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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 24, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From __________ to __________.
Commission file number 0-14709
Hutchinson Technology Incorporated
(Exact name of registrant as specified in its charter)
Minnesota 41-0901840
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
40 West Highland Park
Hutchinson, Minnesota 55350
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(Address of principal executive offices) (Zip code)
(320) 587-3797
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of December 5, 2000 was $422,456,088.20, based on the closing sale
price for the registrant's common stock on that date. For purposes of
determining this number, all officers and directors of the registrant are
considered to be affiliates of the registrant. This number is provided only for
the purpose of this report on Form 10-K and does not represent an admission by
either the registrant or any such person as to the status of such person.
As of December 5, 2000 the registrant had 24,850,215 shares of common stock
issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated December 20, 2000 for the
annual meeting of shareholders to be held January 31, 2001 are incorporated by
reference in Part III.
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the headings
"Item 1. Business," "Item 2. Properties" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such statements are
subject to risks and uncertainties, including those discussed under "Risk
Factors" on pages 7-13 and "Forward-Looking Statements" on page 20 of this
Annual Report on Form 10-K, that could cause actual results to differ materially
from those projected. Because actual results may differ, readers are cautioned
not to place undue reliance on these forward-looking statements.
PART I
HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES
ITEM 1. BUSINESS
Unless otherwise indicated, references to "2001" means HTI's fiscal year ending
September 30, 2001, references to "2000" mean HTI's fiscal year ended September
24, 2000, references to "1999" mean HTI's fiscal year ended September 26, 1999
and references to "1998" mean HTI's fiscal year ended September 27, 1998.
OVERVIEW
Hutchinson Technology Incorporated ("HTI") was incorporated in 1965 in
Minnesota. HTI is the world's leading supplier of suspension assemblies for hard
disk drives. HTI estimates that it produces a majority of all suspension
assemblies sold to disk drive manufacturers and their suppliers, including
recording head manufacturers, worldwide. Suspension assemblies are critical
components of hard disk drives that hold the recording heads in position above
the spinning magnetic disks. HTI's suspension assemblies are manufactured with
proprietary technology and processes to uniform and precise specifications that
are critical to maintaining the necessary microscopic clearance between the head
and disk. During 2000, HTI shipped approximately 488 million suspension
assemblies of all types. HTI is a supplier to nearly all domestic and many
foreign-based users of suspension assemblies, including Alps, IBM and its
affiliates, Maxtor, Quantum, Read-Rite, SAE Magnetics/TDK and its affiliates,
Samsung, Seagate Technology, Toshiba and Western Digital. HTI developed its
leadership position in suspension assemblies through research, development and
design activities coupled with a substantial investment in manufacturing
technologies and equipment, and has maintained this position through multiple
technological transitions in the disk drive industry over the past decade.
HTI is focused on continuing to develop suspension assemblies which address the
rapidly changing requirements of the hard disk drive industry. HTI's TSA
suspension assemblies are designed to satisfy both the electrical connectivity
requirements of the disk drive industry as well as the changing market demands
and performance standards required by its customers. TSA suspensions incorporate
thin electrical conductors in the suspension itself which replace the fine wires
used to connect the recording head to the drive's electronic circuitry. HTI's
TSA suspensions are being widely adopted within the disk drive industry, as TSA
suspensions offer customers opportunities to enhance drive performance by
eliminating wires that interfere with the recording head's flying performance.
HTI's TSA suspensions also enable customers to improve yields and throughput,
eliminate manufacturing steps and adopt automated assembly processes, all of
which lower their overall costs of production and improve production
efficiencies. In 2000, HTI shipped approximately 299 million TSA suspensions.
HTI believes its TSA suspension has become a disk drive industry standard
platform onto which additional features currently in development can be
integrated.
INDUSTRY BACKGROUND
In its August 2000 report, International Data Corporation ("IDC") estimated that
total revenue in the disk drive industry (defined as unit shipments multiplied
by the midyear average unit price paid by OEMs for quantity 1000+ contracts)
would be approximately $25.2 billion in 2000 and grow to approximately $27.8
billion in 2002. Disk drive industry growth has been driven by such factors as
the growing use of desktop PCs, workstations, portable computers and enterprise
computing and storage, the increasing amount of memory required for software
program storage and the continuing accumulation of data. In its April 2000
report, TrendFOCUS stated that desktop PCs and servers are expected to grow at
17.5% and 12% average annual growth rates, respectively, from 1999 to 2003.
IDC's report estimates that hard disk drive unit shipments will grow at a
compound annual growth rate of 16.5% from 1999 to 2004.
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The demand for additional storage capacity, including storage-area networks
("SAN") and network-attached storage devices ("NAS"), is stimulated by the
expansion of storage-intensive data warehousing, Internet and intranet
applications and the increasing use of disk drives for non-computer applications
such as digital video recording, information appliances, digital cameras, gaming
consoles, voice mail and video data and auto-navigation and global positioning
systems ("GPS"). According to its August 2000 report, IDC estimated that annual
shipments of disk drives would reach approximately 203 million in 2000 and grow
to approximately 279 million in 2002. In addition, industry transitions in head
technology, such as from thin film inductive recording heads to
magneto-resistive ("MR") and giant magneto-resistive ("GMR") heads, and from
nano heads to the smaller pico heads, historically have reduced initial
production yields of the head and disk drive manufacturers. Because a
significant portion of head yield reduction occurs after the head is bonded onto
the suspension assembly, low yields often result in increased demand for
suspension assemblies in order to achieve desired disk drive shipment levels. As
yields improve, as in 1999 and 2000, demand for suspension assemblies
diminishes.
The disk drive industry is volatile and from time to time experiences downturns.
See "Risk Factors - Fluctuations in Operating Results." Data density
improvements also can result in reducing the average number of suspensions
required per drive. During 2000, HTI estimates that continuing rapid
improvements in data density, the amount of data which can be stored on magnetic
disks, together with improvements in disk drive manufacturing made possible by
HTI's TSA suspensions themselves, reduced the average number of suspensions
required per drive from approximately 4.5 in 1999 to approximately 3.3 in 2000.
Total HTI shipments during 2000 decreased from approximately 583 million
suspension assemblies of all types during 1999 to approximately 488 million in
2000. HTI believes that this reduction in its demand in 2000 was due primarily
to decreases in component counts in disk drives because of data density
improvements. HTI believes its suspension assembly demand in 2000 also decreased
due to improved yields at its customers and shifts in its share of certain drive
programs. HTI believes that ongoing technological advances will continue to
reduce the average number of disk drive components, including suspensions, per
drive.
HTI does not believe that end user demand for storage capacity, however, has
slowed significantly, as rapidly evolving technology and computer applications
continue to require storage devices with increased capacity and functionality.
HTI currently anticipates that demand for suspensions for the foreseeable future
will remain relatively flat until average component counts within disk drives
stabilize or increase, or its share of certain drive programs increases, or
until Internet-related storage growth increases or new applications for disk
storage become more widespread. HTI continually monitors technological
developments in the data storage arena and does not believe there has been a
fundamental shift in technology away from disk drive storage. On an ongoing
basis, HTI reviews technological threats to the disk drive market and utilizes
various universities, consortiums and industry participants to provide
additional third-party insights. HTI believes disk drives will remain the
dominant data storage technology for the foreseeable future.
All hard disk drives incorporate the same basic technology. The principal
components of a hard disk drive are recording disk media, a motor assembly, the
control electronics and a head stack assembly. A head stack assembly consists of
multiple magnetic recording heads attached by suspension assemblies to the
actuator arm. Each disk drive contains one or more (up to twelve) hard disks
attached to a motor assembly that rotates the disks at high speeds in extremely
close proximity to the magnetic recording heads, each of which is attached to a
suspension assembly. In certain low-cost drives, first introduced in 1999, only
one side of one disk is used, resulting in the need for only one recording head,
and one suspension, in the drive. Typically two recording heads (one for each
side of the disk), and therefore two suspension assemblies, are used with each
disk in the disk drive.
Suspension assemblies are critical to disk drive performance and reliability.
The design of suspension assemblies is driven by the increasing performance
requirements of new disk drives, principally reduced data access time, increased
data density, smaller recording heads and technology incorporated in the type of
recording head used. Technological advances in disk drives generally require
suspension assemblies with specialized design, expanded functionality and
greater precision. One of the major determinants of disk drive performance and
data storage capacity is the microscopic height at which the magnetic head
"flies" above the disk. Suspension assemblies hold the magnetic recording heads
in position and are a significant factor in controlling the critical flying
height of the head above the disk and maintaining the position of the head on
the tracks of data. A typical nominal flying height is less than one millionth
of an inch (a sheet of paper is approximately 3,000 millionths of an inch
thick).
Hard disk drive storage capacity increases as data density increases.
Improvements in data density have been attained by lowering the fly height of
the recording head, using smaller recording heads with advanced air bearing
designs, improving other components such as motors and media and using new
recording head types such as those of MR and GMR design. As drive manufacturers
transition to smaller pico-sized MR and GMR heads, the process of bonding fine
electrical wires to the recording head and to the rest of the drive's electronic
circuitry has become more difficult and costly, and the wires themselves
interfere with the head's flying performance. HTI developed its TSA suspension
assemblies, which incorporate electrical conductors in the suspension itself, to
address this difficulty. TSA suspensions enable drive makers to use the smaller
pico-sized MR and GMR heads that allow for increased data density.
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Extensions of the TSA suspension platform will enable drive makers to increase
track and bit density, further improving data storage capacity.
PRODUCTS
HTI's current products can be categorized as (i) suspension assemblies, and (ii)
other products, consisting primarily of etched and stamped components used in
connection with, or related to, suspension assemblies.
The following table shows, for each of 2000, 1999 and 1998, the relative
contribution to net sales in millions of dollars and percentages of each product
category:
2000 1999 1998
-------------- ---------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------- --- ------ ---
Suspension
Assemblies $455.1 99% $557.8 96% $390.9 96%
Other 4.5 1 22.5 4 16.7 4
------- --- ------ --- ------ ---
Total Net Sales $459.6 100% $580.3 100% $407.6 100%
======= === ====== === ====== ===
See Note 11 to the consolidated financial statements contained in Item 14 herein
for a distribution of revenue by geographic area for each of 2000, 1999 and
1998. See also Eleven-Year Selected Financial Data.
During 2000, HTI shipped approximately 488 million suspension assemblies of all
types. HTI has developed significant proprietary capabilities in the design and
production of suspension assemblies for both current and emerging disk drive
designs. HTI has been in the forefront of industry technology transitions by
developing improved suspension assemblies in anticipation of several market
shifts to new generations of smaller magnetic heads (mini-to-micro,
micro-to-nano and nano-to-pico). HTI currently has the capability to produce
multiple variations of suspension assemblies based on several standard designs.
This capability permits HTI to assist customers' design efforts and to rapidly
modify its standard designs to meet the varied and changing requirements of
specific customers. To help develop prototype suspensions, HTI maintains a test
laboratory and computerized systems to simulate and analyze suspension designs.
HTI's ability to predict and modify suspension assembly performance is
especially important in developing suspensions for high capacity drives and
drives with low access times.
TSA SUSPENSION ASSEMBLIES - HTI's TSA suspensions are being widely adopted
within the disk drive industry. These suspensions integrate into the suspension
thin electrical conductors that connect directly with the recording head. The
integral etched copper leads of the TSA suspension are pre-positioned on the
suspension assembly from the head region through the length of the suspension
and, in some cases, along the actuator. Electrical integration is a key feature
of suspension assemblies as disk drive manufacturers continue to make the
transition to smaller and/or more advanced recording heads. HTI believes
features of its current TSA suspensions, such as extended electrical leads, as
well as additional features currently in development, will result in improved
yields and increased throughput for its customers. These performance advantages
of HTI's TSA suspensions command a higher sale price than HTI's conventional
suspensions.
In 2000, HTI shipped approximately 299 million TSA suspensions. TSA suspensions
accounted for approximately 16% of HTI's 1998 unit shipments, approximately 41%
of HTI's 1999 unit shipments, and approximately 61% of HTI's 2000 unit
shipments. HTI expects them to account for approximately 75% of its total unit
shipments during 2001.
TSA suspension assemblies are adaptable to future developments in disk drive
design and manufacturing. Variations of TSA suspension assemblies now in
development by HTI offer promising solutions to the challenges posed by
increasing data density. As the number of data tracks per disk increases to
achieve increased data density, recording heads must be positioned above data
tracks with more precision than current disk drive technology allows. HTI is
developing high-performance suspensions that reduce positioning variations, and
HTI's "aTSA" suspension incorporates a second stage actuator to provide
additional precision required to properly position the head over a data track as
track densities increase. Similarly, an increase in data density achieved by
increasing the number of data bits recorded per linear inch on each data track
will require preamplification to improve data transfer signals as bit density
increases. Electrical termination pads are incorporated in HTI's "cTSA"
suspension to provide a means of positioning a preamplifier closer to the
recorded data to reduce the signal to noise problem. Additional variations for
other TSA suspension products also are in development.
CONVENTIONAL SUSPENSION ASSEMBLIES - In 2000, HTI shipped approximately 189
million conventional suspension assemblies, as compared to 343 million in 1999
and 433 million in 1998. Conventional suspension assemblies do not provide the
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electrical connectivity features of a TSA suspension. HTI expects that the
number of conventional suspension assemblies that it produces will continue to
diminish, and expects conventional suspension assemblies to account for
approximately 25% of its total unit shipments during 2001.
OTHER PRODUCTS - To further assure customers that the TSA suspensions they
require for their products will be readily available when and where they are
needed, HTI manufactures and sells to competitive suspension assembly
manufacturers etched and stamped component-level parts, such as load beams, base
plates and flexures for both conventional and TSA suspensions. HTI also is
engaged in the development of product opportunities in the medical device and
other markets, including a monitor that measures tissue oxygen saturation. HTI
expects to begin marketing this product in Europe and the United States in 2001,
but does not expect it to generate significant revenue in 2001. See "Risk
Factors - Product Development and Introduction."
