-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TukAHQCCWhwLc8enT3h9gDSdZaPgj9Nb/GnTHEamljN978T7C80TeEv6Zi/sPEjJ iG2FzC4MUHwDriHcB5ZehQ== 0000891618-97-003674.txt : 19970918 0000891618-97-003674.hdr.sgml : 19970918 ACCESSION NUMBER: 0000891618-97-003674 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970904 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HMT TECHNOLOGY CORP CENTRAL INDEX KEY: 0001005967 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 943084354 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-27586 FILM NUMBER: 97675003 BUSINESS ADDRESS: STREET 1: 1055 PAGE AVE CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5104903100 MAIL ADDRESS: STREET 1: 1055 PAGE AVENUE CITY: FREMONT STATE: CA ZIP: 94538 10-K/A 1 AMENDMENT #1 TO THE FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED MARCH 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM --------------- TO --------------- COMMISSION FILE NUMBER: 000-27586 HMT TECHNOLOGY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3084354 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 1055 PAGE AVENUE, FREMONT, CA 94538 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (510) 490-3100 WEB PAGE ADDRESS: WWW.HMTT.COM SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (TITLE OF EACH CLASS) (NAME OF EXCHANGE ON WHICH REGISTERED) COMMON STOCK, PAR VALUE $0.001 NASDAQ NATIONAL MARKET 5 3/4% CONVERTIBLE SUBORDINATED NOTES, NASDAQ SMALLCAP MARKET DUE 2004
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 31, 1997 the aggregate market value of Common Stock held by non-affiliates was approximately $426.1 million. For purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion of shares held by directors and officers is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. As of June 25, 1997, 41,535,789 shares of the registrant's common stock, par value $0.001 per share, which is the only class of common stock of the registrant, were outstanding. The Company's stock is traded on the Nasdaq National Market (HMTT). The undersigned registrant hereby amends and restates its report on Form 10-K for the fiscal year ended March 31, 1997 in its entirety, as set forth herein. The purpose of this filing is to correct the column spacing on certain tables in the financial statements. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is hereby incorporated by reference from the Company's definitive proxy statement, filed with the Commission on July 8, 1997. ================================================================================ 2 HMT TECHNOLOGY CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997
PAGE ---- PART I Item 1. Business..................................................................... 1 Item 2. Properties................................................................... 20 Item 3. Legal Proceedings............................................................ 21 Item 4. Submission of Matters to a Vote of Security Holders.......................... 21 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... 22 Item 6. Selected Consolidated Financial Data......................................... 23 Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations........................................................ 24 Item 8. Consolidated Financial Statements and Supplementary Data..................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................... 28 PART III Item 10. Directors and Executive Officers of the Registrant........................... 29 Item 11. Executive Compensation....................................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 29 Item 13. Certain Relationships and Related Transactions............................... 29 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.......................................................................... 30
i 3 PART I ITEMS 1, 2, 3 AND 4. ITEM 1. BUSINESS This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." HMT Technology Corporation ("HMT" or the "Company") is an independent supplier of high-performance thin film disks for high-end, high-capacity hard disk drives, which in turn are used in high-end PCs, network servers and workstations. HMT was incorporated in Delaware in 1988 as a subsidiary of Hitachi Metals, Ltd. ("Hitachi Metals") to acquire certain assets and certain liabilities of the thin film division of Xidex Corporation, which had been producing thin film disks since 1983. Since completing the acquisition, the Company has continued to supply thin film disks to manufacturers of hard disk drives. The disks currently being shipped by the Company are primarily for disk drives with storage capacities ranging from 2.0 to 10.0 gigabytes ("GB") (using two to 12 disks), and substantially all have coercivity levels of 2000 Oe or higher. Since March 1994, the Company has focused on addressing the needs of the high-end, high-capacity segment of the disk drive market. HMT believes that its recent operating results reflect its success in meeting these needs and that its future growth and success depend on its ability to continue to develop and market products that enable its customers to produce high-performance disk drives for high-end data storage applications. The Company provides a range of magnetic density points (coercivities), glide heights and disk thicknesses to match the design and performance requirements of each particular customer. The Company's principal customers currently include Maxtor Corporation ("Maxtor"), Samsung Electronic Company Limited ("Samsung"), Iomega Coporation ("Iomega"), Western Digital Corporation ("Western Digital"), Micropolis Corporation ("Micropolis") and Quantum Corporation ("Quantum"). INDUSTRY BACKGROUND The Disk Drive Market Market demand for disks and disk drives has been growing steadily, stimulated by demand for new computers, upgrades to existing computers and the growing use of sophisticated network servers. The introduction of increasingly powerful microprocessors and more memory intensive software, combined with the development and growth of multimedia computing applications and Internet usage, have stimulated demand for PCs in both the home and business markets. According to International Data Corporation ("IDC"), worldwide shipments of PCs were 59 million units in 1995 and 69 million units in 1996, and are projected to reach approximately 117 million units in 2000. In addition, the PC server market, driven by the trend toward networking applications and the expansion of the Internet, is expected to grow substantially through the year 2000. The combined demand from the PC and PC server markets has resulted in strong growth in unit shipments of disk drives. According to IDC, worldwide shipments of hard disk drives were 105 million units in 1996 and are projected to be 132 million units in 1997 and 223 million units in 2000. According to IDC, the worldwide market for hard disk drives was approximately $23 billion in 1996. Strong overall demand for disk drives has also stimulated the growth of the thin film disk market. According to Trend Focus, there were 340 million thin film disks produced in 1996 with an estimated market value of $4.0 billion. Trend Focus projects that the total market for thin film disks will reach 725 million units in 2000, with an estimated market value of $7.9 billion. The applications being developed for PCs require greater storage capacity and, as a result, have sharply increased the demand for high-capacity disk drives. Users purchasing newer PCs for business and home are commonly attracted by the availability of greater processing power, larger databases, multimedia and other memory intensive applications and more