, HMT's management team, many of whom had joined
the Company since February 1994, refocused the strategy and operations of the
Company. The new management concentrated on the 3 1/2-inch disk form factor,
focused on the high-end, high-capacity segment of the disk drive market and
expanded the Company's customer base. In addition, HMT implemented an extensive
quality assurance program, developed proprietary manufacturing processes and
optimized production capacity utilization. These changes resulted in higher
production volumes, lower unit costs, and higher average selling prices
primarily associated with new high-end products. As a result, the Company has
increased sales and improved gross margins, achieving net income of $60.6
million for fiscal 1997 compared with a net loss of $8.9 million for fiscal
1995. The rate of improvement in the Company's operating results experienced
over the past two years is not expected to continue in future periods.
The Company recently completed construction of a new 124,000 square foot
production facility at its Fremont, California site. The administrative office
areas and four production scale sputtering lines were brought into service
during the fourth quarter of fiscal 1997. The Company plans to install up to 12
additional production scale sputtering lines in this new facility. In addition,
the Company completed the expansion of its facility in Eugene, Oregon during
fiscal 1997, commencing volume production of aluminum substrates and
nickel-plated and polished substrates at that site.
The Company derives substantially all of its sales from the sale of thin
film disks to a small number of customers. Loss of or a reduction in orders from
one or more of the Company's customers could result in a substantial reduction
in net sales. Because many of the Company's expense levels are based, in part,
on its expectations as to future revenues, decreases in net sales may result in
a disproportionately greater negative impact on operating results. Due to the
rapid technological change and frequent development of new disk drive products,
it is common in the industry for the relative mix of customers and products to
change rapidly, even from quarter to quarter. At any one time the Company
typically supplies disks in volume for fewer than ten disk drive products.
The Company has experienced a period of rapid expansion in its operations,
including the organization and management of a significant expansion in
manufacturing capacity that has placed, and may continue to place, a significant
strain on the Company's management and other resources. The Company's status as
a public company since its March 1996 initial public offering has placed
additional demands on the Company's management, including its finance and
accounting organization. The Company's ability to manage its operations
effectively will require it to continue to improve its operational, financial
and management information systems,
24
<PAGE> 24
and to train, motivate and manage its employees. If the Company's management is
unable to manage its operations effectively, the Company's business, operating
results and financial condition could be adversely affected.
Due to the changes in ownership resulting from the Leveraged
Recapitalization, utilization of net operating losses is limited to
approximately $0.8 million per year over the loss carryforward period (expiring
between 2008 and 2010). The benefit from the net operating losses was recorded
in the quarter ended December 31, 1995. Had the Company been obligated to pay
taxes at the statutory rates for fiscal 1996, net income would have been $30.7
million.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ----------- ----------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 59.4 61.6 92.7 105.3 107.4
-------- -------- -------- -------- --------
Gross profit (loss)...................................... 40.6 38.4 7.3 (5.3) (7.4)
Operating expenses:
Research and development............................... 2.2 2.0 4.3 4.3 3.5
Selling, general and administrative.................... 4.5 4.0 5.8 8.0 6.7
Recapitalization expenses.............................. -- 2.2 -- -- --
-------- -------- -------- -------- --------
Total operating expenses....................... 6.7 8.2 10.1 12.3 10.2
-------- -------- -------- -------- --------
Operating income (loss).................................. 33.9 30.2 (2.8) (17.6) (17.6)
Interest expense, net.................................... 1.3 4.4 9.4 9.3 6.7
-------- -------- -------- -------- --------
Income (loss) before income tax provision (benefit)
and extraordinary debt extinguishment costs............ 32.6 25.8 (12.2) (26.9) (24.3)
Income tax provision (benefit)........................... 9.6 1.3 0.1 0.1 (0.3)
Extraordinary debt extinguishment costs, net of
income taxes........................................... -- 0.6 -- -- --
-------- -------- -------- -------- --------
Net income (loss)........................................ 23.0% 23.9% (12.3)% (27.0)% (24.0)%
========= ========= ========== ========== ========
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Net Sales. Net sales were $263.2 million in fiscal 1997, $194.4 million in
fiscal 1996, and $72.9 million in fiscal 1995. This represented an increase of
35.4% from fiscal 1996 to fiscal 1997, and an increase of 166.7% from fiscal
1995 to fiscal 1996. The increase in net sales in fiscal 1997 was primarily
attributable to an increase in manufacturing capacity, resulting from the
addition of new sputtering lines, and improved utilization of existing capacity
and improved manufacturing processes, resulting in higher production volume and
unit shipments. The unit sales volume increased 60% from fiscal 1996 to fiscal
1997 while average selling prices declined 16% over the same period. The
increase in net sales in fiscal 1996 compared to fiscal 1995 was primarily
attributable to an increase in manufacturing capacity, primarily from improved
utilization of existing capacity, improved manufacturing processes, and
increased yields, resulting in higher production volume and unit shipments, as
well as higher average selling prices primarily associated with the sale of new
high-end products. The Company anticipates that average selling prices will
fluctuate with industry supply and demand. Substantially all of the Company's
net sales consist of products delivered to customers in Asia, primarily foreign
subsidiaries of U.S.
companies.
Gross Profit. Gross margin was 40.6% in fiscal 1997, 38.4% in fiscal 1996
and 7.3% in fiscal 1995. The increases in gross margin in fiscal 1997 and fiscal
1996 were primarily a result of decreased unit production costs, improved
utilization of manufacturing capacity, improved manufacturing processes, and the
absorption of fixed costs over higher unit production volume. Production of
aluminum and nickel plated substrates at the Eugene, Oregon manufacturing
facility (which was acquired during the first quarter of fiscal 1997) and lower
substrate and other raw material prices also contributed to a decrease in the
unit cost during fiscal 1997. Increased yields in fiscal 1996, and a
manufacturing disruption experienced during the last quarter of fiscal 1995 also
contributed to improved margins in fiscal 1996 compared to fiscal 1995.
Research and Development. Research and development expenses were $5.8
million, or 2.2% of net sales, in fiscal 1997, $3.8 million, or 2.0% of net
sales, in fiscal 1996, and $3.1 million, or 4.3% of net sales, in fiscal 1995.
Research and development expenses increased in absolute dollars in fiscal 1997
and 1996 due to an increase in headcount related to the Company's new product
introductions, as well as increased efforts to expand research and to provide
enabling technology elements for advanced products. The
25
<PAGE> 25
decrease of research and development expenses as a percentage of net sales in
fiscal 1996 was primarily a result of the substantial increase in net sales over
the same period. The Company develops manufacturing processes for new products
directly on active production lines during the research and development phase,
avoiding the need for substantial capital investment in dedicated research
equipment. The Company anticipates that research and development expenses will
increase in absolute dollars in future periods, although as a percentage of net
sales, research and development expenses may fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses were $11.8 million, or 4.5% of net sales, in fiscal 1997, $7.8 million,
or 4.0% of net sales, in fiscal 1996 and $4.2 million, or 5.8% of net sales, in
fiscal 1995. The fiscal 1997 and fiscal 1996 increase in selling, general and
administrative expenses in absolute dollars primarily reflected increased
headcount necessary to support higher production volume and unit shipments. The
fiscal 1996 decline in selling, general and administrative expenses as a
percentage of net sales primarily reflected the increase in net sales over the
same period, partially offset by an increase in the selling, general and
administrative expenses in absolute dollars. The Company anticipates that
selling, general and administrative expenses will continue to increase in
absolute dollars as headcount is increased to support anticipated higher levels
of production volume, although as a percentage of net sales, selling general and
administrative expenses may fluctuate from period to period.
Recapitalization Expenses. The Company effected the Leveraged
Recapitalization on November 30, 1995, and recorded a $4.3 million charge for
related expenses for the quarter ended December 31, 1995.