MANUFACTURING
HTI's manufacturing strategy focuses on enhancing its ability to reliably
produce suspension assemblies in high volume and with the precision required by
its customers. HTI has developed advanced process and measurement systems and
automated production equipment. HTI has adopted an integrated manufacturing
approach that closely couples design, tooling and manufacturing, which has
facilitated the development, implementation and high-volume production of new
suspension assembly products. HTI believes that its integrated approach gives it
a competitive advantage in quickly supplying suspension prototypes and
commencing volume manufacturing. This manufacturing approach also allows HTI to
rapidly shift tooling in its suspension assembly production units to respond to
fluctuating product mix and thereby minimize the size of its finished goods
inventory.
A suspension assembly consists of two to four components that are laser-welded
together. TSA suspension assemblies also incorporate electrical leads which
provide electrical connection from the recording head to the disk drive's
electronic circuitry. Alignment, adjustment and freedom from imperfections and
contaminants are of critical importance. HTI's products require several
manufacturing processes, each dependent on different technical disciplines, to
ensure the high degree of precision and process control necessary to meet strict
customer tolerances and other requirements. HTI has developed sophisticated
proprietary manufacturing processes and controls, and related equipment, which
are essential to the precision and reliability of its products. The
manufacturing processes employed by HTI 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. HTI monitors and controls these processes through
real-time statistical process analysis to track critical parameters and take
corrective action as required.
HTI's critical raw material needs are available through multiple sources of
supply, with the following exceptions. Certain types of photoresist, a liquid
compound used in the photoetching process, and the stainless steel, copper and
polyimide materials that meet HTI's strict specifications, are each currently
available from only one supplier. To protect against the adverse effect of a
short-term supply disruption, HTI maintains several weeks' supply of these
materials. See "Risk Factors - Availability of Certain Materials."
HTI's production processes require the storage, use and disposal of a variety of
chemicals that are considered hazardous under applicable federal and state laws.
Accordingly, HTI is subject to a variety of regulatory requirements for the
handling of such materials. See "Risk Factors - Manufacturing Risks."
RESEARCH AND DEVELOPMENT
HTI participates in an industry that is subject to rapid technological change,
and its ability to remain competitive depends on, among other things, its
ability to anticipate such change and to continue its close working
relationships with the engineering staffs of its customers. As a result, HTI has
devoted and will continue to devote substantial resources to product development
and process engineering efforts. As of September 24, 2000, HTI employed 634
engineers and technicians who are responsible for implementing new technologies
as well as process and product development and improvements. Expenditures for
these activities in 2000, 1999 and 1998 amounted to approximately $53,906,000,
$56,638,000 and $52,235,000, respectively. Of those amounts, HTI classified
approximately $21,433,000, $23,106,000 and $20,360,000, respectively, as
research and development expenses.
HTI's current research and development efforts are principally directed to
continuing the development of its TSA suspension assemblies and related
follow-on features to meet ongoing technological advances in the disk drive
industry, including changing head size, improved data density, performance
standards and electrical connectivity requirements for disk drives, as well as
manufacturing process improvements.
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HTI also is engaged in the development of product opportunities in the medical
device and other markets, including a monitor that measures tissue oxygen
saturation. In 1999, HTI finalized the design of a second-generation monitor
that incorporates several design improvements to enhance the monitor's operation
in a variety of settings. This monitor is the subject of multiple research
studies at hospitals and universities, and HTI expects to submit this product
for FDA market clearance in the first half of 2001. For 2000, 1999 and 1998,
research and development expenses allocated to development of these product
opportunities were approximately $4,432,000, $2,757,000 and $3,190,000,
respectively. See "Risk Factors - Product Development and Introduction."
CUSTOMERS AND MARKETING
HTI's products are sold principally through its own eleven-member account
management team operating primarily from its headquarters in Hutchinson,
Minnesota. Through a subsidiary, HTI has one account manager and seven technical
representatives in Asia. HTI's products are sold to original equipment
manufacturers for use in their products and to subassemblers who sell to
original equipment manufacturers. HTI's account management team is organized by
individual customer and contacts are typically initiated with both the
customer's purchasing agents and its engineers. HTI's engineers and account
management team together actively participate in the selling process and in
maintaining customer relationships.
In 1999, HTI implemented the use of "just-in-time" (JIT) inventory hubs in Hong
Kong, the People's Republic of China and Thailand, near the major production
centers of certain individual customers. In 2000, HTI added JIT inventory hubs
in Japan and Singapore. As customers have shifted to build-to-order
manufacturing, HTI's account management team, together with HTI personnel
assigned to each JIT hub, regularly exchange information with each customer to
assure that the customer's inventory requirements are met.
HTI is a supplier to nearly all domestic and many foreign-based manufacturers of
hard disk drives and recording heads used in such drives. The following table
shows HTI's five largest customers for 2000 as a percentage of net sales.
SAE Magnetics, Ltd/TDK....... 26%
Seagate Technology, Inc...... 19%
IBM and affiliates........... 15%
Read-Rite Corporation........ 14%
Alps Electric Co., Ltd....... 13%
Sales to HTI's five largest customers constituted 87%, 82% and 84% of net sales,
respectively, for 2000, 1999 and 1998. Significant portions of HTI's revenue may
be indirectly attributable to large manufacturers of disk drives, such as Maxtor
Corporation, Quantum Corporation, Toshiba Corporation and Western Digital
Corporation, which may purchase recording head assemblies from several different
recording head manufacturers that utilize HTI's suspension assemblies.
HTI expects to continue to depend upon a limited number of customers for a
substantial majority of its sales, given the relatively small number of hard
disk drive and recording head manufacturers. HTI's results of operations could
be adversely affected by reduced requirements of its major customers.
Sales to foreign-based enterprises totaled $257,324,000, $272,129,000 and
$167,767,000 for 2000, 1999 and 1998, respectively. Sales to foreign
subsidiaries of U.S. corporations totaled $155,422,000, $144,120,000 and
$47,885,000 for 2000, 1999 and 1998, respectively. The majority of these sales
were to the Pacific Rim region. In addition, HTI has significant sales to U.S.
corporations which use HTI's products in their offshore manufacturing sites.
BACKLOG
HTI's sales are generally made pursuant to purchase orders rather than long-term
contracts. HTI's backlog of purchase orders was approximately $90,424,000 at
September 24, 2000, as compared to $85,837,000 at September 26, 1999. Such
purchase orders may be changed or cancelled by customers on short notice without
penalty. In addition, HTI believes that it is a common practice for disk drive
manufacturers to place orders in excess of their needs during growth periods.
Accordingly, HTI does not believe that backlog should be considered indicative
of sales for any future period.
COMPETITION
HTI believes that the principal factors of competition in the suspension
assembly market include time to market, product quality, design expertise,
reliability of volume supply and price. HTI estimates that it produces a
majority of all suspension assemblies sold to disk drive manufacturers and their
suppliers, including recording head manufacturers, worldwide. HTI's principal
competitors are K. R. Precision Co. ("KRP"), Magnecomp Corporation and Nihon
Hatsujo Kabusikigaisha ("NHK"). In addition, Fujitsu Limited, a
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drive manufacturer, fabricates its own suspension assemblies for use in its own
products. The electrical interconnect features of HTI's TSA suspensions also
face competition from wireless interconnection technologies, such as deposition
circuitry and flexible circuitry, which are being used in drive production.
Although there can be no assurance that the number of competitors will not
increase in the future or that users of suspension assemblies will not develop
internal capabilities to manufacture suspension assemblies, HTI believes that
the number of entities that have the technical capability and capacity for
producing precision suspension assemblies in large volumes will remain small.
Other types of data storage systems, such as semiconductor (flash) memory, tape
memory and laser (optical and CD) drives, may become competitive with certain
hard disk drive applications, and thereby affect the demand for certain of HTI's
products. However, given the current state of the technologies, flash memories
are not expected to be price competitive with disk drives and optical and tape
memories are inherently much slower than disk drives. Accordingly, HTI believes
that such technologies will not materially impact the market for hard disk
drives in the near future.
INTELLECTUAL PROPERTIES
Certain equipment, processes, information and knowledge generated by HTI and
utilized in the manufacture of its products are regarded as proprietary by HTI
and are protectable under applicable trade secret, copyright and unfair
competition laws. In addition, if HTI believes it has made inventions in
manufacturing equipment, products and processes for making products where
patents might enhance HTI's position, patents have been and will continue to be
pursued in the U.S. and in other countries. As of September 24, 2000, HTI held
97 U.S. patents and 14 foreign patents, and had 52 patent applications pending
in the U.S. and 49 patent applications pending in other countries. Within HTI,
intellectual property protection of trade secrets is achieved through physical
security measures at HTI's facilities as well as through non-disclosure and
non-competition agreements with all employees, confidentiality policies, and
non-disclosure agreements with consultants, strategic suppliers and customers.
See "Risk Factors - Intellectual Properties."
HTI has entered into licensing and cross-licensing agreements under HTI's
patents and patent applications allowing certain competitors to produce certain
of HTI's products in return for either royalty payments or cross-license rights.
HTI and certain users of HTI's products have from time to time received, and may
in the future receive, communications from third parties asserting patents
against HTI or its customers that may relate to certain of HTI's manufacturing
equipment or products or to products that include HTI's products as a component.
HTI is currently a party to the litigation described below under the heading
"Item 3. Legal Proceedings." In addition, certain of HTI's customers have been
sued on patents having claims closely related to products HTI sells. HTI expects
that, as the number of patents issued continues to increase, and as HTI grows,
the volume of intellectual property claims could increase. See "Risk Factors -
Intellectual Properties."
EMPLOYEES
As of September 24, 2000, HTI had 4,729 regular employees, 2,214 of whom were
working at HTI's Hutchinson, Minnesota plant, 954 of whom were working at HTI's
Sioux Falls, South Dakota plant, 1,373 of whom were working at HTI's Eau Claire,
Wisconsin plant, 169 of whom were working at HTI's Plymouth, Minnesota plant,
and 19 of whom were working overseas. HTI's ability to conduct its business
would be impaired if a significant number of its specialized employees were to
leave and could not be replaced by comparable personnel. The locations of HTI's
plants and the broad span and complexity of technology encompassed by HTI's
products and processes limit the number of qualified engineering and other
candidates for key positions. HTI expects that internal training will continue
to be the primary avenue for the development of key employees.
None of HTI's employees is subject to a collective bargaining agreement, and HTI
has experienced no work stoppages. HTI believes that its employee relations are
good.
RISK FACTORS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS - This Annual Report on
Form 10-K contains forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not historical facts, but rather are based on our
current expectations, estimates and projections about the disk drive industry,
and our beliefs and assumptions. We intend words such as "anticipates,"
"expects," "intends," "plans," "believes," "estimates" and similar expressions
to identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control and are difficult to predict.
These factors could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements. These risks and
uncertainties are described in the following risk factors and elsewhere in this
Annual Report on Form 10-K. We caution you not to place undue reliance on these
forward-looking statements, which reflect our management's view only as
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of the date of this Annual Report on Form 10-K. We are not obligated to update
these statements or publicly release the result of any revisions to them to
reflect events or circumstances after the date of this Annual Report on Form
10-K or to reflect the occurrence of unanticipated events.
FLUCTUATIONS IN OPERATING RESULTS - Our past operating results, and our gross
margins, have fluctuated from fiscal period to period. We expect our future
operating results and gross margins will continue to fluctuate from fiscal
period to period. These fluctuations may be caused by:
- changes in overall demand for our products
- technological changes that reduce the number of suspensions per drive
required by driver makers
- changes in our manufacturing process, or problems related to implementing a
new manufacturing process
- increased costs when we start producing new products, and achieving
high-volume production quickly
- changes in the specific products our customers buy
- changes in our selling prices
- changes in our production capacity, and using our capacity efficiently
- changes in our infrastructure costs, and how we control them
- changes in our manufacturing yields
- long disruptions in operations at any of our plants for any reason
- changes in the cost of, or limits on, available materials and labor
Since 1999, data density improvements, together with improvements in disk drive
manufacturing made possible by our TSA suspensions themselves, resulted in drive
manufacturers reducing the suspensions required per drive more quickly than we
anticipated, offsetting somewhat the continuing growth in demand for storage. As
a consequence, our operating results in 2000 were impacted negatively. We
believe data density improvements will continue to impact demand for disk drive
components. If customer demand for suspension assemblies weakens, or if one or
more customers reduce, delay or cancel orders, our business, financial condition
and results of operations could be materially adversely affected.
We rapidly expanded our TSA suspension production capacity in 1998, but our
high-volume production of TSA suspensions was not profitable in that fiscal
year. Our production inefficiencies resulted in significantly lower gross
margins, which adversely affected our operating results. We have been producing
TSA suspension assemblies profitably at the gross margin level since the end of
the 1998 fourth quarter, primarily due to higher volumes and productivity gains.
Our gross margins in the last half of 1999 and in 2000, however, were reduced by
weaker than expected demand, resulting in excess TSA manufacturing capacity, and
an expected decline in TSA prices as certain TSA suspension products matured.
Our operating results during this time period consequently were impacted
negatively.
We typically allow our customers to change or cancel orders without penalty
before scheduled shipment. We therefore plan our production and inventory based
primarily on forecasts of customer demand, including forecasts of customer pulls
of product out of our "just-in-time" inventory hubs. Our forecasts, and customer
demand, often fluctuate significantly from week to week.
Our selling prices are subject to pricing pressure from our customers and market
pressure from our competitors. Our selling prices change if our pricing
strategies change. Our selling prices also are affected by changes in overall
demand for our products, changes in the specific products our customers buy and
a product's life cycle. A typical life cycle for our products begins with higher
pricing when a product is introduced, decreasing prices when it is mature, and
slightly increasing pricing as it is phased out. To offset price decreases
during a product's life, we rely primarily on higher sales volume. We also rely
on improving our manufacturing yield to reduce the cost of manufacturing our
mature products. If we cannot reduce our manufacturing costs during a product's
life cycle, or at all, our business, financial condition and results of
operations could be materially adversely affected.
Many of our products are shipped overseas, specifically to the Pacific Rim
region. The revenue we earn from these products has qualified for favorable tax
treatment. If we stop shipping products overseas, or if the tax laws change to
eliminate the favorable tax treatment to which this revenue is subject, 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 99% of
our net sales in 2000, 96% of our net sales in 1999 and 96% of our net sales in
1998. The hard disk drive industry is intensely competitive and our technology
changes rapidly. The industry's demand for components also fluctuates. The hard
disk drive industry is volatile, with periods of increased demand and rapid
growth followed by periods of oversupply and subsequent contraction. These
cycles may affect suppliers to this industry because hard disk drive
manufacturers tend
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to order more components than they may need during growth periods, and sharply
reduce orders for components during periods of contraction.