sophisticated operating systems, such as Windows 95 or Windows 4 NT. Increasing use of the Internet and on-line data, including image storage and retrieval, have further stimulated the demand for storage capacity. The disk drive industry has responded to this demand with significant technology and product advances. As a result, mean storage capacity per disk drive has increased from 213 megabytes ("MB") in 1993 to 690 MB in 1995 to 2.7 GB in 1997. Meanwhile, the average number of disks per drive has remained relatively constant at about 2.5 disks. While storage capacity has grown, the cost per MB has fallen from $1.26 in 1993 to $0.32 in 1995 and to $0.10 in 1997. Today's market continues to generate pressure for advances to facilitate these trends in computing, especially at the high-end. Thus, the Company believes that success in the disk drive market has depended and for the foreseeable future will depend on the ability of the disk drive manufacturer, together with its suppliers of critical components, such as thin film disks, to keep pace with these advances. Additionally, removable-media storage devices, including removable hard disk drives, have received increased attention in the data storage market. Removable hard disk drives utilize cartridges incorporating thin film disks and combine the high-capacity and rapid access of hard disk drives with the benefits of removability. These devices can be used peripherally to increase the storage capacity for PCs. Disk Drive Technology The basic elements of the disk drive, sized to fit various industry form factors, have remained essentially the same since hard disk drives were first introduced. The principal components of a hard disk drive are disks, heads, spindle and actuator mechanics and electronics. Each disk drive typically contains from one to ten disks that are attached to a spindle/motor assembly within a sealed enclosure. The electronics control the spinning of the disk, the positioning of the head and the writing and retrieval of data stored on the disk. The recording head is a small magnetic transducer that, when the disk is spinning, "flies" just above the disk surface. Data are written on circumferential tracks on the disk when the electronic channel sends current pulses to the head. The head converts these pulses to magnetic fields that cause the magnetic layer within the disk and under the recording head to become magnetized, oriented in the direction of the head's magnetic field. Reversing the current in the head reverses the direction of the magnetic field on the disk. During the read-back process, as the head scans over the disk, magnetic flux from the disk's magnetic layer is picked up by the head and induces an electrical current which is converted into voltage. The output signal voltage is then transformed into digital data by the read channel electronics. The following diagram illustrates the principal components of a typical hard disk drive: [DIAGRAM -- of a typical hard disk drive with arrows identifying key components: disk, spindle, recording head, and electronics.] Major improvements in disk drive performance have been based on technological advances in the principal components. In a typical disk drive today, the spindle/motor assembly rotates the disk at 5,200 to 10,000 revolutions per minute. The head reads and writes data onto the spinning disk while flying at a height of 0.7 to 1.7 microinches (0.018 to 0.04 micron) at data transfer rates of 70 to 130 megabits per second. The combination of modern head and disk technologies enables this drive to store data on 5,000 to 8,000 circumferential tracks per radial inch on the disk with 100,000 to 160,000 bits of data per inch along each track. 2 5 Thin Film Disk Technology A thin film disk is composed of a substrate, generally aluminum, coated with thin films capable of storing information in the form of magnetic patterns. The manufacturing of thin film disks is a multi-step process using processes similar to those used for the production of silicon wafers for semiconductors. The manufacturing process involves the deposition of extremely thin, uniform layers of magnetic film onto a substrate using a sputtering process, by either a static or in-line system, similar to that used to coat silicon wafers. The basic process consists of many interrelated steps and requires an extremely clean environment. Minor deviations in the manufacturing process, minute impurities in materials used, particulate contamination or other problems can cause significant numbers of disks to be rejected, thereby causing significant yield loss. The most significant technological challenges facing disk manufacturers today are associated with market demand for increased storage capacity and durability. An effective implementation of thin film technology to meet these challenges must address various performance-related characteristics, including magnetics, glide height, durability and static friction ("stiction"). - Magnetics. Coercivity, a measure of the magnetic strength of the disk, is expressed in Oersted ("Oe"). The coercivity of the disk is determined by the types of disk substrate and thin film materials used, substrate surface conditions before disk sputtering, and the conditions that exist during the sputtering process, including temperature, vacuum and possible sources of disk contamination. As areal density increases, higher coercivity is needed to permit sharper transitions between magnetized regions. This allows each bit of data to be stored in a smaller area, and therefore more data can be stored in the same disk area. Advanced drive designs currently require coercivities in the range of 2000 to 2400 Oe, compared to a range of 950 to 1200 Oe seven years ago. The Company believes that most high-end disk drive manufacturers will require coercivities of 2400 Oe and above by the end of 1997. HMT currently manufactures and sells disks in commercial quantities with coercivities ranging from 2000 to 2400 Oe, with more than 50% of the Company's revenues during the three months ended March 31, 1997 deriving from disks with coercivities of 2200 Oe and above. The Company is also currently producing small quantities of disks for use in customer development programs with coercivities of up to 3000 Oe. - Glide Height. The glide height of the disk is the measure of the height at which the head can fly over the disk without hitting anything and is a standard used in the specification of the disk. The actual flying height of the head in the disk drive is higher than the glide height to provide a margin for safety. Glide height depends on the smoothness and flatness of the disk surface. The lower the disk head flies above the disk surface, the more accurately the head can read the magnetic signal, allowing a smaller magnetized region to store each bit of data and thereby contributing to increases in areal density. While the current industry standard glide height is 1.5 microinches, the Company expects that glide heights will decrease to 1.0 microinches by the end of 1997. The Company currently manufactures and sells disks in commercial quantities with glide heights of 1.5 microinches to 1.0 microinches. - Durability Through Start/Stop Cycles. In most hard disk drives, the head and disk come into contact when the disk drive is turned off and the head rests directly on the inner diameter of the disk. To prevent wear on the disk, a protective overcoat is deposited over the magnetic layer of the disk. However, the thickness of this overcoat must be minimized because this layer increases the distance of the head from the magnetic layer, thereby reducing the strength of the magnetic signal reaching the head. Customer specifications typically require 60,000 start/stop cycles for desktop PCs. - Stiction. Stiction is the static friction that occurs when two smooth surfaces come into contact. In the case of hard disk drives, an extremely smooth disk surface enables lower glide heights and can enhance durability by reducing the friction which occurs when the head contacts the disk. However, if a disk is too smooth, stiction will cause the head to adhere to the disk surface when the drive is turned on and off, causing irreparable damage to the hard disk drive. Disk manufacturers minimize this problem primarily through texturizing the disk surface in a controlled manner. 