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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended September 28, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to ________________.
Commission file number 0-14709
HUTCHINSON TECHNOLOGY INCORPORATED
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(Exact name of registrant as specified in its charter)
Minnesota 41-0901840
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
40 West Highland Park
Hutchinson, Minnesota 55350
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(Address of principal executive offices) (Zip code)
(320) 587-3797
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
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 definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of December 1, 1997 was $431,618,814, based on the
closing sale price for the Company's Common Stock on that date. For
purposes of determining this number, all officers and directors of the
registrant are considered to be affiliates of the registrant. This number
is provided only for the purpose of this report on Form 10-K and does not
represent an admission by either the registrant or any such person as to
the status of such person.
As of December 1, 1997 the registrant had 19,637,098 shares of
Common Stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal
year ended September 28, 1997 are incorporated by reference in Part II.
Portions of the registrant's Proxy Statement dated December 19, 1997 for the
annual meeting of shareholders to be held January 28, 1998 are incorporated by
reference in Part III.
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business," "Item 2. Properties" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements within the meaning of the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements are subject to risks and uncertainties, including those
discussed under "Forward-Looking Statements" in Item 7 and "Risk Factors" on
pages 10-14 of this Annual Report on Form 10-K, that could cause actual results
to differ materially from those projected. Because actual results may differ,
readers are cautioned not to place undue reliance on these forward-looking
statements.
ITEM 1. BUSINESS
THE COMPANY
Hutchinson Technology Incorporated (the "Company") was incorporated in 1965
in Minnesota. The Company is the world's leading supplier of suspension
assemblies for hard disk drives. Suspension assemblies are critical components
of hard disk drives that hold the recording heads in position above the spinning
magnetic disks. The Company's suspension assemblies are manufactured with
proprietary technology and processes to uniform and precise specifications that
are critical to maintaining the necessary microscopic clearance between the head
and disk. During the fiscal year ended September 28, 1997, the Company shipped
approximately 719 million suspension assemblies. The Company believes its sales
to disk drive and recording head manufacturers account for approximately 70% of
the worldwide supply of suspension assemblies. The Company is a supplier to
nearly all domestic and many foreign-based users of suspension assemblies,
including Applied Magnetics, IBM, Maxtor, Quantum, Read-Rite, TDK/SAE Magnetics,
Seagate Technology, Toshiba, Western Digital and Yamaha. The Company developed
its leadership position in suspension assemblies through research, development
and design activities coupled with a substantial investment in manufacturing
technologies and equipment. The Company is focused on continuing to develop
suspension assemblies which address the rapidly changing requirements of the
hard disk drive industry. The Company's current research and development efforts
are principally focused on continuing the development and prototype production
of new high-precision conventional and TSA suspension assemblies to meet
changing market demands, performance standards and electrical connectivity
requirements. During the next several years, the Company anticipates increasing
acceptance by the disk drive industry of its TSA suspensions, which integrate
into the suspension thin electrical conductors that connect directly with the
recording head. The Company also is evaluating product opportunities in the
medical devices market but does not expect any medical-related revenues in
fiscal 1998.
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INDUSTRY BACKGROUND
The market for disk drives has grown rapidly in recent years, driven by
such factors as the growing use of desktop PCs, workstations, portable computers
and enterprise computing and storage, the increasing amount of memory required
for software program storage and the continuing accumulation of data.
Additionally, the increasing use of disk drives for non-computer applications
such as voice mail and video data, the expansion of storage-intensive data
warehousing, Internet and intranet applications, and the simultaneous use of
multiple small disk drives, such as systems using Redundant Arrays of
Inexpensive Disks ("RAID"), have contributed to the rapid growth of the disk
drive industry. In a study published in August 1997, TRENDFOCUS-Registered
Trademark- estimated that approximately 106 million disk drives were shipped
worldwide in calendar 1996. According to TRENDFOCUS-Registered Trademark-,
annual shipments of disk drives are forecasted to increase to more than 129
million in calendar 1997, and to more than 227 million in calendar 2000.
Hard disk drives incorporate the same basic technology. The principal
components of a hard disk drive are recording disk media, a motor assembly, the
control electronics and a head stack assembly. A head stack assembly consists of
multiple magnetic recording heads attached by suspension assemblies to the
actuator arm. Each disk drive contains one or more (up to thirteen) hard disks
attached to a motor assembly which rotates the disks at high speeds in extremely
close proximity to the magnetic recording heads, each of which is attached to a
suspension assembly. Typically two recording heads (one for each side of the
disk), and therefore two suspension assemblies, are used with each disk in the
disk drive.
An average of five suspension assemblies currently are contained in every
disk drive that is produced. In recent years, the growth of unit demand for
suspension assemblies has exceeded the growth in disk drive shipments for
several reasons. First, the growth in demand for storage in PCs, workstations
and network servers has exceeded the rate of increase in the areal density of
storage capacity on disks. Therefore, to satisfy the increasing demand for
storage capacity, there has been an increase in the average number of disks,
recording heads and suspension assemblies shipped per disk drive. Second, the
demand for very high capacity disk drives, such as those used in network
servers, has been growing faster than the overall demand for disk drives. Drives
for such network servers each typically contain four to ten disks, and therefore
eight to twenty recording heads and suspension assemblies. Third, industry
transitions from thin film inductive recording heads to magneto-resistive (MR)
heads, and from nano heads to the smaller pico heads, have reduced initial
production yields of the head and disk drive manufacturers. Because a
significant portion of head yield reduction is ascertained after the head is
bonded onto the suspension assembly, low yields often result in increased demand
for suspension assemblies in order to achieve desired disk drive shipment
levels.
Suspension assemblies are critical to disk drive performance and
reliability. The design of suspension assemblies is driven by the increasing
performance requirements of new disk drives, principally reduced data access
time, increased data storage density, smaller recording heads and technology
incorporated in the type of recording head used. Technological advances in disk
drives generally require suspension assemblies with specialized design, expanded
functionality and greater precision. One of the major determinants of disk drive
data storage capacity is the microscopic height at which the magnetic head
"flies" above the disk. Suspension assemblies hold the magnetic recording heads
in position and are a significant factor in controlling the critical flying
height of the head above the disk and maintaining the position of the head on
the tracks of data. A typical nominal flying height
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is about one millionth of an inch (a sheet of paper is approximately 3,000
millionths of an inch thick). Excessive flying height impairs the ability of the
head to read or write data. Insufficient flying height causes the head to hit
the disk surface which destroys the magnetic coating and the data on the disk.
Flying height is to a large extent determined by the magnitude of the force
exerted by the suspension assembly on the recording head and by the location of
the point on the recording head at which the assembly imposes the force.
PRODUCTS
The Company's current products can be categorized as follows:
- suspension assemblies, and
- other, consisting primarily of etched and stamped components.
The following table shows, for each of fiscal 1997, 1996 and 1995, the
relative contribution to net sales in millions of dollars and percentages of
each product category:
FISCAL 1997 FISCAL 1996 FISCAL 1995
-------------- -------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ----
Suspension Assemblies. . $448.1 99% $345.4 98% $292.1 97%
Other. . . . . . . . . . 5.1 1 7.8 2 7.9 3
------ ---- ------ ---- ------ ----
Total Net Sales . . . $453.2 100% $353.2 100% $300.0 100%
------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ----
SUSPENSION ASSEMBLIES
The Company has developed significant proprietary capabilities in the
design and production of suspension assemblies for both current and emerging
disk drive designs. The Company has developed improved suspension assemblies in
anticipation of several market shifts to new generations of smaller magnetic
heads (mini-to-micro, micro-to-nano, and nano-to-pico). The Company currently
produces over 300 variations of suspension assemblies for the nano and pico
platforms to meet the varied and changing requirements of individual customers.
In total, the Company shipped approximately 719 million suspension assemblies of
all types during the fiscal year ended September 28, 1997.
For customer-specific suspension assemblies, the Company has developed the
ability to assist customers' design efforts and to modify rapidly the Company's
standard designs to address specific customer needs. Because of its integrated
manufacturing approach that closely couples design, tooling and manufacturing,
the Company believes that it has a competitive advantage in quickly supplying
prototypes and commencing volume manufacturing.
In order to help develop both standard and customer-specific suspensions,
the Company maintains a test laboratory and computerized systems to simulate and
analyze suspension designs. The ability to predict and modify suspension
assembly performance is especially important in developing suspensions for high
capacity drives and drives with low access times.
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TSA SUSPENSION ASSEMBLIES. During the next several years, the Company
anticipates increasing acceptance by the disk drive industry of its TSA
suspensions, which integrate into the suspension thin electrical conductors that
connect directly with the recording head. The integral etched copper leads of
the TSA suspension are pre-positioned on the suspension assembly from the head
region through the length of the suspension and, in some cases, along the
actuator. The Company believes that this electrical integration will be a key
feature of suspension assemblies as disk drive manufacturers make the transition
to smaller and more complex recording heads and the process of attaching the
smaller head to the rest of the drive's electronics becomes more difficult and
costly, involving greater risk of handling damage as well as interference by the
electrical wires with the head's performance.
The Company believes that electrical integration will reduce the manual
labor required to attach the heads to suspensions and will ease automated
assembly. TSA suspensions also increase the consistency of head flying by
eliminating certain wires that can impart forces which adversely affect the
recording head's flying attitude. The Company believes that similar benefits
throughout the head gimbal assembly and head stack assembly processes will
result in improved yields and increased throughput for its customers, which
should translate into lower capital investment, reduced labor and lower overall
costs for such customers. TSA suspensions are particularly suited for
magneto-resistive (MR) heads, which constitute a major portion of the new and
smaller types of recording heads that allow increased data storage density and
require at least twice as many electrical leads as conventional recording heads.
The Company introduced TSA suspension assemblies to customers and began
shipping electrically functional engineering samples in the first half of fiscal
1996. As of November 4, 1997, TSA suspensions had been designed-in on a total
of twelve programs at five major disk drive manufacturers, were in use in three
customer disk drive programs in production and were under evaluation in seven
new disk drive programs.
OTHER
The Company also manufactures a small amount of etched and stamped
components used in connection with or related to suspension assemblies. The
Company also is engaged in the development of certain medical devices for which
there is no revenue anticipated in fiscal 1998; there can be no assurance that
the Company's efforts will result in a marketable product or that such products
will ever generate significant revenue.
MANUFACTURING
The Company's manufacturing strategy focuses on enhancing its ability to
reliably produce suspension assemblies in high volume and with the precision
required by its customers, by investing in the development of advanced process
and measurement systems and the design of its automated production equipment, as
well as in additional manufacturing facilities and equipment. The Company also
has adopted an integrated manufacturing approach that closely couples design,
tooling and manufacturing. This integrated approach has facilitated the rapid
development, implementation and high-volume production of new suspension
assembly products. Effective use of this integrated approach, together with the
Company's equipment, has increased production yields and efficiency, and has
been an important factor in the reduction of manufacturing costs.
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A suspension assembly consists of two or three components that are laser
welded together. TSA suspension assemblies also incorporate electrical leads
which provide electrical connection from the recording head to the disk drive's
circuitry. Alignment, adjustment and freedom from imperfections and contaminants
are of critical importance. The Company's products require several manufacturing
processes, each dependent on different technical disciplines, to ensure the high
degree of precision and process control necessary to meet strict customer
tolerance and other requirements. The Company has developed sophisticated
proprietary manufacturing processes and controls, and related equipment, which
are essential to the precision and reliability of its products. The
manufacturing processes employed by the Company include photoetching, stamping,
plasma etching, plating, precision forming, laser welding and ultra-cleaning.
The photoetching of the components, the laser-welding operations which fuse the
components together and subsequent processing steps are subject to stringent
specifications and controls. The Company monitors and controls these processes
through real-time statistical process analysis, and continuously tracks critical
parameters and takes corrective action as required.
The Company's critical raw material needs are available through multiple
sources of supply, with the following exceptions. Certain types of photoresist,
a liquid compound used in the photoetching process, and the stainless steel,
copper and polyamide materials that meet the Company's strict specifications,
are each currently available from only one supplier. To protect against the
adverse effect of a short-term supply disruption, the Company maintains several
weeks' supply of these materials. If for any reason the Company were unable to
continue to obtain these materials in the necessary quantities and at reasonable
prices, the Company's results of operations would be materially adversely
affected.
