<PAGE>
Filed pursuant to Rule 424(b)(1)
File number 333-70275
File number 333-09872
4,800,000 Shares
[LOGO]
Common Stock
-------------
Hutchinson Technology Incorporated is offering 4,800,000 shares to be sold
in the offering. Hutchinson Technology's Common Stock is traded on the Nasdaq
National Market under the symbol "HTCH". On February 2, 1999, the last reported
sale price for the Common Stock on the Nasdaq National Market was $46.75 per
share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
----------- -------------
<S> <C> <C>
Initial public offering price..................................... $ 45.50 $ 218,400,000
Underwriting discount............................................. $ 1.93 $ 9,264,000
Proceeds, before expenses, to Hutchinson Technology............... $ 43.57 $ 209,136,000
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 717,472 shares from Hutchinson Technology at the initial public
offering price less the underwriting discount.
------------------
The underwriters expect to deliver the shares against payment in New York,
New York on February 8, 1999.
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
HAMBRECHT & QUIST
------------
Prospectus dated February 2, 1999.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION ABOUT OUR COMPANY AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT HUTCHINSON TECHNOLOGY
AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. HUTCHINSON TECHNOLOGY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND
ELSEWHERE IN THIS PROSPECTUS. HUTCHINSON TECHNOLOGY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE DATA IN THIS PROSPECTUS
HAVE BEEN ADJUSTED TO REFLECT A THREE-FOR-ONE STOCK SPLIT IN 1997.
HUTCHINSON TECHNOLOGY INCORPORATED
We are the world's leading supplier of suspension assemblies for hard disk
drives. We estimate that we currently produce 70% (plus or minus 10 percentage
points) of all suspension assemblies sold worldwide to hard disk drive
manufacturers and their suppliers, including recording head manufacturers. Our
products include conventional and TSA suspension assemblies and suspension
assembly components. Suspension assemblies are critical components of hard disk
drives that hold the recording heads in position above the spinning magnetic
disks. We supply nearly all major 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.
Since the mid-1980's, we have led a number of critical technology
transitions for suspension assemblies as the disk drive industry has moved
toward smaller, higher capacity devices. Most recently, we introduced our TSA
suspension assemblies, which integrate electrical conductors in the suspension,
in anticipation of the disk drive industry's transition to smaller and more
sensitive recording heads. TSA suspension assemblies offer our customers
improved disk drive performance and lower overall production costs. Our
customers are increasingly adopting TSA suspension assemblies, and we currently
supply TSA suspension assemblies to four customers on 15 programs in production.
The disk drive industry is highly cyclical, with periods of increased demand
and rapid growth followed by periods of oversupply and subsequent contraction.
Beginning in the third quarter of fiscal 1997 and continuing throughout all of
fiscal 1998, total suspension assembly unit sales in the industry declined
substantially. Total shipments of our suspension assemblies peaked at 201
million units in the second quarter of fiscal 1997 and declined to 122 million
units in the fourth quarter of fiscal 1998. Despite this slowdown, end-user
demand for storage capacity continues to grow. International Data Corporation
("IDC") estimates in a November 1998 report that disk drive unit shipments would
reach 139 million in 1998 and grow to 247 million in 2002. In the first quarter
of fiscal 1999 (our quarter ended December 27, 1998), our total shipments of
suspension assemblies increased to 144 million units.
Demand for our TSA suspension assemblies, which was not adversely affected
by the industry slowdown, continues to exceed our production capacity. We expect
demand for TSA suspension assemblies to continue to rise as the disk drive
industry increasingly adopts the TSA suspension assembly platform. In fiscal
1998, we shipped 85 million TSA
3
<PAGE>
suspension assemblies, up from 8 million in fiscal 1997. In the first quarter of
fiscal 1999, we shipped 55 million TSA suspension assemblies, representing 38%
of total unit volume shipped and a majority of net sales in that period. We
expect that TSA suspension assemblies will account for approximately half of our
unit volume in fiscal 1999.
Demand for our conventional suspension assemblies started to recover during
the latter part of the fourth quarter of fiscal 1998 and continued to recover in
the first quarter of fiscal 1999. We shipped 89 million conventional suspension
assemblies in the first quarter of fiscal 1999, up from the 83 million units
shipped in the fourth quarter of fiscal 1998.
While maintaining our commitment to produce conventional suspension
assemblies for customers, we will continue to invest in additional TSA
suspension assembly production capacity in fiscal 1999 and 2000 to meet demand
for TSA suspension assemblies and accelerate adoption of TSA as a disk drive
industry standard platform.
Our principal executive offices are located at 40 West Highland Park,
Hutchinson, Minnesota 55350, and our telephone number at that location is (320)
587-3797.
4
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by Hutchinson Technology to purchase additional shares in the
offering. See "Underwriting".
<TABLE>
<S> <C>
Shares offered by
Hutchinson Technology... 4,800,000 shares
Shares to be outstanding
after the offering(1)... 24,586,229 shares
</TABLE>
<TABLE>
<S> <C>
Nasdaq National Market
symbol................ "HTCH"
Use of proceeds......... For general
corporate purposes,
primarily capital
expenditures
related to
expansion of TSA
suspension assembly
production
capacity. See "Use
of Proceeds".
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FISCAL YEAR ENDED(2)
----------------------- -------------------------------------
DEC. 27, DEC. 28, SEPT. 27, SEPT. 28, SEPT. 29,
1998 1997 1998 1997 1996
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 155,275 $ 88,982 $ 407,616 $ 453,232 $ 353,186
Income (loss) from operations.................... 16,714 (15,926) (65,124) 52,716 18,203
Net income (loss)................................ 11,533 (11,474) (48,411) 41,909 13,802
Basic earnings (loss) per common share........... $ 0.58 $ (0.58) $ (2.46) $ 2.29 $ 0.84
Diluted earnings (loss) per common share......... $ 0.52 $ (0.58) $ (2.46) $ 2.21 $ 0.82
Weighted average common shares outstanding....... 19,783 19,629 19,709 18,272 16,350
Weighted average common and diluted shares
outstanding.................................... 25,632 19,629 19,709 18,978 16,806
UNIT SHIPMENTS:
Conventional suspension assemblies............... 89,000 128,000 431,000 711,000 539,000
TSA suspension assemblies........................ 55,000 7,000 85,000 8,000 --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1998
----------------------------
ACTUAL AS ADJUSTED(3)
----------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................................................... $ 103,957 $ 312,643
Total assets........................................................................ 556,686 765,372
Long-term debt, including current maturities and convertible subordinated notes..... 222,240 222,240
Total shareholders' investment...................................................... 248,495 457,181
</TABLE>
- ------------------
(1) Based upon the number of shares outstanding as of December 27, 1998.
Excludes 2,294,195 shares issuable upon exercise of options outstanding
under Hutchinson Technology's employee benefit plans as of December 27,
1998. See Note 5 of Notes to Consolidated Financial Statements included
elsewhere in this prospectus.
(2) Hutchinson Technology operates on a 52 or 53 week fiscal year ending on the
last Sunday in September in each year. Fiscal 1998 and 1997 contained 52
weeks and fiscal 1996 contained 53 weeks.
(3) Adjusted to give effect to the issuance and sale of the 4,800,000 shares of
Common Stock in this offering at a public offering price of $45.50 per share
and the anticipated application of the estimated net proceeds from the
offering. See "Use of Proceeds".
5
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES ALSO MAY IMPAIR OUR
BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN SUCH CASE,
THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR
PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT HUTCHINSON TECHNOLOGY
AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. HUTCHINSON TECHNOLOGY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, AS MORE FULLY DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
HUTCHINSON TECHNOLOGY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
FLUCTUATIONS IN OPERATING RESULTS
Our past operating results and, in particular, our gross margins, have
fluctuated from fiscal period to period. We expect our future operating results
to fluctuate from fiscal period to period. These fluctuations may be caused by
such factors as:
- - changes in overall demand for our products;
- - changes in our manufacturing process, or problems related to implementing a
new manufacturing process;
- - new product introductions by us or our competitors;
- - changes in the specific products our customers buy;
- - changes in our selling prices;
- - changes in our production capacity or our use of that capacity;
- - increased costs when we start producing new products;
- - how quickly we achieve profitable high-volume production for new products;
- - changes in our infrastructure costs and how we control them;
- - changes in our manufacturing yields and those of our customers;
- - changes in the volume or pricing achieved in production programs;
- - long disruptions in operations at any of our plants for any reason; and
- - changes in the cost of, or limits on, available materials and labor.
We typically allow our customers to change or cancel orders without penalty
until approximately two weeks before scheduled shipment. We therefore plan our
production and inventory based primarily on forecasts of customer demand. Both
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 fiscal 1997 and throughout all
of fiscal 1998, as our major customers delayed or cancelled component orders. We
believe the slowdown occurred primarily because:
- - drive and recording head manufacturers decreased component purchases to lower
inventory levels;
- - demand for server and desk-top systems was somewhat softer;
- - some major personal computer companies started to use build-to-order
manufacturing, which decreased their required disk drive inventory levels; and
- - data density improvements reduced slightly the average number of suspensions
required per drive (from slightly over 5 to approximately 4.8 suspension
assemblies).
Our operating results were adversely affected by this slowdown. If customer
demand for suspension assemblies weakens or fails to
6
<PAGE>
recover as we expect, 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 selling prices are subject to pricing pressure from our customers and
market pressure from our competitors. 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 as it
matures, and slightly increasing pricing as it is phased out. To offset price
decreases during a product's life, we rely primarily on higher unit 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, our business, financial condition and results of
operations could be materially adversely affected.
PRODUCTION AND ACCEPTANCE OF TSA SUSPENSION ASSEMBLIES
We have invested substantial amounts of financial, management, engineering
and manufacturing resources to develop and introduce our TSA suspension
assemblies. TSA suspension assemblies accounted for 1% of our fiscal 1997 unit
shipments, 16% of our fiscal 1998 unit shipments and 38% of our unit shipments
in our fiscal quarter ended December 27, 1998. We expect TSA suspension
assemblies to account for approximately half of our total unit shipments and a
majority of net sales during fiscal 1999. If continuing market acceptance and/or
production of our TSA suspension assemblies is delayed for any reason, however,
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.
We rapidly expanded our TSA suspension assembly production capacity in
fiscal 1998, but our high-volume production of TSA suspension assemblies was not
profitable until the first quarter of fiscal 1999 (our quarter ended December
27, 1998). Our TSA production inefficiencies during fiscal 1998 resulted in
significantly lower gross margins, which adversely affected our fiscal 1998
operating results. If we fail to continue the transition to profitable
high-volume production of our TSA suspension assemblies 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.
DEPENDENCE ON HARD DISK DRIVE INDUSTRY
Almost all of our sales depend on the hard disk drive industry. Sales of
suspension assemblies accounted for 97% of our net sales in our fiscal quarter
ended December 27, 1998, and 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 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 more acutely 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 business, financial condition and results of
operations would be materially adversely affected if a future significant
slowdown in the industry occurs.
PRODUCT DEVELOPMENT AND INTRODUCTION
Our industry experiences rapid technology shifts. Our continued success
depends on our ability to develop and rapidly bring to volume production new
products that meet higher performance specifications.
7
<PAGE>
A number of risks are inherent in this process. 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. We also may incur higher
manufacturing costs. We may need to change our manufacturing processes or
develop new processes. If processes change, we may need to replace or modify our
equipment. We may require additional capital to implement these changes.
New products that are currently in development include:
- - suspension assemblies that incorporate second stage actuators to improve head
positioning over increasingly tighter data tracks on each disk;
- - suspension assemblies on which a preamplifier may be mounted to improve data
transfer signals from the disk;
- - suspension assemblies for use with new smaller-sized femto heads; and
- - suspension assemblies with higher performance specifications than our
customers currently require.
If we fail to introduce successfully new products on a regular and timely
basis, our business, financial condition and results of operations could be
materially adversely affected. If a competitor introduces 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 must qualify our products with our customers. The qualification process
for disk drive products can be lengthy, complex and difficult. Our management
cannot be sure that our suspension assemblies 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. See "Business --
Products".
In addition to suspension assemblies, we are developing products for the
medical devices market. Our research and development expenses allocated to
medical devices were $443,000 in our fiscal quarter ended December 27, 1998, and
$3.2 million in fiscal 1998, $2.7 million in fiscal 1997 and $2.0 million in
fiscal 1996. Our efforts, however, may not result in marketable products. Even
if we are able to develop marketable products, they may not generate significant
revenue.
CAPITAL NEEDS; ANTICIPATED MARKET GROWTH
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 assembly production. We have invested substantial amounts 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
constructed plants in Eau Claire, Wisconsin and Sioux Falls, South Dakota and
expanded our plant in Hutchinson, Minnesota.