Yield improvements by head manufacturers and technological advances, such as
rapid improvements in data density, also may result in lower drive component
demand. Our results of operations have been adversely affected at various times
during slowdowns in hard disk drive industry demand for components. In 2000, our
results of operations were impacted negatively due to increases in data
densities that reduced the industry's demand for components, as well as improved
yields at our customers and shifts in our share of certain drive programs. Our
results of operations could be materially adversely affected if the reduction in
the industry's component demand continues long-term or a future significant
slowdown in the industry occurs.
PRODUCT DEVELOPMENT AND INTRODUCTION - Our continued success depends on our
ability to develop and rapidly bring to volume production new product platforms
and new products that meet increasingly higher performance specifications.
A number of risks are inherent in this process. Increasingly higher performance
specifications, as well as transitions to new product platforms, initially can
lower our overall manufacturing yields and efficiencies. This in turn can cause
product shipments to be delayed or missed. Higher manufacturing costs also may
be incurred. Manufacturing processes may need to be changed or new processes
developed. If processes change, equipment may need to be replaced, modified or
designed, built and installed. These changes may require additional capital.
We may need to increase our research and development and engineering expenses to
support technological advances and to introduce and manufacture new products.
We expect these expenses to increase for the following new products:
- suspensions that incorporate second stage actuators to improve head
positioning over increasingly tighter data tracks on each disk
- suspensions with higher performance specifications than our customers
currently require
- suspensions on which a preamplifier may be mounted to improve data transfer
signals from the disk
- suspensions for use with new smaller-sized femto heads
If we fail to introduce successfully new products on a regular and timely basis,
demand for our existing products could decline, and our business, financial
condition and results of operations could be materially adversely affected. If a
competitor introduced a widely-accepted new suspension assembly design, and we
were not able to respond to the new design effectively, our business, financial
condition and results of operations would be materially adversely affected.
We must qualify our products with our customers. The qualification process for
disk drive products can be complex and difficult. We 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.
We are developing products for the medical device and other markets, including a
monitor that measures tissue oxygen saturation. In 1999, we finalized the design
of a second-generation monitor that incorporates several design improvements to
enhance the monitor's operation in a variety of settings. This monitor is the
subject of multiple research studies at hospitals and universities, and we
expect to submit this product for FDA market clearance in the first half of
2001. 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; CAPACITY MANAGEMENT - We believe that we may 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 would likely
be used for capital expenditures, research and development, working capital and
debt service. Our business is highly capital intensive. We required particularly
high levels of capital expenditures, including substantial investments in
sophisticated manufacturing technologies and automated production equipment for
our suspension assemblies, as we moved from conventional suspension assembly
production to high-volume TSA suspension production. Our total capital
expenditures were approximately $65,000,000 in 2000, $121,000,000 in 1999 and
$207,000,000 in 1998. We entered into capital leases for production equipment
with costs of approximately $12,400,000 in 2000. We also entered into operating
leases for production and other equipment with costs of approximately
$10,000,000 in 2000, $10,000,000 in 1999 and $47,000,000 in 1998.
We currently anticipate spending approximately $50,000,000 during 2001 primarily
for new business systems, program tooling and manufacturing and process
technology and equipment. We anticipate that we will continue to make similar
capital expenditures
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beyond 2001 to continue to invest in new technologies, production capacity and
infrastructure to accommodate anticipated market growth. If we do not have
sufficient funds, or are unable to obtain funds, in the future, we may have to
delay or change our plans. These delays or changes in our plans could materially
adversely affect our business, financial condition and results of operations.
We have at times increased our production capacity and the overhead that
supports production based on anticipated market demand. Anticipated market
demand, however, has not always developed as expected. As a result, we have
periodically underutilized our capacity. This underutilization has at times
decreased our profitability. In the second half of 1999 and in 2000, reduced
demand resulted in underutilization of our manufacturing capacity, and
consequently, lower profitability. In 2000, we recorded charges of $56,523,000
to write down certain assets relating to excess TSA suspension assembly
manufacturing capacity, which adversely affected our results of operations.
The following factors complicate accurate capacity planning for market demand:
- changes in the specific products our customers buy
- the pace of technological change
- variability in our manufacturing yields
- long lead times for most of our plant and equipment expenditures, requiring
major financial commitments well in advance of actual production
requirements
Our failure to plan our capacity requirements accurately, or our failure to put
in place the technologies and capacity necessary to meet market demand, could
adversely affect our business, financial condition and results of operations. In
1999, we began construction of an additional manufacturing building for our
trace process at our Eau Claire site. As a result of faster than expected
improvements in our TSA suspension manufacturing efficiency and weaker TSA
suspension demand in the second half of 1999, we postponed completion of
building construction, and the building of related equipment, so as to minimize
the impact of excess manufacturing capacity on our results of operations.
Continuing reductions in demand in 2000 caused us to suspend photoetching
operations at our Eau Claire, Wisconsin plant in April 2000 and consolidate
these operations into our Hutchinson, Minnesota plant.
Our ability to execute our long-term strategy may depend to a significant degree
on our ability to obtain additional long-term debt and equity capital. We have
no commitments for additional borrowings or for sales of equity. We cannot
determine the precise amount and timing of our funding needs at this time. We
may be unable to obtain any such future additional financing on terms acceptable
to us or at all. If we fail to comply with certain covenants relating to our
indebtedness, we may need to refinance our indebtedness to repay it. We also may
need to refinance our indebtedness at maturity. We may not be able to obtain
additional capital on favorable terms to refinance our indebtedness.
The following factors could affect our ability to obtain additional financing on
favorable terms, or at all:
- our results of operations
- general economic conditions and conditions in the disk drive industry
- the perception in the capital markets of our business
- our ratio of debt to equity
- our financial condition
- our business prospects
- changes in interest rates
In addition, certain covenants relating to our existing indebtedness limit our
ability to incur additional indebtedness. If we are unable to obtain sufficient
capital in the future, we may have to curtail our capital expenditures 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 adversely
impact our business, financial condition and results of operations.
Rapid technological change in the disk drive industry has led to numerous
suspension assembly design changes and tighter performance specifications. The
resulting suspension assemblies initially are more difficult to manufacture and
typically require additional capital expenditures and increased development and
support expenses. Manufacturing yields and efficiencies also vary from product
to product. Newer products typically have lower initial manufacturing yields and
efficiencies as we commence volume manufacturing and thereafter ramp to full
production.
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During 1998, we did not produce TSA suspensions profitably as we ramped to
high-volume production. We have produced TSA suspensions profitably at the gross
margin level since the end of the 1998 fourth quarter, primarily due to higher
volumes and productivity gains. We cannot be sure that in the future we will
attain our output goals and be profitable with regard to any of our suspension
products, including TSA suspensions with additional features currently in
development.
As we grow, we may need to transfer production of certain suspension assemblies
from one manufacturing site to another. In the past, such transfers have lowered
initial yields and/or manufacturing efficiencies. This results in higher
manufacturing costs. Our manufacturing plants are located in Minnesota, South
Dakota and Wisconsin, all of which can experience severe weather. Severe weather
has, at times, resulted in lower production and decreased our shipments.
Our ability to conduct business would be impaired if our work force were to be
unionized or if a significant number of our specialized employees were to leave
and could not be replaced by comparable personnel. Our business may be adversely
affected if we need to adjust the size of our work force due to fluctuating
demand. The locations of our plants and the broad span and technological
complexity of our products and processes limit the number of satisfactory
engineering and other candidates for key positions.
Our production processes require us to store, use and dispose of chemicals that
are considered hazardous under applicable federal and state laws. We must handle
these chemicals in accordance with a variety of regulatory requirements. If an
accident occurred and resulted in significant personal injury or environmental
damage, our business, financial condition and results of operations could be
materially adversely affected.
CUSTOMER CONCENTRATION - Our sales are concentrated in a small customer base.
Although we supply nearly all domestic and many foreign-based manufacturers of
hard disk drives, and manufacturers of recording heads used in hard disk drives,
sales to our five largest customers constituted 87% of net sales for 2000, 82%
of net sales for 1999 and 84% of net sales for 1998. 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 their own
products, or the failure of a customer to pay their account balance with us,
could have a material adverse effect on our results of operations.
INTELLECTUAL PROPERTIES - We attempt to protect our intellectual property rights
through patents, copyrights, trade secrets and other measures. We may not,
however, be able to protect our technology adequately. In addition, competitors
may be able to develop similar technology independently. Our success depends in
large part on trade secrets relating to our proprietary manufacturing processes.
We seek to protect these trade secrets and our other proprietary technology in
part by requiring each of our employees to enter into non-disclosure and
non-competition agreements. In these agreements, the employee agrees to maintain
the confidentiality of all of our proprietary information and, subject to
certain exceptions, to assign to us all rights in any proprietary information or
technology made or contributed by the employee during his or her employment. In
addition, we regularly enter into non-disclosure agreements with third parties,
such as consultants, suppliers and customers. These agreements may, however, be
breached, and we may not have an adequate 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 that they
will not independently determine our success. Moreover, patents may not be
issued for our pending patent applications, and our issued patents may not be
broad enough to protect our technology. We compete in an industry with rapid
development and technological innovation. We cannot be sure that our future
technology will be protectable, or that any patent issued to us will not be
challenged, invalidated, circumvented or infringed. In addition, we have only
limited patent rights outside the United States, and the laws of certain foreign
countries may not protect our intellectual property rights to the same extent as
do the laws of the United States.
We and certain users of our products have received, and may receive,
communications from third parties asserting patents against us or our customers
that may relate to our manufacturing equipment or to our products or to products
that include our products as a component. We are currently a party to the
litigation described below under the heading "Item 3. Legal Proceedings." In
addition, certain of our customers have been sued on patents having claims
closely related to products we sell. If any third party makes a valid
infringement claim against us and a license were not available on terms
acceptable to us, our business, financial condition and results of operations
could be adversely affected. We expect that, as the number of patents issued
continues to increase, and as we grow, the volume of intellectual property
claims made against us could increase. We may need to engage in litigation to:
- enforce patents issued or licensed to us
- protect trade secrets or know-how owned by us
- determine the enforceability, scope and validity of the intellectual
property rights of others
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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.
AVAILABILITY OF CERTAIN MATERIALS - We currently can obtain certain types of
photoresist, a liquid compound used in the photoetching process, and the
stainless steel, copper and polyimide materials that meet our strict
specifications from only one supplier of each such material. The supplier of
stainless steel periodically resets the price of the product we purchase based
on fluctuations in the value of the Japanese yen. When it does so, our costs for
raw materials may increase. If we could not obtain the materials referred to
above in the necessary quantities, with the necessary quality and at reasonable
prices, our business, financial condition and results of operations could be
materially adversely affected.
COMPETITION - Certain of our customers are using, or are considering the use of,
wireless interconnection technologies that compete with the electrical
interconnect features of our TSA suspension assemblies. We cannot be sure that
our customers will select TSA suspensions for design into their products instead
of alternative wireless interconnection technologies, such as deposition
circuitry and flexible circuitry. If our customers accept technologies that
compete with TSA suspensions, our business, financial condition and results of
operations may be 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.
VOLATILITY OF SECURITIES - The securities of companies in the disk drive
industry (including our securities) generally have volatile market prices. If
our revenue or earnings in any fiscal quarter fail to meet the investment
community's expectations, the market price of our securities could fall. In
addition, the market for our securities has experienced significant price and
volume fluctuations that are unrelated to our operating results. Future
announcements about us and general market conditions may affect the market price
of our securities significantly. Future trading prices of our securities may
depend on factors beyond our influence such as perceptions of our business and
the disk drive industry generally, prevailing interest rates and the market for
similar securities. The volatility of market prices for our securities may limit
our ability in the future to raise additional capital.
LEVERAGE; ABILITY TO SERVICE DEBT - Our ratio of total debt and capital leases
to total capitalization at September 24, 2000 was 37.3%. Our ability to satisfy
our obligations to pay interest and to repay debt is dependent on our future
performance. Our performance is subject to prevailing economic conditions and
financial, business and other factors, including factors beyond our control. To
the extent that a substantial portion of our cash flow from operations is used
to pay the principal of, and interest on, our indebtedness, such cash flow will
not be available to fund future operations and capital expenditures. Our debt
level also may limit our ability to obtain additional financing to fund future
capital expenditures, research and development, working capital, debt service
and other general corporate requirements. It could also make us more vulnerable
to general economic downturns and competitive pressures. We cannot be sure that
our operating cash flow will be sufficient to fund our future capital
expenditure and debt service requirements or to fund future operations.
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 the end of our 2000 third quarter, we were not in compliance with certain of
these restrictive financial covenants because of our operating results in 1999
and in the first three quarters of 2000. As a result, although we had obtained
waivers of these covenant violations for our third quarter, we classified the
long-term portion of our outstanding senior notes as current liabilities on our
third quarter balance sheet. We subsequently completed the negotiation and
execution of amendments to the applicable financing agreements, which waived or
modified the terms of these financial covenants for future fiscal periods. Other
than non-compliance with certain covenants in one equipment lease, which was
terminated as of September 29, 2000 by our purchase of the leased equipment,
effective September 24, 2000, we were in compliance with all such covenants. Our
senior notes have been reclassified as a long-term liability in our financial
statements for the fourth quarter and for the year ended September 24, 2000.
Our ability to comply with restrictive financial 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
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our financing agreements or otherwise obtaining relief from the covenants. If we
default under some or all of our financing agreements, our lenders may require
that we immediately repay the full outstanding amount we owe to them. In such
event, we may have to pursue alternative financing arrangements. If we are not
in compliance with financial covenants in our financing agreements at the end of
any fiscal quarter, our future results of operations and liquidity could be
materially adversely affected.
ITEM 2. PROPERTIES
HTI owns four buildings on a site of approximately 163 acres in Hutchinson,
Minnesota. This site includes executive offices and a manufacturing plant,
development center and training center, with an aggregate of approximately
751,000 square feet of floor area among all four buildings. HTI also leases a
20,000 square foot warehouse, 23,000 square feet of office space and a
fabrication shop of approximately 12,000 square feet near the Hutchinson site.