The Company's production processes require the storage, use and disposal of
a variety of chemicals which are considered hazardous under applicable federal
and state laws. Accordingly, the Company is subject to a variety of regulatory
requirements for the handling of such materials. If an accident were to result
in significant personal injury or environmental damage, the Company's results of
operations could be materially adversely affected.
RESEARCH AND DEVELOPMENT
The Company participates in an industry that is subject to rapid
technological change, and its ability to remain competitive depends on, among
other things, its ability to anticipate such change and, in that regard, to
continue its close working relationships with the engineering staffs of its
customers. As a result, the Company has devoted and will continue to devote
substantial resources to product development and process engineering efforts. As
of September 28, 1997, the Company employed 852 engineers and technicians who
are responsible for the implementation of new technologies as well as process
and product development and improvements. Expenditures for these activities in
fiscal 1997, 1996 and 1995 amounted to approximately $48,204,000, $51,212,000
and $32,567,000, respectively. Of those amounts, the Company classified
approximately $20,185,000, $27,651,000 and $15,041,000, respectively, as
research and development expenses.
The Company's current research and development efforts are principally
directed to continuing the development and prototype production of new
high-precision conventional and TSA suspension
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assemblies to meet changing head size, performance standards and electrical
connectivity requirements for disk drives.
The Company entered into a Technology Transfer and Development Agreement
(the "Technology Sharing Agreement") and a Patent License Agreement with IBM
during fiscal 1995. Under the Technology Sharing Agreement, IBM made available
to the Company the results of many years of research by IBM into the new
integrated lead suspension. The Company itself had devoted substantial efforts
independent of IBM to the research and development of TSA suspensions, and
contributed its existing TSA suspension technology to the joint effort. As of
September 28, 1997, the Company had made payments totaling $3,500,000 to IBM and
will make additional payments over the next two fiscal years totaling
$4,500,000, all of which have been recorded as an expense by the Company.
Certain royalties have been paid and may be payable in the future by the Company
to IBM under the Technology Sharing Agreement.
The Company also is engaged in the development of certain devices for the
medical market, including a probe for the measurement of tissue oxygen
saturation and tissue vitality during surgery. For fiscal 1997, 1996 and 1995,
research and development expenses allocated to such devices were approximately
$2,725,000, $1,990,000 and $1,477,000, respectively. There can be no assurance
that the Company's efforts will result in a marketable product or that such
products will ever generate significant revenue.
CUSTOMERS AND MARKETING
The Company's products are sold principally through its own ten-member
account management team operating primarily from its headquarters in Hutchinson,
Minnesota. The Company has one account manager in Europe and, through a
subsidiary, one account manager and four technical representatives in Asia. The
Company's products are sold to original equipment manufacturers for use in their
products and to subassemblers who sell to original equipment manufacturers. The
Company's account management team is organized by individual customer and
contacts are typically initiated with both the customer's purchasing agent and
its engineers. The Company's engineers and account management team together
actively participate in the selling process and in maintaining customer
relationships.
The Company is a supplier to nearly all domestic and many foreign-based
manufacturers of hard disk drives and recording heads used in such drives. The
following table shows the Company's five largest customers for fiscal 1997 as a
percentage of net sales.
Seagate Technology Incorporated. . . . . . . . . . 33%
Read-Rite Corporation. . . . . . . . . . . . . . . 14
Yamaha Corporation . . . . . . . . . . . . . . . . 14
TDK/SAE Magnetics, Ltd.. . . . . . . . . . . . . . 13
IBM. . . . . . . . . . . . . . . . . . . . . . . . 12
Sales to the Company's five largest customers constituted 86%, 87% and 86%
of net sales, respectively, for fiscal 1997, 1996 and 1995. Significant portions
of the Company's revenue may be indirectly attributable to large manufacturers
of disk drives, such as Quantum Corporation, Toshiba
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Corporation and Western Digital Corporation, which may purchase recording head
assemblies from several different recording head manufacturers that utilize the
Company's suspension assemblies.
The Company expects to continue to depend upon a limited number of
customers for a substantial majority of its sales, given the relatively small
number of hard disk drive and recording head manufacturers. The Company's
results of operations could be adversely affected by reduced requirements of its
major customers.
Sales to foreign-based enterprises totaled $88,471,000, $63,898,000 and
$46,075,000 in fiscal 1997, 1996 and 1995, respectively. Sales to foreign
subsidiaries of U.S. corporations totaled $83,753,000, $51,564,000 and
$54,398,000 in fiscal 1997, 1996 and 1995, respectively. The majority of these
sales were to the Pacific Rim region. In addition, the Company has significant
sales to U.S. corporations which use the Company's products in their offshore
manufacturing sites.
BACKLOG
The Company's sales are generally made pursuant to purchase orders rather
than long-term contracts. The Company's backlog of purchase orders was
approximately $79,100,000 at September 28, 1997, as compared to $58,500,000 at
September 29, 1996. Such purchase orders may be changed or cancelled by
customers on short notice without penalty. In addition, the Company believes
that it is a common practice for disk drive manufacturers to place orders in
excess of their needs during growth periods. Accordingly, the Company does not
believe that backlog should be considered indicative of sales for any future
period.
COMPETITION
The Company believes that the principal factors of competition in the
suspension assembly market include time to market, product quality, design
expertise, reliability of volume supply and price. The Company estimates that in
fiscal 1997 it produced approximately 70% of all suspension assemblies sold to
disk drive manufacturers and their suppliers, including recording head
manufacturers, worldwide. The Company's principal competitors are K. R.
Precision Co., Magnecomp Corporation and Nippon Hatsujo Kogyo Co. Certain users
of suspension assemblies also have or may develop the ability to fabricate their
own suspension assemblies. In addition to competition in the conventional
suspension assembly market, the electrical interconnect features of the
Company's new TSA suspensions face competition from alternative interconnection
technologies such as conventional wiring, deposition circuitry and flexible
circuitry. Although there can be no assurance that the number of competitors
will not increase in the future or that users of suspension assemblies will not
develop internal capabilities to manufacture suspension assemblies, the Company
believes that the number of entities that have the technical capability and
capacity for producing precision suspension assemblies in large volumes will
remain small.
Other types of computer memory systems, such as semiconductor memories
(flash memory) and tape and laser (optical and CD) drives, may become
competitive with certain hard disk drive applications, and thereby affect the
demand for certain of the Company's products. However, given the current state
of the technologies, semiconductor memories are not expected to be price
competitive with disk drives and optical memories are inherently much slower
than disk drives. Accordingly, the
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Company believes that such technologies will not materially impact the market
for hard disk drives in the near future.
INTELLECTUAL PROPERTIES
Certain equipment, processes, information and knowledge generated by the
Company and utilized in the manufacture of its products are regarded as
proprietary by the Company and are protectable under applicable trade secret,
copyright and unfair competition laws. In addition, if the Company believes it
has made inventions in manufacturing equipment, products and processes for
making products where patents might enhance the Company's position, patents have
been and will continue to be pursued in the U.S. and in other countries. As of
September 28, 1997, the Company held 32 U.S. patents and one foreign patent, and
had 68 patent applications pending in the U.S. and 44 patent applications
pending in other countries. The Company believes that although the patents it
holds and may obtain will be of value, they will not independently determine the
Company's success, which depends principally upon its engineering and
manufacturing skills. There can be no assurance 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 technology.
Within the Company, intellectual property protection of trade secrets is
achieved through physical security measures at the Company's facilities as well
as through non-disclosure and non-competition agreements with all employees and
confidentiality agreements with consultants, strategic suppliers and customers.
There can be no assurance as to the degree of protection afforded by these
practices and laws.
In addition to the Technology Sharing Agreement and the Patent License
Agreement with IBM, the Company also has entered into licensing and
cross-licensing agreements under the Company's patents and patent applications
allowing certain competitors to produce certain of the Company's products in
return for either royalty payments or cross-license rights.
The Company and certain users of the Company's products have from time to
time received, and may in the future receive, communications from third parties
asserting patents against the Company or its customers which may relate to
certain of the Company's manufacturing equipment or products or to products
which include the Company's products as a component. Although the Company to
date has not been a party to any material intellectual property litigation,
certain of its customers have been sued on patents having claims closely related
to products sold by the Company. In the event that any third party were to make
a valid infringement claim and a license were not available on terms acceptable
to the Company, the Company's results of operations could be adversely affected.
The Company expects that, as the number of patents issued continues to increase,
and as the Company grows, the volume of intellectual property claims could
increase.
EMPLOYEES
As of September 28, 1997, the Company had 7,181 regular employees, 3,872 of
whom were working at the Company's Hutchinson, Minnesota plant, 1,639 of whom
were working at the Company's Sioux Falls, South Dakota plant, 1,435 of whom
were working at the Company's Eau Claire, Wisconsin plant, 224 of whom were
working at the Company's Plymouth, Minnesota plant, and 11 of whom were working
overseas. The Company's ability to conduct its business would be impaired if a
significant number of its specialized employees were to leave and could not be
replaced by
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comparable personnel. However, turnover of specialized employees, including key
management personnel, historically has been low. The locations of the Company's
plants and the broad span and complexity of technology encompassed by the
Company's products and processes limit the number of qualified engineering and
other candidates for key positions. The Company expects that internal training
will continue to be the primary avenue for the development of key employees.
None of the Company's employees is subject to a collective bargaining
agreement, and the Company has experienced no work stoppages. The Company
believes that its employee relations are good.
RISK FACTORS
Certain statements made in this Annual Report on Form 10-K are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that involve certain risks and uncertainties. The Company's
actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Annual Report on Form
10-K. These forward-looking statements are made as of the date of this Annual
Report on Form 10-K and the Company assumes no obligation to update such
forward-looking statements, or to update the reasons why actual results could
differ materially from those anticipated in such forward-looking statements.
FLUCTUATIONS IN OPERATING RESULTS
The Company's historical operating results have been and the Company
expects that its future quarterly and annual operating results will continue to
be subject to variations based upon a wide variety of factors, including: the
cyclical nature of the hard disk drive industry and the associated changes in
demand; the ability to develop and implement new manufacturing process
technologies; the ability to introduce new products and to achieve
cost-effective and timely high volume production; changes in product mix and
average selling prices; the availability and efficient utilization of the
Company's production capacity; manufacturing yields; prolonged disruptions of
operations at any of the Company's facilities for any reason; changes in the
cost of or limitations on availability of materials and labor; and increases in
production and engineering costs associated with initial production of new
suspension assembly products.
The Company typically allows its customers to change or cancel orders
without penalty up until approximately two weeks before scheduled shipment. The
Company therefore plans its production and inventory based on forecasts of
customer demand which often fluctuate substantially. These factors, among
others, create an environment where demand can vary significantly from week to
week. In the fourth quarter of fiscal 1997, the Company experienced a sharp drop
in net income compared to the preceding quarter due to reduced demand for
certain of its products. In the event that a major customer reduces, delays or
cancels its orders, the Company's results of operations could be materially
adversely affected.
The selling prices for the Company's products are subject to pricing
pressure from its customers, market pressure from its competitors, pricing
strategies of the Company and product life cycle influences. A typical life
cycle for the Company's products begins with higher pricing in the introduction
stage, decreasing prices during maturity and slightly increasing pricing during
phase-out.
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Selling prices also are affected by overall demand, product mix and product
development and introduction.
A large portion of the Company's products are shipped overseas,
specifically to the Pacific Rim region, and qualify for the benefit of the
Company's Foregin Sales Corporation. Should the Company stop shipping products
overseas or should the tax laws be changed to eliminate the benefit of having a
Foreign Sales Corporation, the Company's financial results could be adversely
affected.
DEPENDENCE ON HARD DISK DRIVE INDUSTRY
Virtually all of the Company's sales are dependent on the hard disk drive
industry. Sales of suspension assemblies accounted for 99%, 98% and 97% of net
sales, respectively, for fiscal 1997, 1996 and 1995. The hard disk drive
industry is characterized by intense competition, rapid technological change and
significant fluctuations in product demand. The hard disk drive industry is also
highly cyclical and has experienced periods of increased demand and rapid growth
followed by periods of oversupply and subsequent contraction. The impact of
cyclical trends on suppliers to this industry has been compounded by the
tendency of hard disk drive manufacturers to order components in excess of their
needs during growth periods, followed by sharp reductions in demand for
components during periods of contraction. The Company's results of operations
have been adversely affected from time to time during hard disk drive industry
slowdowns and could be materially adversely affected in the event of significant
slowdowns in the industry in the future.
