================================================================================
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, 1998
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
INCORPORATION OR ORGANIZATION) NUMBER)
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 NASDAQ SMALLCAP MARKET
NOTES, 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 May 31, 1998 the aggregate market value of Common Stock held by
non-affiliates was approximately $413.6 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 1, 1998, 43,416,320 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
Portions of Registrants Definitive Proxy Statement, which will be filed with
the Commission pursuant to Registration 14A in connection with the 1998 Annual
Meeting, are incorporated by reference in Part III of this Report.
================================================================================
HMT TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K
<PAGE>
PART I
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, and removable hard disk drives, which in turn are used in
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 16.8 gigabytes ("GB")
(using two to eight disks), and all have coercivity levels of 2000 Oersted
("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 current 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 Iomega Corporation ("Iomega"), Maxtor Corporation ("Maxtor"), Western
Digital Corporation ("Western Digital"), and Samsung Electronic Company
Limited ("Samsung"). During fiscal 1998, the Company also shipped disks to
Micropolis Corporation ("Micropolis.") In May 1998, the Company announced it
had received qualification for, and would begin shipping disks to SyQuest
Corporation ("SyQuest").
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 Trend Focus, worldwide shipments of PCs were 69 million units in
1996 and 81 million units in 1997, and are projected to reach approximately
131 million units in 2001. 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 2001.
The combined demand from the PC and PC server markets has resulted in
strong growth in unit shipments of disk drives. According to Trend Focus,
worldwide shipments of hard disk drives were 131 million units in 1997 and are
projected to be 223 million units in 2001. According to Trend Focus, the
worldwide market for hard disk drives was approximately $26 billion in 1997.
Strong overall demand for disk drives has also stimulated the growth of the
thin film disk market. According to Trend Focus, there were 417 million thin
film disks produced in 1997, with an estimated market value of $4.8 billion.
Trend Focus projects that the total market for thin film disks will reach 681
million units in 2001, with an estimated market value of $6.8 billion.
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 3.0 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 $0.08 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: disk, 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 0.5 to 1.5 microinches (0.013 to 0.038 micron) at
data transfer rates of 110 to 160 megabits per second. The combination of
modern head and disk technologies enables this drive to store data on 7,000 to
10,000 circumferential tracks per radial inch on the disk with 140,000 to
200,000 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 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 2400 to 2700 Oe,
compared to a range of 950 to 1200 Oe eight years ago. The Company believes
that most high-end disk drive manufacturers will require
coercivities of 2800 Oe and above by the end of 1998. HMT currently
manufactures and sells disks in commercial quantities with coercivities
ranging from 2000 to 2700 Oe, with over 50% of the Company's revenues during
the three months ended March 31, 1998 deriving from disks with coercivities of
2300 Oe and above. The Company is also currently producing small quantities of
disks for use in customer development programs with coercivities of up to 3200
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
for advanced applications is 1.0 microinch, the Company expects that glide
heights will decrease to less than 0.8 microinches by the end of 1998. The
Company currently manufactures and sells disks in commercial quantities with
glide heights of 1.2 microinches to 0.8 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 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 3200 Oe level.
- - Develop Collaborative Relationships with Leading Head and Disk Drive
Manufacturers. The Company works closely with head manufacturers developing
new technologies, including Magneto-Resistive ("MR"), Giant MR ("GMR"), Dual
Stripe MR ("DSMR"), and Proximity MR head compatible disk. 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 the 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. In January of 1997, the Company 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. In fiscal 1998, the Company installed six
additional production scale sputtering lines in this new facility, and has
plans for the installation of six more lines. The Company also completed the
first phase of 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. During the fourth quarter of fiscal 1998,
the Company began the second phase of expansion for the Eugene facility. 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
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 3200 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 December 31, 1996, 2000 Oe and below products comprised
80% of total units shipped, as compared with the three months ended March 31,
1998, where 2100 Oe and above products comprised 70% of total units shipped.
The Company's disks are currently used by seven disk drive manufacturers
in more than nine 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 16.8 GB with storage capacity per disk ranging from 1 GB to 2.9 GB and
removable disk drives that have capacities ranging from 1.0 GB to 2.0 GB with
storage capacity per disk of approximately 500 MB to 1.0 GB. 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:
Machine, Chamfer, Bake, Grind, 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 machines the
inner edges of the blank to specified diameters, chamfers the inner and outer
edges of the blank, and bakes the chamfered blank to relieve stress induced by
the machine and chamfer processes. 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. HMT currently utilizes different texture
processes, including laser texturing, to address different customer
requirements. 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 for parametrics, errors in the read/erase
process and surface defects.
The conversion of a specialized aluminum alloy substrate into a final
product requires two 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 24 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 currently operate seven days a
week, 24 hours per day.
The Company recently completed construction of a new 124,000 square foot
production facility at its Fremont, California site. Four production scale
sputtering lines were brought into service during the fourth quarter of fiscal
1997. In fiscal 1998, the Company installed six additional production scale
sputtering lines in this new facility, and has plans for the installation of
six more lines. The Company also completed the first phase of 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. During the fourth quarter of fiscal 1998, the Company began the
second phase of expansion for the Eugene facility.
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 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 texturing
process, a highly automated patented process, produces a controlled roughness
on the disk's surface to improve its stiction characteristics. HMT currently
utilizes different texture processes, including laser texturing to address
different customer requirements. 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. Important new technologies, such as
MR heads, GMR, and DSMR heads, are emerging and are replacing older inductive
technology. MR head technology separates 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 superior read/write performance of MR recording heads has made MR heads
the dominant head technology at the present time. The Company expects GMR
heads, which have even higher sensitivity than MR heads, thereby producing
more output, to be the heads 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 new alloy systems, 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 1996, 1997 and 1998,
the Company incurred $3.8 million, $5.8 million, and $8.8 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.
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 1998, fiscal 1997 and fiscal 1996:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Maxtor....................... 23.4% 40.7% 40.5%
Samsung...................... 16.0% 19.8% 0.1%
Iomega....................... 28.9% 12.2% 2.4%
Western Digital.............. 19.0% 11.9% 35.8%
</TABLE>
The Company's other customers during fiscal 1998 included Micropolis
and Quantum Corporation ("Quantum"). During the third quarter of fiscal 1998,
Micropolis filed for protection under Chapter 7 of the Bankruptcy Code.