Interest Expense, Net. Interest expense, net was $3.3 million, or 1.3% of
net sales, in fiscal 1997, $8.6 million, or 4.4% of net sales, in fiscal 1996
and $6.9 million or 9.4% of net sales in fiscal 1995. The fiscal 1997 decrease
was primarily a result of interest earned on excess cash balances, lower average
debt balances and a $2.4 million increase in capitalized interest. The fiscal
1996 increase in absolute dollars was primarily a result of higher average debt
balances and interest rates, as compared to fiscal 1995. The Company anticipates
interest expense, net will increase in absolute dollars as a result of higher
average debt balances (a result of the completion of the sale of the Convertible
Notes in January 1997), lower invested cash balances and lower capitalized
interest as construction-in-progress balances decrease.
Provision for Income Taxes. The Company recorded income tax provisions of
$25.4 million, $2.6 million and $20,000 in fiscal 1997, 1996 and 1995,
respectively. The fiscal 1997 tax rate of approximately 30% reflected statutory
federal and state rates, reduced primarily by benefits realized from the
establishment of a foreign sales corporation, utilization of state credits and
implementation of other state tax planning strategies.
During fiscal 1996, the Company assessed the recoverability of deferred tax
assets and, based on expectations about operating results for the fiscal year
ending March 31, 1997 and future years, determined it was more likely than not
that the entire balance of deferred tax assets would be recovered. As the facts
that supported the reduction of the valuation allowance related to the period
immediately following the Leveraged Recapitalization, the Company reduced its
fiscal 1996 income tax expense by approximately $6.9 million to reflect the tax
benefit associated with recognition of deferred tax assets at December 31, 1995.
The recognition of deferred tax assets and the utilization of $12.7 million of
net operating loss carryforwards produced an effective tax rate of 5.2% for
fiscal 1996. Due to a loss in fiscal 1995, the Company required no federal
income tax provision. The income tax provision recorded during fiscal 1995 was
based upon state income taxes of Hitachi Metals allocated to the Company.
Extraordinary debt extinguishment costs, net of income taxes. The Company
repaid the balance of a senior bank term loan incurred in connection with the
Leveraged Recapitalization on March 14, 1996, after completion of its initial
public offering. As a result, the Company recorded a one-time non-cash charge of
$1.1 million, net of income taxes, for the write-off of the portion of
unamortized debt issue costs related to the senior bank term loan during fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997 and fiscal 1996, the Company financed its cash
requirements through cash from financing activities and operations. In fiscal
1995, the Company financed its cash requirements primarily through cash from
operations.
The Company's operations provided net cash of $90.7 million, $50.4 million
and $8.7 million for fiscal 1997, 1996 and 1995, respectively. Cash generated
during fiscal 1997 reflected net income plus depreciation and amortization, an
increase in total liabilities, and the utilization of deferred tax assets,
partially offset by increases in inventories and receivables. Increased sales
and improved margins contributed to the positive cash flow provided by
operations in each of the past two fiscal years.
26
<PAGE> 26
For fiscal 1997 and fiscal 1996, net cash used in investing activities was
$208.2 million and $35.5 million, respectively. The Company invested $199.4
million and $39.6 million in property, plant and equipment during fiscal 1997
and fiscal 1996, respectively.
During fiscal 1997 and 1996, net cash from financing activities was $125.9
million and $20.0 million, respectively. Cash provided by financing activities
for fiscal 1997 reflects the issuance of $230.0 million in Convertible Notes,
and the related redemption of $59.0 million in Series A Preferred Stock,
prepayment of the $47.0 million in subordinated promissory notes, and repayment
of $41.0 million in long-term borrowings, as well as the receipt of $11.7
million from the exercise of the underwriters' over-allotment option pursuant to
the Company's initial public offering.
As of March 31, 1997, the Company's principal sources of liquidity
consisted of $55.1 million in cash, cash equivalents and short-term investments,
and a $50.0 million unsecured revolving credit facility under which there were
no borrowings. At March 31, 1997, the Company had indebtedness of $230.0 million
in Convertible Notes, that require semi-annual interest payments beginning July
15, 1997. The Company expects to spend in excess of $200.0 million on capital
expenditures directed toward expansion of production capacity over the next
twelve months.
The Company believes existing cash balances, cash generated from
operations, and funds available under its credit facilities will provide
adequate cash to fund its operations for at least the next twelve months. While
operating activities are expected to provide cash in certain periods, continued
expansion of the Company's manufacturing capacity may require the Company to
obtain additional sources of financing. Additional sources of long-term
liquidity could include cash generated from operations and debt and equity
financings. The Company continues to have significant future obligations and
expects that it may require additional capital to support continued expansion of
the Company's manufacturing capacity and growth, if any. There can be no
assurance that the Company will be able to obtain alternative sources of
financing on favorable terms, if at all, at such time or times as the Company
may require such capital.
Recent pronouncements. During February 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings per Share" (SFAS No. 128)
which establishes standards for computing and presenting earnings per share
(EPS) more comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. While the Company studies the
impact of the pronouncement, it continues to calculate EPS based on Accounting
Pronouncements Board Opinion No. 15, "Earnings per Share." SFAS No. 128 will be
effective for the Company's 1998 fiscal year, including interim periods, with a
restatement of all prior-period EPS data presented.
27
<PAGE> 27
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required by this item are set
forth on pages 39 through 55 and the related consolidated financial statement
schedule is set forth on page 56.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In December 1995, the Company decided to retain Coopers & Lybrand
L.L.P. as the independent accountants for the Company and dismissed Ernst &
Young L.L.P., the Company's former accountants. The decision to change
independent accountants was approved by the Company's Board of Directors and was
made in connection with the Leveraged Recapitalization. There were no
disagreements with the former accountants regarding any matters with respect to
accounting principles or practices, financial statement disclosure or auditing
scope or procedure through December 1995, or with respect to the Company's
financial statements for the fiscal years ended March 31, 1994 and 1995. The
former accountants' reports as of and for the fiscal years ended March 31, 1994
and 1995 are not a part of the consolidated financial statements of the Company
included in this annual report on Form 10-K and the related consolidated
financial statement schedules included elsewhere in this report. Such reports
did not contain an adverse opinion or disclaimer of an opinion or qualifications
as to uncertainty, audit scope or accounting principles. Prior to retaining
Coopers & Lybrand L.L.P., the Company had not consulted with Coopers & Lybrand
L.L.P. regarding accounting principles. However, Hitachi Metals and certain
stockholders of HMT had consulted Coopers & Lybrand L.L.P. for the limited
purpose of determining appropriate accounting treatment of the Leveraged
Recapitalization.
28
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors" and "Other Matters"
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 1997 Annual Meeting of Stockholders to be held on August 14, 1997 (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors-Compensation of
Directors," "Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption " Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
29
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. See Index to Consolidated Financial Statements
and Financial Statement Schedules included on page 32.
2. Financial Statement Schedules. See "Schedule II -- Valuation and
Qualifying Accounts" included on page 49. All other schedules have been omitted
since the required information is not present in amounts sufficient to require
submission of the schedules, or because the information required is included in
the consolidated financial statements or notes thereto.
3. List of Exhibits. See Index of Exhibits included on page 52.
(b) Reports on Form 8-K:
During the quarter ended March 31, 1997, a report on Form 8-K was filed by
the Company on January 21, 1997, in which the Company reported the sale of
$230 million aggregate principal amount of 5 3/4% Convertible Subordinated
Notes, due 2004.
(c) Exhibits:
The exhibits which are filed with this report or which are incorporated
herein by reference are set forth in the Exhibit Index beginning on page 52.