HTI operates a manufacturing plant in Sioux Falls, South Dakota, owned by HTI,
of approximately 299,000 square feet, approximately 60% of which currently is
being utilized.
HTI operates a manufacturing plant in Eau Claire, Wisconsin, in connection with
which it leases a building of approximately 156,000 square feet, approximately
70% of which currently is being utilized. HTI also owns a photoetching plant in
Eau Claire of approximately 320,000 square feet. HTI suspended operations of the
Eau Claire photoetching plant, however, in April 2000 due to continuing
reductions in demand, and consolidated all of its photoetching operations into
its Hutchinson, Minnesota plant. HTI began construction in 1999 of an additional
manufacturing plant of approximately 262,000 square feet at the Eau Claire site.
Completion of the building construction was postponed due to decreases in the
disk drive industry's forecasts for components and, as a result, decreases in
HTI's forecast of suspension assembly demand for the foreseeable future.
HTI leases a building of approximately 100,000 square feet located in Plymouth,
Minnesota for stamping operations, office space and a logistic center, and has
subleased approximately 45,000 square feet of space located in Eden Prairie,
Minnesota, for which HTI still holds the prime lease. HTI leases a business
office in the Netherlands, and also leases sales offices in Singapore, Japan and
the People's Republic of China.
HTI believes that its existing facilities will be adequate to meet its currently
anticipated requirements.
ITEM 3. LEGAL PROCEEDINGS
On September 18, 2000, HTI commenced a lawsuit in the United States District
Court for the District of Minnesota against the Magnecomp Group, an
unincorporated association of companies, and seven members of the Magnecomp
Group. The lawsuit alleges that the Magnecomp Group has sold infringing products
without a license, and alleges infringement of nine of HTI's patents related to
the design and manufacture of suspension assemblies. The lawsuit requests
damages, including treble damages, attorneys' fees, costs, and an injunction
against the Magnecomp Group.
On October 12, 2000, Magnecomp Corporation commenced a lawsuit in the United
States District Court for the Central District of California against HTI. The
lawsuit alleges that HTI has sold products infringing four patents, engaged in
anti-competitive conduct in violation of federal and state antitrust laws, and
violated California state law regarding contractual interference and unfair
competition. The lawsuit requests damages, including treble damages, attorneys'
fees, costs, punitive damages, and an injunction against HTI. On December 8,
2000, the California District Court issued an order granting HTI's motion to
transfer the California action to the United States District Court for the
District of Minnesota.
HTI is a party to certain claims arising in the ordinary course of business. In
the opinion of management, the outcome of such claims will not materially affect
HTI's current or future financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of HTI are as follows:
NAME AGE POSITION
-------------------- ------ --------------------------------------
Jeffrey W. Green 60 Chairman of the Board
and Director
Wayne M. Fortun 51 President, Chief Executive Officer and
Director
John A. Ingleman 54 Vice President, Chief Financial
Officer and Secretary
Rebecca A. Albrecht 47 Vice President of Human Resources
Beatrice A. Graczyk 52 Vice President and
Chief Operating Officer
Richard C. Myers 60 Vice President of Administration
Richard J. Penn 44 Vice President of Sales
and Marketing
R. Scott Schaefer 47 Vice President and
Chief Technical Officer
Mr. Green is a co-founder of HTI and has served as a director since HTI's
formation in 1965. Mr. Green has been Chairman of the Board since January 1983,
and served as HTI's Chief Executive Officer from January 1983 to May 1996. Mr.
Green is also a director of Applied Biometrics, Inc.
Mr. Fortun was elected President and Chief Operating Officer in 1983, Chief
Executive Officer in May 1996, and is now President and Chief Executive Officer.
He has served as a director of HTI since 1983. He is also a director of G&K
Services, Inc. Mr. Fortun has been with HTI since 1975.
Mr. Ingleman was elected Vice President in January 1982, Chief Financial Officer
in January 1988, and Secretary in January 1992. Mr. Ingleman served as HTI's
Treasurer from January 1982 through January 1996. Mr. Ingleman has been with HTI
since 1977.
Ms. Albrecht was elected Vice President in January 1995 and is now Vice
President of Human Resources. Previously she had been Director of Human
Resources since 1988. Ms. Albrecht has been with HTI since 1983.
Ms. Graczyk was elected Vice President in May 1990, and in March 1999 was
elected Vice President and Chief Operating Officer. Ms. Graczyk has been with
HTI since 1970.
Mr. Myers was elected Vice President in January 1988 and has been Vice President
of Administration since January 1995. Mr. Myers has been with HTI since 1977.
Mr. Penn was elected Vice President in January 1996 and is now Vice President of
Sales and Marketing. Previously he had been Director of Sales and Marketing
since December 1994. Mr. Penn has been with HTI since 1981.
Mr. Schaefer was elected Vice President in May 1990 and is now Vice President
and Chief Technical Officer. Mr. Schaefer has been with HTI since 1979.
Executive officers are elected annually by the Board of Directors and serve a
one-year period or until their successors are elected.
None of the above executive officers is related to each other or to any director
of HTI.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
HTI's common stock, $.01 par value, trades on The Nasdaq National Market under
the symbol HTCH. For price information regarding HTI's common stock, see Note 12
to the consolidated financial statements contained in Item 14 herein. As of
December 5, 2000, HTI's common stock was held by 949 shareholders of record.
DIVIDENDS
HTI has never paid any cash dividends on its common stock. HTI currently intends
to retain all earnings for use in its business and does not anticipate paying
cash dividends in the foreseeable future. Any future determination as to payment
of dividends will depend upon the financial condition and results of operations
of HTI and such other factors as are deemed relevant by the Board of Directors.
HTI's loan agreements contain certain covenants limiting, among other things,
HTI's ability to pay cash dividends or make other distributions. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity, Capital Resources and Other Matters", and Note 4 to the
consolidated financial statements contained in Item 14 herein.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required pursuant to this Item appears on page 42 of
this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
HTI should be read in conjunction with the selected historical consolidated
financial data and consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
GENERAL
Since the late 1980's, we have derived virtually all of our revenue from the
sale of suspension assemblies to a small number of customers. We currently sell
a variety of suspension assemblies based on several standard designs. Suspension
assemblies are a critical component of hard disk drives and our results of
operations are highly dependent on the hard disk drive industry. The hard disk
drive industry is intensely competitive and volatile and our results of
operations have been adversely affected from time to time due to hard disk drive
industry slowdowns, technological changes that impact industry component demand
and production yields and our own product transitions.
Improvements in data density of hard disk drives, which have outpaced storage
capacity requirements, have enabled disk drive manufacturers to reduce their
costs by using fewer components, including suspensions, in each drive. Improved
head-gimbal assembly yields at our customers and shifts in our share of certain
drive programs have also, to a lesser extent, decreased demand for our products.
Results for 1999 and 2000, therefore, did not show the results we expected, as
unit shipments declined. During the fourth quarter of 2000, unit shipments did
show some improvement, increasing to 122 million units from 113 million in the
third quarter. However, we still have limited visibility for future demand.
Late in our first quarter of 2000, our forecast of suspension assembly demand
decreased significantly due to industry forecasts indicating substantial
decreases in component counts as a result of data density improvements,
extending from the desktop market to server drives. Consequently, we conducted
an impairment review to determine if there was impairment of certain excess
manufacturing equipment and tooling. The results of the first quarter of 2000
included a $43,528,000 write-down of impaired manufacturing equipment and
tooling, primarily for our TSA suspensions, and a $3,000,000 charge for
severance costs for approximately 250 employees terminated during that quarter.
In light of continued weak demand for suspension assemblies, we terminated 350
employees during our second quarter of 2000, resulting in a $1,181,000 charge to
selling, general and administrative expenses in that quarter for severance
costs.
Further decreases in the industry's forecast for components and our resulting
lower forecast for suspension assembly demand early in our third quarter, caused
us to suspend photoetching operations at our Eau Claire, Wisconsin plant and
consolidate these operations into our Hutchinson, Minnesota plant. This resulted
in the elimination of approximately 200 production and support positions at the
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Eau Claire plant. We also eliminated approximately 750 additional positions
across our plants. This workforce reduction resulted in a $3,745,000 charge for
severance costs. We also recognized an additional $12,995,000 write-down of
impaired manufacturing equipment and tooling, primarily for our TSA suspensions.
These charges were recognized during the third quarter of 2000.
Our financial results for the last quarter of 2000 were, and subsequent years
will be, impacted favorably by lower depreciation, lease and labor expenses as a
consequence of these first, second and third quarter charges. These charges are
expected to produce an estimated annual labor savings of approximately
$100,000,000. These charges also are expected to produce savings of depreciation
and lease costs of approximately $13,000,000, $10,000,000, $8,000,000 and
$6,000,000 for the fiscal years 2001 through 2004, respectively, and thereafter
an aggregate of $6,000,000 in additional savings. We will continue to have
excess capacity, and suspension shipments will remain relatively flat for the
foreseeable future, until average component counts within disk drives stabilize
or increase, or our share of certain drive programs increases, or until
Internet-related storage growth increases or new applications for disk storage
become more widespread.
Our gross margins have fluctuated and will continue to fluctuate based upon a
variety of factors such as changes in demand, increases in production and
engineering costs associated with production of new products, product mix,
selling prices, the level of utilization of our production capacity,
manufacturing yields and changes in the cost of materials. Gross margins have
been negatively impacted since the third quarter of 1999 by lower than expected
suspension shipments resulting in excess manufacturing equipment and tooling.
Gross margins did improve, however, during the fourth quarter of 2000 due to
higher unit shipments, cost reduction measures and manufacturing productivity
and yield improvements.
Our ability to introduce new products on a timely basis is an important factor
in our success. New products have lower manufacturing yields and are produced in
lower quantities than more mature products. Our dedicated development center
enables us to shorten development cycles and achieve high volume output per
manufacturing unit more quickly. Manufacturing yields generally improve as the
product matures and production volumes increase. Manufacturing yields also vary
depending on the complexity and uniqueness of product specifications. Because
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.
We typically allow customers to change or cancel orders on short notice without
penalty. We plan our production and inventory based primarily on forecasts of
customer demand, including forecasts of customer pulls of product out of our
"just-in-time" inventory hubs, rather than on order backlog. Both customer
demand and the resulting forecasts often fluctuate substantially. These factors,
among others, create an environment where scheduled production and capacity
utilization can vary significantly from week to week, leading to variability in
gross margins and difficulty in estimating our market share.
In addition to improvements in suspension assembly demand, our operating margins
depend, in part, on the successful management of our corporate infrastructure,
our suspension assembly production capacity and our workforce. During the past
two years, we consolidated some of our manufacturing operations to make better
use of existing equipment and support staff across all of our plants and to
reduce costs. As part of our efforts to improve our operating margins through
reduced costs and improved efficiency, we have reduced our overall employment
level by 2,972 employees over the past year through workforce reductions and
managed attrition.
MARKET TRENDS
We expect the expanding use of personal computers, enterprise computing and
storage, increasingly complex software and the emergence of new applications for
disk storage, such as Internet-related storage, digital video recording, digital
cameras, network attached storage, gaming consoles and other consumer
applications, will further increase disk drive demand in the future. We also
believe demand for disk drives will continue to be subject, as it has in the
past, to rapid or unforeseen changes resulting from, among other things,
technological advances, changes in disk drive inventory levels, responses to
competitive price changes and unpredicted high or low market acceptance of new
drive models. Improvements in data density of hard disk drives, extending from
the desktop market to server drives, reduced unit shipments of suspension
assemblies in the second half of 1999 and in 2000. We expect suspension assembly
shipments will remain relatively flat for the foreseeable future until average
component counts within disk drives stabilize or increase, or our share of
certain drive programs increases, or until Internet-related storage growth
increases or new applications for disk storage become more widespread.
As in past years, disk drives continue to be the storage device of choice for
applications requiring low access times and higher capacities because of their
speed and low cost per megabyte of stored data. The cost of storing data on disk
drives continues to decrease primarily due to increasing data density, the
amount of data which can be stored on magnetic disks.
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<PAGE> 17
Improvements in data density have been attained by lowering the fly height of
the read/write head, using smaller read/write heads with advanced air bearing
designs, improving other components such as motors and media, and using new
read/write head types such as those of magneto-resistive (MR) and giant
magneto-resistive (GMR) design. The move to MR and GMR heads, which require more
electrical leads, and the transition to smaller pico-sized heads, which are more
sensitive to mechanical variation, have compelled drive manufacturers to use
wireless suspension technologies, such as our TSA suspension assemblies. Our TSA
suspension assemblies are being widely adopted within the disk drive industry.
The continual pursuit of increasing data density and lower storage costs may
lead to further value-added features for TSA suspensions, such as extended
electrical leads. Actuated suspensions, including our aTSA suspension,
incorporate a second stage actuator on the suspension to improve head
positioning over increasingly tighter data tracks. Our cTSA suspension allows
for attachment of preamplifiers near the head to improve data transfer signals.
The introduction of new types or sizes of read/write heads and new disk drive
designs tends to initially decrease customers' yields with the result that we
may experience temporary elevations of demand for some types of suspension
assemblies. Likewise, as programs mature, higher yields decrease the demand for
suspension assemblies. The advent of new heads and new drive designs may require
rapid development and implementation of new suspension types which temporarily
may reduce our manufacturing yields and efficiencies. There can be no assurance
that we will not continue to be affected by such changes.
We generally experience fluctuating selling prices due to product maturity,
competitive pricing pressures and new product offerings. While many of our
current products are reaching or are in the mature phase of their life cycles
and thus are experiencing declining selling prices, our newer products initially
have higher selling prices.
2000 OPERATIONS
The following table sets forth our consolidated statements of operations as a
percentage of net sales from period to period.
PERCENTAGE OF NET SALES
---------------------------
2000 1999 1998
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 92 84 101
---- ---- ----
Gross profit (loss) 8 16 (1)
Research and development expenses 4 4 5
Selling, general and administrative expenses 11 8 10
Asset impairment and other 14 -- --
---- ----- -----
Income (loss) from operations (21) 4 (16)
Other income 3 2 1
Interest expense (3) (2) (1)
---- ---- ----
Income (loss) before income taxes (21) 4 (16)
Provision (benefit) for income taxes (5) 1 (4)
---- ---- ----
Net income (loss) (16) 3 (12)
==== ==== ====
Net sales for 2000 were $459,572,000, a decrease of $120,698,000 or 21% compared
to 1999. This decrease was primarily due to lower suspension assembly sales
volume due to lower overall demand for our products.