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 shipped products to MKE during fiscal
1998. 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. This agreement 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. For example, Maxmedia, an affiliate of Maxtor, has recently
commenced internal media production of thin film disks. There has also been a
trend toward consolidation in the disk drive industry that the Company expects
to continue. For example, during fiscal 1998, StorMedia Incorporated
("StorMedia"), one of the Company's competitors, acquired another of the
Company's competitors; Akashic Memories Corporation, a subsidiary of Kubota,
Inc. ("Akashic"). 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.
COMPETITION
Competitors in the thin film disk industry fall into three groups: U.S.
non-captive manufacturers, Asian-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 Komag, Incorporated ("Komag"), and StorMedia.
Asian-based competitors include Fuji Electric Company Limited ("Fuji"),
Mitsubishi Kasei Corporation ("Mitsubishi"), Trace Corporation ("Trace"),
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 Technology, Inc. ("Seagate"), Western Digital and an affiliate
of Maxtor, 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. The Company has experienced significant pricing pressures in the
past, and there can be no assurance that the Company will not experience
further 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 37 patents and 11 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, Virgle 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., case
no. C-96 21055 JW ("Hedgcoth I"), Mr. Hedgcoth alleges that certain HMT disks
infringe three patents allegedly owned by him (the "Hedgcoth I Patents"). On
July 1, 1997, Mr. Hedgcoth filed a second 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., case no. C-97 20581 JW
("Hedgcoth II"), Mr. Hedgcoth alleges that certain HMT disks infringe a fourth
patent allegedly owned by him (the "Hedgcoth II Patent"). Each of the Hedgcoth
I and Hedgcoth II complaints seeks an injunction and unspecified damages,
which are sought to be trebled. The Company has filed counterclaims in
Hedgcoth I and Hedgcoth II seeking declaratory judgments that the Hedgcoth I
Patents and the Hedgcoth II Patent 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, sputtering
systems, 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, 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. 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, 1998, the Company had 2,248 full-time employees, with
2,008 in manufacturing, 84 in research and development, 89 in quality
assurance and 67 in administration and marketing. The Company believes it
generally has good relations with its 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.
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 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 (nine as of March
31, 1998) 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. If production for a
disproportionate number of new products is commenced in a given quarter or if
manufacturing yields for such products do not improve in a timely manner, the
Company's operating results for such quarter could be adversely affected. For
example, during the quarter ended March 31, 1997, the Company's operating
results were adversely affected due partly to lower yields associated with
initial production of a significant number of new 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 1998, the Company shipped most of its thin film disks to
four customers: Iomega, Maxtor, Western Digital, and Samsung. Aggregate
shipments to Iomega, Maxtor, Western Digital, and Samsung represented 28.9 %,
23.4 %, 19.0 % , and 16.0 %, respectively, of net sales in fiscal 1998. 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.
During 1997, one of the Company's customers, Micropolis, filed for
protection under Chapter 7 of The Bankruptcy Code. 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, two of the Company's customers, Western Digital and
an affiliate of Maxtor, manufacture thin film disks for their own use. 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 and Conner Peripherals, Inc., combined to
form the world's largest disk drive manufacturing company. In addition, during
fiscal 1996, Hewlett-Packard Co. exited the disk drive business. 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. For example
during fiscal 1998, StorMedia Incorporated ("StorMedia"), one of the
Company's competitors acquired another of the Company's competitors;
Akashic Memories Corporation, a subsidiary of Kubota, Inc. ("Akashic").
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. This agreement 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.
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. For example, during 1997, one of the Company's customers,
Micropolis, filed for protection under Chapter 7 of the Bankruptcy Code.
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.
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. In fiscal 1998, the Company installed an additional six production scale
sputtering lines in this new facility, and has plans for the installation of
six more lines. The Company also completed the first phase of 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.
During the fourth quarter of fiscal 1998, the Company began the second phase of
expansion for the Eugene facility.
The Company currently expects to spend in excess of $100 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. 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, Asian-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 Komag and
StorMedia. Asian-based competitors include Fuji, Mitsubishi, Trace, 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 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 experienced significant pricing pressure during fiscal
1998, 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.
During fiscal 1998, many of the Company's competitors and customers
increased disk manufacturing capacity, resulting in industry capacity in
excess of levels of demand. As a result, many of the Company's customers and
competitors have experienced recent financial difficulties, resulting in
increased competition .
These increased levels of competition, could have a material adverse effect on
the Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH
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.
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, sputtering systems, sputter targets, plating chemicals, abrasive
tapes and slurries, certifier heads 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
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.
PROCESS QUALITY CONTROL RISKS
The manufacture of the Company's high-performance thin film disks
requires a tightly controlled multi-stage process and the use of high-quality
materials. Efficient production of the Company's products requires
utilization of advanced manufacturing techniques and clean room facilities.
Disk fabrication occurs in a highly controlled, clean environment to minimize
dust and other yield- and quality-limiting contaminants. Despite stringent
manufacturing controls, weaknesses in process control or minute impurities in
materials may cause a substantial percentage of the disks in a lot to be
defective. The success of the Company's manufacturing operation depends in
part on the Company's ability to maintain process control and minimize such
impurities in order to maximize its yield of acceptable high-quality disks.
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. While the Company has implemented
procedures to monitor its manufacturing process and the quality of production
materials, there can be no assurance that such procedures will be adequate.
NEED FOR ADDITIONAL FINANCING
The disk media business is capital intensive, and the Company believes
that in order to remain competitive, it may require 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 $100
million on capital expenditures principally directed toward expansion of
production capacity over the next twelve months. The Company believes that
existing cash balances, cash generated from operations, and funds available
under its credit facility 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. 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, 1998, the
Company had approximately $88.7 million in working capital, including
approximately $25.0 million in cash and cash equivalents. In addition, the
Company's operations generated cash flow of $84.9 million during the year
ended March 31, 1998.
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. The Company has 37 patents and 11 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 is from time to time 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, Virgle 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., case
no. C-96 21055 JW ("Hedgcoth I"), Mr. Hedgcoth alleges that certain HMT disks
infringe three patents allegedly owned by him (the "Hedgcoth I Patents"). On
July 1, 1997, Mr. Hedgcoth filed a second 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., case no. C-97 20581 JW
("Hedgcoth II"), Mr. Hedgcoth alleges that certain HMT disks infringe a fourth
patent allegedly owned by him (the "Hedgcoth II Patent"). Each of the Hedgcoth
I and Hedgcoth II complaints seeks an injunction and unspecified damages,
which are sought to be trebled. The Company has filed counterclaims in
Hedgcoth I and Hedgcoth II seeking declaratory judgments that the Hedgcoth I
Patents and the Hedgcoth II Patent 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.