Our total capital expenditures were approximately $35 million in our fiscal
quarter ended December 27, 1998, and approximately $207 million in fiscal 1998
and $83 million in fiscal 1997. We also entered into operating leases for
production and other equipment with costs of approximately $3 million in our
fiscal quarter ended December 27, 1998, and approximately $47 million in fiscal
1998 and $29 million in fiscal 1997. We currently anticipate spending
approximately $135 million during the remainder of fiscal 1999 primarily to
expand TSA suspension assembly production capacity.
8
<PAGE>
We anticipate that we will continue to make significant capital expenditures
in fiscal 2000 and beyond to further expand our TSA suspension assembly
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 our business, financial condition and results of operations.
See "Use of Proceeds" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources".
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;
and
- - the ability of our customers to delay or cancel orders on short notice.
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 materially adversely affect our business, financial condition and results
of operations.
Implementing our long-term strategy may depend to a significant degree on
our obtaining additional long-term debt and equity capital. We cannot determine
the precise amount and timing of our funding needs at this time. We may be
unable to obtain future additional financing on terms acceptable to us or at
all. We may need to refinance our debt to repay it at maturity. The following
factors could affect whether we 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 of our business in the capital markets;
- - our results of operations;
- - our ratio of debt to equity and other aspects of our financial condition; and
- - our business prospects.
Certain terms of our existing debt limit our ability to incur additional
debt. 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 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 materially 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
9
<PAGE>
manufacturing and thereafter ramp to full production.
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 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 major 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 85% of net sales for our fiscal quarter
ended December 27, 1998, and 84% of our net sales for fiscal 1998, 86% of our
net sales for fiscal 1997, and 87% of our net sales for fiscal 1996. Over the
years, the disk drive industry has experienced numerous consolidations. This has
resulted in fewer, but larger, 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 assemblies in high volume for
its own products, or the failure of a customer to pay its account balance with
us, could have a material adverse effect on our results of operations. See
"Business -- Customers and Marketing".
COMPETITION
Certain of our customers and potential customers currently use
interconnection technologies that compete with TSA suspension assemblies. If our
current or potential customers adopt or increasingly move towards competing
interconnection technologies, such as deposition circuitry or flexible
circuitry, and do not continue to purchase our TSA suspension assemblies, our
business, financial condition and results of operations would be materially
adversely affected.
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. See "Business --
Competition".
Some of our competitors manufacture suspension assemblies overseas where
their labor costs are significantly lower than our labor costs. If any of these
competitors developed and implemented the technology required to produce a
suspension assembly similar to the TSA suspension assembly, the product they
produce could have a lower overall cost per unit than our cost per unit. As a
result of pricing competition, demand for our TSA suspension assemblies could
decline. If demand declines, our business, financial condition and results of
operations would be materially adversely affected.
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
10
<PAGE>
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 remedy 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 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 characterized
by rapid technological development and innovation. We cannot be sure that a
patent will be issued to protect our future technology. Any patent issued to us
may 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 or by us
could increase. We may need to engage in litigation to:
- - enforce patents issued or licensed to us;
- - protect against infringement claims from third parties;
- - protect trade secrets or know-how owned by us; or
- - 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. See "Business -- Intellectual Properties".
AVAILABILITY OF SOLE SOURCED MATERIALS
We currently 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. If we could not obtain these materials 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. Our 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. See "Business --
Manufacturing".
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
Our ability to conduct business would be impaired if our work force were to
be unionized or if many of our specialized or production employees left and
could not be replaced by comparable personnel. There are a limited
11
<PAGE>
number of qualified engineering and other candidates for our key positions due
to the locations of our plants and the broad span and complexity of the
technology included in our products and processes.
FAVORABLE TAX TREATMENT
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, if the tax laws change to eliminate the tax benefits of having a
Foreign Sales Corporation, or if our Foreign Sales Corporation otherwise loses
its favorable tax status, our business, financial condition and results of
operations could be materially adversely affected.
VOLATILITY OF STOCK PRICE
The market price of our Common Stock, like that of other companies in the
disk drive industry, has fluctuated in the past and is likely to fluctuate in
the future. If our revenue or earnings in any fiscal quarter fail to meet the
investment community's expectations, the market price of our Common Stock could
fall. In addition, the securities markets have experienced significant price and
volume fluctuations that are unrelated to our operating results. Future trading
prices of our Common Stock 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. Investors may be unable to
resell their shares of our Common Stock at or above the offering price. The
volatility of market prices for our Common Stock may limit our ability in the
future to raise additional capital. See "Price Range of Common Stock".
HIGH LEVERAGE; ABILITY TO SERVICE DEBT
We incurred $150 million of additional debt in connection with the sale of
our 6% Convertible Subordinated Notes due 2005 in March 1998. Our ratio of total
debt to total capitalization, including these Convertible Notes, at December 27,
1998 was 47.2%. The Convertible Notes are callable in March 2001 at a per share
conversion price of $28.35. 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 depend on our future performance. Our performance is subject to prevailing
economic conditions and financial, business and other factors, including factors
beyond our control. If a substantial portion of our cash flow from operations is
used to pay the principal of, and interest on, our debt, 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 future operating cash flow will be sufficient to fund our future
capital expenditure and debt service requirements or to fund our future
operations.
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. At December 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 waivers of 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 cannot
comply with financial covenants in
12
<PAGE>
our financing agreements at the end of any future fiscal quarter, our results of
operations and liquidity could be materially adversely affected.
YEAR 2000 ISSUE
Many computer programs, microprocessors and embedded date-reliant systems
use two digits rather than four to define the applicable year. Programs and
systems that record only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. If not corrected,
date-related information and data could cause such programs or systems to fail
or to generate erroneous information. Although our products have no inherent
time or date function, we use computer systems and programs that will be
affected by Year 2000 issues.
In fiscal 1997, we began a comprehensive Year 2000 readiness program. We
believe that we have allocated adequate resources for our Year 2000 compliance
efforts, and we do not expect to incur significant expenses to become Year 2000
compliant. We cannot be sure, however, that we will be able to assess, identify
and correct all Year 2000 issues in a timely or successful manner. 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.
We are also currently assessing whether our suppliers are Year 2000
compliant. A delay or failure by our suppliers to become Year 2000 compliant
could, in a worst case, interrupt our business and have a material adverse
effect on our business, financial condition and results of operation. The
revenue stream and financial stability of our customers may be adversely
impacted by Year 2000 compliance problems as well, which could cause
fluctuations in our revenue and operating results. See our detailed discussion
of the Year 2000 issue included in "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Year 2000 Issue".
USE OF PROCEEDS
We estimate the net proceeds to Hutchinson Technology from the sale of the
4,800,000 shares of Common Stock being offered to be approximately $208.7
million ($239.9 million if the underwriters' over-allotment option is exercised
in full), at a public offering price of $45.50 per share and after deducting the
underwriting discount and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering for general corporate
purposes, primarily capital expenditures related to expansion of TSA suspension
assembly production capacity. Pending such uses, we will invest the net proceeds
in short-term, income-producing investments. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources" and "Business -- Manufacturing".
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Our Common Stock is quoted on the Nasdaq National Market under the symbol
"HTCH". The following table sets forth, for the periods indicated, the high and
low sale prices per share of the Common Stock as reported on the Nasdaq National
Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1997
Quarter ended December 29, 1996.......................................... $ 26.92 $ 12.58
Quarter ended March 30, 1997............................................. 39.00 24.75
Quarter ended June 29, 1997.............................................. 36.88 23.13
Quarter ended September 28, 1997......................................... 36.50 23.38
FISCAL 1998
Quarter ended December 28, 1997.......................................... $ 36.13 $ 18.13
Quarter ended March 29, 1998............................................. 28.00 19.00
Quarter ended June 28, 1998.............................................. 32.75 21.35
Quarter ended September 27, 1998......................................... 28.38 12.63
FISCAL 1999
Quarter ended December 27, 1998.......................................... $ 35.25 $ 11.88
Quarter ending March 28, 1999 (through February 2)....................... 51.25 32.63
</TABLE>
On February 2, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $46.75 per share. As of February 1, 1999, there were
1,014 record holders of the Common Stock.
DIVIDEND POLICY
Hutchinson Technology has never paid any cash dividends on its Common Stock.
Hutchinson Technology currently intends to retain any earnings for use in its
business and does not anticipate paying cash dividends in the foreseeable
future. Certain of our financing agreements contain restrictive covenants which
impose limitations on the payment of dividends. See Note 2 of Notes to
Consolidated Financial Statements included elsewhere in this prospectus.
CORPORATE INFORMATION
Hutchinson Technology was incorporated in Minnesota in 1965. References in
this prospectus to "Hutchinson Technology", "we", "our" and "us" refer to
Hutchinson Technology Incorporated and its subsidiaries.
Hutchinson Technology's principal executive offices are located at 40 West
Highland Park, Hutchinson, Minnesota 55350, and our telephone number at that
location is (320) 587-3797.
Information contained on Hutchinson Technology's Web site does not
constitute part of this prospectus.
14
<PAGE>
CAPITALIZATION
The following table sets forth Hutchinson Technology's capitalization as of
December 27, 1998 on an actual basis and on an as adjusted basis to give effect
to the receipt by Hutchinson Technology of the estimated net proceeds from the
sale of 4,800,000 shares of Common Stock at a public offering price of $45.50.
You should read this information together with Hutchinson Technology's
Consolidated Financial Statements and the notes to those statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 27, 1998
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current maturities(1):
6% Convertible Subordinated Notes due 2005........................................... $ 150,000 $ 150,000
Other................................................................................ 72,240 72,240
----------- ------------
222,240 222,240
Shareholders' investment:
Common Stock, $.01 par value; 45,000,000 shares authorized;
19,786,229 shares issued and outstanding, actual; and
24,586,229 shares issued and outstanding, as adjusted(2)........................... 198 246
Additional paid-in capital........................................................... 153,089 361,727
Retained earnings.................................................................... 95,208 95,208
----------- ------------
Total shareholders' investment..................................................... 248,495 457,181
----------- ------------
Total capitalization............................................................. $ 470,735 $ 679,421
----------- ------------
----------- ------------
</TABLE>
- --------------
(1) For further description of Hutchinson Technology's long-term debt, see Note
2 of Notes to Consolidated Financial Statements included elsewhere in this
prospectus.
(2) Excludes 2,294,195 shares issuable upon exercise of options outstanding
under Hutchinson Technology's employee benefit plans as of December 27,
1998.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and our Consolidated Financial Statements and the notes
to those statements included elsewhere in this prospectus. The selected
consolidated financial data set forth below as of September 27, 1998, September
28, 1997, September 29, 1996, September 24, 1995 and September 25, 1994, and for
the fiscal years then ended, have been derived from our Consolidated Financial
Statements which have been audited by Arthur Andersen LLP. The data as of
December 27, 1998 and December 28, 1997, and for the thirteen weeks then ended,
is unaudited and, in the opinion of our management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
our results of operations for the periods then ended and our financial position
as of such dates. Operating results for the thirteen weeks ended December 27,
1998 are not necessarily indicative of the results to be expected for the entire
fiscal year.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED FISCAL YEAR ENDED(1)
------------------ ---------------------------------------------------------
DEC. 27, DEC. 28, SEPT. 27, SEPT. 28, SEPT. 29, SEPT. 24, SEPT. 25,
1998 1997 1998 1997 1996 1995 1994
-------- -------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales......................................... $155,275 $ 88,982 $407,616 $453,232 $353,186 $299,998 $238,794
Cost of sales..................................... 121,690 89,478 411,252 335,953 273,616 226,235 199,548
-------- -------- --------- --------- --------- --------- ---------
Gross profit (loss)............................. 33,585 (496) (3,636) 117,279 79,570 73,763 39,246
Research and development expenses................. 4,670 5,161 20,360 20,185 27,651 15,041 8,626
Selling, general and administrative expenses...... 12,201 10,269 41,128 44,378 33,716 29,801 22,840
-------- -------- --------- --------- --------- --------- ---------
Income (loss) from operations................... 16,714 (15,926) (65,124) 52,716 18,203 28,921 7,780
Other income, net................................. 772 567 4,261 4,143 1,158 1,462 1,171
Interest expense.................................. (2,888) (147) (4,558) (3,143) (2,108) (2,636) (995 )
-------- -------- --------- --------- --------- --------- ---------
Income (loss) before income taxes............... 14,598 (15,506) (65,421) 53,716 17,253 27,747 7,956
Provision (benefit) for income taxes.............. 3,065 (4,032) (17,010) 11,807 3,451 6,669 2,076
-------- -------- --------- --------- --------- --------- ---------
Net income (loss)............................... $ 11,533 $(11,474) $(48,411) $ 41,909 $ 13,802 $ 21,078 $ 5,880
-------- -------- --------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- --------- ---------
Basic earnings (loss) per common share............ $ 0.58 $ (0.58) $ (2.46) $ 2.29 $ 0.84 $ 1.31 $ 0.37
-------- -------- --------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- --------- ---------
Diluted earnings (loss) per common share.......... $ 0.52 $ (0.58) $ (2.46) $ 2.21 $ 0.82 $ 1.28 $ 0.36
-------- -------- --------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- --------- ---------
Weighted average common shares outstanding........ 19,783 19,629 19,709 18,272 16,350 16,074 15,997
Weighted average common and diluted shares
outstanding..................................... 25,632 19,629 19,709 18,978 16,806 16,479 16,337
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................... $103,957 $108,676 $101,114 $173,156 $ 62,102 $ 54,284 $ 51,996
Total assets...................................... 556,686 427,179 549,478 429,839 238,983 190,898 151,148
Current liabilities............................... 89,361 80,120 93,171 70,190 46,563 36,208 18,829
Long-term debt, including current maturities and
convertible subordinated notes.................. 222,240 76,854 222,860 78,194 58,945 37,700 40,080
Total shareholders' investment.................... 248,495 271,734 236,830 282,958 133,684 119,745 94,619
</TABLE>
- ------------------
(1) Hutchinson Technology operates on a 52 or 53 week fiscal year ending on the
last Sunday in September in each year. Fiscal 1998, 1997, 1995 and 1994
contained 52 weeks and fiscal 1996 contained 53 weeks.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS
AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT HUTCHINSON TECHNOLOGY
AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. HUTCHINSON TECHNOLOGY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE INDICATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN
THIS PROSPECTUS. HUTCHINSON TECHNOLOGY UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION
BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
GENERAL
Since the late 1980's, we have derived substantially all of our revenue from
the sale of our suspension assemblies. We currently sell over 300 variations of
conventional suspension assemblies based on several standard designs for nano-
and pico-sized heads. In fiscal 1997, we began volume production of our TSA
suspension assemblies.