30
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
HMT TECHNOLOGY CORPORATION
DATE: June 27, 1997 By: /s/ RONALD L. SCHAUER
----------------------------------
Ronald L. Schauer
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------- -------------------------------------- -------------
<S> <C> <C>
/s/ RONALD L. SCHAUER President, Chief Executive Officer and June 27, 1997
----------------------------- Chairman of the Board
Ronald L. Schauer (Principal Executive Officer)
/s/ PETER S. NORRIS Vice President, Finance, Chief June 27, 1997
----------------------------- Financial Officer and Treasurer
Peter S. Norris (Principal Financial Officer)
/s/ BRUCE C. EDWARDS Director June 27, 1997
-----------------------------
Bruce C. Edwards
/s/ NEIL M. GARFINKEL Director June 27, 1997
-----------------------------
Neil M. Garfinkel
/s/ WALTER G. KORTSCHAK Director June 27, 1997
-----------------------------
Walter G. Kortschak
/s/ ROBERT G. TEAL Director June 27, 1997
-----------------------------
Robert G. Teal
</TABLE>
31
<PAGE> 31
HMT TECHNOLOGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants................................. 33
Consolidated Financial Statements:
Consolidated Balance Sheets..................................... 34
Consolidated Statements of Operations........................... 35
Consolidated Statements of Stockholders' Equity (Deficit)....... 36
Consolidated Statements of Cash Flows........................... 37
Notes to Consolidated Financial Statements........................ 38
Schedules:
II-- Valuation and qualifying accounts.......................... 49
</TABLE>
32
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
HMT Technology Corporation
We have audited the consolidated financial statements and financial
statement schedule of HMT Technology Corporation and its subsidiary listed in
Item 14 (a) (1) and (2) of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HMT
Technology Corporation and its subsidiary as of March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 22, 1997
33
<PAGE> 33
HMT TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1996
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 44,225 $ 35,843
Short-term investments.................................................... 10,833 --
Receivables-- trade, net of allowance for doubtful accounts of
$1,055 and $612 at March 31, 1997 and 1996, respectively............... 35,771 31,070
Other receivables......................................................... 23 357
Inventories............................................................... 11,837 7,129
Deposits, prepaid expenses and other assets............................... 474 879
Deferred income taxes..................................................... 6,532 5,028
---------- ----------
Total current assets................................................. 109,695 80,306
Construction in progress.................................................... 76,433 15,745
Property, plant and equipment, net.......................................... 178,875 63,383
Other assets................................................................ 8,386 1,415
Deferred income taxes....................................................... -- 4,937
---------- ----------
Total assets......................................................... $ 373,389 $ 165,786
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 26,424 $ 13,911
Accrued liabilities....................................................... 8,765 16,682
Obligations under capital leases-- current portion........................ 2,679 3,814
---------- ---------
Total current liabilities............................................ 37,868 34,407
Obligations under capital leases, net of current portion.................... 3,172 4,698
Other long-term liabilities................................................. 3,562 --
Deferred income taxes....................................................... 3,345 --
Subordinated promissory notes payable to stockholders....................... -- 47,000
53/4% Convertible Subordinated Notes, due 2004............................... 230,000 --
----------- ----------
Total liabilities.................................................... 277,947 86,105
Commitments (Note 6)
Mandatorily Redeemable Series A Preferred Stock, $0.001 par value with
a redemption value of $10.00 per share; authorized: 9,100,000 and
15,000,000 shares at March 31, 1997 and March 31, 1996, respectively ;
issued and outstanding: none and 5,900,000 shares at March 31, 1997 and
1996, respectively..........................................................
-- 60,157
----------- ---------
Common Stock, $0.001 par value; authorized: 100,000,000 shares;
issued and outstanding: 41,046,360 and 38,719,178 shares at
March 31, 1997 and 1996, respectively...................................... 41 39
Additional paid-in capital.................................................. 92,084 77,913
Retained earnings........................................................... 79,966 18,221
Distribution in excess of basis (Note 1).................................... (76,649) (76,649)
---------- ----------
Total stockholders' equity........................................... 95,442 19,524
---------- ----------
Total liabilities and stockholders' equity........................ $ 373,389 $ 165,786
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 34
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net sales..................................................... $ 263,209 $ 194,401 $ 72,893
Cost of sales................................................. 156,277 119,803 67,539
---------- ---------- ---------
Gross profit................................................ 106,932 74,598 5,354
Operating expenses:
Research and development.................................... 5,812 3,803 3,130
Selling, general and administrative......................... 11,803 7,774 4,230
Recapitalization expenses................................... -- 4,347 --
--------- ---------- ---------
Total operating expenses................................. 17,615 15,924 7,360
---------- ---------- ---------
Operating income (loss)................................ 89,317 58,674 (2,006)
Interest expense, net......................................... 3,329 8,578 6,915
---------- ---------- ---------
Income (loss) before income tax provision and
extraordinary debt extinguishment costs................ 85,988 50,096 (8,921)
Income tax provision.......................................... 25,400 2,590 20
---------- ---------- ---------
Net income (loss) before extraordinary debt
extinguishment costs........................................ 60,588 47,506 (8,941)
Extraordinary debt extinguishment costs, net of income
taxes of $692............................................... -- 1,127 --
--------- ---------- ---------
Net income (loss)........................................ 60,588 46,379 (8,941)
Accretion reversal (accretion) for dividends on Mandatorily
Redeemable Series A Preferred Stock......................... 1,157 (1,157) --
---------- ---------- ---------
Net income (loss) available for common stockholders........... $ 61,745 $ 45,222 $ (8,941)
========== ========== =========
Primary net income (loss) available for common stockholders
per $ 1.40 $ 1.31 $ (0.26)
share before extraordinary debt extinguishment costs........
Extraordinary debt extinguishment costs per share,
net of income taxes.......................................... -- 0.03 --
---------- ---------- ---------
Net income (loss) available for common stockholders per share
Primary..................................................... $ 1.40 $ 1.28 $ (0.26)
========== ========== =========
Fully diluted............................................... $ 1.35 $ 1.28 $ (0.26)
========== ========== =========
Shares used in computing net income per share
Primary..................................................... 44,185 35,224 34,822
========== ========== =========
Fully diluted............................................... 46,027 35,224 34,822
========== ========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
35
<PAGE> 35
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
DISTRIBUTIONS RETAINED TOTAL
COMMON STOCK ADDITIONAL IN EXCESS EARNINGS STOCKHOLDERS'
-------------------------- PAID-IN OF NET BOOK (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL VALUE DEFICIT) (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1994 ..... 4,650 $ 15,000 -- -- $ (61,093) $ (46,093)
Capital contribution ...... -- -- $ 3,484 -- -- 3,484
Net loss .................. -- -- -- -- (8,941) (8,941)
----------- ----------- ----------- ----------- ----------- -----------
Balances, March 31, 1995 ... 4,650 15,000 3,484 -- (70,034) (51,550)
Net income for the
period from April 1,
1995 through
November 30, 1995 ...... -- -- -- -- 27,001 27,001
Distribution to
stockholders ............ (4,650) (15,000) (3,484) $ (76,649) 43,033 (52,100)
Common Stock issued
upon the Leveraged
Recapitalization ........ 29,656,057 30 927 -- -- 957
Initial Public Offering
of $0.001 par value
Common Stock, net of
offering expenses ....... 8,400,000 8 76,924 -- -- 76,932
Common Stock issued
under Stock Option
Plans ................... 663,121 1 62 -- -- 63
Net income for the
period from
December 1, 1995
through March 31, -- -- -- -- 19,378 19,378
1996.....................