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 the
Company's 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 at any of the Company's facilities 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 1997 and 1998, 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.
ANTI-TAKEOVER EFFECTS
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.
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 Company's 5 _% Convertible Subordinated Notes due 2004 ("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.
ITEM 2. PROPERTIES
The Company owns one 57,776 square foot building, used for
manufacturing and administration, on approximately 4.3 acres of land in
Fremont, California and another 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, Virgle 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., case
no. C-96 21055 JW ("Hedgcoth I"), Mr. Hedgcoth alleges that certain HMT disks
infringe three patents allegedly owned by him (the "Hedgcoth I Patents"). On
July 1, 1997, Mr. Hedgcoth filed a second 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., case no. C-97 20581 JW
("Hedgcoth II"), Mr. Hedgcoth alleges that certain HMT disks infringe a fourth
patent allegedly owned by him (the "Hedgcoth II Patent"). Each of the Hedgcoth
I and Hedgcoth II complaints seeks an injunction and unspecified damages,
which are sought to be trebled. The Company has filed counterclaims in
Hedgcoth I and Hedgcoth II seeking declaratory judgments that the Hedgcoth I
Patents and the Hedgcoth II Patent 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.
PART II
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, 1998.
PRICE RANGE OF
COMMON STOCK
----------------------
High Low
---------- ----------
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
Fiscal 1998
First Quarter..................... $14 5/8 $10
Second Quarter.................... $17 $12 3/8
Third Quarter..................... $20 $12 1/2
Fourth Quarter.................... $13 3/4 $9 15/16
As of June 1, 1998, there were approximately 211 holders of record of
the Common Stock. On June 1, 1998, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $11.125 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.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
Fiscal Year Ended March 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $356,194 $263,209 $194,401 $72,893 $64,242
Cost of sales............................... 225,599 156,277 119,803 67,539 67,648
--------- --------- --------- --------- ---------
Gross profit (loss)......................... 130,595 106,932 74,598 5,354 (3,406)
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................. 8,825 5,812 3,803 3,130 2,781
Selling, general and administrative....... 13,679 11,803 7,774 4,230 5,115
Recapitalization expenses................. -- -- 4,347 -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 22,504 17,615 15,924 7,360 7,896
--------- --------- --------- --------- ---------
Operating income (loss)..................... 108,091 89,317 58,674 (2,006) (11,302)
Interest expense, net....................... 8,194 3,329 8,578 6,915 6,001
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... 99,897 85,988 50,096 (8,921) (17,303)
Income tax provision (benefit).............. 29,969 25,400 2,590 20 22
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs...................... 69,928 60,588 47,506 (8,941) (17,325)
Extraordinary debt extinguishment costs, net
of income taxes........................... -- -- 1,127 -- --
--------- --------- --------- --------- ---------
Net income (loss)........................... 69,928 60,588 46,379 (8,941) (17,325)
Accretion reversal (accretion) for dividends
on Mandatorily Redeemable Series A
Preferred Stock........................... -- 1,157 (1,157) -- --
--------- --------- --------- --------- ---------
Net income (loss) available for common
stockholders.............................. $69,928 $61,745 $45,222 ($8,941) ($17,325)
========= ========= ========= ========= =========
Net income (loss) available for common
stockholders per share(1)
Basic................................... $1.66 $1.52 $1.28 ($0.26) ($0.50)
========= ========= ========= ========= =========
Diluted................................. $1.40 $1.35 $1.28 ($0.26) ($0.50)
========= ========= ========= ========= =========
Shares used in computing per share
amounts(1)
Basic................................... 42,196 40,493 35,224 34,822 34,822
Diluted............................. 54,542 46,019 35,224 34,822 34,822
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................... $88,699 $71,827 $45,899 ($82,715) ($71,175)
Total assets................................ 478,223 373,389 165,786 75,936 84,104
Long-term and senior bank debt, less current
portion................................... -- -- -- 9,750 12,200
Subordinated promissory notes payable to
stockholders.............................. -- -- 47,000 -- --
Mandatorily Redeemable Series A Preferred
Stock..................................... -- -- 60,157 -- --
5 3/4% Convertible Subordinated Notes....... 230,000 230,000 -- -- --
Total stockholders' equity (deficit)........ 182,452 95,442 19,524 (51,550) (46,093)
</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.
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.
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 and $69.9 million for fiscal 1998, compared with
a net loss of $8.9 million for fiscal 1995.
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 Leveraged
Recapitalization plus accrued interest and to fully repay $41 million in long-
term borrowings outstanding.
In January 1997, the Company 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. In fiscal 1998,
the Company installed six additional production scale sputtering lines in this
new facility, and has plans for the installation of six more lines. The
Company also completed the first phase of 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. During the fourth
quarter of fiscal 1998, the Company began the second phase of expansion for
the Eugene facility. 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.
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>
Fiscal Year Ended March 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 63.3% 59.4% 61.6% 92.7% 105.3%
--------- --------- --------- --------- ---------
Gross profit (loss)......................... 36.7% 40.6% 38.4% 7.3% -5.3%
Operating expenses:
Research and development.................. 2.5% 2.2% 2.0% 4.3% 4.3%
Selling, general and administrative....... 3.9% 4.5% 4.0% 5.8% 8.0%
Recapitalization expenses................. -- -- 2.2% -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 6.4% 6.7% 8.2% 10.1% 12.3%
--------- --------- --------- --------- ---------
Operating income (loss)..................... 30.3% 33.9% 30.2% -2.8% -17.6%
Interest expense, net....................... 2.3% 1.2% 4.4% 9.4% 9.3%
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... 28.0% 32.7% 25.8% -12.2% -26.9%
Income tax provision (benefit).............. 8.4% 9.7% 1.4% 0.1% 0.1%
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs...................... 19.6% 23.0% 24.4% -12.3% -27.0%
Extraordinary debt extinguishment costs, net
of income taxes........................... -- -- 0.5% -- --
--------- --------- --------- --------- ---------
Net income (loss)........................... 19.6% 23.0% 23.9% -12.3% -27.0%
========= ========= ========= ========= =========
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Net Sales. Net sales were $356.2 million in fiscal 1998, $263.2
million in fiscal 1997, and $194.4 million in fiscal 1996. This represented an
increase of 35.3% from fiscal 1997 to fiscal 1998, and an increase of 35.4%
from fiscal 1996 to fiscal 1997. The unit sales volume increased 54.6% from
fiscal 1997 to fiscal 1998 while average selling prices declined 12.5% over
the same period. 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 1998 and 1997 was primarily attributable
to an increase in manufacturing capacity, resulting from the addition of six
sputtering lines, and improved utilization of existing capacity and improved
manufacturing processes, resulting in higher production volume and unit
shipments. 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 36.7% in fiscal 1998, 40.6% in fiscal
1997, and 38.4% in fiscal 1996. The decrease in gross margin in fiscal 1998
was primarily a result of lower average selling prices, somewhat offset by
decreased unit production costs, improved utilization of manufacturing
capacity, improved manufacturing processes, and the absorption of fixed costs
over higher unit production volume. 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, somewhat offset by lower average selling prices. 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.