CUSTOMER CONCENTRATION
While the Company is a supplier to nearly all domestic and many
foreign-based manufacturers of hard disk drives and recording heads used in hard
disk drives, the Company's sales have remained concentrated within a small
customer base. Sales to the Company's five largest customers constituted 86%,
87% and 86% of net sales, respectively, for fiscal 1997, 1996 and 1995. Over the
years, the disk drive industry has experienced numerous consolidations. This has
resulted in fewer, but larger, customers for the Company's products. The loss of
one or more of the Company's major customers for any reason, or the failure of a
major customer to pay its account balance with the Company, could have a
material adverse effect on the Company's results of operations.
CAPITAL EXPANSION AND MANAGEMENT OF GROWTH
The Company's business is highly capital intensive. The Company has made a
substantial investment in sophisticated manufacturing technologies and automated
production equipment and anticipates continued substantial capital expenditures
in the future. In an effort to enable the Company's business to grow with the
market, the Company has at times invested in additional capacity and
infrastructure to support anticipated market demand. Anticipated demand,
however, has not always materialized as rapidly as expected, which has resulted
in periodic underutilization of resources and decreased profitability. If the
Company is unable in the future to fund its capital expenditures from internally
generated funds or from other sources, its results of operations could be
materially adversely affected.
Growth in the Company's net sales depends, in part, on the successful
expansion by the Company of its manufacturing capacity, manufacturing workforce
and corporate infrastructure. The
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Company currently anticipates spending approximately $200 million during fiscal
1998 for expansion of production capacity, primarily for manufacturing and
support equipment, construction of the Company's Sioux Falls, South Dakota plant
and construction of an expansion to the Company's Hutchinson, Minnesota plant.
The Company continues to make substantial investments in its corporate
infrastructure to support growth, including investments in equipment and
facilities, research and development, selling, general and administrative
support and manufacturing support. These expansion plans involve a number of
risks. The Company faces the task of identifying, recruiting, training and
integrating a large number of new employees quickly enough to keep pace with its
growth. The Company's growth also may strain the Company's management,
manufacturing, information systems, financial and other resources. Any failure
to expand these areas in an efficient manner could have a material adverse
effect on the Company. The Company has significantly increased its operations to
support increased revenues, including the hiring of additional personnel, and
has made and expects to continue to make substantial investments in research,
development and engineering and in sales and marketing to support product
development. There can be no assurance that the Company will be able to achieve
a rate of growth or level of sales in any future period commensurate with its
level of expenses.
MANUFACTURING RISKS
The Company manufactures a wide variety of suspension assemblies having
different selling prices and manufacturing costs. The product mix varies from
week to week as market demand changes. Any substantial variation in product mix
can lead to changes in utilization of equipment and tooling, inventory
obsolescence and overstaffing in certain areas, all of which may adversely
impact Company profitability.
Rapid technological change within the disk drive industry has led to
numerous suspension assembly design changes and tighter performance
specifications. The resulting suspension assemblies initially are more difficult
to manufacture and can require additional capital expenditures and increased
development and support expenses. Manufacturing yields and efficiencies also
vary from product to product. Newer products typically have lower initial
manufacturing yields and efficiencies. As the Company grows, production of
certain suspension assemblies may need to be transferred from one manufacturing
site to another. At times, this transfer has lowered initial yields and/or
manufacturing efficiencies, resulting in higher manufacturing costs.
The Company's manufacturing plants are located in Minnesota, South Dakota
and Wisconsin, all of which can experience severe weather. Severe weather has at
times resulted in lower production and decreased Company profitability.
The Company's ability to conduct business would be impaired if its work
force were to be unionized or if a significant number of its specialized
employees were to leave and could not be replaced by comparable personnel. The
locations of the Company's plants and the broad span and technological
complexity of the Company's products and processes limit the number of
satisfactory engineering and other candidates for key positions.
PRODUCT DEVELOPMENT AND INTRODUCTION
The Company's continued success depends upon its ability to develop and
rapidly bring to volume production new product platforms or suspension
assemblies having increasingly higher
12
<PAGE>
performance specifications. A number of risks are inherent in this process.
Increasingly higher or tighter performance specifications, as well as
transitions to new product platforms, initially can have the effect of lowering
the Company's overall yields and manufacturing efficiencies. This in turn can
cause product shipments to be delayed or missed. Higher manufacturing costs also
may be incurred. Manufacturing processes may need to be changed, new processes
developed and equipment replaced, modified or designed, built and installed,
thus requiring additional capital. Increased research and development and
engineering expenses also may be required to support technological advances and
the introduction and manufacture of new product platforms, such as suspensions
that incorporate second stage actuators to improve head positioning over
increasingly tighter data tracks on each disk, or suspensions on which a
preamplifier may be mounted to improve data transfer signals from the disk.
The Company has invested a substantial amount of financial, management,
engineering and manufacturing resources in the development of its new TSA
suspension assemblies. If the commercial acceptance and/or production of the
Company's TSA suspension assemblies were delayed for any reason or if TSA
suspension assemblies cannot be produced profitably in the quantities and to the
specifications required by customers, the Company's results of operations could
be materially adversely affected. In addition, there can be no assurance that
the Company's TSA suspensions will gain market acceptance in lieu of alternative
interconnection technologies such as conventional wiring, deposition circuitry
and flexible circuitry. In the event that the Company were to fail to introduce
successfully new products on a regular and timely basis, demand for the
Company's existing products could decline, which could have a material adverse
effect on the Company's results of operations.
If a competitor were to introduce a new suspension assembly design to which
the Company could not effectively respond, and such a new design gained wide
acceptance by the disk drive industry, the Company's results of operations could
be materially adversely affected.
INTELLECTUAL PROPERTIES
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 believes that although the patents it holds and may obtain will be
of value, they will not independently determine the Company's success. Moreover,
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. There can be no assurance 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
technology. 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 and certain users of the Company's products have from time to
time received, and may in the future receive, communications from third parties
asserting patents against the Company or its customers which may relate to
certain of the Company's manufacturing equipment or products or to products
which include the Company's products as a component. Although the Company to
date has not been a party to any material intellectual property litigation,
certain of its customers have been sued on patents having claims closely related
to products sold by the Company. In
13
<PAGE>
the event that any third party were to make a valid infringement claim and a
license were not available on terms acceptable to the Company, the Company's
results of operations could be adversely affected. The Company expects that, as
the number of patents issued continues to increase, and as the Company grows,
the volume of intellectual property claims could increase.
AVAILABILITY OF CERTAIN MATERIALS
Certain types of photoresist, a liquid compound used in the photoetching
process, and the stainless steel, copper and polyamide materials that meet the
Company's strict specifications, are each currently available from only one
supplier. The supplier of stainless steel periodically resets the price of its
product based on fluctuations in the value of the Japanese yen which may
increase the Company's costs for raw materials. If for any reason the Company
were unable to continue to obtain these materials in the necessary quantities
and at reasonable prices, the Company's results of operations would be adversely
affected.
VOLATILITY OF STOCK PRICE
The Company's stock price, like that of other companies in the disk drive
industry, is subject to significant volatility. If revenues or earnings in any
quarter fail to meet the investment community's expectations for any reason,
there could be an immediate adverse impact on the Company's stock price. The
stock price also may be affected by broader market trends unrelated to the
Company's performance. Such volatility may limit the Company's ability in the
future to raise additional capital.
ITEM 2. PROPERTIES
The Company's executive offices, primary manufacturing plants and training
center are located in four buildings owned by the Company on a site of
approximately 163 acres in Hutchinson, Minnesota. The largest building has floor
area of approximately 450,000 square feet. The Company also leases a 20,000
square foot warehouse, 31,000 square feet of office space and a 7,000 square
foot fabrication shop near the Hutchinson site. The Company recently broke
ground for construction of a 178,000 square foot expansion of an existing 56,000
square foot equipment build center in Hutchinson which the Company anticipates
financing primarily through a sale-leaseback transaction.
The Company operates a manufacturing plant in Sioux Falls, South Dakota, in
connection with which it leases a building of approximately 94,000 square feet,
a training center of 5,500 square feet and a warehouse of 4,800 square feet. The
Company recently broke ground for construction of a 295,000 square foot
manufacturing plant in Sioux Falls which the Company anticipates financing
primarily through a sale-leaseback transaction.
The Company also operates a manufacturing plant in Eau Claire, Wisconsin,
in connection with which it leases a building of approximately 156,000 square
feet. The Company has completed construction of a photoetching plant owned by
the Company of approximately 320,000 square feet in Eau Claire and first
produced parts that were customer-qualified in October 1997.
The Company is leasing a building of approximately 100,000 square feet
located in Plymouth, Minnesota for stamping operations, office space and a
logistic center, and has leased approximately 45,000 square feet of space
located in Eden Prairie, Minnesota for offices and a communications and
14
<PAGE>
computer center. The Company also leases sales offices in Singapore, the
Netherlands and the People's Republic of China.
The Company believes that its existing facilities, including the expansion
under construction in Hutchinson, Minnesota and the plant under construction in
Sioux Falls, South Dakota will be adequate to meet its currently anticipated
requirements.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- ----------------------------------
Jeffrey W. Green 57 Chairman of the Board and Director
Wayne M. Fortun 48 President, Chief Executive Officer
and Chief Operating
Officer and Director
John A. Ingleman 51 Vice President, Chief Financial
Officer and Secretary
Rebecca A. Albrecht 44 Vice President of Human Resources
Beatrice A. Graczyk 49 Vice President of Disk Drive
Components Operations
Richard C. Myers 57 Vice President of Administration
LeRoy E. Olson 61 Vice President of Disk Drive
Components Operations Development
Richard J. Penn 41 Vice President of Sales and Marketing
R. Scott Schaefer 44 Vice President and Chief Technical
Officer
MR. GREEN is a co-founder of the Company and has served as a director
since the Company's formation in 1965. Mr. Green has been Chairman of the Board
since January 1983, and served as the Company's Chief Executive Officer from
January 1983 to May 1996.
15
<PAGE>
MR. FORTUN was elected a director in 1983. He has been with the
Company since 1975 and was elected President and Chief Operating Officer in
January 1983 and Chief Executive Officer in May 1996.
MR. INGLEMAN was elected Vice President in January 1982, Chief
Financial Officer in January 1988, and Secretary in January 1992. Mr. Ingleman
served as the Company's Treasurer from January 1982 through January 1996. Mr.
Ingleman has been with the Company since 1977.
MS. ALBRECHT was elected Vice President in January 1995 and is now
Vice President of Human Resources. Previously she had been Director of Human
Resources since 1988. Ms. Albrecht has been with the Company since 1983.
MS. GRACZYK was elected Vice President in May 1990 and is now Vice
President of Disk Drive Components Operations. She had been Director of
Component Operations since 1988. Ms. Graczyk has been with the Company since
1970.
MR. MYERS was elected Vice President in January 1988 and is now Vice
President of Administration. Mr. Myers served as the Company's Vice President
of Sales and Marketing from January 1988 through January 1995. Mr. Myers has
been with the Company since 1977.
MR. OLSON was elected Vice President in May 1990 and is now Vice
President of Disk Drive Components Operations Development. He had been Director
of Sioux Falls Operations since April 1988 when he joined the Company.
MR. PENN was elected Vice President in January 1996 and is now Vice
President of Sales and Marketing. Previously he had been Director of Sales and
Marketing since December 1994, Senior Manager responsible for Medical Business
Development from January 1994 to December 1994 and Marketing Manager since June
1990. Mr. Penn has been with the Company since 1981.
MR. SCHAEFER was elected Vice President in May 1990 and is now Vice
President and Chief Technical Officer. He had been Vice President of Medical
Business Development since 1990 and Director of Engineering since 1988. Mr.
Schaefer has been with the Company since 1979.
Executive officers are elected annually by the Board of Directors and
serve a one-year period or until their successors are elected.
None of the above executive officers is related to each other or to
any director of the Company, except that Richard N. Rosett, a director, is
married to Mr. Green's first cousin.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 28, 1997, pages 33-34, 39 and
43.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 28, 1997, pages 40 and 41.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 28, 1997, pages 21-26.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 28, 1997, pages 27-39.