The disk drive industry is highly cyclical, with periods of increased demand
and rapid growth followed by periods of oversupply and subsequent contraction.
Beginning in the third quarter of fiscal 1997 and continuing throughout all of
fiscal 1998, total suspension assembly unit sales in the industry declined
substantially. Total shipments of our suspension assemblies peaked at 201
million units in the second quarter of fiscal 1997 and declined to 122 million
units in the fourth quarter of fiscal 1998. Demand for our conventional
suspension assemblies started to recover during the latter part of the fourth
quarter of fiscal 1998 and continued to recover in the first quarter of fiscal
1999. In the first quarter of fiscal 1999, we shipped 89 million conventional
suspension assemblies. While this is down from the 128 million units shipped in
the first quarter of fiscal 1998, it is up from the 83 million units shipped in
the fourth quarter of fiscal 1998.
Demand for our TSA suspension assemblies, which was not adversely affected
by the industry slowdown, continues to exceed our production capacity. In fiscal
1998, we shipped 85 million TSA suspension assemblies, up from 8 million units
shipped in fiscal 1997. In the first quarter of fiscal 1999, we shipped 55
million TSA suspension assemblies, representing 38% of our total unit volume and
a majority of net sales in that period.
We expect that demand for our conventional suspension assemblies will
continue to increase modestly from the levels shipped in the first quarter of
fiscal 1999. Overall, however, we will ship fewer conventional suspension
assemblies in fiscal 1999 than we shipped in fiscal 1998. At the same time, we
anticipate continuing acceptance by the disk drive industry of our TSA
suspension assemblies and expect TSA suspension assemblies to account for
approximately half of our total unit shipments and a majority of our net sales
during fiscal 1999.
TSA suspension assemblies have a higher average selling price than
conventional suspension assemblies because of the improved performance and other
benefits they provide to our customers. We rapidly expanded our TSA suspension
assembly production capacity in fiscal 1998, but our high-volume production of
TSA suspension assemblies was not profitable in that year due to production
inefficiencies. With higher volumes, productivity gains and the benefits of
premium pricing on a particular program that required an accelerated ramp-up, we
produced TSA suspension assemblies profitably in the first quarter of fiscal
1999. We expect further productivity gains as we continue to increase our TSA
suspension assembly output. Over time, we expect these gains to result in gross
margins that will eventually exceed our historical gross margins on our
conventional suspension assemblies.
17
<PAGE>
Growth in our net sales depends, in part, on the successful expansion of our
TSA suspension assembly manufacturing capacity, our manufacturing work force and
our corporate infrastructure. To meet current and anticipated future demand for
TSA suspension assemblies, we are continuing our planned expansion of TSA
suspension assembly production capacity. In the fiscal year ended September 27,
1998, our capital expenditures were approximately $207 million, primarily
related to expansion of TSA suspension assembly capacity. We made capital
expenditures of $35 million in the first quarter of fiscal 1999. We currently
anticipate spending an additional $135 million in capital expenditures during
the remainder of fiscal 1999, primarily for expansion of TSA suspension assembly
production capacity. We anticipate that we will continue to make significant
capital expenditures in fiscal 2000 to further expand our TSA suspension
assembly production capacity to accommodate anticipated market growth.
Our ability to introduce new products on a timely basis is an important
factor in our continued success. New products have lower manufacturing yields
and are produced in lower quantities than more mature products. Manufacturing
yields generally improve as a product matures and production volumes increase.
Manufacturing yields also vary depending on the complexity and uniqueness of
product specifications. Because our 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. Both customer demand and
our 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.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our consolidated statements of operations as
a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED FISCAL YEAR ENDED
------------------- ---------------------------------
DEC. 27 DEC. 28, SEPT. 27, SEPT. 28, SEPT. 29,
1998 1997 1998 1997 1996
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100% 100% 100% 100% 100%
Cost of sales..................................... 78 101 101 74 77
--- --- --- --- ---
Gross profit (loss)............................. 22 (1) (1) 26 23
Research and development expenses................. 3 5 5 4 8
Selling, general and administrative expenses...... 8 12 10 10 10
--- --- --- --- ---
Income (loss) from operations................... 11 (18) (16) 12 5
Other income, net................................. -- 1 1 1 --
Interest expense.................................. (2) -- (1) (1) --
--- --- --- --- ---
Income (loss) before income taxes............... 9 (17) (16) 12 5
Provision (benefit) for income taxes.............. 2 (4) (4) 3 1
--- --- --- --- ---
Net income (loss)............................... 7% (13)% (12)% 9% 4%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
THIRTEEN WEEKS ENDED DECEMBER 27, 1998 VS. THIRTEEN WEEKS ENDED DECEMBER 28,
1997
Net sales for the thirteen weeks ended December 27, 1998 were $155,275,000,
an increase of $66,293,000 or 75% compared to the comparable period in fiscal
1998. This increase was primarily a result of substantially higher average
selling prices, a substantial portion of which was due to premium pricing on a
particular program that required an accelerated ramp-up, and a favorable product
mix of more TSA suspension assemblies. Modest increases in overall suspension
assembly sales volume also contributed to the increase in sales. The TSA
suspension assembly program that we benefited from in the recent quarter is
expected to continue into the second fiscal quarter although at substantially
lower pricing than we realized in the first fiscal quarter.
Gross profit for the thirteen weeks ended December 27, 1998 was $33,585,000,
compared to a gross loss of $496,000 for the comparable period in fiscal 1998.
Gross profit (loss) as a percent of net sales increased from (1)% to 22%,
primarily due to the premium pricing described above, improved manufacturing
efficiencies on TSA suspension assembly production and higher TSA suspension
assembly sales volume.
Research and development expenses for the thirteen weeks ended December 27,
1998 were $4,670,000 compared to $5,161,000 for the thirteen weeks ended
December 28, 1997. The decrease was mainly due to lower medical product
development expenses. As a percent of net sales, research and development
expenses decreased from 5% in the first quarter of fiscal 1998 to 3% in the
first quarter of fiscal 1999.
Selling, general and administrative expenses for the thirteen weeks ended
December 27, 1998 were $12,201,000, an increase of $1,932,000 or 19% compared to
the comparable period in fiscal 1998. The increased expenses were due primarily
to increased profit sharing and other incentive compensation costs of $2,222,000
and higher depreciation and lease expense of $486,000. These increases were
partially offset by a decrease in travel and training expense of $290,000,
decreased recruitment and relocation expenses of $288,000 and decreased bad debt
expense of $223,000. As a percent of net sales, selling, general and
19
<PAGE>
administrative expenses decreased from 12% in the first quarter of fiscal 1998
to 8% in the first quarter of fiscal 1999.
Other income for the thirteen weeks ended December 27, 1998 was $772,000, an
increase of $205,000 from the comparable period in fiscal 1998, primarily due to
an increase in interest income as a result of higher average investment
balances.
Interest expense for the thirteen weeks ended December 27, 1998 increased
$2,741,000 from the comparable period in fiscal 1998, due to higher average
outstanding debt and a decrease in capitalization of interest of $468,000.
The income tax provision for the thirteen weeks ended December 27, 1998 was
based on an estimated effective tax for the fiscal year of 21% which was below
the statutory federal rate primarily due to the large portion of sales that
qualifies for the benefit of our Foreign Sales Corporation.
Net income for the thirteen weeks ended December 27, 1998 was $11,533,000,
compared to a net loss of $11,474,000 for the comparable period in fiscal 1998.
As a percent of net sales, net income (loss) increased from (13)% to 7%
primarily due to higher average selling prices and modest sales volume increases
as noted above.
FISCAL YEAR ENDED SEPTEMBER 27, 1998 VS. FISCAL YEAR ENDED SEPTEMBER 28, 1997
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 our 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 qualifies for the benefit of our
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 YEAR ENDED SEPTEMBER 28, 1997 VS. FISCAL YEAR ENDED SEPTEMBER 29, 1996
Net sales for 1997 were $453,232,000, an increase of $100,046,000 or 28%
compared to 1996. This increase was primarily due to increased suspension
assembly volume.
Gross profit for 1997 was $117,279,000, an increase of $37,709,000 or 47%
compared to 1996, and gross profit as a percent of net sales increased from 23%
to 26%. This increase was primarily due to higher sales volume and improved
manufacturing efficiencies.
20
<PAGE>
Research and development expenses for 1997 were $20,185,000 compared to
$27,651,000 for fiscal 1996. The prior year amount includes a $5,500,000 charge
related to a technology sharing agreement with IBM and higher development
expenses related to production of TSA prototype suspensions.
Selling, general and administrative expenses for 1997 were $44,378,000, an
increase of $10,662,000 or 32% compared to 1996. The increased expenses were due
primarily to increased profit sharing and other incentive compensation costs of
$7,443,000 and a $1,855,000 increase in labor expenses. As a percent of net
sales, selling, general and administrative expenses remained at 10%.
Other income, net, for 1997 was $4,143,000, an increase of $2,985,000
compared to 1996. The increase is primarily due to an increase of $3,631,000 in
interest income as a result of a higher average investment balance, partially
offset by a $443,000 increase in royalties paid under licensing agreements.
Interest expense for 1997 was $3,143,000, an increase of $1,035,000 compared
to 1996, primarily due to higher average outstanding debt, partially offset by
higher capitalization of interest of $1,740,000.
The income tax provision for 1997 was based on an effective tax rate for the
year of 22% which was below the statutory federal rate primarily due to the
large portion of sales that qualifies for the benefit of our Foreign Sales
Corporation.
