<PAGE>
PROSPECTUS
$150,000,000
[LOGO]
6% CONVERTIBLE SUBORDINATED NOTES DUE 2005
------------------
THIS PROSPECTUS RELATES TO THE PUBLIC OFFERING AND SALES FROM TIME TO TIME
BY THE HOLDERS (THE "SELLING HOLDERS") OF $150,000,000 AGGREGATE PRINCIPAL
AMOUNT OF 6% CONVERTIBLE SUBORDINATED NOTES DUE 2005 (THE "NOTES") OF HUTCHINSON
TECHNOLOGY INCORPORATED, A MINNESOTA CORPORATION (THE "COMPANY"), AND THE SHARES
OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF THE COMPANY (THE "COMMON STOCK")
INTO WHICH THE NOTES ARE CONVERTIBLE. THE NOTES ARE CONVERTIBLE, AT THE OPTION
OF THE HOLDER (AS DEFINED HEREIN), INTO SHARES OF COMMON STOCK AT ANY TIME PRIOR
TO THEIR STATED MATURITY (AS DEFINED HEREIN), UNLESS PREVIOUSLY REDEEMED OR
REPURCHASED, AT A CONVERSION PRICE OF $28.35 PER SHARE, SUBJECT TO ADJUSTMENTS
IN CERTAIN EVENTS. SEE "DESCRIPTION OF NOTES--CONVERSION RIGHTS." THE COMMON
STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HTCH." ON MAY 8,
1998, THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET WAS $30.50 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
INTEREST ON THE NOTES IS PAYABLE ON MARCH 15 AND SEPTEMBER 15 OF EACH YEAR,
COMMENCING ON SEPTEMBER 15, 1998. THE NOTES ARE REDEEMABLE, IN WHOLE OR IN PART,
AT THE COMPANY'S OPTION AT ANY TIME ON OR AFTER MARCH 20, 2001 AT THE REDEMPTION
PRICES SET FORTH HEREIN, PLUS ACCRUED AND UNPAID INTEREST AND LIQUIDATED
DAMAGES, IF ANY. IF A REPURCHASE EVENT (AS DEFINED HEREIN) OCCURS, EACH HOLDER
OF NOTES WILL HAVE THE RIGHT, SUBJECT TO CERTAIN CONDITIONS AND RESTRICTIONS, TO
REQUIRE THE COMPANY TO REPURCHASE ALL OR ANY PART OF SUCH HOLDER'S NOTES AT 100%
OF THEIR PRINCIPAL AMOUNT, PLUS ACCRUED AND UNPAID INTEREST AND LIQUIDATED
DAMAGES, IF ANY. THE NOTES ARE GENERAL UNSECURED OBLIGATIONS OF THE COMPANY,
SUBORDINATED TO ALL EXISTING AND FUTURE SENIOR INDEBTEDNESS (AS DEFINED HEREIN)
OF THE COMPANY. IN ADDITION, THE NOTES WILL BE EFFECTIVELY SUBORDINATED TO ALL
INDEBTEDNESS AND OTHER OBLIGATIONS OF THE COMPANY'S SUBSIDIARIES. AT FEBRUARY
22, 1998, THE COMPANY HAD APPROXIMATELY $75 MILLION OF SENIOR INDEBTEDNESS
OUTSTANDING. THE INDENTURE (AS DEFINED HEREIN) GOVERNING THE NOTES DOES NOT
LIMIT OR PROHIBIT THE INCURRENCE OF ADDITIONAL INDEBTEDNESS, INCLUDING SENIOR
INDEBTEDNESS, BY THE COMPANY OR ITS SUBSIDIARIES. SEE "DESCRIPTION OF NOTES" FOR
A MORE COMPLETE DESCRIPTION OF THE INDENTURE'S PROVISIONS.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE NOTES. THE
COMPANY DOES NOT INTEND TO APPLY FOR LISTING OF THE NOTES ON ANY SECURITIES
EXCHANGE OR FOR QUOTATION OF THE NOTES THROUGH ANY AUTOMATED QUOTATION SYSTEM.
PRIOR TO THIS OFFERING, THE NOTES WERE DESIGNATED FOR TRADING ON THE PRIVATE
OFFERING, RESALE AND TRADING THROUGH AUTOMATED LINKAGES ("PORTAL") MARKET. THE
NOTES ARE NOT EXPECTED TO REMAIN ELIGIBLE FOR TRADING ON THE PORTAL MARKET.
THERE CAN BE NO ASSURANCE THAT ANY TRADING MARKET WILL DEVELOP FOR THE NOTES.
THE NOTES WERE ISSUED BY THE COMPANY IN MARCH 1998 AND WERE SOLD IN
TRANSACTIONS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE NOTES WERE ISSUED IN THE FORM OF GLOBAL
NOTES (AS DEFINED HEREIN), AND SO LONG AS THE NOTES REMAIN IN SUCH FORM, THE
COMPANY'S OBLIGATIONS TO PAY INTEREST AND PRINCIPAL WILL BE SATISFIED WHEN THE
COMPANY PAYS THE RECORD HOLDER, CEDE & CO. SEE "DESCRIPTION OF NOTES."
THE SELLING HOLDERS, DIRECTLY OR THROUGH UNDERWRITERS, DEALERS OR AGENTS,
MAY SELL THE NOTES, OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES,
OFFERED HEREBY FROM TIME TO TIME ON TERMS TO BE DETERMINED AT THE TIME OF SALE.
SUCH NOTES, OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES, MAY BE
SOLD AT MARKET PRICES PREVAILING AT THE TIME OF SALE OR AT NEGOTIATED PRICES.
THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE BY THE SELLING
HOLDERS OF NOTES, OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES. SEE
"SELLING HOLDERS" AND "PLAN OF DISTRIBUTION."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN
INVESTMENT IN THE NOTES OFFERED HEREBY.
THE SELLING HOLDERS ARE ENTITLED TO REGISTRATION OF THEIR NOTES, AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES, PURSUANT TO A SHELF
REGISTRATION AGREEMENT (AS DEFINED HEREIN) AND THIS OFFER IS INTENDED TO SATISFY
THE RIGHTS GRANTED BY THE SHELF REGISTRATION AGREEMENT. THE COMPANY HAS AGREED
TO PAY SUBSTANTIALLY ALL OF THE EXPENSES OF THE OFFERING OF THE NOTES, AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES, BY THE SELLING HOLDERS OTHER
THAN UNDERWRITING DISCOUNTS AND COMMISSIONS, IF ANY. THE COMPANY HAS AGREED TO
INDEMNIFY THE SELLING HOLDERS AND CERTAIN OTHER PERSONS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT. SEE "PLAN OF
DISTRIBUTION."
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 8, 1998.
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN,
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON THE
BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ON ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY AT THE TIME SUCH STATEMENTS WERE
MADE. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "EXPECT," "INTEND" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE
COMPANY, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
COMPANY BELIEVES THESE STATEMENTS ARE REASONABLE, PROSPECTIVE PURCHASERS OF THE
NOTES SHOULD BE AWARE THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET
FORTH BELOW UNDER THE CAPTION "RISK FACTORS" OR OTHER FACTORS. PROSPECTIVE
PURCHASERS OF THE NOTES SHOULD CONSIDER CAREFULLY THE FACTORS UNDER THE CAPTION
"RISK FACTORS," AS WELL AS THE OTHER INFORMATION AND DATA CONTAINED IN, OR
INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN
THE NOTES. THE COMPANY CAUTIONS THE READER, HOWEVER, THAT SUCH LIST OF FACTORS
UNDER THE CAPTION "RISK FACTORS" MAY NOT BE EXHAUSTIVE AND THAT THOSE OR OTHER
FACTORS, MANY OF WHICH ARE OUTSIDE OF THE COMPANY'S CONTROL, COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMPANY AND ITS ABILITY TO SERVICE ITS
INDEBTEDNESS, INCLUDING PRINCIPAL AND INTEREST PAYMENTS ON AND LIQUIDATED
DAMAGES, IF ANY, WITH RESPECT TO THE NOTES. ALL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH UNDER THE
CAPTIONS "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION."
i
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN, OR INCORPORATED BY
REFERENCE INTO, THIS PROSPECTUS. CERTAIN CAPITALIZED TERMS IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, REFERENCES TO THE
"COMPANY" REFER TO THE COMPANY COLLECTIVELY WITH ITS SUBSIDIARIES. UNLESS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT
A THREE-FOR-ONE STOCK SPLIT THAT WAS DISTRIBUTED ON FEBRUARY 11, 1997 TO HOLDERS
OF RECORD ON JANUARY 31, 1997 (THE "STOCK SPLIT").
THE COMPANY
The Company is the world's leading supplier of suspension assemblies for
hard disk drives. The Company estimates that it produces approximately 70% of
all suspension assemblies sold to disk drive manufacturers and their suppliers,
including recording head manufacturers, worldwide. 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 of all types. 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, Samsung, Seagate Technology, TDK/SAE Magnetics,
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, and has maintained this position through multiple technological
transitions in the disk drive industry over the past decade.
In an October 1997 report, International Data Corporation ("IDC") estimated
that total revenue in the disk drive industry (defined as unit shipments
multiplied by the midyear average unit price paid by OEMs for quantity 1000+
contracts) would surpass $28 billion in 1997 and grow to over $40 billion in
1999. Disk drive industry growth has been 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. In its October 1997 report, IDC
stated that desktop PCs and multiuser systems are expected to grow at 12% and
14% compound annual growth rates, respectively, from 1997 to 2001. Moreover,
unit growth rates for disk drives and disk drive components are expected to
exceed unit growth rates for desktop PCs and multiuser systems due to a variety
of factors, including the rapidly increasing demand for additional storage
capacity. IDC's report estimates that hard disk drive unit shipments will grow
at a compound annual growth rate of 19% from 1997 to 2001. Each disk drive
contains one or more (up to thirteen) disks. 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.
The disk drive industry is highly cyclical and is characterized by periods
of increasing demand and rapid growth followed by periods of oversupply and
subsequent contraction. Following a period of rapid growth in sales of disk
drive components, the disk drive industry recently has experienced a significant
downturn which began in the summer of 1997. In the current downturn, demand for
and shipments of disk drive components, including the Company's conventional
suspension assemblies, have been adversely affected as most of the Company's
major customers have delayed or cancelled component orders as they have sought,
the Company believes, to lower excess inventory that accumulated during the
preceding period of rapid growth. Total shipments of the Company's suspension
assembly units have decreased from a peak of approximately 201 million shipped
in the thirteen weeks ended March 30, 1997 to approximately 135 million shipped
in the thirteen weeks ended December 28, 1997. The Company believes that demand
for its conventional suspension assemblies will increase when disk drive
inventory levels are reduced, as the
1
<PAGE>
Company does not believe there has been a significant slowdown in end user
demand for storage capacity or a fundamental shift in technology away from disk
drive storage.
Hard disk drive storage capacity increases as areal density increases.
Improvements in areal density have been attained by lowering the fly height of
the recording head, using smaller recording heads with advanced air bearing
designs, improving other components such as motors and media and using new
recording head types such as those of magneto-resistive (MR) design. As drive
manufacturers transition to smaller pico-sized MR heads, the current process of
bonding fine electrical wires to the recording head and to the rest of the
drive's electronic circuitry is becoming more difficult and costly, and the
wires themselves interfere with the head's flying performance. The Company
believes that demand for increased storage capacity and the move to smaller
pico-sized MR heads, which require more electrical leads and are more sensitive
to mechanical variation, will require manufacturers to use advanced wireless
suspensions, such as the Company's TSA suspension assemblies.
The Company's TSA suspension assemblies are designed to satisfy both the new
electrical connectivity requirements of the disk drive industry as well as the
changing market demands and performance standards required by its customers. TSA
suspensions incorporate thin electrical conductors in the suspension itself
which replace the fine wires used to connect the recording head to the drive's
electronic circuitry. The Company anticipates continuing acceptance by the disk
drive industry of its TSA suspensions during the next two years, as TSA
suspensions offer customers opportunities to enhance drive performance by
eliminating wires that interfere with the recording head's flying performance.
During the first fiscal year of volume manufacturing of its TSA suspension
assemblies (the fiscal year ended September 28, 1997), the Company shipped
approximately 8 million TSA suspensions (approximately 4 million of which were
shipped in the fiscal 1997 fourth quarter), and in the thirteen weeks ended
December 28, 1997, the Company shipped approximately 7 million TSA suspensions.
For the first eight weeks of the fiscal 1998 second quarter, the Company shipped
approximately 7 million TSA suspensions. Demand for and shipments of the
Company's TSA suspensions continue to rise and, the Company believes, have not
been affected by the recent downturn in component demand. As of April 15, 1998,
TSA suspensions were in use in five customer disk drive programs in production
and had been designed-in on a total of seventeen programs. The Company believes
its TSA suspensions, and related follow-on features currently in development,
will become a disk drive industry standard platform onto which multiple features
can be integrated.
STRATEGY
The Company intends to maintain its position at the forefront of industry
technology transitions, as it has over the past decade, by delivering industry
standard solutions to industry-wide technological challenges. The Company
designs and develops suspension assemblies which meet the increasingly higher
performance specifications of disk drive manufacturers, and is committed to
reliably producing its suspension assemblies in high volume, with specialized
design, expanded functionality and greater precision. The Company has
increasingly emphasized assisting disk drive manufacturers in reducing their
time to market with new drives by designing and developing suspension
assemblies, and the processes to manufacture them, in advance of market needs.
Key elements of the Company's strategy include:
DELIVER INDUSTRY STANDARD SOLUTIONS. As the disk drive industry transitions
to smaller pico-sized MR heads, the Company is leading a parallel technological
transition among industry component suppliers by developing a product platform
that it believes will significantly enhance drive performance. The Company's TSA
suspensions offer customers a wireless solution to industry-wide manufacturing
problems posed by smaller pico-sized MR heads. The Company believes TSA
suspensions enable customers to improve yields and throughput, eliminate
manufacturing steps and adopt automated assembly processes, all of which can
lower their overall costs of production and improve production efficiencies. The
Company believes that its TSA suspensions will provide an industry standard
component platform onto which multiple features that enhance hard disk drive
performance can be integrated.
2
<PAGE>
MAINTAIN TECHNOLOGY LEADERSHIP WITH CUSTOMER-FOCUSED ENGINEERING. The
Company's engineers and sales force work closely with the engineering staffs of
its customers as a design team to develop suspension assemblies that address
individual customer requirements. Through its customer relationships, the
Company derives substantial insight into industry trends. This insight enables
the Company to provide advanced designs which position it well to have its
suspension assemblies designed into future generations of disk drives.
MANUFACTURE HIGH VOLUME PRECISION PRODUCTS. In addition to its design
expertise, the Company believes its leadership position is based on its volume
production capability and the precision of its suspension assemblies. In order
to provide assemblies in high volumes and with the precision required by its
customers, the Company has increasingly invested in developing advanced process
and measurement systems in connection with the design of its automated
production equipment. The Company has adopted an integrated and flexible
manufacturing approach that closely couples design, tooling and manufacturing.
This integrated approach has enabled the Company to respond rapidly to changes
in the volume and product mix demands of its customers.
LEAD INDUSTRY TECHNOLOGY TRANSITIONS. The Company has been at the forefront
of multiple technological transitions in the disk drive industry over the past
decade and intends to remain a technological leader by identifying emerging
industry trends and responding with solutions in advance of market needs. In
prior industry transitions, such as the rapid move from micro- to the smaller
nano-sized heads in 1993, and in the current more gradual move from nano- to
even smaller pico-sized heads, the Company has developed innovative design and
manufacturing solutions in advance of its competitors. Although many drive
manufacturers are just now making the transition to pico-sized heads, the
Company's technological leadership is evidenced by its current qualification in
nineteen pico-design drive programs, having been initially qualified in a pico
program in 1994. In addition, to continue to lead industry technology
transitions, the Company has already begun to develop follow-on features for its
TSA suspension assemblies which should enable drive manufacturers to continue to
achieve improved drive performance and increased data storage capacity.
The Company was incorporated under the laws of the State of Minnesota in
1965. The Company's principal office is located at 40 West Highland Park,
Hutchinson, Minnesota 55350 and its telephone number is (320) 587-3797.
RECENT DEVELOPMENTS
In March 1998, the Company issued and sold $150,000,000 aggregate principal
amount of the Notes to NationsBanc Montgomery Securities LLC and First Chicago
Capital Markets, Inc. (together, the "Initial Purchasers"), which resold the
Notes in transactions exempt from registration under the Securities Act. The net
proceeds to the Company from the sale of the Notes (after deducting the Initial
Purchasers' discount and estimated offering expenses payable by the Company)
were approximately $145,000,000.
3
<PAGE>
THE NOTES
<TABLE>
<S> <C>
Securities Offered................ $150,000,000 aggregate principal amount of 6%
Convertible Subordinated Notes due 2005 (the "Notes").
See "Plan of Distribution."
Interest Payment Dates............ March 15 and September 15, commencing September 15,
1998.
Stated Maturity................... March 15, 2005.
Interest.......................... 6% per annum.
Conversion Rights................. The Notes are convertible, at the option of the Holder,
into Common Stock at any time prior to their Stated
Maturity, unless previously redeemed or repurchased, at
a conversion price of $28.35 per share (initially
equivalent to a conversion rate of 35.273 shares per
$1,000 principal amount of Notes), subject to
adjustments in certain events. See "Description of
Notes-- Conversion Rights."
Optional Redemption............... The Notes are redeemable, in whole or in part, at the
Company's option at any time on or after March 20, 2001
upon not less than 30 nor more than 60 days' notice, at
the redemption prices set forth in "Description of
Notes--Optional Redemption," in each case together with
accrued and unpaid interest and liquidated damages, if
any.
Repurchase Events................. Upon the occurrence of any Repurchase Event occurring
prior to the Stated Maturity of the Notes, each Holder
will have the right, at such Holder's option, to require
the Company to repurchase all or any part of such
Holder's Notes at 100% of the principal amount thereof,
subject to adjustment in certain events, together with
accrued and unpaid interest and liquidated damages, if
any. See "Description of Notes--Certain Rights to
Require Repurchase of Notes." There can be no assurance
that the Company will have the financial resources
necessary to repurchase the Notes upon a Repurchase
Event.
Subordination..................... The Notes are general unsecured obligations of the
Company, subordinated in right of payment to all
existing and future Senior Indebtedness of the Company.
In addition, the Notes will be effectively subordinated
to all current and future liabilities of the Company's
subsidiaries. At February 22, 1998, the Company had
approximately $75 million of Senior Indebtedness
outstanding. The Indenture governing the Notes does not
limit or prohibit the incurrence of additional
indebtedness, including Senior Indebtedness, by the
Company or its subsidiaries. See "Description of
Notes--Subordination," "Description of Certain
Indebtedness and Other Financing Agreements" and
"Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and
Capital Resources."
Use of Proceeds................... The Company will not receive any of the proceeds from
the sale by the Selling Holders of Notes or the Common
Stock issuable upon conversion thereof. See "Use of
Proceeds."
</TABLE>
4
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<TABLE>
<S> <C>
Registration Rights; Liquidated
Damages......................... The Company is required, pursuant to a Shelf
Registration Agreement dated as of March 18, 1998
entered into among the Company and the Initial
Purchasers (the "Shelf Registration Agreement"), to file
with the Securities and Exchange Commission (the
"Commission"), and to use its best efforts to have
declared effective, a shelf registration statement (the
"Shelf Registration Statement") to register resales of
the Notes and the Common Stock issuable upon conversion
thereof and to keep such Shelf Registration Statement
effective for two years from the effective date thereof.
This offer is intended to satisfy the rights granted by
the Shelf Registration Agreement. The Company is
permitted to suspend the use of this prospectus (that is
a part of the Shelf Registration Statement) during
certain periods under certain circumstances. If this
prospectus is unavailable for an aggregate period in
excess of 60 days in any 12-month period, the Company
will be required to pay liquidated damages to the
Holders of the Notes or the underlying Common Stock, as
the case may be. See "Description of Notes--Registration
Rights; Liquidated Damages."
Trading........................... The Company does not intend to apply for listing of the
Notes on any securities exchange or for quotation of the
Notes through any automated quotation system. Prior to
this offering, the Notes were designated for trading on
the PORTAL Market. The Notes are not expected to remain
eligible for trading on the PORTAL Market. The Common
Stock is quoted on the Nasdaq National Market under the
symbol "HTCH."
Issuance and Sale of the Notes.... In March 1998, the Company issued and sold $150,000,000
aggregate principal amount of the Notes to the Initial
Purchasers in transactions exempt from registration
under the Securities Act. The Initial Purchasers resold
the Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) ("QIBs")
and a limited number of institutional accredited
investors (as defined in Rule 501(a)(1), (2), (3) and
(7) under the Securities Act) (the "Institutional
Accredited Investors") in transactions exempt from
registration under the Securities Act.
Book Entry; Form and Transfer..... The Notes were issued in the form of, and currently are
represented by, one or more Global Notes (as defined
herein) deposited with the Trustee as custodian for, and
registered in the name of a nominee of, The Depository
Trust Company ("DTC"). Notes sold to investors that so
request will be issued in the form of Definitive Notes
(as defined herein) and such interest in the Notes will
not be represented by the Global Notes. See "Description
of Notes--Form, Denomination and Registration."
Risk Factors...................... See "Risk Factors" for a discussion of factors to be
considered before purchasing the Notes offered hereby.
</TABLE>
5
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SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FISCAL YEARS ENDED(1)
---------------------- --------------------------------------
DEC. 28, DEC. 29, SEPT. 28, SEPT. 29, SEPT. 24,
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 88,982 $ 106,906 $ 453,232 $ 353,186 $ 299,998
Income (loss) from operations.................... (15,926) 14,455 52,716 18,203 28,921
Net income (loss)................................ (11,474) 11,117 41,909 13,802 21,078
Basic earnings (loss) per common share........... $ (0.58) $ 0.68 $ 2.29 $ 0.84 $ 1.31
Diluted earnings (loss) per common share......... $ (0.58) $ 0.65 $ 2.21 $ 0.82 $ 1.28
Weighted average common shares outstanding....... 19,629 16,361 18,272 16,350 16,074
Weighted average common and diluted shares
outstanding.................................... 19,629 17,120 18,978 16,806 16,479
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 28, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and securities available for sale.............................. $ 55,490 $ 200,490
Working capital....................................................................... 108,676 253,676
Total assets.......................................................................... 427,179 577,179
Long-term debt, including current maturities.......................................... 76,854 226,854
Total shareholders' investment........................................................ 271,734 271,734
</TABLE>
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(1) The Company operates on a 52 or 53 week fiscal year ending on the last
Sunday in September in each year. Fiscal 1997 and 1995 contained 52 weeks
and fiscal 1996 contained 53 weeks.
(2) Adjusted to give effect to the sale of the Notes by the Company in March
1998 and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
------------------------
On February 26, 1998 the Company announced a net loss of $0.56 per share on
net sales of $52 million for the eight-week period ended February 22, 1998,
compared with net earnings of $0.91 per share on net sales of $124 million for
the thirteen-week fiscal 1997 second quarter. For the first eight weeks of the
fiscal 1998 second quarter, the Company shipped a total of 64 million
suspensions compared to a total of 135 million for the thirteen-week fiscal 1998
first quarter. See "Risk Factors--Fluctuations in Operating Results; Liquidity
Needs."
6
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CONSIDER CAREFULLY THE SPECIFIC
RISK FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION CONTAINED IN, OR
INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS BEFORE DECIDING TO INVEST IN THE
NOTES OFFERED HEREBY. IN PARTICULAR, PROSPECTIVE PURCHASERS SHOULD REVIEW
"DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS" PRECEDING THE PROSPECTUS
SUMMARY.
FLUCTUATIONS IN OPERATING RESULTS; LIQUIDITY NEEDS
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 substantial 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 selling prices; the availability and efficient utilization of the Company's
production capacity; the ability to control infrastructure costs; manufacturing
yields; prolonged disruptions of operations at any of the Company's plants 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 recently has experienced significant reductions in demand for
and shipments of its conventional suspension assemblies because of a slowdown in
the disk drive industry's demand for disk drive components due, the Company
believes, to excess inventory held by drive and recording head manufacturers.