3 6 Disk manufacturers cannot simply address each performance characteristic discretely because the interplay among characteristics significantly impacts the overall performance of the disk. For example, a protective overcoat that yields a highly durable disk may well reduce the disk's potential storage capacity. Challenges Facing the Disk Drive Industry Despite technological advances in components, including thin film disks, and the prospects for continued data storage market growth, disk drive manufacturers face a demanding marketplace. A strong competitive position is best achieved through continual innovation. Improvements in product performance characteristics, designed to meet the growing demands for increased storage capacity, play an integral part in allowing the manufacturer to generate acceptable gross margins. However, in the highly competitive disk drive industry, other manufacturers have generally been able to develop comparable products within a relatively short time. The likelihood of rapidly decreasing profitability over the life cycle of any given product provides a strong incentive for manufacturers to innovate. This results in extremely short product cycles, currently estimated to be from nine to twelve months. Disk drive manufacturers participating in the high-end, high-capacity disk drive market segment can realize higher gross margins by successfully addressing the need for drives capable of supporting today's demand for high-performance, value-added computing products. In this segment, which supplies products incorporated into high-end PCs, network servers and workstations, users are less price sensitive than typical home PC consumers because they have a more compelling need for a value-added product. Because of the short product cycles and the significant technology improvements incorporated into each new generation of high performance disk drives, the need to be in the forefront of technological advances is particularly great for companies competing in this segment. Disk drive manufacturers can produce higher capacity products by putting more disks in a drive or coupling a number of drives together in an array. These approaches are limited by form factor constraints and technical complexity. These are also relatively high cost solutions since the drive manufacturer is adding more componentry. A more cost-effective solution is to develop a product that can store more data using the same number of components. Thus, disk drive manufacturers generally have relied on the development of new head technologies and of thin film disks with improved areal density characteristics to support generational advances in storage capacity and performance. THE HMT APPROACH HMT focuses on providing value added technological solutions that meet the demands of the high-end, high-capacity disk drive market. The Company develops, manufactures and sells technologically advanced products designed to provide improved performance, principally through achieving higher coercivities and lower glide heights. The Company seeks to be a supplier to disk drive manufacturers with a proven record for technological leadership because these customers have the greatest ability to fully exploit the value of technologically superior disks. By working with such high-end customers and their head vendors, HMT can influence leading edge disk drive designs and earn a strong position as a supplier of disks for these products. STRATEGY The key elements of HMT's strategy are as follows: - Establish and Maintain Leadership in High-End Product Technology. The Company focuses its development resources principally on performance improvements for disks sold to the high-end, high-capacity segment of the disk drive industry. In order to improve product performance characteristics, including magnetics, glide height, durability and stiction, HMT is continually engaged in efforts to enhance its proprietary technologies and processes. For example, efforts in the alloy and process development area, focusing largely on non-precious metal alloys, are directed toward improving disk coercivity above the 3000 Oe level. 4 7 - Develop Collaborative Relationships with Leading Head and Disk Drive Manufacturers. The Company works closely with head manufacturers developing new technologies, including TRI-PAD compatible and MR-head ready disks. This collaboration enables the parties to develop compatible products that can be effectively incorporated together into leading edge disk drives. HMT also seeks to establish strong relationships with its customers, enabling the Company to participate in establishing technological and design requirements for new products. The Company believes that close technical collaboration with its customers and their other suppliers during the design phase of new disk drives facilitates integration of the Company's products into new disk drives, improves the Company's ability to reach cost effective high volume manufacturing rapidly and enhances the likelihood that the Company will become a primary supplier of thin film disks for high performance disk drive products. - Develop Advanced Manufacturing Processes to Support Volume Production. HMT develops advanced manufacturing processes directly on state-of-the-art production equipment. Developing manufacturing processes for new products directly on active production lines during the research and development phase increases the likelihood that the Company can quickly and efficiently transition to high volume commercial production of new products. The ability to implement new processes quickly also helps the Company meet its customers' increasingly rapid time-to-market demands and advances its goal of having its products designed into its customers' disk drives. - Expand Manufacturing Capacity. The Company recently completed construction of a new 124,000 square foot production facility at its Fremont, California site. The administrative office areas and four production scale sputtering lines were brought into service during the fourth quarter of fiscal 1997. The Company plans to install up to 12 additional production scale sputtering lines in this new facility. In addition, the Company completed the expansion of its facility in Eugene, Oregon during fiscal 1997, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. The Company expects that added capacity will enable it to improve its ability to meet the demands of current customers and position it to take advantage of additional market opportunities. - Maintain Strict Quality Control of Manufacturing Process. HMT believes that its close attention to quality control results in a consistent product and high production yields and is key to its success. Attention to quality has the dual benefit of producing high performance disks and lowering the Company's cost of production. In addition, product quality is an essential factor in the supplier certification process of disk drive manufacturers. PRODUCTS The Company provides a range of magnetic density points (coercivities), glide heights