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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended September 27, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to ________________.
Commission file number 0-14709
HUTCHINSON TECHNOLOGY INCORPORATED
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(Exact name of registrant as specified in its charter)
Minnesota 41-0901840
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
40 West Highland Park
Hutchinson, Minnesota 55350
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(Address of principal executive offices) (Zip code)
(320) 587-3797
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of December 1, 1998 was
$635,576,709, based on the closing sale price for the Company's Common
Stock on that date. For purposes of determining this number, all
officers and directors of the registrant are considered to be
affiliates of the registrant. This number is provided only for the
purpose of this report on Form 10-K and does not represent an
admission by either the registrant or any such person as to the status
of such person.
As of December 1, 1998 the registrant had 19,784,489 shares of
Common Stock issued and outstanding.
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NOTE REGARDING UNAUTHORIZED FILING
ON DECEMBER 17, 1998 AT 3:28 P.M., EASTERN STANDARD TIME, THE EDGAR
FILING AGENT FOR HUTCHINSON TECHNOLOGY INCORPORATED (THE "COMPANY")
MISTAKENLY FILED ON THE EDGAR FILING SYSTEM OF THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION"), WITHOUT AUTHORIZATION FROM THE COMPANY, A
DRAFT FORM OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 27, 1998. THE FILING WAS ASSIGNED ACCESSION NUMBER
0001047469-98-044325 BY THE COMMISSION. THE DRAFT FILED ON THE EDGAR SYSTEM
DOES NOT CONSTITUTE THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED SEPTEMBER 27, 1998.
THE FOLLOWING CONSTITUTES THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED SEPTEMBER 27, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal
year ended September 27, 1998 are incorporated by reference in Part II.
Portions of the registrant's Proxy Statement dated December 17, 1998 for the
annual meeting of shareholders to be held January 26, 1999 are incorporated by
reference in Part III.
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business," "Item 2. Properties" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements are subject to risks and uncertainties, including those discussed
under "Forward-Looking Statements" in Item 7 and "Risk Factors" on pages
13-21 of this Annual Report on Form 10-K, that could cause actual results to
differ materially from those projected. Because actual results may differ,
readers are cautioned not to place undue reliance on these forward-looking
statements.
ITEM 1. BUSINESS
THE COMPANY
Hutchinson Technology Incorporated (the "Company") was incorporated in
1965 in Minnesota. The Company is the world's leading supplier of suspension
assemblies for hard disk drives. The Company estimates that it produces
approximately 70% (plus or minus 10 percentage points) 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
27, 1998, the Company shipped approximately 516 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 and its affiliates, Maxtor, Quantum, Read-Rite, SAE Magnetics/TDK,
Samsung, Seagate Technology, Toshiba, Western Digital and Yamaha. The
Company developed its leadership position in suspension assemblies through
research, development and design activities coupled with a substantial
investment in manufacturing technologies and equipment, 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, as
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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 its TSA suspension assemblies (the fiscal year
ended September 28, 1997), the Company shipped approximately 8 million TSA
suspensions. In the fiscal year ended September 27, 1998, the Company
shipped approximately 85 million TSA suspensions. 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 its November 1998 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 be approximately $26.9 billion in 1998 and
grow to approximately $32.5 billion in 2000. 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 August 1998 report, TRENDFOCUS stated that
desktop PCs and servers are expected to grow at 12.7% and 14.8% compound
annual growth rates, respectively, from 1998 to 2001. Unit growth rates for
disk drives and disk drive components are expected to parallel unit growth
rates for desktop PCs and servers. IDC's report estimates that hard disk
drive unit shipments will grow at a compound annual growth rate of 13.8% from
1997 to 2002.
The 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 November 1998 report, IDC estimated that
annual shipments of disk drives would reach approximately 139 million in 1998
and grow to approximately 184 million in 2000. 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. In addition, industry
transitions from thin film inductive recording heads to magneto-resistive
("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 occurs after the head is bonded onto the
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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. Suspension
assembly unit sales have been depressed due to a slowdown in component demand
which began in the latter part of the fiscal 1997 third quarter and continued
throughout the fiscal 1997 fourth quarter and all of fiscal 1998. The Company
believes the slowdown was due to excess inventory held by drive and recording
head manufacturers and to somewhat softer server and desk-top system demand. In
addition, some of the major personal computer companies transitioned to
build-to-order manufacturing, decreasing their required disk drive inventory
levels. Further, data density improvements also resulted in reducing slightly
the average number of suspensions required per drive, from slightly over 5 to
approximately 4.8 suspensions. Total shipments of the Company's suspension
assembly units decreased from a peak of approximately 201 million shipped in the
thirteen weeks ended March 30, 1997 to a low of approximately 122 million
shipped in the thirteen weeks ended September 27, 1998. 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. 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. The recent
slowdown in component demand did not extend to industry demand for the Company's
TSA suspensions, which has continued to rise. Demand for the Company's
conventional suspension assemblies started to recover during the latter part of
the fiscal quarter ended September 27, 1998. However, the Company expects
conventional suspension shipments in fiscal 1999 will trail those of fiscal 1998
as customer demand shifts towards TSA suspensions.
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 that 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. The Company developed its TSA
suspension assemblies, which incorporate electrical conductors in the suspension
itself, to address this difficulty.
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.
PRODUCTS
The Company's current products can be categorized as (i) suspension
assemblies, and (ii) other products, consisting primarily of etched and stamped
components used in connection with, or related to, suspension assemblies.
The following table shows, for each of fiscal 1998, 1997 and 1996, the
relative contribution to net sales in millions of dollars and percentages of
each product category:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
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AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Suspension Assemblies $390.9 96% $448.1 99% $345.4 98%
Other 16.7 4 5.1 1 7.8 2
------- ---- ------- ---- ------- ----
Total Net Sales $407.6 100% $453.2 100% $353.2 100%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
</TABLE>
During the fiscal year ended September 27, 1998, the Company shipped
approximately 516 million suspension assemblies of all types. 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.
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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
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, 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 that
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. 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. In the fiscal year ended
September 27, 1998, the Company shipped approximately 85 million TSA
suspensions. TSA suspensions accounted for approximately one percent of the
Company's fiscal 1997 unit shipments and approximately 16% of the Company's
fiscal 1998 unit shipments. The Company expects them to account for
approximately half of its total unit shipments 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 component-level
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parts, such as load beams, base plates and flexures for both conventional and
TSA suspensions, for sale to competitive suspension assembly manufacturers.
As demand for TSA suspensions increases, customers will 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 by the Company offer promising solutions to the challenges
posed by increasing areal density 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 degree of precision required 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 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 TSA suspensions and these
related follow-on features will result in TSA products becoming a disk drive
industry standard platform.
The Company has invested 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, financial condition and results of operations could be
materially adversely affected. Furthermore, if the Company fails to complete
the transition to profitable high-volume production of its TSA suspension
products or determines that TSA suspension assemblies cannot be produced
profitably in the quantities and to the specifications required by customers,
the Company's business, financial condition and results of operations 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. The monitor is now the subject of clinical trials at several
hospitals. The Company does not expect any medical-related revenue in fiscal
1999, 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
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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 investment in 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 tolerances 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 to track critical parameters and take corrective
action as required.
The Company's critical raw material needs are available through multiple
sources of supply, with the following exceptions. Certain types of
photoresist, a liquid compound used in the photoetching process, and the
stainless steel, copper and 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, with the necessary quality and at reasonable prices,
the Company's results of operations could be materially adversely affected.
The Company's production processes require the storage, use and disposal
of a variety of chemicals that 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, financial condition and 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 to continue its close
working relationships with the engineering staffs of its customers. As a
result, the Company has devoted and will continue to devote substantial
resources to product development and process engineering efforts. As of
September 27, 1998, the Company employed
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859 engineers and technicians who are responsible for implementing new
technologies as well as process and product development and improvements.
Expenditures for these activities in fiscal 1998, 1997 and 1996 amounted to
approximately $52,235,000, $48,204,000 and $51,212,000, respectively. Of
those amounts, the Company classified approximately $20,360,000, $20,185,000
and $27,651,000, 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 September 27,
1998, the Company had made payments totaling $5,500,000 to IBM and will make
additional payments over the next two 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 fiscal 1998, 1997 and 1996, research and development expenses allocated
to medical devices were approximately $3,190,000, $2,725,000 and $1,990,000,
respectively. There can be no assurance that the Company's efforts will
result in marketable products or that such products will ever generate
significant revenue.
CUSTOMERS AND MARKETING
The Company's products are sold principally through its own
eleven-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 six 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.
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The Company is a supplier to nearly all domestic and many foreign-based
manufacturers of hard disk drives and recording heads used in such drives.
The following table shows the Company's five largest customers for fiscal
1998 as a percentage of net sales.
<TABLE>
<S> <C>
SAE Magnetics, Ltd/TDK.. . . . . . . . . 26%
IBM and affiliates . . . . . . . . . . . 20
Seagate Technology Incorporated. . . . . 18
Read-Rite Corporation. . . . . . . . . . 10
Yamaha Corporation . . . . . . . . . . . 10
</TABLE>
Sales to the Company's five largest customers constituted 84%, 86% and
87% of net sales, respectively, for fiscal 1998, 1997 and 1996. 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.
The Company expects to continue to depend upon a limited number of
customers for a substantial majority of its sales, given the relatively small
number of hard disk drive and recording head manufacturers. The Company's
results of operations could be adversely affected by reduced requirements of
its major customers.
Sales to foreign-based enterprises totaled $167,767,000, $88,471,000 and
$63,898,000 for fiscal 1998, 1997 and 1996, respectively. Sales to foreign
subsidiaries of U.S. corporations totaled $47,885,000, $83,753,000 and
$51,564,000 for fiscal 1998, 1997 and 1996, respectively. The majority of
these sales were to the Pacific Rim region. In addition, the Company has
significant sales to U.S. corporations which use the Company's products in
their offshore manufacturing sites.
BACKLOG
The Company's sales are generally made pursuant to purchase orders
rather than long-term contracts. The Company's backlog of purchase orders
was approximately $101,541,000 at September 27, 1998, as compared to
$79,100,000 at September 28, 1997. Such purchase orders may be changed or
cancelled by customers on short notice without penalty. In addition, the
Company believes that it is a common practice for disk drive manufacturers to
place orders in excess of their needs during growth periods. Accordingly, the
Company does not believe that backlog should be considered indicative of
sales for any future period.
COMPETITION
The Company believes that the principal factors of competition in the
suspension assembly market include time to market, product quality, design
expertise, reliability of volume supply and price. The Company estimates
that it produces approximately 70% (plus or minus 10 percentage points) 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
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Corporation and Nippon Hatsujo Kabusikigaisha. 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.
INTELLECTUAL PROPERTIES
Certain equipment, processes, information and knowledge generated by the
Company and utilized in the manufacture of its products are regarded as
proprietary by the Company and are protectable under applicable trade secret,
copyright and unfair competition laws. In addition, if the Company believes
it has made inventions in manufacturing equipment, products and processes for
making products where patents might enhance the Company's position, patents
have been and will continue to be pursued in the U.S. and in other countries.
As of September 27, 1998, the Company held 51 U.S. patents and nine foreign
patents, and had 60 patent applications pending in the U.S. and 34 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
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<PAGE>
the Company or its customers that may relate to certain of the Company's
manufacturing equipment or products or to products that include the Company's
products as a component. Although the Company to date has not been a party
to any such material intellectual property litigation, certain of its
customers have been sued on patents having claims closely related to products
sold by the Company. In the event that any third party were to make a valid
infringement claim and a license were not available on terms acceptable to
the Company, the Company's results of operations could be adversely affected.
The Company expects that, as the number of patents issued continues to
increase, and as the Company grows, the volume of intellectual property
claims could increase.
EMPLOYEES
As of September 27, 1998, the Company had 7,764 regular employees, 3,827
of whom were working at the Company's Hutchinson, Minnesota plant, 1,667 of
whom were working at the Company's Sioux Falls, South Dakota plant, 2,058 of
whom were working at the Company's Eau Claire, Wisconsin plant, 203 of whom
were working at the Company's Plymouth, Minnesota plant, and 9 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 Company's ability to conduct its business also could be
impaired if a large number of production employees were to leave and could
not be replaced. 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.
12
<PAGE>
RISK FACTORS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are not
historical facts, but rather are based on our current expectations, estimates
and projections about the disk drive industry, and our beliefs and
assumptions. We intend words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control and are difficult to predict.
These factors could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements. These risks and
uncertainties are described in the following risk factors and elsewhere in
this Annual Report on Form 10-K. We caution you not to place undue reliance
on these forward-looking statements, which reflect our management's view only
as of the date of this Annual Report on Form 10-K. We are not obligated to
update these statements or publicly release the result of any revisions to
them to reflect events or circumstances after the date of this Annual Report
on Form 10-K or to reflect the occurrence of unanticipated events.
FLUCTUATIONS IN OPERATING RESULTS
Our past operating results have fluctuated from fiscal period to
period. We expect our future operating results also to fluctuate from fiscal
period to period. These fluctuations may be caused by:
- changes in overall demand for our products
- changes in our manufacturing process, or problems related to
implementing a new manufacturing process
- introducing new products desired by our industry
- changes in the specific products our customers buy
- changes in our selling prices
- changes in our production capacity, and using our capacity
efficiently
- changes in our infrastructure costs, and how we control them
- changes in our manufacturing yields
- long disruptions in operations at any of our plants for any reason
- changes in the cost of, or limits on, available materials and
labor
- increased costs when we start producing new products, and
achieving high volume production quickly and profitably
We typically allow our customers to change or cancel orders without
penalty up until approximately two weeks before scheduled shipment. We
therefore plan our production and inventory based primarily on forecasts of
customer demand. Our forecasts, and customer demand, often fluctuate
significantly from week to week. Customer demand for and our shipments of
conventional suspension assemblies decreased significantly during the latter
part of our fiscal 1997 and throughout all of fiscal 1998, as our major
customers delayed or cancelled component orders. We believe this reduction
was due to a slowdown in the disk drive industry's demand for disk drive
components. We believe the slowdown occurred primarily because:
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<PAGE>
- drive and recording head manufacturers held excess inventory
- server and desk-top system demand was somewhat softer
- some major personal computer companies started to use
build-to-order manufacturing, which decreased their required
disk drive inventory levels
- data density improvements reduced slightly the average number of
suspensions required per drive (from slightly over 5 to
approximately 4.8 suspensions)
Our operating results were adversely affected by this slowdown. We
believe shipments of conventional suspensions in fiscal 1999 will trail those
of fiscal 1998 as customer demand shifts towards TSA suspension assemblies.