Net income for 1997 was $41,909,000, an increase of $28,107,000 compared to
1996. As a percent of net sales, net income increased from 4% to 9% primarily
due to the higher sales volume and improved manufacturing efficiencies, noted
above.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated quarterly financial
data for the periods indicated. We derived this data from unaudited consolidated
financial statements and, in the opinion of our management, it includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial results for such periods. Results of operations for
any previous fiscal quarter do not necessarily indicate what results may be for
any future period.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------------------------------
DEC. 27, SEPT. 27, JUNE 28, MAR. 29, DEC. 28,
1998 1998 1998 1998 1997
-------- --------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................................. $155,275 $116,379 $107,127 $ 95,128 $ 88,982
Cost of sales......................................................... 121,690 118,477 105,472 97,825 89,478
-------- --------- -------- -------- --------
Gross profit (loss)................................................. 33,585 (2,098) 1,655 (2,697) (496)
Research and development expenses..................................... 4,670 5,023 4,652 5,524 5,161
Selling, general and administrative expenses.......................... 12,201 9,852 9,589 11,418 10,269
-------- --------- -------- -------- --------
Income (loss) from operations....................................... 16,714 (16,973) (12,586) (19,639) (15,926)
Other income, net..................................................... 772 1,306 1,840 548 567
Interest expense...................................................... (2,888) (2,243) (1,764) (404) (147)
-------- --------- -------- -------- --------
Income (loss) before income taxes................................... 14,598 (17,910) (12,510) (19,495) (15,506)
Provision (benefit) for income taxes.................................. 3,065 (4,648) (3,260) (5,070) (4,032)
-------- --------- -------- -------- --------
Net income (loss)................................................... $ 11,533 $(13,262) $ (9,250) $(14,425) $(11,474)
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Basic earnings (loss) per common share................................ $ 0.58 $ (0.67) $ (0.47) $ (0.73) $ (0.58)
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Diluted earnings (loss) per common share.............................. $ 0.52 $ (0.67) $ (0.47) $ (0.73) $ (0.58)
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Weighted average common shares outstanding............................ 19,783 19,778 19,755 19,673 19,629
Weighted average common and diluted shares outstanding................ 25,632 19,778 19,755 19,673 19,629
AS A PERCENTAGE OF NET SALES:
Net sales............................................................. 100% 100% 100% 100% 100%
Cost of sales......................................................... 78 102 99 103 101
-------- --------- -------- -------- --------
Gross profit (loss)................................................. 22 (2) 1 (3) (1)
Research and development expenses..................................... 3 4 4 6 5
Selling, general and administrative expenses.......................... 8 8 9 12 12
-------- --------- -------- -------- --------
Income (loss) from operations....................................... 11 (14) (12) (21) (18)
Other income, net..................................................... -- 1 2 1 1
Interest expense...................................................... (2) (2) (2) -- --
-------- --------- -------- -------- --------
Income (loss) before income taxes................................... 9 (15) (12) (20) (17)
Provision (benefit) for income taxes.................................. 2 (4) (3) (5) (4)
-------- --------- -------- -------- --------
Net income (loss)................................................... 7% (11)% (9)% (15)% (13)%
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
<CAPTION>
SEPT. 28, JUNE 29, MAR. 30, DEC. 29,
1997 1997 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................................. $100,354 $121,713 $124,259 $106,906
Cost of sales......................................................... 86,046 88,534 85,579 75,794
--------- -------- -------- --------
Gross profit (loss)................................................. 14,308 33,179 38,680 31,112
Research and development expenses..................................... 5,028 4,671 4,747 5,739
Selling, general and administrative expenses.......................... 9,457 11,955 12,048 10,918
--------- -------- -------- --------
Income (loss) from operations....................................... (177) 16,553 21,885 14,455
Other income, net..................................................... 1,217 1,759 861 306
Interest expense...................................................... (517) (759) (1,009) (858)
--------- -------- -------- --------
Income (loss) before income taxes................................... 523 17,553 21,737 13,903
Provision (benefit) for income taxes.................................. 112 3,855 5,054 2,786
--------- -------- -------- --------
Net income (loss)................................................... $ 411 $ 13,698 $ 16,683 $ 11,117
--------- -------- -------- --------
--------- -------- -------- --------
Basic earnings (loss) per common share................................ $ 0.02 $ 0.70 $ 0.95 $ 0.68
--------- -------- -------- --------
--------- -------- -------- --------
Diluted earnings (loss) per common share.............................. $ 0.02 $ 0.68 $ 0.91 $ 0.65
--------- -------- -------- --------
--------- -------- -------- --------
Weighted average common shares outstanding............................ 19,585 19,531 17,610 16,361
Weighted average common and diluted shares outstanding................ 20,334 20,276 18,415 17,120
AS A PERCENTAGE OF NET SALES:
Net sales............................................................. 100% 100% 100% 100%
Cost of sales......................................................... 86 73 69 71
--------- -------- -------- --------
Gross profit (loss)................................................. 14 27 31 29
Research and development expenses..................................... 5 3 3 5
Selling, general and administrative expenses.......................... 9 10 10 10
--------- -------- -------- --------
Income (loss) from operations....................................... -- 14 18 14
Other income, net..................................................... 2 1
Interest expense...................................................... (1) (1) (1) (1)
--------- -------- -------- --------
Income (loss) before income taxes................................... 1 14 17 13
Provision (benefit) for income taxes.................................. 1 3 4 3
--------- -------- -------- --------
Net income (loss)................................................... 0% 11% 13% 10%
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash and cash equivalents, securities
available for sale, cash flow from operations and additional financing capacity.
As of December 27, 1998, we did not have available a revolving credit or other
similar borrowing facility. On December 31, 1998, we signed a financing
agreement with The CIT Group/Business Credit, Inc., establishing a $50,000,000
credit facility secured by our accounts receivable and inventory.
Our cash and cash equivalents increased from $58,942,000 at September 27,
1998 to $71,075,000 at December 27, 1998. We generated cash from operating
activities of $46,102,000 for the thirteen weeks ended December 27, 1998.
In fiscal 1998, our cash and cash equivalents fluctuated significantly. Cash
and cash equivalents decreased from $98,340,000 at September 28, 1997 to
$36,069,000 at December 28, 1997, increased to $160,549,000 at March 29, 1998,
decreased to $107,924,000 at June 28, 1998 and further decreased to $58,942,000
at September 27, 1998. Cash used for capital expenditures totaled $206,888,000
in fiscal 1998 and $35,397,000 in the first quarter of fiscal 1999. We financed
these capital expenditures primarily through the issuance of $150,000,000 in
aggregate principal amount of Convertible Subordinated Notes. The capital
expenditures we made in fiscal 1998 were primarily related to:
- - expansion of TSA suspension assembly production capacity, including
manufacturing and support equipment;
- - construction costs for our Sioux Falls, South Dakota plant; and
- - construction of an expansion to our Hutchinson, Minnesota plant.
The capital expenditures we made in the first quarter of fiscal 1999 were
primarily related to continued expansion of our TSA suspension assembly
production capacity.
We currently anticipate spending an additional $135,000,000 during the
remainder of fiscal 1999 and significant amounts thereafter, primarily for
continued expansion of TSA suspension assembly production capacity and new
technologies, production capacity and infrastructure to accommodate anticipated
market growth. In addition, the sale of our Convertible Subordinated Notes in
March 1998 increased our ratio of total debt to total capitalization to 47.2% at
December 27, 1998. Our obligations to pay interest increased substantially as a
result of this increased debt. To the extent that a substantial portion of our
cash flow from operations is used to pay the principal of, and interest on, our
debt, such cash flow will not be available to fund future operations and capital
expenditures.
We currently believe that the net proceeds from this offering, our cash and
cash equivalents, cash generated from operations and our existing credit
facility will be sufficient to meet our operating expenses, debt service
requirements and capital expenditures through fiscal 1999. We believe that we
may require significant additional external financing to meet our capital
requirements beyond fiscal 1999. We expect to pursue additional debt or equity
financing to supplement the capital resources we will have after we complete
this offering. Our ability to obtain additional financing will depend upon a
number of factors, including our future performance and financial results and
general economic and capital market conditions. Moreover, certain of our
existing debt agreements contain covenants which may restrict our ability to
accept certain types of financing. We cannot be sure that we will be able to
raise additional capital on reasonable terms or at all.
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 to generate erroneous information. Our
products have no inherent time or date function. Our products will operate
regardless of the Year 2000 issue. However, we
23
<PAGE>
use computer systems and programs that will be affected by Year 2000 issues.
In fiscal 1997, we began a comprehensive Year 2000 readiness program. The
program addressed:
- - business software and hardware;
- - manufacturing software and hardware used in the design, and/or manufacturing
of suspension assemblies; and
- - third party suppliers.
Although we do not currently expect any significant disruption to our operations
due to Year 2000 issues, we cannot be sure that we will be able to assess,
identify and correct all Year 2000 issues in a timely or successful manner.
We completed remediation of our key business software in November 1997.
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.
We will complete additional testing of these systems during fiscal 1999 using
"data-aging" software.
We completed an enterprise-wide inventory in May 1998 of all other business
software and hardware with potential Year 2000 issues. The inventory included
approximately 460 purchased and internally-developed business and desktop
software programs or packages. We consider 350 of these software programs or
packages critical. The inventory also included over 3,000 pieces of hardware,
including personal computers, servers and network devices. We have analyzed all
of the critical business and desktop software and substantially all of the
hardware included in the inventory for the existence and extent of Year 2000
issues. As of December 27, 1998, approximately 70% of the critical software and
approximately 85% of the hardware was Year 2000 compliant. We believe that all
of the critical business software and hardware included in the inventory will be
Year 2000 compliant by September 1999.
We completed an enterprise-wide inventory in May 1998 of all manufacturing
software, hardware and embedded-chip technology with potential Year 2000 issues.
The inventory included:
- - 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.
We expect to complete analysis of all of the items included in the inventory
for the existence and extent of Year 2000 issues in January 1999. As of December
27, 1998, approximately 35% of such manufacturing software, hardware and
embedded-chip technology was Year 2000 compliant. We believe that all
manufacturing software, hardware and embedded-chip technology will be Year 2000
compliant by September 1999.
We are assessing our suppliers whose failure to become Year 2000 compliant
in a timely manner, if at all, could have a material adverse effect on us. We
distributed questionnaires on Year 2000 compliance status (and follow-up
letters, as necessary) to over 200 of our suppliers. We currently are reviewing
supplier responses and initiated follow-up activities in December 1998 to
evaluate, or mitigate, potential risks associated with such suppliers due to
Year 2000 issues.
As of December 27, 1998, the costs we have incurred for Year 2000 compliance
efforts have not been material. We currently estimate 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 our best estimates, which
were derived using assumptions about future events.
24
<PAGE>
These estimates may change as our efforts proceed and actual results could
differ significantly from current plans.
Although we expect to complete our Year 2000 remediation in 1999, there are
risks if our efforts are delayed or fail. A delay or failure in remedying a Year
2000 issue, caused by computer hardware or software errors, or our failure to
be, or suppliers who may not be, Year 2000 compliant could, in a worst case,
interrupt our business. Any interruption in our business could have a material
adverse effect on our business, financial condition and results of operations
depending upon the extent and duration of the interruption.
We will begin to develop contingency plans for Year 2000 readiness in March
1999 to ensure that back-up processes are in place if we are unable to complete
remediation efforts by December 31, 1999. We expect to complete these
contingency plans by September 1999, but we cannot be sure that we will complete
such plans, or that any such plans will address all risks that may actually
arise.
25
<PAGE>
BUSINESS
HUTCHINSON TECHNOLOGY
Hutchinson Technology Incorporated was incorporated in 1965 in Minnesota. We
are the world's leading supplier of suspension assemblies for hard disk drives.
We estimate that we currently produce 70% (plus or minus 10 percentage points)
of all suspension assemblies sold worldwide to disk drive manufacturers and
their suppliers, including recording head manufacturers. We supply nearly all
major domestic and many foreign-based users of suspension assemblies, including:
<TABLE>
<S> <C> <C> <C>
- - Applied Magnetics - Samsung
- - IBM and its - Seagate Technology
affiliates
- - Maxtor - Toshiba
- - Quantum - Western Digital
- - Read-Rite - Yamaha
- - SAE Magnetics/TDK
</TABLE>
During our fiscal year ended September 27, 1998, we shipped 516 million
suspension assemblies, and in the fiscal quarter ended December 27, 1998, we
shipped 144 million suspension assemblies.
Suspension assemblies are critical components of hard disk drives. The
suspension assembly holds the recording head in position above the spinning
magnetic disks. We manufacture our suspension assemblies with proprietary
technology and processes to uniform and precise specifications that are critical
to maintaining the necessary microscopic clearance between the head and disk.
We developed our leadership position through substantial investment in
research, development and design activities coupled with significant investments
in proprietary manufacturing equipment and production capacity. We have
maintained this position through multiple technology transitions in the disk
drive industry over the past decade, including the transition from thin-film
inductive recording heads to magneto-resistive ("MR") and giant
magneto-resistive ("GMR") recording heads, and the transition from micro- to
nano-to pico-sized recording heads.
Our focus is to continue to develop suspension assemblies which address the
rapidly changing requirements of the hard disk drive industry. We designed our
TSA suspension assemblies to satisfy both the new electrical connectivity
requirements of the disk drive industry and the changing market demands and
performance standards required by our customers. TSA suspension assemblies
integrate thin electrical conductors in the suspension. The conductors replace
the fine wires used in conventional assemblies to connect the recording head to
the drive's electronic circuitry. These wires interfere with the recording
head's flying performance. By eliminating this interference, TSA suspension
assemblies offer our customers the opportunity to enhance drive performance. We
believe TSA suspension assemblies also enable our customers to improve yields
and throughput, eliminate manufacturing steps and expand the use of automated
assembly processes. We believe these benefits can lower our customers' overall
production costs.
We anticipate continuing acceptance by the disk drive industry of our TSA
suspension assemblies. In the first fiscal year of volume manufacturing of TSA
suspension assemblies (our fiscal year ended September 28, 1997), we shipped 8
million TSA suspension assemblies, representing 1% of total unit volume shipped.