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
Incorporated herein by reference is the information appearing under
the headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," pages 4-6 and 15, in the Company's Proxy Statement
dated December 19, 1997. See also Part I hereof under the heading "Item X.
Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under
the headings "Summary Compensation Table" and "Option Tables", pages 11-13,
and the information regarding compensation of non-employee directors on pages
5-6, in the Company's Proxy Statement dated December 19, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under
the heading "Security Ownership of Principal Shareholders and Management,"
pages 2-3, and the information appearing in the tables and notes on pages
11-13, in the Company's Proxy Statement dated December 19, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements:
Report of Independent Public Accountants
Consolidated Statements of Operations for the fiscal years ended
September 28, 1997, September 29, 1996 and September 24, 1995
Consolidated Balance Sheets as of September 28, 1997 and
September 29, 1996
Consolidated Statements of Cash Flows for the fiscal years ended
September 28, 1997, September 29, 1996 and September 24, 1995
Consolidated Statements of Shareholders' Investment for the
fiscal years ended September 28, 1997, September 29, 1996 and
September 24, 1995
Notes to Consolidated Financial Statements
(Incorporated by reference to pages 27-39 of the Company's
Annual Report to Shareholders for the fiscal year ended September
28, 1997.)
2. Financial Statement Schedules:
Report of Independent Public Accountants on Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. Exhibits:
3.1 Restated Articles of Incorporation of the Company, as amended by
Articles of Amendment dated January 27, 1988 and as amended by
Articles of Amendment dated January 21, 1997 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 29, 1997, File No. 0-14709).
3.2 Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 29, 1996, File No. 0-14709).
4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and
Exchange Commission upon request copies of instruments with
respect to long-term debt.
18
<PAGE>
4.2 Note Purchase Agreement dated as of April 20, 1994, providing for
the placement of $20,000,000 of senior unsecured notes with
Teachers Insurance and Annuity Association of America
(incorporated by reference to Exhibit 4.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 27,
1994, File No. 0-14709), Amendment dated as of March 15, 1996
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 24,
1996, File No. 0-14709), and Amendment dated as of February 24,
1997 (incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, File No. 0-14709).
4.3 Note Purchase Agreement dated as of April 20, 1994, providing for
the placement of $5,000,000 of senior unsecured notes with
Central Life Assurance Company (incorporated by reference to
Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 27, 1994, File No. 0-14709), Amendment
dated as of March 15, 1996 (incorporated by reference to Exhibit
4.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 24, 1996, File No. 0-14709), and Amendment
dated as of February 24, 1997 (incorporated by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 30, 1997, File No. 0-14709).
4.4 Note Purchase Agreement dated as of April 20, 1994, providing for
the placement of $5,000,000 of senior unsecured notes with Modern
Woodmen of America (incorporated by reference to Exhibit 4.12 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 27, 1994, File No. 0-14709), Amendment dated as of March
15, 1996 (incorporated by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 24, 1996, File No. 0-14709), and Amendment dated as of
February 24, 1997 (incorporated by reference to Exhibit 4.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1997, File No. 0-14709).
4.5 Credit Agreement between the Company and The First National Bank
of Chicago, dated as of December 8, 1995 (incorporated by
reference to Exhibit 4.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 24, 1995, File No.
0-14709), First Amendment dated as of June 22, 1996 (incorporated
by reference to Exhibit 4.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 23, 1996, File No. 0-14709),
and Second Amendment dated as of February 24, 1997 (incorporated
by reference to Exhibit 4.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1997, File No.
0-14709).
4.6 Note Purchase Agreement dated as of July 26, 1996, providing for
the placement of $15,000,000 of senior unsecured notes with
Metropolitan Insurance and Annuity Company (incorporated by
reference to Exhibit 4.6 to the Company's Annual Report on Form
10-K for the fiscal year ended September 29, 1996, File No.
0-14709), and Amendment dated as of February 24, 1997
(incorporated by reference to Exhibit 4.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, File No. 0-14709).
19
<PAGE>
4.7 Note Purchase Agreement dated as of July 26, 1996, providing for
the placement of $10,000,000 of senior unsecured notes with
Metropolitan Life Insurance Company (incorporated by reference to
Exhibit 4.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996, File No. 0-14709), and
Amendment dated as of February 24, 1997 (incorporated by
reference to Exhibit 4.7 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1997, File No.
0-14709).
4.8 Note Purchase Agreement dated as of July 26, 1996, providing for
the placement of $25,000,000 of senior unsecured notes with
Teachers Insurance and Annuity Association of America
(incorporated by reference to Exhibit 4.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 29, 1996,
File No. 0-14709), and Amendment dated as of February 24, 1997
(incorporated by reference to Exhibit 4.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, File No. 0-14709).
10.1 Lease with Right of Refusal between Donald Wendorff and Laura
Wendorff, Lessors, and the Company, Lessee, dated September 6,
1995 (incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
24, 1995, File No. 0-14709).
10.2 Office/Warehouse Lease between OPUS Corporation, Lessor, and the
Company, Lessee, dated December 29, 1995 (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 24, 1996, File No.
0-14709), and First Amendment to Office/Warehouse Lease dated
April 30, 1996 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 23, 1996, File No. 0-14709).
10.3 Building Lease dated April 1988 and Amendment to Building Lease
dated August 29, 1988 (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 25, 1988, File No. 0-14709), Second Amendment to
Building Lease dated as of September 18, 1989, relating to the
Company's Sioux Falls, South Dakota facility (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1990, File No.
0-14709), Third Amendment to Building Lease dated September 19,
1991, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 29, 1991, File No. 0-14709), Fourth Amendment to
Commercial Lease dated September 29, 1992, relating to the
Company's Sioux Falls, South Dakota facility (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form
10-K for the fiscal year ended September 27, 1992, File No.
0-14709), Fifth Amendment to Commercial Lease dated February 11,
1993, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 24, 1995, File No. 0-14709), Sixth Amendment to
Commercial Lease dated February 17, 1995, relating to the
Company's
20
<PAGE>
Sioux Falls, South Dakota facility (incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 24, 1995, File No. 0-14709), and
Seventh Amendment to Commercial Lease dated April 1, 1995,
relating to the Company's Sioux Falls, South Dakota facility
(incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
24, 1995, File No. 0-14709).
10.4 Hutchinson Technology Incorporated 401-K Plan and related 401-K
Trust (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1990, File No. 0-14709), and Amendment effective
April 1, 1995 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 24, 1996, File No. 0-14709), and Amendment effective April
1, 1996 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 23, 1996, File No. 0-14709).
10.5 Directors' Retirement Plan effective as of January 1, 1992
(incorporated by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
27, 1992, File No. 0-14709).
10.6 Description of Bonus Program for Key Employees of Hutchinson
Technology Incorporated (incorporated by reference to Exhibit
10.13 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 27, 1992, File No. 0-14709).
10.7 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 25, 1988, File No. 0-14709), Amendment to the
1988 Stock Option Plan (incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 26, 1993, File No. 0-14709), and Amendment to the
1988 Stock Option Plan (incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 26, 1995, File No. 0-14709).
*10.8 Technology Transfer and Development Agreement, effective as of
September 1, 1994, between Hutchinson Technology Incorporated and
International Business Machines Corporation (incorporated by
reference to Exhibit 10.10 to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended June 25, 1995, File No.
0-14709), and Amendment dated December 11, 1995 to the Technology
Transfer and Development Agreement between International Business
Machines Corporation and Hutchinson Technology Incorporated
executed June 15, 1995 (incorporated by reference to Exhibit 10.8
to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 24, 1995, File No. 0-14709).
*10.9 Patent License Agreement, effective as of September 1, 1994,
between Hutchinson Technology Incorporated and International
Business Machines Corporation (incorporated by reference to
Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended June 25, 1995, File No. 0-14709).
21
<PAGE>
10.10 Lease Agreement between Meridian Eau Claire LLC and Hutchinson
Technology Incorporated, dated May 1, 1996 (incorporated by
reference to Exhibit 10.10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 23, 1996, File No. 0-14709).
10.11 Master Lease Agreement dated as of December 19, 1996 between
General Electric Capital Corporation, as Lessor, and Hutchinson
Technology Incorporated, as Lessee (incorporated by reference to
Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 29, 1996, File No. 0-14709).
10.12 Hutchinson Technology Incorporated 1996 Incentive Plan
(incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 29,
1996, File No. 0-14709).
11.1 Statement Regarding Computation of Net Income Per Share.
13.1 Annual Report to Shareholders for the fiscal year ended
September 28, 1997 (only those portions specifically incorporated
by reference herein shall be deemed filed with the Securities and
Exchange Commission).
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
--------------------
* Exhibits 10.8 and 10.9 contain portions for which confidential
treatment has been granted by the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter of the
fiscal year ended September 28, 1997.
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hutchinson Technology Incorporated:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements included in the Hutchinson Technology
Incorporated and Subsidiaries 1997 Annual Report to Shareholders, incorporated
by reference in this Annual Report on Form 10-K, and have issued our report
thereon dated October 29, 1997. Our audit was made for the purpose of forming
an opinion on those statements taken as a whole. The schedule listed in
Item 14(a)(2) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 29, 1997
23
<PAGE>
SCHEDULE II
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Additions Charged Other Balance at
Beginning to Costs Changes End of
of Period and Expenses Add (Deduct) Period
--------- ----------------- ------------ ----------
<S> <C> <C> <C>
1995:
Deducted from asset accounts-
Allowance for doubtful accounts receivable............ $1,397 $ 148 ($6)(1) $1,539
Reserve for sales returns and allowances.............. 489 1,797 (1,901)(2) 385
--------- ----------------- ------------ ----------
$1,886 $1,945 ($1,907) $1,924
--------- ----------------- ------------ ----------
--------- ----------------- ------------ ----------
1996:
Deducted from asset accounts-
Allowance for doubtful accounts receivable............ $1,539 $ 178 ($1)(1) $1,716
Reserve for sales returns and allowances.............. 385 1,835 (1,788)(2) 432
--------- ----------------- ------------ ----------
$1,924 $2,013 ($1,789) $2,148
--------- ----------------- ------------ ----------
--------- ----------------- ------------ ----------
1997:
Deducted from asset accounts-
Allowance for doubtful accounts receivable............ $1,716 $ 254 ($5)(1) $1,965
Reserve for sales returns and allowances.............. 432 1,348 (1,563)(2) 217
--------- ----------------- ------------ ----------
$2,148 $1,602 ($1,568) $2,182
--------- ----------------- ------------ ----------
--------- ----------------- ------------ ----------
</TABLE>
(1) Uncollectible accounts receivable written off, net of recoveries.
(2) Returns honored and credit memos issued.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 15, 1997.
HUTCHINSON TECHNOLOGY
INCORPORATED
By /s/ Wayne M. Fortun
---------------------------------
Wayne M. Fortun
President, Chief Operating Officer
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on December 15, 1997.
/s/ Wayne M. Fortun
-----------------------------------
Wayne M. Fortun, President, Chief
Operating Officer, Chief Executive
Officer (Principal Executive Officer)
and Director
/s/ John A. Ingleman
-----------------------------------
John A. Ingleman, Vice President, Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
/s/ W. Thomas Brunberg
-----------------------------------
W. Thomas Brunberg, Director
/s/ Archibald Cox, Jr.
-----------------------------------
Archibald Cox, Jr., Director
/s/ James E. Donaghy
-----------------------------------
James E. Donaghy, Director
/s/ Harry C. Ervin, Jr.