If customer demand for suspension assemblies weakens, or if one or more
customers reduce, delay or cancel orders, our business, financial condition
and results of operations could be materially adversely affected.
Our gross margins have fluctuated and will continue to fluctuate
from fiscal period to period. These fluctuations may be caused by:
- whether we use our capacity efficiently
- changes in overall demand for our products
- changes in the specific products our customers buy
- changes in our selling prices
- changes in our manufacturing yields
- increased costs when we start producing new products
- changes in the cost of, or limits on, available materials
We rapidly expanded our TSA suspension production capacity in fiscal
1998, but our high-volume production of TSA suspensions was not profitable in
that fiscal year. Our production inefficiencies resulted in significantly
lower gross margins, which adversely affected our operating results.
Our selling prices are subject to pricing pressure from our
customers and market pressure from our competitors. Our selling prices change
if our pricing strategies change. Our selling prices also are affected by
changes in overall demand for our products, changes in the specific products
our customers buy and a product's life cycle. A typical life cycle for our
products begins with higher pricing when a product is introduced, decreasing
prices when it is mature, and slightly increasing pricing as it is phased
out. To offset price decreases during a product's life, we rely primarily on
higher sales volume. We also rely on improving our manufacturing yield to
reduce the cost of manufacturing our mature products. If we cannot reduce our
manufacturing costs during a product's life cycle, or at all, our business,
financial condition and results of operations could be materially adversely
affected.
Many of our products are shipped overseas, specifically to the
Pacific Rim region. The revenue we earn from these products qualifies for
favorable tax treatment due to our Foreign Sales Corporation. If we stop
shipping products overseas, or if the tax laws change to eliminate the tax
benefits of having a Foreign Sales Corporation, the Company's business,
financial condition and results of operations could be materially adversely
affected.
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<PAGE>
DEPENDENCE ON HARD DISK DRIVE INDUSTRY
Almost all of our sales depend on the hard disk drive industry.
Sales of suspension assemblies accounted for 96% of our net sales in fiscal
1998, 99% of our net sales in fiscal 1997 and 98% of our net sales in fiscal
1996. The hard disk drive industry is intensely competitive and our
technology changes rapidly. The industry's demand for components also
fluctuates. The hard disk drive industry is highly cyclical, with periods of
increased demand and rapid growth followed by periods of oversupply and
subsequent contraction. These cycles may affect suppliers to this industry
because hard disk drive manufacturers tend to order more components than they
may need during growth periods, and sharply reduce orders for components
during periods of contraction. Our results of operations have been adversely
affected at various times during hard disk drive industry slowdowns, as they
were in the latter part of fiscal 1997 and throughout all of fiscal 1998. Our
results of operations could be materially adversely affected if the recent
slowdown continues or a future significant slowdown in the industry occurs.
PRODUCT DEVELOPMENT AND INTRODUCTION
Our continued success depends on our ability to develop and rapidly
bring to volume production new product platforms and new products that meet
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 lower our overall manufacturing yields and 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 or new processes developed. If processes change, equipment may
need to be replaced, modified or designed, built and installed. These changes
may require additional capital.
We may need to increase our research and development and engineering
expenses to support technological advances and to introduce and manufacture
new products. We expect these expenses to increase for the following new
products:
- suspensions that incorporate second stage actuators to improve
head positioning over increasingly tighter data tracks on each
disk
- suspensions on which a preamplifier may be mounted to improve data
transfer signals from the disk
- suspensions for use with new smaller-sized femto heads
15
<PAGE>
- suspensions with higher performance specifications than our
customers currently require
If we fail to introduce successfully new products on a regular and
timely basis, demand for our existing products could decline, and our
business, financial condition and results of operations could be materially
adversely affected. If a competitor introduced a new suspension assembly
design, we may not be able to respond to the new design effectively. If the
new design was widely accepted by the disk drive industry, our business,
financial condition and results of operations could be materially adversely
affected.
We have invested substantial amounts of financial, management,
engineering and manufacturing resources to develop and introduce our TSA
suspension assemblies. If continuing market acceptance and/or production of
our TSA suspension assemblies is delayed for any reason or if widespread
market acceptance of the TSA product platform is not achieved, our business,
financial condition and results of operations could be materially adversely
affected. Furthermore, if we fail to complete the transition to profitable
high-volume production of our TSA suspension products or determine that TSA
suspension assemblies cannot be produced profitably in the quantities and to
the specifications required by our customers, our business, financial
condition and results of operations could be materially adversely affected.
We must qualify our products with our customers. The qualification
process for disk drive products can be complex and difficult. Our management
cannot be sure that our TSA suspensions will continue to be selected for
design into our customers' products. If we are unable to obtain additional
customer qualifications, or if we cannot qualify our products for high-volume
production quantities, or at all, our business, financial condition and
results of operations could be materially adversely affected.
We are developing products for the medical devices market. We have
developed a monitor that measures tissue oxygen saturation. This monitor
recently received FDA clearance for marketing in the U.S. The monitor is now
the subject of clinical trials at several hospitals. Our research and
development expenses allocated to medical devices were approximately
$3,190,000 in fiscal 1998, $2,725,000 in fiscal 1997 and $1,990,000 in fiscal
1996. Our efforts, however, may not result in marketable products. Even if we
are able to generate marketable products, they may not generate significant
revenue.
CAPITAL NEEDS; ANTICIPATED MARKET GROWTH
We believe that we will need significant funds over the next several
years to achieve our long-term strategic objectives, and to maintain and
enhance our competitive position. These funds will be used for capital
expenditures, research and development, working capital and debt service. Our
business is highly capital intensive. We require particularly high levels of
capital expenditures as we move from conventional suspension assembly
production to high-volume TSA suspension production. We have made substantial
investments in sophisticated manufacturing technologies and automated
production equipment for our suspension assemblies. We have added significant
manufacturing capacity that has increased our fixed costs over the past two
fiscal years. We have
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<PAGE>
constructed plants in Eau Claire, Wisconsin and Sioux Falls, South Dakota and
expanded our plant in Hutchinson, Minnesota. Our total capital expenditures
were approximately $83,000,000 in fiscal 1997 and $207,000,000 in fiscal
1998. We also entered into operating leases for production and other
equipment with costs of approximately $29,000,000 in fiscal 1997 and
$47,000,000 in fiscal 1998. We currently anticipate spending approximately
$170,000,000 during fiscal 1999 to expand TSA suspension production capacity.
We anticipate that we will continue to make significant capital expenditures
in fiscal 2000 and beyond to further expand TSA suspension production
capacity. We also will need to continue to invest in new technologies,
production capacity and infrastructure to accommodate anticipated market
growth. Any inability to obtain funds in the future could delay or change our
plans. If we are unable to obtain funds, we may have to curtail our capital
expenditures, slow plant construction and expansion, and reduce research and
development expenditures. These delays or changes in our plans could
materially adversely affect the Company's business, financial condition and
results of operations.
We have at times increased our production capacity and the overhead
that supports production based on anticipated market demand. Anticipated
market demand, however, has not always developed as rapidly as expected. As a
result, we have periodically underutilized our capacity. This underutilization
has at times decreased our profitability. The following factors complicate
accurate capacity planning for market demand:
- the pace of technological change
- variability in our manufacturing yields
- long lead times for most of our plant and equipment expenditures,
requiring major financial commitments well in advance of actual
production requirements
Our failure to plan our capacity requirements accurately, or our failure to
put in place the technologies and capacity necessary to meet market demand,
could adversely affect our business, financial condition and results of
operations.
Our ability to execute our long-term strategy may depend to a
significant degree on our ability to obtain additional long-term debt and
equity capital. We have no commitments for additional borrowings or for sales
of equity. We cannot determine the precise amount and timing of our funding
needs at this time. We may be unable to obtain any such future additional
financing on terms acceptable to us or at all. We may need to refinance our
indebtedness to repay it at maturity. We may need to obtain additional
capital on favorable terms to refinance our indebtedness. The following
factors could affect our ability to obtain additional financing on favorable
terms, or at all:
- changes in interest rates
- general economic conditions and conditions in the disk drive
industry
- the perception in the capital markets of our business
- our results of operations
- our ratio of debt to equity
- our financial condition
- our business prospects
In addition, certain covenants relating to our existing indebtedness limit our
ability to incur additional indebtedness. If we are unable to obtain sufficient
capital in the future, we may have to curtail our capital expenditures,
slow plant construction and expansion, and reduce research and
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<PAGE>
development expenditures. Any such actions could have a material adverse
effect on our business, financial condition and results of operations.
MANUFACTURING RISKS
We manufacture a wide variety of suspension assemblies with
different selling prices and manufacturing costs. Our product mix varies
weekly as market demand changes. Any substantial variation in product mix can
lead to changes in utilization of our equipment and tooling, inventory
obsolescence and overstaffing in certain areas, all of which could adversely
impact our business, financial condition and results of operation.
Rapid technological change in 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 we
commence volume manufacturing and thereafter ramp to full production.
Our TSA suspension assembly production moved from pre-production
volumes in fiscal 1997, when we shipped 8 million TSA suspensions, to
production volumes in fiscal 1998, when we shipped 85 million TSA
suspensions. During fiscal 1998, we did not produce TSA suspensions
profitably as we ramped to high-volume production. At the end of the fiscal
1998 fourth quarter, however, we produced TSA suspensions at positive gross
margins. We cannot be sure that we will attain our output goals and be
profitable with regard to TSA suspension products.
As we grow, we may need to transfer production of certain suspension
assemblies from one manufacturing site to another. In the past, such
transfers have lowered initial yields and/or manufacturing efficiencies. This
results in higher manufacturing costs. Our 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 our shipments.
Our ability to conduct business would be impaired if our work force
were to be unionized or if a significant number of our specialized employees
were to leave and could not be replaced by comparable personnel. The
locations of our plants and the broad span and technological complexity of
our products and processes limit the number of satisfactory engineering and
other candidates for key positions.
Our production processes require us to store, use and dispose of
chemicals that are considered hazardous under applicable federal and state
laws. We must handle these chemicals in accordance with a variety of
regulatory requirements. If an accident occurred and resulted in significant
personal injury or environmental damage, our business, financial condition
and results of operations could be materially adversely affected.
CUSTOMER CONCENTRATION
Our sales are concentrated in a small customer base. Although we supply
nearly all domestic and many foreign-based manufacturers of hard disk drives,
and manufacturers of recording heads used in hard disk drives, sales to our five
largest customers constituted 84% of net sales for fiscal 1998, 86% of net sales
for fiscal 1997, and 87% of net sales for fiscal 1996. Over the years, the disk
drive industry has experienced numerous consolidations. This has resulted in
fewer, but larger,
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customers for our products. The loss of one or more of our major customers
for any reason, including the development by any one customer of the
capability to produce suspension assembles in high volume for their own
products, or the failure of a customer to pay their account balance with us,
could have a material adverse effect on our results of operations.
INTELLECTUAL PROPERTIES
We attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures. We may not, however,
be able to protect our technology adequately. In addition, competitors may be
able to develop similar technology independently. Our success depends in
large part on trade secrets relating to our proprietary manufacturing
processes. We seek to protect these trade secrets and our other proprietary
technology in part by requiring each of our employees to enter into
non-disclosure and non-competition agreements. In these agreements, the
employee agrees to maintain the confidentiality of all of our proprietary
information and, subject to certain exceptions, to assign to us all rights in
any proprietary information or technology made or contributed by the employee
during his or her employment. In addition, we regularly enter into
non-disclosure agreements with third parties, such as consultants, suppliers
and customers. These agreements may, however, be breached, and we may not
have an adequate remedies for any such breach. In addition, our competitors
may otherwise learn or independently develop our trade secrets.
We believe that the patents we hold and may obtain are valuable, but
that they will not independently determine our success. Moreover, patents may
not be issued for our pending patent applications, and our issued patents may
not be broad enough to protect our technology. We compete in an industry with
rapid development and technological innovation. We cannot be sure that our
future technology will be protectable, or that any patent issued to us will
not be challenged, invalidated, circumvented or infringed. In addition, we
have only limited patent rights outside the United States, and the laws of
certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws of the United States.
We and certain users of our products have received, and may receive,
communications from third parties asserting patents against us or our
customers that may relate to our manufacturing equipment or to our products
or to products that include our products as a component. We have not been a
party to any such material intellectual property litigation to date. Certain
of our customers, however, have been sued on patents having claims closely
related to products we sell. If any third party makes a valid infringement
claim against us and a license were not available on terms acceptable to us,
our business, financial condition and results of operations could be
adversely affected. We expect that, as the number of patents issued continues
to increase, and as we grow, the volume of intellectual property claims made
against us could increase. We may need to engage in litigation to
- enforce patents issued or licensed to us
- protect trade secrets or know-how owned by us
- determine the enforceability, scope and validity of the
intellectual property rights of others
We could incur substantial costs in such litigation or other similar legal
actions, which could have a material adverse effect on our business,
financial condition and results of operations.
COMPETITION
We believe certain of our customers are considering development of
or are using wireless interconnection technologies that compete with our TSA
suspension assemblies. Our management cannot be sure that our customers will
accept TSA suspensions instead of alternative wireless interconnection
technologies, such as deposition circuitry and flexible circuitry. If our
customers accept technologies that compete with TSA suspensions, our
business, financial condition and results of operations may be potentially
adversely affected.
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<PAGE>
Future technological innovations may reduce demand for disk drives.
Data storage alternatives that compete with disk drive-based data storage do
exist. These storage alternatives include semiconductor (flash) memory, tape
memory and laser (optical and CD) drives. The current core technology for
hard disk drive data storage has been the dominant technology in the industry
for many years. This technology could be replaced by an alternate technology
in the future. Our business, financial condition and results of operations
could be materially adversely affected if technology is adopted by the
computer industry that replaces disk drives as a computer data storage medium.
We currently can obtain certain types of photoresist, a liquid
compound used in the photoetching process, and the stainless steel, copper
and polyimide materials that meet our strict specifications from only one
supplier of each such material. The supplier of stainless steel periodically
resets the price of the product we purchase based on fluctuations in the
value of the Japanese yen. When it does so, our costs for raw materials may
increase. If we could not obtain the materials referred to above in the
necessary quantities, with the necessary quality and at reasonable prices,
our business, financial condition and results of operations could be
materially adversely affected.