Research and Development. Research and development expenses were $8.8
million or 2.5% of net sales, in fiscal 1998, $5.8 million, or 2.2% of net
sales, in fiscal 1997, and $3.8 million, or 2.0% of net sales, in fiscal 1996.
Research and development expenses increased in absolute dollars in fiscal
1998, 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 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 $13.7 million or 3.9% of net sales, in fiscal
1998, $11.8 million, or 4.5% of net sales, in fiscal 1997, and $7.8 million, or
4.0% of net sales, in fiscal 1996. The continued increase in selling, general
and administrative expenses in absolute dollars primarily reflected increased
headcount necessary to support higher production volume and unit shipments. 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 $8.2 million or 2.3%
of net sales, in fiscal 1998, $3.3 million, or 1.3% of net sales, in fiscal
1997, and $8.6 million, or 4.4% of net sales, in fiscal 1996. The fiscal 1998
increase in interest expense, net was primarily a result of the $13.8 million
interest expense recorded on the Company's Convertible Notes, (issued in
January 1997), somewhat offset by the $2.1 million increase in capitalized
interest. The fiscal 1997 decrease was primarily a result of interest earned on
excess cash balances, lower average debt balances and a $2.1 million increase
in capitalized interest. The Company anticipates interest expense, net will
increase in absolute dollars as a result of lower average invested cash
balances and lower capitalized interest as construction-in-progress balances
decrease.
Provision for Income Taxes. The Company recorded income tax provisions
of $30.0 million, $25.4 million, and $2.6 million in fiscal 1998, 1997 and
1996, respectively. The fiscal 1998 and 1997 tax rates 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.
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 1998 and fiscal 1997, the Company financed its cash
requirements through cash from financing activities and operations.
The Company's operations provided net cash of $84.9 million, $90.7
million, and $50.4 million for fiscal 1998, 1997 and 1996, respectively. Cash
generated during fiscal 1998 reflected net income plus depreciation and
amortization, an increase in deferred tax and accrued liabilities, 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.
For fiscal 1998 and fiscal 1997, net cash used in investing activities
was $118.5 million and $208.2 million, respectively. The Company invested
$130.3 million and $199.4 million in property, plant and equipment during
fiscal 1998 and fiscal 1997, respectively.
During fiscal 1998 and 1997, net cash from financing activities was
$14.4 million and $125.9 million, respectively. Cash provided by financing
activities for fiscal 1998 reflects the $13.4 million received for common stock
issued in connection with the Company's follow-on offering, the employee stock
purchase plan, and the incentive stock option ("ISO") plans, as well as a $2
million tax benefit for disqualifying dispositions related to the Company's ISO
plans.
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, 1998, the Company's principal sources of liquidity
consisted of $25.0 million in cash, cash equivalents and short-term
investments, and a $100.0 million unsecured revolving credit facility under
which there were no borrowings. The Company must comply with certain
restrictive financial covenants and conditions as defined in the
unsecured revolving credit facility. At March 31, 1998, the Company had
indebtedness of $230.0 million in Convertible Notes, that require semi-annual
interest payments which began July 15, 1997. The Company expects to spend in
excess of $100.0 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
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which will require the reporting of additional
financial information in a complete set of financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and will
require earlier periods to be restated to reflect application of the
provisions of SFAS No. 130. The Company believes that the adoption of
SFAS 130 will have an immaterial effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS No. 131,") "Disclosures About
Segments of an Enterprise and Related Information," which specifies disclosure
requirements for segment reporting. SFAS No. 131 supersedes SFAS No. 14 and
SFAS No. 18 and is effective for fiscal years beginning after December 15,
1997, and requires earlier years to be restated if practicable. The Company
believes that it operates in one segment for purposes of SFAS 131.
YEAR 2000 COMPLIANCE
The Company has reviewed both its internal computer systems and its
products that could be affected by the "Year 2000" issue and has identified
some systems and a few products that will be affected. The Company presently
believes, with modification to existing software and conversion to new
software, the "Year 200" issues relating to internal computer systems and
products will not cause significant operational problems or computer problems.
Furthermore, the cost of implementing these solutions is not anticipated to be
material to the financial position or results of operations. However, if such
modifications and conversions are not made, or not completed timely, the "Year
2000" issue could have a material adverse impact on the operations of the
Company. Furthermore, the costs of such conversions and updates are based on
management's best estimates, which are derived utilizing numerous assumptions
of future events including such things as, but not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
The Company will initiate formal communications with all of its
significant suppliers and large customers in fiscal 1999 to determine the
extent to which the Company is vulnerable to those third parties failure to
remediate their own "Year 2000" issues. There can be no guarantee that the
systems of other companies on which significant suppliers and large customers
rely upon will be timely converted, or a failure to convert by another
company, or a conversion that is incompatible with the Company's systems will
not have a material adverse impact on the Company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required by this item and the
related consolidated financial statement schedule are set forth in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 "Management"
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 1998 Annual Meeting of Stockholders to be held on July 20, 1998 (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "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.
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.
2. FINANCIAL STATEMENT SCHEDULES. See "Schedule II --
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
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
(c) Exhibits:
The exhibits which are filed with this report or which are incorporated
herein by reference are set forth in the Exhibit Index.