-----------------------------------
Harry C. Ervin, Jr., Director
/s/ Jeffrey W. Green
-----------------------------------
Jeffrey W. Green, Director
/s/ Richard N. Rosett
-----------------------------------
Richard N. Rosett, Director
/s/ Steven E. Landsburg
-----------------------------------
Steven E. Landsburg, Director
25
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
11.1 Statement Regarding Computation of Net Income
Per Share.......................................Filed Electronically
13.1 Annual Report to Shareholders for the
fiscal year ended September 28, 1997
(only those portions specifically
incorporated by reference herein
shall be deemed filed with the
Securities and Exchange Commission)..............Filed Electronically
21.1 List of Subsidiaries ............................Filed Electronically
23.1 Consent of Independent Public Accountants........Filed Electronically
27.1 Financial Data Schedule (EDGAR version only).....Filed Electronically
<PAGE>
EXHIBIT 11.1
HUTCHINSON TECHNOLOGY INCORPORATED
STATEMENT REGARDING COMPUTATION
OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the Fiscal Year Ended
-------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
NET INCOME $41,909 $13,802 $21,078
------- ------- -------
------- ------- -------
NET INCOME PER SHARE - PRIMARY:
Weighted average common shares outstanding 18,272 16,350 16,074
Dilutive effect of stock options outstanding
after application of treasury stock method 706 456 405
------- ------- -------
18,978 16,806 16,479
------- ------- -------
------- ------- -------
PRIMARY NET INCOME PER SHARE $2.21 $0.82 $1.28
------- ------- -------
------- ------- -------
NET INCOME PER SHARE - FULLY DILUTED:
Weighted average common shares outstanding 18,272 16,350 16,074
Dilutive effect of stock options outstanding
after application of treasury stock method 771 456 543
------- ------- -------
19,043 16,806 16,617
------- ------- -------
------- ------- -------
FULLY DILUTED NET INCOME PER SHARE $2.20 $0.82 $1.27
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following table sets forth the Company's Consolidated Statements of
Operations as a percentage of net sales and the percentage change in the amount
of such items from period to period.
<TABLE>
<CAPTION>
Percentage of net sales Percentage change
--------------------------------------------------------------
1997 1996
1997 1996 1995 TO 1996 to 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100% 100% 100% 28% 18%
Cost of sales 74 77 75 23 21
- -------------------------------------------------------------------------------------------------------------
Gross profit 26 23 25 47 8
Research and development expenses 4 8 5 (27) 84
Selling, general and administrative expenses 10 10 10 32 13
- -------------------------------------------------------------------------------------------------------------
Income from operations 12 5 10 190 (37)
Other income 1 -- -- 258 (21)
Interest expense (1) -- (1) 49 (20)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 12 5 9 211 (38)
Provision for income taxes 3 1 2 242 (48)
- -------------------------------------------------------------------------------------------------------------
Net income 9 4 7 204 (35)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
MARKET TRENDS
The Company expects that the expanding use of personal computers, enterprise
computing and storage, increasingly complex software and the emergence of new
applications for disk storage that have contributed to the historical
year-to-year increases in disk drive production will continue for the
foreseeable future. The Company also believes demand for disk drives will
continue to be subject, as it has in the past, to rapid short-term changes
resulting from, among other things, changes in disk drive inventory levels,
responses to competitive price changes and unpredicted high or low market
acceptance of new drive models.
As in past years, disk drives continue to be the storage device of choice for
applications requiring low access times and higher capacities because of their
speed and low cost per megabyte of stored data. The cost of storing data on disk
drives continues to decrease primarily due to increasing areal density, the
amount of data which can be stored on magnetic disks. Improvements in areal
density have been attained by lowering the fly height of the read/write head,
using smaller read/write heads with advanced air bearing designs, improving
other components such as motors and media and using new read/write head types
such as those of magneto-resistive (MR) design. The move to MR heads, which
require more electrical leads, and the transition to smaller or pico-sized
heads, which are more sensitive to mechanical variation, may compel drive
manufacturers to use newer suspension technologies, such as the Company's TSA
suspension assemblies. Although customer demand for TSA suspensions is growing,
the Company expects that conventional suspensions will make up a majority of its
shipments for at least the next fiscal year.
21
<PAGE>
The continual pursuit of increasing areal density may lead to further
value-added features for TSA suspensions which incorporate a second stage
actuator on the suspension to improve head positioning over increasingly tighter
data tracks, or which mount preamplifiers near the head to improve data transfer
signals. These changes require the Company to develop the competencies of an
electromechanical system supplier so that multiple functions may be consolidated
on the suspension assembly.
The introduction of new types or sizes of read/write heads and new disk drive
designs tends to initially decrease customers' yields with the result that the
Company may experience temporary elevations of demand for some types of
suspension assemblies. The advent of new heads and new drive designs may require
rapid development and implementation of new suspension types which temporarily
may reduce the Company's manufacturing yields and efficiencies. There can be no
assurance that such changes will not continue to affect the Company.
The Company generally experiences fluctuating selling prices due to product
maturity, competitive pricing pressures and new product offerings. While many of
the Company's current products are reaching or are in the mature phase of their
life cycle and thus are experiencing declining selling prices, its newer
products, such as TSA suspensions, have initially much higher selling prices.
FISCAL 1997 OPERATIONS
Net sales for 1997 were $453,232,000, an increase of $100,046,000 or 28%
compared to 1996. This increase was primarily due to increased suspension
assembly volume.
Gross profit for 1997 was $117,279,000, an increase of $37,709,000 or 47%
compared to 1996, and gross profit as a percent of net sales increased from 23%
to 26%. This increase was primarily due to higher sales volume and improved
manufacturing efficiencies.
Research and development expenses for 1997 were $20,185,000 compared to
$27,651,000 for fiscal 1996. The prior year amount includes a $5,500,000 charge
related to a technology sharing agreement with IBM and higher development
expenses related to production of TSA prototype suspensions.
Selling, general and administrative expenses for 1997 were $44,378,000, an
increase of $10,662,000 or 32% compared to 1996. The increased expenses were due
primarily to increased profit sharing and other incentive compensation costs of
$7,443,000 and a $1,855,000 increase in labor expenses. As a percent of net
sales, selling, general and administrative expenses remained at 10%.
Other income, net, for 1997 was $4,143,000, an increase of $2,985,000 compared
to 1996. The increase was primarily due to an increase of $3,631,000 in interest
income as a result of a higher average investment balance, partially offset by a
$443,000 increase in royalties paid under licensing agreements.
22
<PAGE>
Interest expense for 1997 was $3,143,000, an increase of $1,035,000 compared to
1996, primarily due to higher average outstanding debt, offset by higher
capitalization of interest of $1,740,000.
The income tax provision for 1997 was based on an effective tax rate for the
year of 22% which was below the statutory federal rate primarily due to the
large portion of sales that qualify for the benefit of the Company's Foreign
Sales Corporation.
Net income for 1997 was $41,909,000, an increase of $28,107,000 compared to
1996. As a percent of net sales, net income increased from 4% to 9% primarily
due to the higher sales volume and improved manufacturing efficiencies, noted
above.
FISCAL 1996 OPERATIONS
Net sales for 1996 were $353,186,000, an increase of $53,188,000 or 18% compared
to 1995. This increase was attributable primarily to the Company shipping
approximately 36% more suspension assemblies during 1996 than 1995, partially
offset by a lower average selling price due to selling higher volumes of
lower-priced suspensions.
Gross profit for 1996 was $79,570,000, an increase of $5,807,000 or 8% compared
to 1995, and gross profit as a percent of net sales decreased from 25% to 23%.
In addition to the sales volumes of lower-priced suspensions noted above, the
decrease in gross profit as a percent of net sales was also due to reduced
shipments during the fourth quarter resulting in an increase in fixed costs as a
percent of sales.
Research and development expenses for 1996 were $27,651,000, an increase of
$12,610,000 or 84% compared to 1995. The majority of the higher expenses were
due to increased TSA suspensions development efforts of approximately $7,100,000
and a charge of $5,500,000 related to a technology sharing agreement with IBM,
compared to a $2,500,000 charge for the technology sharing agreement during
1995.
Selling, general and administrative expenses for 1996 were $33,716,000, an
increase of $3,915,000 or 13% compared to 1995. The increased expenses were due
primarily to an increase in recruitment and relocation expenses of $1,722,000,
mainly related to the start-up of the Eau Claire assembly manufacturing
facility, increases in professional services of $1,418,000 and labor of
$1,141,000, partially offset by reduced profit sharing expenses of $1,167,000.
As a percentage of net sales, selling, general and administrative expenses
remained at 10%.
The income tax provision for 1996 was based on an effective tax rate for the
year of 20% which was below the statutory federal rate primarily due to the
large portion of sales that qualifies for the benefit of the Company's Foreign
Sales Corporation.
Net income for 1996 was $13,802,000, a decrease of $7,276,000 compared to 1995.
As a percent of net sales, net income decreased from 7% to 4% primarily due to
lower gross profit margins, noted above, and increased research and development
efforts.
23
<PAGE>
FISCAL 1995 OPERATIONS
Net sales for 1995 were $299,998,000, an increase of $61,204,000 or 26% compared
to 1994. This increase was primarily attributable to the Company shipping
approximately 31% more suspension assemblies during 1995 than 1994.
Gross profit for 1995 was $73,763,000, an increase of $34,517,000 or 88%
compared to 1994, and gross profit as a percent of net sales increased from 16%
to 25%. The increase in gross profit and gross profit as a percent of net sales
was primarily due to improving manufacturing efficiencies and higher sales
volume, as noted above.
The majority of the research and development expenses are attributable to the
development of new suspension assembly types to meet customers' changing
requirements. Research and development expenses for 1995 were $15,041,000, an
increase of $6,415,000 or 74% compared to 1994. The higher expenses were
primarily due to a charge of $2,500,000 related to the technology sharing
agreement with IBM and increased labor expenses of $1,841,000.
Selling, general and administrative expenses for 1995 were $29,801,000, an
increase of $6,961,000 or 30% compared to 1994. The increased expenses were
primarily due to additional profit sharing expenses of $2,198,000 and increased
labor expenses of $2,197,000. As a percentage of net sales, selling, general and
administrative expenses increased from 9% to 10%.
Other income for 1995 was $1,462,000, an increase of $291,000 or 25% compared to
1994. The increase was primarily a result of a $1,324,000 increase in interest
income as a result of a higher average investment balance offset partially by a
$825,000 decrease in income derived from licensing agreements.
Interest expense for 1995 was $2,636,000, an increase of $1,641,000 as a result
of higher outstanding debt and lower capitalization of interest.
The income tax provision for 1995 was based on an effective tax rate for the
year of 24% which was below the statutory federal rate primarily due to the
large portion of sales that qualifies for the benefit of the Company's Foreign
Sales Corporation.
Net income for 1995 was $21,078,000, an increase of $15,198,000 compared to
1994. The increase was primarily due to improving manufacturing efficiencies and
higher sales volume, as noted above.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
The Company's cash and cash equivalents increased to $98,340,000 at September
28, 1997 compared to $22,884,000 at September 29, 1996. The increase is
primarily a result of the stock offering, noted below, and cash flow from
operating activities. The Company generated cash from operating activities of
$76,816,000 in fiscal 1997 compared to $39,904,000 in fiscal 1996 and
$57,814,000 in fiscal 1995.
24
<PAGE>
In February 1997, the Company issued 3,000,000 shares of its common stock
through a public offering. The Company received net proceeds of $102,900,000 and
is using the funds for general corporate purposes, primarily for expenditures
for manufacturing and support equipment, construction of the Company's Eau
Claire, Wisconsin and Sioux Falls, South Dakota plants and an expansion of the
Company's Hutchinson, Minnesota plant. Pending such uses, the Company has
invested the net proceeds from the offering in short-term debt securities.
Cash used for capital expenditures totaled $82,639,000 in fiscal 1997 compared
to $77,065,000 in fiscal 1996 and $44,472,000 in fiscal 1995. The expenditures
in fiscal 1997 were primarily for manufacturing and support equipment and
construction costs of the photoetch plant at the Company's Eau Claire site. The
Company anticipates, but is not contractually committed to, fiscal 1998
expenditures of approximately $200,000,000 primarily for manufacturing and
support equipment, construction of the Company's Sioux Falls, South Dakota plant
and construction of an expansion to the Company's Hutchinson, Minnesota plant.
Financing of these capital expenditures will be principally from internally
generated funds, cash balances and/or additional financing capacity. The Company
anticipates financing the Sioux Falls, South Dakota plant and the Hutchinson,
Minnesota expansion through sale-leaseback transactions and internal financing.
During the first quarter of fiscal 1997, the Company signed a Master Lease
Agreement for up to $25,000,000 with General Electric Capital Corporation
("GE"). The agreement provides for leasing of manufacturing equipment in fiscal
1997. During the fourth quarter of fiscal 1997, the Company signed an amendment
to the Master Lease Agreement with GE, providing for leasing of up to an
additional $30,000,000 of manufacturing equipment in fiscal 1998. The Company
serves as a purchasing agent on behalf of GE. As such, amounts expended on GE's
behalf, but not yet reimbursed, are included on the accompanying consolidated
balance sheet under GE lease receivable.