The Company's operating results have been adversely affected by this slowdown,
and operating activities consequently have not provided the cash needed to help
fund planned capital expenditures that are necessary to meet rising demand for
the Company's TSA suspension assemblies. In addition, cost-effective high volume
production of TSA suspensions has not yet been achieved by the Company in
connection with its ramp-up of TSA suspension capacity. These production
inefficiencies have further adversely affected operating results. The Company
announced a net loss of $0.56 per share on net sales of $52 million for the
eight-week period ended February 22, 1998, compared with net earnings of $0.91
per share on net sales of $124 million for the thirteen-week fiscal 1997 second
quarter.
The combination of these factors required the Company to raise significant
additional capital to fund its immediate short-term operating and capital
expenditure requirements. The Company did so through its sale of the Notes in
March 1998. Following the sale of the Notes by the Company in March 1998, the
Company's principal future liquidity needs will be for debt service requirements
under the Notes and other outstanding indebtedness (which rank senior to the
Notes), and to fund operations and capital expenditures. Although the Company
believes the net proceeds from its sale of the Notes in March 1998, plus
anticipated future revenue and cash flow from operations, will be sufficient to
meet its operating expenses, debt service and capital expenditure requirements
through fiscal 1999, there can be no assurances in this regard.
The Company anticipates that continued significant capital expenditures will
be necessary in fiscal 1999 and 2000 for continued expansion of its TSA
suspension production capacity as the Company transitions from conventional
suspension assembly production to high volume TSA suspension assembly
production, and to accommodate anticipated market growth. In that regard, beyond
fiscal 1999 the Company expects it will require significant additional external
financing to fund operations, debt service and capital expenditures. The Company
has no commitments for additional sales of equity, and is uncertain whether it
will have access to additional capital or borrowing arrangements on terms
economically favorable to the Company, if at all. If cash flow is not sufficient
to fund operations, debt service and capital expenditures and the Company is
unable to find alternative sources of financing in a timely manner, the Company
will be required to curtail capital equipment expenditures, slow plant
construction and expansion, reduce research and development investment or pursue
alternative financing strategies, any of
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which could materially adversely affect the Company's business, results of
operations and ability to service its indebtedness (including the Notes). The
Company is a party to a number of financing agreements that contain restrictive
financial covenants that require the Company to maintain certain financial
ratios, and a payment or other default under certain of these agreements that
causes acceleration of the underlying obligation will constitute an Event of
Default (as defined in the Indenture) under the Notes. See "Increased Leverage;
Financial Covenants" below.
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 component demand and shipments can vary
significantly from week to week. In the current downturn, demand for and
shipments of disk drive components, including the Company's conventional
suspension assemblies, have been adversely affected as most of the Company's
major customers have delayed or cancelled component orders as they have sought,
the Company believes, to lower excess inventory that accumulated during the
preceding period of rapid growth. As a result of this downturn, the Company
experienced sharp drops in operating cash flow and net income in the fourth
quarter of fiscal 1997, the first quarter of fiscal 1998, and the first eight
weeks of the second quarter of fiscal 1998, in each case compared with
comparable periods in fiscal 1996 and 1997. Results of operations continue to be
adversely impacted by the current downturn in the disk drive industry's demand
for disk drive components and could be materially adversely impacted by future
industry slowdowns. In the event that one or more major customers reduce, delay
or cancel orders, the Company's business, results of operations and ability to
service its indebtedness (including the Notes) 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. Selling prices also
are affected by overall demand, product mix and product development and
introduction. 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. To offset price decreases during a
product's life, the Company relies primarily on higher sales volume and
obtaining yield improvements and corresponding cost reductions in the
manufacture of existing products. To the extent that cost reductions do not
occur in a timely manner, the Company's business, results of operations and
ability to service its indebtedness (including the Notes) could be materially
adversely affected.
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 Foreign
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 business, results of operations and ability to
service its indebtedness (including the Notes) could be materially 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%, 99%, 98% and 97% of
net sales, respectively, for the thirteen weeks ended December 28, 1997 and 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. In the current downturn, demand for and shipments of disk drive
components, including the Company's conventional suspension assemblies, have
been adversely affected as most of the Company's major customers have delayed or
cancelled component orders as they
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have sought, the Company believes, to lower excess inventory that accumulated
during the preceding period of rapid growth. Total shipments of the Company's
suspension assembly units have decreased from a peak of approximately 201
million shipped in the thirteen weeks ended March 30, 1997 to approximately 135
million shipped in the thirteen weeks ended December 28, 1997. The Company's
business, results of operations and ability to service its indebtedness
(including the Notes) could be materially adversely affected in the event of
continuing and future slowdowns of sales of components in the hard disk drive
industry.
Future technological innovations may reduce demand for disk drives. Data
storage alternatives that compete with disk drive-based data storage do exist,
including semiconductor (flash) memory, tape memory and laser (optical and CD)
drives. Although the current core technology for hard disk drive data storage
has been the predominant technology in the industry for many years, this
technology could be replaced by an alternate technology in the future. There can
be no assurance that the Company's products will be adaptable to any successor
technology. The Company's business, results of operations and ability to service
its indebtedness (including the Notes) could be materially adversely affected by
the adoption of a technology that replaces disk drives as a computer data
storage medium.
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 performance specifications. A number of
risks are inherent in this process. Increasingly higher 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. 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 business, results of operations and ability to service
its indebtedness (including the Notes). If a competitor were to introduce a new
suspension assembly design to which the Company could not effectively respond,
and if such a new design were to gain wide acceptance by the disk drive
industry, the Company's business, results of operations and ability to service
its indebtedness (including the Notes) could be materially adversely affected.
The Company is investing a substantial amount of financial, management,
engineering and manufacturing resources in its TSA suspension assemblies and has
only recently begun volume production of its TSA suspensions. If continuing
market acceptance and/or production of the Company's TSA suspension assemblies
were delayed for any reason or if widespread market acceptance of the TSA
product platform is not achieved, the Company's business, results of operations
and ability to service its indebtedness (including the Notes) could be
materially adversely affected. Furthermore, if the Company fails to transition
to cost-effective high volume production of TSA suspensions and determines that
TSA suspension assemblies cannot be produced profitably in the quantities and to
the specifications required by customers, the Company's business, results of
operations and ability to service its indebtedness (including the Notes) could
be materially adversely affected.
The Company must qualify its products with its customers. The customer
qualification process for disk drive products can be lengthy, complex and
difficult. The Company is now making the transition from conventional suspension
assembly production to high volume TSA suspension assembly production. There can
be no assurance that the Company's TSA suspensions will continue to be selected
for design into its customers' products. In the event that the Company is unable
to obtain additional customer qualifications leading to production quantities of
TSA suspensions in a timely manner, or at all, the Company's business,
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results of operations and ability to service its indebtedness (including the
Notes) could be materially adversely affected.
The Company believes certain of its customers are considering development of
or are using wireless interconnection technologies that compete with its TSA
suspension assemblies. There can be no assurance that the Company's TSA
suspensions will gain market acceptance over other wireless interconnection
technologies that are alternatives to conventional wiring, such as deposition
circuitry and flexible circuitry, or that market acceptance of such competitive
technologies will not adversely affect the Company's business, results of
operations and ability to service its indebtedness (including the Notes).
CAPITAL NEEDS
The Company believes that, in order to achieve its long-term strategic
objectives and maintain and enhance its competitive position, it will need
significant additional financial resources over the next several years to fund
operations, debt service and capital expenditures. The Company's business is
highly capital intensive, particularly as the Company transitions from
conventional suspension assembly production to high volume TSA suspension
assembly production. The Company has made a substantial investment in
sophisticated manufacturing technologies and automated production equipment and
has added significant manufacturing capacity and increased its fixed costs over
the past two years, while constructing plants in Eau Claire, Wisconsin and Sioux
Falls, South Dakota and expanding its plant in Hutchinson, Minnesota. The
Company's fiscal 1997 capital expenditures totaled approximately $83 million.
The Company also leased approximately $29 million of production and other
equipment through operating leases in fiscal 1997. The Company currently
anticipates fiscal 1998 capital expenditures of approximately $200 million, of
which approximately $57 million were incurred in the first fiscal quarter. In
addition, the Company plans to enter into lease financings for approximately $50
million of production and other equipment in fiscal 1998.
The Company's ability to execute its long-term strategy may depend to a
significant degree on its ability to obtain additional long-term debt and equity
capital. The Company anticipates that continued significant capital expenditures
will be necessary in fiscal 1999 and 2000 for continued expansion of its TSA
suspension production capacity and to accommodate anticipated market growth. In
that regard, beyond fiscal 1999 the Company expects it will require significant
additional external financing to fund operations, debt service and capital
expenditures. The Company is uncertain whether it will have access to additional
capital or borrowing arrangements on terms economically favorable to the
Company, if at all. If cash flow is not sufficient to fund operations, debt
service and capital expenditures and the Company is unable to find alternative
sources of financing in a timely manner, the Company will be required to curtail
capital equipment expenditures, slow plant construction and expansion, reduce
research and development investment or pursue alternative financing strategies,
any of which could materially adversely affect the Company's business, results
of operations and ability to service its indebtedness (including the Notes). See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
INCREASED LEVERAGE; FINANCIAL COVENANTS
In connection with the sale of the Notes by the Company in March 1998, the
Company incurred $150 million in additional indebtedness which increased the
ratio of total debt (as used herein "total debt" refers to long-term debt
including current maturities) to total capitalization from 22.3%, at February
22, 1998, to 46.3%, on an as adjusted basis. As a result of this increased
leverage, the Company's interest obligations have increased substantially. The
degree to which the Company is leveraged could adversely affect the Company's
ability to obtain additional financing to fund operations, debt service and
future capital expenditures, and could make it more vulnerable to general
economic downturns and competitive pressures. In addition, the Indenture
governing the Notes does not restrict the ability of the Company or its
subsidiaries to incur additional indebtedness, including Senior Indebtedness.
Additional indebtedness of the Company may rank senior or PARI PASSU with the
Notes in certain circumstances. See "Description of
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Notes." The Company's ability to satisfy its obligations will be dependent upon
its future performance, which is subject to prevailing economic conditions and
financial, business and other factors, including factors beyond the Company's
control. To the extent that a substantial portion of the Company's cash flow
from operations is used to pay the principal of, and interest on, its
indebtedness, such cash flow will not be available to fund future operations and
capital expenditures. There is no assurance that the Company's operating cash
flow will be sufficient to meet its debt service requirements or to repay the
Notes at maturity or upon a Repurchase Event. See "Capitalization," "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital Resources."
The Company is a party to a number of financing agreements that contain
restrictive financial covenants that require the Company to maintain certain
financial ratios, and a payment or other default under certain of these
agreements that causes acceleration of the underlying obligation will constitute
an Event of Default under the Notes. The Company's approximately $75 million of
outstanding Private Placement Notes (as defined herein), Master Lease Agreement
with General Electric Capital Corporation ("GE"), Old Credit Facility (as
defined herein) relating to the letter of credit supporting its outstanding
variable rate demand note, and the Subordination, Non-Disturbance and Attornment
Agreement relating to the lease of the Company's Eau Claire, Wisconsin assembly
plant each contain restrictive financial covenants that require the Company to
maintain certain minimum financial ratios, including, in certain cases, fixed
charge coverage, interest coverage and total debt to total capitalization
ratios. The ability of the Company to comply with these covenants depends upon
its future operating performance. The Company's ability to achieve its required
operating performance depends, in part, on general industry conditions and other
factors outside of the Company's control, and there can be no assurance that the
Company will be able to comply with these covenants. A default under some or all
of the foregoing agreements may allow acceleration of amounts outstanding
thereunder. In such event, the Company may have to pursue alternative financing
arrangements. See "Description of Certain Indebtedness and Other Financing
Agreements."
MANAGEMENT OF GROWTH
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 Company currently anticipates spending
approximately $200 million during fiscal 1998 for expansion of production
capacity, primarily related to expansion of TSA suspension capacity, including
manufacturing and support equipment, construction of the Company's Sioux Falls,
South Dakota plant and expansion of the Company's Hutchinson, Minnesota plant.
The Company anticipates that continued significant capital expenditures will be
necessary in fiscal 1999 and 2000 for continued expansion of its TSA suspension
production capacity, and to accommodate expected market growth. 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
or timely manner could have a material adverse effect on the Company's business,
results of operations and ability to service its indebtedness (including the
Notes). The Company has significantly expanded its operations to support
increased production, including the hiring of additional personnel, and has made
and expects to continue to make substantial investments in research, development
and engineering to support product development. There can be no assurance that
the Company will be able to achieve a rate of growth or operating results in any
future period commensurate with its level of expenses.
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In an effort to enable the Company's business to grow with the market, the
Company has invested at times in additional capacity and infrastructure to
support anticipated demand for its suspension assemblies. Anticipated demand,
however, has not always materialized as rapidly as expected, resulting in
periodic underutilization of resources, decreased profitability and net losses.
Accurate capacity planning for market demand is complicated by the pace of
technological change, the effects of variable manufacturing yields, and the fact
that most of the Company's plant and equipment expenditures have long lead
times, thus requiring major commitments well in advance of actual requirements.
The Company's underestimation or overestimation of its capacity requirements, or
failure to successfully and timely put in place the proper technologies and
infrastructure, could have a material adverse effect on the Company's business,
results of operations and ability to service its indebtedness (including the
Notes).
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 could adversely
impact the Company's business, results of operations and ability to service its
indebtedness (including the Notes).
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 typically 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 commences
volume manufacturing and thereafter ramps to full production. The Company's TSA
suspension assembly production recently has moved from prototype and
pre-production volumes to production volumes. In fiscal 1997, the Company
shipped approximately 8 million TSA suspensions (approximately 4 million of
which were shipped in the fiscal 1997 fourth quarter), and in the thirteen weeks
ended December 28, 1997, the Company shipped approximately 7 million TSA
suspensions. For the first eight weeks of the fiscal 1998 second quarter, the
Company shipped approximately 7 million TSA suspensions. Cost-effective high
volume production of TSA suspensions, however, has not yet been achieved by the
Company in connection with its ramp-up of TSA suspension capacity. There can be
no assurance that the Company will attain its output goals and related
profitability with regard to TSA suspension production.
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 shipments.
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.
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 business,
results of operations and ability to service its indebtedness (including the
Notes) could be materially adversely affected.
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SUBORDINATION
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Indebtedness of the Company.
In addition, the Notes are effectively subordinated to all current and future
liabilities of the Company's subsidiaries. At February 22, 1998, the Company had
approximately $75 million of indebtedness outstanding that would have
constituted Senior Indebtedness. As a result of such subordination, in the event
of bankruptcy, liquidation or reorganization of the Company, or upon
acceleration of the Notes due to an Event of Default, the assets of the Company
will be available to pay obligations on the Notes only after the administrative
expenses of the bankruptcy and all Senior Indebtedness, if any, have been paid
in full. There may not be sufficient assets remaining to pay amounts due on any
or all of the Notes then outstanding. The Indenture does not limit or prohibit
the incurrence of additional indebtedness, including Senior Indebtedness, by the
Company or its subsidiaries. The incurrence of such additional indebtedness
could materially adversely affect the Company's ability to pay its obligations
under the Notes. The Company anticipates that it will incur additional
indebtedness in the future. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources,"
"Description of Certain Indebtedness and Other Financing Agreements" and
"Description of Notes--Subordination."
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 87%,
86%, 87% and 86% of net sales, respectively, for the thirteen weeks ended
December 28, 1997 and 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, including the development by
any one customer of the capability to produce suspension assemblies in high
volume for its own products, or the failure of a customer to pay its account
balance with the Company, could have a material adverse effect on the Company's
business, results of operations and ability to service its indebtedness
(including the Notes).
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's success depends in large part on trade secrets relating to its
proprietary manufacturing processes. The Company seeks to protect these trade
secrets and its other proprietary technology in part by requiring each of its
employees to enter into a non-disclosure agreement in which the employee agrees
to maintain the confidentiality of all proprietary information of the Company
and, subject to certain exceptions, to assign to the Company all rights in any
proprietary information or technology made or contributed by the employee during
his or her employment. In addition, the Company regularly enters into
non-disclosure agreements with third parties, such as consultants, suppliers and
customers. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any such breach, or that the
Company's trade secrets will not otherwise become known or independently
developed by the Company's competitors.
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. The Company competes in an industry characterized by
rapid development and technological innovation. There can be no assurance that
the Company's future technology will be protectable, or that any patent issued
to the Company will not be challenged, invalidated, circumvented or
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infringed. 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 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 business, results of operations and ability to
service its indebtedness (including the Notes) 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.
Litigation may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. The Company could incur substantial costs in seeking enforcement of its
issued or licensed patents against infringement or the unauthorized use of its
trade secrets and proprietary know-how by others or in defending itself against
claims of infringement by others, which could have a material adverse effect on
the Company's business, results of operations and ability to service its
indebtedness (including the Notes). See "Business--Intellectual Properties."
AVAILABILITY OF CERTAIN MATERIALS
Certain types of photoresist, a liquid compound used in the photoetching
process, and the stainless steel, copper and polyimide 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 business, results of operations and
ability to service its indebtedness (including the Notes) could be materially
adversely affected.
VOLATILITY OF NOTES AND STOCK PRICE
The market prices for securities of companies in the disk drive industry
(including those of the Company) are subject to significant volatility. If
revenue or earnings in any fiscal quarter fail to meet the investment
community's expectations for any reason, there could be an immediate adverse
impact on the market price of the Company's securities. The market, in addition,
has from time to time experienced significant price and volume fluctuations that
are unrelated to the operating results of the Company. Future announcements
concerning the Company, as well as general market conditions, may have a
significant effect on the market price of the Notes and the Common Stock into
which they are convertible. In addition, future trading prices of the Notes will
depend on other factors, such as prevailing interest rates, perceptions of the
Company's creditworthiness and the market for similar securities, and the Notes
may trade at a discount from the principal amount based on such factors. Such
volatility may limit the Company's ability in the future to raise additional
capital.
LIMITATIONS ON REPURCHASE UPON REPURCHASE EVENT
In the event of a Repurchase Event, which includes a Change in Control and a
Termination of Trading (each as defined herein), occurring prior to the maturity
of the Notes, each Holder of the Notes has the right, at such Holder's option,
to require the Company to repurchase all or any part of such Holder's Notes at a
purchase price equal to 100% of the principal amount thereof, subject to
adjustment in certain events, together with accrued and unpaid interest and
liquidated damages, if any, to, but excluding, the repurchase date. Future
agreements relating to other indebtedness (including other Senior Indebtedness)
to which the
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Company becomes a party may contain restrictions or prohibitions on the
repurchase of the Notes by the Company. In the event a Repurchase Event occurs
at a time when the Company is prohibited from repurchasing the Notes, the
Company could seek the consent of its lenders to the repurchase of the Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such consent or repay such borrowings, the Company would
remain prohibited from repurchasing the Notes. In such case, the Company's
failure to repurchase the Notes would constitute an Event of Default under the
Indenture whether or not payment of the Repurchase Price (as defined herein) is
permitted by the subordination provisions of the Indenture. Any such default
may, in turn, cause a default under Senior Indebtedness of the Company.
Moreover, the occurrence of a Repurchase Event in and of itself may constitute
an event of default under the Senior Indebtedness of the Company. As a result,
in either case, payment of the repurchase price of the Notes would, absent a
waiver, be prohibited under the subordination provisions of the Indenture until
the Senior Indebtedness is paid in full. Further, the ability of the Company to
repurchase the Notes upon a Repurchase Event will be dependent on the
availability of sufficient funds and compliance with applicable securities laws.
Accordingly, there can be no assurance that the Company will be able to
repurchase the Notes upon a Repurchase Event. The term "Repurchase Event" is
limited to certain specified transactions and may not include other events that
might adversely affect the financial condition of the Company or result in a
downgrade of the credit rating, if any, of the Notes, nor would the requirement
that the Company repurchase the Notes upon a Repurchase Event necessarily afford
the Holders of the Notes protection in the event of a highly leveraged
reorganization, merger or similar transaction involving the Company. See
"Description of Notes--Certain Rights to Require Repurchase of Notes."
ABSENCE OF PUBLIC MARKET
Prior to this offering, there has been no public market for the Notes. The
Company does not intend to apply for listing of the Notes on any securities
exchange or for quotation of the Notes through any automated quotation system.
There can be no assurance as to the liquidity of any markets that may develop
for the Notes, the ability of the Holders to sell their Notes or the price at
which the Holders of the Notes may be able to sell such Notes. Future trading
prices of the Notes will depend upon many factors including, among other things,
prevailing interest rates, the Company's operating results, the price of the
Common Stock and the market for similar securities. The Initial Purchasers have
informed the Company that they intend to make a market in the Notes offered
hereby; however, the Initial Purchasers are not obligated to do so, and any such
market making may be discontinued at any time without notice to the Holders of
the Notes. See "Description of Notes--Registration Rights; Liquidated Damages."
Prior to this offering, the Notes were designated for trading on the PORTAL
Market. The Notes are not expected to remain eligible for trading on the PORTAL
Market.
YEAR 2000 ISSUES
Certain of the Company's business systems may require updating to continue
to function properly beyond 1999. The Company believes that adequate resources
have been allocated for this purpose and does not expect to incur significant
expenditures to address this issue. However, there can be no assurance that the
Company will identify all Year 2000 compliance problems in its systems in
advance of their occurrence or that the Company will be able to remedy
successfully any problems that are discovered. The expenses of the Company's
efforts to address such problems, or the expenses or liabilities to which the
Company may become subject as a result of such problems, could have a material
adverse effect on the Company's business, results of operations and ability to
service its indebtedness (including the Notes). In addition, the revenue stream
and financial stability of existing customers may be adversely impacted by Year
2000 compliance problems, which could cause fluctuations in the Company's
revenue and operating results. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition-- Liquidity and Capital
Resources."
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USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale by the
Selling Holders of Notes or the Common Stock issuable upon conversion thereof.
The net proceeds to the Company from the issuance and sale by the Company in
March 1998 of the Notes (after deducting the Initial Purchasers' discount and
estimated offering expenses payable by the Company) were approximately
$145,000,000. The net proceeds are being used for general corporate purposes,
primarily related to expansion of TSA suspension capacity, including
manufacturing and support equipment, construction of the Company's Sioux Falls,
South Dakota assembly plant and the expansion of the Company's Hutchinson,
Minnesota plant. Pending such uses, the Company has invested the net proceeds in
short-term income-producing investments. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and Capital
Resources," "Business--Manufacturing" and "--Facilities."
CAPITALIZATION
The following table sets forth the unaudited cash, cash equivalents and
securities available for sale and capitalization of the Company at December 28,
1997 on an actual basis and as adjusted to give effect to the sale of the Notes
by the Company in March 1998 (after deducting the Initial Purchasers' discount
and estimated offering expenses payable by the Company). This table should be
read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto incorporated herein by reference to the Company's Annual
Report on Form 10-K, as amended, for the fiscal year ended September 28, 1997.
<TABLE>
<CAPTION>
DECEMBER 28, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and securities available for sale................................. $ 55,490 $ 200,490
---------- -----------
---------- -----------
Long-term debt, including current maturities(1):
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 25,000
Senior unsecured notes, 7.46%, payable in varying semi-annual installments through
February 2004........................................................................ 24,375 24,375
Other long-term debt................................................................... 2,479 2,479
6% Convertible Subordinated Notes due 2005............................................. -- 150,000
---------- -----------
Total long-term debt, including current maturities................................... 76,854 226,854
---------- -----------
Shareholders' investment:
Common Stock, $.01 par value; 45,000,000 shares authorized; 19,638,568 shares issued
and outstanding(2)................................................................... 196 196
Additional paid-in capital............................................................. 150,926 150,926
Retained earnings...................................................................... 120,612 120,612
---------- -----------
Total shareholders' investment....................................................... 271,734 271,734
---------- -----------
Total capitalization............................................................... $ 348,588 $ 498,588
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) For further description of the Company's long-term debt, see "Description of
Certain Indebtedness and Other Financing Agreements" included elsewhere in
this prospectus and the Notes to Consolidated Financial Statements of the
Company incorporated herein by reference to the Company's Annual Report on
Form 10-K, as amended, for the fiscal year ended September 28, 1997.