Accretion for dividends
on Mandatorily
Redeemable Series A
Preferred Stock ......... -- -- -- -- (1,157) (1,157)
----------- ----------- ----------- ----------- ----------- -----------
Balances, March 31, 1996 .... 38,719,178 39 77,913 (76,649) 18,221 19,524
Over-allotment on Initial
Public Offering of $0.001
par value ................. 1,260,000 1 11,741 -- -- 11,742
Common Stock, net of
offering expenses
Common Stock issued under
Employee Stock Purchase
Plans ................... 121,744 -- 1,035 -- -- 1,035
Common Stock issued
under Stock Option ...... 1,396
Plans ................... 945,438 1 1,395 -- --
Net income ................ -- -- -- -- 60,588 60,588
Reversal of accretion, net,
for dividends on
Mandatorily Redeemable
Series A ................ -- -- -- -- 1,157 1,157
----------- ----------- ----------- ----------- ----------- -----------
Preferred Stock
Balances, March 31, 1997 .... 41,046,360 $ 41 $ 92,084 $ (76,649) $ 79,966 $ 95,442
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
36
<PAGE> 36
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 60,588 $ 46,379 $ (8,941)
Adjustments to reconcile net income (loss) to net cash provided by
operations:
Depreciation and amortization .................................... 20,839 12,291 11,492
Provision for loss on inventories ................................ 3,801 (2,938) 2,536
Loss (gain) on sale or disposal of assets ........................ 2,988 181 (16)
Deferred income taxes ............................................ 6,778 (9,965) --
Changes in operating assets and liabilities:
Receivables-- trade .............................................. (4,701) (23,539) 4,361
Other receivables ................................................ 334 29 188
Inventories ...................................................... (8,509) 6,623 (2,327)
Deposits, prepaid expenses and other assets ...................... 405 840 90
Accounts payable ................................................. 12,513 6,940 1,776
Accrued liabilities .............................................. (7,917) 13,573 (452)
Long term liabilities ............................................ 3,562 -- --
--------- --------- ---------
Net cash provided by operating activities ........................ 90,681 50,414 8,707
--------- --------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment ................... (197,395) (39,629) (7,317)
Purchase of short-term investments ............................... (10,833) -- --
Proceeds from sale of equipment .................................. -- 2,205 18
Decrease in other assets ......................................... -- 1,961 12
--------- --------- ---------
Net cash used in investing activities ............................ (208,228) (35,463) (7,287)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on obligations under capital leases ........... (4,744) (9,994) (4,701)
Net proceeds from (repayments on) short-term borrowings .......... -- (86,700) 26,600
Repayment of long-term notes payable ............................. -- (12,200) (22,450)
Proceeds from long-term borrowings ............................... 41,000 -- --
Repayments on long-term borrowings ............................... (41,000) -- --
Proceeds from issuance of senior bank term loan .................. -- 60,000 --
Repayments on senior bank term loan .............................. -- (60,000) --
Financing costs .................................................. (7,500) (2,944) --
Proceeds from issuance of 53/4% Convertible Subordinated Notes .. 230,000 -- --
Proceeds from (repayment of) subordinated promissory notes payable
to ............................................................... (47,000) 47,000 --
stockholders
Distribution to stockholders ..................................... -- (52,100) --
Proceeds from issuance of Common Stock ........................... 14,173 77,952 --
Proceeds from issuance (redemption) of Mandatorily Redeemable
Series A Preferred Stock ......................................... (59,000) 59,000 --
--------- --------- ---------
Net cash provided by (used in) financing activities .............. 125,929 20,014 (551)
--------- --------- ---------
Net increase in cash and cash equivalents ........................ 8,382 34,965 869
Cash and cash equivalents at beginning of period ................. 35,843 878 9
--------- --------- ---------
Cash and cash equivalents at end of period ....................... $ 44,225 $ 35,843 $ 878
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period ......................... $ 4,859 $ 8,776 $ 5,698
Cash paid for income taxes during the period ..................... $ 27,925 $ 3,522 $ --
Supplemental disclosure of noncash investing and
financing activities:
Machinery and equipment acquired pursuant to a capital lease ..... $ 2,083 $ -- $ --
Refinancing of existing capital lease obligations ................ $ -- $ 13,105 $ 14,930
Accretion (accretion reversal) for dividends on Mandatorily
Redeemable
Series A Preferred Stock ......................................... $ (1,157) $ 1,157 $ --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
37
<PAGE> 37
HMT TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
HMT Technology Corporation (the "Company"), operates in a single industry
segment, and designs, manufactures and markets thin film magnetic disks for use
in computer hard drives.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, HMT FSC Ltd. (incorporated on February 14,
1996). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year
The Company uses a 52-week fiscal year ending on March 31 and thirteen- to
fourteen-week quarters that end on the Sunday closest to the calendar quarter
end.
Recapitalization
On November 30, 1995, the Company effected a leveraged recapitalization
(the "Leveraged Recapitalization") pursuant to which the Company repurchased
from Hitachi Metals, Ltd. ("Hitachi Metals"), then the sole stockholder of the
Company, all of the outstanding shares of Common Stock of the Company, and
certain investment funds, members of management and Hitachi Metals purchased
newly issued Common Stock, Mandatorily Redeemable Series A Preferred Stock
("Series A Preferred Stock") and subordinated promissory notes ("Subordinated
Notes") of the Company. As of November 30, 1995 (immediately prior to the
Leveraged Recapitalization), the Company had approximately $98.5 million in
assets (unaudited) and approximately $122.7 million in liabilities (unaudited).
Immediately following the Leveraged Recapitalization, the Company had $110.9
million in assets (unaudited), and $132.1 million in liabilities (unaudited)
(including $60.0 million of senior bank term loan and $47.0 million of
Subordinated Notes to stockholders) and $59.0 million of Series A Preferred
Stock.
The Leveraged Recapitalization has been accounted for as a
recapitalization, and accordingly, no change in the accounting basis of the
Company's assets has been made in the accompanying financial statements. The
amount of cash paid and securities issued to the stockholders of the Company
exceeded the Company's net assets on the date of the transaction and has been
recorded in the equity section as distributions in excess of net book value.
Stock Split
The Company's Board of Directors effected a 31-for-1 stock split on March
13, 1996. All shares and per share data in the accompanying financial statements
have been retroactively restated to reflect the stock split.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase and money market
funds to be cash equivalents. The Company maintains deposits with several
financial institutions in the United States. Deposits in banks may exceed the
amount of insurance provided on such deposits. The Company has not experienced
any losses on its deposits of cash and cash equivalents.
38
<PAGE> 38
Short-Term Investments
The Company invests its excess cash in short-term, interest bearing,
investment grade securities. At March 31, 1997, all such investments are
designated as available-for-sale. Unrealized holding gains and losses, if any,
are reported net of related taxes as a separate component of stockholders'
equity. Realized gains and losses on sales of all such securities are reported
in earnings and computed using the specific identification method and interest
on investments is included in interest income. At March 31, 1997, short-term
investments are stated at cost which approximates fair value. Short-term
investments consist of interest bearing, investment grade commercial paper
maturing before August 1997. There were no unrealized gains or losses on these
securities as of March 31, 1997.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out basis. The Company's inventories include
high-technology materials that may be specialized in nature or subject to rapid
technological obsolescence. While the Company has programs to minimize the
required inventories on hand and considers technological obsolescence in
estimating reserves to reduce recorded amounts to market value, such estimates
could change in the future.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation and
amortization is provided using the straight-line method over estimated useful
lives of ten to 35 years for the building and improvements; five to ten years or
the lease term, whichever is shorter, for leasehold improvements; and three to
five years for the machinery, equipment and furniture and fixtures. The
Company's policy is to regularly review the carrying amount of specialized
assets and to evaluate the remaining life and recoverability of such equipment
in light of current market conditions. Upon disposal, the assets and related
accumulated depreciation are removed from the Company's accounts, and resulting
gains or losses are reflected in operations.
Other Assets
Other assets are comprised principally of debt issue costs which are
capitalized and amortized to interest expense using the effective interest
method over the term of the related debt.
Warranties
The Company's products are generally warrantied for a period of 60 days
from customer receipt. Estimated future costs of repair, replacement, or
customer accommodations are reflected in the accompanying financial statements.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the liability method is used for accounting for income
taxes. The realization of deferred tax assets is based on historical tax
positions and expectations about future taxable income.
Revenue Recognition
Revenue is generally recognized upon shipment of product to the customer.
Sales are reported net of a provision for estimated product returns.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Foreign Currency Accounting
Substantially all of the Company's sales are denominated in U.S. dollars.
Foreign currency transactions during the period are
39
<PAGE> 39
immaterial and are included in operations.