VOLATILITY OF SECURITIES
The securities of companies in the disk drive industry (including
our securities) generally have volatile market prices. If our revenue or
earnings in any fiscal quarter fail to meet the investment community's
expectations, the market price of our securities could fall. In addition, the
market for our securities has experienced significant price and volume
fluctuations that are unrelated to our operating results. Future
announcements about us and general market conditions may affect the market
price of our securities significantly. Future trading prices of our
securities may depend on factors beyond our influence such as perceptions of
our business and the disk drive industry generally, prevailing interest rates
and the market for similar securities. The volatility of market prices for
our securities may limit our ability in the future to raise additional
capital.
INCREASED LEVERAGE; ABILITY TO SERVICE DEBT
We incurred $150,000,000 in additional indebtedness in connection
with the sale of our 6% Convertible Subordinated Notes due 2005 in March
1998. The additional indebtedness increased our ratio of total debt to total
capitalization from 21.7% at September 28, 1997 to 48.5% at September 27,
1998. Our obligations to pay interest increased substantially as a result of
this increased debt. Our ability to satisfy our obligations to pay interest
and to repay the debt will be dependent on our future performance. Our
performance is subject to prevailing economic conditions and financial,
business and other factors, including factors beyond our control. To the
extent that a substantial portion of our cash flow from operations is used to
pay the principal of, and interest on, our indebtedness, such cash flow will
not be available to fund future operations and capital expenditures. Our
increased debt level also may limit our ability to obtain additional
financing to fund future capital expenditures, research and development,
working capital, debt service and other general corporate requirements. It
could also make us more vulnerable to general economic downturns and
competitive pressures. We cannot be sure that our operating cash flow will be
sufficient to fund our future capital expenditure and debt service
requirements or to fund future operations.
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RESTRICTIVE COVENANTS
We have entered into a number of financing agreements that contain
restrictive financial covenants. These covenants require us to maintain cash
availability and to meet certain minimum financial ratios, including, in
certain cases, fixed charge coverage, interest coverage and total debt to
total capitalization ratios. Effective September 27, 1998 we were in
compliance with all such covenants. Our ability to comply with these
covenants depends upon our future operating performance. Our future operating
performance depends, in part, on general industry conditions and other
factors beyond our control. We cannot be sure that we will be able to comply
with these covenants. If we fail to comply with these covenants in the
future, we may not be successful in renegotiating the financing agreements or
otherwise obtaining relief from the covenants. If we default under some or
all of the financing agreements, our lenders may require that we immediately
repay the full outstanding amount we owe to them. In such event, we may have
to pursue alternative financing arrangements. If we are not in compliance
with financial covenants in our financing agreements at the end of any fiscal
quarter, our future results of operations and liquidity could be materially
adversely affected.
YEAR 2000 ISSUES
Certain of our business systems may require updating to continue to
function properly beyond 1999. We believe that we have allocated adequate
resources for this purpose and we do not expect to incur significant expenses
to address this issue. We may not identify all Year 2000 compliance problems
in our systems before they occur, however, or we may not be able to remedy
successfully any problems that we do discover. The expenses of our efforts to
address such problems, or the expenses or liabilities to which we may become
subject as a result of such problems, could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
revenue stream and financial stability of our customers may be adversely
impacted by Year 2000 compliance problems, which could cause fluctuations in
our revenue and operating results. See our discussion of the year 2000 issue
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (incorporated by reference in this Annual Report on
Form 10-K).
ITEM 2. PROPERTIES
The Company's executive offices, primary manufacturing plants and
training center are located in four buildings, owned by the Company, on a
site of approximately 163 acres in Hutchinson, Minnesota. The largest
building has floor area of approximately 480,000 square feet, and the Company
recently completed construction of a 179,000 square foot expansion to an
existing 56,000 square foot equipment build center. 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 completed construction in fiscal 1998 of a manufacturing
plant in Sioux Falls, South Dakota, owned by the Company, of approximately
299,000 square feet. The Company also leases a warehouse of 4,800 square
feet in Sioux Falls.
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The Company operates a manufacturing plant in Eau Claire, Wisconsin, in
connection with which it leases a building of approximately 156,000 square
feet. The Company also operates a photoetching plant in Eau Claire, owned by
the Company, of approximately 320,000 square feet.
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 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 will be adequate to
meet its currently anticipated requirements.
ITEM 3. 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. The lawsuit alleges, among other things, breach of
non-compete, confidentiality and assignment of inventions agreements. On
August 24, 1998, the Court entered an injunction against the defendants.
Thereafter, the Company filed motions to add a competitor and its parent
corporation as party defendants, with whom the enjoined defendants had a
contract. The parties entered into a Memorandum of Understanding dated
September 20, 1998, setting forth the material terms of an agreement to
resolve the litigation. The parties currently are negotiating a formal
settlement agreement, consistent with the Memorandum.
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 financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------- --- ----------------------------------------------
<S> <C> <C>
Jeffrey W. Green 58 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 45 Vice President of Human Resources
Beatrice A. Graczyk 50 Vice President of Disk Drive Components
Operations
Richard C. Myers 58 Vice President of Administration
Richard J. Penn 42 Vice President of Sales and Marketing
R. Scott Schaefer 45 Vice President and Chief Technical Officer
</TABLE>
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. Green is also a director of Mediwave,
Inc. and Applied Biometrics, Inc.
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. Mr. Ingleman served
as the Company's Treasurer from January 1982 through January 1996. Mr.
Ingleman has been with the Company since 1977.
MS. ALBRECHT was elected Vice President in January 1995 and is now Vice
President of Human Resources. Previously she had been Director of Human
Resources since 1988. Ms. Albrecht has been with the Company since 1983.
MS. GRACZYK was elected Vice President in May 1990 and is now Vice
President of Disk Drive Components Operations. Previously she had been
Director of Component Operations since 1988. Ms. Graczyk has been with the
Company since 1970.
MR. MYERS was elected Vice President in January 1988 and has been Vice
President of Administration since January 1995. Mr. Myers served as the
Company's Vice President of Sales and Marketing from January 1988 through
January 1995. Mr. Myers has been with the Company since 1977.
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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.
Executive officers are elected annually by the Board of Directors and
serve a one-year period or until their successors are elected.
None of the above executive officers is related to each other or to any
director of the Company, except that Richard N. Rosett, a director, is
married to Mr. Green's first cousin.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 27, 1998, pages
31-32, 37 and 41.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 27, 1998, pages
38 and 39.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 27, 1998, pages 17-23.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the Company's Annual Report to
Shareholders for the fiscal year ended September 27, 1998, pages 24-37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under
the headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," pages 4-5 and 14, in the Company's Proxy Statement
dated December 17, 1998. See also Part I hereof under the heading "Item X.
Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under
the headings "Summary Compensation Table" and "Option Tables", pages 10-12,
and the information regarding compensation of non-employee directors on
page 5, in the Company's Proxy Statement dated December 17, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under
the heading "Security Ownership of Principal Shareholders and Management," pages
2-3, and the information appearing in the tables and notes on pages
11-12, in the Company's Proxy Statement dated December 17, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants
Consolidated Statements of Operations for the fiscal years ended
September 27, 1998, September 28, 1997 and September 29, 1996
Consolidated Balance Sheets as of September 27, 1998 and
September 28, 1997
Consolidated Statements of Cash Flows for the fiscal years ended
September 27, 1998, September 28, 1997 and September 29, 1996
Consolidated Statements of Shareholders' Investment for the fiscal
years ended September 27, 1998, September 28, 1997 and September 29,
1996
Notes to Consolidated Financial Statements
(Incorporated by reference to pages 24-37 of the Company's
Annual Report to Shareholders for the fiscal year ended September
27, 1998.)
25
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
3. EXHIBITS:
3.1 Restated Articles of Incorporation of the Company, as amended by
Articles of Amendment dated January 27, 1988 and as amended by
Articles of Amendment dated January 21, 1997 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 29, 1997, File No. 0-14709).
3.2 Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 29, 1996, File No. 0-14709).
4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and
Exchange Commission upon request copies of instruments with
respect to long-term debt.
4.2 Indenture dated as of March 18, 1998 between the Company and
U.S. Bank National Association, as Trustee (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-3, Registration No. 333-50143).
4.3 Purchase Agreement dated March 12, 1998 by and among the
Company, NationsBanc Montgomery Securities LLC and First
Chicago Capital Markets, Inc. (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-3, Registration No. 333-50143).
4.4 Shelf Registration Agreement dated as of March 18, 1998 by
and among the Company, NationsBanc Montgomery Securities LLC and
First Chicago Capital Markets, Inc. (incorporated by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-3, Registration No. 333-50143).
10.1 Lease with Right of Refusal between Donald Wendorff and Laura
Wendorff, Lessors, and the Company, Lessee, dated September 6,
1995 (incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
24, 1995, File No. 0-14709).
10.2 Office/Warehouse Lease between OPUS Corporation, Lessor, and the
Company, Lessee, dated December 29, 1995 (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 24, 1996, File No.
0-14709), and First Amendment to Office/Warehouse Lease dated
April 30, 1996 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 23, 1996, File No. 0-14709).
10.3 Building Lease dated April 1988 and Amendment to Building Lease
dated August 29, 1988 (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 25, 1988, File No. 0-14709), Second Amendment to
Building Lease dated as of September 18, 1989, relating to the
Company's Sioux Falls, South Dakota facility (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1990, File No.
0-14709), Third Amendment to Building Lease dated September 19,
1991, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 29, 1991, File No. 0-14709), Fourth Amendment to
Commercial Lease dated September 29, 1992, relating to the
26
<PAGE>
Company's Sioux Falls, South Dakota facility (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form
10-K for the fiscal year ended September 27, 1992, File No.
0-14709), Fifth Amendment to Commercial Lease dated February 11,
1993, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 24, 1995, File No. 0-14709), Sixth Amendment to
Commercial Lease dated February 17, 1995, relating to the
Company's Sioux Falls, South Dakota facility (incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on Form
10-K for the fiscal year ended September 24, 1995, File No.
0-14709), and Seventh Amendment to Commercial Lease dated April
1, 1995, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 24, 1995, File No. 0-14709).
#10.4 Hutchinson Technology Incorporated 401-K Plan and related 401-K
Trust (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1990, File No. 0-14709), and Amendment effective
April 1, 1995 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 24, 1996, File No. 0-14709), and Amendment effective April
1, 1996 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 23, 1996, File No. 0-14709).
#10.5 Directors' Retirement Plan effective as of January 1, 1992
(incorporated by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
27, 1992, File No. 0-14709).
#10.6 Description of Bonus Program for Key Employees of Hutchinson
Technology Incorporated (incorporated by reference to Exhibit
10.13 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 27, 1992, File No. 0-14709).
#10.7 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 25, 1988, File No. 0-14709), Amendment to the
1988 Stock Option Plan (incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 26, 1993, File No. 0-14709), and Amendment to the
1988 Stock Option Plan (incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 26, 1995, File No. 0-14709).
*10.8 Technology Transfer and Development Agreement, effective as of
September 1, 1994, between Hutchinson Technology Incorporated and
International Business Machines Corporation (incorporated by
reference to Exhibit 10.10 to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended June 25, 1995, File No.
0-14709), and Amendment dated December 11, 1995 to the Technology
Transfer and Development Agreement between International Business
Machines Corporation and Hutchinson Technology Incorporated
executed June 15, 1995 (incorporated by
27
<PAGE>
reference to Exhibit 10.8 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 24, 1995, File No.
0-14709).
*10.9 Patent License Agreement, effective as of September 1, 1994,
between Hutchinson Technology Incorporated and International
Business Machines Corporation (incorporated by reference to
Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended June 25, 1995, File No. 0-14709).
10.10 Lease Agreement between Meridian Eau Claire LLC and Hutchinson
Technology Incorporated, dated May 1, 1996 (incorporated by
reference to Exhibit 10.10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 23, 1996, File No. 0-14709).
10.11 Master Lease Agreement dated as of December 19, 1996 between
General Electric Capital Corporation, as Lessor ("GE"), and
Hutchinson Technology Incorporated, as Lessee (incorporated by
reference to Exhibit 10.11 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 29, 1996, File No.
0-14709), Amendment dated June 30, 1997 to the Master Lease
Agreement between GE and Hutchinson Technology Incorporated
(incorporated by reference to Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 28, 1997, File No. 0-14709), letter amendment dated
March 5, 1998 to the Master Lease Agreement between GE and
Hutchinson Technology Incorporated (incorporated by reference to
Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 29, 1998, File No. 0-14709), and letter
amendment dated September 25, 1998 to the Master Lease Agreement
between GE and Hutchinson Technology Incorporated.
#10.12 Hutchinson Technology Incorporated 1996 Incentive Plan
(incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 29,
1996, File No. 0-14709).
#10.13 Hutchinson Technology Incorporated Incentive Bonus Plan
(incorporated by reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 28,
1997, File No. 0-14709).
11.1 Statement Regarding Computation of Per Share Earnings.
13.1 Annual Report to Shareholders for the fiscal year ended
September 27, 1998 (only those portions specifically incorporated
by reference herein shall be deemed filed with the Securities and
Exchange Commission).
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
28
<PAGE>
- --------------------
* Exhibits 10.8 and 10.9 contain portions for which confidential treatment
has been granted by the Securities and Exchange Commission.
# Management contract, compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the fourth quarter of the fiscal
year ended September 27, 1998.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hutchinson Technology Incorporated:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements included in the Hutchinson Technology
Incorporated and Subsidiaries 1998 Annual Report to Shareholders, incorporated
by reference in this Annual Report on Form 10-K, and have issued our report
thereon dated October 29, 1998. Our audit was made for the purpose of forming
an opinion on those statements taken as a whole. The schedule listed in
Item 14(a)(2) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 29, 1998
30
<PAGE>
SCHEDULE II
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Costs Other Changes End of
of Period and Expenses Add (Deduct) Period
------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C>
1996:
Deducted from asset accounts -
Allowance for doubtful
accounts receivable...... $1,539 $ 178 ($1) (1) $1,716
Reserve for sales returns
and allowances........... 385 1,835 (1,788) (2) 432
------ ------ ------- ------
$1,924 $2,013 ($1,789) $2,148
------ ------ ------- ------
------ ------ ------- ------
1997:
Deducted from asset accounts -
Allowance for doubtful
accounts receivable...... $1,716 $ 254 ($5) (1) $1,965
Reserve for sales returns
and allowances........... 432 1,348 (1,563) (2) 217
------ ------ ------- ------
$2,148 $1,602 ($1,568) $2,182
------ ------ ------- ------
------ ------ ------- ------
1998:
Deducted from asset accounts -
Allowance for doubtful
accounts receivable...... $1,965 $1,730 $0 (1) $3,695
Reserve for sales returns
and allowances........... 217 5,656 (4,361) (2) 1,512
------ ------ ------- ------
$2,182 $7,386 ($4,361) $5,207
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
(1) Uncollectible accounts receivable written off, net of recoveries.