(2) Excludes 1,897,006 shares issuable upon exercise of options outstanding
under the Company's stock option plans as of December 28, 1997 and the
5,290,995 shares of Common Stock issuable upon conversion of the Notes. See
"Selling Holders."
16
<PAGE>
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future. Certain of
the Company's financing agreements contain restrictive covenants which, among
other things, impose limitations on the payment of dividends. See "Description
of Certain Indebtedness and Other Financing Agreements" and the Notes to
Consolidated Financial Statements of the Company incorporated herein by
reference to the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended September 28, 1997.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company trades on the Nasdaq National Market under
the symbol "HTCH." The following table sets forth for the periods indicated the
range of high and low closing sale prices of the Common Stock as reported on the
Nasdaq National Market, which prices reflect the Stock Split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1996
Quarter ended December 24, 1995.............................................................. $ 21.83 $ 15.17
Quarter ended March 24, 1996................................................................. 17.16 12.17
Quarter ended June 23, 1996.................................................................. 19.46 12.75
Quarter ended September 29, 1996............................................................. 14.38 10.25
FISCAL 1997
Quarter ended December 29, 1996.............................................................. 26.79 12.75
Quarter ended March 30, 1997................................................................. 38.38 25.17
Quarter ended June 29, 1997.................................................................. 35.00 23.44
Quarter ended September 28, 1997............................................................. 35.88 24.00
FISCAL 1998
Quarter ended December 28, 1997.............................................................. 35.44 19.38
Quarter ended March 29, 1998................................................................. 26.44 20.13
Quarter ended June 28, 1998 (through May 8).................................................. 30.94 25.56
</TABLE>
On May 8, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $30.50 per share.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of September 28, 1997,
September 29, 1996, September 24, 1995, September 25, 1994 and September 26,
1993, and for the fiscal years then ended, has been derived from the Company's
Consolidated Financial Statements which have been audited by Arthur Andersen
LLP. The information as of December 28, 1997 and December 29, 1996, and for the
thirteen weeks then ended, is unaudited. However, in the opinion of management
of the Company, such unaudited financial data includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's results of operations for the periods then ended and the Company's
financial position as of such dates. Operating results for the thirteen weeks
ended December 28, 1997 are not necessarily indicative of the results that may
be expected for the entire fiscal year. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto incorporated herein by reference to the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended September 28,
1997, and "Management's Discussion and Analysis of Results of Operations and
Financial Condition" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED FISCAL YEARS ENDED(1)
-------------------- -----------------------------------------------------
DEC. 28, DEC. 29, SEPT. 28, SEPT. 29, SEPT. 24, SEPT. 25, SEPT. 26,
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 88,982 $ 106,906 $ 453,232 $ 353,186 $ 299,998 $ 238,794 $ 198,734
Cost of sales................................... 89,478 75,794 335,953 273,616 226,235 199,548 154,311
--------- --------- --------- --------- --------- --------- ---------
Gross profit (loss)........................... (496) 31,112 117,279 79,570 73,763 39,246 44,423
Research and development expenses............... 5,161 5,739 20,185 27,651 15,041 8,626 9,846
Selling, general and administrative expenses.... 10,269 10,918 44,378 33,716 29,801 22,840 24,616
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations................. (15,926) 14,455 52,716 18,203 28,921 7,780 9,961
Other income, net............................... 567 306 4,143 1,158 1,462 1,171 1,403
Interest expense................................ (147) (858) (3,143) (2,108) (2,636) (995) (254)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes............. (15,506) 13,903 53,716 17,253 27,747 7,956 11,110
Provision (benefit) for income taxes............ (4,032) 2,786 11,807 3,451 6,669 2,076 2,556
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............................. $ (11,474) $ 11,117 $ 41,909 $ 13,802 $ 21,078 $ 5,880 $ 8,554
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic earnings (loss) per common share.......... $ (0.58) $ 0.68 $ 2.29 $ 0.84 $ 1.31 $ 0.37 $ 0.54
Diluted earnings (loss) per common share........ $ (0.58) $ 0.65 $ 2.21 $ 0.82 $ 1.28 $ 0.36 $ 0.53
Weighted average common shares outstanding...... 19,629 16,361 18,272 16,350 16,074 15,997 15,869
Weighted average common and diluted shares
outstanding................................... 19,629 17,120 18,978 16,806 16,479 16,337 16,226
OPERATING DATA:
Ratio of earnings to fixed charges(2)........... -- 7.3x 5.9x 3.8x 6.7x 2.9x 5.2x
</TABLE>
<TABLE>
<CAPTION>
DEC. 28, DEC. 29, SEPT. 28, SEPT. 29, SEPT. 24, SEPT. 25, SEPT. 26,
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 36,069 $ 54,482 $ 98,340 $ 22,884 $ 30,479 $ 18,570 $ 4,860
Working capital................................. 108,676 92,743 173,156 62,102 54,284 51,996 26,238
Total assets.................................... 427,179 289,532 429,839 238,983 190,898 151,148 116,639
Current liabilities............................. 80,120 62,117 70,190 46,563 36,208 18,829 17,870
Long-term debt, including current maturities.... 76,854 82,605 78,194 58,945 37,700 40,080 12,460
Total shareholders' investment.................. 271,734 145,037 282,958 133,684 119,745 94,619 88,689
</TABLE>
- --------------------------
(1) The Company operates on a 52 or 53 week fiscal year ending on the last
Sunday in September in each year. Fiscal 1997, 1995, 1994 and 1993 contained
52 weeks and fiscal 1996 contained 53 weeks.
(2) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes and fixed charges (exclusive of capitalized interest). Fixed charges
consist of interest (including capitalized interest) and amortization of
debt costs and the estimated interest portion of rents. Earnings were
inadequate to cover fixed charges by $17.0 million for the thirteen weeks
ended December 28, 1997.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" INCLUDED ELSEWHERE IN THIS PROSPECTUS AND
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
INCORPORATED HEREIN BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS
AMENDED, FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997. THIS PROSPECTUS,
INCLUDING THE INFORMATION INCORPORATED HEREIN BY REFERENCE, CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. IN PARTICULAR,
PROSPECTIVE PURCHASERS SHOULD REVIEW "DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS" PRECEDING THE PROSPECTUS SUMMARY. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
ABOVE IN "RISK FACTORS," AND ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Company derives virtually all of its revenue from the sale of suspension
assemblies to a small number of customers. Suspension assemblies are a critical
component of hard disk drives and the Company's results of operations are highly
dependent on the hard disk drive industry. The hard disk drive industry is
intensely competitive and highly cyclical and the Company's results of
operations have been adversely affected from time to time during hard disk drive
industry slowdowns.
The Company recently has experienced significant reduction in demand for and
shipments of its conventional suspension assemblies because of a slowdown in the
disk drive industry's demand for disk drive components due, the Company
believes, to excess inventory held by drive and recording head manufacturers.
The Company's operating results have been adversely affected by this slowdown,
and operating activities consequently have not provided the cash needed to help
fund planned capital expenditures that are necessary to meet rising demand for
the Company's TSA suspension assemblies. In addition, cost-effective high-volume
production of TSA suspensions has not yet been achieved by the Company in
connection with its ramp-up of TSA suspension capacity. These production
inefficiencies have further adversely affected operating results. For the
eight-week period ended February 22, 1998, the Company announced a net loss of
$0.56 per share on net sales of $52 million, compared with net earnings of $0.91
per share on net sales of $124 million for the thirteen-week fiscal 1997 second
quarter. The combination of these factors required the Company to raise
significant additional capital to fund its immediate short-term operating and
capital expenditure requirements, through its sale of the Notes in March 1998.
The Company's gross margins have fluctuated and will continue to fluctuate
quarterly and annually based upon a variety of factors such as the level of
utilization of the Company's production capacity, changes in demand, product
mix, selling prices and manufacturing yields, increases in production and
engineering costs associated with initial production of new products and changes
in the cost of or limitations on availability of materials. The Company's
ability to introduce new products on a timely basis is an important factor in
its continued success. New products initially have lower manufacturing yields
and are produced in lower quantities than more mature products. Manufacturing
yields generally improve as the product matures and production volumes increase.
Manufacturing yields also vary depending on the complexity and uniqueness of
product specifications. Because the Company's business is capital intensive and
requires a high level of fixed costs, gross margins are also extremely sensitive
to changes in volume. Assuming fixed product prices, small variations in
capacity utilization or manufacturing yields generally have a significant impact
on gross margins. The Company typically allows its customers to change or cancel
orders without penalty up until approximately two weeks before scheduled
shipment. Due to the absence of substantial noncancellable backlog, the Company
plans its production and inventory based on forecasts of customer demands, which
often fluctuate substantially. These factors, among others, create an
environment where demand can vary significantly from week to week.
19
<PAGE>
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 Company currently is constructing a new
assembly plant in Sioux Falls, South Dakota and is expanding its Hutchinson,
Minnesota plant. The Company currently anticipates spending approximately $200
million during fiscal 1998 for such construction and for expansion of TSA
suspension production capacity. The Company anticipates that continued
significant capital expenditures will be necessary in fiscal 1999 and 2000 for
continued expansion of its TSA suspension production capacity as the Company
transitions from conventional suspension assembly production to high volume TSA
suspension assembly production, and to accommodate anticipated market growth. If
the Company is not able to complete its current expansion plans in a timely
manner and within acceptable budgets, its quarterly and annual results of
operations will be materially and adversely affected.
RESULTS OF OPERATIONS
The following table sets forth the Company's consolidated statements of
operations as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FISCAL YEARS ENDED
------------------------ -------------------------------------
DEC. 28, DEC. 29, SEPT. 28, SEPT. 29, SEPT. 24,
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100% 100% 100% 100% 100%
Cost of sales............................................... 101 71 74 77 75
----- ----- ----- ----- -----
Gross profit (loss)....................................... (1) 29 26 23 25
Research and development expenses........................... 5 5 4 8 5
Selling, general and administrative expenses................ 12 10 10 10 10
----- ----- ----- ----- -----
Income (loss) from operations............................. (18) 14 12 5 10
Other income, net........................................... 1 -- 1 -- --
Interest expense............................................ -- (1) (1) -- (1)
----- ----- ----- ----- -----
Income (loss) before income taxes......................... (17) 13 12 5 9
Provision (benefit) for income taxes........................ (4) 3 3 1 2
----- ----- ----- ----- -----
Net income (loss)......................................... (13)% 10% 9% 4% 7%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THIRTEEN WEEKS ENDED DECEMBER 28, 1997 VS. THIRTEEN WEEKS ENDED DECEMBER 29,
1996
Net sales for the thirteen weeks ended December 28, 1997 were $88,982,000, a
decrease of $17,924,000 or 17% compared to the comparable period in fiscal 1997.
This decrease was primarily due to decreased suspension assembly sales volume.
Gross loss for the thirteen weeks ended December 28, 1997 was $496,000,
compared to a gross profit of $31,112,000 for the comparable period in fiscal
1997, and gross profit (loss) as a percent of net sales decreased from 29% to
(1)%, primarily due to lower conventional suspension assembly sales volume and
higher costs associated with TSA suspension assembly capacity expansion.
Research and development expenses for the thirteen weeks ended December 28,
1997 were $5,161,000 compared to $5,739,000 for the thirteen weeks ended
December 29, 1996. The prior year amount includes development expenses related
to production of TSA prototype suspensions.
Selling, general and administrative expenses for the thirteen weeks ended
December 28, 1997 were $10,269,000, a decrease of $649,000 or 6% compared to the
comparable period in fiscal 1997. The decreased expenses were due primarily to
decreased profit sharing and other incentive compensation costs of $2,744,000,
partially offset by an increase in labor expenses of $761,000, increased
recruitment and relocation of $560,000 and higher bad debt expense of $389,000.
As a percent of net sales, selling, general
20
<PAGE>
and administrative expenses increased from 10% in the first quarter of fiscal
1997 to 12% in the first quarter of fiscal 1998.
Other income for the thirteen weeks ended December 28, 1997 was $567,000, an
increase of $261,000 from the comparable period in fiscal 1997, primarily due to
an increase in interest income as a result of a higher average investment
balance.
Interest expense for the thirteen weeks ended December 28, 1997 decreased
$711,000 from the comparable period in fiscal 1997, primarily due to an increase
in capitalization of interest of $986,000, offset partially by higher average
outstanding debt.
The income tax benefit for the thirteen weeks ended December 28, 1997 was
based on an estimated effective tax rate for the fiscal year of 26% 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 loss for the thirteen weeks ended December 28, 1997 was $11,474,000,
compared to net income of $11,117,000 for the comparable period in fiscal 1997.
As a percent of net sales, net income (loss) decreased from 10% to (13)%
primarily due to the lower sales volume and higher fixed costs noted above.
YEAR ENDED SEPTEMBER 28, 1997 VS. YEAR ENDED SEPTEMBER 29, 1996
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 is 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.
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 qualifies 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.
21
<PAGE>
YEAR ENDED SEPTEMBER 29, 1996 VS. YEAR ENDED SEPTEMBER 24, 1995
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 suspension 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 startup 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.
22
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated quarterly financial
data for the periods indicated. This data is derived from unaudited consolidated
financial statements and, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial results for such periods. Results of operations for any previous
fiscal quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------------------------------------
DEC. 28, SEPT. 28, JUNE 29, MAR. 30, DEC. 29,
1997 1997 1997 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 88,982 $ 100,354 $ 121,713 $ 124,259 $ 106,906
Cost of sales........................................ 89,478 86,046 88,534 85,579 75,794
---------- ---------- ---------- ---------- ----------
Gross profit (loss)................................ (496) 14,308 33,179 38,680 31,112
Research and development expenses.................... 5,161 5,028 4,671 4,747 5,739
Selling, general and administrative expenses......... 10,269 9,457 11,955 12,048 10,918
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...................... (15,926) (177) 16,553 21,885 14,455
Other income, net.................................... 567 1,217 1,759 861 306
Interest expense..................................... (147) (517) (759) (1,009) (858)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................. (15,506) 523 17,553 21,737 13,903
Provision (benefit) for income taxes................. (4,032) 112 3,855 5,054 2,786
---------- ---------- ---------- ---------- ----------
Net income (loss).................................. ($ 11,474) $ 411 $ 13,698 $ 16,683 $ 11,117
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per common share............... ($ 0.58) $ 0.02 $ 0.70 $ 0.95 $ 0.68
Diluted earnings (loss) per common share............. ($ 0.58) $ 0.02 $ 0.68 $ 0.91 $ 0.65
Weighted average common shares outstanding........... 19,629 19,585 19,531 17,610 16,361
Weighted average common and diluted shares
outstanding........................................ 19,629 20,334 20,276 18,415 17,120
AS A PERCENTAGE OF NET SALES:
Net sales............................................ 100% 100% 100% 100% 100%
Cost of sales........................................ 101 86 73 69 71
---------- ---------- ---------- ---------- ----------
Gross profit (loss)................................ (1) 14 27 31 29
Research and development expenses.................... 5 5 3 3 5
Selling, general and administrative expenses......... 12 9 10 10 10
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...................... (18) 0 14 18 14
Other income, net.................................... 1 2 1 -- --
Interest expense..................................... -- (1) (1) (1) (1)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................. (17) 1 14 17 13
Provision (benefit) for income taxes................. (4) 1 3 4 3
---------- ---------- ---------- ---------- ----------
Net income (loss).................................. (13)% 0% 11% 13% 10%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Following a period of accelerated growth in demand for conventional
suspension assemblies which began in the first quarter of fiscal 1997, in the
most recent three fiscal quarters for which data is set forth above (commencing
in the last part of the third quarter of fiscal 1997) the Company has
experienced significantly declining sales of conventional suspension assemblies.
These declines are directly related to reduced demand from both disk drive and
recording head manufacturers, as drive manufacturers have sought, the Company
believes, to lower inventory levels and reduce the disk drive industry
oversupply that accumulated during the preceding period of growth. Demand for
and shipments of the Company's TSA
23
<PAGE>
suspension assemblies have increased steadily, however, during the most recent
three fiscal quarters for which data is set forth above. In order to meet
current and anticipated future demand for TSA suspension assemblies, the Company
is continuing its planned expansion of TSA production capacity, which has
required significantly increased levels of capital expenditures. The
simultaneous reduction in revenue associated with conventional suspension
assemblies and the increase in revenue associated with TSA suspension assemblies
has resulted in significantly declining gross margins. In contrast to the
Company's profitable conventional suspension production, TSA suspension
production only recently moved from prototype and pre-production volumes to
production volumes. The relatively early stage of volume production has resulted
in production inefficiencies and lower manufacturing yields, and therefore
profitability has not yet been achieved. Because of the significant level of
fixed costs inherent in the Company's business, earnings have historically risen
and declined in direct correlation to conventional suspension assembly sales.
The Company believes that demand for its conventional suspension assemblies will
increase when disk drive inventory levels are reduced, as the Company does not
believe there has been a significant slowdown in end user demand for storage
capacity or a fundamental shift in technology away from disk drive storage. See
"Risk Factors--Fluctuations in Operating Results; Liquidity Needs."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operations,
cash balances and additional financing capacity. The Company's cash and cash
equivalents decreased to $36,069,000 at December 28, 1997 from $98,340,000 at
September 28, 1997 and as compared to $22,884,000 at September 29, 1996. The
Company used cash from operating activities of $1,852,000 for the thirteen weeks
ended December 28, 1997, as compared to cash generated from operating activities
of $76,816,000 in fiscal 1997, $39,904,000 in fiscal 1996 and $57,814,000 in
fiscal 1995.
Cash used for capital expenditures totaled $56,794,000 for the thirteen
weeks ended December 28, 1997, an increase of $48,303,000 from the comparable
period in fiscal 1997, and was $82,639,000 in fiscal 1997, $77,065,000 in fiscal
1996 and $44,472,000 in fiscal 1995. The expenditures for the first quarter of
fiscal 1998 were primarily related to expansion of TSA suspension capacity,
including manufacturing and support equipment, construction costs for the
Company's Sioux Falls, South Dakota plant and construction of an expansion to
the Company's Hutchinson, Minnesota plant. 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.
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 currently does not have available a
revolving credit or other similar borrowing facility. See "Risk
Factors--Increased Leverage; Financial Covenants" and "Description of Certain
Indebtedness and Other Financing Agreements--Old Credit Facility."
During the first quarter of fiscal 1997, the Company signed a Master Lease
Agreement for up to $25,000,000 with GE. The agreement provided 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 Company's consolidated balance sheet under GE lease receivable.
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In March 1998, the Company issued and sold $150,000,000 aggregate principal
amount of the Notes to the Initial Purchasers, which resold the Notes in
transactions exempt from registration under the Securities Act. Following the
sale of the Notes by the Company in March 1998, the Company's principal future
liquidity requirements will be for debt service requirements under the Notes and
other outstanding indebtedness, and to fund operations and capital expenditures.
Historically, the Company has funded its capital and operating requirements with
a combination of cash generated from operations and external debt or equity
financings. The Company has utilized these sources of capital to fund
significant capital expenditures, to fund operations and to service debt. The
Company currently anticipates fiscal 1998 capital expenditures of approximately
$200 million, primarily related to expansion of TSA suspension capacity,
including manufacturing and support equipment, construction of the Company's
Sioux Falls assembly plant and the expansion of the Company's Hutchinson plant.
These capital expenditures will support the Company's continued development of,
and capacity expansion for, TSA suspension assemblies. The Company believes the
net proceeds from the sale of the Notes by the Company in March 1998, any cash
generated from operations and anticipated future revenue will be sufficient to
meet its operating expenses, debt service and capital expenditure requirements
through fiscal 1999, as the Company continues to transition from conventional
suspension assembly production to high volume TSA suspension assembly
production. See "Risk Factors--Fluctuations in Operating Results; Liquidity
Needs" and "--Capital Needs."
The Company anticipates that continued significant capital expenditures will
be necessary in fiscal 1999 and 2000 for continued expansion of its TSA
suspension production capacity, and to accommodate anticipated market growth. In
that regard, beyond fiscal 1999 the Company expects it will require significant
additional external financing to fund operations, debt service and capital
expenditures. The Company's ability to fund its future liquidity needs depends
on its future performance and financial results, which, to a certain extent, are
subject to general conditions in the hard disk drive industry as well as general
economic, financial, competitive and other factors that are beyond its control.
If forecasted operating results do not meet the Company's expectations or if the
Company is unable to obtain adequate financing at such time or times as such
financing is required, the Company's future financial results and liquidity
could be materially adversely affected. There can be no assurance that the
Company's business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
the Company will be able to obtain additional financing in an amount sufficient
to enable the Company to service its indebtedness (including the Notes), make
necessary capital expenditures or fund its operations. See "Risk
Factors--Capital Needs."
In connection with the sale of the Notes by the Company in March 1998, the
Company incurred $150 million in additional indebtedness which increased the
ratio of total debt to total capitalization from 22.3%, at February 22, 1998, to
46.3%, on an as adjusted basis. As a result of this increased leverage, the
Company's interest obligations increased substantially. To the extent that a
substantial portion of the Company's cash flow from operations is used to pay
the principal of, and interest on, its indebtedness, such cash flow will not be
available to fund future operations and capital expenditures. There is no
assurance that the Company's operating cash flow will be sufficient to meet its
debt service requirements or to repay the Notes at maturity or upon a Repurchase
Event. See "Risk Factors--Increased Leverage; Financial Covenants,"
"--Limitations on Repurchase Upon Repurchase Event," "Capitalization" and
"Selected Consolidated Financial Data."
The Company uses technology throughout its operations that will be affected
by Year 2000 issues. During fiscal 1997, the Company implemented remediation
steps to make the core business systems which are part of the Company's computer
systems Year 2000 compliant. The Company also has initiated a company-wide
project, to be completed in fiscal 1998, to identify and assess other Company
systems for Year 2000 compliance and the Year 2000 compliance status of its
critical suppliers. The expenses relating to Year 2000 compliance incurred in
fiscal 1997 and for the thirteen weeks ended December 28, 1997 were not
material, and the Company believes the amounts that may be required to be
incurred in the future for such compliance will not have a material impact on
its results of operations, liquidity and capital resources. See "Risk
Factors--Year 2000 Issues."
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BUSINESS
THE COMPANY
The Company is the world's leading supplier of suspension assemblies for
hard disk drives. The Company estimates that it produces approximately 70% of
all suspension assemblies sold to disk drive manufacturers and their suppliers,
including recording head manufacturers, worldwide. 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 of all types. 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, Samsung, Seagate Technology, TDK/SAE Magnetics,
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, and has maintained this position through multiple technological
transitions in the disk drive industry over the past decade.
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 TSA suspension assemblies are designed to satisfy both the new
electrical connectivity requirements of the disk drive industry as well as the
changing market demands and performance standards required by its customers. TSA
suspensions incorporate thin electrical conductors in the suspension itself
which replace the fine wires used to connect the recording head to the drive's
electronic circuitry. The Company anticipates continuing acceptance by the disk
drive industry of its TSA suspensions during the next two years, as TSA
suspensions offer customers opportunities to enhance drive performance by
eliminating wires that interfere with the recording head's flying performance.
The Company believes TSA suspensions also enable customers to improve yields and
throughput, eliminate manufacturing steps and adopt automated assembly
processes, all of which can lower their overall costs of production and improve
production efficiencies. During the first fiscal year of volume manufacturing of
TSA suspension assemblies (the fiscal year ended September 28, 1997), the
Company shipped approximately 8 million TSA suspensions (approximately 4 million
of which were shipped in the fiscal 1997 fourth quarter), and in the thirteen
weeks ended December 28, 1997, the Company shipped approximately 7 million TSA
suspensions. For the first eight weeks of the fiscal 1998 second quarter, the
Company shipped 7 million TSA suspensions. As of April 15, 1998, TSA suspensions
were in use in five customer disk drive programs in production and had been
designed-in on a total of seventeen programs. The Company believes its TSA
suspensions, and related follow-on features currently in development, will
become a disk drive industry standard platform onto which multiple features can
be integrated.