Concentration of Risks
Three customers accounted for 76.8% and 84.3% of accounts receivable at
March 31, 1997 and 1996, respectively. Significant customers accounted for the
following percentages of net sales in fiscal 1997, 1996 and 1995:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Maxtor Corporation........................... 40.7% 40.5% 73.7%
Samsung Electronics Company Limited.......... 19.8 0.1 0.3
Iomega Corporation........................... 12.2 2.4 --
Western Digital Corporation.................. 11.9 35.8 5.9
Micropolis Corporation....................... 8.4 9.1 11.2
</TABLE>
The Company sells substantially all of its production to Asian subsidiaries
of U.S. companies. The Company performs ongoing credit evaluations of its
customers. The Company does not require collateral for its receivables and
maintains an allowance for potential credit losses, which have been
insignificant to date.
The Company's Fremont facilities currently account for all of its finished
goods production. Disruption of operations at either of the two Company's
production facilities could cause delays in, or an interruption of, production
and shipment of products, which could materially adversely affect the Company's
business, operating results and financial condition.
The Company maintains its short term investments at one financial
institution. The Company has not experienced material losses on any of its
investments.
Public Offering
During March 1996, the Company sold 8,400,000 shares of Common Stock at
$10.00 per share through its initial public offering ("IPO"), all of which were
sold by the Company. The net proceeds (after underwriter's discounts and
commissions and other costs associated with the IPO) totaled $76.9 million. On
April 12, 1996, the Company sold an additional 1,260,000 shares of common stock
at $10.00 per share pursuant to the underwriters' over-allotment option,
resulting in net proceeds of approximately $11.7 million.
Computation of Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common shares consist of stock options and warrants as if exercised for
all periods presented. Accretion (reversal) of the Series A Preferred Stock
dividend reduces (increases) earnings available for holders of Common Stock in
the computation of earnings per share. Net income used in the computation of
fully diluted income per share assumes the conversion of the 5 3/4% convertible
subordinated notes.
For the relevant periods, the Company has computed common and dilutive
common share equivalents in determining the number of shares used in calculating
earnings per share pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 83. SAB 83 requires the Company to include all
common share equivalents issued during the 12 months preceding the filing date
of an initial public offering in its calculation of the number of shares used to
determine earnings per share as if shares used to determine earnings per share
had been outstanding for all periods presented.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, other receivables and
accrued liabilities are a reasonable estimate of their fair value due to their
short term nature. The carrying values of the Company's long term debt and
Series A Preferred Stock are a reasonable estimate of their fair value based on
interest rates as of March 31, 1996 for issues with similar remaining
maturities.
The estimated fair value amounts of the Company's financial instruments
have been determined by the Company, using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, thus, the
40
<PAGE> 40
estimates provided herein are not necessarily indicative of the amounts that
could be realized in a current market exchange.
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different than the book value of those financial instruments. When the
fair value is equal to the book value no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. The effect of using
different market assumptions and/or estimation methodologies may be material to
the estimated fair value amounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (SFAS No. 128) which establishes
standards for computing and presenting earnings per share (EPS) more comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. While the Company studies the impact of the
pronouncement, it continues to calculate EPS based on Accounting Pronouncements
Board Opinion No. 15, "Earnings per Share." SFAS No. 128 will be effective for
the Company's 1998 fiscal year, including interim periods, with a restatement of
all prior-period EPS data presented.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. The
reclassification has no impact on previously reported net income or
stockholders' equity (deficit).
2. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
INVENTORIES:
Raw materials............... $ 4,307 $ 1,284
Work-in-process............. 5,843 5,123
Finished goods.............. 1,687 722
-------- --------
$ 11,837 $ 7,129
======== ========
</TABLE>
Inventories reflect reserves of approximately $5.3 million and $1.5 million
as of March 31, 1997 and 1996, respectively.
41
<PAGE> 41
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, NET:
Land............................................. $ 4,869 $ 4,636
Building and improvements........................ 80,417 13,814
Leasehold improvements........................... 22,187 15,501
Machinery, equipment and furniture and fixtures.. 124,415 71,742
---------- ----------
231,888 105,693
Less accumulated depreciation and amortization... 53,013 42,310
---------- ----------
$ 178,875 $ 63,383
========== ==========
</TABLE>
Construction in progress was approximately $76.4 million and $15.7 million
at March 31, 1997 and 1996, respectively. Additions to construction in progress
include capitalized interest of approximately $2.4 million, $278,000, and $8,000
during fiscal 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ACCRUED LIABILITIES:
Interest payable...... $ 2,473 $ 2,088
Income taxes payable.. -- 8,620
Payroll related items. 2,957 1,599
Other................. 3,335 4,375
--------- ---------
$ 8,765 $ 16,682
========= =========
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Company had the following transactions with a certain stockholder and
its affiliates:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Hitachi Metals Trading
Purchases of raw materials.................. $ 11,139 $ 8,755 $ 3,044
Sales....................................... 2 19 12
Hitachi Metals America
Purchases of raw materials.................. 1,450 2,274 1,038
Hitachi Metals Research Ltd.
Contract research and development services.. -- 514 202
Hitachi Metals Limited
Purchases of raw materials.................. -- -- 14
Interest under capital lease obligations.... -- -- 737
Hitachi Kizoku Shoji
Sales....................................... -- -- 1,522
</TABLE>
4. OBLIGATIONS UNDER CAPITAL LEASES
Assets under capital lease obligations as of March 31, 1997 consist of
machinery and equipment with a cost of $16.6 million and accumulated
amortization of $8.5 million ($26.9 million and $10.4 million, respectively, at
March 31, 1996). Minimum future lease payments under capital lease obligations,
together with the present value of the net minimum lease payments, are as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) PERIOD ENDING
MARCH 31, 1997
--------------
<S> <C>
1998................................................... $ 3,206
1999................................................... 2,827
2000................................................... 574
-------
Minimum lease payments................................... 6,607
Less amount representing interest........................ 756
-------
Present value of minimum lease payments.................. 5,851
Less current portion..................................... 2,679
-------
Capital lease obligation, net of current portion.... $ 3,172
=======
</TABLE>
42
<PAGE> 42
In November 1995, in connection with the Leveraged Recapitalization, the
Company entered into an agreement to refinance an existing capital lease under
which the majority of assets under the existing lease plus assets with a net
book value of approximately $5.0 million were conveyed to the new lessor. The
appraised value of the assets conveyed to the new lessor exceeded their net book
value on the date transferred. The new lease agreement, classified as a capital
lease, required an initial payment of $6.1 million and 36 monthly payments of
$0.2 million. Upon maturity, the Company has the option to renew the lease,
purchase the equipment at fair market value, or return it to the lessor with a
restocking fee.
5. DEBT
On November 30, 1995, in connection with the Leveraged Recapitalization,
the Company paid off the entire balance of short-term borrowings and long-term
notes outstanding at that time. The Company partially financed the Leveraged
Recapitalization through a $60.0 million senior bank term loan and $47.0 million
in 12% Subordinated Notes sold to stockholders. The Subordinated Notes were
repaid in full with proceeds from the sale of 5 3/4% convertible subordinated
notes.
Extraordinary debt extinguishment costs, net of income taxes. Pursuant to
the credit agreement, the Company repaid the balance of a senior bank term loan
on March 14, 1996, after completion of the IPO. As a result, the Company
recorded a one-time non-cash charge of $1.1 million (or $0.03 per share), net of
income taxes, for the write-off of the portion of unamortized debt issue costs
related to the senior bank term loan.
On August 28, 1996, the Company amended and restated the revolving credit
agreement originally entered into in 1995 pursuant to the Leveraged
Recapitalization. This unsecured $50 million revolving credit agreement is with
a consortium of banks and expires August 28, 1999. The credit agreement contains
certain covenants relating to profitability, minimum levels of tangible net
worth, limitations on additional debt, minimum levels of liquidity and prohibit
the cash payment of dividends on common stock. At March 31, 1997 and 1996, the
Company had no borrowings under this facility.