Gross profit for 2000 was $36,149,000, compared to $93,666,000 for 1999, and
gross profit as a percent of net sales decreased from 16% to 8%. This decrease
was primarily due to lower suspension assembly sales volume, partially offset by
lower manufacturing labor and benefits expenses as a result of the workforce
reductions that occurred during 2000.
Research and development expenses for 2000 were $21,433,000 compared to
$23,106,000 for 1999. Suspension assembly product and process development
accounted for $18,331,000 of such expenses, and the remaining $3,102,000 was
used for the development of HTI's product for the medical device and other
markets, a monitor that measures tissue oxygen saturation.
During 2000, we recorded charges of $63,268,000 to write down certain assets and
record severance costs for approximately 1,200 terminated employees. Components
of the charges included $56,523,000 of asset write-downs for impaired
manufacturing equipment and tooling, primarily for our TSA suspensions, and
$6,745,000 of severance costs. See Note 3, "Asset Impairment and Other", in the
notes to the consolidated financial statements.
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<PAGE> 18
Selling, general and administrative expenses for 2000 were $49,864,000, an
increase of $2,637,000 or 6% compared to 1999. The increased expenses were due
primarily to charges of $1,900,000 as a result of the difference between
payments made to purchase certain leased equipment over the fair market value of
such equipment, together with certain fees related to amending certain financing
agreements, increased occupancy, depreciation and lease expenses of $1,543,000,
increased health and dental benefit expenses of $1,514,000 and increased
professional services expenses of $1,209,000, offset partially by decreased
profit sharing costs of $3,556,000. As a percent of net sales, selling, general
and administrative expenses increased from 8% to 11%.
Other income, net, for 2000 was $13,572,000, an increase of $3,520,000 compared
to 1999. The increase was primarily due to an increase of $4,247,000 in interest
income as a result of higher investment yields in the short-term markets.
Interest expense for 2000 was $13,305,000, an increase of $2,238,000 compared to
1999, primarily due to a decrease in capitalization of interest of $2,293,000.
The income tax benefit for 2000 was based on an effective tax rate for the year
of 25% which was below the statutory federal rate primarily due to valuation
allowances on certain net operating loss carryforwards.
Net loss for 2000 was $73,612,000, compared to net income of $17,638,000 for
1999. As a percent of net sales, net income decreased from 3% to (16)% primarily
due to the charges and the lower suspension assembly sales volume, discussed
above.
1999 OPERATIONS
Net sales for 1999 were $580,270,000, an increase of $172,654,000 or 42%
compared to 1998. This increase was primarily due to a higher average sell price
and increased suspension assembly sales volume.
Gross profit for 1999 was $93,666,000, compared to a gross loss of $3,636,000
for 1998, and gross profit (loss) as a percent of net sales increased from (1)%
to 16%. This increase was primarily due to higher TSA suspension assembly sales
volume, partially offset by higher manufacturing costs associated with increased
TSA suspension assembly production.
Research and development expenses for 1999 were $23,106,000 compared to
$20,360,000 for 1998. A majority of the research and development expenses were
used for further TSA product development and for the development of HTI's
medical product.
Selling, general and administrative expenses for 1999 were $47,227,000, an
increase of $6,099,000 or 15% compared to 1998. The increased expenses were due
primarily to increased profit sharing costs of $3,556,000, increased labor
expenses of $2,139,000 and increased depreciation and lease expenses of
$1,127,000. As a percent of net sales, selling, general and administrative
expenses decreased from 10% to 8%.
Other income, net, for 1999 was $10,052,000, an increase of $5,791,000 compared
to 1998. The increase was primarily due to an increase of $5,254,000 in interest
income as a result of a higher average investment balance.
Interest expense for 1999 was $11,067,000, an increase of $6,509,000 compared to
1998, primarily due to higher average outstanding debt and lower capitalization
of interest of $1,656,000.
The income tax provision for 1999 was based on an effective tax rate for the
year of 21% which was below the statutory federal rate primarily due to the
large portion of sales that qualify for the benefit of our Foreign Sales
Corporation.
Net income for 1999 was $17,638,000, compared to a net loss of $48,411,000 for
1998. As a percent of net sales, net income increased from (12)% to 3% primarily
due to a higher average sell price and higher sales volume, noted above.
1998 OPERATIONS
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 HTI's medical
product.
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<PAGE> 19
Selling, general and administrative expenses for 1998 were $41,128,000, a
decrease of $3,250,000 or 7% compared to 1997. The decreased expenses were due
primarily to decreased profit sharing and other incentive compensation costs of
$9,349,000 and decreased recruitment and relocation costs of $886,000, partially
offset by increased labor expenses of $2,597,000, higher depreciation and lease
expense of $1,929,000, fees related to certain financing agreements of
$1,535,000 and higher bad debt provision of $1,476,000. As a percent of net
sales, selling, general and administrative expenses remained at 10%.
Interest expense for 1998 was $4,558,000, an increase of $1,415,000 compared to
1997, primarily due to higher average outstanding debt, offset by higher
capitalization of interest of $3,820,000.
The income tax benefit for 1998 was based on an effective tax rate for the year
of 26% which was below the statutory federal rate primarily due to tax credits
and the large portion of sales that qualify for the benefit of HTI's Foreign
Sales Corporation.
Net loss for 1998 was $48,411,000, compared to net income of $41,909,000 for
1997. As a percent of net sales, net income decreased from 9% to (12)% primarily
due to the lower sales volume and higher manufacturing costs, noted above.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
Our principal sources of liquidity are cash and cash equivalents, securities
available for sale, cash flow from operations and additional financing capacity.
As of September 24, 2000, we had a $50,000,000 credit facility secured by our
accounts receivable and inventory. Letters of credit outstanding under this
facility totaled $18,583,000 as of such date, including $819,000 issued as
security for our $800,000 variable rate demand note, $17,139,000 issued in
connection with obligations under equipment leases, and $625,000 issued to
support potential self-insured workmens' compensation obligations. No other
letters of credit were outstanding under the credit facility at September 24,
2000. The amount we can borrow under this credit facility is limited by the
levels of our accounts receivable and inventory balances. As of September 24,
2000, $31,385,000 of borrowing capacity remained available to us.
Our cash and cash equivalents increased from $98,820,000 at September 26, 1999
to $129,314,000 at September 24, 2000. Our securities available for sale
decreased from $139,402,000 to $110,955,000 during the same period. Overall,
this reflects a $2,047,000 increase in our cash and cash equivalents and
securities available for sale. We generated cash from operating activities of
$69,679,000 in 2000 and $81,176,000 in 1999 and used cash from operating
activities of $12,824,000 in 1998.
Cash used for capital expenditures totaled $64,657,000 in 2000 compared to
$120,596,000 in 1999 and $206,888,000 in 1998. The expenditures in 2000 were
primarily for continued equipment improvements to meet advanced product
specifications, new program tooling, automated vision inspection equipment and
the purchase of certain leased equipment in connection with early termination of
equipment leases. We currently anticipate spending approximately $50,000,000
during 2001 primarily for new business systems, program tooling and
manufacturing and process technology and equipment. Financing of these capital
expenditures will be principally from internally generated funds, cash and cash
equivalents, securities available for sale and/or additional financing capacity.
Certain of our existing financing agreements contain financial covenants and
covenants which may restrict our ability to enter into certain types of
financing. At the end of our 2000 third quarter, we were not in compliance with
certain restrictive financial covenants because of our operating results in 1999
and in the first three quarters of 2000. As a result, although we had obtained
waivers of these covenant violations for our third quarter, we classified the
long-term portion of our outstanding senior notes as current liabilities on our
third quarter balance sheet. We subsequently completed the negotiation and
execution of amendments to the applicable financing agreements, which waived or
modified the terms of these financial covenants for future fiscal periods. Other
than non-compliance with certain covenants in one equipment lease, which was
terminated as of September 29, 2000 by our purchase of the leased equipment,
effective September 24, 2000, we were in compliance with all such covenants. Our
senior notes have been reclassified as a long-term liability in our financial
statements for the fourth quarter and for the year ended September 24, 2000. If
we are not in compliance with financial covenants in our financing agreements at
the end of any quarter, our future financial results and liquidity could be
materially adversely affected.
We currently believe that our cash and cash equivalents, securities available
for sale, cash generated from operations and credit facility will be sufficient
to meet our operating expenses, debt service requirements and capital
expenditures through 2001. We may require additional financing to meet our
capital requirements beyond 2001, dependent on market conditions, including the
growth of Internet-related storage and new applications for disk storage. We
will pursue additional debt or equity financing to supplement our current
capital resources if needed. Our ability to obtain additional financing will
depend upon a number of factors, including our future
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<PAGE> 20
performance and financial results and general economic and capital market
conditions. We cannot be sure that we will be able to raise additional capital
on reasonable terms or at all.
OTHER MATTERS
We are involved in certain legal matters which may result in additional future
cash requirements. See the discussion of these matters in Note 8, "Commitments
and Contingencies," in the notes to the consolidated financial statements.
We will be subject to certain recent accounting pronouncements. See the
discussion of these matters in Note 1, "Summary of Significant Accounting
Policies," in the notes to the consolidated financial statements.
INFLATION
Management believes inflation has not had a material effect on our operations or
on our financial condition. There can be no assurance, however, that our
business will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS
The statements under the headings "General" and "Market Trends" about demand for
and shipments of disk drives and suspension assemblies, including TSA
suspensions, manufacturing capacity and yields and selling prices, the
statements under the heading "General" about anticipated operating results, and
the statements under the heading "Liquidity, Capital Resources and Other
Matters" about covenant amendments, capital expenditures and capital resources,
are forward-looking statements based on current expectations. These statements
are subject to risks and uncertainties, including slower or faster customer
acceptance of our new products, difficulties in producing our TSA suspensions,
difficulties in managing our capacity, changes in manufacturing efficiencies,
difficulties in obtaining covenant amendments in our existing financing
agreements and the other risks and uncertainties discussed above. These factors
may cause our actual future results to differ materially from historical
earnings and from the financial performance we presently anticipate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our credit facility with The CIT Group/Business Credit, Inc. carries interest
rate risk, in connection with certain borrowings under the working capital line
it provides, that is generally related to either LIBOR or the prime rate. If
either of these rates were to change while we had such borrowings outstanding
under the working capital line provided by the credit facility, interest expense
would increase or decrease accordingly. At September 24, 2000, there were
$32,000 in outstanding borrowings under the working capital line provided by the
credit facility. Our variable rate demand note ("Note") also carries interest
rate risk that is generally related to the 91-day U.S. treasury bill interest
rate. At September 24, 2000, the outstanding principal amount of the Note was
$800,000 which was subject to an interest rate of 4.40%.
We have no earnings or cash flow exposure due to market risk on our other debt
obligations which are subject to fixed interest rates. Interest rate changes,
however, would affect the fair market value of this fixed rate debt. At
September 24, 2000, we had fixed rate debt of $214,816,000.
We do not enter into derivative or other financial instruments for trading or
speculative purposes. All of our sales transactions are denominated in U.S.
dollars and thus are not subject to risk due to currency exchange fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto required pursuant to this Item begin
on page 25 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under the headings
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," pages 4-5 and 15, in HTI's Proxy Statement dated December 20, 2000.
See also Part I hereof under the heading "Item X. Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the headings
"Summary Compensation Table" and "Option Tables", pages 11-13, and the
information regarding compensation of non-employee directors on page 5, in HTI's
Proxy Statement dated December 20, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the heading
"Security Ownership of Principal Shareholders and Management," pages 2-3, and
the information appearing in the tables and notes on pages 12-13, in HTI's Proxy
Statement dated December 20, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:
1. Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years ended
September 24, 2000, September 26, 1999 and September 27, 1998
Consolidated Balance Sheets as of September 24, 2000 and September 26,
1999
Consolidated Statements of Cash Flows for the fiscal years ended
September 24, 2000, September 26, 1999 and September 27, 1998
Consolidated Statements of Shareholders' Investment for the fiscal
years ended September 24, 2000, September 26, 1999 and September 27,
1998
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
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(B) EXHIBITS:
Unless otherwise indicated, all documents incorporated herein by reference to a
document filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, are located under SEC file number
0-14709.
3.1 Restated Articles of Incorporation of HTI, as amended by Articles of
Amendment dated 1/27/88 and as amended by Articles of Amendment dated
1/21/97 (incorporated by reference to Exhibit 3.1 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 6/29/97).
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 12/29/96) and
Amendments to Restated By-Laws of HTI dated 7/19/00 (incorporated by
reference to Exhibit 3.2 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 6/25/00).
4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and Exchange
Commission upon request copies of instruments with respect to long-term
debt.
4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.6 to
HTI's Registration Statement on Form S-3, Registration No. 333-50143).
4.3 Purchase Agreement dated 3/12/98 by and among HTI, NationsBanc
Montgomery Securities LLC and First Chicago Capital Markets, Inc.
(incorporated by reference to Exhibit 4.7 to HTI's Registration
Statement on Form S-3, Registration No. 333-50143).
4.4 Shelf Registration Agreement dated as of 3/18/98 by and among HTI,
NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc. (incorporated by reference to Exhibit 4.8 to HTI's
Registration Statement on Form S-3, Registration No. 333-50143).
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI,
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 3/24/96), and
First Amendment to Office/Warehouse Lease dated 4/30/96 (incorporated
by reference to Exhibit 10.2 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 6/23/96).
#10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated by
reference to Exhibit 10.12 to HTI's Annual Report on Form 10-K for the
fiscal year ended 9/27/92) and Amendment effective as of 11/19/97
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 12/28/97).
#10.3 Description of Bonus Program for Key Employees of Hutchinson Technology
Incorporated (incorporated by reference to Exhibit 10.13 to HTI's
Annual Report on Form 10-K for the fiscal year ended 9/27/92).
#10.4 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8 to
HTI's Annual Report on Form 10-K for the fiscal year ended 9/25/88),
Amendment to the 1988 Stock Option Plan (incorporated by reference to
Exhibit 10.5 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/26/93), and Amendment to the 1988 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 3/26/95).