The Company established a $25,000,000 unsecured credit facility with The First
National Bank of Chicago during the first quarter of fiscal 1996. At September
28, 1997 the Company had a letter of credit under this facility of $1,425,000 as
security for a variable rate demand note. No amounts were outstanding under the
credit facility or letter of credit at September 28, 1997.
During the fourth quarter of fiscal 1996, the Company completed a $50,000,000
private debt placement, of which $25,000,000 was issued in July 1996 as senior
unsecured notes, having a fixed rate of 7.85%, annual principal payments of
$8,333,000 beginning on July 26, 2001 and maturing in July 2003. The Company
issued the remaining $25,000,000 during the first quarter of fiscal 1997 as a
senior unsecured note having a fixed rate of 8.07%, annual principal payments of
$4,167,000 beginning on November 26, 2001 and maturing in November 2006. The
Company's maturities of long-term debt for the five years subsequent to
September 28, 1997 are $5,332,000, $4,613,000, $3,995,000, $12,330,000, and
$16,499,000, respectively. The Company's financing agreements contain various
restrictive covenants. As of September 28, 1997, the Company was in compliance
with all such covenants.
25
<PAGE>
The Company believes that its cash and cash equivalents, cash to be generated
from operations, existing lending facilities and available financing capacity
will provide the Company with sufficient liquidity and capital resources for
working capital, debt maturities, capital expenditures and other needs.
The Company is involved in certain legal matters which may result in additional
future cash requirements. See the discussion of these matters in Note 6,
"Commitments and Contingencies," in the notes to the consolidated financial
statements.
The Company will be subject to certain recent accounting pronouncements. See the
discussion of these matters in Note 1, "Summary of Significant Accounting
Policies," in the notes to the consolidated financial statements.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition. There can be no assurance, however,
that the Company's business will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS
The statements on pages 3 through 6 of this Annual Report about demand for
suspension assemblies, including TSA suspensions, anticipated capital
expenditures, TSA suspension development and production and medical product
introduction and expenditures, the statements under the heading "Market Trends"
about demand for disk drives and suspension assemblies, including TSA
suspensions, manufacturing yields and selling prices and the statements under
the heading "Liquidity, Capital Resources and Other Matters" about anticipated
capital expenditures and capital resources, are forward-looking statements based
on current expectations. These statements are subject to risks and
uncertainties, including slower or faster acceptance of its new products,
difficulties in producing its TSA suspensions, difficulties in expanding
capacity, difficulties or uncertainties about developing new products and those
discussed above. These factors may cause the Company's actual future results to
differ materially from historical earnings and from the financial performance of
the Company presently anticipated.
26
<PAGE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries In thousands, except per share data
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal years ended
SEPTEMBER 28, 1997 September 29, 1996 September 24, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $453,232 $353,186 $299,998
Cost of sales 335,953 273,616 226,235
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 117,279 79,570 73,763
Research and development expenses 20,185 27,651 15,041
Selling, general and administrative expenses 44,378 33,716 29,801
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 52,716 18,203 28,921
Other income, net 4,143 1,158 1,462
Interest expense (3,143) (2,108) (2,636)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 53,716 17,253 27,747
Provision for income taxes 11,807 3,451 6,669
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 41,909 $ 13,802 $ 21,078
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Net income per common and
common equivalent shares $ 2.21 $ 0.82 $ 1.28
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares outstanding 18,978 16,806 16,479
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries Dollars in thousands
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 28, 1997 September 29, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 98,340 $ 22,884
Securities available for sale 20,211 3,064
Trade receivables, net 51,467 46,803
GE lease receivable 31,073 5,242
Other receivables 3,504 4,233
Inventories 27,189 17,235
Prepaid taxes and expenses 11,562 9,204
- ----------------------------------------------------------------------------------------------------
Total current assets 243,346 108,665
Property, plant and equipment, at cost:
Land, buildings and improvements 45,437 39,888
Equipment 218,289 189,989
Construction in progress 84,345 34,801
Less: accumulated depreciation (172,818) (142,972)
- ----------------------------------------------------------------------------------------------------
Net property, plant and equipment 175,253 121,706
Other assets 11,240 8,612
- ----------------------------------------------------------------------------------------------------
$ 429,839 $ 238,983
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ----------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 5,332 $ 5,760
Accounts payable and accrued expenses 39,373 23,008
Accrued compensation 19,407 12,187
Accrued income taxes 6,078 5,608
- ----------------------------------------------------------------------------------------------------
Total current liabilities 70,190 46,563
Long-term debt, less current maturities 72,862 53,185
Other long-term liabilities 3,829 5,551
Commitments and contingencies (Notes 5 and 6)
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares authorized,
19,619,000 and 16,356,000 issued and outstanding 196 164
Additional paid-in capital 150,676 43,343
Retained earnings 132,086 90,177
- ----------------------------------------------------------------------------------------------------
Total shareholders' investment 282,958 133,684
- ----------------------------------------------------------------------------------------------------
$ 429,839 $ 238,983
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries In thousands
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal years ended
SEPTEMBER 28, 1997 September 29, 1996 September 24, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 41,909 $ 13,802 $ 21,078
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 38,299 33,565 28,174
Deferred tax benefit (2,608) (6,085) (2,498)
Loss on disposal of assets 266 344 403
Changes in operating assets and
liabilities (Note 7) (1,050) (1,722) 10,657
- --------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 76,816 39,904 57,814
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (82,639) (77,065) (44,472)
Funding from GE lease receivable 9,915 -- --
Expenditures from GE lease receivable (35,746) (5,242) --
Proceeds from the sale of assets -- 15,300 --
Purchases of marketable securities (31,343) (4,944) (3,080)
Sales of marketable securities 14,196 3,070 1,890
- --------------------------------------------------------------------------------------------------------------
Cash used for investing activities (125,617) (68,881) (45,662)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 25,000 25,500 --
Repayments of long-term debt (5,751) (4,255) (2,380)
Net proceeds from issuance of common stock 105,008 137 2,137
- --------------------------------------------------------------------------------------------------------------
Cash provided by (used for)
financing activities 124,257 21,382 (243)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 75,456 (7,595) 11,909
Cash and cash equivalents at
beginning of year 22,884 30,479 18,570
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 98,340 $ 22,884 $ 30,479
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries In thousands
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Common stock
-------------------------- Additional
Shares Amount Paid-in capital Retained earnings
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 25, 1994 15,999 $160 $ 39,162 $ 55,297
Exercise of stock options 345 3 4,066 --
Issuance of common stock -- -- 12 --
Retirements of common stock (3) -- (33) --
Net income -- -- -- 21,078
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 24, 1995 16,341 163 43,207 76,375
Exercise of stock options 15 1 127 --
Issuance of common stock -- -- 9 --
Net income -- -- -- 13,802
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 29, 1996 16,356 164 43,343 90,177
Exercise of stock options 268 2 4,711 --
Issuance of common stock 3,001 30 102,877 --
Retirements of common stock (6) -- (255) --
Net income -- -- -- 41,909
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1997 19,619 $196 $150,676 $132,086
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
Hutchinson Technology Incorporated Columnar dollar amounts in thousands,
and Subsidiaries except per share amounts
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Hutchinson Technology Incorporated and its subsidiaries (the
Company), all of which are wholly owned. All significant intercompany accounts
and transactions have been eliminated in consolidation.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1996 and
1995 financial statements to conform with the 1997 presentation. Such
reclassifications had no effect on previously reported results of operations or
shareholders' investment.
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
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Ultimate results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - During March 1997, the Financial Accounting
Standards Board ("FASB") released Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"), which requires the disclosure of
basic earnings per share and diluted earnings per share. The Company expects to
adopt SFAS 128 in fiscal 1998 and anticipates that the effect of adopting SFAS
128 will not be significant.
In June 1997, the FASB released Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which requires presentation
of comprehensive income on the face of the financial statements. Comprehensive
income would include such items as unrealized holding gains/losses on securities
available for sale, foreign currency translation adjustments and minimum pension
liability adjustments. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company expects to adopt SFAS 130 in fiscal 1999 and
anticipates that the effect of adopting SFAS 130 will not be significant.
In June 1997, the FASB released Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which requires reported segments to be those used by management to
disaggregate a company. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. The Company expects to adopt SFAS 131 in fiscal 1999 and
anticipates that the effect of adopting SFAS 131 will not be significant.
31
<PAGE>
FISCAL YEAR - The Company's fiscal year is the fifty-two/fifty-three week period
ending on the last Sunday in September. The fiscal year ended September 28, 1997
is a fifty-two week period, the fiscal year ended September 29, 1996 is a
fifty-three week period and the fiscal year ended September 24, 1995 is a
fifty-two week period.
REVENUE RECOGNITION AND CUSTOMERS - The Company recognizes revenue upon the
shipment of completed products. Sales to customers in excess of 10% of net sales
is as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Seagate Technology Incorporated 33% 35% 36%
Read-Rite Corporation 14 13 19
Yamaha Corporation 14 16 13
SAE Magnetics, Ltd/TDK 13 14 9
IBM 12 9 9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sales to the Company's five largest customers constituted 86%, 87% and 86% of
net sales for fiscal 1997, 1996 and 1995, respectively.
Sales to foreign locations were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Foreign-based enterprises $ 88,471 $ 63,898 $ 46,075
Foreign subsidiaries of U.S. corporations 83,753 51,564 54,398
- --------------------------------------------------------------------------------
$172,224 $115,462 $100,473
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The majority of these foreign location sales were to the Pacific Rim region. In
addition, the Company had significant sales to U.S. corporations which used the
Company's products in their offshore manufacturing sites.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of all highly liquid
investments with original maturities of ninety days or less.
SECURITIES AVAILABLE FOR SALE - Securities available for sale consist of
investments with original maturities greater than 90 days which are intended to
be held less than one year. Securities available for sale at September 28, 1997
and September 29, 1996 consisted of U.S. government securities with a market
value and cost of $20,211,000 and $3,064,000, respectively.
TRADE RECEIVABLES - The Company grants credit to customers, but generally does
not require collateral or any other security to support amounts due. Trade
receivables are net of allowances of $2,182,000 at September 28, 1997 and
$2,148,000 at September 29, 1996.
INVENTORIES - All inventories are stated at the lower of last-in, first-out
(LIFO) cost or market. Inventories consist of the following at September 28,
1997 and September 29, 1996:
1997 1996
- -------------------------------------------------------------------
Raw materials $10,560 $ 4,137
Work in process 5,950 5,558
Finished goods 10,919 7,830
LIFO reserve (240) (290)
- -------------------------------------------------------------------
$27,189 $17,235
- -------------------------------------------------------------------
- -------------------------------------------------------------------
32
<PAGE>
PROPERTY AND DEPRECIATION - Property, plant and equipment are stated at cost.
Costs of renewals and betterments are capitalized and depreciated. Maintenance
and repairs are charged to expense as incurred.
Property is depreciated over the estimated useful life on a straight-line basis
for financial reporting purposes and is depreciated using primarily accelerated
methods for tax reporting purposes. Estimated useful lives for financial
reporting purposes are as follows:
Buildings 25 to 35 years
Leasehold improvements 5 to 10 years
Equipment 3 to 8 years
ENGINEERING AND PROCESS DEVELOPMENT - The Company's engineers and technicians
are responsible for the implementation of new technologies as well as process
and product development and improvements. Expenditures related to these
activities totaled $48,204,000 in 1997, $51,212,000 in 1996 and $32,567,000 in
1995. Of these amounts, approximately $20,185,000 in 1997, $27,651,000 in 1996
and $15,041,000 in 1995 are classified as research and development expenses.
INCOME TAXES - Deferred taxes are provided at currently enacted tax rates on all
significant temporary differences.
NET INCOME PER SHARE - Net income per share, which is approximately equivalent
on both a primary and fully diluted basis, is based, to the extent dilutive, on
the weighted average number of common and common equivalent shares outstanding.
2. FINANCING ARRANGEMENTS
LONG-TERM DEBT 1997 1996
- --------------------------------------------------------------------------------
Senior unsecured notes, 7.85%, payable in varying
annual installments through July 2003 $25,000 $25,000
Senior unsecured note, 8.07%, payable in varying
annual installments through November 2006 25,000 --
Senior unsecured notes, 7.46%, payable in varying
semi-annual installments through February 2004 24,375 28,125
Other long-term debt 3,819 5,820
- --------------------------------------------------------------------------------
78,194 58,945
Less: current maturities (5,332) (5,760)
- --------------------------------------------------------------------------------
$72,862 $53,185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company has a $25,000,000 unsecured credit facility expiring in December
1998 with an effective interest rate of the CD or LIBOR plus a variable spread
(6.0% to 6.2% at September 28, 1997). At September 28, 1997, the Company had a
letter of credit under this facility of $1,425,000 as security for a variable
rate demand note included above in other long-term debt. No amounts were
outstanding under the credit facility or letter of credit at September 28, 1997.