Issuance of 5 3/4% Convertible Subordinated Notes
In January, 1997 the Company completed a $230 million private placement of
the Convertible Notes to qualified institutional investors, resulting in net
proceeds of approximately $222.5 million (after estimated offering costs).
Proceeds from the issuance of the Convertible Notes were used to repay the $47
million principal balance of the subordinated notes plus accrued interest and to
redeem the $59 million of Series A Preferred Stock issued pursuant to the
Leverage Recapitalization, and to fully repay the $41 million in long-term
borrowings outstanding.
The Convertible Notes have an interest rate of 5 3/4% payable semiannually
at January 15 and July 15, are convertible into shares of common stock of the
Company at a conversion price of $23.75 per share, subject to adjustment in
certain events, and mature January, 2004. The Convertible Notes are not
redeemable prior to January 19, 2000. Thereafter the Company may redeem the
Convertible Notes initially at 103.286% and at decreasing prices thereafter to
100% at maturity, in each case together with accrued interest. As of March 31,
1997, the fair value of the Convertible Notes, which is determined based on
quoted market price, was $194.4 million.
6. COMMITMENTS
The Company leases office and manufacturing facilities under operating
lease agreements. Future minimum payments under these noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING (DOLLARS
MARCH 31, IN THOUSANDS)
----------------- --------------
<S> <C> <C>
1998.................... $ 859
1999.................... 720
2000.................... 131
2001.................... 4
-------
$ 1,714
=======
</TABLE>
Rent expense was approximately $0.8 million, $0.8 million and $0.9 million
for the years ended March 31, 1997, 1996 and 1995, respectively.
43
<PAGE> 43
Equipment and Facilities Purchase Commitments
As of March 31, 1997, the Company had commitments to purchase $43.2 million
and $12.5 million of equipment and facilities, respectively.
7. MANDATORILY REDEEMABLE PREFERRED STOCK
On November 30, 1995, in connection with the Leveraged Recapitalization,
the Company issued 5,900,000 shares of Series A Preferred Stock. Dividends on
the Preferred Stock were accreted based on the effective interest method from
the date of issuance. During the fourth quarter of fiscal 1997, the Company
redeemed the Series A Preferred Stock with proceeds from the issuance of the
Convertible Notes. As a result, the Company recorded a one-time reversal of
approximately $3.8 million during the fourth quarter of 1997 for cumulative
accreted dividends.
The Board of Directors is authorized without further action by the
Company's stockholders, to issue 9,100,000 shares of Preferred Stock, in one or
more series and to fix the rights, preferences and privileges thereof.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock-
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. In the event of the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities.
The Common Stock has no preemptive rights or other subscription rights. All
outstanding shares of Common Stock are fully paid and nonassessable. The Company
has reserved 9,684,210 shares of Common Stock in the event of conversion of the
Convertible Notes.
The Company has not declared or paid cash dividends as of March 31, 1997.
Warrants
In connection with the Leveraged Recapitalization, the Company issued to
the banks that provided the senior bank term loan warrants to purchase 701,344
shares of Common Stock. During the fourth quarter of fiscal 1996, pursuant to
the terms of the warrant agreement, the Company exercised its right to
repurchase 40% of the outstanding warrants for an immaterial amount, leaving a
balance of warrants to purchase 420,794 shares of common stock. The warrants are
exercisable at a purchase price of $0.0003 per share at any time prior to
November 30, 2002.
Stock Option Plans
In November 1995, the Board of Directors authorized and reserved an
aggregate of 12,400,000 shares of Common Stock for issuance under the 1995
Management Stock Option Plan and the 1995 Stock Option Plan (together, as the
"Stock Plans").
In January 1996, the Board of Directors adopted the 1996 Non-Employees
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to nonemployee
directors of the Company (other than employees or affiliates of Summit Partners,
L.P. or Hitachi Metals).
In the event of a merger, consolidation, reverse merger or reorganization,
options outstanding under the Directors' Plan will automatically become fully
vested and will terminate if not exercised prior to such event.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The exercise price of
options under the Directors' Plan will equal the fair market value of the Common
Stock on the date of grant. The Directors' Plan will terminate in January 2006,
unless earlier terminated by the Board of Directors.
In January 1996 the Board of Directors adopted the 1996 Equity Incentive
Plan (the "Incentive Plan"). The Incentive Plan provides for grants of incentive
stock options to employees (including officers and employee directors) and of
nonstatutory stock options, restricted stock purchase awards, stock bonuses and
stock appreciation rights to employees (including officers and directors) and
44
<PAGE> 44
consultants of the Company.
The combined maximum number of shares of Common Stock authorized to be
issued pursuant to options granted under the Directors' Plan and the Incentive
Plan is 3,000,000 shares.
A summary of activity under the Stock Plans is as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------
Aggregate Weighted Average
Available for Number of Exercise Exercise Price
Grant Options Per Share Price Per Share
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Authorized 15,400,000 -
Granted (12,284,150) 12,284,150 $ 0.03 - 10.00 $ 1,566,837 $ 0.13
Cancellations 15,306 (15,306) - $ 0.03 $ (493) $ 0.03
Exercised (8,351,121) $ 0.03 - 10.00 $ (311,497) $ 0.04
--------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 3,131,156 3,917,723 $ 0.03 - 10.00 $ 1,254,847 $ 0.32
Granted (556,700) 556,700 $ 15.81 - 16.25 $ 8,911,396 $16.01
Cancellations 224,088 (224,036) $(1,752,432) $ 7.87
Exercised (945,438) $ 0.097 - $ 8.50 $ (48,022) $ 0.05
--------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 2,797,136 3,304,949 $ 0.03 - 18.50 $8,365,789 $ 2.53
</TABLE>
Upon grant, 1,550,000 options vested immediately and were exercised. During
fiscal 1997 and 1996, an additional 373,612 and 1,464,048 options vested upon
achievement of certain other performance goals, respectively. The majority of
remaining outstanding options will vest ratably over a four year period. Of the
options to purchase 12,284,150 shares granted to all optionees, options to
purchase 8,339,000 shares were exercised pursuant to early exercise provisions
contained in the holders' stock option agreements. As of March 31, 1997,
3,200,045 shares of Common Stock exercised pursuant to early exercise provisions
were subject to repurchase at prices ranging from $0.03 to $0.10 per share upon
termination of employment. The options expire no later than ten years after the
date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the 1995
Plan. Had compensation cost for the 1996 Plan been determined based on the fair
value at the grant date for the options granted in fiscal 1997 consistent with
the provisions of SFAS 123, the Company's net income for fiscal 1997 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Net income - as reported $61,744 $45,222
Net income - pro forma $60,348 $44,876
Earnings per share - as reported
Primary $ 1.40 $ 1.28
Fully Diluted $ 1.35 $ 1.28
Earnings per share - pro forma
Primary $ 1.37 $ 1.27
Fully Diluted $ 1.31 $ 1.27
</TABLE>
The fair value of each option grant for the 1996 Plan is estimated on the date
of the grant using the Black- Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
- ---------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.36% - 5.53%
Expected life 2-5 years
Expected volatility 0.77
Expected dividend $ -
</TABLE>
The weighted average expected life was calculated based on the vesting period
and the anticipated exercise behavior of the employees.
45
<PAGE> 45
The following table summarizes the stock options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.03 - $0.10 2,725,699 8.68 $ 0.04 279,151 $ 0.04
$ 10.00 103,750 8.95 $ 10.00 25,000 $ 10.00
$ 13.13 33,000 9.29 $ 13.13 - $ -
$ 13.38 79,000 9.88 $ 13.38 - $ -
$ 14.50 68,200 9.34 $ 14.50 - $ -
$ 14.88 31,300 9.24 $ 14.88 - $ -
$ 15.00 10,000 9.70 $ 15.00 - $ -
$ 16.25 250,000 9.77 $ 16.25 - $ -
$ 18.50 4,000 9.47 $ 18.50 - $ -
- ---------------- ---------- ---- --------- -------- --------------
$0.03 - $18.50 3,304,949 8.83 $ 2.53 304,151 $ 0.86
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In January 1996, the Board adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 500,000 shares of Common Stock. Under
the Purchase Plan substantially all employees may be granted the opportunity to
purchase shares of common stock at 85% of the lower of the fair market value of
the Common Stock on the commencement date of each offering period or the
specified purchase date (generally April 30 and October 31 of each year).