(2) Returns honored and credit memos issued.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 22, 1998.
HUTCHINSON TECHNOLOGY
INCORPORATED
By /s/ Wayne M. Fortun
----------------------------------------
Wayne M. Fortun
President, Chief Operating Officer and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on December 22, 1998.
/s/ Wayne M. Fortun
-------------------------------------------
Wayne M. Fortun, President, Chief Operating
Officer, Chief Executive Officer (Principal
Executive Officer) and Director
/s/ John A. Ingleman
-------------------------------------------
John A. Ingleman, Vice President, Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
/s/ W. Thomas Brunberg
-------------------------------------------
W. Thomas Brunberg, Director
/s/ Archibald Cox, Jr.
-------------------------------------------
Archibald Cox, Jr., Director
/s/ James E. Donaghy
-------------------------------------------
James E. Donaghy, Director
/s/ Harry C. Ervin, Jr.
-------------------------------------------
Harry C. Ervin, Jr., Director
/s/ Jeffrey W. Green
-------------------------------------------
Jeffrey W. Green, Director
/s/ Steven E. Landsburg
-------------------------------------------
Steven E. Landsburg, Director
/s/ Richard N. Rosett
-------------------------------------------
Richard N. Rosett, Director
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<C> <S> <C>
3.1 Restated Articles of Incorporation of the
Company, as amended by Articles of
Amendment dated January 27, 1988 and as
amended by Articles of Amendment dated
January 21, 1997 (incorporated by reference
to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
June 29, 1997, File No. 0-14709). . . . . . . .Incorporated by Reference
3.2 Restated By-Laws of the Company
(incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form
10-Q for the quarter ended December 29,
1996, File No. 0-14709).. . . . . . . . . . . .Incorporated by Reference
4.1 Instruments defining the rights of security
holders, including an indenture. The
Registrant agrees to furnish the Securities
and Exchange Commission upon request copies
of instruments with respect to long-term
debt.
4.2 Indenture dated as of March 18, 1998 between
the Company and U.S. Bank National Association,
as Trustee (incorporated by reference to
Exhibit 4.6 to the Company's Registration
Statement on Form S-3, Registration No.
333-50143) . . . . . . . . . . . . . . . . . . Incorporated by Reference
4.3 Purchase Agreement dated March 12, 1998 by
and among the Company, NationsBanc Montgomery
Securities LLC and First Chicago Capital
Markets, Inc. (incorporated by reference to
Exhibit 4.7 to the Company's Registration
Statement on Form S-3, Registration No.
333-50143) . . . . . . . . . . . . . . . . . . Incorporated by Reference
4.4 Shelf Registration Agreement dated as of
March 18, 1998 by and among the Company,
NationsBanc Montgomery Securities LLC and
First Chicago Capital Markets, Inc.
(incorporated by reference to Exhibit 4.8
to the Company's Registration Statement on
Form S-3, Registration No. 333-50143). . . . . Incorporated by Reference
10.1 Lease with Right of Refusal between Donald
Wendorff and Laura Wendorff, Lessors, and
the Company, Lessee, dated September 6,
1995 (incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form
10-K for the fiscal year ended September
24, 1995, File No. 0-14709).. . . . . . . . . .Incorporated by Reference
10.2 Office/Warehouse Lease between OPUS
Corporation, Lessor, and the Company,
Lessee, dated December 29, 1995
(incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form
10-Q for the quarter ended March 24, 1996,
File No. 0-14709), and First Amendment to
Office/Warehouse Lease dated April 30, 1996
(incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form
10-Q for the quarter ended June 23, 1996,
File No. 0-14709).. . . . . . . . . . . . . . .Incorporated by Reference
10.3 Building Lease dated April 1988 and
Amendment to Building Lease dated August
29, 1988 (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 25, 1988, File No. 0-14709),
Second
33
<PAGE>
Amendment to Building Lease dated as of
September 18, 1989, relating to the
Company's Sioux Falls, South Dakota
facility (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 30, 1990, File No. 0-14709),
Third Amendment to Building Lease dated
September 19, 1991, relating to the
Company's Sioux Falls, South Dakota
facility (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 29, 1991, File No. 0-14709),
Fourth Amendment to Commercial Lease dated
September 29, 1992, relating to the
Company's Sioux Falls, South Dakota
facility (incorporated by reference to
Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the fiscal year
ended September 27, 1992, File No.
0-14709), Fifth Amendment to Commercial
Lease dated February 11, 1993, relating to
the Company's Sioux Falls, South Dakota
facility (incorporated by reference to
Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 24, 1995, File No. 0-14709),
Sixth Amendment to Commercial Lease dated
February 17, 1995, relating to the
Company's Sioux Falls, South Dakota
facility (incorporated by reference to
Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 24, 1995, File No. 0-14709), and
Seventh Amendment to Commercial Lease dated
April 1, 1995, relating to the Company's
Sioux Falls, South Dakota facility
(incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K
for the fiscal year ended September 24,
1995, File No. 0-14709) . . . . . . . . . . . .Incorporated by Reference
10.4 Hutchinson Technology Incorporated 401-K
Plan and related 401-K Trust (incorporated
by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1990,
File No. 0-14709), and Amendment effective
April 1, 1995 (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 24, 1996, File No. 0-14709), and
Amendment effective April 1, 1996
(incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form
10-Q for the quarter ended June 23, 1996,
File No. 0-14709) . . . . . . . . . . . . . . .Incorporated by Reference
34
<PAGE>
10.5 Directors' Retirement Plan effective as of
January 1, 1992 (incorporated by reference
to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year
ended September 27, 1992, File No. 0-14709) . .Incorporated by Reference
10.6 Description of Bonus Program for Key
Employees of Hutchinson Technology
Incorporated (incorporated by reference to
Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the fiscal year
ended September 27, 1992, File No. 0-14709) . .Incorporated by Reference
10.7 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal
year ended September 25, 1988, File No.
0-14709), Amendment to the 1988 Stock
Option Plan (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 26, 1993, File No. 0-14709), and
Amendment to the 1988 Stock Option Plan
(incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form
10-Q for the quarter ended March 26, 1995,
File No. 0-14709) . . . . . . . . . . . . . . .Incorporated by Reference
*10.8 Technology Transfer and Development
Agreement, effective as of September 1,
1994, between Hutchinson Technology
Incorporated and International Business
Machines Corporation (incorporated by
reference to Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q/A for the
quarter ended June 25, 1995, File No.
0-14709), and Amendment dated December 11,
1995 to the Technology Transfer and
Development Agreement between International
Business Machines Corporation and
Hutchinson Technology Incorporated executed
June 15, 1995 (incorporated by reference to
Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
December 24, 1995, File No. 0-14709). . . . . .Incorporated by Reference
*10.9 Patent License Agreement, effective as of
September 1, 1994, between Hutchinson
Technology Incorporated and International
Business Machines Corporation (incorporated
by reference to Exhibit 10.11 to the
Company's Quarterly Report on Form
35
<PAGE>
10-Q/A for the quarter ended June 25, 1995,
File No. 0-14709). . . . . . . . . . . . . . .Incorporated by Reference
10.10 Lease Agreement between Meridian Eau Claire
LLC and Hutchinson Technology Incorporated,
dated May 1, 1996 (incorporated by reference
to Exhibit 10.10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
June 23, 1996, File No. 0-14709) . . . . . . .Incorporated by Reference
10.11 Master Lease Agreement dated as of December
19, 1996 between General Electric Capital
Corporation, as Lessor ("GE"), and
Hutchinson Technology Incorporated, as
Lessee (incorporated by reference to
Exhibit 10.11 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
December 29, 1996, File No. 0-14709),
Amendment dated June 30, 1997 to the Master
Lease Agreement between GE and Hutchinson
Technology Incorporated (incorporated by
reference to Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the
quarter ended December 28, 1997, File No.
0-14709), letter amendment dated March 5,
1998 to the Master Lease Agreement between
GE and Hutchinson Technology Incorporated
(incorporated by reference to Exhibit 10.11
to the Company's Quarterly Report on Form
10-Q for the quarter ended March 29, 1998,
File No. 0-14709), and letter amendment
dated September 25, 1998 to the Master
Lease Agreement between GE and Hutchinson
Technology Incorporated. . . . . . . . . . . . . . Filed Electronically
#10.12 Hutchinson Technology Incorporated 1996
Incentive Plan (incorporated by reference
to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
December 29, 1996, File No. 0-14709). . . . . .Incorporated by Reference
#10.13 Hutchinson Technology Incorporated
Incentive Bonus Plan (incorporated by
reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the
quarter ended December 28, 1997, File
No. 0-14709). . . . . . . . . . . . . . . . . .Incorporated by Reference
11.1 Statement Regarding Computation of Per
Share Earnings. . . . . . . . . . . . . . . . . . . Filed Electronically
13.1 Annual Report to Shareholders for the
fiscal year ended September 27, 1998 (only
those portions
36
<PAGE>
specifically incorporated by reference
herein shall be deemed filed with
the Securities and Exchange Commission). . . . . . Filed Electronically
21.1 List of Subsidiaries. . . . . . . . . . . . . . . . Filed Electronically
23.1 Consent of Independent Public Accountants. . . . . Filed Electronically
27.1 Financial Data Schedule. . . . . . . . . . . . . . Filed Electronically
</TABLE>
37
<PAGE>
EXHIBIT 10.11
September 25, 1998
Hutchinson Technology Incorporated
40 West Highland Park
Hutchinson, Minnesota 55350
RE: Master Lease Agreement dated as of December 19, 1996, as amended
----------------------------------------------------------------
Gentlemen:
This will confirm the collateral understanding which has been reached
between us with respect to the above-referenced Master Lease Agreement, as
previously amended (the "Lease"), between General Electric Capital Corporation
("Lessor") and Hutchinson Technology Incorporated ("Lessee"). The interest of
Lessor in certain Equipment Schedules executed pursuant to the Lease has been
assigned to Firstar Leasing Services Corporation, U.S. Bancorp Leasing &
Financial, The Fifth Third Leasing Company, The CIT Group/Equipment Financing,
Citizens Leasing Corporation and Selco Service Corporation (collectively,
"Assignees"). Assignees join herein to confirm their agreement to the
amendments hereinafter set forth.
In consideration of the sum of Ten Dollars ($10.00) in hand paid, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. The following new Paragraph (g) is added to Section V:
" (g)(1) Within fifteen (15) days after the close of each of
the first two fiscal periods in each fiscal quarter, Lessee will
furnish a certificate of an authorized officer of Lessee
confirming compliance with the financial covenant specified in
Section XXIV(d) hereof, and (2) concurrently with each delivery
of financial statements pursuant to Section V(b) hereof, Lessee
will furnish a certificate of an authorized officer of Lessee
confirming compliance with all of the financial covenants
specified in Section XXIV hereof, in all cases including all
calculations required to substantiate such compliance."
<PAGE>
Hutchinson Technology Incorporated
September 25, 1998
Page 2
2. Section XXIV of the Lease is amended by deleting Paragraph (a) through
(c) and substituting in lieu thereof the following:
" (a) maintain, as at the last day of each fiscal quarter
beginning with the first quarter of fiscal year 1999, a Leverage
Ratio of not more than .55:1.0;
(b) maintain, as at the last day of each specified fiscal
quarter, a ratio of (1) earnings before Interest Expense, taxes,
depreciation and amortization for the most recently ended twelve
(12) month period, to (2) Interest Expense for the most recently
ended twelve (12) month period, of not less than the following
amount specified for such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
Q1 1999 0.20:1.00
Q2 1999 1.70:1.00
Q3 1999 2.90:1.00
Q4 1999 4.80:1.00
thereafter .80:1.00;
</TABLE>
(c) maintain, as of the last day of each specified fiscal
quarter, a Fixed Charge Coverage Ratio of not less than the
following amount specified for such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
Q1 1999 .60:1.00
Q2 1999 1.00:1.00
Q3 1999 1.40:1.00
Q4 1999 1.90:1.00
thereafter 1.90:1.00; and
</TABLE>
2
<PAGE>
Hutchinson Technology Incorporated
September 25, 1998
Page 3
(d) maintain in the aggregate, as of the last day of each
fiscal period during each specified fiscal quarter, a minimum
cash or Cash Equivalents and/or availability under a line of
credit or availability from other sources of not less than the
following amount, specified for such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Amount
-------------- ------
<S> <C>
Q1 1999 $25,000,000
thereafter $35,000,000
</TABLE>
As used herein, "Cash Equivalents" means (i) readily marketable
securities issued by the United States of America, (ii) readily
marketable commercial paper rated A-2 or better by Standard &
Poors Corporation (or similar rating by any similar organization
which rates commercial paper), (iii) certificates of deposit or
bankers' acceptances issued by commercial banks of recognized
standing operating in the United States of America, each having
assets in excess of $250,000,000.00, (iv) tax exempt obligations
long-term rated at least an A by Standard & Poor's and at least
rated A-1 by Standard & Poor's for short-term, and (v) Corporate
Debt Securities rated at least A by Standard & Poor's."
3. Section XXIV of the Lease is further amended by deleting the
definition of "Interest Expense" therein, and substituting in lieu thereof the
following::
"INTEREST EXPENSE" means, for any period of determination, all interest
(without duplication), whether paid in cash or accrued as a liability, on
Indebtedness of the Lessee and its Subsidiaries on a consolidated basis during
such period (including imputed interest on Capitalized Lease Obligations)."
4. On the date of actual execution of this letter amendment by all
parties hereto, Lessee shall prepay Rent to Lessor, in the aggregate amount of
$2,259,569.31, which prepayment of Rent shall be applied by Lessor upon receipt
and credited as follows: (a) on the last day of the first fiscal quarter of
Lessee's fiscal year 2000 following satisfaction by Lessee of the financial
covenants specified in Section XXIV of the Lease in each fiscal quarter of
Lessee's fiscal year 1999, and provided that no Default or event which, with the
giving of notice or the lapse of time, or both, would become a Default has then
occurred and is continuing under the Lease, such prepayment shall be credited in
prepayment of the quarterly installment of Rent
3
<PAGE>
Hutchinson Technology Incorporated
September 25, 1998
Page 4
otherwise due under the Lease on such date, or (b) if a default occurs under the
Lease or the conditions specified in clause (a) above are not satisfied, the
amount paid by Lessee to Lessor pursuant to this Section 4 shall be credited in
prepayment of the final installment of Rent otherwise becoming due under the
Lease.