and disk thicknesses. HMT currently manufactures and sells disks in commercial quantities with substantially all having coercivities levels of 2000 Oe or higher and glide heights of 1.5 microinches or less. The Company is also currently producing small quantities of disks for use in customer development programs with coercivities of up to 3000 Oe. The Company's product mix continually shifts as technological advances are implemented in anticipation of demand for disks with improved performance characteristics and the Company transitions production from less technologically sophisticated disks still in active use. For example, during the three months ended March 31, 1995, 1800 Oe and below products comprised 95.0% of total units shipped. In the three months ended March 31, 1997, substantially all products shipped were 2000 Oe and above, with more than 50% of the units shipped having coercivities of 2200 Oe and above. The Company's disks are currently used by seven disk drive manufacturers in more than 10 different 3 1/2-inch disk drive products. Currently, these disks are used in fixed disk drives that have capacities ranging from 2.0 GB to 10 GB with storage capacity per disk ranging from 750 MB to 1.5 GB and removable disk drives that have capacities of approximately 1.0 GB with storage capacity per disk of approximately 500 MB. The Company has the technological capability to produce disks to fit standard form factors of 5 1/4-inches and below, although it currently produces only 3 1/2-inch disks. 5 8 MANUFACTURING AND QUALITY HMT believes that its internally developed proprietary and patented manufacturing processes and state-of-the-art equipment, to which it has made proprietary modifications, combined with its extensive expertise, currently provide HMT with a technological advantage over competing independent thin film disk manufacturers. HMT's expertise, processes and equipment also allow it to develop new proprietary processes in response to customers' requirements for improved product performance and to integrate new technologies into the manufacturing process rapidly. The Company's production lines can be installed, modified or expanded on a cost efficient basis. The use of a modular strategy facilitates incremental capacity increases, efficient adaptation of manufacturing equipment for new product processes and achievement of high volume manufacturing capacity for new products on a timely basis. Manufacturing Process The Company's manufacturing process is briefly summarized as follows: Chamfer, Grind, Bake and Wash. The initial input to the production of a thin film disk is an aluminum blank that can be procured from a number of sources. To create specialized aluminum alloy substrates, HMT chamfers the inner and outer edges of the blank, and bakes the chamfered blank to bring out surface roughness. HMT then grinds the blank to achieve required gauge thickness and flatness, remove surface defects, and improve surface finish. HMT then washes the blank to remove particles. HMT currently produces these substrates through in house manufacturing, but may from time to time purchase a portion of its requirements from independent vendors. Plate, Polish, Texture and Wash. Aluminum substrates are plated with electroless Nickel-Phosphorous alloy, a non-magnetic layer critical to corrosion resistance that strengthens the disk and improves durability. The Company currently performs most of its nickel plating in-house. Disks are then polished to produce a mirror smooth surface. Polishing enhances the nickel surface, reducing its roughness, while maintaining the overall flatness of the disk. The Company's texturizing process, a highly automated patented process, produces a controlled roughness on the disk's surface to improve its stiction characteristics. The final step in these front-end processes is washing to present a clean disk surface. Subsequent processes occur in class 10 clean rooms only. Sputter, Dip Lube and Kiss Buff. The sputter process uses equipment and a process, similar to that used in silicon wafer fabrication, in which layers of materials are deposited on the disk through a vacuum sputtering process. The chrome and magnetic layers determine the magnetic properties of the disk. The carbon layer is a protective overcoat. After sputtering, a microscopic layer of lubrication is applied to the disk's surface to improve durability and reduce surface friction. After lubrication, a surface finishing step is applied, commonly referred to as kiss buff or tape burnish. Glide/Certify. In the test and certification process each finished disk is electronically screened and certified as acceptable based on the customer's specifications. A robotically controlled tester electronically tests for glide performance. The tester then writes information onto the disk, reads it back and erases it, simulating performance in the customer's disk drive. Each disk is tested for parametrics, errors in the read/erase process and surface defects. The conversion of a specialized aluminum alloy substrate into a final product requires three to five days. 6 9 THE THIN FILM DISK PRODUCTION PROCESS [DIAGRAM -- A flow chart summarizing the principal steps in the process flow and the corresponding disk layers created during the thin film disk production process.] Quality Assurance HMT has a dedicated quality assurance group. The Company believes that its quality assurance program allows it to realize superior product yields and consistently produce a quality product. Because a high quality product is critical to achieving strong operating results and high customer satisfaction, HMT's emphasis on this area will remain a top priority. The organization consists of four separate groups: - Application Engineering. The Application Engineering group is responsible for reviewing customer requirements and specifications by conducting specification reviews and soliciting customer and internal manufacturing feedback. Other functions include correlating and evaluating the results of HMT and customer testing, generating standards and performing source audits. 7 10 - Supplier Quality Engineering. Because quality assurance is a critical aspect of the Company's strategy, the emphasis on quality must extend to the supplier level. The Supplier Quality Engineering group is responsible for ensuring incoming product quality through auditing suppliers, reviewing process data, establishing internal specifications and creating quality procedures and practices. The group also establishes material specifications, supplier benchmarking and standards for qualification of the supplier base. - Reliability and Process Engineering. The Reliability and Process Engineering group is responsible for performing ongoing reliability testing, process improvement testing and new product development testing. Specific functions involve statistical process control analysis, gauge repeatability and reproducibility studies, equipment calibration, process qualification improvements and in-process quality audits. - Customer Support. The Customer Support group acts as liaison between the customer and the Company's manufacturing organization. All customer concerns and issues are handled through the group. Other responsibilities include corrective action requests, non-conforming material reviews, return material authorizations and document control. Manufacturing Facilities and Capacity The Company's manufacturing facilities, distribution center and administrative offices are located in Fremont, California. The Company's Fremont facility received ISO 9001 certification in May 1996. The Company operates 18 production scale sputtering lines for production and development of