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
--------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....... $ 22,046 $ 10,095 --
State......... 65 2,460 $ 20
Deferred:
Federal....... 3,289 (9,291) --
State......... -- (674) --
--------- --------- -----
$ 25,400 $ 2,590 $ 20
========= ========= =====
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate..... 35.0% 35.0% (34.0)%
-------- -------- --------
Net operating loss benefit........................... -- -- 34.0
Benefit of foreign sales corporation................. (4.1) (1.0) --
State income taxes................................... 3.2 2.6 0.2
Benefit of operating losses.......................... -- (25.5) --
State credits........................................ (3.2) -- --
Other................................................ (1.4) 7.4 --
Change in valuation allowance........................ -- (13.3) --
-------- -------- --------
Effective tax rate.............................. 29.5% 5.2% 0.2%
======== ======== ========
</TABLE>
46
<PAGE> 46
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1997 1996
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued vacation........................ $ 405 $ 330
State credits........................... 148 --
Inventory reserve....................... 2,447 953
Depreciation............................ -- 873
Allowances and other accrued liabilities 3,437 3,650
Net operating loss carryforward......... 3,686 4,159
-------- --------
Total deferred tax assets............ 10,123 9,965
Deferred tax liabilities:
Depreciation............................ (6,936) --
-------- --------
Less valuation allowance.................. -- --
-------- --------
Net deferred tax assets.............. $ 3,187 $ 9,965
======== ========
</TABLE>
Although realization of the deferred tax assets is not assured, the Company
believes that it is more likely than not that all of the deferred tax assets
will be realized.
At March 31, 1997, the Company had federal net operating loss carryforwards
of approximately $10.5 million available to offset future taxable income. These
net operating loss carryforwards expire in the years 2008 to 2010. Because the
Leveraged Recapitalization caused an ownership change, as defined by tax law,
the Company's ability to use its net operating loss carryforwards from November
30, 1995 is limited to a specified dollar amount each year.
Prior to the Leveraged Recapitalization, the Company was a member of a
combined group for California tax reporting purposes and began to report on a
single entity basis after the Leveraged Recapitalization. The Company's current
state provision for the year ended March 31, 1996 represents its share of the
combined group's California tax liability through November 30, 1995, plus its
California tax liability for the period from December 1, 1995 through March 31,
1996, computed on a single entity basis.
10. 401(K) PLAN
The Company has a deferred tax savings 401(k) plan and generally matches
50% of employee contributions up to 4% of gross salaries. The employer
contributions do not vest until the employee's second year of service, at which
time the contributions vest 100%. All employees employed for at least six months
are eligible to participate under the plan. The Company contributed to the plan
approximately $0.7 Million, $0.3 million, $0.2 million in fiscal 1997, 1996 and
1995, respectively.
47
<PAGE> 47
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information should be read in conjunction
with Note 1.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales ............................................. $76,420 $62,080 $61,243 $63,466
Gross profit .......................................... 32,406 26,717 24,872 22,937
Operating income ...................................... 28,110 22,708 20,325 18,174
Net income ............................................ 16,778 17,501 13,983 12,326
Net income available for common stockholders .......... 15,895 16,605 13,074 16,171
Net income (loss) available for common stockholders per
share
Primary ............................................. $ 0.36 $ 0.38 $ 0.30 $ 0.37
Fully diluted ....................................... $ 0.36 $ 0.38 $ 0.30 $ 0.32
Shares used in computing net income per share
Primary ............................................. 44,015 44,205 44,229 44,291
Fully diluted ....................................... 44,015 44,205 44,229 51,660
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales ............................................. $28,589 $44,422 $56,346 $65,044
Gross profit .......................................... 6,618 17,215 23,546 27,219
Operating income ...................................... 4,429 14,797 15,959 23,489
Net income ............................................ 2,567 12,320 19,912 11,580
Net income available for common stockholders .......... 2,567 12,320 19,912 10,423
Net income (loss) available for common stockholders
per share Primary ..................................... $ 0.07 $ 0.35 $ 0.57 $ 0.29
Fully diluted ....................................... $ 0.07 $ 0.35 $ 0.57 $ 0.29
Shares used in computing net income per share
Primary ............................................. 34,822 34,822 34,822 36,431
Fully diluted ....................................... 34,822 34,822 34,822 36,431
</TABLE>
Net sales and net income are subject to fluctuations as a result of customer
actions including the timing of mandated delivery schedules.
48
<PAGE> 48
SCHEDULE II
HMT TECHNOLOGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
ACCOUNT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1995
Provision for loss on inventory.. $ 1,920 $ 5,045 --- $ (2,509) $ 4,456
Allowance for doubtful accounts
receivable.................... 120 (135) -- (152) 137
Year ended March 31, 1996
Provision for loss on inventory.. 4,456 635 -- (3,573) 1,518
Allowance for doubtful accounts
receivable.................... 137 450 -- 25 612
Year ended March 31, 1997
Provision for loss on inventory.. 1,518 3,865 --- (63) 5,320
Allowance for doubtful accounts
receivable.................... 612 60 $ 400 (17) 1,055
</TABLE>
49
<PAGE> 49
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Recapitalization Agreement by and among the Company and the Investors
listed on Exhibit A thereto dated October 31, 1995.(1)
2.2 Redemption Agreement by and between the Company and Hitachi Metals,
dated November 30, 1995.(1)
3.2 Restated Certificate of Incorporation, dated March 27, 1997.
3.3 Bylaws of the Registrant.(1)
4.1 Reference is made to Exhibits 3.2 through 3.3.(1)
4.2 Specimen stock certificate.(1)
4.3 Intentionally Blank
4.4 Intentionally Blank
4.5 Form of Restricted Global Convertible Subordinated Note due 2004 (2)
4.6 Form of Unrestricted Global Convertible Subordinated Note due 2004 (2)
4.7 Form of Certificated Convertible Subordinated Note due 2004 (2)
4.8 Indenture, dated as of January 15, 1997, between HMT Technology
Corporation (the "Company") and State Street Bank and Trust Company of
California, N.A., as Trustee. (2)
4.9 Registration Agreement, dated as of January 15, 1997, among the Company,
Salomon Brothers, Alex Brown & Sons Incorporated, Hambrecht & Quist LLC
and Robertson, Stephens & Company LLC (collectively, the "Initial
Purchasers"). (2)
4.10 Purchase Agreement, dated January 15, 1997, between the Company and the
Initial Purchasers. (2)
4.11 Amended and Restated Revolving Credit Agreement, dated as of August 28,
1996. (2)
4.12 First Amendment to Amended and Restated Revolving Credit Agreement, dated
January 14, 1997. (2)
10.1 Lease Agreement between the Company and Sun Life Assurance Company of
Canada, dated January 5, 1989, as amended.(1)
10.2 Sublease Agreement between the Company and McKenzie Socket Technology,
dated December 22, 1992, as amended.(1)
10.3 Lease Agreement between the Company and Amorok/Wells Venture, dated
August 15, 1990, as amended.(1)
10.4 Form of Indemnity Agreement entered into between the Registrant and its
directors and executive officers.(1)
10.5 Registrant's 1995 Stock Option Plan (the "1995 Plan").(1)
10.6 Form of Incentive Stock Option under the 1995 Plan.(1)
10.7 Form of Early Exercise Agreement under the 1995 Plan.(1)
10.8 Registrant's 1995 Management Stock Option Plan (the "Management
Plan").(1)
10.9 Form of Incentive Stock Option under the Management Plan.(1)
10.10 Form of Early Exercise Agreement under the Management Plan.(1)
10.11 Registrant's 401(k) Profit Sharing Plan.(1)
10.12 Revolving Credit and Term Loan Agreement by and among the Company,
First National Bank of Boston and Banque Paribas, dated November 30,
1995 (the "Credit Agreement").(1)