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 15, 1998 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 June 15, 1998
- ----------------------- and Chairman of the Board
Ronald L. Schauer (Principal Executive Officer)
/s/ PETER S. NORRIS Vice President, Finance, Chief June 15, 1998
- ----------------------- Financial Officer and Treasurer
Peter S. Norris (Principal Financial Officer)
/s/ BRUCE C. EDWARDS Director June 15, 1998
- -----------------------
Bruce C. Edwards
/s/ WALTER G. KORTSCHAK Director June 15, 1998
- -----------------------
Walter G. Kortschak
/s/ NEIL M. GARFINKEL Director June 15, 1998
- -----------------------
Neil M. Garfinkel
/s/ DONALD P. BEADLE Director June 15, 1998
- -----------------------
Donald P. Beadle
/s/ RICHARD S. LOVE Director June 15, 1998
- -----------------------
Richard S. Love
/s/ HARRY G. VAN WICKLE Director June 15, 1998
- -----------------------
Harry G. Van Wickle
</TABLE>
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules:
II -- Valuation and qualifying accounts
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998, 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 20, 1998
HMT TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $24,985 $44,225
Short-term investments........................ -- 10,833
Receivables -- trade, net of allowance for
doubtful accounts of $1,327 and $1,055 at
March 31, 1998 and 1997, respectively...... 70,016 35,771
Other receivables............................. 644 23
Inventories................................... 18,400 11,837
Deposits, prepaid expenses and other assets... 629 474
Deferred income taxes......................... 12,249 6,532
---------- ----------
Total current assets.................. 126,923 109,695
Construction in progress........................ 53,373 76,433
Property, plant and equipment, net.............. 290,483 178,875
Other assets.................................... 7,444 8,386
---------- ----------
Total assets.......................... $478,223 $373,389
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $27,301 $26,424
Accrued liabilities........................... 8,270 8,765
Obligations under capital leases -- current
portion.................................... 2,653 2,679
---------- ----------
Total current liabilities............. 38,224 37,868
Obligations under capital leases, net of
current portion............................... 555 3,172
Other long-term liabilities..................... 7,984 3,562
Deferred income taxes........................... 19,008 3,345
5 3/4% Convertible Subordinated Notes, due 2004. 230,000 230,000
---------- ----------
Total liabilities..................... 295,771 277,947
---------- ----------
Commitments (Note 6)
Common Stock, $0.001 par value; authorized:
100,000,000 shares; issued and outstanding:
43,157,143 and 41,046,360 shares at March 31,
1998 and 1997, respectively................... 43 41
Additional paid-in capital...................... 109,164 92,084
Retained earnings............................... 149,894 79,966
Distribution in excess of basis (Note 1)........ (76,649) (76,649)
---------- ----------
Total stockholders' equity............ 182,452 95,442
---------- ----------
Total liabilities and stockholders'
equity.............................. $478,223 $373,389
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $356,194 $263,209 $194,401
Cost of sales............................. 225,599 156,277 119,803
---------- ---------- ----------
Gross profit............................ 130,595 106,932 74,598
---------- ---------- ----------
Operating expenses:
Research and development................ 8,825 5,812 3,803
Selling, general and administrative..... 13,679 11,803 7,774
Recapitalization expenses............... -- -- 4,347
---------- ---------- ----------
Total operating expenses............. 22,504 17,615 15,924
---------- ---------- ----------
Operating income (loss).............. 108,091 89,317 58,674
Interest expense, net..................... 8,194 3,329 8,578
---------- ---------- ----------
Income (loss) before income tax
provision and extraordinary debt
extinguishment costs................ 99,897 85,988 50,096
Income tax provision...................... 29,969 25,400 2,590
---------- ---------- ----------
Net income (loss) before extraordinary
debt extinguishment costs............... 69,928 60,588 47,506
Extraordinary debt extinguishment costs,
net of income taxes of $692............. -- -- 1,127
---------- ---------- ----------
Net income (loss)............... 69,928 60,588 46,379
Accretion reversal (accretion) for
dividends on Mandatorily Redeemable
Series A Preferred Stock................ -- 1,157 (1,157)
---------- ---------- ----------
Net income (loss) available for common
stockholders............................ $69,928 $61,745 $45,222
========== ========== ==========
Basic net income (loss) available for
common stockholders per share before
extraordinary debt extinguishment costs. $1.66 $1.40 $1.31
Extraordinary debt extinguishment costs
per share, net of income taxes.......... -- -- 0.03
---------- ---------- ----------
Net income (loss) available for common
stockholders per share
Basic................................. $1.66 $1.52 $1.28
========== ========== ==========
Diluted........................... $1.40 $1.35 $1.28
========== ========== ==========
Shares used in computing net income per
share
Basic................................. 42,196 40,493 35,224
========== ========== ==========
Diluted........................... 54,542 46,019 35,224
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
Distributions Retained Total
Common Stock Additional In Excess of Earnings Stockholders'
--------------------- Paid-in Net Book (Accumulated Equity
Shares Amount Capital Value Deficit) (Deficit)
----------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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, 1996...................... -- -- -- -- 19,378 19,378
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
Common Stock, net of offering
expenses...................... 1,260,000 1 11,741 -- -- 11,742
Common Stock issued under
Employee Stock Purchase
Plan......................... 121,744 -- 1,035 -- -- 1,035
Common Stock issued under Stock
Option Plans.................. 945,438 1 1,395 -- -- 1,396
Net income...................... -- -- -- -- 60,588 60,588
Reversal of accretion, net, for
dividends on Mandatorily
Redeemable Series A
Preferred Stock............... -- -- -- -- 1,157 1,157
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1997.......... 41,046,360 41 92,084 (76,649) 79,966 95,442
Follow-On Offering of $0.001
par value Common Stock, net
of offering expenses......... 1,000,000 1 13,350 -- -- 13,351
Common Stock issued under
Employee Stock Purchase
Plan......................... 278,255 -- 2,575 -- -- 2,575
Common Stock issued under Stock
Option Plans.................. 832,528 1 1,155 -- -- 1,156
Net income...................... -- -- -- -- 69,928 69,928
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1998.......... 43,157,143 $43 $109,164 ($76,649) $149,894 $182,452
=========== ======== =========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $69,928 $60,588 $46,379
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization..................... 41,771 20,839 12,291
Provision for loss on inventories................. 1,844 3,801 (2,938)
Provision for doubtful accounts receivable........ 272 460 450
Loss (gain) on sale or disposal of assets......... -- 2,988 181
Deferred income taxes............................. 9,946 6,778 (9,965)
Changes in operating assets and liabilities:
Receivables -- trade.............................. (34,517) (5,161) (23,989)
Other receivables................................. (621) 334 29
Inventories....................................... (8,407) (8,509) 6,623
Deposits, prepaid expenses and other assets....... (155) 405 840
Accounts payable.................................. 877 12,513 6,940
Accrued liabilities............................... (495) (7,917) 13,573
Long term liabilities............................. 4,422 3,562 --
--------- --------- ---------
Net cash provided by operating activities......... 84,865 90,681 50,414
--------- --------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment....(130,320) (197,395) (39,629)
Sale (Purchase) of short-term investments......... 10,833 (10,833) --
Proceeds from sale of equipment................... -- -- 2,205
Decrease in other assets.......................... 942 -- 1,961
--------- --------- ---------
Net cash used in investing activities.............(118,545) (208,228) (35,463)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on obligations under capital
leases.......................................... (2,642) (4,744) (9,994)
Net proceeds from (repayments on) short-term
borrowings...................................... -- -- (86,700)
Repayment of long-term notes payable.............. -- -- (12,200)
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 5 3/4% Convertible
Subordinated Notes.............................. -- 230,000 --
Proceeds from (repayment of) subordinated
promissory notes payable to stockholders........ -- (47,000) 47,000
Distribution to stockholders...................... -- -- (52,100)
Proceeds from issuance of Common Stock............ 17,082 14,173 77,952
Proceeds from issuance (redemption) of
Mandatorily Redeemable Series A Preferred
Stock........................................... -- (59,000) 59,000
--------- --------- ---------
Net cash provided by financing activities......... 14,440 125,929 20,014
--------- --------- ---------
Net increase in cash and cash equivalents......... (19,240) 8,382 34,965
Cash and cash equivalents at beginning of period.. 44,225 35,843 878
--------- --------- ---------
Cash and cash equivalents at end of period........ $24,985 $44,225 $35,843
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period.......... $13,582 $4,859 $8,776
Cash paid for income taxes during the period...... $20,860 $27,925 $3,522
Supplemental disclosure of noncash investing and
financing activities:
Machinery and equipment acquired pursuant to a
capital lease................................... $1,633 $2,083 $ --
Refinancing of existing capital lease obligations. $ -- $ -- $13,105
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.