5. Concurrently with the execution hereof, Lessee shall pay to Lessor a
fee in the amount of $244,863.57 (calculated as one-half of one percent of the
outstanding lease receivables due under the Lease as of September 30, 1998).
6. RELEASE OF CLAIMS BY LESSEE. The Lessee represents and warrants that
Lessee is not aware of any claims, counterclaims, setoffs, actions or causes of
actions, damages or liabilities of any kind or nature whatsoever whether at law
or in equity, in contract or in tort, whether now accrued or hereafter maturing
(collectively, "Claims") against Lessor, its direct or indirect parent
corporation or any direct or indirect affiliates of such parent corporation, or
any of their respective directors, officers, employees, agents, attorneys and
legal representatives, or the heirs, administrators, successors or assigns of
any of them (collectively, "Lessor Parties") that directly or indirectly arise
out of, are based upon or are in any manner connected with any Prior Related
Event (as defined below). As in inducement to Lessor to enter into this
Amendment, Lessee, and its successors and assigns hereby knowingly and
voluntarily release and discharge all Lessor Parties from any and all Claims,
known to Lessee, that directly or indirectly arise out of, are based upon or are
in any manner connected with any Prior Related Event, other than obligations of
the Lessor Parties under the Master Lease Agreement. As used herein, the term
"Prior Related Event" means any transaction, event, circumstance, action,
failure to act, occurrence of any sort or type, known to Lessee, which occurred,
existed, was taken, permitted or begun at any time prior to the date of this
Amendment or occurred, existed, was taken, was permitted or begun in accordance
with, pursuant to or by virtue of any of the terms of the Lease or any documents
executed in connection with the Lease or which was related to or connect in any
manner, directly or indirectly to the Lease and all Schedules thereto.
7. Except as expressly set forth herein, the terms and conditions of the
Lease remain unmodified and in full force and effect.
4
<PAGE>
Hutchinson Technology Incorporated
September 25, 1998
Page 5
If the foregoing accurately sets forth our understanding with respect to
the subject matter hereof, please sign and return the enclosed copy of this
letter and it will constitute an amendment of the Lease pursuant to Section
XX (f) thereof.
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Timothy B. Perusek
-------------------------------
Name: Timothy B. Perusek
-----------------------------
Title: Vice President
----------------------------
FIRSTAR LEASING SERVICES
CORPORATION
By: /s/ Jay Buechler
-------------------------------
Name: Jay Buechler
----------------------------
Title: Assistant Vice-President
---------------------------
U.S. BANCORP LEASING
& FINANCIAL
By: /s/ Clifford Swan
-------------------------------
Name: Clifford Swan
----------------------------
Title: Vice-President
----------------------------
THE FIFTH THIRD LEASING
COMPANY
By: /s/ David A. Merrill
-------------------------------
Name: David A. Merrill
-----------------------------
Title: Vice-President
----------------------------
5
<PAGE>
Hutchinson Technology Incorporated
September 25, 1998
Page 6
SELCO SERVICE CORPORATION
By: /s/ Daniel L. Bailey
-------------------------------------
Name: Daniel L. Bailey
-----------------------------------
Title: Vice President
----------------------------------
THE CIT GROUP/EQUIPMENT
FINANCING
By: /s/ Ben Boesch
--------------------------------------
Name: Ben Boesch
--------------------------------------
Title: Senior Credit/Operations Manager
-----------------------------------
CITIZENS LEASING CORPORATION
By: /s/ John M. Young
--------------------------------------
Name: John M. Young
-----------------------------------
Title: Vice President
-----------------------------------
AGREED:
HUTCHINSON TECHNOLOGY INCORPORATED
By: /s/ John A. Ingleman
-----------------------------
Name: John A. Ingleman
---------------------------
Title: Chief Financial Officer
-------------------------
6
<PAGE>
EXHIBIT 11.1
HUTCHINSON TECHNOLOGY INCORPORATED
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the Fiscal Year Ended
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) ($48,411) $41,909 $13,802
-------- ------- -------
-------- ------- -------
NET INCOME (LOSS) PER SHARE - BASIC:
Weighted average common
shares outstanding 19,709 18,272 16,350
-------- ------- -------
BASIC NET INCOME (LOSS)
PER SHARE ($2.46) $2.29 $0.84
-------- ------- -------
-------- ------- -------
NET INCOME (LOSS) PER SHARE -
DILUTED:
Weighted average common
shares outstanding 19,709 18,272 16,350
Dilutive effect of stock
options outstanding after
application of treasury -- 706 456
stock method -------- ------- -------
19,709 18,978 16,806
-------- ------- -------
-------- ------- -------
DILUTED NET INCOME (LOSS)
PER SHARE ($2.46) $2.21 $0.82
-------- ------- -------
-------- ------- -------
</TABLE>
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Management's Discussion and Analysis of Results
of Operations and Financial Condition
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 and during the Company's own
product transitions.
The Company experienced a significant reduction in demand for and shipments
of its conventional suspension assemblies during the latter part of fiscal
1997 and throughout all of fiscal 1998. The Company believes this reduction
was due to a slowdown in the disk drive industry's demand for disk drive
components, primarily because of excess inventory held by drive and recording
head manufacturers as a result of softer demand for both servers and personal
computers. In addition, some of the major personal computer companies
transitioned to build-to-order manufacturing, decreasing the required disk
drive inventory levels and improvements in data density have somewhat offset
the continuing growth in demand for storage. The Company's operating results
were adversely affected by this slowdown, and consequently have not provided
the cash needed to help fund capital expenditures that are necessary to meet
steadily rising demand for the Company's TSA suspension assemblies. The
Company believes fiscal 1999 shipments of conventional suspensions will
continue to trail prior year levels as customer demand shifts towards TSA
suspension assemblies.
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 production of new products and changes in
the cost, or limitations in the availability, of materials. Profitable
high-volume production of TSA suspensions was not achieved by the Company in
connection with its ramp-up of TSA suspension capacity during fiscal 1998.
These production inefficiencies resulted in significantly lower gross margins
which adversely affected operating results. However, positive gross margins
were achieved on TSA suspension production at the end of the fourth quarter
of fiscal 1998.
The Company's ability to introduce new products on a timely basis is an
important factor in its continued success. New products 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. Small variations
in capacity utilization or manufacturing yields generally have a significant
impact on gross margins. The Company typically allows customers to change or
cancel orders on short notice without penalty. The Company therefore plans
its production and inventory based primarily on forecasts of customer demand
rather than on order backlog. Both customer demand and the resulting
forecasts often fluctuate substantially. These factors, among others, create
an environment where scheduled production and capacity utilization can vary
significantly from week to week, leading to variability in gross margins.
17
<PAGE>
Growth in the Company's net sales depends, in part, on the successful
expansion by the Company of its manufacturing capacity, manufacturing work
force and corporate infrastructure. In order to meet current and anticipated
future demand for TSA suspension assemblies, the Company is continuing its
planned expansion of TSA suspension production capacity. The Company
currently anticipates spending approximately $170,000,000 in capital
expenditures during fiscal 1999 primarily for expansion of TSA suspension
production capacity. The Company anticipates that continued significant
capital expenditures will be necessary in fiscal 2000 for continued expansion
of its TSA suspension production capacity and to accommodate anticipated
market growth. If the Company is not able to finance or complete its current
expansion plans in a timely manner and within acceptable budgets, its
quarterly and annual results of operations may be materially adversely
affected.
MARKET TRENDS
The Company expects that the expanding use of personal computers, enterprise
computing and storage, increasingly complex software and the emergence of new
applications for disk storage that have contributed to the historical
year-to-year increases in disk drive production will continue for the
foreseeable future. The Company also believes demand for disk drives will
continue to be subject, as it has in the past, to rapid short-term changes
resulting from, among other things, changes in disk drive inventory levels,
responses to competitive price changes and unpredicted high or low market
acceptance of new drive models.
As in past years, disk drives continue to be the storage device of choice for
applications requiring low access times and higher capacities because of
their speed and low cost per megabyte of stored data. The cost of storing
data on disk drives continues to decrease primarily due to increasing areal
density, the amount of data which can be stored on magnetic disks.
Improvements in areal density have been attained by lowering the fly height
of the read/write head, using smaller read/write heads with advanced air
bearing designs, improving other components such as motors and media and
using new read/write head types such as those of magneto-resistive (MR)
design. The move to MR heads, which require more electrical leads, and the
transition to smaller or pico-sized heads, which are more sensitive to
mechanical variation, may compel drive manufacturers to use newer suspension
technologies, such as the Company's TSA suspension assemblies. Due to growth
in customer demand for TSA suspensions, the Company expects that TSA
suspensions will make up approximately half of its shipments in the next
fiscal year.
The continual pursuit of increasing areal density may lead to further value
added features for TSA suspensions which incorporate a second stage actuator
on the suspension to improve head positioning over increasingly tighter data
tracks, or which mount preamplifiers near the head to improve data transfer
signals. These changes require the Company to develop the competencies of an
electromechanical system supplier so that multiple functions may be
consolidated on the suspension assembly.
The introduction of new types or sizes of read/write heads and new disk drive
designs tends to initially decrease customers' yields with the result that
the Company may experience temporary elevations of demand for some types of
suspension assemblies. The advent of new heads and new drive designs may
require rapid development and implementation of new suspension types which
temporarily may reduce the Company's manufacturing yields and efficiencies.
There can be no assurance that such changes will not continue to affect the
Company.
The Company generally experiences fluctuating selling prices due to product
maturity, competitive pricing pressures and new product offerings. While many
of the Company's current products are reaching or are in the mature phase of
their life cycle and thus are experiencing declining selling prices, its
newer products have initially much higher selling prices.
18
<PAGE>
FISCAL 1998 OPERATIONS
The following table sets forth the Company's Consolidated Statements of
Operations as a percentage of net sales and the percentage change in the
amount of such items from period to period.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100% 100% 100% (10)% 28%
Cost of sales 101 74 77 22 23
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (1) 26 23 (103) 47
Research and development expenses 5 4 8 1 (27)
Selling, general and administrative expenses 10 10 10 (7) 32
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (16) 12 5 (224) 190
Other income, net 1 1 -- 3 258
Interest expense (1) (1) -- 45 49
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (16) 12 5 (222) 211
Provision (benefit) for income taxes (4) 3 1 (244) 242
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) (12) 9 4 (216) 204
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales for 1998 were $407,616,000, a decrease of $45,616,000 or 10%
compared to 1997. This decrease was primarily due to decreased suspension
assembly volume.
Gross loss for 1998 was $3,636,000, compared to a gross profit of
$117,279,000 for 1997, and gross profit (loss) as a percent of net sales
decreased from 26% to (1)%. This decrease was primarily due to lower
conventional suspension assembly sales volume and higher manufacturing costs
associated with increased TSA suspension assembly production.
Research and development expenses for 1998 were $20,360,000 compared to
$20,185,000 for 1997. A majority of the research and development expenses
were used for further TSA product development and for development of the
Company's medical product.
Selling, general and administrative expenses for 1998 were $41,128,000, a
decrease of $3,250,000 or 7% compared to 1997. The decreased expenses were
due primarily to decreased profit sharing and other incentive compensation
costs of $9,349,000 and decreased recruitment and relocation costs of
$886,000, partially offset by increased labor expenses of $2,597,000, higher
depreciation and lease expense of $1,929,000, fees related to certain
financing agreements of $1,535,000 and higher bad debt provision of
$1,476,000. As a percent of net sales, selling, general and administrative
expenses remained at 10%.
Interest expense for 1998 was $4,558,000, an increase of $1,415,000 compared
to 1997, primarily due to higher average outstanding debt, offset by higher
capitalization of interest of $3,820,000.
The income tax benefit for 1998 was based on an effective tax rate for the
year of 26% which was below the statutory federal rate primarily due to tax
credits and the large portion of sales that qualify for the benefit of the
Company's Foreign Sales Corporation.
Net loss for 1998 was $48,411,000, compared to net income of $41,909,000 for
1997. As a percent of net sales, net income decreased from 9% to (12)%
primarily due to the lower sales volume and higher manufacturing costs, noted
above.
FISCAL 1997 OPERATIONS
Net sales for 1997 were $453,232,000, an increase of $100,046,000 or 28%
compared to 1996. This increase was primarily due to increased suspension
assembly volume.
Gross profit for 1997 was $117,279,000, an increase of $37,709,000 or 47%
compared to 1996, and gross profit as a percent of net sales increased from
23% to 26%. This increase was primarily due to higher sales volume and
improved manufacturing efficiencies.
19
<PAGE>
Research and development expenses for 1997 were $20,185,000 compared to
$27,651,000 for 1996. The prior year amount includes a $5,500,000 charge
related to a technology sharing agreement with IBM and higher development
expenses related to production of TSA prototype suspensions.
Selling, general and administrative expenses for 1997 were $44,378,000, an
increase of $10,662,000 or 32% compared to 1996. The increased expenses were
due primarily to increased profit sharing and other incentive compensation
costs of $7,443,000 and a $1,855,000 increase in labor expenses. As a percent
of net sales, selling, general and administrative expenses remained at 10%.
Other income, net, for 1997 was $4,143,000, an increase of $2,985,000
compared to 1996. The increase was primarily due to an increase of $3,631,000
in interest income as a result of a higher average investment balance,
partially offset by a $443,000 increase in royalties paid under licensing
agreements.
Interest expense for 1997 was $3,143,000, an increase of $1,035,000 compared
to 1996, primarily due to higher average outstanding debt, offset by higher
capitalization of interest of $1,740,000.
The income tax provision for 1997 was based on an effective tax rate for the
year of 22% which was below the statutory federal rate primarily due to the
large portion of sales that qualify for the benefit of the Company's Foreign
Sales Corporation.
Net income for 1997 was $41,909,000, an increase of $28,107,000 compared to
1996. As a percent of net sales, net income increased from 4% to 9% primarily
due to the higher sales volume and improved manufacturing efficiencies, noted
above.
FISCAL 1996 OPERATIONS
Net sales for 1996 were $353,186,000, an increase of $53,188,000 or 18%
compared to 1995. This increase was attributable primarily to the Company
shipping approximately 36% more suspension assemblies during 1996 than 1995,
partially offset by a lower average selling price due to selling higher
volumes of lower-priced suspensions.
Gross profit for 1996 was $79,570,000, an increase of $5,807,000 or 8%
compared to 1995, and gross profit as a percent of net sales decreased from
25% to 23%. In addition to the sales volumes of lower-priced suspensions
noted above, the decrease in gross profit as a percent of net sales was also
due to reduced shipments during the fourth quarter resulting in an increase
in fixed costs as a percent of sales.