INDUSTRY BACKGROUND
In an October 1997 report, IDC estimated that total revenue in the disk
drive industry (defined as unit shipments multiplied by the midyear average unit
price paid by OEMs for quantity 1000+ contracts) would surpass $28 billion in
1997 and grow to over $40 billion in 1999. Disk drive industry growth has been
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.
In its October 1997 report, IDC stated that desktop PCs and multiuser systems
are expected to grow at 12% and 14% compound annual growth rates, respectively,
from 1997 to 2001. Moreover, unit growth rates for disk drives and disk drive
components are expected to exceed unit growth rates for desktop PCs and
multiuser systems due to a variety of factors, including the rapidly increasing
demand for additional storage capacity. IDC's report estimates that hard disk
drive unit shipments will grow at a compound annual growth rate of 19% from 1997
to 2001.
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This demand for additional storage capacity is stimulated by 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"). According to its
October 1997 report, IDC estimated that annual shipments of disk drives would
reach 130.7 million in 1997 and grow to 190.5 million in 1999. This growth is
occurring 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 MR heads, which are
significantly more sensitive than thin film inductive heads in reading data from
disks with higher areal densities, 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.
The disk drive industry, despite the rapid growth in recent years, is also
highly cyclical and from time to time experiences downturns. End user demand for
storage capacity, however, has not slowed significantly, as rapidly evolving
technology and computer applications continue to require storage devices with
increased capacity and functionality. Suspension assembly unit sales are
currently depressed due to the current slowdown in component demand which began
in the summer of 1997 due, the Company believes, to excess inventory held by
drive and recording head manufacturers. Total shipments of the Company's
suspension assembly units have decreased from a peak of approximately 201
million shipped in the thirteen weeks ended March 30, 1997 to approximately 135
million shipped in the thirteen weeks ended December 28, 1997. This decrease has
not affected industry demand for the Company's TSA suspensions, which continues
to rise. The Company believes that demand for its conventional suspension
assemblies will increase when disk drive inventory levels are reduced, as the
Company does not believe there has been a significant slowdown in end user
demand for storage capacity or a fundamental shift in technology away from disk
drive storage.
All 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.
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
performance and 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 is about one
millionth of an inch (a sheet of paper is approximately 3,000 millionths of an
inch thick).
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Hard disk drive storage capacity increases as areal density increases.
Improvements in areal density have been attained by lowering the fly height of
the recording head, using smaller recording heads with advanced air bearing
designs, improving other components such as motors and media and using new
recording head types such as those of MR design. As drive manufacturers
transition to smaller pico-sized MR heads, the current process of bonding fine
electrical wires to the recording head and to the rest of the drive's electronic
circuitry is becoming more difficult and costly, and the wires themselves
interfere with the head's flying performance.
DATA STORAGE ALTERNATIVES. Demand for data storage capacity is expected to
increase one hundredfold over the next ten years. Disk drives continue to be the
storage device of choice for applications requiring low access times, high
transfer rates and capabilities in excess of one gigabyte. The average cost per
megabyte of disk drive storage continues to decline and, at the end of 1997,
storage in large capacity drives was approximately 7 cents per megabyte, as
compared to approximately 10 cents at the end of 1996. In addition to disk
drives, several other methods of storing data are currently available, including
semiconductor (flash) memory, tape memory and laser (optical and CD) drives.
While use of flash "drives" has grown during the last year, its price is
typically in excess of $10.00 per megabyte and it is used primarily in
applications where its higher speed and durability and lower power usage
outweigh the cost disadvantage. Often mobile systems include the option of both
flash memory and disk drives, with a small amount of flash memory available for
very high-speed storage and the bulk of the data or programs stored on disk
drives. Both tape drives and optical drives can store data at lower cost than
disk drives, but their speeds of data access and transfer continue to be
considerably slower than those of disk drives because of technical limitations
that the Company believes are inherent in their operation. In addition, although
optical drives can store data inexpensively, the ability to write to CDs is very
expensive. These types of devices continue to be used, in addition to disk
drives, for the storage of very large amounts of data which does not require
fast access. Currently in development are new storage devices combining magnetic
and optical storage technologies. These new drives incorporate magneto-optical
recording heads which may have fly heights similar to disk drives, and thus
require suspension assemblies to control their fly height. Because these new
magneto-optical drives are in development, they still have many technical and
economic challenges to overcome before becoming commercially available.
The Company continually monitors technological developments in the data
storage arena. On an ongoing basis, the Company reviews technological threats to
the disk drive market and utilizes various universities, consortiums and
industry participants to provide additional third-party insights.
STRATEGY
The Company intends to maintain its position at the forefront of industry
technology transitions, as it has over the past decade, by delivering industry
standard solutions to industry-wide technological challenges. The Company
designs and develops suspension assemblies which meet the increasingly higher
performance specifications of disk drive manufacturers, and is committed to
reliably producing its suspension assemblies in high volume, with specialized
design, expanded functionality and greater precision. The Company has
increasingly emphasized assisting disk drive manufacturers in reducing their
time to market with new drives by designing and developing suspension
assemblies, and the processes to manufacture them, in advance of market needs.
Key elements of the Company's strategy include:
DELIVER INDUSTRY STANDARD SOLUTIONS. As the disk drive industry transitions
to smaller pico-sized MR heads, the Company is leading a parallel technological
transition among industry component suppliers by developing a product platform
that it believes will significantly enhance drive performance. The Company's TSA
suspensions offer customers a wireless solution to industry-wide manufacturing
problems posed by smaller pico-sized MR heads. The Company believes TSA
suspensions enable customers to improve yields and throughput, eliminate
manufacturing steps and adopt automated assembly processes, all of which can
lower their overall costs of production and improve production efficiencies. The
Company
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believes that its TSA suspensions will provide an industry standard component
platform onto which multiple features that enhance hard disk drive performance
can be integrated.
MAINTAIN TECHNOLOGY LEADERSHIP WITH CUSTOMER-FOCUSED ENGINEERING. The
Company's engineers and sales force work closely with the engineering staffs of
its customers as a design team to develop suspension assemblies that address
individual customer requirements. Through its customer relationships, the
Company derives substantial insight into industry trends. This insight enables
the Company to provide advanced designs which position it well to have its
suspension assemblies designed into future generations of disk drives.
MANUFACTURE HIGH VOLUME PRECISION PRODUCTS. In addition to its design
expertise, the Company believes its leadership position is based on its volume
production capability and the precision of its suspension assemblies. In order
to provide assemblies in high volumes and with the precision required by its
customers, the Company has increasingly invested in developing advanced process
and measurement systems in connection with the design of its automated
production equipment. The Company has adopted an integrated and flexible
manufacturing approach that closely couples design, tooling and manufacturing.
This integrated approach has enabled the Company to respond rapidly to changes
in the volume and product mix demands of its customers.
LEAD INDUSTRY TECHNOLOGY TRANSITIONS. The Company has been at the forefront
of multiple technological transitions in the disk drive industry over the past
decade and intends to remain a technological leader by identifying emerging
industry trends and responding with solutions in advance of market needs. In
prior industry transitions, such as the rapid move from micro- to the smaller
nano-sized heads in 1993, and in the current more gradual move from nano- to
even smaller pico-sized heads, the Company has developed innovative design and
manufacturing solutions in advance of its competitors. Although many drive
manufacturers are just now making the transition to pico-sized heads, the
Company's technological leadership is evidenced by its current qualification in
nineteen pico-design drive programs, having been initially qualified in a pico
program in 1994. In addition, to continue to lead industry technology
transitions, the Company has already begun to develop follow-on features for its
TSA suspension assemblies which should enable drive manufacturers to continue to
achieve improved drive performance and increased data storage capacity.
PRODUCTS
The Company manufactures suspension assemblies and certain other etched and
stamped components used in connection with or related to suspension assemblies.
During the fiscal year ended September 28, 1997 and for the thirteen weeks ended
December 28, 1997, the Company shipped approximately 719 million and 135 million
suspension assemblies of all types, respectively. 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
been in the forefront of industry technology transitions by developing 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). To help develop prototype suspensions, the Company maintains a
test laboratory and computerized systems to simulate and analyze suspension
designs. The Company's ability to predict and modify suspension assembly
performance is especially important in developing suspensions for high capacity
drives and drives with low access times.
CONVENTIONAL SUSPENSION ASSEMBLIES
The Company currently has the capacity to produce over 300 variations of
conventional suspension assemblies based on several standard designs for the
nano and pico platforms. This capability permits the Company to assist
customers' design efforts and to rapidly modify its standard designs to meet the
varied and changing requirements of specific customers. The Company believes
that its integrated manufacturing approach, closely coupling design, tooling and
manufacturing, gives it a competitive advantage in quickly
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supplying conventional suspension prototypes and commencing volume
manufacturing. This manufacturing approach also allows the Company to rapidly
shift tooling in its conventional suspension assembly production units to
respond to fluctuating product mix and thereby minimize the size of its finished
goods inventory.
TSA SUSPENSION ASSEMBLIES
The Company anticipates continuing acceptance by the disk drive industry of
its TSA suspensions during the next two years, 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. The current process of using fine electrical wires to attach
the smaller head to the rest of the drive's electronic circuitry is more
difficult and costly, involving greater risk of handling damage as well as
interference by the electrical wires with the head's performance.
Electrical integration, a key feature of the Company's TSA suspensions, can
reduce the manual labor required to attach heads to suspensions and thus
facilitates 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 position. 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 MR heads,
which constitute a major portion of the new and smaller types of recording heads
that allow increased data storage density. MR heads require at least twice as
many electrical leads as conventional recording heads. For these reasons, TSA
suspensions command a higher sale price than the Company's conventional
suspensions.
The Company introduced TSA suspension assemblies to customers and began
shipping electrically functional engineering samples in the first half of fiscal
1996. The Company recently has moved into production volume of its TSA
suspension assemblies. In fiscal 1997, the Company shipped approximately 8
million TSA suspensions (approximately 4 million of which were shipped in the
fiscal 1997 fourth quarter), and in the thirteen weeks ended December 28, 1997,
the Company shipped approximately 7 million TSA suspensions. For the first eight
weeks of the fiscal 1998 second quarter, the Company shipped approximately 7
million TSA suspensions, which are currently designed-in on a total of seventeen
programs and are in use in five customer disk drive programs in production.
While TSA suspensions only accounted for approximately one percent of the
Company's fiscal 1997 unit shipments, the Company expects them to account for
half or more of its total output during fiscal 1999. To further assure customers
that the TSA suspensions they require for their products will be readily
available when and where they are needed, in fiscal 1998 the Company started
offering for sale to competitive suspension assembly manufacturers
component-level parts, such as load beams, base plates and flexures for both
conventional and TSA suspensions. As demand for TSA suspensions increases,
customers will now have an additional source of supply for critical suspension
assemblies.
TSA suspension assemblies are adaptable to future developments in disk drive
design and manufacturing. Variations of TSA suspension assemblies now in
development offer promising solutions to the challenges posed by increasing
areal density so as to increase disk drive capacity. As the number of data
tracks per disk increases to achieve increased areal density (tracks are
expected to increase from the current 5,000 per inch to 20,000 or more per inch
within the next few years), recording heads must be positioned above data tracks
with more precision than current disk drive technology allows. A TSA suspension
incorporating a second stage actuator could provide the required degree of
precision to properly position the head over a data track as track densities
increase. Similarly, an increase in areal density achieved by increasing the
number of data bits recorded per linear inch on each data track will
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require preamplification to overcome signal to noise problems that occur as bit
density increases. Electrical termination pads incorporated in a TSA suspension
provide a means of positioning a preamplifier closer to the recorded data to
reduce the signal to noise problem. Additional variations for other TSA
suspension products are also in development. The Company anticipates that its
development of TSA suspensions and these related follow-on features will result
in TSA products becoming a disk drive industry standard platform.
The Company continues to invest a substantial amount of financial,
management, engineering and manufacturing resources in the development of its
TSA suspension assemblies. If continuing market acceptance and/or production of
the Company's TSA suspension assemblies were delayed for any reason or if
widespread market acceptance of the TSA product platform is not achieved, the
Company's business, results of operations and ability to service its
indebtedness (including the Notes) could be materially adversely affected.
Furthermore, if the Company fails to transition to cost-effective high volume
production of TSA suspensions and determines that TSA suspension assemblies
cannot be produced profitably in the quantities and to the specifications
required by customers, the Company's business, results of operations and ability
to service its indebtedness (including the Notes) could be materially adversely
affected.
OTHER PRODUCTS
The Company 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 product opportunities in the medical devices
market. In February 1998, the Company received FDA clearance for marketing in
the U.S. a monitor that measures the percentage of oxygenated blood in tissue,
and the monitor is now the subject of clinical trials at several hospitals. The
Company does not expect any medical-related revenue in fiscal 1998, and there
can be no assurance that the Company's efforts will result in marketable
products 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 plants and equipment. The Company also has
adopted an integrated manufacturing approach that closely couples design,
tooling and manufacturing. This integrated approach has facilitated the
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 reducing the Company's manufacturing costs.
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
electronic 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.
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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 polyimide 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. See "Risk Factors-- Availability of Certain Materials."
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 December 28, 1997, the Company employed 986 engineers and technicians who are
responsible for implementing new technologies as well as process and product
development and improvements. Expenditures for these activities for the thirteen
weeks ended December 28, 1997 and for fiscal 1997, 1996 and 1995 amounted to
approximately $11,358,000, $48,204,000, $51,212,000 and $32,567,000,
respectively. Of those amounts, the Company classified approximately $5,161,000,
$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 of its TSA suspension assemblies and
related follow-on features to meet ongoing technological advances in the disk
drive industry, including 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 non-exclusive Patent License
Agreement (the "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 February 1, 1998, the Company
had made payments totaling $5,500,000 to IBM and will make additional payments
over the next four fiscal quarters totaling $2,500,000, all of which have been
recorded as an expense by the Company. In addition, 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 product opportunities in
the medical devices market, including a monitor that measures tissue oxygen
saturation. This monitor recently received FDA clearance for marketing in the
U.S., and is now the subject of clinical trials at several hospitals. For the
thirteen weeks ended December 28, 1997 and for fiscal 1997, 1996 and 1995,
research and development expenses allocated to such devices were approximately
$1,008,000, $2,725,000, $1,990,000 and $1,477,000, respectively. The Company
currently anticipates that research and development expenses allocated to such
product opportunities in fiscal 1998 will increase to approximately $5,000,000.
There can be no assurance that the Company's efforts will result in marketable
products or that such products will ever generate significant revenue.
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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 as a percentage of
net sales.
<TABLE>
<CAPTION>
THIRTEEN WEEKS FISCAL YEARS ENDED
ENDED ----------------------------
---------------------------- SEPT. 28, SEPT. 29,
DEC. 28, 1997 DEC. 29, 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Seagate Technology Incorporated................................ 17% 36% 33% 35%
Read-Rite Corporation.......................................... 19 13 14 13
Yamaha Corporation............................................. 12 14 14 16
TDK/SAE Magnetics, Ltd......................................... 27 13 13 14
IBM............................................................ 12 10 12 9
<CAPTION>
SEPT. 24,
1995
-------------
<S> <C>
Seagate Technology Incorporated................................ 36%
Read-Rite Corporation.......................................... 19
Yamaha Corporation............................................. 13
TDK/SAE Magnetics, Ltd......................................... 9
IBM............................................................ 9
</TABLE>
Sales to the Company's five largest customers constituted 87% and 86% of net
sales, respectively, for the thirteen weeks ended December 28, 1997 and December
29, 1996, and 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 Corporation and Western Digital Corporation, which may purchase
recording head assemblies from several different recording head manufacturers
that utilize the Company's suspension assemblies. TSA suspensions currently are
in production in drive programs at IBM, Quantum, Samsung and Toshiba.
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. See "Risk Factors--Customer Concentration."
Sales to foreign-based enterprises totaled $27,996,000, $88,471,000,
$63,898,000 and $46,075,000 for the thirteen weeks ended December 28, 1997 and
for fiscal 1997, 1996 and 1995, respectively. Sales to foreign subsidiaries of
U.S. corporations totaled $19,933,000, $83,753,000, $51,564,000 and $54,398,000
for the thirteen weeks ended December 28, 1997 and for 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. 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. See "Risk Factors--Dependence on Hard Disk Drive Industry."
33
<PAGE>
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 it
produces 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 wireless interconnection technologies that are
alternatives to conventional wiring, such as deposition circuitry and flexible
circuitry which are also being considered for and used in drive production.
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 data storage systems, such as semiconductor (flash) memory,
tape memory 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,
flash memories are not expected to be price competitive with disk drives and
optical and tape memories are inherently much slower than disk drives.
Accordingly, the Company believes that such technologies will not materially
impact the market for hard disk drives in the near future. See "Industry
Background--Data Storage Alternatives" above.
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
April 1, 1998, the Company held 42 U.S. patents and nine foreign patents, and
had 72 patent applications pending in the U.S. and 31 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 in large part upon its engineering skills and
proprietary manufacturing processes. There can be no assurance that any patent
issued to the Company will not be challenged, invalidated, circumvented or
infringed 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 other 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
34
<PAGE>
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.
See "Risk Factors--Intellectual Properties."
EMPLOYEES
As of December 28, 1997, the Company had 7,324 regular employees, 3,948 of
whom were working at the Company's Hutchinson, Minnesota plant, 1,586 of whom
were working at the Company's Sioux Falls, South Dakota plant, 1,545 of whom
were working at the Company's Eau Claire, Wisconsin plant, 233 of whom were
working at the Company's Plymouth, Minnesota plant, and 12 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 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.
FACILITIES
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 480,000 square feet. The Company also leases a 20,000
square foot warehouse, 34,000 square feet of office space and a fabrication shop
of approximately 12,000 square feet near the Hutchinson site. The Company is
constructing a 178,000 square foot expansion to an existing 56,000 square foot
equipment build center in Hutchinson.
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 is constructing a 295,000 square foot manufacturing plant in Sioux
Falls.
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, which first produced parts that
were customer-qualified in October 1997.
The Company leases 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 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.
35
<PAGE>
LEGAL PROCEEDINGS
On February 27, 1998, the Company commenced a lawsuit, in McLeod County
District Court in Glencoe, Minnesota, against five former employees and their
newly-formed company. Four of the five former employees were managers or
supervisors and all were involved with the Company's TSA suspension program. The
lawsuit alleges, among other things, breach of non-compete, confidentiality and
assignment of inventions agreements. The Company seeks monetary damages in an
amount to be determined at trial, and an injunction preventing unlawful conduct
by the defendants. The Company has determined to pursue the lawsuit to prevent
the improper use and disclosure of trade secrets and other confidential
information.
The Company is a 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 business or results
of operations.
36
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Jeffrey W. Green...................... 57 Chairman of the Board and Director
Wayne M. Fortun....................... 49 President, Chief Executive Officer and Chief
Operating Officer and Director
John A. Ingleman...................... 52 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 Component
Operations
Richard C. Myers...................... 57 Vice President of Administration
LeRoy E. Olson........................ 61 Vice President of Disk Drive Components
Operations Development
Richard J. Penn....................... 42 Vice President of Sales and Marketing
R. Scott Schaefer..................... 44 Vice President and Chief Technical Officer
W. Thomas Brunberg(1)................. 58 Director
Archibald Cox, Jr.(2)................. 57 Director
James E. Donaghy(1)................... 63 Director
Harry C. Ervin, Jr.(2)................ 69 Director
Steven E. Landsburg(2)................ 44 Director
Richard N. Rosett(1).................. 70 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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.
MR. FORTUN was elected President and Chief Operating Officer in 1983 and
Chief Executive Officer in May 1996. He has served as a director of the Company
since 1983. He is also a director of G&K Services, Inc. and Excelsior-Henderson
Motorcycle Manufacturing Company. Mr. Fortun has been with the Company since
1975.
MR. INGLEMAN was elected Vice President in January 1982, Chief Financial
Officer in January 1988 and Secretary in January 1992. Previously he 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. Previously she had been Director of
Component Operations since 1988. Ms. Graczyk has been with the Company since
1970.
37
<PAGE>
MR. MYERS was elected Vice President in January 1988 and is now Vice
President of Administration. In January 1995, he was elected Vice President of
Administration. 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. Previously 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. Previously 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.
MR. BRUNBERG became a director of the Company in 1975. He is a certified
public accountant and has been a shareholder in the Minneapolis accounting firm
of Brunberg Thoresen Diaby & Associates, Ltd. since March 1991.
MR. COX became a director of the Company in May 1996. Mr. Cox has been Vice
Chairman and President of Magnequench International, Inc., a manufacturer of
magnets and magnetic material, since October 1995. He has been Chairman of
Sextant Group, Inc., a financial advisory firm, since August 1993. Mr. Cox
served as President and Chief Executive Officer of The First Boston Corporation,
an investment banking firm, from July 1990 to August 1993, and as a Managing
Director of Tiger Management Company, an investment fund, from November 1993 to
June 1994.
MR. DONAGHY became a director of the Company in 1992. From January 1991 to
September 1997, Mr. Donaghy was the Chief Executive Officer and President and a
director of Sheldahl, Inc. ("Sheldahl"), a manufacturer of laminates, composite
materials and flexible electronic interconnects. He has been Chief Executive
Officer and a director of Sheldahl since September 1997.
MR. ERVIN became a director of the Company in 1969. Mr. Ervin, who is now
retired, was a Vice President of Dain Bosworth Incorporated, an investment
banking firm, from April 1988 through June 1996.
MR. LANDSBURG became a director of the Company in March 1997. He has been an
Associate Professor of Economics at the University of Rochester since September
1991.
MR. ROSETT became a director of the Company in 1986. He has been a Professor
of Economics at the Rochester Institute of Technology ("RIT") since July 1990
and Director of Quality Cup Programs at RIT since July 1995. Mr. Rosett was Dean
of the College of Business at RIT from July 1990 to July 1996. Mr. Rosett is
also a director of Smith Corona Corp.
38
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS AND OTHER FINANCING AGREEMENTS
Set forth below is a summary description of the Private Placement Notes and
the Company's variable rate demand note (and related letter of credit) with the
City of Hutchinson, Minnesota, which constitute Senior Indebtedness for purposes
of the Notes offered hereby. Also described below are certain other financing
agreements that will not constitute Senior Indebtedness.
PRIVATE PLACEMENT NOTES
In July 1996 the Company entered into separate Note Purchase Agreements with
several insurance companies pursuant to which the Company issued, in July 1996,
senior unsecured notes in the aggregate original principal amount of $25,000,000
and, in November 1996, a senior unsecured note in the original principal amount
of $25,000,000. The notes issued in July 1996 bear interest at the fixed rate of
7.85% per annum. The principal of such notes is payable in 3 consecutive annual
installments of approximately $8,333,333 each commencing in July 2001 and
continuing until July 2003. The note issued in November 1996 bears interest at
the fixed rate of 8.07% per annum. The principal of such note is payable in 6
consecutive annual installments of approximately $4,166,667 each commencing in
November 2001 and continuing until November 2006. The notes are prepayable at
any time in whole or in part at the option of the Company at par plus a
make-whole premium. The Note Purchase Agreements contain certain covenants,
including covenants requiring the Company to maintain specified fixed charge
coverage and leverage ratios. The fixed charge coverage covenant requires the
Company to maintain, as of the end of each fiscal quarter, consolidated net
income available for fixed charges (I.E., income before income taxes, interest
and rental expense) of at least 150% of consolidated fixed charges (I.E.,
interest and rental expense) (i) if such date occurs at or before the end of the
Company's 1998 fiscal year, for a period consisting of any 4 fiscal quarters (no
more than three of which may be consecutive) selected by the Company from among
the 7 consecutive fiscal quarters ending on such date, and (ii) if such date
occurs after the end of the Company's 1998 fiscal year, for a period consisting
of any 4 fiscal quarters selected by the Company from among the 6 consecutive
fiscal quarters ending on such date. The leverage covenant requires the Company
to maintain total debt at no more than 55% of total capitalization. The Note
Purchase Agreements also contain, among other things, a covenant which requires
the Company to maintain a specified level of tangible net worth, certain
covenants which impose limitations on the ability of each of the Company and its
subsidiaries to incur additional indebtedness, grant liens, make investments,
pay dividends, enter into mergers, dispose of assets, enter into long-term
leases, guaranty obligations of others or change the nature of its business, and
customary events of default.