products. A typical sputtering line consists of one sputtering machine and associated equipment, such as texturizers, lubricators, glide testers and certifiers. The Company's facilities, which currently operate seven days a week, 24 hours per day, are close to full capacity. The Company recently completed construction of a new 124,000 square foot production facility at its Fremont, California site. Four production scale sputtering lines in this new facility were brought into service during the fourth quarter of fiscal 1997. The Company plans to install up to 12 additional production scale sputtering lines in this new facility. In addition, the Company completed the expansion of its facility in Eugene, Oregon during fiscal 1997, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. Because the Company has been operating at close to full capacity, further growth in the Company's net sales will depend on the continued successful expansion by the Company of its manufacturing capacity. There can be no assurance that the Company will be able to successfully increase capacity and the failure to do so could have a material adverse effect of the Company's business, operating results and financial condition. TECHNOLOGY The Company believes that there are a number of factors that are key to establishing and maintaining an advanced technology position. The Company is optimizing non-precious metal alloys, based on a cobalt/chromium/tantalum alloy, for future products with coercivities that can support foreseeable demand for increased storage capacity using relatively inexpensive materials. The Company also has extensive expertise in the deposition of these and other alloys onto disks. The Company uses state-of-the-art static sputtering machines in the development and production of disks. Static machines differ from in-line, pallet machines used by some other disk manufacturers in a number of important respects. Static sputtering machines process one stationary disk at a time, allowing for greater control of alloy deposition and minimizing spatial and temperature variation; use isolated process chambers, permitting the manufacturer to control and optimize each process step separately; and do not require a pallet, reducing the risk of contamination of the disk surface during processing. The Company has further enhanced the performance of sputtering equipment supplied by vendors through internally developed, proprietary and patented modifications. The Company believes its unique tribology approach, which minimizes detrimental interaction between the head and disk, is another area of strength. The method involves balancing the inter-relationship between texturizing, carbon overcoating and lubrication. The Company's patented graded zone texture process allows the Company to produce a rougher texture at the disk's inner diameter, while creating a smoother surface on the remainder of the disk. This process provides increased protection where the head most often comes into 8 11 contact with the disk, while also minimizing the distance between the head and the disk magnetics in other regions of the disk where data is stored and read. A nitrogen-containing carbon overcoat offers superior wear resistance. Application of the Company's in-house blended lubricant results in disks that can withstand an extreme range of temperature and humidity conditions. These additional layers must be thick enough to achieve the desired protection of the disk and thin enough to minimize the distance between the head and the magnetic layer of the disk. The Company believes that its application of these technologies, with particular attention to the inter-relationship between the technologies and their combined effect on disk performance, have enabled it to develop competitive high-capacity disks. The Company also devotes considerable resources to developing disks for drives utilizing new head technology. Head technology, traditionally based on flying inductive heads that combine the read and write function within one head, is undergoing significant evolution. Two important new technologies, proximity recording and MR-heads, have emerged and over time are expected to replace traditional inductive technology. The Company believes that proximity recording, such as TRI-PAD or similar technology, which is an extension of current inductive technology that, by design, allows a portion of the head to have intermittent contact with the disk, will be an important technology for the next several years. MR-head technology segregates the read and write function to different elements of the head. By physically disconnecting the writing and readback processes each can be individually tuned for optimized performance. The Company expects that the superior performance offered by MR technology will make it the dominant head technology of the future. In order to take advantage of the technological potential of these new head technologies and enable the Company to play a role in setting design specifications for the disk drive product, HMT works directly with head manufacturers to develop compatible disks. The Company has demonstrated the ability to produce disks for the new head formats through the use of non-precious metal alloys, modified equipment and optimized processes. The Company believes that its materials science expertise and ongoing commitment to developing new technologies is critical to remaining competitive and achieving desired operating results. The Company expects its research and development effort to remain focused on alloy and process development, substrate finish and texture, overcoat development, and compatibility with advanced recording concepts. As it has done in the past, the Company intends to conduct many of its development programs directly on active production lines, facilitating transition to high volume commercial production and minimizing development expense. During the fiscal years 1995, 1996 and 1997, the Company incurred $3.1 million, $3.8 million, and $5.8 million, respectively, of research and development expenses. The Company believes that its future success depends on its ability to continue to enhance its existing products and to develop new products. CUSTOMERS, SALES AND SUPPORT The Company sells its products directly to independent OEM disk drive manufacturers for incorporation primarily into hard disk drives which are marketed under the manufacturers' own labels. The following table sets forth the percentage of net sales attributable to sales to the Company's principal customers in fiscal 1997, fiscal 1996 and fiscal 1995:
FISCAL FISCAL FISCAL 1997 1996 1995 ------ ------ ------ Maxtor................................................ 40.7% 40.5% 73.7% Samsung............................................... 19.8 0.1 0.3 Iomega................................................ 12.2 2.4 -- Western Digital....................................... 11.9 35.8 5.9