<PAGE>
HMT TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
HMT Technology Corporation ("HMT" or the "Company") is an
independent supplier of high-performance thin film disks for high-end,
high-capacity, and removable hard disk drives, which in turn are used in
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.
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.
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.
Short-Term Investments
The Company invests its excess cash in short-term, interest bearing,
investment grade securities. 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.
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 immaterial and are
included in operations.
Concentration of Risks
Three customers accounted for 77.9% and 76.8% of accounts receivable at
March 31, 1998 and 1997, respectively. Significant customers accounted for the
following percentages of net sales in fiscal 1998, 1997 and 1996:
Years Ended March 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Maxtor Corporation................... 23.4% 40.7% 40.5%
Samsung Electronics Company Limited.. 16.0% 19.8% 0.1%
Iomega Corporation................... 28.9% 12.2% 2.4%
Western Digital Corporation.......... 19.0% 11.9% 35.8%
Micropolis Corporation............... 0.1% 8.4% 9.1%
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 Company's
two 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. On August 13,
1997, the Company sold an additional 1,000,000 shares of Common Stock at
$13.89 per share through a follow-on offering, resulting in net proceeds of
approximately $13.4 million.
Computation of Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
secutrities. Diluted earnings per share is very similar to the previously
reported primary earnings per share. Earnings per share amounts for all
periods presented have been restated to conform to FAS 128 requirements.
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 value of the Company's long term debt is
a reasonable estimate of their fair value based on interest rates as of March
31, 1998 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 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
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," which will require the reporting of
additional financial information in a complete set of financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997
and will require earlier periods to be restated to reflect application of the
provisions of SFAS No. 130. The Company believes that the adoption of
SFAS 130 will have an immaterial effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information," which specifies disclosure
requirements for segment reporting. SFAS No. 131 supersedes SFAS No. 14 and
SFAS No. 18 and is effective for fiscal years beginning after December 15,
1997, and requires earlier years to be restated if practicable. The Company
believes that it operates in one segment for purposes of SFAS 131.
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
March 31,
--------------------
1998 1997
--------- ---------
(dollars in thousands)
Inventories:
Raw materials..................... $7,498 $4,307
Work-in-process................... 6,024 5,843
Finished goods.................... 4,878 1,687
--------- ---------
$18,400 $11,837
========= =========
Inventories reflect reserves of approximately $7.1 million and $5.3
million as of March 31, 1998 and 1997, respectively.
March 31,
--------------------
1998 1997
--------- ---------
(dollars in thousands)
Property, Plant and Equipment, Net:
Land................................ $4,869 $4,869
Building and improvements........... 110,393 80,417
Leasehold improvements.............. 30,501 22,187
Machinery, equipment and furniture
and fixtures...................... 237,112 124,415
--------- ---------
382,875 231,888
Less accumulated depreciation
and amortization.................. 92,392 53,013
--------- ---------
$290,483 $178,875
========= =========
Construction in progress was approximately $53.4 million and $76.4
million at March 31, 1998 and 1997, respectively. Additions to construction in
progress include capitalized interest of approximately $4.5 million, $2.4
million, and $278,000 during fiscal 1998, 1997 and 1996, respectively. No
other interest was capitalized during fiscal 1998, 1997 and 1996.
March 31,
--------------------
1998 1997
--------- ---------
(dollars in thousands)
Accrued Liabilities:
Interest payable.................... $2,822 $2,473
Payroll related items............... 4,618 2,957
Other............................... 830 3,335
--------- ---------
$8,270 $8,765
========= =========
3. RELATED PARTY TRANSACTIONS
The Company had the following transactions with a certain stockholder and
its affiliates (in thousands):
Years Ended March 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Hitachi Metals Trading
Purchases of raw materials......... $1,237 $11,139 $8,755
Sales.............................. -- 2 19
Hitachi Metals America
Purchases of raw materials......... 1,241 1,450 2,274
Hitachi Metals Research Ltd.
Contract research and development
services......................... $ -- $ -- $514
4. OBLIGATIONS UNDER CAPITAL LEASES
Assets under capital lease obligations as of March 31, 1998 consist of
machinery and equipment with a cost of $16.3 million and accumulated
amortization of $12.0 million ($16.6 million and $8.5 million, respectively,
at March 31, 1997). Minimum future lease payments under capital lease
obligations, together with the present value of the net minimum lease
payments, are as follows (in thousands):
Period
Ending
March 31,
1998
---------
1999............................................. $2,987
2000............................................. 574
---------
Minimum lease payments........................... 3,561
Less amount representing interest................ 353
---------
Present value of minimum lease payments.......... 3,208
Less current portion............................. 2,653
---------
Capital lease obligation, net of current portion. $555
=========
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 November 17, 1997, the Company amended and restated the revolving
credit agreement originally entered into in 1995 pursuant to the Leveraged
Recapitalization. This unsecured $100 million revolving credit agreement is
with a consortium of banks and expires November 17, 2000. 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, 1998 and 1997, 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, 1998, the fair value of the Convertible Notes, which is
determined based on quoted market price, was $201.3 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:
(dollars
in
Fiscal Year Ending March 31, thousands)
- ---------------------------------------- ---------
1999............................ $829
2000............................ 153
2001............................ 110
2002............................ 109
2003............................ 84
---------
$1,285
=========
Rent expense was approximately $1.0 million, $0.8 million and $0.8
million for the years ended March 31, 1998, 1997 and 1996, respectively.