In April 1994 the Company entered into separate Note Purchase Agreements
with several insurance companies pursuant to which the Company issued senior
unsecured notes in the aggregate original principal amount of $30,000,000. The
notes bear interest at the fixed rate of 7.46% per annum. The principal of the
notes is payable in 16 consecutive semi-annual installments of $1,875,000 each
commencing in August 1996 and continuing until February 2004. The notes are
prepayable at any time in whole or in part at the option of the Company at par
plus a make-whole premium. The Note Purchase Agreements contain certain
covenants, including covenants requiring the Company to maintain specified fixed
charge coverage and leverage ratios. The fixed charge coverage covenant requires
the Company to maintain, as of the end of each fiscal quarter, consolidated net
income available for fixed charges of at least 150% of consolidated fixed
charges (i) for the period of 20 consecutive fiscal quarters ending on such
date, and (ii) for a period consisting of any 4 fiscal quarters selected by the
Company from among the 7 consecutive fiscal quarters ending on such date. The
leverage covenant requires the Company to maintain total debt at no more than
50% of total capitalization. The Note Purchase Agreements also contain, among
other things, covenants which require the Company to maintain a specified
current ratio and a specified level of tangible net worth, covenants which
impose limitations on the ability of each of the Company and its subsidiaries to
incur additional indebtedness, grant liens, make investments, pay dividends,
enter into mergers, dispose of assets, enter into long-term leases, engage in
sale leaseback transactions, guaranty obligations of others or change the nature
of its business, and customary events of default.
39
<PAGE>
In October 1988 the Company entered a Note Purchase Agreement with several
insurance companies pursuant to which the Company issued its senior unsecured
notes in the aggregate original principal amount of $10,000,000. The notes bear
interest at the fixed rate of 10.31% per annum. The principal of the notes is
payable in 7 consecutive annual installments of $1,340,000 each commencing in
October 1991 and continuing until October 1997, with a final installment equal
to the remaining unpaid principal amount of the notes due in October 1998. The
notes are prepayable at the option of the Company at par plus a make-whole
premium (i) in whole or in part on any principal or interest payment date, or
(ii) in whole at any time if the Company desires to effect a merger or sale of
assets which is prohibited by the note purchase agreement and which is not
consented to by the holders of the notes. The Note Purchase Agreement contains
certain covenants, including covenants requiring the Company to maintain
specified fixed charge coverage and leverage ratios. The fixed charge coverage
covenant requires the Company to maintain, as of the end of each fiscal quarter,
average consolidated net income available for fixed charges of at least 150% of
consolidated fixed charges (i) for the period of 20 consecutive fiscal quarters
ending on such date, and (ii) for a period consisting of any 4 fiscal quarters
selected by the Company from among the 7 consecutive fiscal quarters ending on
such date. The leverage covenant requires the Company to maintain total debt at
no more than 55% of total capitalization. The Note Purchase Agreement also
contains, among other things, covenants which require the Company to maintain a
specified current ratio and specified levels of tangible net worth and working
capital, covenants which impose limitations on the ability of each of the
Company and its subsidiaries to incur additional indebtedness, grant liens, make
investments, pay dividends, enter into mergers, dispose of assets, enter into
long-term leases, engage in sale leaseback transactions, guaranty obligations of
others or change the nature of its business, and customary events of default.
In March 1996 the Company entered into an agreement with the Wisconsin
Department of Development pursuant to which the department made a loan to the
Company in the amount of $1,000,000. The loan is secured by certain equipment of
the Company and is evidenced by two promissory notes, each in the original
principal amount of $500,000. The notes bear interest at the fixed rate of 4%
per annum (subject to increase by up to an additional 4% per annum in the event
the Company fails to comply with certain job creation and maintenance criteria).
The principal of the first such note is payable in 10 consecutive equal annual
installments commencing in March 1997 and continuing until March 2006. The
principal of the second such note is subject to reduction without payment in the
event the Company satisfies certain job creation and maintenance criteria, and
any portion of such principal which is not so reduced is payable in 6
consecutive equal annual installments commencing in March 2001 and continuing
until March 2006. The agreement with the Wisconsin Department of Development
contains customary covenants and events of default.
VARIABLE RATE DEMAND NOTE
In April 1993 the Company entered into an industrial development revenue
bond financing, the proceeds of which were used to refund existing bonds. In
connection with that financing, new tax-exempt bonds were issued by the City of
Hutchinson, Minnesota (the "City") in the original principal amount of
$2,000,000, and the proceeds of those bonds were loaned by the City to the
Company to effect the refunding pursuant to a Loan Agreement between the City
and the Company. The bonds are secured by a letter of credit which has been
issued by The First National Bank of Chicago (the "Bank") and which expires in
March 1999. The bonds, and the note evidencing the loan to the Company,
currently bear interest at a variable rate per annum, adjusted weekly, equal to
the lesser of (i) the interest rate necessary to enable the remarketing agent to
remarket the bonds at par, as determined by the remarketing agent, (ii) 18%,
(iii) the maximum rate specified in the letter of credit (currently 10%) or (iv)
the maximum rate permitted by law. The principal of the bonds and the note is
payable in 4 consecutive annual installments of $100,000 each commencing in June
1993 and continuing until June 1996, and 8 consecutive annual installments of
$200,000 each commencing in June 1997 and continuing until June 2004. In
addition, while the bonds are subject to a variable rate of interest, the
bondholders may tender the bonds for purchase at par on 7 days' notice, and upon
any such tender the Company is obligated to pay under the note an amount
40
<PAGE>
sufficient to pay the purchase price of the tendered bonds. As long as the bonds
are subject to a variable rate of interest, the bonds and the note may be
prepaid at any time in whole or in part at the option of the Company at par. The
bonds and the note are also subject to mandatory prepayment in certain events,
including, upon the expiration of the letter of credit, if the Company fails to
either extend the same or provide a substitute letter of credit. The Trust
Indenture governing the bonds and the Loan Agreement between the Company and the
City contain covenants and events of default customary for this type of
transaction. The letter of credit has been issued under the Old Credit Facility
(as defined below). Under the terms of the Old Credit Facility, the Company is
required to pay a fee on any undrawn portion of the letter of credit from time
to time outstanding equal to the greater of (i) $1,500 for each year or any part
thereof, or (ii) a rate per annum determined by reference to LIBOR plus 2%. The
Old Credit Facility contains certain covenants, including a leverage covenant
requiring the Company to maintain, as of the last day of each fiscal quarter
from and after the issuance of the Notes, total debt at no more than 50% of
total capitalization. The Old Credit Facility also contains, among other things,
covenants which require the Company to maintain specified levels of net worth
and earnings before interest, taxes, depreciation and amortization, covenants
which impose limitations on the ability of each of the Company and its
subsidiaries to incur additional indebtedness, grant liens, make investments and
acquisitions, pay dividends, enter into mergers, dispose of assets, sell
receivables, engage in sale leaseback transactions, make or commit to make
capital expenditures, guaranty obligations of others or change the nature of its
business, and customary events of default.
OLD CREDIT FACILITY
The Company has amended its existing credit facility with the Bank (the "Old
Credit Facility") solely to permit the letter of credit described above under
"--Variable Rate Demand Note" to remain outstanding. Under the terms of this
amendment, however, the Company is not permitted to incur any additional
borrowings under the Old Credit Facility, and is required to continue to comply
with the restrictive covenants described above under "--Variable Rate Demand
Note" as long as the letter of credit remains outstanding.
In March 1998 the Company entered into a commitment for a proposed new
credit facility with the Bank to permit unsecured borrowings of up to
$25,000,000. The Company paid a $1,000,000 arrangement fee in connection with
this commitment. The Company determined not to close this proposed new credit
facility and has no further obligations under the terms of such commitment.
The Company currently has no other commitments for, and is uncertain whether
it will have access to, additional capital or borrowing arrangements on terms
economically favorable to the Company, if at all. See "Risk
Factors--Fluctuations in Operating Results; Liquidity Needs" and "--Capital
Needs."
GE MASTER LEASE AGREEMENT
In December 1996 the Company entered into a Master Lease Agreement with GE,
as lessor. The Master Lease Agreement provided for the leasing by the Company of
certain assembly and etching equipment in fiscal 1997 with an aggregate
capitalized lessor's cost of up to $25,000,000, $15,400,000 of which was funded.
In June 1997 the Master Lease Agreement was amended to provide for the leasing
by the Company of additional assembly and etching equipment in fiscal 1998 with
an aggregate capitalized lessor's cost of up to $30,000,000. Commitments by the
lessor for the acquisition and leasing of additional equipment in each fiscal
year after fiscal 1998 are subject to the approval of the lessor and the payment
by the Company of a fee equal to .25% of the amount of the lessor's commitment
with respect to such fiscal year. Under the Master Lease Agreement, the lessor
has been granted the exclusive right to provide all lease financing requirements
of the Company with respect to assembly and/or etching equipment for a period of
three years after the date of the agreement (provided that the Company may
arrange for a third party to provide such lease financing requirements if the
lessor at any time fails to provide a commitment for the full amount requested
by the Company). The lessor may require the prepayment and cancellation of the
Master Lease Agreement in the event of certain changes in control of the
Company. The Master
41
<PAGE>
Lease Agreement contains, among other things, covenants which require the
Company to maintain specified fixed charge coverage, interest coverage and
leverage ratios, and customary events of default (including events of default if
the Company enters into certain mergers or conveyances of substantially all of
its assets). The fixed charge coverage covenant requires the Company to
maintain, as of the end of each fiscal quarter, a ratio of (i) earnings before
interest, taxes, depreciation, amortization and rentals for the most recently
ended 12-month period, to (ii) the sum of interest and rentals for the most
recently ended 12-month period plus current maturities of long-term debt as of
such fiscal quarter end, of not less than an amount which varies by quarter and
ranges from .64:1 to 3.99:1. The interest coverage covenant requires the Company
to maintain, as of the end of each fiscal quarter, a ratio of (i) earnings
before interest, taxes, depreciation and amortization for the most recently
ended 12-month period, to (ii) interest for the most recently ended 12-month
period, of not less than an amount which varies by quarter and ranges from
1.28:1 to 11.90:1. The leverage covenant requires the Company to maintain, as of
the end of each fiscal quarter, total debt at no more than 50% of total
capitalization.
WISCONSIN SALE-LEASEBACK TRANSACTION
In May 1996 the Company entered into a transaction with respect to its Eau
Claire, Wisconsin facility. As part of that transaction, the Company transferred
the facility to Meridian Eau Claire LLC, which concurrently leased the facility
back to the Company. In order to finance the purchase price of the facility, the
lessor borrowed $15,300,000 from an insurance company, which was secured by a
mortgage of the facility and an assignment of the lessor's interests under the
lease. Also as part of the transaction, the Company entered into a
Subordination, Non-Disturbance and Attornment Agreement with the lessor and the
insurance company. The term of the lease of the facility commences on the date
of the lease and ends 15 years thereafter, provided that the lease may be
renewed by the Company for 4 additional periods of 5 years each. The Company is
obligated to pay under the lease basic rent in the amount of $144,582 per month
and, as additional rent, all property taxes, insurance premiums, utility
charges, maintenance expenses and other costs, expenses and obligations relating
to the leased premises. Pursuant to the lease, the Company has been granted a
right of first refusal in the event of a proposed sale or other transfer by the
lessor of the leased premises. The lease contains customary events of default,
including cross defaults to the covenants contained in the Subordination,
Non-Disturbance and Attornment Agreement. The Subordination, Non-Disturbance and
Attornment Agreement contains certain covenants, including covenants requiring
the Company to maintain specified fixed charge coverage and leverage ratios. The
fixed charge coverage covenant requires the Company to maintain, as of the end
of each fiscal quarter, consolidated net income available for fixed charges of
at least 150% of consolidated fixed charges (i) for the period of 20 consecutive
fiscal quarters ending on such date, and (ii) for a period consisting of any 4
fiscal quarters selected by the Company from among the 7 consecutive fiscal
quarters ending on such date. The leverage covenant requires the Company to
maintain total debt at no more than 50% of total capitalization. The
Subordination, Non-Disturbance and Attornment Agreement also contains, among
other things, covenants which require the Company to maintain a specified level
of tangible net worth and covenants which impose limitations on the ability of
each of the Company and its subsidiaries to enter into mergers, dispose of
assets or engage in sale leaseback transactions. Pursuant to the Subordination,
Non-Disturbance and Attornment Agreement, the Company has the right to purchase
the note evidencing the insurance company's loan at any time at par plus the
make-whole premium provided for in the note.
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DESCRIPTION OF NOTES
The Notes were issued under an indenture dated as of March 18, 1998 (the
"Indenture") between the Company and U.S. Bank National Association, as trustee
(the "Trustee"), a copy of which has been filed with the Commission as an
exhibit to the Shelf Registration Statement of which this prospectus forms a
part. The following summaries of certain provisions of the Indenture and the
Shelf Registration Agreement do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Indenture and the Shelf Registration Agreement, including the definition
therein of certain terms used below. The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended. Copies of the Indenture and the Shelf
Registration Agreement are available from the Company upon request. References
in this section to the "Company" are solely to Hutchinson Technology
Incorporated and not to its subsidiaries.
GENERAL
The Notes are general, unsecured subordinated obligations of the Company,
limited in aggregate principal amount to $150,000,000, and will mature on March
15, 2005 (the "Stated Maturity"). The Notes bear interest at the rate of 6% per
annum from the date of initial issuance of Notes pursuant to the Indenture, or
from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on March 15 and September 15 of each year,
commencing September 15, 1998, to the Person in whose name such Notes (or any
predecessor Notes) are registered (individually, a "Holder" and collectively,
the "Holders") at the close of business on the preceding March 1 or September 1,
as the case may be (whether or not a business day). Interest on the Notes is
paid on the basis of a 360-day year consisting of twelve 30-day months.
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and liquidated
damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the Holder of interests in such Global Note.
With respect to Definitive Notes, the Company will make all payments of
principal, premium, if any, interest and liquidated damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. See "Same Day Settlement and Payment"
below.
The Notes have been issued in registered form, without coupons and in
denominations of $1,000 or any integral multiple thereof. No service charge will
be made for any transfer or exchange of the Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge and
any other expenses (including the fees and expenses of the Trustee) payable in
connection therewith. The Company is not required (i) to issue or register the
transfer of or exchange of any Notes during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption and
ending at the close of business on the day of such mailing, (ii) to register the
transfer of or exchange of any Notes selected for redemption in whole or in
part, except the unredeemed portion of Notes being redeemed in part or (iii) to
register the transfer of or exchange of any Notes surrendered for conversion or
repurchase (and not withdrawn) upon the occurrence of a Repurchase Event.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of, and premium and interest on, and liquidated damages, if
any, with respect to, any Notes which remain unclaimed for two years after such
principal, premium, interest or liquidated damages, if any, becomes due and
payable may be repaid to the Company. Thereafter, the Holder of such Notes may,
as an unsecured general creditor, look only to the Company for payment thereof.
The Indenture does not contain any provisions that would provide protection
to Holders of the Notes against a sudden and dramatic decline in credit quality
of the Company resulting from any takeover, recapitalization or similar
restructuring, except as described below under "Certain Rights to Require
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Repurchase of Notes" below. There can be no assurance that the Company will have
the financial resources necessary to repurchase the Notes upon a Repurchase
Event. See "Risk Factors--Fluctuations in Operating Results; Liquidity Needs"
and "--Limitations on Repurchase Upon Repurchase Event."
CONVERSION RIGHTS
The Notes are convertible into Common Stock prior to their Stated Maturity,
unless previously redeemed or repurchased, initially at the conversion price of
$28.35 per share (which is initially equivalent to a conversion rate of 35.273
shares per $1,000 of Notes). The right to convert Notes which have been called
for redemption will terminate at the close of business on the business day
immediately preceding the Redemption Date, unless the Company subsequently
defaults on payment of the Redemption Price. See "Optional Redemption" below. A
Note for which a Holder has delivered a Repurchase Event purchase notice
exercising the option of such Holder to require the Company to repurchase such
Note may be converted only if such notice is withdrawn by a written notice of
withdrawal delivered by the Holder to the Company prior to the close of business
on the business day immediately preceding the Repurchase Date, unless the
Company subsequently defaults on the payment of the Repurchase Price. See
"Certain Rights to Require Repurchase of Notes" below.
The conversion price is subject to adjustment, without duplication, upon the
occurrence of any one or more of the following events: (i) the subdivision,
combination or reclassification of outstanding shares of Common Stock; (ii) the
payment of a dividend or distribution on Common Stock in shares of Common Stock
or the payment of a dividend or distribution on any other class of capital stock
of the Company in shares of Common Stock; (iii) the issuance of rights or
warrants to all holders of Common Stock entitling them to acquire shares of
Common Stock (or securities convertible into Common Stock) at a price per share
less than the Current Market Price; (iv) the distribution to holders of Common
Stock of shares of capital stock (other than Common Stock), evidences of
indebtedness or assets (including securities and dividends or distributions paid
in part in cash, but excluding dividends or distributions paid exclusively in
cash and dividends, distributions, rights and warrants referred to above); (v)
the distribution to all or substantially all holders of Common Stock of rights
or warrants to subscribe for its securities (other than those referred to in
(iii) above); (vi) a distribution consisting exclusively of cash to all holders
of Common Stock in an aggregate amount that, together with (A) all other cash
distributions (excluding any cash distributions referred to in (iv) above) made
within the 12 months preceding the date fixed for determining the shareholders
entitled to such distribution and (B) any cash and the fair market value of
other consideration payable in respect of any tender offer by the Company or a
subsidiary of the Company for the Common Stock consummated within the 12 months
preceding such date of determination, exceeds 10% of the Company's market
capitalization (being the product of the Current Market Price times the number
of shares of Common Stock then outstanding) on such date of determination
entitled to such distribution; (vii) the consummation of a tender offer made by
the Company or any subsidiary of the Company for all or any portion of the
Common Stock which involves an aggregate consideration that, together with (X)
any cash and other consideration payable in respect of any tender offer by the
Company or a subsidiary of the Company for the Common Stock consummated within
the 12 months preceding the consummation of such tender offer and (Y) the
aggregate amount of all cash distributions (excluding any cash distributions
referred to in (iv) above) to all holders of the Common Stock within the 12
months preceding the consummation of such tender offer, exceeds 10% of the
product of the Current Market Price immediately prior to the date of
consummation of such tender offer times the number of shares of Common Stock
outstanding at the date of consummation of such tender offer; (viii) payment in
respect of a tender offer or exchange offer by a person other than the Company
or any subsidiary of the Company in which, as of the closing date of the offer,
the Board of Directors is not recommending rejection of the offer; and (ix) the
issuance of Common Stock or securities convertible into, or exchangeable for,
Common Stock at a price per share (or having a conversion or exchange price per
share) that is less than the then Current Market Price of the Common Stock (but
excluding, among other things, issuances: (a) pursuant to any bona fide plan for
the benefit of employees, directors or consultants of the Company now or
hereafter
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<PAGE>
in effect; (b) to acquire all or any portion of a business in an arm's-length
transaction between the Company and an unaffiliated third party including, if
applicable, issuances upon exercise of options or warrants assumed in connection
with such an acquisition; (c) in a bona fide public offering pursuant to a firm
commitment underwriting or sales at the market pursuant to a continuous offering
stock program; (d) pursuant to the exercise of warrants, rights (including,
without limitation, earnout rights) or options, or upon the conversion of
convertible securities, which are issued and outstanding on the date hereof, or
which may be issued in the future at a fair value and with an exercise price or
conversion price at least equal to the Current Market Price of the Common Stock
at the time of issuance of such warrant, right, option or convertible security;
and (e) pursuant to a dividend reinvestment plan or other plan hereafter adopted
for the reinvestment of dividends or interest provided that such Common Stock is
issued at a price at least equal to 95% of the Current Market Price of the
Common Stock at the time of such issuance). The adjustment referred to in clause
(viii) of the preceding sentence will only be made if the tender offer or
exchange is for an amount which increases the offeror's ownership of Common
Stock to more than 25% of the total shares of Common Stock outstanding, and if
the cash and value of any other consideration included in such payment per share
of Common Stock exceeds the Current Market Price per share of Common Stock on
the business day next succeeding the last date on which tenders or exchanges may
be made pursuant to such tender or exchange offer. The adjustment referred to in
clause (viii) will generally not be made, however, if, as of the closing of the
offer, the offering documents with respect to such offer disclose a plan or an
intention to cause the Company to engage in a consolidation or merger of the
Company or a sale of all or substantially all of the Company's assets. No
adjustment of the conversion price is required to be made until cumulative
adjustments amount to at least one percent of the conversion price, as last
adjusted. Any adjustment that would not otherwise be sufficient to require a
change to be made pursuant to the immediately preceding sentence shall be
carried forward and taken into account in any subsequent adjustment.
The Indenture provides that if the Company implements a shareholders' rights
plan, such rights plan must provide that upon conversion of the Notes the
Holders will receive, in addition to the Common Stock issuable upon such
conversion, such rights whether or not such rights have separated from the
Common Stock at the time of such conversion.
In addition to the foregoing adjustments, the Company is permitted to reduce
the conversion price as it considers to be advisable in order that any event
treated for federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the holders of the Common Stock or, if that is not
possible, to diminish any income taxes that are otherwise payable because of
such event. See "Certain United States Federal Income Tax Consequences."
In the case of any consolidation or merger of the Company with any other
Person (other than one in which no change is made in the Common Stock), or any
sale or transfer of all or substantially all of the assets of the Company, the
Holder of any Note then outstanding will, with certain exceptions, have the
right thereafter to convert such Note only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a Holder of the number of shares of Common Stock into which
such Note might have been converted immediately prior to such consolidation,
merger, sale or transfer, and adjustments will be provided for events subsequent
thereto that are as nearly equivalent as practical to the conversion price
adjustments described above.
In the case of any Note that has been converted into Common Stock after any
Regular Record Date, but on or before the next Interest Payment Date, interest,
the stated due date of which is on such Interest Payment Date, shall be payable
on such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the Holder of such Note who is a Holder on such Regular Record
Date. Any Note converted after any Regular Record Date but on or before the next
Interest Payment Date (other than Notes called for redemption) must be
accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of Notes being surrendered for
conversion. Except as described in the two preceding sentences, no interest will
be payable by the Company on converted
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Notes with respect to any Interest Payment Date subsequent to the date of
conversion. No other payment or adjustment for interest or dividends will be
made upon conversion. Fractional shares of Common Stock will not be issued upon
conversion, but, in lieu thereof, the Company will pay a cash adjustment based
upon the Closing Price at the close of business on the day of conversion (or, if
such day is not a Trading Day, on the Trading Day immediately preceding such
day).
SUBORDINATION
The payment of the principal of, premium, if any, interest on, and
liquidated damages, if any, with respect to, the Notes is, to the extent set
forth in the Indenture, subordinated in right of payment to the prior payment in
full in cash of all Senior Indebtedness. If there is a payment or distribution
of assets to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets or
any bankruptcy, insolvency or similar proceedings of the Company, the holders of
all Senior Indebtedness will be entitled to receive payment in full in cash of
all obligations in respect of such Senior Indebtedness before the Holders of the
Notes will be entitled to receive any payment in respect of the principal of,
premium, if any, interest on, or liquidated damages, if any, with respect to the
Notes (other than in Junior Securities).
In the event of the acceleration of the maturity of the Notes, the holders
of all Senior Indebtedness will first be entitled to receive payment in full in
cash of all obligations due thereon before the Holders of the Notes will be
entitled to receive any payment for the principal of, premium, if any, interest
on, or liquidated damages, if any, with respect to the Notes (other than in
Junior Securities). The Indenture further requires that the Company promptly
notify holders of Senior Indebtedness if payment of the Notes is accelerated
because of an Event of Default.