In our fiscal year ended September 27, 1998, we shipped 85 million TSA
suspension assemblies, representing 16% of our total unit volume shipped. In the
fiscal quarter ended December 27, 1998, we shipped 55 million TSA suspension
assemblies, representing 38% of total unit volume shipped. We believe our TSA
suspension assemblies, and the related follow-on features we are currently
developing, will become a disk drive industry standard platform onto which
multiple features can be integrated.
INDUSTRY BACKGROUND
MARKET GROWTH. International Data Corporation ("IDC") estimates in a
November 1998 report that annual shipments of disk drives would reach
approximately 139 million in 1998 and grow to approximately 247 million
26
<PAGE>
in 2002. Disk drive industry growth continues to be 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 addition, demand for additional storage capacity will be driven 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.
Certain factors have caused disk drive component sales to grow faster than
sales of disk drives. First, the demand for very high capacity disk drives, such
as those used in network servers, has grown faster than the overall demand for
disk drives. Each high capacity disk drive typically contains four to ten disks,
and therefore eight to twenty recording heads and suspension assemblies. Disk
drives in desktop PCs, on the other hand, typically contain one to three disks,
and therefore two to six recording heads and suspension assemblies. Second,
industry transitions from thin-film inductive recording heads to MR heads, which
are significantly more sensitive than thin-film inductive heads in reading data
from disks with higher areal densities, and from nano-sized heads to the smaller
pico-sized heads, have reduced initial production yields of the head and disk
drive manufacturers. Because a significant portion of yield reduction on
recording heads occurs after the head is bonded onto the suspension assembly,
low yields often result in increased demand for suspension assemblies to achieve
desired disk drive shipment levels.
CYCLICALITY. The disk drive industry is highly cyclical, with periods of
increased demand and rapid growth followed by periods of oversupply and
subsequent contraction. Total suspension assembly unit sales in the industry
declined due to a slowdown in component demand which began in the third quarter
of fiscal 1997 and continued throughout all of fiscal 1998. We believe the
slowdown occurred because:
- - drive and recording head manufacturers decreased component purchases to lower
inventory levels;
- - 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; and
- - data density improvements reduced slightly the average number of suspension
assemblies required per drive (from slightly over 5 to approximately 4.8
suspension assemblies).
Total shipments of our suspension assemblies decreased from a peak of 201
million shipped in our fiscal quarter ended March 30, 1997 to a low of 122
million shipped in our fiscal quarter ended September 27, 1998. In our fiscal
quarter ended December 27, 1998, we shipped 144 million suspension assemblies.
Despite the recent slowdown in component demand, we believe that end-user
demand for storage capacity continues to grow and that no fundamental shift in
technology away from disk drive storage has occurred. New computer technology
and applications continue to require storage devices with increased capacity and
functionality. Industry demand for our conventional suspension assemblies
started to recover along with the disk drive industry during the latter part of
our fiscal quarter ended September 27, 1998 and continued to recover in our
fiscal quarter ended December 27, 1998. We expect that conventional suspension
assembly shipments in fiscal 1999 will trail those of fiscal 1998, as our
product mix continues to shift towards our TSA suspension assemblies. Demand for
our TSA suspension assemblies, which we believe has not been adversely affected
by the industry slowdown, has continued to rise, and we expect this trend to
continue as the disk drive industry moves to adopt the TSA suspension assembly
platform.
27
<PAGE>
COMPONENTS OF DISK DRIVES. 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 a motor
assembly to which one or more (up to thirteen) hard disks are attached. The
motor assembly rotates the disks at high speeds in extremely close proximity to
the magnetic recording heads. Each recording head 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 hold the magnetic recording heads in position as the
disks rotate at speeds up to 10,000 rpm. The microscopic height at which the
magnetic head "flies" above the disk is a major determinant of disk drive
performance and data storage capacity. 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). Suspension assemblies 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.
The design of suspension assemblies is driven by the increasing performance
requirements of new disk drives. These performance requirements include 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.
Hard disk drive storage capacity increases as areal density increases. Areal
density measures the amount of data that can be recorded on a given surface area
of a disk. Areal density has been improved by:
- - using new recording head types such as MR and GMR heads;
- - lowering the fly height of the recording head;
- - using smaller recording heads with advanced air bearing designs; and
- - improving other drive components such as motors and media.
The process of using fine electrical wires with conventional suspension
assemblies to attach the smaller head to the rest of the drive's electronic
circuitry is difficult and costly. This attachment process also involves greater
risk of handling damage and the electrical wires interfere with the head's
performance.
We have developed our TSA suspension assemblies, which integrate electrical
conductors in the suspension, to address the difficulties inherent in the
current wire attachment process. As a result, we believe that the disk drive
industry is rapidly adopting the TSA suspension assembly platform.
STRATEGY
We intend to maintain our position at the forefront of suspension assembly
technology transitions, as we have over the past decade, by developing and
delivering industry standard solutions to industry-wide technological
challenges. We design and develop suspension assemblies which meet the higher
performance specifications of disk drive manufacturers. We are committed to
reliably producing suspension assemblies in high volume, with specialized
design, expanded functionality and greater precision. We increasingly focus on
assisting disk drive manufacturers to reduce their time to market with new
drives by designing and developing suspension assemblies and the processes to
manufacture them in advance of market needs. Key elements of our strategy
include:
DEVELOP AND DELIVER INDUSTRY STANDARD SOLUTIONS. Our TSA suspension
assembly is rapidly becoming accepted as the industry standard as the disk drive
industry moves to smaller pico-sized MR heads. Our TSA suspension assemblies
offer customers an integrated solution to industry-wide manufacturing problems
posed by smaller
28
<PAGE>
pico-sized MR heads. We believe TSA suspension assemblies enable customers to:
- - improve yields and throughput;
- - eliminate manufacturing steps; and
- - expand the use of automated assembly processes.
We believe these benefits can lower our customers' overall costs of
production. We believe that our TSA suspension assemblies will provide an
industry standard component platform onto which multiple features that enhance
hard disk drive performance can be integrated.
MANUFACTURE HIGH VOLUME PRECISION PRODUCTS. We believe our leadership
position is based on our volume production capacity and the precision of our
suspension assemblies as well as our design expertise. To provide suspension
assemblies in high volumes and with the precision required by our customers, we
have developed advanced process and measurement systems as part of the design of
our automated production equipment. We have adopted an integrated and flexible
manufacturing approach that closely couples design, tooling and manufacturing.
We are able to respond rapidly to changes in the volume and product mix demands
of our customers because of our integrated manufacturing approach.
MAINTAIN TECHNOLOGY LEADERSHIP WITH CUSTOMER-FOCUSED ENGINEERING. Our
engineers and sales force work in joint design teams with the engineering staffs
of our customers to develop suspension assemblies that address individual
customer requirements. Through our customer relationships, we gain substantial
insight into industry trends. We are then able to provide advanced suspension
assembly designs which may be designed into future generations of disk drives.
LEAD INDUSTRY TECHNOLOGY TRANSITIONS. We have been at the forefront of
multiple technology transitions in the disk drive industry over the past decade.
We intend to remain a technological leader by identifying emerging industry
trends and responding with solutions in advance of market needs. In prior
industry transitions, such as the rapid move from micro-to the smaller
nano-sized heads in 1993, and in the current more gradual move from nano-to even
smaller pico-sized heads, we developed innovative design and manufacturing
solutions in advance of our competitors. Although many drive manufacturers are
just now moving to pico-sized heads, we were initially qualified in a pico
program in 1994, and we are qualified currently in nineteen pico-design drive
programs. To continue to lead industry technology transitions, we are now
developing follow-on features for our TSA suspension assemblies, including
second stage actuators and preamplifiers. We believe these new follow-on
features should enable drive manufacturers to continue to achieve improved drive
performance and increased data storage capacity.
PRODUCTS
We manufacture conventional suspension assemblies, TSA suspension
assemblies, suspension assembly components and certain other products. We have
developed significant proprietary capabilities in the design and production of
suspension assemblies for both current and emerging disk drive designs. We have
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 suspension assemblies, we maintain a
test laboratory and computerized systems to simulate and analyze suspension
assembly designs. Our ability to predict and modify suspension assembly
performance is especially important as we develop suspension assemblies for high
capacity drives and drives with low access times.
CONVENTIONAL SUSPENSION ASSEMBLIES
We currently are able to produce over 300 variations of conventional
suspension assemblies based on several standard designs for the nano and pico
platforms. This capability permits us to assist customers in their design
efforts and to rapidly modify our standard designs to meet the varied and
changing requirements of specific customers. We believe our integrated
manufacturing approach, closely coupling design, tooling and manufacturing,
gives us a competitive advantage because we
29
<PAGE>
can quickly supply conventional suspension assembly prototypes and commence
volume manufacturing. This manufacturing approach allows us to rapidly shift
tooling in our conventional suspension assembly production units to respond to
fluctuating product mix. This approach also helps us to minimize the size of our
finished goods inventory.
TSA SUSPENSION ASSEMBLIES
TSA suspension assemblies include a thin electrical conductor of etched
copper that is integrated into the suspension and connects directly with the
recording head. The integral etched copper leads of our TSA suspension assembly
are pre-positioned on the suspension assembly from the head region through the
length of the suspension and, in some cases, along the actuator. We believe this
electrical integration will be a key feature of suspension assemblies in
improving performance and lowering costs for disk drive manufacturers. As a
result, we anticipate continuing acceptance by the disk drive industry of our
TSA suspension assemblies.
TSA suspension assemblies fulfill a customer need arising from the
convergence of two industry trends. First, the industry is migrating toward the
use of smaller recording heads, such as pico-sized heads. More pico heads can be
produced from an individual silicon wafer, thus lowering head costs. In
addition, smaller heads enable increases in data density and improvements in
drive performance. It is, however, more difficult to connect these smaller heads
to the rest of a disk drive's electronic circuitry.
Second, the industry is moving to adopt MR recording heads. MR heads offer
certain performance advantages over inductive heads. They also require the
attachment of additional electrical wires, which makes wire alignment and
termination more difficult.
Our TSA suspension assemblies solve many of the manufacturing problems posed
by the industry move to pico-sized heads and MR technology. TSA suspension
assemblies replace conventional wires with etched copper leads integrated in the
suspension. The leads are correctly aligned and ready for head attachment. This
enables manufacturers to reduce the manual labor required to attach the head to
the suspension, expand the use of automated assembly processes, improve yields
and throughput and enhance performance by eliminating wires that can interfere
with proper head flying position. We believe these benefits translate into lower
capital investment, reduced labor and lower overall costs for our customers.
We 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 our TSA suspension
assemblies (our fiscal year ended September 28, 1997), we shipped 8 million TSA
suspension assemblies. In the fiscal year ended September 27, 1998, we shipped
85 million TSA suspension assemblies. TSA suspension assemblies accounted for 1%
of our fiscal 1997 unit shipments and 16% of our fiscal 1998 unit shipments. In
the fiscal quarter ended December 27, 1998, we shipped 55 million TSA suspension
assemblies, representing 38% of total unit volume shipped in that period. We
expect TSA suspension assemblies will account for approximately half of our
total unit shipments during fiscal 1999.
SUSPENSION ASSEMBLY COMPONENTS
In fiscal 1998, in response to customer desire for second sources for TSA
suspension assembly components, we started selling component-level parts,
primarily flexures for TSA suspension assemblies, to competing suspension
assembly manufacturers. We believe these component sales will speed the adoption
of TSA suspension assemblies as an industry-wide platform. As demand for TSA
suspension assemblies increases, our customers will have additional sources of
supply for critical suspension assemblies.
PRODUCTS UNDER DEVELOPMENT
We believe we can adapt TSA suspension assemblies to future developments in
disk drive design and manufacturing. We are developing TSA suspension assembly
variations that offer promising solutions to the challenges posed by increasing
disk drive capacity and areal density. 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
30
<PAGE>
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 assembly 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 assembly
provide a means of positioning a preamplifier closer to the recorded data to
reduce the signal to noise problem. We are developing additional variations for
other TSA suspension assembly products. We anticipate that TSA suspension
assemblies and these related follow-on features will result in TSA products
becoming a disk drive industry standard platform.
We also are developing products for the medical devices market. In February
1998, we 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. We do not expect any medical-
related revenue in fiscal 1999. We cannot be sure that our efforts will result
in marketable products. Even if we are able to develop marketable products, they
may not generate significant revenue.