10.12.1 First Amendment to the Credit Agreement dated February 22, 1996.
10.12.2 Second Amendment to the Credit Agreement dated March 31, 1996.
10.12.3 Third Amendment to the Credit Agreement dated August 28, 1996.
10.14 Warrant Purchase Agreement by and among the Company, First National
Bank of Boston and Banque Paribas dated November 30, 1995.(1)
10.15 Example of Common Stock Purchase Warrant dated November 30,
1995.(1)
10.16 Example of Subordinated Promissory Note dated November 30, 1995.(1)
10.17 Master Lease Agreement by and between the Company and Comdisco, dated
November 30, 1995.(1)
10.18 Investor Rights Agreement by and among the Company, certain of the
Company's officers, and the Investors listed on Exhibit A of the
Recapitalization Agreement, dated November 30, 1995.(1)
10.20 Registrant's 1996 Equity Incentive Plan (the "Incentive Plan").(1)
10.21 Form of Incentive Stock Option under the Incentive Plan.(1)
10.22 Form of Non-statutory Stock Option under the Incentive Plan.(1)
10.23 Registrant's Employee Stock Purchase Plan.(1)
10.24 Registrant's Non-Employee Directors' Stock Option Plan (the "Directors'
Plan").(1)
10.25 Form of Non-Statutory Stock Option under the Directors' Plan.(1)
</TABLE>
50
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C>
10.26 Registrant's Executive Severance Plan.(1)
11.1 Statement Regarding Calculation of Net Income (loss) per share.
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant.(1)
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Cooley Godward LLP (included in Exhibit
5.1).
24.1 Power of Attorney. Reference is made to page 31.
27.1 Financial Data Schedule
99.1 Press Release, titled "HMT Technology Corporation Announces Completion of
Private Placement of Convertible Subordinated Notes," dated January
22,1997. (2)
</TABLE>
- ----------
(1) Previously filed in Registration Statement No. 333-450.
(2) Previously filed in Form 8-K, dated as of January 21, 1997
51
<PAGE> 1
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
HMT TECHNOLOGY CORPORATION
HMT Technology Corporation, a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is HMT Technology Corporation. The HMT
Technology Corporation was originally incorporated under the same name, and the
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on December 28, 1988.
2. Pursuant to Section 245 of the General Corporation Law of the State
of Delaware, this Restated Certificate of Incorporation restates and integrates
the provisions of the Certificate of Incorporation of this Corporation.
3. The text of the Restated Certificate of Incorporation of this
Corporation is hereby restated as follows:
I.
The name of this Corporation is HMT Technology Corporation.
II.
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is The Prentice-Hall Corporation System, Inc.
III.
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is one hundred nine
million one hundred thousand (109,100,000) shares. One hundred million
(100,000,000) shares shall be Common Stock, each
1.
<PAGE> 2
having a par value of one-tenth of one cent ($.001). Nine million one hundred
thousand (9,100,000) shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).
B. Shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, by filing a
certificate (a "Preferred Stock Designation") pursuant to the Delaware General
Corporation Law, to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions of any wholly unissued series of Preferred Stock,
and to establish from time to time the number of shares constituting any such
series or any of them; and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be decreased in accordance with the foregoing sentence, the
shares constituting such decrease shall resume the status that they had prior to
the adoption of the resolution originally fixing the number of shares of such
series.
V.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
(1) The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of Directors. The number
of directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
(2) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
directors shall be elected at each annual meeting of stockholders for a term of
one year. Each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director.
(3) Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then outstanding shares of
voting stock of the Corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then outstanding shares of the Voting Stock.
2.
<PAGE> 3
(4) Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B.
(1) Subject to paragraph (h) of Section 42 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of
all of the then outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend or repeal Bylaws.
(2) The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
(3) No action shall be taken by the stockholders of the
Corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws, and following the closing of the Initial Public
Offering no action shall be taken by the stockholders by written consent.
(4) Special meetings of the stockholders of the Corporation
may be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (iv) by the holders of the shares entitled to cast
not less than twenty percent (20%) of the votes at the meeting, and shall be
held at such place, on such date, and at such time as the Board of Directors
shall fix.
(5) Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
VI.
A. A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders,
3.
<PAGE> 4
(ii) for act or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amended, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in paragraph
B. of this Article VII, and all rights conferred upon the stockholders herein
are granted subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
The foregoing Restated Certificate of Incorporation has been duly
approved by the Board of Directors.
I further declare under penalty of perjury under the laws of the state
of Delaware that the matters set forth in this Restated Certificate of
Incorporation are true and correct.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed by Ronald L. Schauer, its authorized officer this 27th day of March,
1997.
HMT TECHNOLOGY CORPORATION
/s/ Ronald L. Schauer
--------------------------
Ronald L. Schauer
President, Chief Executive
Officer and Chairman of
the Board
<PAGE> 1
EXHIBIT 11.1
HMT TECHNOLOGY CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding for the period............... 40,493 30,234 29,656
Net effect of dilutive stock options-based on the treasury
stock method using average market price.................... -- --
3,692
Common equivalent shares pursuant to Staff Accounting
Bulletin No. 83................................................ -- 4,990 5,166
--------- --------- ---------
Shares used in computing per share amounts....................... 44,185 35,224 34,822
========= ========= =========
Net income (loss) available for common stockholders.............. $ 61,745 $ 45,222 $ (8,941)
========= ========= =========
Net income (loss) available for common stockholders per share.... $ 1.40 $ 1.28 $ (0.26)
========= ========= =========
Fully Diluted:
Weighted average shares outstanding for the period............... 40,493 30,234 29,656
Net effect of dilutive stock options-based on the treasury
stock method using the year-end market price, if
higher than average market price...........................
3,692 -- --
Common equivalent shares pursuant to Staff Accounting
Bulletin No. 83................................................ -- 4,990 5,166
Assumed conversion of 5 3/4% convertible
subordinated notes............................................. 1,842 -- --
--------- --------- ---------
Shares used in computing per share amounts....................... 46,027 35,224 34,822
========= ========= =========
Net income (loss) available for common stockholders.............. $ 61,745 $ 45,222 $ (8,941)
Add 5 3/4% convertible subordinated note
interest, net of interest capitalized and income tax effect... 588 -- --
--------- --------- ---------
Net income (loss) available for common stockholders.............. $ 62,333 $ 45,222 $ (8,941)
========= ========= =========
Net income (loss) available for common stockholders per share.... $ 1.35 $ 1.28 $ (0.26)
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of HMT Technology Corporation on Form S-3 (File No. 333-24385) of our report
dated April 22, 1997, on our audits of the consolidated financial statements and
financial statement schedule of HMT Technology Corporation and its subsidiary as
of March 31, 1997 and 1996, and for the years ended March 31, 1997, 1996 and
1995, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USDOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1,000
<CASH> 44,225
<SECURITIES> 10,833
<RECEIVABLES> 35,771
<ALLOWANCES> (1,055)
<INVENTORY> 11,837
<CURRENT-ASSETS> 109,695
<PP&E> 308,321
<DEPRECIATION> (53,013)
<TOTAL-ASSETS> 373,389
<CURRENT-LIABILITIES> 37,868
<BONDS> 230,000
0
0
<COMMON> 92,125
<OTHER-SE> 3,317
<TOTAL-LIABILITY-AND-EQUITY> 373,389
<SALES> 263,209
<TOTAL-REVENUES> 263,209
<CGS> 156,277
<TOTAL-COSTS> 156,277
<OTHER-EXPENSES> 17,615
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 3,329
<INCOME-PRETAX> 85,988
<INCOME-TAX> 25,400
<INCOME-CONTINUING> 60,588
<DISCONTINUED> 0
<EXTRAORDINARY> 1,157
<CHANGES> 0
<NET-INCOME> 61,745
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.35
</TABLE>