The Company also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) to the Holders upon or in respect of the
Notes (other than in Junior Securities) if (i) a default in the payment of the
principal of, or premium, if any, or interest on any Designated Senior
Indebtedness (a "Payment Default") occurs and is continuing beyond any
applicable grace period or (ii) any other default occurs and is continuing with
respect to any Designated Senior Indebtedness that permits holders of Designated
Senior Indebtedness as to which that default relates to accelerate its maturity
(a "Nonpayment Default" ) and the Trustee receives notice of such default (a
"Payment Blockage Notice") from (a) if such Nonpayment Default shall have
occurred under any Credit Facility, the representative of the Credit Facility,
(b) if such Nonpayment Default shall have occurred under the Private Placement
Notes, the holders thereof or their designated agents or (c) if such Nonpayment
Default shall have occurred with respect to any other issue of Designated Senior
Indebtedness, the holders, or a representative of the holders, of at least 20%
of such Designated Senior Indebtedness. The payments on or in respect of the
Notes shall be resumed (i) in the case of a Payment Default respecting
Designated Senior Indebtedness, on the date on which that default is cured or
waived or ceases to exist and (ii) in the case of a Nonpayment Default
respecting Designated Senior Indebtedness, the earliest of (a) the date on which
that Nonpayment Default is cured or waived or ceases to exist, (b) the date the
applicable Payment Blockage Notice is retracted by written notice to the Trustee
from a representative of the holders of the Designated Senior Indebtedness which
have given that Payment Blockage Notice and (c) 179 days after the date on which
the applicable Payment Blockage Notice is received by the Trustee, unless any
Payment Default has occurred and is continuing or an Event of Default of the
type referred to in clause (g) of the first sentence under "Events of Default"
below has occurred with respect to the Company. No new period of payment
blockage may be commenced unless and until (i) 365 days shall have elapsed since
the effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, interest on, and liquidated
damages, if any, with respect to, the Notes that have come due have been paid in
full in cash. No Nonpayment Default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis of a
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subsequent Payment Blockage Notice unless such default shall have been cured or
waived for a period of not less than 90 days.
The Indenture governing the Notes does not limit or prohibit the incurrence
of additional indebtedness, including Senior Indebtedness, by the Company or its
subsidiaries. In addition, the Notes are effectively subordinated to all current
and future liabilities of the Company's subsidiaries. At February 22, 1998, the
Company had approximately $75 million of Senior Indebtedness outstanding. The
indebtedness outstanding under the Private Placement Notes and the Company's
variable rate demand note (and related letter of credit) with the City of
Hutchinson constitute Senior Indebtedness.
By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Indebtedness may
receive more, ratably, and Holders of the Notes may receive less, ratably, than
the other creditors of the Company. Such subordination will not prevent the
occurrences of any Event of Default under the Indenture.
The Notes are obligations exclusively of the Company. Because certain
operations of the Company are conducted through its subsidiaries, the cash flow
and consequent ability to service debt of the Company, including the Notes, may
depend, in part, upon the earnings of its subsidiaries and their ability to
distribute cash to the Company. The payment of dividends and the making of loans
and advances to the Company by its subsidiaries may be subject to statutory and
contractual restrictions, are dependent upon the earnings of those subsidiaries
and are subject to various business considerations. Any right of the Company to
receive assets of any of its subsidiaries upon their liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in which
case the claims of the Company would still be subordinate to any security
interests in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Company.
In the event that, notwithstanding the foregoing, the Trustee or any Holder
receives any payment or distribution of assets of the Company of any kind in
contravention of any of the terms of the Indenture, whether in cash, property or
securities, including, without limitation, by way of set-off or otherwise, in
respect of the Notes before all Senior Indebtedness is paid in full in cash,
then such payment or distribution will be held by the recipient in trust for the
benefit of holders of Senior Indebtedness, and will be immediately paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness.
OPTIONAL REDEMPTION
The Notes are redeemable, at the Company's option, in whole or from time to
time in part, at any time on or after March 20, 2001, upon a date (a "Redemption
Date") not less than 30 nor more than 60 days' notice mailed to each Holder of
Notes to be redeemed at its address appearing in the Security Register and prior
to the Stated Maturity at the following prices ("Redemption Prices") (expressed
as percentages of the principal amount) plus accrued and unpaid interest and
liquidated damages, if any, to the Redemption Date (subject to the right of
Holders on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date).
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<PAGE>
If redeemed during the 12-month period beginning March 15 (beginning March
20 in the case of the first such period), the Redemption Price shall be:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----- ----------------
<S> <C>
2001........................................................................ 103.43%
2002........................................................................ 102.57
2003........................................................................ 101.71
2004........................................................................ 100.86
2005........................................................................ 100.00
</TABLE>
in each case together with accrued and unpaid interest and liquidated damages,
if any, to but excluding the Redemption Date.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange or national market
system, if any, on which the Notes are listed, or, if the Notes are not so
listed, on a pro rata basis, by lot or by such other method as the Trustee shall
deem fair and appropriate; provided that no Notes of $1,000 principal amount or
less shall be redeemed in part. Notice of any redemption will be sent, by
first-class mail, at least 20 days and not more than 60 days prior to the date
fixed for redemption, to the Holder of each Note to be redeemed to such Holder's
last address as then shown upon the registry books of the Registrar. The notice
of redemption must state the Redemption Date, the Redemption Price and the
amount of accrued interest to be paid. Any notice that relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the Redemption
Date, upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion thereof will be issued. On and after the Redemption
Date, interest will cease to accrue on the Notes or portion thereof called for
redemption, unless the Company defaults in its obligations with respect thereto.
The Notes do not have the benefit of any sinking fund.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company will not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and the Company will not permit any
Person to consolidate with or merge into the Company unless: (a) the Person
formed by such consolidation or into which the Company is merged or the Person
which acquires the properties and assets of the Company substantially as an
entirety is a corporation, partnership, trust, or limited liability company
organized and validly existing under the laws of the United States or any state
thereof or the District of Columbia and expressly assumes payment of the
principal of, premium, if any, interest on, and liquidated damages, if any, with
respect to, the Notes and performance and observance of each obligation of the
Company under the Indenture; (b) after consummating such consolidation, merger,
transfer or lease, no Default or Event of Default will occur and be continuing;
(c) such consolidation, merger, conveyance, transfer or lease does not adversely
affect the validity or enforceability of the Notes; and (d) the Company has
delivered to the Trustee an Officer's Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, conveyance, transfer or lease
complies with the provisions of the Indenture.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF NOTES
In the event of any Repurchase Event occurring on or prior to the Stated
Maturity, each Holder of Notes will have the right, at the Holder's option, to
require the Company to repurchase all or any part of the Holder's Notes on the
date (the "Repurchase Date") that is 30 days after the date the Company gives
notice of the Repurchase Event as described below at a price (the "Repurchase
Price") equal to 100% of the principal amount thereof, together with accrued and
unpaid interest to but excluding the Repurchase
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Date. On or prior to the Repurchase Date, the Company shall deposit with the
Trustee or a Paying Agent an amount of money in same day funds sufficient to pay
the Repurchase Price of the Notes which are to be repaid on or promptly
following the Repurchase Date.
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Notes when required under the preceding
paragraph will result in an Event of Default under the Indenture whether or not
such repurchase is permitted by the subordination provisions of the Indenture.
On or before the 15th day after the occurrence of a Repurchase Event, the
Company is obligated to mail to all Holders of Notes a notice of the occurrence
of such Repurchase Event and identifying the Repurchase Event, the Repurchase
Date, the date by which the repurchase right must be exercised, the Repurchase
Price for Notes (which shall equal 100% of the principal amount thereof,
together with accrued and unpaid interest and liquidated damages, if any, to but
excluding the Repurchase Date) and the procedures which the Holder must follow
to exercise this right. To exercise the repurchase right, the Holder of a Note
must deliver, prior to the close of business on the third business day preceding
the Repurchase Date, written notice to the Company (or an agent designated by
the Company for such purpose) of the Holder's exercise of such right, together
with the certificates evidencing the Notes with respect to which the right is
being exercised, duly endorsed for transfer.
There can be no assurance that the Company will have the financial resources
necessary to repurchase the Notes upon a Repurchase Event. See "Risk
Factors--Fluctuations in Operating Results; Liquidity Needs" and "--Limitations
on Repurchase Upon Repurchase Event." The Company's future Senior Indebtedness
may provide that a change in control of the Company would constitute an event of
default thereunder, the occurrence of which would cause any repurchase of the
Notes, absent a waiver, to be blocked by the subordination provisions of the
Notes. In addition, even if such event of default did not occur or was waived,
the right to require the Company to repurchase Notes as a result of the
occurrence of a Repurchase Event could create an event of default under Senior
Indebtedness of the Company, as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provisions of the Notes. See
"Subordination" above. The Company's ability to pay cash to the Holders of Notes
upon a Repurchase Event may be limited by certain financial covenants contained
in the Company's Senior Indebtedness. Failure by the Company to repurchase the
Notes when required will result in an Event of Default with respect to the Notes
whether or not such repurchase is permitted by the subordination provisions
thereof.
In the event a Repurchase Event occurs and the Holders exercise their rights
to require the Company to repurchase Notes, the Company intends to comply with
applicable tender offer rules under the Exchange Act, including Rules 13e-4 and
14e-1, as then in effect, with respect to any such purchase.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving the
Company that may adversely affect Holders. In addition, the foregoing provisions
may discourage open market purchases of the Common Stock or a non-negotiated
tender or exchange offer for such stock and, accordingly, may limit a
shareholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Trustee (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and, with respect to the annual financial statements only, an audit
report thereon by the Company's independent public accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were
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required to file such reports. In addition, whether or not required by the rules
and regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless the
Commission will not accept such a filing).
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to the
Notes: (a) default in the payment of the principal of, or the premium, if any,
on any Note when due (even if such payment is prohibited by the subordination
provisions of the Indenture); (b) default in the payment of any interest on, or
liquidated damages, if any, with respect to, any Note when due, which default
continues for 30 days (even if such payment is prohibited by the subordination
provisions of the Indenture); (c) failure to provide timely notice of a
Repurchase Event as required by the Indenture; (d) default in the payment of the
Repurchase Price in respect of any Note on the Repurchase Date therefor (even if
such payment is prohibited by the subordination provisions of the Indenture);
(e) default in the performance, or breach, of any other covenant or warranty of
the Company in the Indenture which continues for 60 days after written notice as
provided in the Indenture; (f) default under one or more bonds, notes or other
evidences of indebtedness for money borrowed by the Company or any subsidiary of
the Company or under one or more mortgages, indentures or instruments under
which there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by the Company or any subsidiary of the Company,
whether such indebtedness now exists or shall hereafter be created, which
default individually or in the aggregate shall constitute a failure to pay the
principal of indebtedness in excess of $5.0 million when due and payable after
the expiration of any applicable grace period with respect thereto or shall have
resulted in indebtedness in excess of $5.0 million becoming or being declared
due and payable prior to the date on which it would otherwise have become due
and payable, without such indebtedness having been discharged, or such
acceleration having been rescinded or annulled; and (g) certain events in
bankruptcy, insolvency or reorganization of the Company or any subsidiary of the
Company.
If an Event of Default with respect to the Notes (other than as specified in
clause (g) in the immediately preceding paragraph with respect to the Company)
shall occur and be continuing, the Trustee or the Holders of not less than 25%
in aggregate principal amount of the outstanding Notes may declare the principal
of, and premium, if any, on all such Notes to be due and payable immediately,
but if the Company cures all Events of Default and has paid or deposited with
the Trustee a sum sufficient to pay all principal of, premium, if any, interest
on, and liquidated damages, if any, with respect to, Notes then due and certain
other conditions are met, such declaration may be canceled and past defaults may
be waived by the Holders of a majority in principal amount of outstanding Notes.
If an Event of Default shall occur as a result of an event of bankruptcy,
insolvency or reorganization of the Company, the principal of, premium, if any,
and any accrued and unpaid interest on, and liquidated damages, if any, with
respect to, the Notes shall automatically become due and payable. The Company is
required to furnish to the Trustee annually a statement as to the performance by
the Company of certain of its obligations under the Indenture and as to any
default in such performance. The Indenture provides that the Trustee may
withhold notice to the Holders of the Notes of any continuing default (except in
the payment of the principal of, premium, if any, interest on, or liquidated
damages, if any, with respect to, any Notes) if the Trustee considers it in the
interest of Holders of the Notes to do so.
MODIFICATION, AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of outstanding Notes; provided, however, that no such modification or
amendment may without consent of the Holder of each outstanding Note affected
thereby (i) change the Stated Maturity of the principal of, or any installment
of interest on, or liquidated damages, if any, with respect to, any Note; (ii)
reduce the principal amount of, or the premium or interest on, or liquidated
damages, if any, with respect to, any Note; (iii) change the place of
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payment where, or currency in which, any Note or any premium or interest or
liquidated damages, if any, thereon is payable; (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Note; (v) adversely affect the right to convert the Notes; (vi) adversely affect
the right to cause the Company to repurchase the Notes; (vii) modify the
subordination provisions in a manner adverse to the Holders of the Notes; or
(viii) reduce the above stated percentage of aggregate principal amount of
outstanding Notes necessary for waiver or compliance with certain provisions of
the Indenture or for waiver of certain defaults.
The Indenture may also be modified or amended without the consent of the
Holders: (i) to cause the Indenture to be qualified under the Trust Indenture
Act of 1939, as amended; (ii) to evidence the succession of another Person to
the Company as otherwise permitted by the Indenture; (iii) to add to the
covenants of the Company for the benefit of the Holders of the Notes or to
surrender any power conferred upon the Company; (iv) to add any Events of
Default; (v) to permit or facilitate the issuance of securities in
uncertificated form; (vi) to secure the Notes; (vii) to provide for successor
trustees; or (viii) to cure any ambiguity, to correct or supplement any
provision which may be inconsistent with any other provision or to make any
other provisions with respect to matters or questions arising under the
Indenture; provided such action shall not adversely affect the interest of
Holders of Notes in any material respect and the Trustee may rely upon the
opinion of counsel to that effect.
The Holders of a majority in aggregate principal amount of outstanding Notes
may waive compliance by the Company with certain restrictive provisions of the
Indenture. The Holders of a majority in aggregate principal amount of
outstanding Notes may waive any past default or right under the Indenture,
except (i) a default in payment of principal, premium or interest or liquidated
damages, if any, (ii) the right of a Holder to redeem or convert the Note, or
(iii) with respect to any covenant or provision of the Indenture that requires
the consent of the Holder of each outstanding Note affected.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
A "CHANGE IN CONTROL" shall occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly owned subsidiary of the
Company in which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock would be converted into cash,
securities or other property, in each case, other than a consolidation or merger
of the Company in which the holders of the Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority of the
total voting power of all classes of Capital Stock entitled to vote generally in
the election of directors of the continuing or surviving Person immediately
after such consolidation or merger in substantially the same relative proportion
as their ownership of Common Stock immediately before such transaction; (iii)
any person, or any persons acting together which would constitute a "group" for
purposes of Section 13(d) of the Exchange Act, together with any affiliates
thereof, shall beneficially own (as defined in Rule 13d-3 under the Exchange
Act) at least 50% of the total voting power of all classes of capital stock of
the Company entitled to vote generally in the election of
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directors of the Company; (iv) at any time during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of 66-2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
or (v) the Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
"CREDIT FACILITY" means, with respect to the Company, any credit facility,
as the same may be amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time.
"DESIGNATED SENIOR INDEBTEDNESS" means principal, interest, premiums, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing (i) indebtedness outstanding under the Old Credit
Facility, the Private Placement Notes and the Company's variable rate demand
note (and related letter of credit) with the City of Hutchinson, and (ii) any
other indebtedness (a) under any debt facility with banks or other lenders which
provides for revolving credit loans, term loans, receivables financing
(including through the sale of receivables) or letters of credit to the Company
or any of its subsidiaries and (b) any other Senior Indebtedness the principal
amount of which is $5 million or more and, in each case, that has been
designated by the Company as "Designated Senior Indebtedness."
"DISQUALIFIED CAPITAL STOCK" means, with respect to the Company, Capital
Stock of the Company that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by the Company, in
whole or in part, on or prior to the Stated Maturity of the Notes, provided that
only the portion of such Capital Stock which is so convertible, exercisable,
exchangeable or redeemable or subject to repurchase prior to such Stated
Maturity shall be deemed to be Disqualified Capital Stock.
"JUNIOR SECURITIES" means any Qualified Capital Stock and any indebtedness
of the Company that is fully subordinated in right of payment to Senior
Indebtedness to the same extent as the Notes and has no scheduled installment of
principal due, by redemption, sinking fund payment or otherwise, on or prior to
the Stated Maturity of the Notes.
"PERSON" or "PERSON" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PRIVATE PLACEMENT NOTES" means (i) the 7.46% Senior Notes due 2004 in the
original aggregate principal amount of $30,000,000 issued and sold pursuant to
the three separate note purchase agreements, each dated as of April 20, 1994,
between the Company and Teachers Insurance and Annuity Association of America,
Central Life Assurance Company and Modern Woodmen of America, respectively, (ii)
the 7.85% Senior Notes due 2003 in the original aggregate principal amount of
$25,000,000 and the 8.07% Senior Note due 2006 in the original aggregate
principal amount of $25,000,000 issued and sold pursuant to the three separate
note purchase agreements, each dated as of July 26, 1996, between the Company
and Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity
Company and Teachers Insurance and Annuity Association of America, respectively,
(iii) the 10.31% Senior Notes due 1998 in the original aggregate principal
amount of $10,000,000 issued and sold pursuant to a note purchase agreement
dated October 28, 1988, between the Company and Northwestern National Life
Insurance Company, Northern Life Insurance Company, The North Atlantic Life
Insurance Company of America and American Investors Life Insurance Company, and
(iv) the Promissory Notes due 2006 in the original aggregate principal amount of
up to $1,000,000 issued pursuant to an agreement dated March 21, 1996 between
the Company and the Wisconsin Department of Development.
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"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"REGULATION S" means Regulation S under the Securities Act.
A "REPURCHASE EVENT" shall have occurred upon the occurrence of a Change in
Control (as defined above) or a Termination of Trading (as defined below).
"RULE 144A" means Rule 144A under the Securities Act.
"SENIOR INDEBTEDNESS" is defined in the Indenture as: (a) all indebtedness,
liabilities and obligations of the Company for money borrowed under the
Company's credit facilities (including, without limitation, the principal,
premium (if any), unpaid fees and interest in connection therewith and
reimbursement obligations under letters of credit issued pursuant to such credit
facilities) and any predecessor or successor credit facilities thereto, whether
outstanding on the date of execution of the Indenture or thereafter created,
incurred or assumed; (b) all present and future obligations under any agreement,
device or arrangement providing for payments which are related to fluctuations
of interest rates, exchange rates or forward rates, including, but not limited
to, dollar-denominated or cross-currency interest rate exchange agreements,
forward currency exchange agreements, interest rate swap or collar protection
agreements, forward rate currency or interest rate options, puts and warrants or
similar agreements, devices or arrangements of the Company ("Hedging
Agreements"), including all obligations of the Company, whether absolute or
contingent under any and all cancellations, buy backs, reversals, terminations
or assignments of any Hedging Agreement; (c) indebtedness of the Company for
money borrowed, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred or assumed, except any such other indebtedness that
by the terms of the instrument or instruments by which such indebtedness was
created or incurred expressly provides that it (i) is junior in right of payment
to the Notes or (ii) ranks PARI PASSU in right of payment with the Notes; and
(d) any amendments, renewals, extensions, modifications, refinancings and
refundings of any of the foregoing. The term "indebtedness for money borrowed"
when used with respect to the Company is defined to mean (i) any obligation of,
or any obligation guaranteed by, the Company for the repayment of borrowed money
(including, without limitation, fees, penalties and other obligations in respect
thereof), whether or not evidenced by bonds, notes or other written instruments,
(ii) any deferred payment obligation of, or any such obligation guaranteed by,
the Company for the payment of the purchase price of property or assets
evidenced by a note or similar instrument; (iii) repurchase obligations or
liabilities of the Company with respect to accounts or notes receivable sold by
the Company or otherwise financed by the Company in a securitization or
structured receivables financing transaction; (iv) reimbursement obligations of
the Company in respect of letters of credit relating to indebtedness or other
obligations of the Company that qualify as indebtedness or obligations of the
kind referred to in clauses (i) through (iii) above; and (v) any obligation of,
or any such obligation guaranteed by, the Company for the payment of rent or
other amounts under a lease of property or assets which obligation is required
to be classified and accounted for as a capitalized lease on the balance sheet
of the Company under generally accepted accounting principles, in each such case
whether such indebtedness or obligations arise or accrue before or after the
commencement of any bankruptcy, insolvency or receivership proceedings and
whether they arise directly between the Company and any holder of such
indebtedness or obligation, or are acquired outright, conditionally or as
collateral security from another by any such holder, including, without
limitation, interest and fees accruing pre-petition or post-petition at the rate
or rates prescribed in the applicable credit agreements, notes or agreement
evidencing such Senior Indebtedness and costs, expenses and attorneys' and
paralegals' fees, whenever incurred (and whether or not such claims, interest,
costs, expenses or fees are allowed or allowable in any such proceeding).
"STATED MATURITY," when used with respect to the Notes, means March 15,
2005.
A "TERMINATION OF TRADING" shall occur if the Common Stock (or other common
stock into which the Notes are then convertible) is neither listed for trading
on a U.S. national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
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SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture, other than
its obligation to pay the principal of, premium and interest on, and liquidated
damages with respect to the Notes and certain other obligations (including its
obligation to deliver shares of Common Stock upon conversion of the Notes),
while Notes remain outstanding if (a) all outstanding Notes have become due and
payable or will become due and payable at their Stated Maturity within one year,
or (b) all outstanding Notes are scheduled for redemption within one year or are
delivered to the Trustee for conversion in accordance with the Indenture, and in
either case the Company has irrevocably deposited with the Trustee an amount
sufficient to pay and discharge all outstanding Notes on the date of their
Stated Maturity or the scheduled date of redemption.
FORM, DENOMINATION AND REGISTRATION
The Notes have been issued in fully registered form, without coupons, in
denominations of $1,000 in principal amount and integral multiples thereof.
GLOBAL NOTES; BOOK-ENTRY FORM. Notes held by QIBs are evidenced by a global
note (the "144A Global Note") which has been deposited with, or on behalf of,
DTC, New York, New York and registered in the name of Cede & Co. ("Cede") as
DTC's nominee. Notes sold to persons in offshore transactions (each, a "Non-U.S.
Person") in compliance with Regulation S will be evidenced initially by a global
note (the "Regulation S Global Note") which will be deposited with, or on behalf
of, DTC and registered in the name of Cede as DTC's nominee for the accounts
held through the Euroclear System ("Euroclear") operated by Morgan Guaranty
Trust Company of New York, Brussels office or Cedel, S.A. ("Cedel"). Notes held
by Institutional Accredited Investors (that have agreed in writing to comply
with the transfer restrictions and other conditions set forth in the Purchase
Agreement described herein) are evidenced by a global note (the "Institutional
Accredited Investor Global Note"), which has been deposited with, or on behalf
of, DTC and registered in the name of Cede as DTC's nominee.
The 144A Global Note, the Regulation S Global Note and the Institutional
Accredited Investor Global Note are hereinafter collectively referred to as the
Global Notes. Except as set forth above, the record ownership of the Global
Notes may be transferred, in whole or in part, only to another nominee of DTC or
to a successor of DTC or its nominee.