33
<PAGE>
On July 26, 1996, the Company completed a $50,000,000 private debt placement, of
which $25,000,000 was issued as senior unsecured notes, having a fixed rate of
7.85%, annual principal payments of $8,333,000 beginning on July 26, 2001 and
maturing July 26, 2003. The Company issued the remaining $25,000,000 on November
26, 1996 as a senior unsecured note having a fixed rate of 8.07%, annual
principal payments of $4,167,000 beginning on November 26, 2001 and maturing
November 26, 2006.
The Company's financing agreements contain certain restrictive covenants which
require the Company, among other things, to maintain specified levels of net
income, working capital, tangible net worth and financial ratios, and also
impose limitations on capital expenditures, additional indebtedness, leases,
guarantees and the payment of dividends. The Company was in compliance with all
such covenants as of September 28, 1997.
Maturities of long-term debt for the five years subsequent to September 28, 1997
are as follows:
- -----------------------------------------------------
1998 $ 5,332
1999 4,613
2000 3,995
2001 12,330
2002 16,499
Thereafter 35,425
- -----------------------------------------------------
$78,194
- -----------------------------------------------------
- -----------------------------------------------------
3. INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $12,795 $ 8,204 $ 8,142
State 1,620 1,332 1,025
Deferred (2,608) (6,085) (2,498)
- --------------------------------------------------------------------------------
$11,807 $ 3,451 $ 6,669
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The deferred benefit is composed of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
Asset bases, lives and depreciation methods $(1,206) $ (895) $ (552)
Reserves and accruals not currently
deductible (1,402) (5,888) (1,534)
Tax credits 133 2,195 (1,041)
Valuation allowance and other (133) (1,497) 629
- --------------------------------------------------------------------------------
$(2,608) $(6,085) $(2,498)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the federal statutory tax rate to the effective tax rate is
as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35% 35% 35%
Effect of:
State income taxes, net of federal
income tax benefits 2% 3% 2%
Tax benefits of the Foreign Sales
Corporation (11) (15) (14)
Other (primarily tax credits) (4) (3) 1%
- --------------------------------------------------------------------------------
22% 20% 24%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
34
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At September 28, 1997,
the Company had unused tax credits of $2,605,000, all of which can be carried
forward indefinitely. A valuation allowance of $605,000 has been recognized to
offset the related deferred tax assets due to the uncertainty of realizing the
benefit of certain tax credits. The following is a table of the significant
components of the Company's deferred tax assets:
SEPTEMBER 28, September 29,
DEFERRED TAX ASSETS 1997 1996
- --------------------------------------------------------------------
Current deferred tax assets:
Receivable reserves $ 855 $ 873
Inventories 7,179 5,419
Accruals and other reserves 2,557 2,367
- --------------------------------------------------------------------
Total current deferred tax assets $10,591 $ 8,659
Long-term deferred tax assets (liabilities):
Property, plant and equipment 4,959 3,753
Accruals and other reserves 1,616 2,146
Tax credits 2,605 2,738
Valuation allowance (605) (738)
- --------------------------------------------------------------------
Total long-term deferred tax
assets $ 8,575 $ 7,899
- --------------------------------------------------------------------
Total deferred tax assets $19,166 $16,558
- --------------------------------------------------------------------
- --------------------------------------------------------------------
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS - The fair value is based on quoted market prices.
SECURITIES AVAILABLE FOR SALE - The fair value of these instruments is based on
quoted market prices.
LONG-TERM DEBT - The fair value of the Company's long-term debt is estimated
based on the discounted value of the future cash flows expected to be paid on
the loans. The discount rate used to estimate the fair value of the loans is the
rate currently available to the Company for loans with similar terms and
maturities.
The estimated fair values of the Company's financial instruments are as follows:
1997 1996
- --------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $98,340 $98,340 $22,884 $22,884
Securities available for sale 20,211 20,211 3,064 3,064
Long-term debt 78,194 78,368 58,945 59,619
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35
<PAGE>
5. EMPLOYEE BENEFITS
STOCK OPTIONS - The Company has two stock option plans, under which up to
6,000,000 common shares are reserved for issuance and of which options
representing 2,894,045 common shares have been granted as of September 28, 1997.
Options may be granted to any employee, including officers and directors of the
Company, and certain non-employees, at a price not less than the fair market
value of the Company's common stock at the date the options are granted. Options
generally expire ten years from the date of grant or at an earlier date as
determined by the committee of the Board of Directors that administers the
plans. Options granted under the plans generally are exercisable one year from
the date of grant.
1988 Plan 1996 Plan
- --------------------------------------------------------------------------------
Balance, September 25, 1994 1,059,675 --
Granted at $7.75 382,260 --
Exercised at $2.00 to $10.33 (345,009) --
- --------------------------------------------------------------------------------
Balance, September 24, 1995 1,096,926 --
Granted at $16.33 438,510 --
Exercised at $3.92 to $7.75 (15,810) --
- --------------------------------------------------------------------------------
Balance, September 29, 1996 1,519,626 --
Granted at $17.33 543,000 --
Granted at $29.38 to $36.67 -- 18,500
Exercised at $4.25 to $16.33 (267,630) --
Expired (8,235) --
- --------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1997 1,786,761 18,500
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company follows Accounting Principles Board Opinion No. 25, under which no
compensation cost has been recognized in connection with stock option grants
pursuant to the stock option plans. Had compensation cost been determined
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company's pro forma net income
and pro forma earnings per share would have been as follows (in thousands):
1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $41,909 $13,802
Pro forma 36,020 9,363
- --------------------------------------------------------------------------------
Net income per common and common equivalent shares:
As reported $ 2.21 $ 0.82
Pro forma 1.90 0.56
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In determining compensation cost pursuant to SFAS 123, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
during 1997: risk-free interest rates of 5.85% to 6.25%; expected life of six
years; and expected volatility of 68% to 71%. The following weighted average
assumptions were used for grants in 1996: risk-free interest rate of 5.6%;
expected life of six years; and expected volatility of 73%.
36
<PAGE>
EMPLOYEE BENEFIT PLANS - The Company has a defined contribution plan covering
its employees. The Company's contributions to the plan were $7,762,000 in 1997,
$6,463,000 in 1996 and $3,979,000 in 1995.
The Company sponsors a comprehensive medical and a dental plan for qualified
employees that is funded by contributions from both the Company and plan
participants. Contributions are made through a Voluntary Employee's Benefit
Association Trust. The Company recognized expense related to these plans of
$15,377,000 in 1997, $13,439,000 in 1996 and $10,427,000 in 1995.
6. COMMITMENTS AND CONTINGENCIES
The Company is committed under various operating lease agreements. Total rent
expense under these operating leases was $12,487,000 in 1997, $7,502,000 in 1996
and $4,866,000 in 1995. Future minimum payments for all operating leases with
initial or remaining terms of one year or more subsequent to September 28, 1997
are as follows:
- -------------------------------------------------------------
1998 $13,946
1999 11,390
2000 9,075
2001 7,568
2002 and thereafter 42,288
- ------------------------------------------------------------
- ------------------------------------------------------------
On May 1, 1996, the Company received $15,300,000 in a sale-leaseback transaction
relating to its Eau Claire, Wisconsin assembly manufacturing building. The lease
has a term of 15 years.
During the first quarter of fiscal 1997, the Company signed a Master Lease
Agreement for up to $25,000,000 with General Electric Capital Corporation
("GE"). The agreement provides for leasing of manufacturing equipment in fiscal
1997. During the fourth quarter of fiscal 1997, the Company signed an amendment
to the Master Lease Agreement with GE, providing for leasing of up to an
additional $30,000,000 of manufacturing equipment in fiscal 1998. The Company
serves as a purchasing agent on behalf of GE. As such, amounts expended on GE's
behalf, but not yet reimbursed, are included on the accompanying consolidated
balance sheets under GE lease receivable.
The Company entered into a Technology Transfer and Development Agreement (the
"Technology Sharing Agreement") and a Patent License Agreement with IBM during
fiscal 1995. As of September 28, 1997, the Company had made payments totaling
$3,500,000 to IBM and will make additional payments over the next two fiscal
years totaling $4,500,000, all of which have been recorded as an expense and a
related liability by the Company. Certain royalties have been paid and may be
payable in the future by the Company to IBM under the Technology Sharing
Agreement.
37
<PAGE>
The Company and certain users of the Company's products have from time to
time received, and may in the future receive, communications from third parties
asserting patents against the Company or its customers which may relate to
certain of the Company's manufacturing equipment or products or to products
which include the Company's products as a component. Although the Company
has not been a party to any material intellectual property litigation,
certain of its customers have been sued on patents having claims closely related
to products sold by the Company. In the event that any third party were to make
a valid infringement claim and a license were not available on terms acceptable
to the Company, the Company's operating results could be adversely affected.
The Company is party to certain other claims arising in the ordinary
course of business. In the opinion of management, the outcome of such claims
will not materially affect the Company's current or future financial position
or results of operations.
7. SUPPLEMENTARY CASH FLOW INFORMATION
1997 1996 1995
- ------------------------------------------------------------------------------
Changes in operating assets and liabilities:
Receivables, net $(3,934) $(10,353) $(1,568)
Inventories (9,954) (3,937) (3,769)
Prepaid and other expenses (2,520) (334) (1,231)
Accounts payable and accrued liabilities 17,801 8,850 15,725
Other non-current liabilities (1,723) 4,052 1,500
$(1,050) $ (1,722) $10,657
- ------------------------------------------------------------------------------
Cash paid for:
Interest (net of amount capitalized) $ 2,520 $ 1,703 $ 2,655
Income taxes 13,891 8,405 7,792
- ------------------------------------------------------------------------------
Capitalized interest was $2,946,000 in 1997, $1,206,000 in 1996 and $512,000
in 1995.
8. SALE OF COMMON STOCK
In February 1997, the Company issued 3,000,000 shares of its common stock
through a public offering. The Company received net proceeds of $102,900,000
and is using the funds for general corporate purposes, primarily
expenditures for manufacturing and support equipment, construction of the
Company's Eau Claire, Wisconsin and Sioux Falls, South Dakota plants and an
expansion of the Company's Hutchinson, Minnesota plant. Pending such uses,
the Company has invested the net proceeds from the offering in short-term
debt securities.
9. STOCK SPLIT
On January 20, 1997, the Company announced that its Board of Directors
approved a three-for-one stock split of the Company's common stock, effective
at the close of business on February 11, 1997. The Company also changed the
par value of its common stock to $.01 per share. Common share and earnings
per share amounts in the accompanying consolidated statements have been
retroactively adjusted to reflect the stock split and par value change.
38
<PAGE>
10. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
The following table summarizes unaudited financial data for fiscal years 1997
and 1996.