The Company's other customers during fiscal 1997 included Micropolis, Quantum, and Hewlett Packard. Iomega utilizes the disks in its removable media hard disk drives. Due to cessation of its high-end manufacturing operations, Quantum's high-end products are now being manufactured by Matsushita Kotobuki Electronics Industries ("MKE"), and the Company is currently shipping products to MKE. Due to the rapid and frequent development of new disk drive products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter. 9 12 The Company has generally sold its products to customers pursuant to purchase orders and similar short-term arrangements. In June 1996, the Company entered into a long-term supply agreement with Maxtor covering the supply of disks to Maxtor through June, 2001. While this agreement contemplates a significant increase in the purchases of disks by Maxtor from current levels, it is subject to a number of conditions and qualifications; and there can be no assurance that Maxtor will in fact remain a significant customer during the term of the agreement. The Company believes that close technical collaboration with its customers and their other suppliers during the design phase of new disk drives facilitates integration of the Company's products into new disk drives, improves the Company's ability to rapidly reach cost effective high volume manufacturing and enhances the likelihood that the Company will become a primary supplier of thin film disks for new disk drive products. However, the design-in process is ongoing and recurs frequently, and the Company must compete for participation in each new product program, even those of existing customers. The Company's customer sales and service efforts are an integral part of maintaining strong customer relations. The sales and service organization processes requests from customers concerning product needs and acts to mobilize the Company's resources to fulfill customer requests. Although the Company has broadened its customer base, there are a relatively small number of disk drive manufacturers, and the Company expects that its dependence on a few customers will continue in the future. Additionally, there is the possibility that one or more of the Company's customers could develop or expand their ability to produce thin film disks internally and, as a result, could reduce the level of purchases or cease purchasing from the Company or could sell thin film disks in competition with the Company. There has also been a trend toward consolidation in the disk drive industry that the Company expects to continue. If any of the Company's customers or competitors were to combine and rationalize suppliers and competitive product lines, the Company's business, results of operations and financial condition could be materially adversely affected. BACKLOG The Company's sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reductions or rescheduling without significant penalties. Customers typically provide the Company with forecasts of expected requirements for the next three to six months and submit purchase orders 60 to 90 days in advance of shipment dates. Because these purchase orders may be modified or rescheduled by customers on short notice and without penalty, the Company does not believe that its backlog as of any particular date should be considered indicative of sales for any future period. COMPETITION Competitors in the thin film disk industry fall into three groups: U.S. non-captive manufacturers, Japan-based manufacturers and U.S. captive manufacturers. Historically each of these groups has supplied approximately one-third of the worldwide thin film disk unit output. The Company's primary U.S. non-captive competitors are Akashic Memories Corporation, a subsidiary of Kubota, Inc. ("Akashic"), Komag, Incorporated ("Komag") and StorMedia Incorporated ("StorMedia"). Japan-based competitors include Fuji Electric Company Limited ("Fuji"), Mitsubishi Kasei Corporation ("Mitsubishi"), Showa Denko K.K. ("Showa Denko") and Hoya Corporation ("Hoya"). Certain of these companies have significantly greater financial, technical and marketing resources than the Company. In addition, U.S. captive manufacturers, which include certain computer manufacturers, as well as disk drive manufacturers such as Seagate, an affiliate of Maxtor and Western Digital, manufacture disks or plan to manufacture disks for their internal use as part of their vertical integration programs. These companies could increase their internal production and reduce or cease purchasing from independent disk suppliers such as the Company. In the event of an oversupply of disks, these customers are likely to utilize their internal capacity prior to purchasing disks from independent manufacturers such as the Company. Moreover, while captive manufacturers have, to date, sold only nominal quantities of thin film disks in the open market, there can be no assurance that such companies will not in the future do so in direct competition with the Company. Furthermore, there can be no assurance 10 13 that other current and potential customers will not acquire or develop capacity to produce thin film disks for internal use, or that disk manufacturing capacity will not exceed demand. Any such changes could have a material adverse effect on the Company's business, operating results and financial condition. Announcement or implementation of any of the following by the Company's competitors could have a material adverse effect on the Company's business, operating results and financial condition: changes in pricing, product introductions, increases in production capacity, changes in product mix and technological innovation. The market for thin film disk products is highly competitive, and the Company expects competition to increase in the future. The Company believes that the principal competitive factors affecting this market include performance, quality, delivery capability and price. The Company believes that its products compete favorably in the high-end segment of the market that it serves, especially with respect to performance and quality. The thin film disk industry is characterized by short product life cycles, ranging from nine to twelve months. As a result, the Company must continually anticipate, and adapt its products to meet, demand for increased storage capacity. There can be no assurance that in the future the Company will be able to manufacture products on a timely basis with the quality and features necessary in order to remain competitive. In addition, the development of technologically innovative products requires substantial investments in research and development. Specifically, the thin film disk industry is characterized by intense price competition. While the Company believes that consumers in the high-end high-capacity segment of the market in which the Company operates are less sensitive to price, the Company has experienced pricing pressures in the past, and there can be no assurance that the Company will not experience increased price competition in the future. Pricing pressure has included, and may in the future include, demands for discounts, long-term supply commitments and extended payment terms. Any increase in price competition could have a material adverse effect on the Company's business, operating results and financial condition. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that its success will depend more upon the innovation, technological expertise and marketing abilities of its employees. There can be no assurance that the Company will be able to protect its technology adequately or that competitors will not be able to develop similar technology independently. The Company has 33 patents and 16 pending patent applications in the United States. In addition, the Company has nine foreign patents. Patents may not be issued with respect to the Company's pending patent applications, and its issued patents may not be sufficiently broad to protect the Company's technology. No assurance can be given that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide adequate protection to the Company's products. In addition, the Company has only limited patent rights outside the United States and the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The Company may from time to time be notified by third parties that it may be infringing patents owned by such third parties. If necessary, the Company may have to seek a license under such patents or modify its products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that the Company could so avoid infringement of such patents, in which case the Company's business, operating results and financial condition could be materially adversely affected. On December 16, 1996, Virgil L. Hedgcoth filed a lawsuit against the Company and several other entities in the Federal District Court for the Northern District of California. In Hedgcoth v. Hitachi, Ltd., et al., Mr. Hedgcoth alleges that certain HMT disks infringe patents allegedly owned by him (the "Hedgcoth Patents"). The complaint seeks an injunction and unspecified damages, which are sought to be trebled. The Company has filed a counterclaim seeking a declaratory judgment that the Hedgcoth Patents are invalid and unenforceable and that they are not infringed by the HMT disks. The Company does not believe that the litigation Mr. Hedgcoth has pursued will have a material adverse effect on the Company's business, operating results or financial condition; however, this forward looking statement is subject to risks and uncertainties, including those described in "Risk Factors -- Intellectual Property and Proprietary Rights" . 11 14 Litigation may be necessary to enforce the Company's patents, copyrights or other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or claims for indemnification resulting from infringement claims by third parties. Such litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. SOURCES OF SUPPLY The Company relies on a limited number of suppliers for many materials used in its manufacturing processes, including substrates, texturizers, plating chemicals, abrasive tapes and slurries, certifier heads, sputter targets and certain other materials. In general, the Company seeks to have two or three suppliers for its requirements; however, there can be no assurance that the Company can secure more than one source for all of its materials requirements in the future or that its suppliers will be able to meet the Company's requirements on a timely basis or on acceptable terms. Shortages have occurred in the past and there can be no assurance that shortages will not occur in the future, or that materials will not be available only with longer lead times. Moreover, changing suppliers for certain materials, such as lube or buffing tape, would require that the product be requalified with each customer. Requalification could prevent an early design-in, or could prevent or delay continued participation in disk drive programs for which the Company's products have been qualified. In addition, long lead times are required to obtain many materials. Regardless of whether these materials are available from established or new sources of supply, these lead times could impede the Company's ability to quickly respond to changes in demand and product requirements. Furthermore, a significant increase in the price of one or more of these materials could adversely affect the Company's business, operating results and financial condition. While the Company has implemented procedures to monitor the quality of the materials received from its suppliers, there can be no assurance that materials will meet the Company's specifications and will not adversely impact manufacturing yields or cause other production problems. For example, in the quarter ended March 31, 1995, the Company's operating results were adversely affected by chlorine contamination of its thin film disk products that it believes resulted from chlorine contamination of disk carriers provided by one of its suppliers. In addition, there are only a limited number of providers for thin film disk manufacturing equipment, such as sputtering machines, glide testers and certifiers, and ordering additional equipment for replacement or expansion requires long lead times, limiting the rate and flexibility of capacity expansion. Any limitations on, or delays in, the supply of materials or equipment could disrupt the Company's production volume and could have a material adverse effect on the Company's business, operating results and financial condition. ENVIRONMENTAL REGULATION The Company's operations and manufacturing processes are subject to certain environmental laws and regulations, which govern the Company's use, handling, storage, transportation, disposal, emission and discharge of hazardous materials and wastes, the pre-treatment and discharge of process waste waters and its emission of air pollutants. The Company has from time to time been notified of minor violations of environmental laws and regulations. These violations have been corrected in all material respects without undue expense. Additionally, existing waste water treatment facilities and air emission control devices are being upgraded to accommodate increased production and more restrictive environmental discharge levels. Environmental laws and regulations, however, may become more stringent over time, and there can be no assurance that the Company's failure to comply with either present or future laws or regulations, which may become more stringent, would not subject the Company to significant compliance expenses, production suspension or delay, restrictions on expansion or the acquisition of costly equipment. EMPLOYEES As of March 31, 1997, the Company had 1,211 full-time employees, with 1,055 in manufacturing, 54 in research and development, 40 in quality assurance and 62 in administration and marketing. The Company believes it generally has good relations with its employees. None of the Company's employees are represented 12 15 by a labor union, and the Company has never experienced a work stoppage. The Company believes that attracting and motivating skilled technical personnel is vital to its success. Although competition for such personnel is intense, the Company believes that it has not historically experienced difficulties in attracting personnel that are significantly different from those experienced by its competitors. RECAPITALIZATION TRANSACTION On November 30, 1995 the Company effected a leveraged recapitalization (the "Leveraged Recapitalization"). The Leveraged Recapitalization and related transactions consisted of: (i) the repurchase by the Company from Hitachi Metals of shares of Common Stock representing all the outstanding capital stock of the Company for an aggregate purchase price of $52.1 million in cash; (ii) the recapitalization of the Company through the issuance of 21,968,057 shares of Common Stock for an aggregate purchase price of approximately $0.7 million, 5,900,000 shares of Series A Preferred Stock ("Series A Preferred Stock") for an aggregate purchase price of approximately $59.0 million, $47.0 million of subordinated promissory notes ("Subordinated Notes") and $60.0 million in senior debt with associated warrants to purchase 701,344 shares of Common Stock at an exercise price of $0.0003 per share and (iii) the grant of options to purchase 11,451,865 shares of Common Stock under the 1995 Management Stock Option Plan ("Management Plan") and 1995 Stock Option Plan ("Stock Plan" and collectively with the Management Plan, "Stock Plans"). The purchasers of the Company's securities in the Leveraged Recapitalization included certain investment funds affiliated with Summit Partners, L.P. ("Summit Partners") and certain other investment funds, the Company's management and employees and Hitachi Metals. The terms of the Leveraged Recapitalization were determined through negotiations between Hitachi Metals and Summit Partners, who, prior to the Leveraged Recapitalization, did not have any affiliation with the Company. Pursuant to these negotiations, the shares of Common Stock were valued at $0.03 per share. The Series A Preferred