Research and development expenses for 1996 were $27,651,000, an increase of
$12,610,000 or 84% compared to 1995. The majority of the higher expenses were
due to increased TSA suspensions development efforts of approximately
$7,100,000 and a charge of $5,500,000 related to a technology sharing
agreement with IBM, compared to a $2,500,000 charge for the technology
sharing agreement during 1995.
Selling, general and administrative expenses for 1996 were $33,716,000, an
increase of $3,915,000 or 13% compared to 1995. The increased expenses were
due primarily to an increase in recruitment and relocation expenses of
$1,722,000, mainly related to the start-up of the Eau Claire assembly
manufacturing facility, increases in professional services of $1,418,000 and
labor of $1,141,000, partially offset by reduced profit sharing expenses of
$1,167,000. As a percentage of net sales, selling, general and administrative
expenses remained at 10%.
The income tax provision for 1996 was based on an effective tax rate for the
year of 20% which was below the statutory federal rate primarily due to the
large portion of sales that qualifies for the benefit of the Company's
Foreign Sales Corporation.
Net income for 1996 was $13,802,000, a decrease of $7,276,000 compared to
1995. As a percent of net sales, net income decreased from 7% to 4% primarily
due to lower gross profit margins, noted above, and increased research and
development efforts.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
The Company's principal sources of liquidity are cash balances, cash flow
from operations and additional financing capacity. As of September 27, 1998,
the Company did not have available, and had no commitments for, a revolving
credit or other similar borrowing facility.
20
<PAGE>
The Company's cash and cash equivalents have fluctuated during fiscal 1998.
Cash and cash equivalents decreased from $98,340,000 at September 28, 1997 to
$36,069,000 at December 28, 1997 due to capital expenditures, described
below, and increased to $160,549,000 at March 29, 1998 as a result of the
private placement of convertible subordinated notes by the Company, described
below. Cash and cash equivalents decreased to $107,924,000 at June 28, 1998
and to $58,942,000 at September 27, 1998 due to continued capital
expenditures. Cash and cash equivalents decreased by $39,398,000 from
September 28, 1997 to September 27, 1998 primarily because the capital
expenditures during the year were greater than the proceeds from the
convertible subordinated notes and funding from the GE lease receivable,
described below. The Company used cash from operating activities of
$12,824,000 in fiscal 1998 and generated cash from operating activities of
$76,816,000 in fiscal 1997 and $39,904,000 in fiscal 1996.
Cash used for capital expenditures totaled $206,888,000 in fiscal 1998
compared to $82,639,000 in fiscal 1997 and $77,065,000 in fiscal 1996. The
expenditures in 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 Company currently anticipates spending approximately $170,000,000 during
fiscal 1999 primarily for expansion of TSA suspension production capacity,
including manufacturing and support equipment. Financing of these capital
expenditures will be principally from internally generated funds, cash
balances and/or additional financing capacity.
In March 1998, the Company issued and sold $150,000,000 aggregate principal
amount of its 6% Convertible Subordinated Notes due 2005 (the "Convertible
Notes") to NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc., which resold the Convertible Notes to qualified institutional
buyers and institutional accredited investors. The Company used the net
proceeds from the issuance and sale of the Convertible Notes primarily to
fund capital expenditures to expand TSA suspension capacity.
During the first quarter of fiscal 1997, the Company signed a Master Lease
Agreement with General Electric Capital Corporation ("GE"), providing for
leasing of up to $25,000,000 of manufacturing equipment in fiscal 1997. The
Company served as a purchasing agent on behalf of GE. As such, amounts
expended on GE's behalf, but not yet reimbursed, were included on the
accompanying consolidated balance sheet under GE lease receivable. During the
fourth quarter of fiscal 1997, the Company amended the Master Lease
Agreement, providing for leasing of up to $30,000,000 of manufacturing
equipment in fiscal 1998. The full fiscal 1997 and 1998 amounts were expended.
The Company's financing agreements contain various restrictive financial
covenants. Effective September 27, 1998, the Company was in compliance with
all such covenants. If the Company is not in compliance with financial
covenants in its financing agreements at the end of any fiscal quarter, its
future financial results and liquidity could be materially adversely affected.
The Company currently believes its cash balances and cash generated from
operations will be sufficient to meet its operating expenses, debt service
requirements and capital expenditures through fiscal 1999, as the Company
continues to transition from conventional suspension assembly production to
high-volume TSA suspension assembly production. The Company is evaluating and
is pursuing additional external sources of capital to supplement its current
capital resources.
The Company anticipates that continued significant capital expenditures will
be necessary beyond fiscal 1999 for continued expansion of its TSA suspension
production capacity, and to accommodate anticipated market growth. In that
regard, the Company may 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. There
can be no assurance that the Company's business will generate sufficient cash
flow
21
<PAGE>
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, make necessary capital expenditures, fund its operations or
maintain compliance with financing agreement covenants.
In connection with the sale of the Convertible Notes by the Company in March
1998, the Company incurred $150,000,000 in additional indebtedness which
increased the ratio of total debt to total capitalization to 48.5% at
September 27, 1998. 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.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs, microprocessors and
embedded date reliant systems using two digits rather than four to define the
applicable year. If not corrected, date-related information and data could
cause many programs or systems to fail or generate erroneous information. The
Company's products have no inherent time or date function and will operate
regardless of Year 2000 issues. The Company, however, uses computer systems
and programs that will be affected by Year 2000 issues. In fiscal 1997, the
Company initiated a comprehensive Year 2000 readiness program addressing
business software and hardware, manufacturing software and hardware used in
the design, and/or manufacturing of suspension assemblies, and third party
suppliers. Although the Company does not currently expect any significant
disruption to its operations due to Year 2000 issues, there can be no
assurance that the Company will be able to assess, identify and correct all
Year 2000 issues in a timely or successful manner.
The Company completed remediation in November 1997 of its key business
software. These key applications include purchased applications that address,
but are not limited to, sales and order processing, resource planning and
scheduling, procurement, inventory control, shipping and financial accounting
and reporting. Additional testing of these systems is being completed during
fiscal 1999 using "data-aging" software.
The Company completed an enterprise-wide inventory in May 1998 of all other
business software and hardware with potential Year 2000 issues. The inventory
includes approximately 460 purchased and internally-developed business and
desktop software, of which 350 are considered critical by the Company, and
over 3,000 pieces of hardware, including personal computers, servers and
network devices. All such critical business and desktop software, and 95% of
such hardware has been analyzed for the existence and extent of Year 2000
issues. As of November 23, 1998, approximately 61% of such critical software,
and approximately 85% of such hardware was Year 2000 compliant. The Company
believes that all such critical business software and such hardware will be
Year 2000 compliant by September 1999.
The Company completed an enterprise-wide inventory in May 1998 of all
manufacturing software, hardware and embedded chip technology with potential
Year 2000 issues. The inventory includes all equipment and software used to
design, build and test tools and machines, all tools and machines used to
design, build and test suspension assemblies, and software and equipment for
all facility systems. The Company expects analysis of all such inventory for
the existence and extent of Year 2000 issues to be complete in January 1999.
As of November 23, 1998, approximately 5% of such manufacturing software,
hardware and embedded chip technology was Year 2000 compliant. The Company
believes that all manufacturing software, hardware and embedded chip
technology will be remediated by September 1999.
The Company is assessing its suppliers whose failure to become Year 2000
compliant in a timely manner, if at all, could have a material adverse effect
on the Company. The Company distributed questionnaires on Year 2000
22
<PAGE>
compliance status (and follow-up letters, as necessary) to over 200 of its
suppliers. The Company currently is reviewing supplier responses and expects
to initiate follow-up activities in December 1998 to evaluate, or mitigate,
potential risks associated with such suppliers due to Year 2000 issues.
As of November 23, 1998, the costs incurred by the Company for Year 2000
compliance efforts have not been material. The Company currently estimates
incurring an additional $1,500,000 for Year 2000 remediation efforts. The
projected costs of the Company's Year 2000 compliance efforts are based on
management's best estimates, which were derived using assumptions about
future events. These estimates may change as such efforts proceed and actual
results could differ significantly from current plans.
Although the Company expects to complete its Year 2000 remediation in 1999,
there are risks if its efforts are delayed or fail. A delay or failure in
remedying a Year 2000 issue, caused by computer hardware or software errors
or failures by the Company, or suppliers who may not be Year 2000 compliant
could, in a worst case, interrupt the Company's business. Depending upon the
extent and duration of the business interruption resulting from
non-compliance issues, such interruption could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company will begin to develop contingency plans for Year 2000 readiness
in March 1999 to ensure that back-up processes are in place in the event the
Company is unable to complete remediation efforts by December 31, 1999. The
Company expects to complete these contingency plans by September 1999, but
there is no assurance that the Company will complete such plans or that any
such plans will address all risks that may actually arise.
OTHER MATTERS
The Company is involved in certain legal matters which may result in
additional future cash requirements. See the discussion of these matters in
Note 6, "Commitments and Contingencies," in the notes to the consolidated
financial statements.
The Company will be subject to certain recent accounting pronouncements. See
the discussion of these matters in Note 1, "Summary of Significant Accounting
Policies," in the notes to the consolidated financial statements.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition. There can be no assurance, however,
that the Company's business will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS
The statements on pages 3 through 7 of this Annual Report about demand for
suspension assemblies, including TSA suspensions, anticipated capital
expenditures, TSA suspension development and production and medical product
introduction and expenditures, the statements under the headings "General"
and "Market Trends" about demand for and shipments of disk drives and
suspension assemblies, including TSA suspensions, manufacturing capacity and
yields and selling prices, and the statements under the headings "General"
and "Liquidity, Capital Resources and Other Matters" about anticipated
operating results, capital expenditures and capital resources, and the
statements above under the heading "Year 2000 Issues" about Year 2000
compliance, are forward-looking statements based on current expectations.
These statements are subject to risks and uncertainties, including slower or
faster customer acceptance of the Company's new products, difficulties in
producing its TSA suspensions, difficulties in financing and expanding
capacity, changes in manufacturing efficiencies, difficulties in implementing
Year 2000 compliance and the other risks and uncertainties discussed above.
These factors may cause the Company's actual future results to differ
materially from historical earnings and from the financial performance of the
Company presently anticipated.
23
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Consolidated Statements of Operations In thousands, except per share data
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
- ------------------------------------------------------------------------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 407,616 $ 453,232 $ 353,186
Cost of sales 411,252 335,953 273,616
- ------------------------------------------------------------------------------------------------------
Gross profit (loss) (3,636) 117,279 79,570
Research and development expenses 20,360 20,185 27,651
Selling, general and administrative expenses 41,128 44,378 33,716
- ------------------------------------------------------------------------------------------------------
Income (loss) from operations (65,124) 52,716 18,203
Other income, net 4,261 4,143 1,158
Interest expense (4,558) (3,143) (2,108)
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (65,421) 53,716 17,253
Provision (benefit) for income taxes (17,010) 11,807 3,451
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (48,411) $ 41,909 $ 13,802
- ------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (2.46) $ 2.29 $ 0.84
- ------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (2.46) $ 2.21 $ 0.82
- ------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 19,709 18,272 16,350
- ------------------------------------------------------------------------------------------------------
Weighted average common and diluted
shares outstanding 19,709 18,978 16,806
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- ------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Consolidated Balance Sheets Dollars in thousands
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 58,942 $ 98,340
Securities available for sale 11,921 20,211
Trade receivables, net 65,798 51,467
GE lease receivable -- 31,073
Other receivables 12,337 3,504
Inventories 25,780 27,189
Prepaid taxes and other expenses 19,507 11,562
- -----------------------------------------------------------------------------------------------
Total current assets 194,285 243,346
Property, plant and equipment, at cost:
Land, buildings and improvements 123,599 45,437
Equipment 319,162 218,289
Construction in progress 104,145 84,345
Less: accumulated depreciation (211,617) (172,818)
- -----------------------------------------------------------------------------------------------
Net property, plant and equipment 335,289 175,253
Other assets 19,904 11,240
- -----------------------------------------------------------------------------------------------
$ 549,478 $ 429,839
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- -----------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 4,613 $ 5,332
Accounts payable and accrued expenses 61,822 39,373
Accrued compensation 24,371 19,407
Accrued income taxes 2,365 6,078
- -----------------------------------------------------------------------------------------------
Total current liabilities 93,171 70,190
Long-term debt, less current maturities 68,247 72,862
Convertible subordinated notes 150,000 --
Other long-term liabilities 1,230 3,829
Commitments and contingencies (Notes 5 and 6)
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares
authorized, 19,780,000 and 19,619,000 issued
and outstanding 198 196
Additional paid-in capital 152,957 150,676
Retained earnings 83,675 132,086
- -----------------------------------------------------------------------------------------------
Total shareholders' investment 236,830 282,958
$ 549,478 $ 429,839
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- -----------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Consolidated Statements of Cash Flows In thousands
<TABLE>
<CAPTION>
Fiscal years ended
- ------------------------------------------------------------------------------------------------------------------------
September 27, 1998 September 28, 1997 September 29, 1996
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (48,411) $ 41,909 $ 13,802
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 50,901 38,565 33,909
Deferred taxes (7,350) (2,608) (6,085)
Changes in operating assets and
liabilities (Note 7) (7,964) (1,050) (1,722)
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities (12,824) 76,816 39,904
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------------
Capital expenditures (206,888) (82,639) (77,065)
Funding from GE lease receivable 35,303 9,915 --
Increase in GE lease receivable (4,230) (35,746) (5,242)
Proceeds from the sale of assets -- -- 15,300
Purchases of marketable securities (13,313) (31,343) (4,944)
Sales of marketable securities 21,602 14,196 3,070
- ------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (167,526) (125,617) (68,881)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt -- 25,000 25,500
Repayments of long-term debt (5,334) (5,751) (4,255)
Net proceeds from issuance of convertible
subordinated notes 145,320 -- --
Net proceeds from issuance of common stock 966 105,008 137
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 140,952 124,257 21,382
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (39,398) 75,456 (7,595)
Cash and cash equivalents at
beginning of year 98,340 22,884 30,479
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 58,942 $ 98,340 $ 22,884
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Consolidated Statements of Shareholders' Investment In thousands
<TABLE>
<CAPTION>
Common stock
------------------------- Additional
Shares Amount paid-in capital Retained earnings
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 24, 1995 16,341 $163 $ 43,207 $76,375
Exercise of stock options 15 1 127 --
Issuance of common stock -- -- 9 --
Net income -- -- -- 13,802
- ----------------------------------------------------------------------------------------------------------------
Balance, September 29, 1996 16,356 164 43,343 90,177
Exercise of stock options 268 2 4,711 --
Issuance of common stock 3,001 30 102,877 --
Retirements of common stock (6) -- (255) --
Net income -- -- -- 41,909
- ----------------------------------------------------------------------------------------------------------------
Balance, September 28, 1997 19,619 196 150,676 132,086
Exercise of stock options 169 2 2,524 --
Issuance of common stock 1 -- 12 --
Retirements of common stock (9) -- (255) --
Net loss -- -- -- (48,411)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1998 19,780 $198 $152,957 $83,675
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
Columnar dollar amounts in thousands,
except per share amounts
NOTE 1 Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Hutchinson Technology Incorporated and its
subsidiaries (the "Company"), all of which are wholly- owned. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
RECLASSIFICATIONS - Certain reclassifications have been made in the
1997 and 1996 financial statements to conform with the 1998
presentation. Such reclassifications had no effect on previously
reported results of operations or shareholders' investment.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Ultimate results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial
Accounting Standards Board ("FASB") released Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires presentation of comprehensive income on the face
of the financial statements. Comprehensive income would include such
items as unrealized holding gains/losses on securities available for
sale, foreign currency translation adjustments and minimum pension
liability adjustments. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. The Company will adopt SFAS 130 during the
first quarter of fiscal 1999 and anticipates that the effect of
adopting SFAS 130 will not be significant.