MANUFACTURING
Our manufacturing strategy is to enhance our ability to reliably produce
suspension assemblies in high volume and with the precision required by our
customers. We have therefore developed advanced process and measurement systems
as part of the design of our automated production equipment. We have also
invested in additional manufacturing plants and equipment. We adopted an
integrated manufacturing approach that closely couples design, tooling and
manufacturing. This integrated approach has helped us to develop, implement and
produce in high-volume new suspension assembly products. Effective use of this
integrated approach, together with our investment in equipment, has improved our
production yields and efficiency, and has helped reduce our manufacturing costs.
A suspension assembly consists of two or three components that are laser
welded together. Alignment, adjustment and freedom from imperfections and
contaminants are of critical importance. Our 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. We developed sophisticated
proprietary manufacturing processes and controls, and related equipment, which
are essential to the precision and reliability of our products. The
manufacturing processes we use 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. We monitor and control these processes through real-time
statistical process analysis to track critical parameters, and take corrective
action as required.
To meet current and anticipated future demand for TSA suspension assemblies,
we are continuing our planned expansion of TSA suspension assembly production
capacity. In the fiscal year ended September 27, 1998, our capital expenditures
were approximately $207 million, primarily related to expansion of TSA
suspension assembly capacity. We currently anticipate spending approximately
$170 million in capital expenditures during fiscal 1999, primarily for expansion
of TSA suspension assembly production capacity. We anticipate that we will
continue to make significant capital expenditures in fiscal 2000 to further
expand our TSA suspension assembly production capacity and to accommodate
anticipated market growth.
We obtain our raw materials through multiple sources of supply, with the
following exceptions. We currently obtain certain types of photoresist, a liquid
compound used in the photoetching process, and the stainless steel,
31
<PAGE>
copper and polyimide materials that meet our strict specifications, from only
one supplier of each such material. To protect against the adverse effect of a
short-term supply disruption, we maintain several weeks' supply of these
materials. If we could not obtain these materials 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.
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.
RESEARCH AND DEVELOPMENT
We participate in an industry that is subject to rapid technological change.
Our ability to remain competitive depends on, among other things, our ability to
anticipate such change and to continue our close working relationships with the
engineering staffs of our customers. As a result, we have devoted and will
continue to devote substantial resources to product development and process
engineering efforts. As of December 27, 1998, we employed 870 engineers and
technicians who are responsible for implementing new technologies as well as
process and product development and improvements.
Our expenses for product development and process engineering amounted to
$12.8 million in our fiscal quarter ended December 27, 1998, and $52.2 million
in fiscal 1998, $48.2 million in fiscal 1997 and $51.2 million in fiscal 1996.
Of those amounts, we classified as research and development expenses $4.7
million in our fiscal quarter ended December 27, 1998, and $20.4 million in
fiscal 1998, $20.2 million in fiscal 1997 and $27.7 million in fiscal 1996. The
remaining amounts were included in cost of goods.
Our current research and development efforts are directed principally to
continue development of our TSA suspension assemblies and related follow-on
features. We believe these efforts will address the ongoing technological
advances in the disk drive industry, including changing head size, performance
standards and electrical connectivity requirements for disk drives.
We entered into a Technology Transfer and Development Agreement (the
"Technology Agreement") and a non-exclusive Patent License Agreement with IBM
during fiscal 1995. Under the Technology Agreement, IBM made available to us the
results of many years of research by IBM into a new integrated lead suspension
technology used in our TSA suspension assemblies. We also had devoted
substantial efforts independent of IBM to the research and development of an
integrated lead suspension, and we contributed our existing TSA suspension
assembly technology to the joint effort. As of December 27, 1998, we had paid
$5.5 million to IBM and we will pay to IBM an additional $2.5 million in the
quarter ending March 28, 1999. We have already recorded all of these payments as
an expense. In addition, we have paid certain royalties to IBM and will pay
additional royalties in the future to IBM under the Technology Agreement.
Our research and development expenses allocated to medical devices were
$443,000 in our fiscal quarter ended December 27, 1998, and $3.2 million in
fiscal 1998, $2.7 million in fiscal 1997 and $2.0 million in fiscal 1996. We
anticipate research and development expenses allocated to medical devices of
approximately $3.0 million in fiscal 1999. Our efforts, however, may not result
in marketable products. Even if we are able to develop marketable products, they
may not generate significant revenue.
CUSTOMERS AND MARKETING
We sell our products principally through our eleven-member account
management team which operates primarily from our Hutchinson, Minnesota
headquarters. We have one account manager in Europe and, through a subsidiary,
one account manager and six technical representatives in Asia. We sell our
products to original equipment manufacturers for use in their products and to
subassemblers who sell to original equipment manufacturers. Our account
management team is organized by
32
<PAGE>
individual customer, and we initiate contacts typically with both the customer's
purchasing agent and its engineers. Our engineers and account management team
together actively participate in the selling process and maintain customer
relationships.
We supply nearly all domestic and many foreign-based manufacturers of hard
disk drives and manufacturers of recording heads used in such drives. The
following table shows our five largest customers as a percentage of net sales.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED FISCAL YEAR ENDED
------------------- ---------------------------------
DEC. 27, DEC. 28, SEPT. 27, SEPT. 28, SEPT. 29,
1998 1997 1998 1997 1996
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
IBM and affiliates...................... 36% 13% 20% 12% 9%
SAE Magnetics, Ltd./TDK................. 18 27 26 13 14
Yamaha Corporation...................... 14 12 10 14 16
Seagate Technology Incorporated......... 10 17 18 33 35
Read-Rite Corporation................... 7 19 10 14 13
</TABLE>
Sales to our five largest customers constituted 85% of net sales for our
fiscal quarter ended December 27, 1998, and 84% of our net sales for fiscal
1998, 86% of our net sales for fiscal 1997 and 87% our of net sales for fiscal
1996. Significant portions of our 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 use our
suspension assemblies. We expect to continue to depend upon a limited number of
customers for a substantial majority of our sales, given the relatively small
number of hard disk drive and recording head manufacturers. Our results of
operations could be materially adversely affected if a major customer
significantly reduced its orders for our products.
Sales to foreign-based enterprises totaled $59.4 million for our fiscal
quarter ended December 27, 1998, and $167.8 million for fiscal 1998, $88.5
million for fiscal 1997 and $63.9 million for fiscal 1996. Sales to foreign
subsidiaries of U.S. corporations totaled $23.5 million for our fiscal quarter
ended December 27, 1998, and $47.9 million for fiscal 1998, $83.8 million for
fiscal 1997 and $51.6 million for fiscal 1996. The majority of these sales were
to the Pacific Rim region. In addition, we have significant sales to U.S.
corporations which use our products in their offshore manufacturing sites.
BACKLOG
We generally sell our products pursuant to purchase orders rather than
long-term contracts. Our backlog of purchase orders was $101.9 million at
December 27, 1998, as compared to $101.5 million at September 27, 1998 and $79.1
million at September 28, 1997. These purchase orders may be changed or cancelled
by our customers on short notice without penalty. In addition, we believe that
it is a common practice for disk drive manufacturers to place orders in excess
of their needs during growth periods. Accordingly, we do not believe that
backlog should be considered indicative of sales for any future period.
COMPETITION
We believe that the principal factors of competition in the suspension
assembly market include time to market, technology leadership, product quality,
design expertise, reliability of volume supply and price. Our principal
competitors are K. R. Precision Co., Magnecomp 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 our new TSA suspension assembly face
competition from alternative interconnection technologies. These alternatives to
conventional wiring, such as deposition circuitry and flexible circuitry, are
also being considered for and used in drive
33
<PAGE>
production. Although the number of our competitors may increase in the future,
and users of suspension assemblies also may develop internal capabilities to
manufacture suspension assemblies, we believe 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. Strong competition from other types of
data storage systems could affect the demand for some of our products. Given the
current state of technology, however, we believe that flash memories will not be
price competitive with disk drives and optical and tape memories are inherently
much slower than disk drives. Accordingly, we believe that these other data
storage systems will not materially impact the market for hard disk drives in
the near future.
INTELLECTUAL PROPERTIES
We regard as proprietary certain equipment, processes, information and
knowledge that we have generated and use to manufacture our products. We attempt
to protect this proprietary property and technology under applicable trade
secret, copyright and unfair competition laws. We seek to protect trade secrets
at our facilities through physical security measures, through non-disclosure and
non-competition agreements with all employees and through non-disclosure
agreements with consultants, strategic suppliers and customers. We cannot be
sure that our proprietary property and technology is adequately protected by
these practices and laws.
In addition, if we believe we have inventions in manufacturing equipment,
products and processes for making products where patents might enhance our
position, we have and will continue to pursue patents in the U.S. and in other
countries. As of December 27, 1998, we held 56 U.S. patents and ten foreign
patents, and had 55 patent applications pending in the U.S. and 32 patent
applications pending in other countries. We believe that the patents we hold and
may obtain are valuable, but they will not independently determine our success.
We believe our success depends in large part upon our engineering skills and
proprietary manufacturing processes. Any patent issued to us may be challenged,
invalidated, circumvented or infringed. We cannot be sure that a patent will be
issued to protect our future technology or that the rights granted to us in an
issued patent will protect our technology adequately.
In addition to the Technology Agreement and the Patent License Agreement
with IBM, we also have entered into other licensing and cross-licensing
agreements of certain of our patents and patent applications. These agreements
allow certain competitors to produce certain of our products in return for
either royalty payments or cross-license rights.
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.
EMPLOYEES
As of December 27, 1998, we had 8,293 regular employees, 3,891 of whom were
working at our Hutchinson, Minnesota plant, 1,855 of whom were working at our
Sioux Falls, South Dakota plant, 2,323 of whom were working at our Eau Claire,
Wisconsin plant, 215 of whom were working at our Plymouth, Minnesota plant, and
9 of whom were working overseas.
Our ability to conduct our business would be impaired if many of our
specialized
34
<PAGE>
employees left and could not be replaced by comparable personnel. Turnover of
our specialized employees, however, including key management personnel,
historically has been low. Our ability to conduct our business also could be
impaired if many of our production employees left and could not be replaced.
There are a limited number of qualified engineering and other candidates for our
key positions due to the locations of our plants and the broad span and
complexity of the technology included in our products and processes. We expect
that internal training will continue to be the primary avenue for developing our
key employees.
None of our employees is subject to a collective bargaining agreement, and
we have never experienced a work stoppage. We believe that our employee
relations are good.
FACILITIES
Our executive offices, primary manufacturing plants and training center are
located in four buildings that we own on a site of approximately 163 acres in
Hutchinson, Minnesota. The largest building has floor area of approximately
480,000 square feet, and we recently completed construction of a 179,000 square
foot expansion to an existing 56,000 square foot equipment build center. We also
lease a 20,000 square foot warehouse, 34,000 square feet of office space and a
fabrication shop of approximately 12,000 square feet near our Hutchinson site.
We completed construction in fiscal 1998 of a manufacturing plant of
approximately 299,000 square feet that we own in Sioux Falls, South Dakota. We
also lease a warehouse of 4,800 square feet in Sioux Falls.
We operate a manufacturing plant in Eau Claire, Wisconsin, in connection
with which we lease a building of approximately 156,000 square feet. We also own
and operate a photoetching plant in Eau Claire of approximately 320,000 square
feet.
We lease a building of approximately 100,000 square feet located in
Plymouth, Minnesota for stamping operations, office space and a logistic center.
We lease approximately 45,000 square feet of space located in Eden Prairie,
Minnesota for offices and a computer center. We also lease sales offices in
Singapore, the Netherlands and the People's Republic of China.
We believe that our existing facilities will be adequate to meet our
currently anticipated requirements.
LEGAL PROCEEDINGS
On February 27, 1998, we 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, we
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.
We are a party to certain other claims arising in the ordinary course of
business. In the opinion of our management, the outcome of such claims will not
materially affect our current or future financial position or results of
operations.
35
<PAGE>
MANAGEMENT
The executive officers and directors of Hutchinson Technology 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
W. Thomas Brunberg(1)............. 58 Director
Archibald Cox, Jr.(2)............. 58 Director
James E. Donaghy(1)............... 64 Director
Harry C. Ervin, Jr.(2)............ 69 Director
Steven E. Landsburg(2)............ 44 Director
Richard B. Solum(1)............... 54 Director
</TABLE>
- --------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
JEFFREY W. GREEN is a co-founder of Hutchinson Technology and has served as
a director since our formation in 1965. Mr. Green has been Chairman of the Board
since January 1983, and served as our Chief Executive Officer from January 1983
to May 1996. Mr. Green is also a director of Mediwave, Inc. and Applied
Biometrics, Inc.
WAYNE M. FORTUN was elected President and Chief Operating Officer in 1983
and Chief Executive Officer in May 1996. He has served as a director of
Hutchinson Technology since 1983. He is also a director of G&K Services, Inc.
and Excelsior-Henderson Motorcycle Manufacturing Company. Mr. Fortun has been
with Hutchinson Technology since 1975.