Beneficial interests in the Notes represented by the 144A Global Note may be
transferred (i) to another QIB, (ii) to a Non-U.S. Person who takes delivery in
the form of a beneficial interest in the Notes represented by the Regulation S
Global Note, only upon receipt by the Trustee from the transferor of a written
certificate to the effect that such transfer is being made in accordance with
Rule 903 or Rule 904 of Regulation S (a "Regulation S Transfer Certificate"), or
(iii) to a person who takes delivery in the form of a beneficial interest in the
Note represented by the Institutional Accredited Investor Global Note only upon
receipt by the Trustee from the transferee of a written certificate to the
effect that such transfer is being made to a person who the transferor
reasonably believes is purchasing for its own account or accounts as to which it
exercises sole investment discretion and that such person and each such account
is an Institutional Accredited Investor, in each case in a transaction meeting
the requirements of Regulation D and in accordance with any applicable
securities laws of any state of the United States or any other jurisdiction (an
"Institutional Accredited Investor Transfer Certificate"). Beneficial interests
in the Notes represented by the Institutional Accredited Investor Global Note
may be transferred (i) to a QIB who takes delivery in the form of a beneficial
interest in the Notes represented by the 144A Global Note only upon receipt by
the Trustee of a written certification (a "Rule 144A Transfer Certificate") to
the effect that such transfer is being made to a person whom the transferor
reasonably believes is purchasing for its own account or accounts as to which it
exercises sole investment discretion and that such person and each such account
is a QIB within the meaning of Rule 144A, in each case in a transaction meeting
the requirements of Rule 144A and in accordance with any applicable securities
laws of any state of the United States or any
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other jurisdiction, (ii) to a Non-U.S. Person who takes delivery in the form of
a beneficial interest in the Notes represented by the Regulation S Global Note,
only upon receipt by the Trustee of a Regulation S Transfer Certificate, or
(iii) to another Institutional Accredited Investor who takes delivery in the
form of a beneficial interest in the Notes represented by the Institutional
Accredited Investor Global Note.
Any beneficial interest in Notes represented by any of the Global Notes that
is transferred to a person who takes delivery in the form of a beneficial
interest in Notes represented by another Global Note will, upon transfer, cease
to be a beneficial interest in Notes represented by such former Global Note and
become a beneficial interest in Notes represented by the latter Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interests in Notes represented by such
latter Global Note for as long as it retains such an interest.
No person other than a QIB may own a beneficial interest in the 144A Global
Note. Holders may hold their interest in their respective Global Note directly
through DTC if such Holders are participants in DTC or indirectly through
organizations that are participants in DTC (the "Participants"). Holders who are
not Participants may beneficially own interests in their respective Global Note
held by DTC only through Participants or certain banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants"). Owners of beneficial interests in the Global Notes will be
entitled to have certificates registered in their names and to receive physical
delivery of certificates in definitive form (a "Definitive Note").
Non-U.S. Persons may hold their interests in Notes represented by the
Regulation S Global Note through Cedel or Euroclear, if they are participants in
such systems, or indirectly through organizations that are participants in such
systems. Investors may also hold such beneficial interests through organizations
other than Euroclear and Cedel that are participants in the DTC system. Cedel
and Euroclear will hold interests in the Notes represented by the Regulation S
Global Note on behalf of their participants through customers' securities
accounts in Cedel's or Euroclear's respective names on the books of their
respective depositories, which in turn will hold such interests in Notes
represented by the Regulation S Global Note in customers' securities accounts in
the depositories' names on the books of DTC. Transfers between participants in
Euroclear and Cedel will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfer between DTC, on the one hand, and
directly or indirectly through Euroclear or Cedel participants, on the other,
will be effected by DTC in accordance with DTC rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Cedel, as the case may be, by the counterpart in such system in accordance with
its rules and procedures and within its established deadline (Brussels' time).
Euroclear or Cedel, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf of delivering or receiving
beneficial interests in the relevant Global Note in DTC, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Cedel participants and participants in Euroclear may not
deliver instructions directly to the depositories for Cedel or Euroclear.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing a beneficial interest in a Global Note from a DTC
Participant will be credited during the securities settlement processing day
immediately following the DTC settlement date and such credit of any
transactions in beneficial interests in such Global Note settled during such
processing will be reported to the relevant Euroclear or Cedel participant on
such business day. Cash received in Euroclear or Cedel as a result of sales of
beneficial interests in a Global Note by or through a Euroclear or Cedel
participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Euroclear or Cedel cash
account only as of the business day following settlement in DTC.
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QIBs may hold their interests in the 144A Global Notes directly through DTC
if such Holder is a Participant, or indirectly through organizations which are
Participants. Transfers between Participants will be effected in the ordinary
way in accordance with DTC rules and will be settled in same day funds. Holders
of beneficial interests in the Regulation S Global Notes (a "Regulation S
Holder") may hold their interests in the Regulation S Global Notes directly
through Cedel or Euroclear, or indirectly through organizations that are
participants in Cedel or Euroclear. Cedel and Euroclear will hold interests in
the Regulation S Global Notes on behalf of their participants through their
respective depositaries at DTC. Transfers between participants in Euroclear and
Cedel will be effected in the ordinary way in accordance with their respective
rules and operating procedures. The laws of some states require that certain
persons take physical delivery of securities in definitive form. Consequently,
the ability to transfer beneficial interests in the Global Notes to such persons
may be limited.
The Holders of Notes who are not Participants may beneficially own interests
in the Global Notes held by DTC only through Participants or Indirect
Participants. So long as Cede, as the nominee of DTC, is the registered owner of
the Global Notes, Cede for all purposes will be considered the sole holder of
the Global Notes.
Payment of interest on the Redemption Price (upon redemption at the option
of the Company) and the repurchase price (at the option of the Holder upon a
Repurchase Event) of the Global Notes will be made to Cede, the nominee for DTC,
as the registered owner of the Global Notes, by wire transfer of immediately
available funds. None of the Company, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company has been informed by DTC that, with respect to any payment of
interest on the Redemption Price (upon redemption at the option of the Company)
or the repurchase price (at the option of the Holder upon a Repurchase Event) of
the Global Notes, and liquidated damages, if any, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests in the Notes represented
by the Global Notes as shown on the records of DTC, unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by
Participants to owners of beneficial interests in Notes represented by the
Global Notes held through such Participants will be the responsibility of such
Participants, as is now the case with securities held for the accounts of
customers registered in "street name."
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in immediately available funds.
The laws of some states require that certain persons take physical delivery of
securities in definitive form. Because DTC can only act on behalf of
Participants, who in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having a beneficial interest in Notes represented
by the Global Notes to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes to the accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing
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corporations and may include certain other organizations such as the Initial
Purchasers. Certain of such Participants (or their representatives), together
with other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with, a Participant, either directly or
indirectly.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures in
order to facilitate transfers of interests in the Global Notes among
Participants, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time. If DTC is
at any time unwilling or unable to continue as depositary and a successor
depositary is not appointed by the Company within 90 days, the Company will
cause Notes to be issued in definitive form in exchange for the Global Notes.
DEFINITIVE NOTES. Notes sold to investors that so request will be issued in
the form of a Definitive Note (which will initially bear the Securities Act
Legend, as defined below) and such interest in the Notes will not be represented
by the Global Notes. Furthermore, Definitive Notes may be issued in exchange for
Notes represented by the Global Note if no successor depositary is appointed by
the Company as set forth above. Any Definitive Note issued to a QIB or an
Institutional Accredited Investor or to a Non-U.S. Person will bear the
Securities Act Legend, except as provided below.
Unless determined otherwise by the Company in accordance with applicable
law, Definitive Notes issued upon transfer or exchange of beneficial interests
in Notes represented by the 144A Global Note and the Institutional Accredited
Investor Global Note will bear a legend setting forth transfer restrictions
under the Securities Act. Unless determined otherwise by the Company in
accordance with applicable law, Definitive Notes issued upon transfer or
exchange of beneficial interests in Notes represented by the Regulation S Global
Note will not bear the Securities Act Legend. Upon the transfer, exchange or
replacement of Notes bearing the legend, or upon specific request for removal of
the Securities Act Legend on a Note, the Trustee shall make available for
delivery only Notes that bear such legend, or shall refuse to remove such
legend, as the case may be, unless there is delivered to the Company and the
Trustee such satisfactory evidence, in the form of a Regulation S Transfer
Certificate and an opinion of counsel, that neither the Securities Act Legend
nor the restrictions on transfer set forth therein are required to ensure
compliance with the provisions of the Securities Act.
Any Holder desiring to exchange a legended Definitive Note for a beneficial
interest in Notes represented by the Rule 144A Global Note must provide a
certification that it is a QIB (a "Rule 144A Exchange Certificate"). Any Holder
desiring to exchange a legended Definitive Note for a beneficial interest in
Notes represented by a Regulation S Global Note must provide a certification
that the Note was purchased in a transaction complying with Regulation S (a
"Regulation S Exchange Certificate"). Any Holder desiring to exchange a legended
Definitive Note for a beneficial interest in Notes represented by the
Institutional Accredited Investor Global Note must provide a certification that
it is an Institutional Accredited Investor (an "Institutional Accredited
Investor Exchange Certificate").
Any Holder desiring to transfer a legended Definitive Note to a transferee
which takes delivery in the form of a beneficial interest in Notes represented
by the 144A Global Note must provide a Rule 144A Transfer Certificate. Any
Holder desiring to transfer a legended Definitive Note to a transferee which
takes delivery in the form of a beneficial interest in Notes represented by the
Regulation S Global Note must provide a Regulation S Transfer Certificate. Any
Holder desiring to exchange a legended Definitive Note to a transferee which
takes delivery in the form of a beneficial interest in Notes represented by the
Institutional Accredited Investor Global Note must provide an Institutional
Accredited Investor Transfer Certificate.
Any Holder desiring to exchange an unlegended Definitive Note for, or
transfer an unlegended Definitive Note to a transferee which takes delivery in
the form of, a beneficial interest in Notes represented by a Global Note may do
so without need for such certification.
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If a Holder desires to exchange an unlegended Definitive Note for, or
transfer an unlegended Definitive Note to a transferee which takes delivery in
the form of, a beneficial interest in Notes represented by a Global Note, the
Trustee must receive a certificate, in the case of any exchange, in the form of
a Rule 144A Exchange Certificate or an Institutional Accredited Investor
Exchange Certificate, as applicable, or, in the case of a transfer, in the form
of a Rule 144A Transfer Certificate or an Institutional Accredited Investor
Exchange Certificate, as the case may be.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and liquidated
damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the Holder of interests in such Global Note.
With respect to Definitive Notes, the Company will make all payments of
principal, premium, if any, interest and liquidated damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. The Company expects that secondary
trading in the Definitive Notes will also be settled in immediately available
funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Shelf Registration Agreement, the Company has filed the
Shelf Registration Statement to cover resales of Transfer Restricted Securities
by the Holders thereof. The Company will be permitted to prohibit offers and
sales of Transfer Restricted Securities pursuant to the Shelf Registration
Statement under certain circumstances and subject to certain conditions (any
period during which offers and sales are prohibited being referred to as a
"Suspension Period"). "Transfer Restricted Securities" means each Note and any
underlying share of Common Stock until the date on which such Note or underlying
share of Common Stock has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement, the date on
which such Note or underlying share of Common Stock is distributed to the public
pursuant to Rule 144 under the Securities Act or the date on which such Note or
share of Common Stock may be sold or transferred pursuant to Rule 144(k) (or any
similar provisions then in force).
Holders of the Transfer Restricted Securities will be required to deliver
information to be used in connection with, and to be named as selling
securityholders in, the Shelf Registration Statement in order to transfer their
Transfer Restricted Securities pursuant to the Shelf Registration Statement.
There can be no assurance that the Company will be able to maintain an effective
and current registration statement as required. The absence of such a
registration statement may limit the Holder's ability to sell such Transfer
Restricted Securities or adversely affect the price at which such Transfer
Restricted Securities can be sold.
If the Shelf Registration Statement shall cease to be effective (without
being succeeded immediately by an additional registration statement filed and
declared effective) or useable for the offer and sale of Transfer Restricted
Securities for a period of time (including any Suspension Period) which shall
exceed 60 days in the aggregate in any 12-month period (such event , a
"Registration Default"), then the Company is required to pay damages
("liquidated damages") to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default, in an amount equal to $.05 per week per $1,000 aggregate
principal amount of the Notes, or, if applicable, an equivalent amount per week
per share (subject to adjustment as set forth above) of Common Stock
constituting Transfer Restricted Securities, held by such Holder. The amount of
the liquidated damages will increase by an additional $.05 per week per $1,000
aggregate principal amount of Notes held by each Holder (or shares of Common
Stock, as noted above) with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of liquidated
damages of $.50 per week per $1,000 aggregate principal amount of the Notes (or
shares of Common Stock, as noted above) held by each Holder. All accrued
liquidated damages will be paid by the Company on each Interest
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Payment Date in cash. Such payment will be made to Holders as set forth under
"Same Day Settlement and Payment" above. Following the cure of all Registration
Defaults, the accrual of liquidated damages will cease.
The Company shall cause the Shelf Registration Statement to be effective for
a period of two years from the effective date thereof or such shorter period
that will terminate when each of the Transfer Restricted Securities covered by
the Shelf Registration Statement ceases to be a Transfer Restricted Security.
The foregoing summary of certain provisions of the Shelf Registration
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the Shelf Registration
Agreement. Copies of the Shelf Registration Agreement are available from the
Company upon request.
The Company is required, to the extent it receives certain information from
Holders after initial effectiveness of the Shelf Registration Statement, to file
supplemental prospectuses within 20 business days of receiving such information
unless the Company receives such information from Holders holding at least $2.0
million principal amount of Notes, in which case supplemental prospectuses will
be filed within 10 business days of receiving such information. Holders who are
not named in the Shelf Registration Statement or any such supplemental
prospectus are not be permitted to sell or otherwise transfer the Notes held
except in accordance with certain transfer restrictions set forth herein.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance with
the laws of the State of New York, without giving effect to such state's
conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
U.S. Bank National Association is the Trustee under the Indenture. The
Company and its subsidiaries may maintain deposit accounts and conduct other
banking transactions with the Trustee in the ordinary course of business.
In case an Event of Default shall occur (and shall not be cured or waived in
a timely manner), the Trustee will be required to use the degree of care of a
prudent person in the conduct of his own affairs in the exercise of its powers.
Subject to such provisions, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request of any of the Holders
of Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
ABSENCE OF PUBLIC MARKET
Prior to this offering, there has been no public market for the Notes and
there can be no assurance as to the liquidity of any markets that may develop
for the Notes, the ability of the Holders to sell their Notes or at what price
Holders of the Notes will be able to sell their Notes. Future trading prices of
the Notes will depend upon many factors including, among other things,
prevailing interest rates, the Company's operating results, the price of the
Common Stock and the market for similar securities. The Initial Purchasers have
informed the Company that they intend to make a market in the Notes offered
hereby; however, the Initial Purchasers are not obligated to do so and any such
market making activity may be terminated at any time without notice to the
Holders of the Notes. Prior to this offering, the Notes were designated for
trading on the PORTAL Market. The Notes are not expected to remain eligible for
trading on the PORTAL Market. The Company does not intend to apply for listing
of the Notes on any securities exchange or for quotation of the Notes through
any automated quotation system.
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<PAGE>
DESCRIPTION OF COMMON STOCK
The Amended and Restated Articles of Incorporation, as amended, of the
Company authorize the issuance by the Company through its Board of Directors of
45,000,000 shares of Common Stock, par value $.01 per share. Upon any
liquidation or dissolution of the Company, the holders of Common Stock share
ratably, in proportion to the number of shares held, in the assets available for
distribution after payment of all prior claims. All outstanding shares of the
Company's Common Stock are fully paid and nonassessable. As of December 28,
1997, there were 19,638,568 shares of Common Stock outstanding, held of record
by approximately 1,013 shareholders.
Holders of Common Stock have no preemptive rights and are entitled to one
vote for each share held on each matter submitted to a vote of shareholders.
Cumulative voting for the election of directors is not permitted. Generally, the
affirmative vote of the holders of a majority of the outstanding shares of
Company voting stock is necessary to authorize any agreement for consolidation,
merger or sale or other disposition of all or substantially all of the Company's
assets, unless such transactions involve a beneficial holder of 20% or more of
the Company's voting stock or related parties. Generally, such transactions
involving a beneficial holder of at least 20% of the voting stock of the
Company, liquidations or dissolutions of the Company at the time that it has
such a 20% or more beneficial shareholder, and certain other specified
transactions involving such a substantial shareholder, whether or not they
otherwise require a shareholder vote, require the affirmative vote of the
holders of at least two-thirds of the outstanding shares of voting stock, unless
first approved by not less than the greater of (a) two or (b) two-thirds of the
directors (other than such 20% shareholder or related parties) who were members
of the Board of Directors on May 15, 1983, or immediately prior to the time such
shareholder became the beneficial owner of 20% or more of the Company's Common
Stock. A two-thirds vote of the outstanding shares of the Company's voting stock
is required to amend this special voting provision. Other amendments to the
Company's Amended and Restated Articles of Incorporation require an affirmative
vote of the holders of a majority of the shares entitled to vote that are
present at a meeting of the shareholders.
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors of the Company out of funds legally
available therefor. However, as noted under "Dividend Policy," the Company
presently intends to retain any earnings for use in the Company's business and
does not anticipate paying cash dividends in the foreseeable future. Certain of
the Company's financing agreements contain restrictive covenants which, among
other things, impose limitations on the payment of dividends. See the Notes to
Consolidated Financial Statements of the Company incorporated herein by
reference to the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended September 28, 1997.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A., is the Transfer Agent and Registrar for the
Common Stock of the Company.
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<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain material United States
federal income tax consequences to holders of the Notes and Common Stock into
which the Notes may be converted. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal
Revenue Service ("IRS") rulings, and judicial decisions now in effect, all of
which are subject to change (possibly with retroactive effect) or different
interpretations. There can be no assurance that the IRS will not successfully
challenge one or more of the tax consequences described herein, and the Company
has not obtained, nor does it intend to obtain, a ruling from the IRS with
respect to the U.S. federal income tax consequences of acquiring or holding
Notes or Common Stock.
This discussion does not deal with all aspects of United States federal
income taxation that may be important to holders of the Notes or shares of
Common Stock and does not deal with tax consequences arising under the laws of
any foreign, state or local jurisdiction. This discussion is for general
information only, and does not purport to address all tax consequences that may
be important to a particular holder in light of their personal circumstances
(such as holders subject to the alternative minimum tax provisions of the Code),
or to certain types of purchasers (such as certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities or persons who
hold the Notes or Common Stock in connection with a straddle or hedge, a
conversion transaction or other integrated transactions) that may be subject to
special rules. This discussion is limited to holders who hold the Notes and the
shares of Common Stock received upon conversion thereof as capital assets.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any holder
who is not a United States person. The term "United States person" or "U.S.
Holder" means a citizen or resident (as defined in Section 7701(a) of the Code)
of the United States, a corporation or partnership created or organized in the
United States or any state thereof, an estate, the income of which is subject to
U.S. federal income tax regardless of its source and, in general, a trust, if
(i) a court within the United States is able to exercise primary supervision
over the administration of the trust and (ii) one or more United States persons
have the authority to control all substantial decisions of the trust.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR PARTICIPATION IN
THIS OFFERING, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING CONVERSION OF
THE NOTES, AND THE EFFECT THAT THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH
TAX CONSEQUENCES.
OWNERSHIP OF THE NOTES
INTEREST ON NOTES. Interest on Notes generally will be taxable to a holder
as ordinary interest income at the time such interest is paid or accrued, in
accordance with the holder's method of tax accounting. The Company expects that
the Notes will not be issued with original issue discount ("OID") within the
meaning of the Code.
The Company intends to take the position that the liquidated damages, if and
when paid, will be taxable to a U.S. Holder as ordinary income in accordance
with such U.S. Holder's method of tax accounting. The IRS, however, may take a
different position, which could affect both a U.S. Holder's income and the
timing of the Company's deduction with respect to such liquidated damages.
MARKET DISCOUNT AND BOND PREMIUM. If a U.S. Holder acquires a Note
subsequent to its original issuance and if the face amount of the Note exceeds
the U.S. Holder's tax basis by more than a specified DE MINIMIS amount, the U.S.
Holder generally will be treated as having acquired the Note at a market
discount equal to such excess. Gain on disposition of a Note purchased with
market discount generally will be treated as ordinary income to the extent such
gain does not exceed the accrued market discount on the Note. In addition, a
U.S. Holder of a Note purchased with market discount may be required to defer a
portion of its interest deductions attributable to any indebtedness incurred or
continued to purchase or carry the Note. Generally, the amount of accrued market
discount is determined using a straight-line
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<PAGE>
method. However, a U.S. Holder may elect to accrue such market discount on a
constant yield method, in which case neither the rule regarding the
recharacterization of income as ordinary upon disposition nor the interest
deferral rule will apply to such U.S. Holder.
If a U.S. Holder acquires a Note subsequent to its original issuance and if
the face amount of the Note is less than the U.S. Holder's tax basis, the U.S.
Holder generally will be treated as having acquired the Note with bond premium
equal to such excess. Such a U.S. Holder may elect to amortize such bond premium
as an offset to interest income under a constant-yield method over the life of
the Note, in which case the U.S. Holder's tax basis in the Note would be reduced
by the amount of the amortized bond premium.
All U.S. Holders who acquire a Note with either market discount or bond
premium should consult their tax advisers regarding the tax consequences of
holding such Note and the consequences of the various elections available to
such U.S. Holders.
CONSTRUCTIVE DIVIDEND. Certain corporate transactions, such as
distributions of assets to holders of Common Stock, may cause a deemed
distribution to the holders of the Notes if the conversion price or conversion
ratio of the Notes is adjusted to reflect such corporate transaction. Such
deemed distributions, if any, will be taxable as a dividend, return of capital,
or capital gain in accordance with the earnings and profits rules discussed
under "Distribution on Shares of Common Stock" below.
SALE OR EXCHANGE OF NOTES OR SHARES OF COMMON STOCK. In general, a U.S.
Holder of Notes will recognize gain or loss upon the sale, exchange, redemption,
retirement or other disposition of the Notes measured by the difference between
the amount of cash and the fair market value of any property received (except to
the extent attributable to the payment of accrued interest not previously
included in income) and the holder's adjusted tax basis in the Notes. A U.S.
Holder's tax basis in Notes generally will equal the cost of the Notes to the
holder. In general, each U.S. Holder of Common Stock into which the Notes have
been converted will recognize gain or loss upon the sale, exchange, redemption
or other disposition of the Common Stock under rules similar to those applicable
to the Notes. For the basis and holding period of shares of Common Stock, see
"Conversion of Notes" below. Special rules may apply to redemptions of the
Common Stock which may result in the amount paid being treated as a dividend.
The gain or loss on the disposition of the Notes or shares of Common Stock will
be capital gain or loss and will be long-term capital gain or loss if the Notes
or shares of Common Stock have been held for more than one year at the time of
such disposition. Legislation enacted in 1997 reduces to 20% the maximum rate of
tax on long-term capital gains on most capital assets held by an individual for
more than 18 months. Gain on most capital assets held by an individual more than
one year and up to 18 months is subject to tax at a maximum rate of 28%. Holders
are urged to consult their own tax advisors regarding the legislation.
U.S. Holders should be aware that the resale of the Notes may be affected by
the "market discount" rules of the Code under which a purchaser of a Note
acquiring the Note at a market discount generally would be required to include
as ordinary income a portion of the gain realized upon the disposition or
retirement of such Note, to the extent of the market discount that has accrued
but has not been included in income while the debt instrument was held by such
purchaser.
CONVERSION OF NOTES. A U.S. Holder of Notes will not recognize gain or loss
on the conversion of Notes into shares of Common Stock except to the extent the
Common Stock is considered attributable to accrued interest not previously
included in income (which is taxable as ordinary income) or with respect to cash
received in lieu of a fractional share of Common Stock. The U.S. Holder's tax
basis in the shares of Common Stock received upon conversion of the Notes will
be equal to the holder's aggregate basis in the Notes exchanged therefor (less
any portion thereof allocable to cash received in lieu of a fractional share).
The holding period of the shares of Common Stock received by the U.S. Holder
upon conversion of Notes will generally include the period during which the
holder held the Notes prior to the conversion.
Cash received in lieu of a fractional share of Common Stock should be
treated as a payment in exchange for such fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash
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paid in lieu of such fractional shares generally will equal the difference
between the amount of cash received and the amount of tax basis allocable to the
fractional shares.