Equipment and Facilities Purchase Commitments
As of March 31, 1998, the Company had commitments to purchase $20.1
million and $8.8 million of equipment and facilities, respectively.
Legal Proceedings
On December 16, 1996, Virgle 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., case no. C-96
21055 JW ("Hedgcoth I"), Mr. Hedgcoth alleges that certain HMT disks infringe
three patents allegedly owned by him (the "Hedgcoth I Patents"). On July 1,
1997, Mr. Hedgcoth filed a second 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., case no. C-97 20581 JW
("Hedgcoth II"), Mr. Hedgcoth alleges that certain HMT disks infringe a fourth
patent allegedly owned by him (the "Hedgcoth II Patent"). Each of the Hedgcoth
I and Hedgcoth II complaints seeks an injunction and unspecified damages,
which are sought to be trebled. The Company has filed counterclaims in
Hedgcoth I and Hedgcoth II seeking declaratory judgments that the Hedgcoth I
Patents and the Hedgcoth II Patent 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.
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,
1998.
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. The
remaining warrants to purchase 420,794 shares of Common Stock were exercised
during the first and third quarters of fiscal 1998.
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.
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 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
--------------------------------------
Weighted
Available Number Aggregate Average
for of Exercise Exercise
Grant Options Per Share Price Price
------------ ----------- ---------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Authorized................ 15,400,000 --
Granted................... (12,284,150) 12,284,150 $0.03 - $10.00 $1,566,837 $0.03
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
Granted................... (1,701,000) 1,701,000 $10.00 - $14.50 19,523,015 $11.48
Cancellations............. 237,478 (237,478) (1,433,675) $6.03
Exercised................. (742,186) $0.03 - 14.88 (314,585) $0.42
------------ ----------- ------------
Balances, March 31, 1998.. 1,333,614 4,026,285 $0.03 - $18.50 26,140,544 $6.50
============ =========== ================ ============ ========
</TABLE>
Upon grant, 1,550,000 options vested immediately and were exercised.
During fiscal 1997, an additional 373,612 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, 1998,
2,044,644 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 1998, 1997
and 1996 would have been reduced to the pro forma amounts indicated below
(amounts in thousands, except per share):
Years Ended March 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net income -- as reported............... $69,928 $61,744 $45,222
Net income -- pro forma................. $65,605 $60,348 $44,876
Earnings per share -- as reported
Basic................................. $1.66 $1.52 $1.28
Diluted............................... $1.40 $1.35 $1.28
Earnings per share -- pro forma
Basic................................. $1.55 $1.49 $1.27
Diluted............................... $1.32 $1.32 $1.27
The effects of applying SFAS 123 on pro forma disclosures of net
income and net income per share for fiscal 1998, 1997, and 1996 are not
likely to be representative of the pro forma effects on net income and
earnings per share in future years.
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:
1998 1997 and 1996
------------- --------------
Risk-free interest rate 5.72% - 6.74% 5.36% - 5.53%
Expected life 2-5 years 2-5 years
Expected volatility 0.69 0.77
Expected dividend $-- $--
The weighted average expected life was calculated based on the vesting
period and the anticipated exercise behavior of the employees.
The following table summarizes the stock options outstanding at March 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.03 - $ 0.10 1,896,225 7.68 $0.04 438,021 $0.0349
$10.00 - $11.06 1,390,926 9.08 $10.93 26,926 $10.00
$11.94 - $14.50 445,809 9.16 $13.85 46,971 $13.78
$14.875- $18.50 293,325 8.70 $16.12 88,742 $16.04
----------- -----------
$0.03 - $18.50 4,026,285 8.41 $6.49 600,660 $3.92
=========== ===========
</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 terms of the Purchase Plan, employees may elect to contribute up to
15% of their compensation toward the purchase of shares of the Company's
Common Stock. The purchase price per share is the lesser of 85% of the fair
market value of the stock on the first day of enrollment during the six month
offering period or the last day within the six month offering period (generally
April 30 and October 31 of each year). The total number of shares of stock
issuable under the Purchase Plan aggregated 500,000 shares as of March 31,
1998. In April 1998, the Company's Board of Directors and Shareholders
approved an increase of 1,000,000 shares to the total number of shares
issuable under the Purchase Plan. Shares issued under the Purchase Plan were
278,255 and 121,744 in fiscal 1998 and 1997, respectively.
For purposes of pro forma disclosure, the fair value of employee's
purchase rights has been estimated using the Black-Scholes model
assuming risk-free interest rates ranging from 6% to 5% in fiscal 1998
and 1997. Volatility factors of the expected market price were 67% and
77% for fiscal 1998 and 1997, respectively. The weighted-average
expected life of the purchase rights was six months for fiscal 1998 and
1997. The weighted-average fair value of the purchase rights granted in
fiscal 1998 and 1997 was $4.92 and $4.60, respectively.
9. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended March 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(dollars in thousands)
Current:
Federal............................. $19,756 $22,046 $10,095
State............................... 268 65 2,460
Deferred:
Federal............................. 13,218 3,289 (9,291)
State............................... (3,273) -- (674)
--------- --------- ---------
$29,969 $25,400 $2,590
========= ========= =========
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
Years Ended March 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Income tax provision (benefit) at
statutory rate....................... 35.0% 35.0% 35.0%
Benefit of foreign sales corporation... -3.1% -4.1% -1.0%
State income taxes..................... 3.2% 3.2% 2.6%
Benefit of operating losses............ -- -- -25.5%
State credits.......................... -5.2% -3.2% --
Other.................................. 0.1% -1.4% 7.4%
Change in valuation allowance.......... -- -- -13.3%
--------- --------- ---------
Effective tax rate................... 30.0% 29.5% 5.2%
========= ========= =========
The components of the deferred tax assets and liabilities are as follows:
March 31,
--------------------
1998 1997
--------- ---------
(dollars in thousands)
Deferred tax assets:
Accrued vacation............................. $631 $405
State credits................................ 4,986 148
Inventory reserve............................ 2,736 2,447
Allowances and other accrued liabilities..... 3,802 3,437
Net operating loss carryforward.............. 94 3,686
--------- ---------
Total deferred tax assets............ 12,249 10,123
--------- ---------
Deferred tax liabilities:
Depreciation................................. (22,316) (6,936)
Net operating loss carryforward.............. 3,308 --
--------- ---------
(19,008) (6,936)
--------- ---------
Less valuation allowance....................... -- --
--------- ---------
Net deferred tax assets.............. ($6,759) $3,187
========= =========
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, 1998, the Company had federal net operating loss
carryforwards of approximately $9.7 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 $810,000 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. EARNINGS PER SHARE
Reconciliation of the numerator and denominator of both basic and diluted EPS
is provided as follows:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average shares outstanding.... 42,196 40,493 35,224
---------- ---------- ----------
Shares used in computing per
share amounts ....................... 42,196 40,493 35,224
========== ========== ==========
Net income available for common
stockholders ........................ $69,928 $61,745 $45,222
========== ========== ==========
Net income available for common
stockholders per share .............. $1.66 $1.52 $1.28
========== ========== ==========
Diluted:
Weighted average shares outstanding.... 42,196 40,493 35,224
Net effect of dilutive stock options-
based on the treasury stock method
using average market price .......... 2,662 3,684 --
Assumed conversion of 5 3/4%
convertible subordinated notes ...... 9,684 1,842 --
---------- ---------- ----------
Shares used in computing per share
amounts ............................. 54,542 46,019 35,224
========== ========== ==========
Net income available for common
stockholders ........................ $69,928 $61,745 $45,222
Add 5 3/4% convertible subordinated
note interest, net of interest
capitalized and income tax effect ... 6,580 587 --
---------- ---------- ----------
Net income available for common
stockholders ........................ $76,508 $62,332 $45,222
========== ========== ==========
Net income available for common
stockholders per share .............. $1.40 $1.35 $1.28
========== ========== ==========
</TABLE>
11. 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 $0.5 Million, $0.4 million, $0.3 million in fiscal 1998,
1997 and 1996, respectively.
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information should be read in conjunction
with Note 1.
<TABLE>
<CAPTION>
Year Ended March 31, 1998
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales........................... $76,837 $90,446 $98,556 $90,355
Gross profit........................ 29,331 34,724 37,018 29,523
Operating income.................... 23,611 29,152 31,381 23,947
Net income.......................... 15,339 19,094 20,470 15,024
Net income available for common
stockholders...................... 15,339 19,094 20,470 15,024
Net income (loss) available for
common stockholders per share
Basic............................. $0.37 $0.46 $0.48 $0.35
Diluted........................... $0.31 $0.38 $0.40 $0.31
Shares used in computing net income
per share
Basic............................. 41,135 41,832 42,768 43,048
Diluted........................... 53,808 54,482 55,099 54,779
Year Ended March 31, 1997
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(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
Basic............................. $0.40 $0.41 $0.32 $0.40
Diluted........................... $0.36 $0.38 $0.30 $0.32
Shares used in computing net income
per share
Basic............................. 39,965 40,399 40,673 40,935
Diluted........................... 44,015 44,205 44,229 51,660
</TABLE>
Net sales and net income are subject to fluctuations as a result of
customer actions including the timing of mandated delivery schedules.
<PAGE>
SCHEDULE II
HMT TECHNOLOGY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at end
Description of Year Expenses Accounts Deductions of Year
- ---------------------------------- ---------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
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
Year ended March 31, 1998:
Provision for loss on inventory.. $5,320 1,844 -- -- $7,164
Allowance for doubtful accounts
receivable.................... $1,055 $272 -- -- $1,327
</TABLE>
<PAGE>
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)
3.3 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)
4.13 Second Amendment to Amended and Restated Revolving Credit Agreement, dated November
17, 1997. (3)
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.(1)
10.12.2 Second Amendment to the Credit Agreement dated March 31, 1996.(1)
10.12.3 Third Amendment to the Credit Agreement dated August 28, 1996.(1)
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)
10.26 Registrant's Executive Severance Plan.(1)
16.1 Letter from Ernst & Young LLP regarding change in certifying accountant.(1)
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.(3)
</TABLE>
- ----------------
(1) Previously filed in Registration Statement No. 333-450.
(2) Previously filed in Form 8-K, dated as of January 21, 1997
(3) Previously filed in Form 10-K, dated as of June 28, 1997
<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 Nos. 333-24385) of
our report dated April 20, 1998, on our audits of the consolidated financial
statements and financial statement schedule of HMT Technology Corporation and
its subsidiary as of March 31, 1998 and 1997, and for the years ended March
31, 1998, 1997 and 1996, which report is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended March 31, 1998 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<FISCAL-YEAR-END> Mar-31-1998 Mar-31-1997
<PERIOD-START> Apr-01-1997 Apr-01-1996
<PERIOD-END> Mar-31-1998 Mar-31-1997
<PERIOD-TYPE> 12-MOS 12-MOS
<CASH> 24,985 44,225
<SECURITIES> 0 10,833
<RECEIVABLES> 71,343 36,826
<ALLOWANCES> 1,327 1,055
<INVENTORY> 18,400 11,837
<CURRENT-ASSETS> 126,923 109,695
<PP&E> 382,875 231,888
<DEPRECIATION> 92,392 53,013
<TOTAL-ASSETS> 478,223 373,389
<CURRENT-LIABILITIES> 38,224 37,868
<BONDS> 230,000 230,000
0 0
0 0
<COMMON> 43 41
<OTHER-SE> 182,409 95,401
<TOTAL-LIABILITY-AND-EQUITY> 478,223 373,389
<SALES> 356,194 263,209
<TOTAL-REVENUES> 356,194 263,209
<CGS> 225,599 156,277
<TOTAL-COSTS> 225,599 156,277
<OTHER-EXPENSES> 22,504 17,615
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,194 3,329
<INCOME-PRETAX> 99,897 85,988
<INCOME-TAX> 29,969 25,400
<INCOME-CONTINUING> 69,928 60,588
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 69,928 61,745
<EPS-PRIMARY> $1.66 $1.52
<EPS-DILUTED> $1.40 $1.35
</TABLE>