JOHN A. INGLEMAN was elected Vice President in January 1982, Chief Financial
Officer in January 1988 and Secretary in January 1992. Previously he served as
our Treasurer from January 1982 through January 1996. Mr. Ingleman has been with
Hutchinson Technology since 1977.
REBECCA A. 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 Hutchinson Technology since
1983.
BEATRICE A. 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 Hutchinson
Technology since 1970.
RICHARD C. MYERS was elected Vice President in January 1988 and has been
Vice President of Administration since January 1995. Mr. Myers served as our
Vice President of Sales and Marketing from January 1988 through January 1995.
Mr. Myers has been with Hutchinson Technology since 1977.
RICHARD J. PENN was elected Vice President in January 1996 and is now Vice
President of Sales and Marketing. Previously
36
<PAGE>
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 Hutchinson
Technology since 1981.
R. SCOTT SCHAEFER was elected Vice President in May 1990 and is now Vice
President and Chief Technical Officer. He was Vice President of Disk Drive
Products Business Development from January 1994 to April 1997 and Vice President
of Medical Business Development from January 1993 to January 1994. Mr. Schaefer
has been with Hutchinson Technology since 1979.
W. THOMAS BRUNBERG became a director of Hutchinson Technology in 1975. He is
a certified public accountant and has been a shareholder in the Minneapolis
accounting firm of Brunberg Thoresen Diaby & Associates, Ltd. since March 1991.
ARCHIBALD COX, JR. became a director of Hutchinson Technology in 1996. Mr.
Cox has been Vice Chairman and President of Magnequench International, Inc., a
manufacturer of magnets and magnetic material, since October 1995. He has been
Chairman of Sextant Group, Inc., a financial advisory firm, since August 1993.
Mr. Cox served as a Managing Director of Tiger Management Company, a hedge fund,
from November 1993 to June 1994.
JAMES E. DONAGHY became a director of Hutchinson Technology in 1992. Since
January 1991, Mr. Donaghy has been Chief Executive Officer and a director of
Sheldahl, Inc., a manufacturer of laminates, composite materials and flexible
electronic interconnects, and served as the President of Sheldahl from January
1991 to September 1997.
HARRY C. ERVIN, JR. became a director of Hutchinson Technology in 1969. Mr.
Ervin, who is now retired, was a Vice President of Dain Bosworth Incorporated,
an investment banking firm, from April 1988 through June 1996.
STEVEN E. LANDSBURG became a director of Hutchinson Technology in 1997. He
has been an Associate Professor of Economics at the University of Rochester
since September 1991.
RICHARD B. SOLUM became a director of Hutchinson Technology in 1999. Mr.
Solum has been a partner in the law firm of Dorsey & Whitney LLP since July 1,
1998. He was a judge of the Hennepin County District Court from January 1992
through June 1998. Mr. Solum previously served as a director of the Company from
1977 until January 1992.
ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file with the SEC
at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You can also obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its Public Reference Room. Our SEC filings are also available at
the office of the National Association of Securities Dealers, Inc. For more
information on obtaining copies of our public filings at the National
Association of Securities Dealers, Inc., you should write to National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
We "incorporate by reference" into this prospectus the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus and information that we file subsequently
with the SEC will automatically update this prospectus. We incorporate by
reference the documents listed below and any filings we make with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities
37
<PAGE>
Exchange Act of 1934 after the initial filing of the registration statement that
contains this prospectus and prior to the time that we sell all the securities
offered by this prospectus:
- - Annual Report on Form 10-K for the fiscal year ended September 27, 1998
(including information specifically incorporated by reference into our Form
10-K from our 1998 Annual Report to Shareholders and our definitive Notice and
Proxy Statement for our 1999 Annual Meeting of Shareholders);
- - Quarterly Report on Form 10-Q for the thirteen weeks ended December 27, 1998;
- - Current Report on Form 8-K dated December 17, 1998; and
- - the description of our Common Stock contained in the registration statement on
Form 8-A filed on June 9, 1986 and any amendment or reports filed to update
that description after the date of this prospectus.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing to or telephoning us at the following address:
Mr. John A. Ingleman
Secretary
Hutchinson Technology Incorporated
40 West Highland Park
Hutchinson, Minnesota 55350
(320) 587-3797
You should rely only on the information incorporated by reference or
presented in this prospectus. We have not authorized anyone else to provide you
with different information. We are only offering these securities in states
where the offer is permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the dates on the front of those
documents.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered by this prospectus
is being passed upon for Hutchinson Technology by Faegre & Benson LLP, 2200
Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402. Certain
legal matters for the underwriters will be passed upon by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto,
California 94304, who may rely on the opinion of Faegre & Benson LLP as to
certain matters relating to the laws of the State of Minnesota.
EXPERTS
The audited consolidated financial statements and schedules included or
incorporated by reference in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
38
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................. F-2
Consolidated Statements of Operations for the thirteen weeks ended December 27, 1998
(unaudited) and December 28, 1997 (unaudited) and for the fiscal years ended
September 27, 1998, September 28, 1997 and September 29, 1996...................... F-3
Consolidated Balance Sheets as of December 27, 1998 (unaudited) and as of September
27, 1998 and September 28, 1997.................................................... F-4
Consolidated Statements of Cash Flows for the thirteen weeks ended December 27, 1998
(unaudited) and December 28, 1997 (unaudited) and for the fiscal years ended
September 27, 1998, September 28, 1997 and September 29, 1996...................... F-5
Consolidated Statements of Shareholders' Investment for the thirteen weeks ended
December 27, 1998 (unaudited) and for the fiscal years ended September 27, 1998,
September 28, 1997 and September 29, 1996.......................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
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 September 28, 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
F-2
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FISCAL YEAR ENDED
------------------------------ ----------------------------------------------
DECEMBER 27, DECEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................... $ 155,275 $ 88,982 $ 407,616 $ 453,232 $ 353,186
Cost of sales.................. 121,690 89,478 411,252 335,953 273,616
-------------- -------------- -------------- -------------- --------------
Gross profit (loss)............ 33,585 (496) (3,636) 117,279 79,570
Research and development
expenses..................... 4,670 5,161 20,360 20,185 27,651
Selling, general and
administrative expenses...... 12,201 10,269 41,128 44,378 33,716
-------------- -------------- -------------- -------------- --------------
Income (loss) from
operations................... 16,714 (15,926) (65,124) 52,716 18,203
Other income, net.............. 772 567 4,261 4,143 1,158
Interest expense............... (2,888) (147) (4,558) (3,143) (2,108)
-------------- -------------- -------------- -------------- --------------
Income (loss) before income
taxes........................ 14,598 (15,506) (65,421) 53,716 17,253
Provision (benefit) for income
taxes........................ 3,065 (4,032) (17,010) 11,807 3,451
-------------- -------------- -------------- -------------- --------------
Net income (loss).............. $ 11,533 $ (11,474) $ (48,411) $ 41,909 $ 13,802
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Basic earnings (loss) per
share........................ $ 0.58 $ (0.58) $ (2.46) $ 2.29 $ 0.84
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Diluted earnings (loss) per
share........................ $ 0.52 $ (0.58) $ (2.46) $ 2.21 $ 0.82
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Weighted average common shares
outstanding.................. 19,783 19,629 19,709 18,272 16,350
Weighted average common and
diluted shares outstanding... 25,632 19,629 19,709 18,978 16,806
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27, SEPTEMBER 28,
1998 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................ $ 71,075 $ 58,942 $ 98,340
Securities available for sale............ 10,005 11,921 20,211
Trade receivables, net................... 59,988 65,798 51,467
GE lease receivable...................... -- -- 31,073
Other receivables........................ 2,877 12,337 3,504
Inventories.............................. 29,485 25,780 27,189
Prepaid taxes and other expenses......... 19,888 19,507 11,562
------------ ------------- -------------
Total current assets................. 193,318 194,285 243,346
Property, plant and equipment, at cost:
Land, buildings and improvements......... 124,515 123,599 45,437
Equipment................................ 341,108 319,162 218,289
Construction in progress................. 102,848 104,145 84,345
Less: accumulated depreciation........... (224,663) (211,617) (172,818)
------------ ------------- -------------
Net property, plant and equipment.... 343,808 335,289 175,253
Other assets............................... 19,560 19,904 11,240
------------ ------------- -------------
$556,686 $ 549,478 $ 429,839
------------ ------------- -------------
------------ ------------- -------------
LIABILITIES AND SHAREHOLDERS' INVESTMENTS
Current liabilities:
Current maturities of long-term debt..... $ 4,615 $ 4,613 $ 5,332
Accounts payable and accrued expenses.... 57,444 61,822 39,373
Accrued compensation..................... 23,997 24,371 19,407
Accrued income taxes..................... 3,305 2,365 6,078
------------ ------------- -------------
Total current liabilities............ 89,361 93,171 70,190
Long-term debt, less current maturities.... 67,625 68,247 72,862
Convertible subordinated notes............. 150,000 150,000 --
Other long-term liabilities................ 1,205 1,230 3,829
Commitments and contingencies (Notes 5 and
6)
Shareholders' investment:
Common stock, $.01 par value, 45,000,000
shares authorized, 19,786,000,
19,780,000 and 19,619,000 issued and
outstanding............................ 198 198 196
Additional paid-in capital............... 153,089 152,957 150,676
Retained earnings........................ 95,208 83,675 132,086
------------ ------------- -------------
Total shareholders' investment....... 248,495 236,830 282,958
------------ ------------- -------------
$556,686 $ 549,478 $ 429,839
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FISCAL YEAR ENDED
------------------------------ ----------------------------------------------
DECEMBER 27, DECEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................... $ 11,533 $ (11,474) $ (48,411) $ 41,909 $ 13,802
Adjustment to reconcile net income
(loss) to cash provided by (used for)
operating activities:
Depreciation and amortization......... 18,240 9,256 50,901 38,565 33,909
Deferred taxes........................ 1,626 (1,938) (7,350) (2,608) (6,085)
Changes in operating assets and
liabilities (Note 7)................ 14,703 2,304 (7,964) (1,050) (1,722)
-------------- -------------- -------------- -------------- --------------
Cash provided by (used for) operating
activities............................ 46,102 (1,852) (12,824) 76,816 39,904
-------------- -------------- -------------- -------------- --------------
INVESTING ACTIVITIES:
Capital expenditures.................... (35,397) (56,794) (206,888) (82,639) (77,065)
Funding from GE lease receivable........ -- 5,468 35,303 9,915 --
Increase in GE lease receivable......... -- (8,623) (4,230) (35,746) (5,242)
Proceeds from the sale of assets........ -- -- -- -- 15,300
Purchases of marketable
securities............................ (223) (2,320) (13,313) (31,343) (4,944)
Sales of marketable securities.......... 2,139 3,111 21,602 14,196 3,070
-------------- -------------- -------------- -------------- --------------
Cash used for investing activities...... (33,481) (59,158) (167,526) (125,617) (68,881)
-------------- -------------- -------------- -------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt.................................. -- -- -- 25,000 25,500
Repayments of long-term debt............ (620) (1,340) (5,334) (5,751) (4,255)
Net proceeds from issuance of
convertible subordinated notes........ -- -- 145,320 -- --
Net proceeds from issuance of common
stock................................. 132 79 966 105,008 137
-------------- -------------- -------------- -------------- --------------
Cash provided by (used for) financing
activities............................ (488) (1,261) 140,952 124,257 21,382
-------------- -------------- -------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents........................... 12,133 (62,271) (39,398) 75,456 (7,595)
Cash and cash equivalents at beginning
of period............................. 58,942 98,340 98,340 22,884 30,479
-------------- -------------- -------------- -------------- --------------
Cash and cash equivalents at end of
period................................ $ 71,075 $ 36,069 $ 58,942 $ 98,340 $ 22,884
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL 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
Exercise of stock options (unaudited)........................ 6 -- 132 --
Net income (unaudited)....................................... -- -- -- 11,533
--------- ------ --------------- -----------
Balance, December 27, 1998 (unaudited)......................... 19,786 $198 $ 153,089 $ 95,208
--------- ------ --------------- -----------
--------- ------ --------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
(INCLUDES DATA APPLICABLE TO UNAUDITED PERIODS)
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. The Company adopted SFAS 130 in the first
quarter of fiscal 1999. The effect of adopting SFAS 130 was not significant as
all other comprehensive income items were not material.
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.
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.
F-7
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
THIRTEEN WEEKS ENDED
--------------------------- FISCAL YEAR
DECEMBER 27, DECEMBER 28, ------------------
1998 1997 1998 1997 1996
------------ ------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
IBM and affiliates...................... 36% 13% 20% 12% 9%
SAE Magnetics, Ltd/TDK.................. 18 27 26 13 14
Yamaha Corporation...................... 14 12 10 14 16
Seagate Technology Incorporated......... 10 17 18 33 35
Read-Rite Corporation................... 7 19 10 14 13
</TABLE>
Sales to the Company's five largest customers constituted 85% and 88% for
the thirteen weeks ended December 27, 1998 and December 28, 1997, and 84%, 86%
and 87% of net sales for fiscal 1998, 1997 and 1996, respectively.