*10.5 Patent License Agreement, effective as of 9/1/94, between Hutchinson
Technology Incorporated and International Business Machines Corporation
(incorporated by reference to Exhibit 10.11 to HTI's Quarterly Report
on Form 10-Q/A for the quarter ended 6/25/95).
10.6 Lease Agreement between Meridian Eau Claire LLC and Hutchinson
Technology Incorporated, dated 5/1/96 (incorporated by reference to
Exhibit 10.10 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 6/23/96) and First Amendment to Lease.
10.7 Master Lease Agreement dated as of 12/19/96 between General Electric
Capital Corporation, as Lessor ("GE"), and Hutchinson Technology
Incorporated, as Lessee (incorporated by reference to Exhibit 10.11 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 12/29/96),
Amendment dated 6/30/97 to the Master Lease Agreement between GE and
Hutchinson Technology Incorporated (incorporated by reference to
Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 12/28/97), letter amendment dated 3/5/98 to the Master Lease
Agreement between GE and Hutchinson Technology Incorporated
(incorporated by reference to Exhibit 10.11 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 3/29/98), letter amendment dated
9/25/98 to the Master Lease Agreement between GE and Hutchinson
Technology
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Incorporated (incorporated by reference to Exhibit 10.11 to HTI's
Annual Report on Form 10-K for the fiscal year ended 9/27/98), letter
amendment dated 1/11/00, effective as of 12/22/99, to the Master Lease
Agreement between GE and Hutchinson Technology Incorporated
(incorporated by reference to Exhibit 10.1 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 12/26/99), and letter amendment dated
8/31/00 to the Master Lease Agreement between GE and Hutchinson
Technology Incorporated.
#10.8 Hutchinson Technology Incorporated 1996 Incentive Plan (incorporated by
reference to Exhibit 10.12 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 12/29/96).
#10.9 Hutchinson Technology Incorporated Incentive Bonus Plan (incorporated
by reference to Exhibit 10.13 to HTI's Quarterly Report on Form 10-Q
for the quarter ended 12/28/97).
#10.10 Description of Hutchinson Technology Incorporated Year 2000 Bonus
Program (incorporated by reference to Exhibit 10.2 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/26/99).
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
* Exhibit 10.5 contains portions for which confidential treatment has been
granted by the Securities and Exchange Commission.
# Management contract, compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
(C) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated July 19, 2000 reporting
under Item 5 ("Other Events") of Form 8-K approval by its Board of Directors of
a share rights plan. The Company also filed a Current Report on Form 8-K dated
September 29, 2000 reporting under Item 5 ("Other Events") of Form 8-K the
completion of its negotiation and execution of amendments to certain of its
financing agreements.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 19, 2000.
HUTCHINSON TECHNOLOGY INCORPORATED
By /s/ Wayne M. Fortun
-----------------------------------------------------------------------------
Wayne M. Fortun
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on December 19, 2000.
/s/ Wayne M. Fortun
--------------------------------------------------------------------------------
Wayne M. Fortun, President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ John A. Ingleman
--------------------------------------------------------------------------------
John A. Ingleman, Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ W. Thomas Brunberg
--------------------------------------------------------------------------------
W. Thomas Brunberg, Director
/s/ Archibald Cox, Jr.
--------------------------------------------------------------------------------
Archibald Cox, Jr., Director
/s/ Jeffrey W. Green
--------------------------------------------------------------------------------
Jeffrey W. Green, Director
/s/ Russell Huffer
--------------------------------------------------------------------------------
Russell Huffer, Director
/s/ Steven E. Landsburg
--------------------------------------------------------------------------------
Steven E. Landsburg, Director
/s/ William T. Monahan
--------------------------------------------------------------------------------
William T. Monahan, Director
/s/ Richard B. Solum
--------------------------------------------------------------------------------
Richard B. Solum, Director
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CONSOLIDATED STATEMENTS OF OPERATIONS
Hutchinson Technology Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED
SEPTEMBER 24, 2000 SEPTEMBER 26, 1999 SEPTEMBER 27, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales $ 459,572 $ 580,270 $ 407,616
Cost of sales 423,423 486,604 411,252
--------- --------- ---------
Gross profit (loss) 36,149 93,666 (3,636)
Research and development expenses 21,433 23,106 20,360
Selling, general and administrative expenses 49,864 47,227 41,128
Asset impairment and other (Note 3) 63,268 -- --
--------- --------- ---------
Income (loss) from operations (98,416) 23,333 (65,124)
Other income, net 13,572 10,052 4,261
Interest expense (13,305) (11,067) (4,558)
--------- --------- ---------
Income (loss) before income taxes (98,149) 22,318 (65,421)
Provision (benefit) for income taxes (24,537) 4,680 (17,010)
--------- --------- ---------
Net income (loss) $ (73,612) $ 17,638 $ (48,411)
========= ========= =========
Basic earnings (loss) per share $ (2.97) $ 0.77 $ (2.46)
========= ========= =========
Diluted earnings (loss) per share $ (2.97) $ 0.75 $ (2.46)
========= ========= =========
Weighted average common shares outstanding 24,779 22,958 19,709
========= ========= =========
Weighted average common
and diluted shares outstanding 24,779 23,575 19,709
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
CONSOLIDATED BALANCE SHEETS
Hutchinson Technology Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(IN THOUSANDS)
SEPTEMBER 24, 2000 SEPTEMBER 26, 1999
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 129,314 $ 98,820
Securities available for sale 110,955 139,402
Trade receivables, net 60,637 72,716
Other receivables 4,071 9,050
Inventories 32,516 40,984
Prepaid taxes and other expenses 16,967 17,814
--------- ---------
Total current assets 354,460 378,786
Property, plant and equipment, at cost:
Land, buildings and improvements 137,836 129,755
Equipment 466,934 429,443
Equipment under capital leases 12,400 --
Construction in progress 17,441 61,187
Less: Accumulated depreciation (350,952) (267,449)
--------- ---------
Net property, plant and equipment 283,659 352,936
Deferred tax assets 33,475 6,343
Other assets 12,339 13,784
--------- ---------
$ 683,933 $ 751,849
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of capital lease obligation $ 8,538 $ --
Current maturities of long-term debt 20,910 4,171
Accounts payable and accrued expenses 36,705 43,635
Accrued compensation 15,729 17,014
GE lease accrual 1,969 4,519
--------- ---------
Total current liabilities 83,851 69,339
Capital lease obligation 9,718 --
Long-term debt, less current maturities 44,706 65,562
Convertible subordinated notes 150,000 150,000
Other long-term liabilities 3,169 1,989
Commitments and contingencies (Notes 7 and 8)
Shareholders' investment:
Common stock $.01 par value, 45,000,000 shares authorized,
24,830,000 and 24,744,000 issued and outstanding 248 247
Additional paid-in capital 364,540 363,399
Retained earnings 27,701 101,313
--------- ---------
Total shareholders' investment 392,489 464,959
--------- ---------
$ 683,933 $ 751,849
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Hutchinson Technology Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(IN THOUSANDS)
FISCAL YEARS ENDED
SEPTEMBER 24, 2000 SEPTEMBER 26, 1999 SEPTEMBER 27, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (73,612) $ 17,638 $ (48,411)
Adjustments to reconcile net income
(loss) to cash provided by (used for)
operating activities:
Depreciation and amortization 92,095 93,797 50,901
Asset impairment and other 56,523 -- --
Deferred taxes (26,748) 3,257 (7,350)
Changes in operating assets and
liabilities (Note 9) 21,421 (33,516) (7,964)
---------- --------- ---------
Cash provided by (used for) operating
activities 69,679 81,176 (12,824)
---------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (64,657) (120,596) (206,888)
Funding from GE lease receivable -- -- 35,303
Increase in GE lease receivable -- -- (4,230)
Purchases of marketable securities (81,875) (193,352) (13,313)
Sales of marketable securities 110,322 65,871 21,602
---------- --------- ---------
Cash used for investing activities (36,210) (248,077) (167,526)
---------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 1,500 --
Repayments of long-term debt (4,117) (4,627) (5,334)
Net proceeds from issuance of convertible
subordinated notes -- -- 145,320
Net proceeds from issuance of common
stock 1,142 209,906 966
---------- --------- ---------
Cash provided by (used for) financing
activities (2,975) 206,779 140,952
---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 30,494 39,878 (39,398)
Cash and cash equivalents at beginning of year 98,820 58,942 98,340
---------- --------- ---------
Cash and cash equivalents at end of year $ 129,314 $ 98,820 $ 58,942
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Hutchinson Technology Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(IN THOUSANDS)
COMMON STOCK
------------------------------------- ADDITIONAL
SHARES AMOUNT PAID-IN CAPITAL RETAINED EARNINGS
------ ------ --------------- -----------------
<S> <C> <C> <C> <C>
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 167 1 1,954 --
Issuance of common stock 4,801 48 208,608 --
Retirements of common stock (4) -- (120) --
Net income -- -- -- 7,638
-------- ------ --------- --------
Balance, September 26, 1999 24,744 247 363,399 101,313
Exercise of stock options 40 -- 451 --
Issuance of common stock 46 1 690 --
Net loss -- -- -- (73,612)
-------- ------ --------- --------
Balance, September 24, 2000 24,830 $ 248 $ 364,540 $ 27,701
======== ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries
(Dollar amounts in thousands except per share amounts)
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Ultimate results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTs
The Company will adopt Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended by Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133" ("SFAS 138"), which is effective
beginning 2001. SFAS 133 requires a company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the hedged assets, liabilities or
firm commitments are recognized through earnings or in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The Company has determined that the effect of adopting SFAS 133 and
SFAS 138 is not material to the earnings and the financial position of the
Company as of September 25, 2000.
FISCAL YEAR
The Company's fiscal year is the fifty-two/fifty-three week period
ending on the last Sunday in September. The fiscal years ended September 24,
2000, September 26, 1999 and September 27, 1998 are all fifty-two week periods.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment to its customers of
completed products, directly from the United States, or, in the alternative,
from the Company's just-in-time inventory hubs.
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 and
corporate debt securities with a market value and cost of $110,955,000 at
September 24, 2000 and $139,402,000 at September 26, 1999.
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 $6,157,000 at September 24, 2000 and $6,395,000 at
September 26, 1999.
INVENTORIES
Effective September 27, 1999, the Company changed its method of
inventory accounting from the last-in, first-out ("LIFO") to the first-in,
first-out ("FIFO") method for determining the cost of inventories. This change
was made due to significant permanent declines in inventory conversion costs
over the life cycle of substantially all of the Company's products. The
permanent declines arise primarily due to technological advances that affect the
Company's conversion costs due to productivity gains. In addition, substantially
all of the Company's peer group utilizes the FIFO method of accounting for their
inventories. The pretax cumulative effect of the accounting change was $165,000
and has been included in cost of sales on the accompanying consolidated
statement of operations for 2000. The effect of this accounting change was not
material to the Company's results of operations; therefore, pro
29
<PAGE> 30
forma earnings per share information has not been presented. All inventories are
stated at the lower of cost or market. Inventories consisted of the following at
September 24, 2000 and September 26, 1999:
2000 1999
-------- --------
Raw materials $ 9,129 $ 15,728
Work in process 9,680 13,749
Finished goods 13,707 11,672
LIFO reserve -- (165)
------- --------
$32,516 $40,984
======= ========
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.
Buildings and leasehold improvements are depreciated on a straight-line
basis and equipment is depreciated using a 150% declining balance method for
financial reporting purposes. Property is depreciated using primarily
accelerated methods for tax reporting purposes. Estimated useful lives for
financial reporting purposes are as follows:
Buildings 25 to 35 years
Leasehold Improvements 5 to 10 years
Equipment 2 to 8 years
Property, plant and equipment are net of reserves of $6,006,000 at September 24,
2000 and $7,295,000 at September 26, 1999.
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 $53,906,000
in 2000, $56,638,000 in 1999 and $52,235,000 in 1998. Of these amounts,
$21,433,000 in 2000, $23,106,000 in 1999 and $20,360,000 in 1998 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
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings (loss) per share is
computed under the treasury stock method and is calculated to compute the
dilutive effect of potential common shares. A reconciliation of these amounts is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Net income (loss) available to common shareholders $(73,612) $ 17,638 $(48,411)
--------- -------- ---------
Weighted average common shares outstanding 24,779 22,958 19,709
Dilutive potential common shares -- 617 --
--------- -------- --------
Weighted average common and diluted shares
outstanding 24,779 23,575 19,709
========= ======== ========
Basic earnings (loss) per share $ (2.97) $ 0.77 $ (2.46)
Diluted earnings (loss) per share $ (2.97) $ 0.75 $ (2.46)
</TABLE>
Potential common shares of 5,291,000 related to the Company's outstanding
convertible subordinated notes were excluded from the computation of diluted
earnings (loss) per share for 2000, 1999 and 1998, as inclusion of these shares
would have been antidilutive. Potential common shares of 315,000 and 584,000
related to the Company's outstanding stock options were excluded from the
computation of diluted earnings (loss) per share for 2000 and 1998, as inclusion
of these shares would have been antidilutive.
30
<PAGE> 31
2. SHARE RIGHTS PLAN
In July 2000, the Board of Directors of the Company declared a dividend
of one common share purchase right on each outstanding share of common stock of
the Company held by shareholders of record as of the close of business on August
10, 2000. Under certain conditions, each right may be exercised to purchase
one-tenth of a share of common stock at an exercise price of $10, subject to
adjustment. The rights generally will become exercisable after any person or
group acquires beneficial ownership of 15% or more of the Company's common stock
or announces a tender or exchange offer that would result in that person or
group beneficially owning 15% or more of the Company's common stock. If any
person or group becomes a beneficial owner of 15% or more of the Company's
common stock, each right will entitle its holder (other than the 15% owner) to
purchase, at an adjusted exercise price equal to ten times the previous purchase
price, shares of the Company's common stock having a value of twice the right's
adjusted exercise price.
The rights, which do not have voting rights, expire in 2010 and may be
redeemed by the Company at a price of $0.001 per right, subject to adjustment,
at any time prior to their expiration or a person's or group's acquisition of
beneficial ownership of at least 15% of the Company' common stock. In certain
circumstances, at the option of the Board of Directors, the Company may exchange
the rights for shares of its common stock, delay or temporarily suspend the
exercisability of the rights, or reduce the stock-ownership threshold of 15% to
not less than 10%.