In June 1997, the FASB released Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which requires reported segments to
be those used by management to disaggregate a company. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. The
Company will adopt SFAS 131 in fiscal 1999 and anticipates that the
effect of adopting SFAS 131 will not be significant.
In June 1998, the FASB released Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The Company has not yet determined the
timing of adoption of SFAS 133. While the Company does not expect the
adoption to materially impact its results of operations or financial
position, adoption of SFAS 133 could increase volatility in earnings
for periods subsequent to adoption.
28
<PAGE>
FISCAL YEAR - The Company's fiscal year is the fifty-two/fifty-three
week period ending on the last Sunday in September. The fiscal year
ended September 27, 1998 is a fifty-two week period, the fiscal year
ended September 28, 1997 is a fifty-two week period and the fiscal year
ended September 29, 1996 is a fifty-three week period.
REVENUE RECOGNITION AND CUSTOMERS -The Company recognizes revenue upon
the shipment of completed products. Sales to customers in excess of 10%
of net sales are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
SAE Magnetics, Ltd/TDK 26% 13% 14%
IBM and affiliates 20 12 9
Seagate Technology Incorporated 18 33 35
Read-Rite Corporation 10 14 13
Yamaha Corporation 10 14 16
- -------------------------------------------------------------------------------------
</TABLE>
Sales to the Company's five largest customers constituted 84%, 86% and
87% of net sales for fiscal 1998, 1997 and 1996, respectively.
Sales to foreign locations were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign-based enterprises $167,767 $ 88,471 $ 63,898
Foreign subsidiaries of U.S. corporations 47,885 83,753 51,564
- -------------------------------------------------------------------------------------
$215,652 $172,224 $115,462
- -------------------------------------------------------------------------------------
</TABLE>
The majority of these foreign location sales were to the Pacific Rim
region. In addition, the Company had significant sales to U.S.
corporations which used the Company's products in their offshore
manufacturing sites.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of all highly
liquid investments with original maturities of ninety days or less.
SECURITIES AVAILABLE FOR SALE - Securities available for sale consist
of investments with original maturities greater than ninety days which
are intended to be held less than one year. Securities available for
sale consisted of U.S. government securities with a market value and
cost of approximately $11,921,000 at September 27, 1998 and $20,211,000
at September 28, 1997.
TRADE RECEIVABLES - The Company grants credit to customers, but
generally does not require collateral or any other security to support
amounts due. Trade receivables are net of allowances of $5,207,000 at
September 27, 1998 and $2,182,000 at September 28, 1997.
INVENTORIES - All inventories are stated at the lower of last-in,
first-out ("LIFO") cost or market. Inventories consist of the following
at September 27, 1998 and September 28, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 9,320 $10,560
Work in process 12,740 5,950
Finished goods 3,908 10,919
LIFO reserve (188) (240)
- ---------------------------------------------------------------------
$25,780 $27,189
- ---------------------------------------------------------------------
</TABLE>
29
<PAGE>
PROPERTY AND DEPRECIATION - Property, plant and equipment are stated at
cost. Costs of renewals and betterments are capitalized and
depreciated. Maintenance and repairs are charged to expense as
incurred.
Property is depreciated over an estimated useful life on a
straight-line basis for financial reporting purposes and is depreciated
using primarily accelerated methods for tax reporting purposes.
Estimated useful lives for financial reporting purposes are as follows:
Buildings 25 to 35 years
Leasehold improvements 5 to 10 years
Equipment 2 to 8 years
ENGINEERING AND PROCESS DEVELOPMENT - The Company's engineers and
technicians are responsible for the implementation of new technologies
as well as process and product development and improvements.
Expenditures related to these activities totaled $52,235,000 in 1998,
$48,204,000 in 1997 and $51,212,000 in 1996. Of these amounts,
approximately $20,360,000 in 1998, $20,185,000 in 1997 and $27,651,000
in 1996 are classified as research and development expenses.
INCOME TAXES - Deferred taxes are provided at currently enacted tax
rates on all significant temporary differences.
NET INCOME PER SHARE - The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
during the first quarter of fiscal 1998. As a result, all prior periods
presented have been restated to conform to the provisions of SFAS No.
128, which requires the presentation of basic and diluted earnings per
share. Basic earnings (loss) per share is computed by dividing net
income (loss) available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted earnings
(loss) per share is computed under the treasury stock method and is
calculated to compute the dilutive effect of potential common shares. A
reconciliation of these amounts is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 19,709 18,272 16,350
Dilutive potential common shares -- 706 456
Weighted average common and diluted shares outstanding 19,709 18,978 16,806
- ------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (2.46) $ 2.29 $ 0.84
- ------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (2.46) $ 2.21 $ 0.82
- ------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
NOTE 2 Financing Arrangements
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
LONG-TERM DEBT 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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 20,625 24,375
6% Convertible Subordinated Notes due 2005 150,000 --
Other long-term debt 2,235 3,819
- --------------------------------------------------------------------------------------
222,860 78,194
Less: Current maturities (4,613) (5,332)
- --------------------------------------------------------------------------------------
$218,247 $72,862
- --------------------------------------------------------------------------------------
</TABLE>
In March 1998, the Company completed a private placement of
$150,000,000 aggregate principal amount of 6% Convertible Subordinated
Notes due 2005 (the "Convertible Notes") with interest payable
semi-annually commencing September 15, 1998. The Convertible Notes are
convertible, at the option of the holder, into Common Stock of the
Company at any time prior to their stated maturity, unless previously
redeemed or repurchased, at a conversion price of $28.35 per share.
Beginning March 20, 2001, the Convertible Notes are redeemable, in
whole or in part, at the option of the Company, at 103.43% of their
principal amount, and thereafter at prices declining to 100% at any
time on and after March 15, 2005. In addition, upon the occurrence of
certain events, each holder of the Convertible Notes may require the
Company to repurchase all or a portion of such holder's Convertible
Notes at a purchase price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest and liquidated
damages, if any, to the date of the repurchase.
The Convertible Notes were issued by the Company and were sold in
transactions exempt from registration under the Securities Act of 1933,
as amended. The Company filed a Registration Statement registering the
Convertible Notes and the shares of Common Stock of the Company into
which the Convertible Notes are convertible.
On July 26, 1996, the Company completed a $50,000,000 private debt
placement, of which $25,000,000 was issued as senior unsecured notes,
having a fixed rate of 7.85%, annual principal payments of $8,333,000
beginning on July 26, 2001 and maturing July 26, 2003. The Company
issued an additional $25,000,000 on November 26, 1996 as a senior
unsecured note having a fixed rate of 8.07%, annual principal payments
of $4,167,000 beginning on November 26, 2001 and maturing November 26,
2006.
The Company's financing agreements contain certain restrictive
covenants which require the Company, among other things, to maintain
specified levels of net income, cash and/or cash available from a
credit facility, working capital, tangible net worth and financial
ratios, and also impose limitations on capital expenditures, additional
indebtedness, leases, guarantees, and the payment of dividends.
Effective September 27, 1998, the Company was in compliance with all
such covenants.
31
<PAGE>
Maturities of long-term debt for the five years subsequent to September
27, 1998 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
<S> <C>
1999 $ 4,613
2000 3,995
2001 12,330
2002 16,499
2003 16,501
Thereafter 168,922
- -----------------------------------------------------------------------
$222,860
- -----------------------------------------------------------------------
</TABLE>
NOTE 3 Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (9,660) $12,795 $ 8,204
State -- 1,620 1,332
Deferred (7,350) (2,608) (6,085)
- ----------------------------------------------------------------------------------------------------
$(17,010) $11,807 $ 3,451
- ----------------------------------------------------------------------------------------------------
</TABLE>
The deferred benefit is composed of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset bases, lives and depreciation methods $ 2,459 $(1,206) $ (895)
Reserves and accruals not currently deductible (5,709) (1,402) (5,888)
Tax credits and net operating loss carryforwards (19,066) 133 2,195
Valuation allowance and other 14,966 (133) (1,497)
- ------------------------------------------------------------------------------------------------------
$ (7,350) $(2,608) $(6,085)
- ------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate (34)% 35% 35%
Effect of:
State income taxes, net of federal income tax benefits (4) 2 3
Tax benefits of the Foreign Sales Corporation (4) (11) (15)
Valuation allowance on net operating loss carryforwards and
other tax credits 16 (4) (3)
- ------------------------------------------------------------------------------------------------------
(26)% 22% 20%
- ------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. At September 27, 1998, the Company had unused tax credits and
net operating loss carryforwards of $21,671,000, of which $5,130,000
can be carried forward indefinitely and $16,541,000 which expire at
various dates from 2010 to 2013. A valuation allowance of $15,571,000
has been recognized to offset the related deferred tax assets due to
the uncertainty of realizing the benefit of certain tax credits and net
operating loss carryforwards.
32
<PAGE>
The following is a table of the significant components of the Company's
deferred tax assets:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
September 28, September 28,
DEFERRED TAX ASSETS 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Receivable reserves $ 2,021 $ 855
Inventories 9,818 7,179
Accruals and other reserves 5,838 2,557
Tax credits 239 --
- ----------------------------------------------------------------------------------------
Total current deferred tax assets $ 17,916 $10,591
- ----------------------------------------------------------------------------------------
Long-term deferred tax assets (liabilities):
Property, plant and equipment 2,500 4,959
Accruals and other reserves -- 1,616
Tax credits 8,734 2,605
Valuation allowance (15,571) (605)
Net operating loss carryforwards 12,937 --
- ----------------------------------------------------------------------------------------
Total long-term deferred tax assets $ 8,600 $ 8,575
- ----------------------------------------------------------------------------------------
Total deferred tax assets $ 26,516 $19,166
- ----------------------------------------------------------------------------------------
</TABLE>
NOTE 4 Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND CASH EQUIVALENTS - The fair value is based on quoted market
prices.
SECURITIES AVAILABLE FOR SALE - The fair value of these instruments is
based on quoted market prices.
LONG-TERM DEBT - The fair value of the Company's long-term debt is
estimated based on the discounted value of the future cash flows
expected to be paid on the loans. The discount rate used to estimate
the fair value of the loans is the rate currently available to the
Company for loans with similar terms and maturities.
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 58,942 $ 58,942 $98,340 $98,340
Securities available for sale 11,921 11,921 20,211 20,211
Long-term debt 222,860 203,033 78,194 78,368
- ---------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
NOTE 5 Employee Benefits
STOCK OPTIONS - The Company has two stock option plans under which up
to 6,000,000 common shares are reserved for issuance and of which
options representing 3,256,380 common shares have been granted as of
September 27, 1998. Options may be granted to any employee, including
officers and directors of the Company, and certain non-employees, at
a price not less than the fair market value of the Company's common
stock at the date the options are granted. Options generally expire
ten years from the date of grant or at an earlier date as determined
by the committee of the Board of Directors that administers the plans.
Options granted under the plans generally are exercisable one year
from the date of grant.
<TABLE>
<CAPTION>
1988 Plan 1996 Plan
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance, September 24, 1995 1,096,926 --
Granted at $16.33 438,510 --
Exercised at $3.92 to $7.75 (15,810) --
- ---------------------------------------------------------------------------------------
Balance, September 29, 1996 1,519,626 --
Granted at $17.33 543,000 --
Granted at $29.38 to $36.67 -- 18,500
Exercised at $4.25 to $16.33 (267,630) --
Expired (8,235) --
- ---------------------------------------------------------------------------------------
Balance, September 28, 1997 1,786,761 18,500
Granted at $20.19 to $27.75 139,065 232,270
Exercised at $13.81 to $33.88 (168,261) --
Expired (2,700) (1,510)
- ---------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1998 1,754,865 249,260
- ---------------------------------------------------------------------------------------
</TABLE>
The Company follows Accounting Principles Board Opinion No. 25, under
which no compensation cost has been recognized in connection with
stock option grants pursuant to the stock option plans. Had
compensation cost been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's pro forma net income (loss)
and pro forma net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $(48,411) $41,909 $13,802
Pro forma (54,303) 36,020 9,363
- ------------------------------------------------------------------------------------------------------
Net income (loss) per common and common equivalent share:
As reported-- basic $ (2.46) $ 2.29 $ 0.84
Pro forma-- basic $ (2.76) $ 1.97 $ 0.57
As reported-- diluted $ (2.46) $ 2.21 $ 0.82
Pro forma-- diluted $ (2.76) $ 1.90 $ 0.56
- ------------------------------------------------------------------------------------------------------
</TABLE>
In determining compensation cost pursuant to SFAS 123, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants during 1998: risk-free interest
rate of 5.8%; expected life of six years; and expected volatility of
69%. The following weighted average assumptions were used for grants
in 1997: risk-free interest rates of 5.85% to 6.25%; expected life
of six years; and expected volatility of 68% to 71%. The following
weighted average assumptions were used for grants in 1996: risk-free
interest rate of 5.6%; expected life of six years; and expected
volatility of 73%.
34
<PAGE>
EMPLOYEE BENEFIT PLANS - The Company has a defined contribution plan
covering its employees. The Company's contributions to the plan were
$9,239,000 in 1998, $7,762,000 in 1997 and $6,463,000 in 1996.