<TABLE>
<CAPTION>
1997 by Quarter 1996 by Quarter
- -------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $106,906 $124,259 $121,713 $100,354 $83,332 $86,546 $91,418 $91,890
Gross profit 31,112 38,680 33,179 14,308 21,444 17,879 21,786 18,461
Income (loss)
from operations 14,455 21,885 16,553 (177) 3,828 5,592 6,878 1,905
Income before
income taxes 13,903 21,737 17,553 523 3,669 5,553 6,663 1,368
Net income 11,117 16,683 13,698 411 2,862 4,332 5,199 1,409
Net income per share 0.66 0.91 0.68 0.02 0.17 0.26 0.31 0.08
Price range per share
High 26.79 38.38 35.00 35.88 21.83 17.16 19.46 14.37
Low 12.75 25.17 23.44 24.00 15.17 12.17 12.75 10.25
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The price range per share, reflected above, is the highest and lowest closing
prices as quoted on The Nasdaq National Market during each quarter. Net income
per share and price range per share for fiscal year 1996 have been restated
to relect the stock split noted above.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HUTCHINSON TECHNOLOGY INCORPORATED:
We have audited the accompanying consolidated balance sheets of Hutchinson
Technology Incorporated (a Minnesota corporation) and Subsidiaries as of
September 28, 1997 and September 29, 1996, and the related consolidated
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended September 28, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of Hutchinson Technology
Incorporated and Subsidiaries as of September 28, 1997 and September 29,
1996, and the results of their operations and their cash flows for each of
the three years in the period ended September 28, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
October 29, 1997
39
<PAGE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries In thousands, except per share data and number of employees
- -------------------------------------------------------------------------------------------------------------------
ELEVEN-YEAR SELECTED FINANCIAL DATA
Annual Growth 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
5-year 10-year FOR THE YEAR:
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
23% 19% Net sales $453,232 $353,186 $299,998
24 22 Gross profit 117,279 79,570 73,763
Percent of net sales 26% 23% 25%
31 23 Income (loss) from operations $ 52,716 $ 18,203 $ 28,921
Percent of net sales 12% 5% 10%
27 25 Net income (loss) $ 41,909 $ 13,802 $ 21,078
Percent of net sales 9% 4% 7%
32 22 Capital expenditures $ 82,639 $ 77,065 $ 44,472
28 31 Research and development expenses 20,185 27,651 15,041
24 21 Depreciation expense 38,299 33,565 28,174
32 27 Cash flow from operating activities 76,816 39,904 57,814
- -------------------------------------------------------------------------------------------------------------------
AT YEAR END:
- -------------------------------------------------------------------------------------------------------------------
28% 22% Receivables $ 86,044 $ 56,278 $ 40,683
37 21 Inventories 27,189 17,235 13,298
29 33 Working capital 173,156 62,102 54,284
33 21 Net property, plant and equipment 175,253 121,706 93,816
32 25 Total assets 429,839 238,983 190,898
36 22 Total debt 78,194 58,945 37,700
Total debt as a percentage of total capitalization 22% 31% 24%
30 28 Shareholders' investment $282,958 $133,684 $119,745
Return on shareholders' investment 20% 11% 20%
17 13 Number of employees 7,181 5,479 4,858
5 6 Shares of stock outstanding 19,619 16,356 16,341
- -------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
- -------------------------------------------------------------------------------------------------------------------
19% 19% Net income (loss) $ 2.21 $ 0.82 $ 1.28
24 21 Shareholders' investment (book value) 14.42 8.17 7.33
Price range
29 17 High 38.38 21.83 29.67
32 17 Low 12.75 10.25 7.67
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries In thousands, except per share data and number of employees
- -----------------------------------------------------------------------------------------------------------------------------
ELEVEN-YEAR SELECTED FINANCIAL DATA
Annual Growth 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
5-year 10-year FOR THE YEAR:
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
23% 19% Net sales $238,794 $198,734 $160,340 $143,260
24 22 Gross profit 39,246 44,423 40,261 27,920
Percent of net sales 16% 22% 25% 19%
31 23 Income (loss) from operations $ 7,780 $ 9,961 $ 13,581 $ 7,265
Percent of net sales 3% 5% 8% 5%
27 25 Net income (loss) $ 5,880 $ 8,554 $ 12,849 $ 4,499
Percent of net sales 2% 4% 8% 3%
32 22 Capital expenditures $ 29,540 $ 46,768 $ 20,492 $ 17,747
28 31 Research and development expenses 8,626 9,846 5,770 4,208
24 21 Depreciation expense 23,974 15,737 12,908 11,253
32 27 Cash flow from operating activities 11,967 22,449 19,397 16,944
- -----------------------------------------------------------------------------------------------------------------------------
AT YEAR END:
- -----------------------------------------------------------------------------------------------------------------------------
28% 22% Receivables $ 39,115 $ 22,320 $ 25,454 $ 18,499
37 21 Inventories 9,529 7,899 5,638 4,580
29 33 Working capital 51,996 26,238 49,018 18,083
33 21 Net property, plant and equipment 77,887 72,419 41,513 34,304
32 25 Total assets 151,148 116,639 109,126 65,992
36 22 Total debt 40,080 12,460 16,755 19,354
Total debt as a percentage of total capitalization 30% 12% 18% 37%
30 28 Shareholders' investment $ 94,619 $ 88,689 $ 77,025 $ 33,512
Return on shareholders' investment 6% 10% 23% 14%
17 13 Number of employees 4,600 4,108 3,332 2,798
5 6 Shares of stock outstanding 15,999 15,993 15,519 11,907
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
- -----------------------------------------------------------------------------------------------------------------------------
19% 19% Net income (loss) $ 0.36 $ 0.53 $ 0.91 $ 0.37
24 21 Shareholders' investment (book value) 5.91 5.55 4.96 2.81
Price range
29 17 High 13.29 16.58 10.67 4.58
32 17 Low 7.25 6.83 3.17 2.04
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Hutchinson Technology Incorporated and Subsidiaries In thousands, except per share data and number of employees
- -----------------------------------------------------------------------------------------------------------------------------
ELEVEN-YEAR SELECTED FINANCIAL DATA
Annual Growth 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
5-year 10-year FOR THE YEAR:
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
23% 19% Net sales $122,444 $ 92,321 $113,714 $77,756
24 22 Gross profit 26,107 7,696 19,329 15,673
Percent of net sales 21% 8% 17% 20%
31 23 Income (loss) from operations $ 8,528 $ (7,221) $ 6,540 $ 6,400
Percent of net sales 7% (8%) 6% 8%
27 25 Net income (loss) $ 5,338 $ (5,693) $ 4,267 $ 4,665
Percent of net sales 4% (6%) 4% 6%
32 22 Capital expenditures $ 6,794 $ 9,568 $ 18,820 $10,955
28 31 Research and development expenses 3,959 4,065 2,774 1,396
24 21 Depreciation expense 9,719 12,305 8,047 5,650
32 27 Cash flow from operating activities 15,174 6,871 7,291 6,996
- -----------------------------------------------------------------------------------------------------------------------------
AT YEAR END:
- -----------------------------------------------------------------------------------------------------------------------------
28% 22% Receivables $ 20,216 $ 15,932 $ 19,166 $11,759
37 21 Inventories 5,913 3,898 5,119 4,205
29 33 Working capital 22,768 15,767 13,716 10,210
33 21 Net property, plant and equipment 27,618 30,419 36,494 25,315
32 25 Total assets 64,669 55,775 63,095 45,577
36 22 Total debt 20,550 21,756 19,469 10,899
Total debt as a percentage of total capitalization 42% 48% 40% 31%
30 28 Shareholders' investment $ 28,834 $ 23,426 $ 28,888 $24,392
Return on shareholders' investment 20% (22%) 16% 21%
17 13 Number of employees 2,648 2,327 2,830 2,074
5 6 Shares of stock outstanding 11,844 11,823 11,634 11,436
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
- -----------------------------------------------------------------------------------------------------------------------------
19% 19% Net income (loss) $ 0.45 $ (0.48) $ 0.36 $ 0.40
24 21 Shareholders' investment (book value) 2.43 1.98 2.48 2.13
Price range
29 17 High 4.50 5.08 7.33 8.17
32 17 Low 1.67 2.08 3.00 2.63
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS EXECUTIVE MANAGEMENT TEAM
<S> <C>
JEFFREY W. GREEN WAYNE M. FORTUN
Chairman of the Board President, Chief Executive Officer
Hutchinson Technology Incorporated and Chief Operating Officer
DIRECTOR SINCE 1965. JOINED HTCH IN 1975.
WAYNE M. FORTUN JEFFREY W. GREEN
President, Chief Executive Officer Chairman of the Board
and Chief Operating Officer JOINED HTCH IN 1965.
Hutchinson Technology Incorporated
DIRECTOR SINCE 1983.
JOHN A. INGLEMAN
Vice President, Chief Financial Officer
W. THOMAS BRUNBERG* and Secretary
Partner JOINED HTCH IN 1977
Brunberg Thoresen Diaby & Associates, Ltd.
(Accounting Firm)
DIRECTOR SINCE 1975. REBECCA A. ALBRECHT
Vice President, Human Resources
JOINED HTCH IN 1983.
ARCHIBALD COX, JR.+
Chairman
Sextant Group, Inc. RICHARD C. MYERS
(Financial Advisory Firm) Vice President, Administration
Vice Chairman and President JOINED HTCH IN 1977.
Magnequench International, Inc.
(Magnetic Material Manufacturing)
DIRECTOR SINCE 1996. BEATRICE A. GRACZYK
Vice President,
Disk Drive Components Operations
JAMES E. DONAGHY* JOINED HTCH IN 1970.
President and Chief Executive Officer
Sheldahl, Inc.
(Electronics and Laminates Manufacturing) R. SCOTT SCHAEFER
DIRECTOR SINCE 1992. Vice President,
Chief Technical Officer
JOINED HTCH IN 1979.
HARRY C. ERVIN+
Formerly Vice President and Investment Officer
Dain Bosworth Incorporated RICHARD J. PENN
(Investment Banking Firm) Vice President, Sales and Marketing
DIRECTOR SINCE 1969. JOINED HTCH IN 1981.
STEVEN E. LANDSBURG+ PEGGY J. LIETZAU
Professor of Economics Corporate Planning Director
University of Rochester JOINED HTCH IN 1977.
DIRECTOR SINCE 1997.
RICHARD N. ROSETT*
Professor of Economics
Rochester Institute of Technology
DIRECTOR SINCE 1986.
* Members of the Audit Committee
+ Members of the Compensation Committee
</TABLE>
<PAGE>
SHAREHOLDERS' INFORMATION
ANNUAL SHAREHOLDERS' MEETING
Wednesday, January 28, 1998, at 10:30 a.m.
Minneapolis Marriott City Center Hotel
30 South Seventh Street
Minneapolis, Minnesota
COMMON STOCK LISTING
Traded in The Nasdaq National Market
Trading symbol: HTCH
Shareholders of record as of
December 2, 1997: 979
DIVIDEND POLICY
The Company has never paid any cash dividends
on its common stock. The Company currently intends
to retain all earnings for use in its business and does
not anticipate paying cash dividends in the foreseeable
future. Any future determination as to payment of dividends
will depend upon the financial condition and results of
operations of the Company and such other factors as are
deemed relevant by the Board of Directors.
LEGAL COUNSEL
Faegre & Benson LLP
Minneapolis, Minnesota
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Anderson LLP
Minneapolis, Minnesota
TRANSFER AGENT
Norwest Bank Minnesota, National Association
161 North Concord Exchange
P.O. Box 738
South St. Paul, Minnesota 55075-0738
(800) 468-9716
SUPPLEMENTAL INFORMATION
Shareholder Information
Todd J. Bradley
Hutchinson Technology Incorporated
40 West Highland Park
Hutchinson, Minnesota 55350
(800) 689-0755
World Wide Web:www.htch.com
E-Mail:[email protected]
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
Name Jurisdiction
- ---- ------------
HTI Export Ltd. Barbados
Hutchinson Technology Asia, Inc. Minnesota
21
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in or incorporated by reference in this Form 10-K into the
Company's previously filed Registration Statements, File Nos. 33-26145 and
333-33165.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
December 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
HUTCHINSON TECHNOLOGY INCORPORATED FOR THE FIFTY-TWO WEEKS ENDED SEPTEMBER 28,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 98,340,000
<SECURITIES> 20,211,000
<RECEIVABLES> 51,476,000
<ALLOWANCES> 2,182,000
<INVENTORY> 27,189,000
<CURRENT-ASSETS> 243,346,000
<PP&E> 348,071,000
<DEPRECIATION> 172,818,000
<TOTAL-ASSETS> 429,839,000
<CURRENT-LIABILITIES> 70,190,000
<BONDS> 72,862,000
0
0
<COMMON> 196,000
<OTHER-SE> 282,762,000
<TOTAL-LIABILITY-AND-EQUITY> 429,839,000
<SALES> 453,232,000
<TOTAL-REVENUES> 453,232,000
<CGS> 335,953,000
<TOTAL-COSTS> 335,953,000
<OTHER-EXPENSES> 20,185,000<F1>
<LOSS-PROVISION> 1,348,000
<INTEREST-EXPENSE> 3,143,000
<INCOME-PRETAX> 53,716,000
<INCOME-TAX> 11,807,000
<INCOME-CONTINUING> 41,909,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,909,000
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.20
<FN>
<F1>Other expenses reflect research and development expenses.
</FN>
</TABLE>