In the event that the Company is acquired in certain merger or other
business-combination transactions, or sells 50 percent or more of its assets or
earnings power, each holder of a right shall have the right to receive, at the
right's adjusted exercise price, common shares of the acquiring company having a
market value of twice the right's adjusted exercise price.
3. ASSET IMPAIRMENT AND OTHER
Advances in technology have enabled disk drive manufacturers to reduce
their costs by using fewer components, including suspension assemblies, in each
disk drive. During 2000, the Company's forecast of suspension assembly demand
decreased significantly due to industry forecasts indicating decreases in
component counts as a result of data density improvements, extending from the
desktop market to server drives. Significant decreases in the industry's
forecast for components and a resulting lower forecast for suspension assembly
demand caused the Company to reduce its workforce by approximately 1,200
employees, including direct positions at its Eau Claire site and indirect
positions in its administrative, development and manufacturing support areas at
all plant sites, and to suspend photoetching operations at its Eau Claire,
Wisconsin plant and consolidate these operations into its Hutchinson, Minnesota
plant. As a result of these events, the Company prepared analyses in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", to
determine if there was impairment of certain excess manufacturing equipment and
tooling, primarily for TSA suspensions. The analyses resulted in impairment
charges based on the difference between the carrying value and the estimated
fair value of these assets. Fair value was based on discounting estimated future
cash flows for assets grouped at the lowest level for which there were
identifiable cash flows at a discount rate commensurate with the risks involved.
The Company recorded charges in 2000 of $56,523,000 for impaired assets and
$6,745,000 for severance costs due to the workforce reductions described above.
The full amount of these severance costs has been paid.
These charges are reflected on the accompanying consolidated statements
of operations as "Asset impairment and other."
31
<PAGE> 32
4. FINANCING ARRANGEMENTS
LONG-TERM DEBT
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Senior unsecured notes, 8.35%, payable in varying
monthly installments through July 2003 $ 25,000 $ 25,000
Senior unsecured note, 8.57%, payable in varying
monthly installments through October 2003 25,000 25,000
Senior unsecured notes, 7.96%, payable in varying
monthly installments through October 2003 13,125 16,875
6% Convertible Subordinated Notes due 2005 150,000 150,000
Other long-term debt 2,491 2,858
-------- --------
215,616 219,733
Less: Current maturities (20,910) (4,171)
-------- --------
$194,706 $215,562
======== ========
</TABLE>
In March 1998, the Company completed a private placement of
$150,000,000 aggregate principal amount of 6% Convertible Subordinated Notes due
2005 (the "Convertible Notes") with interest payable semiannually 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.
The Company's financing agreements contain certain restrictive
covenants which require the Company, among other things, to maintain specified
levels of net income, cash availability, 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
the end of the Company's 2000 third quarter, the Company was not in compliance
with certain of these restrictive financial covenants because of its operating
results in 1999 and in the first three quarters of 2000. As a result, although
the Company had obtained waivers of these covenant violations for its third
quarter, the Company classified the long-term portion of its outstanding senior
notes as current liabilities on its third quarter balance sheet. The Company
subsequently completed the negotiation and execution of amendments to the
applicable financing agreements, which waived or modified the terms of these
financial covenants for future fiscal periods. Other than non-compliance with
certain covenants in one equipment lease, which was terminated as of September
29,2000 by our purchase of the leased equipment, effective September 24, 2000,
the Company was in compliance with all such covenants. The senior notes have
been reclassified as a long-term liability in the financial statements for the
fourth quarter and for the year ended September 24, 2000.
Maturities of long-term debt for the five years subsequent to September
24, 2000 are as follows:
2001 $ 20,910
2002 17,918
2003 16,547
2004 10,125
2005 150,057
Thereafter 59
---------
$ 215,616
=========
32
<PAGE> 33
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2000 1999 1998
-------- ------ --------
Current
Federal $ 4,985 $1,023 $ (9,660)
State (2,774) -- --
Deferred (26,748) 3,657 (7,350)
-------- ------ --------
$(24,537) $4,680 $(17,010)
======== ====== ========
The deferred benefit is composed of the following:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C>
Asset bases, lives and depreciation methods $(15,371) $ 2,709 $ 2,459
Reserves and accruals not currently deductible (114) 1,659 (5,709)
Tax credits and net operating loss carryforwards (35,061) (6,759) (19,066)
Valuation allowance and other 23,798 6,048 14,966
-------- ------- --------
$(26,748) $ 3,657 $ (7,350)
======== ======= ========
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate (34)% 35% (34)%
Effect of:
State income taxes, net of federal income tax benefits (3) 1 (4)
Tax benefits of the Foreign Sales Corporation (2) (6) (4)
Valuation allowance on net operating loss carryforwards
and/or use of tax credits 14 (9) 16
---- ---- ----
(25)% 21% (26)%
==== ==== ====
</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
24, 2000, the Company had unused tax credits and net operating loss
carryforwards of $63,730,000, of which $5,525,000 can be carried forward
indefinitely and $58,205,000 which expire at various dates through 2020. A
valuation allowance of $45,417,000 has been recognized due to the
33
<PAGE> 34
uncertainty of realizing the benefit of certain tax credits and net operating
loss carryforwards. The following is a table of the significant components of
the Company's deferred tax assets:
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 26,
2000 1999
------------- -------------
<S> <C> <C>
Current deferred tax assets:
Receivable reserves $ 2,271 $ 2,489
Inventories 9,290 8,887
Accruals and other reserves 4,571 4,642
Tax credits -- 498
--------- ---------
Total current deferred tax assets 16,132 16,516
Long-term deferred tax assets (liabilities):
Property, plant and equipment 15,162 (209)
Tax credits 13,043 12,903
Net operating loss carryforwards 50,687 15,268
Valuation allowance (45,417) (21,619)
--------- ---------
Total long-term deferred tax assets 33,475 6,343
--------- ---------
Total deferred tax assets $ 49,607 $ 22,859
========= =========
</TABLE>
6. 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, except for the
Convertible Notes, 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 fair value of the Company's Convertible
Notes is estimated based on the closing market price of the Convertible Notes as
of the end of the year.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 129,314 $ 129,314 $ 98,820 $ 98,820
Securities available for sale 110,955 110,955 139,402 139,402
Long-term debt 65,616 47,645 69,733 69,548
Convertible Notes 150,000 145,068 150,000 173,949
</TABLE>
34
<PAGE> 35
7. 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
4,353,185 common shares have been granted as of September 24, 2000. 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.
1996 PLAN 1988 PLAN
--------- ----------
Balance, September 28, 1997 18,500 1,786,761
Granted at $20.19 to $27.75 232,270 139,065
Exercised at $13.81 to $33.88 -- (168,261)
Expired (1,510) (2,700)
----------- -----------
Balance, September 27, 1998 249,260 1,754,865
Granted at $26.63 to $46.63 317,505 --
Exercised at $2.00 to $34.25 (8,080) (159,305)
Expired (3,260) (17,245)
----------- -----------
Balance, September 26, 1999 555,425 1,578,315
Granted at $14.81 to $21.38 779,300 --
Exercised at $2.46 to $17.33 -- (40,280)
Expired (126,140) (50,595)
----------- -----------
Balance, September 24, 2000 1,208,585 1,487,440
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:
2000 1999 1998
--------- --------- ----------
Net income (loss):
As reported $(73,612) $ 17,638 $(48,411)
Pro forma (84,137) 12,489 (54,303)
Net income (loss) per common and
common equivalent share:
As reported - basic $ (2.97) $ 0.77 $ (2.46)
Pro forma - basic $ (3.40) $ 0.54 $ (2.76)
As reported - diluted $ (2.97) $ 0.75 $ (2.46)
Pro forma - diluted $ (3.40) $ 0.53 $ (2.76)
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
various grants during 2000: risk-free interest rate of 6.2%; expected life of
six years; and expected volatility of 78%. The following weighted average
assumptions were used for various grants in 1999: risk-free interest rate of
4.8%; expected life of six years; and expected volatility of 61%. The following
weighted average assumptions were used for various grants in 1998: risk-free
interest rate of 5.8%; expected life of six years; and expected volatility of
69%.
EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan covering its employees. The
Company's contributions to the plan were $10,375,000 in 2000, $11,324,000 in
1999 and $9,239,000 in 1998.
35
<PAGE> 36
The Company sponsors a self-insured comprehensive medical and dental
plan for qualified employees that is funded by contributions from both the
Company and plan participants. Contributions are made through a Voluntary
Employee's Benefit Association Trust. The Company recognized expense related to
these plans of $19,403,000 in 2000, $22,574,000 in 1999 and $19,109,000 in 1998.
8. COMMITMENTS AND CONTINGENCIES
OPERATING AND CAPITAL LEASES
The Company is committed under various operating lease agreements.
Total rent expense under these operating leases was $23,474,000 in 2000,
$26,726,000 in 1999 and $22,099,000 in 1998.
The Company also leases some manufacturing equipment under agreements
that transfer ownership of the equipment by the end of the lease terms. As a
result, the present value of the remaining future minimum lease payments has
been recorded as a capital lease asset and related capitalized lease obligation.
Assets under these capital leases are included in the accompanying consolidated
balance sheets.
Future minimum payments for all operating leases and capital leases
with initial or remaining terms of one year or more subsequent to September 24,
2000 are as follows:
OPERATING CAPITAL
LEASES LEASES
--------- --------
2001 $ 14,327 $ 9,603
2002 11,399 6,328
2003 5,989 7,033
2004 3,239 --
2005 and thereafter 13,700 --
-------- -------
Total minimum lease payments $ 48,654 22,964
========
Amount representing interest (4,708)
-------
Present value of minimum
lease payments $18,256
=======
LEGAL PROCEEDINGS
On September 18, 2000, HTI commenced a lawsuit in the United States
District Court for the District of Minnesota against the Magnecomp Group, an
unincorporated association of companies, and seven members of the Magnecomp
Group. The lawsuit alleges that the Magnecomp Group has sold infringing products
without a license, and alleges infringement of nine of HTI's patents related to
the design and manufacture of suspension assemblies. The lawsuit requests
damages, including treble damages, attorneys' fees, costs, and an injunction
against the Magnecomp Group.
On October 12, 2000, Magnecomp Corporation commenced a lawsuit in the
United States District Court for the Central District of California against HTI.
The lawsuit alleges that HTI has sold products infringing four patents, engaged
in anti-competitive conduct in violation of federal and state antitrust laws,
and violated California state law regarding contractual interference and unfair
competition. The lawsuit requests damages, including treble damages, attorneys'
fees, costs, punitive damages, and an injunction against HTI. On December 8,
2000, the California District Court issued an order granting HTI's motion to
transfer the California action to the United States District Court for the
District of Minnesota.
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
that include the Company's products as a component. The Company is currently a
party to the litigation described above. In addition, certain of its customers
have been sued on patents having claims closely related to products sold by the
Company. In the event any third party were to make a valid infringement claim
and a license were not available on terms acceptable to the Company, the
Company's operating results could be adversely affected. The Company expects
that, as the number of patents issued continues to increase, and as the Company
grows, the volume of intellectual property claims could increase. The Company
may need to engage in litigation to enforce patents issued or licensed to it,
protect trade secrets or know-how owned by it or determine the enforceability,
scope and validity of the intellectual property rights of others. The Company
could incur substantial costs in such litigation or other similar legal actions,
which could have a material adverse effect on its results of operations.
36
<PAGE> 37
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.
OTHER MATTERS
In early calendar 2000, the World Trade Organization ("WTO") ruled that
the United States Foreign Sales Corporation ("FSC") provision constituted an
illegal export subsidy, and specified that the United States withdraw the FSC
provision effective October 1, 2000. In response to the ruling, the United
States government recently enacted The FSC Repeal and Extraterritorial Income
Exclusion Act of 2000. The United States believes this is a WTO-compatible
solution. The Company does not expect that the new legislation will change
materially the tax benefit earned by the Company.
9. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999 1998
-------- ---------- ---------
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Receivables, net $ 17,058 $ (3,631) $(23,164)
Inventories 8,468 (15,204) 1,409
Prepaid and other expenses 910 (2,827) (5,054)
Accounts payable and accrued
liabilities (2,029) (12,613) 21,444
Other non-current liabilities (2,986) 759 (2,599)
-------- -------- --------
$ 21,421 $(33,516) $ (7,964)
======== ======== ========
Cash paid for:
Interest (net of amount capitalized) $12,452 $ 9,685 $ 3,486
Income taxes 5,927 3,775 2,345
</TABLE>
Capitalized interest was $2,817,000 in 2000, $5,110,000 in 1999 and
$6,766,000 in 1998.
10. SALE OF COMMON STOCK
In February 1999, the Company issued 4,800,000 shares of its common
stock through a public offering. The Company received net proceeds of
$209,136,000 which are being used for general corporate purposes.
11. SEGMENT REPORTING
Based on the requirements of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information", the Company has determined that suspension assemblies is its only
reportable segment. The suspension assembly segment consists of conventional and
TSA suspensions sold to a small number of disk drive manufacturers. The
accounting policies of the segment are the same as those described in the
summary of significant accounting policies.
Detailed revenue by product sold are as follows:
2000 1999 1998
-------- -------- --------
Conventional suspensions $103,515 $179,549 $244,777
TSA suspensions 351,544 378,217 146,163
Other 4,513 22,504 16,676
-------- -------- --------
$459,572 $580,270 $407,616
======== ======== ========
37
<PAGE> 38
Sales to foreign locations were as follows:
2000 1999 1998
-------- -------- --------
Foreign-based enterprises $257,324 $272,129 $167,767
Foreign subsidiaries of U.S.
corporations 155,422 144,120 47,885
-------- -------- --------
$412,746 $416,249 $215,652
======== ======== ========
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.