The Company sponsors a comprehensive medical and dental plan for
qualified employees that is funded by contributions from both the
Company and plan participants. Contributions are made through a
Voluntary Employee's Benefit Association Trust. The Company
recognized expense related to these plans of $19,109,000 in 1998,
$15,377,000 in 1997 and $13,439,000 in 1996.
NOTE 6 Commitments and Contingencies
The Company is committed under various operating lease agreements.
Total rent expense under these operating leases was $22,099,000 in
1998, $12,487,000 in 1997 and $7,502,000 in 1996. Future minimum
payments for all operating leases with initial or remaining terms
of one year or more subsequent to September 27, 1998 are as follows:
<TABLE>
- --------------------------------------------------------------
<S> <C>
1999 $16,992
2000 14,259
2001 11,663
2002 10,116
2003 and thereafter 23,001
- --------------------------------------------------------------
</TABLE>
On May 1, 1996 the Company received $15,300,000 in a sale-leaseback
transaction relating to its Eau Claire, Wisconsin assembly
manufacturing building. The lease has a term of 15 years.
During the first quarter of fiscal 1997, the Company signed a Master
Lease Agreement with General Electric Capital Corporation ("GE"),
providing for leasing of up to $25,000,000 of manufacturing equipment
in fiscal 1997. The Company served as a purchasing agent on behalf of
GE. As such, amounts expended on GE's behalf, but not yet reimbursed,
were included on the accompanying consolidated balance sheet under GE
lease receivable. During the fourth quarter of fiscal 1997, the
Company amended the Master Lease Agreement, providing for leasing of
up to $30,000,000 of manufacturing equipment in fiscal 1998. The full
fiscal 1997 and 1998 amounts were expended.
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 such 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 any third party
were to make a valid infringement claim and a license were not
available on terms acceptable to the Company, the Company's operating
results could be adversely affected. The Company expects that, as the
number of patents issued continues to increase, and as the Company
grows, the volume of intellectual property claims could increase.
35
<PAGE>
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. The lawsuit alleges, among other things,
breach of non-compete, confidentiality and assignment of inventions
agreements. On August 24, 1998, the Court entered an injunction against
the defendants. Thereafter, the Company filed motions to add a
competitor and its parent corporation as party defendants, with whom
the enjoined defendants had a contract. The parties entered into a
Memorandum of Understanding dated September 20, 1998, setting forth the
material terms of an agreement to resolve the litigation. The parties
currently are negotiating a formal settlement agreement, consistent
with the Memorandum.
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
financial position or results of operations.
NOTE 7 Supplementary Cash Flow Information
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Receivables, net $(23,164) $(3,934) $(10,353)
Inventories 1,409 (9,954) (3,937)
Prepaid and other expenses (5,054) (2,520) (334)
Accounts payable and accrued liabilities 21,444 17,081 8,850
Other non-current liabilities (2,599) (1,723) 4,052
- ------------------------------------------------------------------------------------------------------
$ (7,964) $(1,050) $ (1,722)
- ------------------------------------------------------------------------------------------------------
Cash paid for:
Interest (net of amount capitalized) $ 3,486 $ 2,520 $ 1,703
Income taxes 2,345 13,891 8,405
- ------------------------------------------------------------------------------------------------------
</TABLE>
Capitalized interest was $6,766,000 in 1998, $2,946,000 in 1997 and
$1,206,000 in 1996.
NOTE 8 Sale of Common Stock
In February 1997, the Company issued 3,000,000 shares of its common
stock through a public offering. The Company received net proceeds of
$102,900,000 and used the funds for general corporate purposes,
primarily expenditures for manufacturing and support equipment,
construction of the Company's Eau Claire, Wisconsin and Sioux Falls,
South Dakota plants and an expansion of the Company's Hutchinson,
Minnesota plant.
NOTE 9 Stock Split
On January 20, 1997, the Company announced that its Board of Directors
approved a three-for-one stock split of the Company's common stock,
effective at the close of business on February 11, 1997. The Company
also changed the par value of its common stock to $.01 per share.
Common share and earnings per share amounts in the accompanying
consolidated statements have been retroactively adjusted to reflect the
stock split and par value change.
36
<PAGE>
NOTE 10 Summary of Quarterly Information (unaudited)
The following table summarizes unaudited financial data for fiscal
years 1998 and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 BY QUARTER 1997 BY QUARTER
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 88,982 $ 95,128 $107,127 $116,379 $106,906 $124,259 $121,713 $100,354
Gross profit (loss) (496) (2,697) 1,655 (2,098) 31,112 38,680 33,179 14,308
Income (loss) from operations (15,926) (19,639) (12,586) (16,973) 14,455 21,885 16,553 (177)
Income (loss) before income taxes (15,506) (19,495) (12,510) (17,910) 13,903 21,737 17,553 523
Net income (loss) (11,474) (14,425) (9,250) (13,262) 11,117 16,683 13,698 411
Net income (loss) per share:
Basic (0.58) (0.73) (0.47) (0.67) 0.68 0.95 0.70 0.02
Diluted (0.58) (0.73) (0.47) (0.67) 0.65 0.91 0.68 0.02
Price range per share:
High 36.13 28.00 32.75 28.38 26.92 39.00 36.88 36.50
Low 18.13 19.00 21.35 12.63 12.58 24.75 23.13 23.38
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The price range per share, reflected above, is the highest and lowest
bids as quoted on The Nasdaq National Market during each quarter.
Report of Independent Public Accountants
TO HUTCHINSON TECHNOLOGY INCORPORATED:
We have audited the accompanying consolidated balance sheets of
Hutchinson Technology Incorporated (a Minnesota corporation) and
Subsidiaries as of September 27, 1998 and September28, 1997, and the
related consolidated statements of operations, shareholders' investment
and cash flows for each of the three years in the period ended
September 27, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hutchinson
Technology Incorporated and Subsidiaries as of September 27, 1998 and
September 28, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended September 27,
1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
October 29, 1998
37
<PAGE>
Hutchinson Technology Incorporated and Subsidiaries
Eleven-Year Selected Financial Data
In thousands, except per share data and number of employees
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ANNUAL GROWTH 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
5-year 10-year FOR THE YEAR:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
15% 14% Net sales $ 407,616 $453,232 $353,186
Gross profit (loss) (3,636) 117,279 79,570
Percent of net sales (1)% 26% 23%
Income (loss) from operations $ (65,124) $ 52,716 $ 18,203
Percent of net sales (16)% 12% 5%
Net income (loss) $ (48,411) $ 41,909 $ 13,802
Percent of net sales (12)% 9% 4%
35 27 Capital expenditures $ 206,888 $ 82,639 $ 77,065
16 22 Research and development expenses 20,360 20,185 27,651
26 20 Depreciation expense 50,544 38,299 33,565
Cash flow from operating activities (12,824) 76,816 39,904
- --------------------------------------------------------------------------------------------------------------------
AT YEAR END:
- --------------------------------------------------------------------------------------------------------------------
28% 15% Receivables $ 78,135 $ 86,044 $ 56,278
27 18 Inventories 25,780 27,189 17,235
31 22 Working capital 101,114 173,156 62,102
36 25 Net property, plant and equipment 335,289 175,253 121,706
36 24 Total assets 549,478 429,839 238,983
78 28 Total debt 222,860 78,194 58,945
Total debt as a percentage of total
capitalization 48% 22% 31%
22 23 Shareholders' investment $ 236,830 $282,958 $133,684
Return on shareholders' investment (19)% 20% 11%
14 11 Number of employees 7,764 7,181 5,479
4 5 Shares of stock outstanding 19,780 19,619 16,356
- --------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION:
- --------------------------------------------------------------------------------------------------------------------
Net income (loss)-- diluted $ (2.46) $ 2.21 $ 0.82
17% 17% Shareholders' investment (book value) 11.97 14.42 8.17
Price range:
16 17 High 35.44 38.38 21.83
15 16 Low 13.81 12.75 10.25
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FOR THE YEAR: 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Net sales $299,998 $238,794 $198,734 $160,340
Gross profit (loss) 73,763 39,246 44,423 40,261
Percent of net sales 25% 16% 22% 25%
Income (loss) from operations $ 28,921 $ 7,780 $ 9,961 $ 13,581
Percent of net sales 10% 3% 5% 8%
Net income (loss) $ 21,078 $ 5,880 $ 8,554 $ 12,849
Percent of net sales 7% 2% 4% 8%
Capital expenditures $ 44,472 $ 29,540 $ 46,768 $ 20,492
Research and development expenses 15,041 8,626 9,846 5,770
Depreciation expense 28,174 23,974 15,737 12,908
Cash flow from operating activities 57,814 11,967 22,449 19,397
- -----------------------------------------------------------------------------------------------------
AT YEAR END:
- -----------------------------------------------------------------------------------------------------
Receivables $ 40,683 $ 39,115 $ 22,320 $ 25,454
Inventories 13,298 9,529 7,899 5,638
Working capital 54,284 51,996 26,238 49,018
Net property, plant and equipment 93,816 77,887 72,419 41,513
Total assets 190,898 151,148 116,639 109,126
Total debt 37,700 40,080 12,460 16,755
Total debt as a percentage of total
capitalization 24% 30% 12% 18%
Shareholders' investment $119,745 $ 94,619 $ 88,689 $ 77,025
Return on shareholders' investment 20% 6% 10% 23%
Number of employees 4,858 4,600 4,108 3,332
Shares of stock outstanding 16,341 15,999 15,993 15,519
- -----------------------------------------------------------------------------------------------------
PER SHARE INFORMATION:
- -----------------------------------------------------------------------------------------------------
Net income (loss)-- diluted $ 1.28 $ 0.36 $ 0.53 $ 0.91
Shareholders' investment (book value) 7.33 5.91 5.55 4.96
Price range:
High 29.67 13.29 16.58 10.67
Low 7.67 7.25 6.83 3.17
- -----------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------
FOR THE YEAR: 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Net sales $143,260 $122,444 $ 92,321 $113,714
Gross profit (loss) 27,920 26,107 7,696 19,329
Percent of net sales 19% 21% 8% 17%
Income (loss) from operations $ 7,265 $ 8,528 $ (7,221) $ 6,540
Percent of net sales 5% 7% (8%) 6%
Net income (loss) $ 4,499 $ 5,338 $ (5,693) $ 4,267
Percent of net sales 3% 4% (6%) 4%
Capital expenditures $ 17,747 $ 6,794 $ 9,568 $ 18,820
Research and development expenses 4,208 3,959 4,065 2,774
Depreciation expense 11,253 9,719 12,305 8,047
Cash flow from operating activities 16,944 15,174 6,871 7,291
- ------------------------------------------------------------------------------------------------------
AT YEAR END:
- ------------------------------------------------------------------------------------------------------
Receivables $ 18,499 $ 20,216 $ 15,932 $ 19,166
Inventories 4,580 5,913 3,898 5,119
Working capital 18,083 22,768 15,767 13,716
Net property, plant and equipment 34,304 27,618 30,419 36,494
Total assets 65,992 64,669 55,775 63,095
Total debt 19,354 20,550 21,756 19,469
Total debt as a percentage of total
capitalization 37% 42% 48% 40%
Shareholders' investment $ 33,512 $ 28,834 $ 23,426 $ 28,888
Return on shareholders' investment 14% 20% (22%) 16%
Number of employees 2,798 2,648 2,327 2,830
Shares of stock outstanding 11,907 11,844 11,823 11,634
- ------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION:
- ------------------------------------------------------------------------------------------------------
Net income (loss)-- diluted $ 0.37 $ 0.45 $ (0.48) $ 0.36
Shareholders' investment (book value) 2.81 2.43 1.98 2.48
Price range:
High 4.58 4.50 5.08 7.33
Low 2.04 1.67 2.08 3.00
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Shareholders' Information
ANNUAL SHAREHOLDERS' MEETING
Tuesday, January 26, 1999, at 10:00 a.m.
Minneapolis Marriott City Center Hotel
30 South Seventh Street
Minneapolis, Minnesota
COMMON STOCK LISTING
Traded in The Nasdaq National Market
Trading symbol: HTCH
Shareholders of record as of
November 30, 1998: 1,038
DIVIDEND POLICY
The Company has never paid any cash dividends on
its common stock. The Company currently intends
to retain all earnings for use in its business and does
not anticipate paying cash dividends in the foresee-
able future. Any future determination as to
payment of dividends will depend upon the financial condition
and results of operations of the Company and such
other factors as are deemed relevant by the Board of Directors.
LEGAL COUNSEL
Faegre & Benson LLP
Minneapolis, Minnesota
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Minneapolis, Minnesota
TRANSFER AGENT
Norwest Bank Minnesota, National Association
161 North Concord Exchange
P.O. Box 738
South St. Paul, Minnesota 55075-0738
(800) 468-9716
SUPPLEMENTAL INFORMATION
Shareholder Information
Todd J. Bradley
Hutchinson Technology Incorporated
40 West Highland Park
Hutchinson, Minnesota 55350
(800) 689-0755
World Wide Web: www.htch.com
E-Mail: [email protected]
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction
---- ------------
<S> <C>
HTI Export Ltd. Barbados
Hutchinson Technology Asia, Inc. Minnesota
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements File Nos. 33-26145 and
333-50143.
Minneapolis, Minnesota,
December 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
HUTCHINSON TECHNOLOGY INCORPORATED FOR THE FIFTY-TWO WEEKS ENDED SEPTEMBER 27,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 58,942,000
<SECURITIES> 11,921,000
<RECEIVABLES> 65,798,000
<ALLOWANCES> 5,207,000
<INVENTORY> 25,780,000
<CURRENT-ASSETS> 194,285,000
<PP&E> 546,906,000
<DEPRECIATION> 211,617,000
<TOTAL-ASSETS> 549,478,000
<CURRENT-LIABILITIES> 93,171,000
<BONDS> 218,247,000
0
0
<COMMON> 198,000
<OTHER-SE> 236,632,000
<TOTAL-LIABILITY-AND-EQUITY> 549,478,000
<SALES> 407,616,000
<TOTAL-REVENUES> 407,616,000
<CGS> 411,252,000
<TOTAL-COSTS> 411,252,000
<OTHER-EXPENSES> 20,360,000<F1>
<LOSS-PROVISION> 5,968,000
<INTEREST-EXPENSE> 4,558,000
<INCOME-PRETAX> (65,421,000)
<INCOME-TAX> (17,010,000)
<INCOME-CONTINUING> (48,411,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,411,000)
<EPS-PRIMARY> (2.46)
<EPS-DILUTED> (2.46)
<FN>
<F1>OTHER EXPENSES REFLECT RESEARCH AND DEVELOPMENT EXPENSES.
</FN>
</TABLE>