DISTRIBUTION ON SHARES OF COMMON STOCK. Distributions, if any, on shares of
Common Stock will constitute dividends for United States federal income tax
purposes to the extent of current or accumulated earnings and profits of the
Company as determined under United States federal income tax principles.
Dividends paid to holders that are United States corporations may qualify for
the dividends-received deduction.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO NON-U.S. HOLDERS
INTEREST ON NOTES. Generally, interest paid on the Notes to a Non-U.S.
Holder will not be subject to United States federal income tax pursuant to the
"portfolio interest exemption" if: (i) such interest is not effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Holder; (ii) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all classes of stock
of the Company entitled to vote; (iii) the Non-U.S. Holder is not a controlled
foreign corporation with respect to which the Company is a "related person"
within the meaning of the Code; (iv) the Non-U.S. Holder is not a bank extending
credit pursuant to a loan agreement entered into in the normal course of
business; and (v) the beneficial owner, under penalties of perjury, certifies
that the beneficial owner is not a United States person and provides the
beneficial owner's name and address. The information required under clause (v)
above may be provided by a securities clearing organization, a bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business. For purposes of clause (ii) above, a Non-U.S. Holder of
Notes is deemed to own the Common Stock into which such Notes may be converted.
A Non-U.S. Holder that is not exempt from tax under these rules generally will
be subject to United States federal income tax withholding at a rate of 30% (or
lower applicable treaty rate); provided, however, that interest effectively
connected with the conduct of a trade or business in the United States by such
Non-U.S. Holder will be subject to the United States federal income tax on net
income that applies to United States persons generally (and, with respect to
corporate holders under certain circumstances, may also be subject to the branch
profits tax) and will not be subject to a 30% withholding tax if certain
certification requirements are met as discussed below. Non-U.S. Holders should
consult applicable income tax treaties, which may provide different rules. To
claim the benefit of a tax treaty or to claim the exemption from withholding for
effectively connected income, a Non-U.S. Holder must provide a properly executed
Form 1001 or 4224, as applicable, prior to the payment of interest. Under
recently issued Treasury Regulations, these forms will be replaced after 1998 by
Form W-8, subject to certain transition rules. Special rules are provided in the
Treasury Regulations for payments through qualified intermediaries.
SALE OR EXCHANGE OF NOTES OR SHARES OF COMMON STOCK. A Non-U.S. Holder
generally will not be subject to United States federal income tax on gain
recognized upon the sale or other disposition of the Notes or shares of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-U.S. Holder, (ii) in the case of
a Non-U.S. Holder who is a nonresident alien individual, such holder is present
in the United States for 183 or more days in the taxable year of the sale or
disposition and either has a "tax home" (as defined for United States federal
income tax purposes) in the United States or an office or other fixed place of
business in the United States to which the sale or disposition is attributable,
(iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain United States expatriates, or (iv) in the case of
the disposition of Common Stock, the Company is a United States real property
holding corporation. The Company believes that it has not been, and does not
expect to become, a United States real property holding corporation. Non-U.S.
Holders should consult applicable income tax treaties, which may provide
different rules.
CONVERSION OF NOTES. A Non-U.S. Holder generally will not be subject to
United States federal income tax on the conversion of Notes into shares of
Common Stock. To the extent a Non-U.S. Holder receives cash in lieu of a
fractional share on conversion, such cash may give rise to gain that would be
subject to the rules described above with respect to the sale or exchange of a
Note or Common Stock. Cash
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or Common Stock treated as or issued for accrued interest will be treated as
interest under the rules described above.
DISTRIBUTION ON SHARES OF COMMON STOCK. Generally, any dividend on shares
of Common Stock to a Non-U.S. Holder will be subject to United States federal
income tax withholding at a rate of 30% unless the dividend is effectively
connected with the conduct of trade or business within the United States by the
Non-U.S. Holder, in which case the dividend will be subject to the United States
federal income tax on net income that applies to United States persons generally
(and, with respect to corporate holders, and under certain circumstances, the
branch profits tax) provided certain certification requirements are met. Non-
U.S. Holders should consult any applicable income tax treaties, which may
provide for a lower rate of withholding or other rules different from those
described above. Currently, dividends paid to an address in a foreign country
generally are presumed (absent actual knowledge to the contrary) to be paid to a
resident of such country for purposes of the withholding rules and for
determining the applicability of a tax treaty rate. Under recently issued
Treasury Regulations, effective after 1998, a Non-U.S. Holder may be required to
satisfy certain certification requirements in order to claim a reduction or of
exemption from withholding under the foregoing rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. HOLDERS. Information reporting will apply to payments of interest or
dividends on or the proceeds of the sale or other disposition of the Notes or
shares of Common Stock made by the Company with respect to certain noncorporate
U.S. Holders, and backup withholding at a rate of 31% may apply unless the
recipient of such payment supplies a taxpayer identification number, certified
under penalties of perjury, as well as certain other information, or otherwise
establishes, in the manner prescribed by law, an exemption from backup
withholding. The Company may nevertheless institute backup withholding with
respect to a holder for payments made on the Notes if instructed to do so by the
IRS. Any amount withheld under backup withholding is allowable as a credit
against the U.S. Holder's federal income tax, providing that the required
information is provided to the IRS.
NON-U.S. HOLDERS. The Company must report annually to the IRS and to each
Non-U.S. Holder any interest or dividend that is subject to withholding, or that
is exempt from U.S. withholding tax pursuant to a tax treaty, or interest that
is exempt from U.S. tax under the portfolio interest exemption. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides.
Currently, backup withholding and information reporting will not apply to
payments of principal on the Notes by the Company to a Non-U.S. Holder if the
holder certifies as to its non-United States person status under penalties of
perjury or otherwise establishes an exemption (provided that neither the Company
nor its Paying Agent has actual knowledge that the holder is a United States
person or that the conditions of any other exemption are not, in fact,
satisfied).
The payment of the proceeds on the disposition of Notes or shares of Common
Stock to or through the United States office of a United States or foreign
broker will be subject to information reporting and backup withholding unless
the owner provides the certification described above or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of Notes or
shares of Common Stock to or through a foreign office of a broker will not be
subject to backup withholding. However, if such broker is a United States
person, a controlled foreign corporation for United States tax purposes, or a
foreign person 50% or more of whose gross income from all sources for certain
periods is from activities that are effectively connected with a United States
trade or business, information reporting requirements will apply unless such
broker has documentary evidence in its files of the owner's Non-U.S. Holder
status and has no actual knowledge to the contrary or unless the owner otherwise
establishes an exemption. Both backup withholding and information reporting will
apply to the proceeds from such dispositions if the broker has actual knowledge
that the payee is a U.S. Holder.
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DEDUCTIBILITY OF INTEREST TO THE COMPANY
Under recent tax legislation, interest on debt "payable in equity" of the
issuer or certain related parties is not deductible by the issuer. For this
purpose, debt payable in equity includes (i) an obligation which is part of an
arrangement designed to result in payment of the obligation with or by reference
to equity of the issuer or certain related parties as well as (ii) certain
obligations convertible at the option of the holder where the holder is
substantially certain to convert. Legislative history provides, among other
things, that the new legislation is not expected to affect convertible debt with
a conversion price significantly higher than the market price for the stock to
be received upon conversion on the date of issuance of the debt. Because the
conversion price for the Common Stock to be received upon conversion of the
Notes will exceed the market price for the Common Stock on the date of issuance
of the Notes, the Company intends to take the position that the interest on the
Notes is deductible to the Company.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PROSPECTIVE
HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES
OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF A NOTE AND OF COMMON STOCK INTO
WHICH A NOTE MAY BE CONVERTED (INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS).
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SELLING HOLDERS
The Notes were initially issued and sold pursuant to a Purchase Agreement,
dated March 12, 1998, among the Company and the Initial Purchasers (the
"Purchase Agreement"). The Notes were acquired from the Initial Purchasers by
the Selling Holders in compliance with Rule 144A, Regulation D or Regulation S
under the Securities Act, or in other permitted resale transactions from holders
who acquired such Notes from the Initial Purchasers or their successors in
further permitted resale transactions exempt from registration under the
Securities Act. The Company agreed to indemnify and hold the Initial Purchasers
harmless against certain liabilities under the Securities Act that may arise in
connection with the sale of the Notes by the Initial Purchasers.
Except as otherwise indicated, the table below sets forth certain
information as of May 4, 1998 with respect to the Notes and the Common Stock
issuable upon conversion thereof. The term "Selling Holders" includes the
beneficial owners of such Notes and Common Stock listed below and their
respective transferees, pledgees, donees or their successors. To the knowledge
of the Company and based on certain representations made by the Selling Holders,
other than as a result of the ownership of the Notes and Common Stock listed
below, none of the Selling Holders (other than NationsBanc Montgomery Securities
LLC) has had any material relationship with the Company or any of its affiliates
within the past three years. NationsBanc Montgomery Securities LLC has engaged
in transactions with and performed various investment banking and other services
for the Company in the past and may do so from time to time in the future.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
AGGREGATE COMMON STOCK
PRINCIPAL AMOUNT ISSUABLE UPON
OF NOTES OWNED AND CONVERSION OF NOTES
NAME OF SELLING HOLDER THAT MAY BE SOLD THAT MAY BE SOLD(1)
- ---------------------------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
Alexandra Global Investment Fund 1, Ltd............................... $ 4,725,000 166,666
Alta Partners Holdings, LDC........................................... 2,500,000 88,183
American Airlines Master Fixed Benefit Pension Trust.................. 120,000 4,232
American Airlines Master Pilots' Variable Annuity Trust............... 340,000 11,992
AMR Investment Services:
Balanced Portfolio.................................................. 120,000 4,232
AMR Investment Services:
Growth and Income Portfolio......................................... 280,000 9,876
Argent Classic Convertible Arbitrage Fund L.P......................... 1,750,000 61,728
Argent Classic Convertible Arbitrage Fund (Bermuda) L.P............... 8,250,000 291,005
CFW-C, L.P............................................................ 5,000,000(2) 176,366
Deutsche Bank A.G..................................................... 10,200,000 359,788
Fidelity Financial Trust: Fidelity Convertible Securities Fund(3)..... 10,750,000 379,188
Goldman, Sachs Small Cap Value Fund................................... 1,802,000 63,562
Hotchkis and Wiley Small Cap Fund..................................... 1,380,000 48,677
HSBC Securities, Inc.................................................. 3,000,000 105,820
J. P. Morgan & Co. Inc................................................ 8,500,000 299,823
The Kaufmann Fund, Inc................................................ 30,000,000 1,058,201
Mainstay Convertible Fund............................................. 2,000,000 70,546
McMahan Securities Company, L.P....................................... 100,000 3,527
New York Life Insurance Company....................................... 5,000,000 176,366
The Northwestern Mutual Life Insurance Company........................ 7,500,000(4) 264,550
Oddo USA Small Cap.................................................... 80,000 2,821
Protective Life Small Cap Equity Fund................................. 198,000 6,984
Putnam Capital Appreciation Fund...................................... 2,000,000 70,546
Schneider Capital Management Corp..................................... 1,500,000 52,910
Southern Nevada Culinary and Bartenders Pension Trust Fund............ 430,000 15,167
Teachers Retirement System of the State of Illinois................... 250,000 8,818
------------------ ----------
TOTAL............................................................... $ 107,775,000 3,801,574
------------------ ----------
------------------ ----------
</TABLE>
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(1) Includes only full shares of Common Stock issuable upon conversion of the
Notes based on an initial conversion price of $28.35 per share (initially
equivalent to a conversion price of 35,273 shares per
(FOOTNOTES CONTINUED ON FOLLOWING PAGE.)
66
<PAGE>
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE.)
$1,000 principal amount of Notes). A cash payment will be made in lieu of any
fractional interest upon conversion.
(2) The holdings of this entity are as of May 8, 1998.
(3) The entity is either an investment company or a portfolio of an investment
company registered under Section 8 of the Investment Company Act of 1940, as
amended, or a private investment account advised by Fidelity Management &
Research Company ("FMR Co."). FMR Co. is a Massachusetts corporation and an
investment advisor registered under Section 203 of the Investment Advisers
Act of 1940, as amended, and provides investment advisory services to the
Fidelity entity identified above, and to other registered investment
companies and to certain other funds which are generally offered to a
limited group of investors. FMR Co. is a wholly-owned subsidiary of FMR
Corp. ("FMR"), a Massachusetts corporation.
(4) Includes $500,000 in principal amount held in The Northwestern Mutual Life
Insurance Company Group Annuity Separate Account.
The preceding table has been prepared based on information furnished to the
Company by or on behalf of the Selling Holders. With respect to each Selling
Holder, the principal amount set forth may have increased or decreased since the
information was furnished, and there may be additional Selling Holders of which
the Company is unaware.
In view of the fact that Selling Holders may offer all or a portion of the
Notes or shares of Common Stock held by them pursuant to this offering, and
because this offering is not being underwritten on a firm commitment basis, no
estimate can be given as to the amount of Notes or the number of shares of
Common Stock that will be held by the Selling Holders after completion of this
offering. In addition, the Selling Holders identified above may have sold,
transferred or otherwise disposed of all or a portion of their Notes since the
date on which they provided information regarding their Notes in transactions
exempt from registration under the Securities Act.
Information concerning the Selling Holders may change from time to time and
any such changed information that the Company becomes aware of will be set forth
in supplements to this prospectus if and when necessary. In addition, the per
share conversion price, and the number of shares of Common Stock issuable upon
conversion of the Notes, is subject to adjustment under certain circumstances.
Accordingly, the aggregate principal amount of Notes, and the number of shares
of Common Stock issuable upon conversion thereof, offered hereby may increase or
decrease. As of the date this prospectus, the aggregate principal amount of
Notes outstanding is $150,000,000.
PLAN OF DISTRIBUTION
The Notes, and the Common Stock issuable upon conversion of the Notes,
offered hereby may be sold from time to time by the Selling Holders to
purchasers directly by any of the Selling Holders in one or more transactions at
market prices prevailing at the time of sale, at a fixed price, which may be
changed, or at varying prices determined at the time of sale or at negotiated
prices. Such prices will be determined by the holders of such securities or by
agreement between such holders and underwriters or dealers who may receive fees
or commissions in connection therewith.
Any of the Selling Holders may from time to time offer the Notes, or the
Common Stock issuable upon conversion of the Notes, beneficially owned by them
through underwriters, dealers or agents, who may receive compensation in the
form of underwriting discounts, commissions or concessions from the Selling
Holders and the purchasers of the Notes, or the Common Stock issuable upon
conversion of the Notes, for whom they may act as agent (which discounts,
commissions or concessions as to particular underwriters, dealers or agents may
be in excess of those customary in the types of transactions involved). Each
Selling Holder will be responsible for payment of discounts and commissions of
underwriters, dealers
67
<PAGE>
or agents. The aggregate proceeds to the Selling Holders from the sale of the
Notes, or the Common Stock issuable upon conversion of the Notes, offered by
them hereby will be the purchase price of such Notes, or Common Stock issuable
upon conversion of the Notes, less discounts and commissions, if any. Each of
the Selling Holders reserves the right to accept and, together with their agents
from time to time to reject, in whole or in part, any proposed purchase of
Notes, or Common Stock issuable upon conversion of the Notes, to be made
directly or through agents. The Company will not receive any of the proceeds
from the sale of the Notes, or Common Stock issuable upon conversion of the
Notes, by the Selling Holders. Alternatively, the Selling Holders may sell all
or a portion of the Notes, and the Common Stock issuable upon conversion of the
Notes, beneficially owned by them and offered hereby from time to time on any
exchange on which the securities are listed, or in the over-the-counter market,
on terms to be determined at the times of such sales. The Selling Holders also
may make private sales directly or through a broker or brokers.
The Company's outstanding Common Stock is listed for trading on the Nasdaq
National Market. Prior to this offering, the Notes were designated for trading
on the PORTAL Market. The Notes are not expected to remain eligible for trading
on the PORTAL Market. The Company does not intend to list the Notes for trading
on any national securities exchange or for quotation through any automated
quotation system. Accordingly, no assurance can be given as to the development
of any trading market for the Notes. See "Risk Factors--Absence of Public
Market" and "--Volatility of Notes and Stock Price."
In order to comply with the securities laws of certain states, if
applicable, the Notes, and Common Stock issuable upon conversion of the Notes,
may be sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states the Notes, and Common Stock issuable
upon conversion of the Notes, may not be sold unless they have been registered
or qualified for sale in such state or an exemption from registration or
qualification requirements is available and is complied with.
The Selling Holders and any underwriters, dealers or agents that participate
in the distribution of the Notes, and Common Stock issuable upon conversion of
the Notes, offered hereby may be deemed to be underwriters within the meaning of
the Securities Act, and any discounts, commissions or concessions received by
them and any provided pursuant to the sale of shares of Common Stock by them
might be deemed to be underwriting discounts and commissions under the
Securities Act.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. To the best
knowledge of the Company, there are currently no plans, arrangements or
understandings between any Selling Holders and any underwriters, dealers or
agents regarding the sale of Notes, or Common Stock issuable upon conversion of
the Notes, by the Selling Holders. There is no assurance that any Selling Holder
will sell any or all of the Notes, or Common Stock issuable upon conversion of
the Notes, described herein, and any Selling Holder may transfer, devise or gift
such securities by other means not described herein.
To the extent required, the specific Notes, or Common Stock issuable upon
conversion of the Notes, to be sold, the names of the Selling Holders, the
respective purchase prices and public offering prices, the names of any
underwriter, dealer or agent, and any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying prospectus
supplement or, if appropriate, a post-effective amendment to the Shelf
Registration Statement, of which this prospectus is a part. The Company entered
into the Shelf Registration Agreement for the benefit of holders of the Notes to
register their Notes, and Common Stock issuable upon conversion of the Notes,
under applicable federal and state securities laws under certain circumstances
and at certain times. The Shelf Registration Agreement provides for
cross-indemnification of the Selling Holders and the Company and their
respective directors, officers and controlling persons against certain
liabilities in connection with the offer and sale of the Notes, and the Common
Stock issuable upon conversion of the Notes, including liabilities under the
Securities Act, and to contribute to payments the parties may be required to
make in respect thereof.
68
<PAGE>
The Company has agreed to pay substantially all of the expenses incurred by
the Selling Holders and the Company incident to the registration, offering and
sale of the Notes, and Common Stock issuable upon conversion of the Notes,
excluding any underwriting discounts or commissions.
The Selling Holders and any other person participating in distribution will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M under the
Exchange Act, which may limit the timing of purchases and sales of any of the
Notes, and Common Stock issuable upon conversion of the Notes, by the Selling
Holders and any other such person. Furthermore, under Regulation M, any person
engaged in the distribution of the Notes, and Common Stock issuable upon
conversion of the Notes, may not simultaneously engage in market-making
activities with respect to the particular Notes, and Common Stock issuable upon
conversion of the Notes, being distributed for certain periods prior to the
commencement of such distribution. All of the foregoing may affect the
marketability of the Notes, and Common Stock issuable upon conversion of the
Notes, and the ability of any person or entity to engage in market-making
activities with respect to the Notes, and Common Stock issuable upon conversion
of the Notes.
The Initial Purchasers have advised the Company that they presently intend
to make a market in the Notes as permitted by applicable laws and regulations.
The Initial Purchasers are not obligated, however, to make a market in the Notes
and any such market making may be discontinued at any time at the sole
discretion of the Initial Purchasers.
69
<PAGE>
LEGAL MATTERS
The validity of the Notes offered hereby and the validity of the Common
Stock issuable upon conversion of the Notes will be passed upon by Faegre &
Benson LLP, Minneapolis, Minnesota.
EXPERTS
The audited financial statements incorporated by reference in this Shelf
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated October 29, 1997 with
respect thereto, and are incorporated herein in reliance upon the authority of
said firm as experts in giving said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the Public Reference Section of the Commission's office at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
in New York (7 World Trade Center, 13th Floor, New York, New York 10048) and
Chicago (Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661). Copies of such reports and information may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Website that contains
reports, proxy statements and other information filed by the Company at
(http://www.sec.gov). Such reports and other information can also be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20549.
The Company has agreed that, if at any time while the Notes, or the Common
Stock issuable upon conversion of the Notes, are restricted securities within
the meaning of the Securities Act or the Company is not subject to the
informational requirements of the Exchange Act, the Company will furnish to
Holders of such Notes and Common Stock and to prospective purchasers designated
by such Holders the information described under "Description of Notes--Reports"
to permit compliance with Rule 144A in connection with resales of such Notes and
Common Stock.
ADDITIONAL INFORMATION
A registration statement on Form S-3 with respect to the Notes, and the
Common Stock issuable upon conversion of the Notes, offered hereby (together
with all amendments, exhibits and schedules thereto, the "Shelf Registration
Statement") has been filed with the Commission under the Securities Act. This
prospectus does not contain all of the information contained in the Shelf
Registration Statement, certain portions of which have been omitted pursuant to
the rules and regulations of the Commission. For further information with
respect to the Company and the Notes, and the Common Stock issuable upon
conversion of the Notes, offered hereby, reference is made to the Shelf
Registration Statement. Statements contained in this prospectus regarding the
contents of any contract or any other documents are not necessarily complete
and, in each instance, reference is hereby made to the copy of such contract or
document filed as an exhibit to the Shelf Registration Statement. The Shelf
Registration Statement may be inspected without charge at the Commission's
principal office in Washington D.C., and copies of all or any part thereof may
be obtained from the Public Reference Section, Securities and Exchange
Commission, Washington, D.C. 20549, upon payment of the prescribed fees.
70
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission under the
Exchange Act, are incorporated in this prospectus by reference:
(a) The Company's Annual Report on Form 10-K, as amended, for the fiscal
year ended September 28, 1997 (which incorporates by reference certain
portions of the Company's 1997 Annual Report to Shareholders, including
financial statements and accompanying information, and certain portions of
the Company's definitive notice and proxy statement for the Company's 1998
Annual Meeting of Shareholders);
(b) The Company's Quarterly Report on Form 10-Q, as amended, for the
thirteen weeks ended December 28, 1997;
(c) The Company's Current Report on Form 8-K dated February 27, 1998;
(d) The Company's Current Report on Form 8-K dated March 18, 1998;
(e) The Company's Current Report on Form 8-K dated April 21, 1998; and
(f) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed with the Commission on
June 9, 1986.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this prospectus and prior to
the termination of the offering of the Notes, and the Common Stock issuable upon
conversion of the Notes, offered hereby shall be deemed to be incorporated by
reference in this prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
The Company will provide without charge to each person to whom this
prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference (other than
exhibits to such documents which are not specifically incorporated by reference
in such documents). Written requests for such copies should be directed to Mr.
John A. Ingleman, Secretary, Hutchinson Technology Incorporated, 40 West
Highland Park, Hutchinson, Minnesota 55350. Telephone requests may be directed
to Mr. Ingleman at (320) 587-3797.
71
<PAGE>
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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES TO ANYONE OR BY
ANYONE IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
RISK FACTORS.............................................................. 7
USE OF PROCEEDS........................................................... 16
CAPITALIZATION............................................................ 16
DIVIDEND POLICY........................................................... 17
PRICE RANGE OF COMMON STOCK............................................... 17
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION..................................................... 19
BUSINESS.................................................................. 26
MANAGEMENT................................................................ 37
DESCRIPTION OF CERTAIN INDEBTEDNESS AND OTHER FINANCING AGREEMENTS........ 39
DESCRIPTION OF NOTES...................................................... 43
DESCRIPTION OF COMMON STOCK............................................... 60
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES..................... 61
SELLING HOLDERS........................................................... 66
PLAN OF DISTRIBUTION...................................................... 67
LEGAL MATTERS............................................................. 70
EXPERTS................................................................... 70
AVAILABLE INFORMATION..................................................... 70
ADDITIONAL INFORMATION.................................................... 70
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 71
</TABLE>
$150,000,000
[LOGO]
6% CONVERTIBLE
SUBORDINATED NOTES
DUE 2005
-------------------
PROSPECTUS
-------------------
MAY 8, 1998
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