Revenue and long-lived assets by geographic area are as follows:
2000 1999 1998
-------- -------- ---------
Revenue:
Hong Kong $141,230 $132,601 $115,990
Thailand 128,270 117,774 40,473
Japan 59,225 72,523 24,557
United States 52,585 168,717 195,075
China 40,799 47,880 25,767
Mexico 23,807 24,135 --
Indonesia 13,577 16,282 --
Other foreign countries 79 358 5,754
-------- -------- ---------
$459,572 $580,270 $407,616
======== ======== =========
2000 1999 1998
-------- -------- ---------
Long-lived assets:
United States $283,602 $352,901 $335,208
Other foreign countries 57 35 81
-------- -------- ---------
$283,659 $352,936 $335,289
======== ======== =========
Sales to customers in excess of 10% of net sales are as follows:
2000 1999 1998
-------- -------- ---------
SAE Magnetics, Ltd/TDK 26% 21% 26%
Seagate Technology, Inc. 19 16 18
IBM and affiliates 15 23 20
Read-Rite Corporation 14 6 10
Alps Electric Co., Ltd. 13 10 4
Yamaha Corporation 2 12 10
Sales to the Company's five largest customers constituted 87%, 82% and
84% of net sales for 2000, 1999 and 1998, respectively.
38
<PAGE> 39
12. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
The following table summarizes unaudited financial data for 2000 and
1999.
<TABLE>
<CAPTION>
2000 BY QUARTER 1999 BY QUARTER
-------------------------------------------------- ---------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $123,823 $110,937 $108,663 $116,149 $155,275 $152,366 $131,257 $141,372
Gross profit 7,983 4,442 4,238 19,486 33,585 36,390 9,393 14,298
Income (loss) from
operations (55,395)(1) (14,131) (30,763)(3) 1,873 16,714 17,169 (7,520) (3,030)
Income (loss)
before income taxes (55,167)(1) (14,527) (30,558)(3) 2,103 14,598 17,404 (6,955) (2,729)
Net income (loss) (39,169)(2) (13,101) (22,919)(4) 1,577 11,533 13,748 (5,494) (2,149)
Net income (loss)
per share -
Basic (1.58) (0.53) (0.92) 0.06 0.58 0.61 (0.22) (0.09)
Diluted (1.58) (0.53) (0.92) 0.06 0.52 0.54 (0.22) (0.09)
Price range per
share
High 30.00 22.50 22.00 25.00 35.25 51.25 29.25 32.75
Low 17.63 14.69 9.38 12.81 11.88 19.69 18.50 21.75
</TABLE>
The price range per share, reflected above, is the highest and lowest
bids as quoted on The Nasdaq National Market during each quarter.
(1) Includes $46,528,000 for asset impairment and other charges.
(2) Includes (net of tax) $34,896,000 for asset impairment and other charges.
(3) Includes $16,740,000 for asset impairment and other charges.
(4) Includes (net of tax) $12,555,000 for asset impairment and other charges.
39
<PAGE> 40
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 24, 2000 and September 26, 1999, and the related consolidated
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended September 24, 2000. These financial
statements and the schedule referred to below 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
generally accepted in the United States. 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 24, 2000 and September 26, 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended September 24, 2000 in conformity with generally
accepted accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 30, 2000
40
<PAGE> 41
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Hutchinson Technology Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
BALANCE AT ADDITIONS CHARGED TO OTHER CHANGES BALANCE AT
BEGINNING OF PERIOD COSTS AND EXPENSES ADD (DEDUCT) END OF PERIOD
------------------- -------------------- ------------- -------------
<S> <C> <C> <C> <C>
1998: Deducted from asset accounts-
Allowance for doubtful accounts receivable.. $1,965 $ 1,730 $ -- (1) $3,695
Reserve for sales returns and allowances.... 217 5,656 (4,361)(2) 1,512
Severance charges........................... -- -- -- --
------ ------- -------- ------
$2,182 $ 7,386 $ (4,361) $5,207
====== ======= ======== ======
1999: Deducted from asset accounts-
Allowance for doubtful accounts receivable.. $3,695 $ 303 $ (927)(1) $3,071
Reserve for sales returns and allowances.... 1,512 6,089 (4,277)(2) 3,324
Severance charges........................... -- -- -- --
------ ------- -------- ------
$5,207 $ 6,392 $ (5,204) $6,395
====== ======= ======== ======
2000: Deducted from asset accounts-
Allowance for doubtful accounts receivable.. $3,071 $ 434 $ 309 (1) $3,814
Reserve for sales returns and allowances.... 3,324 5,319 (6,300)(2) 2,343
Severance charges........................... -- 6,745 (6,745)(3) --
------ ------- -------- ------
$6,395 $12,498 $(12,736) $6,157
====== ======= ======== ======
</TABLE>
(1) Uncollectible accounts receivable written off, net of recoveries.
(2) Returns honored and credit memos issued.
(3) Severance charges paid.
41
<PAGE> 42
ELEVEN-YEAR SELECTED FINANCIAL DATA
Hutchinson Technology Incorporated and Subsidiaries
<TABLE>
<CAPTION>
ANNUAL (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)
GROWTH (%)
-------------- 2000 1999 1998 1997 1996 1995 1994
5 10 --------- -------- -------- -------- -------- -------- --------
YEAR YEAR
---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR:
9 14 Net sales $ 459,572 $580,270 $407,616 $453,232 $353,186 $299,998 $238,794
(13) 3 Gross profit (loss) 36,149 $ 93,666 (3,636) 117,279 79,570 73,763 39,246
Percent of net sales 8% 16% (1)% 26% 23% 25% 16%
Income (loss) from
-- -- operations $(98,416) $ 23,333 $(65,124) $ 52,716 $ 18,203 $ 28,921 $ 7,780
Percent of net sales (21)% 4% (16)% 12% 5% 10% 3%
-- -- Net income (loss) $(73,612) $ 17,638 $(48,411) $ 41,909 $ 13,802 $ 21,078 $ 5,880
Percent of net sales (16)% 3% (12)% 9% 4% 7% 2%
8 25 Capital expenditures $ 64,657 $120,596 $206,888 $ 82,639 $ 77,065 $ 44,472 $ 29,540
Research and development
7 18 expenses 21,433 23,106 20,360 20,185 27,651 15,041 8,626
26 25 Depreciation expense 91,194 92,635 50,544 38,299 33,565 28,174 23,974
Cash flow from operating
4 16 activities 69,679 81,176 (12,824) 76,816 39,904 57,814 11,967
AT YEAR END:
10 12 Receivables $ 64,708 $ 81,766 $ 78,135 $ 86,044 $ 56,278 $ 40,683 $ 39,115
20 19 Inventories 32,516 40,984 25,780 27,189 17,235 13,298 9,529
38 28 Working capital 270,609 309,447 101,114 173,156 62,102 54,284 51,996
Net property, plant
25 26 and equipment 283,659 352,936 335,289 175,253 121,706 93,816 77,887
29 27 Total assets 683,933 751,849 549,478 429,839 238,983 190,898 151,148
Total debt and capital
44 28 leases 233,872 219,733 222,860 78,194 58,945 37,700 40,080
Total debt and capital
leases as a percentage
of total capitalization 37% 32% 48% 22% 31% 24% 30%
27 30 Shareholders' investment $392,489 $464,959 $236,830 $282,958 $133,684 $119,745 $ 94,619
Return on shareholders'
investment (17)% 5% (19)% 20% 11% 20% 6%
(1) 6 Number of employees 4,729 7,701 7,764 7,181 5,479 4,858 4,600
9 8 Shares of stock
outstanding 24,830 24,744 19,780 19,619 16,356 16,341 15,999
PER SHARE
INFORMATION:
-- -- Net income (loss) -
diluted $ (2.97) $ 0.75 $ (2.46) $ 2.21 $ 0.82 $ 1.28 $ 0.36
Shareholders' investment
17 21 (book value) 15.81 18.79 11.97 14.42 8.17 7.33 5.91
Price range:
0 21 High 30.00 51.25 35.44 38.38 21.83 29.67 13.29
4 19 Low 9.38 11.88 13.81 12.75 10.25 7.67 7.25
1993 1992 1991 1990
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FOR THE YEAR:
Net sales $198,734 $160,340 $143,260 $122,444
Gross profit (loss) 44,423 40,261 27,920 26,107
Percent of net sales 22% 25% 19% 21%
Income (loss) from
operations $ 9,961 $ 13,581 $ 7,265 $ 8,528
Percent of net sales 5% 8% 5% 7%
Net income (loss) $ 8,554 $ 12,849 $ 4,499 $ 5,338
Percent of net sales 4% 8% 3% 4%
Capital expenditures $ 46,768 $ 20,492 $ 17,747 $ 6,794
Research and development
expenses 9,846 5,770 4,208 3,959
Depreciation expense 15,737 12,908 11,253 9,719
Cash flow from operating
activities 22,449 19,397 16,944 15,174
AT YEAR END:
Receivables $ 22,320 $ 25,454 $ 18,499 $ 20,216
Inventories 7,899 5,638 4,580 5,913
Working capital 26,238 49,018 18,083 22,768
Net property, plant
and equipment 72,419 41,513 34,304 27,618
Total assets 116,639 109,126 65,992 64,669
Total debt and capital
leases 12,460 16,755 19,354 20,550
Total debt and capital
leases as a percentage
of total capitalization 12% 18% 37% 42%
Shareholders' investment $ 88,689 $ 77,025 $ 33,512 $ 28,834
Return on shareholders'
investment 10% 23% 14% 20%
Number of employees 4,108 3,332 2,798 2,648
Shares of stock
outstanding 15,993 15,519 11,907 11,844
PER SHARE
INFORMATION:
Net income (loss) -
diluted $ 0.53 $ 0.91 $ 0.37 $ 0.45
Shareholders' investment
(book value) 5.55 4.96 2.81 2.43
Price range:
High 16.58 10.67 4.58 4.50
Low 6.83 3.17 2.04 1.67
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation of HTI, as amended by Articles
of Amendment dated 1/27/88 and as amended by Articles of Amendment
dated 1/21/97 (incorporated by reference to Exhibit 3.1 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 6/29/97)..........Incorporated by Reference
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2
to HTI's Quarterly Report on Form 10-Q for the quarter ended 12/29/96)
and Amendments to Restated By-Laws of HTI dated 7/19/00 (incorporated
by reference to Exhibit 3.2 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 6/25/00).............................................Incorporated by Reference
4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and
Exchange Commission upon request copies of instruments with respect to
long-term debt.
4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.6 to
HTI's Registration Statement on Form S-3, Registration No.
333-50143)............................................................Incorporated by Reference
4.3 Purchase Agreement dated 3/12/98 by and among HTI, NationsBanc
Montgomery Securities LLC and First Chicago Capital Markets, Inc.
(incorporated by reference to Exhibit 4.7 to HTI's Registration
Statement on Form S-3, Registration No. 333-50143)....................Incorporated by Reference
4.4 Shelf Registration Agreement dated as of 3/18/98 by and among HTI,
NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc. (incorporated by reference to Exhibit 4.8 to HTI's
Registration Statement on Form S-3, Registration No. 333-50143).......Incorporated by Reference
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI,
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 3/24/96),
and First Amendment to Office/Warehouse Lease dated 4/30/96
(incorporated by reference to Exhibit 10.2 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 6/23/96)...........................Incorporated by Reference
10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated
by reference to Exhibit 10.12 to HTI's Annual Report on Form 10-K for
the fiscal year ended 9/27/92) and Amendment effective as of 11/19/97
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 12/28/97)..........................Incorporated by Reference
10.3 Description of Bonus Program for Key Employees of Hutchinson
Technology Incorporated (incorporated by reference to Exhibit 10.13
to HTI's Annual Report on Form 10-K for the fiscal year ended
9/27/92)..............................................................Incorporated by Reference
10.4 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8
to HTI's Annual Report on Form 10-K for the fiscal year ended
9/25/88), Amendment to the 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to HTI's Annual Report on Form 10-K for the
fiscal year ended 9/26/93), and Amendment to the 1988 Stock Option
Plan (incorporated by reference to Exhibit 10.5 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 3/26/95)....................Incorporated by Reference
10.5 Patent License Agreement, effective as of 9/1/94, between
Hutchinson Technology Incorporated and International Business Machines
Corporation (incorporated by reference to Exhibit 10.11 to HTI's
Quarterly Report on Form 10-Q/A for the quarter ended
6/25/95)..............................................................Incorporated by Reference
10.6 Lease Agreement between Meridian Eau Claire LLC and Hutchinson
Technology Incorporated, dated 5/1/96 (incorporated by reference to
Exhibit 10.10 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 6/23/96) and First Amendment to Lease...........................Filed Electronically
</TABLE>
<PAGE> 44
<TABLE>
<S> <C> <C>
10.7 Master Lease Agreement dated as of 12/19/96 between General
Electric Capital Corporation, as Lessor ("GE"), and Hutchinson
Technology Incorporated, as Lessee (incorporated by reference to
Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 12/29/96), Amendment dated 6/30/97 to the Master Lease Agreement
between GE and Hutchinson Technology Incorporated (incorporated by
reference to Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 12/28/97), letter amendment dated 3/5/98 to the
Master Lease Agreement between GE and Hutchinson Technology
Incorporated (incorporated by reference to Exhibit 10.11 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 3/29/98), letter
amendment dated 9/25/98 to the Master Lease Agreement between GE and
Hutchinson Technology Incorporated (incorporated by reference to
Exhibit 10.11 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/27/98), letter amendment dated 1/11/00, effective as of
12/22/99, to the Master Lease Agreement between GE and Hutchinson
Technology Incorporated (incorporated by reference to Exhibit 10.1 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 12/26/99),
and letter amendment dated 8/31/00 to the Master Lease Agreement
between GE and Hutchinson Technology Incorporated.....................Filed Electronically
10.8 Hutchinson Technology Incorporated 1996 Incentive Plan
(incorporated by reference to Exhibit 10.12 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 12/29/96)..........................Incorporated by Reference
10.9 Hutchinson Technology Incorporated Incentive Bonus Plan
(incorporated by reference to Exhibit 10.13 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 12/28/97)..........................Incorporated by Reference
10.10 Description of Hutchinson Technology Incorporated Year 2000
Bonus Program (incorporated by reference to Exhibit 10.2 to HTI's
Quarterly Report on Form 10-Q for the quarter ended
12/26/99).............................................................Incorporated by Reference
21.1 List of Subsidiaries..................................................Filed Electronically
23.1 Consent of Independent Public Accountants.............................Filed Electronically
27.1 Financial Data Schedule...............................................Filed Electronically
</TABLE>