Sales to foreign locations were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------ FISCAL YEAR
DECEMBER 27, DECEMBER 28, -------------------------------------
1998 1997 1998 1997 1996
-------------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Foreign-based enterprises..................... $ 59,350 $ 27,996 $ 167,767 $ 88,471 $ 63,898
Foreign subsidiaries of U.S. corporations..... 23,510 19,933 47,885 83,753 51,564
-------------- -------------- ----------- ----------- -----------
$ 83,860 $ 47,929 $ 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 $7,234,000 at December 27, 1998, $5,207,000
at September 27, 1998 and $2,182,000 at September 28, 1997.
F-8
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES -- All inventories are stated at the lower of last-in, first-out
("LIFO") cost or market. Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27, SEPTEMBER 28,
1998 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Raw materials.................................. $ 9,464 $ 9,320 $ 10,560
Work in process................................ 13,184 12,740 5,950
Finished goods................................. 7,025 3,908 10,919
LIFO reserve................................... (188) (188) (240)
-------------- -------------- --------------
$ 29,485 $ 25,780 $ 27,189
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
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:
<TABLE>
<S> <C>
Buildings................................................... 25 to 35 years
Leasehold improvements...................................... 5 to 10 years
Equipment................................................... 2 to 8 years
</TABLE>
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, $48,204,000 and $51,212,000 in the 1998,
1997 and 1996 fiscal years, respectively. Of these amounts, and for the same
periods approximately $20,360,000, $20,185,000 and $27,651,000, respectively,
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 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 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
F-9
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
THIRTEEN WEEKS ENDED
------------------------------ FISCAL YEAR
DECEMBER 27, DECEMBER 28, --------------------------------
1998 1997 1998 1997 1996
-------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss)................................. $ 11,533 $ (11,474) $ (48,411) $ 41,909 $ 13,802
Plus: interest expense on convertible subordinated
notes........................................... 2,411 -- -- -- --
Less: additional profit-sharing expense and tax
benefit reduction............................... 697 -- -- -- --
-------------- -------------- ---------- --------- ---------
Net income (loss) available to common
shareholders.................................... $ 13,247 $ (11,474) $ (48,411) $ 41,909 $ 13,802
-------------- -------------- ---------- --------- ---------
-------------- -------------- ---------- --------- ---------
Weighted average common shares outstanding........ 19,783 19,629 19,709 18,272 16,350
Dilutive potential common shares.................. 5,849 -- -- 706 456
-------------- -------------- ---------- --------- ---------
Weighted average common and diluted shares
outstanding..................................... 25,632 19,629 19,709 18,978 16,806
-------------- -------------- ---------- --------- ---------
-------------- -------------- ---------- --------- ---------
Basic earnings (loss) per share................... $ 0.58 $ (0.58) $ (2.46) $ 2.29 $ 0.84
Diluted earnings (loss) per share................. $ 0.52 $ (0.58) $ (2.46) $ 2.21 $ 0.82
</TABLE>
INTERIM FINANCIAL INFORMATION (UNAUDITED) -- The accompanying consolidated
balance sheet as of December 27, 1998, the consolidated statements of operations
and cash flows for the thirteen weeks ended December 27, 1998 and December 28,
1997, and the consolidated statement of shareholders' investment for the
thirteen weeks ended December 27, 1998 are unaudited. However, in the opinion of
management, these financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of results for
these interim periods. The results of operations for the thirteen weeks ended
December 27, 1998 are not necessarily indicative of results to be expected for
the entire year.
2. FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
LONG-TERM DEBT 27, 1998 28, 1997
- -------------- ------------ ------------
<S> <C> <C>
Senior notes, 8.35%, payable in varying annual installments
through July 2003............................................. $ 25,000 $ 25,000
Senior note, 8.57%, payable in varying annual installments
through November 2004......................................... 25,000 25,000
Senior notes, 7.96%, 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>
F-10
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FINANCING ARRANGEMENTS (CONTINUED)
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.
Maturities of long-term debt for the five years subsequent to September 27,
1998 are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 4,613
2000............................................................. 3,995
2001............................................................. 12,330
2002............................................................. 16,499
2003............................................................. 16,501
Thereafter....................................................... 168,922
---------
$ 222,860
---------
---------
</TABLE>
On December 31, 1998, the Company entered into a credit facility agreement
(the "Facility"). The Facility allows the Company to borrow up to $50,000,000.
Advances under the Facility are secured by substantially all of the Company's
receivables and inventory and bear interest at LIBOR plus 2.25% or the prime
rate. The Company is also required to pay a .25% fee for any unused amounts
under the Facility.
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. At December 27, 1998, the Company was in compliance with all such
covenants.
F-11
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
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>
FISCAL YEAR
-----------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Asset bases, lives and depreciation methods................................... $ 2,459 $ (1,206) $ (895)
Reserves and accruals not currenlty 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>
FISCAL YEAR
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate.......................................................... (34)% 35% 35%
Effect of:
State income taxes, net Federal income tax benefits...................................... (4) 2 3
Tax, provision (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 of 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.
F-12
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The following is a table of the significant components of the Company's
deferred tax assets:
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
DEFERRED TAX ASSETS 27, 1998 28, 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
Net operating loss carryforwards............... 12,937 --
Valuation allowance............................ (15,571) (605)
------------ ------------
Total long-term deferred tax assets.......... 8,600 8,575
------------ ------------
Total deferred tax assets........................ $ 26,516 $ 19,166
------------ ------------
------------ ------------
</TABLE>
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>
SEPTEMBER 27, SEPTEMBER 28,
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>
F-13
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 3,553,010 common shares have been granted as of December 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
Granted at $29.63................................................. -- 296,630
Exercised at $12.56 to $34.25..................................... (4,710) (1,850)
----------- -----------
Balance, December 27, 1998.......................................... 1,750,155 544,040
----------- -----------
----------- -----------
</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>
FISCAL YEAR
--------------------------------
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>
F-14
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFITS (CONTINUED)
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%.
EMPLOYEE BENEFIT PLANS -- The Company has a defined contribution plan
covering its employees. The Company's contributions to the plan were $9,239,000,
$7,762,000 and $6,463,000 in the 1998, 1997 and 1996 fiscal years, respectively.
The Company sponsors a comprehensive medical and a dental plan for qualified
employees that is funded by contributions from both the Company and plan
participants. Contributions are made through a Voluntary Employee's Benefit
Association Trust. The Company recognized expense related to these plans of
$19,109,000, $15,377,000 and $13,439,000 in the 1998, 1997 and 1996 fiscal
years, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company is committed under various operating lease agreements. Total
rent expense under these operating leases was $22,099,000, $12,487,000 and
$7,502,000 in the 1998, 1997 and 1996 fiscal years, respectively. 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
F-15
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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.
7. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED FISCAL YEAR
------------------------------------ ---------------------------------
DECEMBER 27, 1998 DECEMBER 29, 1997 1998 1997 1996
----------------- ----------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Changes in operating assets and
liabilities:
Receivables, net.................... $ 15,270 $ 4,559 $ (23,164) $ (3,934) $ (10,353)
Inventories......................... (3,705) (8,200) 1,409 (9,954) (3,937)
Prepaid and other expenses.......... (1,863) (94) (5,054) (2,520) (334)
Accounts payable and accrued
liabilities....................... 5,026 6,065 21,444 17,081 8,850
Other non-current liabilities....... (25) (26) (2,599) (1,723) 4,052
-------- -------- ---------- --------- ----------
$ 14,703 $ 2,304 $ (7,964) $ (1,050) $ (1,722)
-------- -------- ---------- --------- ----------
-------- -------- ---------- --------- ----------
Cash paid (refunded) for:
Interest (net of amount
capitalized)...................... $ 51 $ 1,059 $ 3,486 $ 2,520 $ 1,703
Income taxes........................ (9,068) 2,548 2,345 13,891 8,405
</TABLE>
Capitalized interest was $973,000, $1,441,000, $6,766,000, $2,946,000 and
$1,206,000 for the thirteen weeks ended December 27, 1998 and December 28, 1997
and the 1998, 1997 and 1996 fiscal years, respectively.
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
F-16
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SALE OF COMMON STOCK (CONTINUED)
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.
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.
10. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
The following table summarizes unaudited financial data for the 13 weeks
ending December 27, 1998 and fiscal years 1998 and 1997.
<TABLE>
<CAPTION>
1999 BY QUARTER 1998 BY QUARTER 1997 BY QUARTER
---------------- ------------------------------------------ ------------------------------------------
FIRST FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
---------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $ 155,275 $ 88,982 $ 95,128 $ 107,127 $ 116,379 $ 106,906 $ 124,259 $ 121,713 $ 100,354
Gross profit (loss).... 33,585 (496) (2,697) 1,655 (2,098) 31,112 38,680 33,179 14,308
Income (loss) from
operations........... 16,714 (15,926) (19,639) (12,586) (16,973) 14,455 21,885 16,553 (177)
Income (loss) before
income taxes......... 14,598 (15,506) (19,495) (12,510) (17,910) 13,903 21,737 17,553 523
Net income (loss)...... 11,533 (11,474) (14,425) (9,250) (13,262) 11,117 16,683 13,698 411
Net income (loss) per share:
Basic................ 0.58 (0.58) (0.73) (0.47) (0.67) 0.68 0.95 0.70 0.02
Diluted.............. 0.52 (0.58) (0.73) (0.47) (0.67) 0.65 0.91 0.68 0.02
Price range per share:
High................. 35.25 36.13 28.00 32.75 28.38 26.92 39.00 36.88 36.50
Low.................. 11.88 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.
F-17
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
UNDERWRITING
Hutchinson Technology and the underwriters for the offering (the
"Underwriters") named below, for whom Goldman, Sachs & Co., Salomon Smith Barney
Inc. and Hambrecht & Quist LLC are acting as representatives (collectively, the
"Representatives"), have entered into an underwriting agreement with respect to
the shares being offered. Subject to certain conditions, each Underwriter has
severally agreed to purchase the number of shares indicated in the following
table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ------------------
<S> <C>
Goldman, Sachs & Co..................................... 1,440,000
Salomon Smith Barney Inc................................ 1,440,000
Hambrecht & Quist LLC................................... 960,000
CIBC Oppenheimer Corp................................... 192,000
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated...... 96,000
Donaldson, Lufkin & Jenrette Securities Corporation..... 192,000
John G. Kinnard & Company, Incorporated................. 96,000
Lehman Brothers Inc..................................... 192,000
PaineWebber Incorporated................................ 192,000
------------------
Total............................................... 4,800,000
------------------
------------------
</TABLE>
------------------------
If the Underwriters sell more than the total number set forth in the table
above, the Underwriters have an option to buy up to an additional 717,472 shares
from Hutchinson Technology to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
Underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Hutchinson Technology. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase additional shares.
Paid by Hutchinson Technology
------------------------------
<TABLE>
<CAPTION>
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per Share...... $ 1.93 $ 1.93
Total.......... $9,264,000 $10,648,721
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the Underwriters to securities dealers may be sold at a discount of up
to $1.15 per share from the public offering price. Any such securities dealers
may resell any shares purchased from the Underwriters to certain other brokers
or dealers at a discount of up to $0.10 per share from the public offering
price. If all the shares are not sold at the offering price, the Representatives
may change the offering price and the other selling terms.
Hutchinson Technology, and its directors and executive officers, have agreed
with the Underwriters not to dispose of or hedge any of their Common Stock or
securities convertible into or exchangeable for shares of Common Stock during
the period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, except with the prior written consent of the
Representatives. This agreement does not apply to issuances or sales by
Hutchinson Technology pursuant to any existing employee benefit plans or upon
conversion or exchange of any currently outstanding convertible or exchangeable
securities.
In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These
U-1
<PAGE>
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
Underwriters of a greater number of shares than they are required to purchase in
the offering. Stabilizing transactions consist of certain bids or purchases made
for the purpose of preventing or retarding a decline in the market price of the
Common Stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the Representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
makers' bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
Hutchinson Technology estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $450,000.
Hutchinson Technology has agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
U-2
<PAGE>
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 13
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Corporate Information..................................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 17
Business.................................................................. 26
Management................................................................ 36
Additional Information.................................................... 37
Legal Matters............................................................. 38
Experts................................................................... 38
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
4,800,000 Shares
HUTCHINSON TECHNOLOGY INCORPORATED
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
Representatives of the Underwriters
- --------------------------------------------------------------------------------
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