Stock was valued at $10.00 per share, and the Subordinated Notes were valued at face value. The values of these securities were confirmed by a third party appraisal. The Leveraged Recapitalization has been accounted for as a recapitalization, and accordingly, no change in the accounting basis of the Company's assets has been made. As of November 30, 1995 (immediately prior to the Leveraged Recapitalization), the Company had $98.5 million in assets and $122.7 million in liabilities. Immediately following the Leveraged Recapitalization, the Company had $110.9 million in assets, $132.1 million in liabilities (including a $60.0 million senior bank term loan and $47.0 million of Subordinated Notes) and $59.0 million of Series A Preferred Stock. See "Certain Relationships and Related Transactions -- Leveraged Recapitalization." RISK FACTORS In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company and its business. This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results historically have been, and may continue to be, subject to significant quarterly and annual fluctuations. As a result, the Company's operating results in any quarter may not be indicative of its future performance. Factors affecting operating results include: market acceptance of new products; timing of significant orders; changes in pricing by the Company or its competitors; timing of product announcements and product transitions by the Company, its customers or its competitors; order cancellations, modifications and quantity adjustments and shipment reschedulings; changes in product mix; manufacturing yields; the level of utilization of the Company's production capacity; increases in production and engineering costs associated with initial manufacture of new products; and changes in the cost of or limitations on the availability of materials. The impact of these and other factors on the Company's revenues and operating 13 16 results in any future period cannot be forecasted with certainty. The Company's expense levels are based, in part, on its expectations as to future revenues. Because the Company's sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reduction or rescheduling on short notice and without significant penalties, the Company's backlog as of any particular date may not be indicative of sales for any future period, and such changes could cause the Company's net sales to fall below expected levels. If revenue levels are below expectations, operating results are likely to be materially adversely affected. Net income, if any, and gross margins may be disproportionately affected by a reduction in net sales because a proportionately smaller amount of the Company's expenses varies with its revenues. The Company derives substantially all of its net sales from the sale of thin film disks to a small number of customers. The Company typically supplies disks in volume for a limited number of disk drive products at any one time, and these products have an extremely short life cycle. Due to the rapid technological change and frequent development of new disk drive products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter. Generally, new products have higher average selling prices than more mature products. Therefore, the Company's ability to introduce new products in a timely fashion is an important factor in its continued success. Moreover, manufacturing yields and production capacity utilization impact the Company's operating results. New products often have lower manufacturing yields and are produced in lower quantities than more mature products. Manufacturing yields generally improve as the product matures and production volumes increase. Manufacturing yields also vary depending on the complexity and uniqueness of product specifications. The ability to adjust manufacturing procedures to reduce costs and improve manufacturing yields and productivity during a product's life is limited, and many adjustments can only be implemented in connection with new product introductions or upgrades. Small variations in manufacturing yields and productivity can have a significant impact on operating results. Furthermore, because the thin film disk industry is capital intensive and requires a high level of fixed costs, operating results are also extremely sensitive to changes in volume. Substantial advance planning and commitment of financial and other resources is necessary for expansion of manufacturing capacity, while the Company's sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reduction or rescheduling without significant penalties. The impact of any of the foregoing factors could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; LENGTHY SALES CYCLE During fiscal 1997, the Company shipped most of its thin film disks to four customers: Maxtor, Samsung, Iomega and Western Digital. Aggregate shipments to Maxtor, Samsung, Iomega and Western Digital represented 40.7%, 19.8% 12.2% and 11.9%, respectively, of net sales in fiscal 1997. There are a relatively small number of disk drive manufacturers, and the Company expects that its dependence on a few customers will continue in the future. Loss of or a reduction in orders from one or more of the Company's customers could result in a substantial reduction in net sales and operating results. Because many of the Company's expense levels are based, in part, on its expectations as to future revenues, decreases in net sales may result in a disproportionately greater negative impact on operating results. The Company's success will therefore depend on the success of its key customers. One or more of the Company's customers could develop or expand their ability to produce thin film disks internally and, as a result, could reduce the level of purchases or cease purchasing from the Company or could sell thin film disks in competition with the Company. For example, one of the Company's customers, Western Digital, manufactures thin film disks for its own use and an affiliate of another customer, Maxtor, recently began to do so. There has also been a trend toward consolidation in the disk drive industry, which the Company expects to continue. For example, in February 1996, two leading disk drive manufacturers, Seagate Technology, Inc. ("Seagate") and Conner Peripherals, Inc., combined to form the world's largest disk drive manufacturing company. In addition, during the second calendar quarter of 1996, Hewlett-Packard announced its intentions to exit the disk drive business. Also, due to cessation of its high-end manufacturing operations, Quantum's high-end products are now being made by MKE. If any of the Company's customers or competitors were to combine and reduce suppliers and competitive product lines, the Company's business, operating results and financial condition could be materially adversely affected. 14 17 The Company has generally sold its products to customers pursuant to purchase orders and similar short-term arrangements. In June 1996, the Company entered into a long-term supply agreement with Maxtor covering the supply of disks to Maxtor through June 2001. While this agreement contemplates a significant increase in the purchases of disks by Maxtor from current levels, it is subject to a number of conditions and qualifications; and there can be no assurance that Maxtor will in fact remain a significant customer during the term of the agreement. Qualifying thin film disks for incorporation into a new disk drive product requires the Company to work extensively with the customer and the customer's other suppliers to meet product specifications. Therefore, customers often require a significant number of product presentations and demonstrations, as well as substantial interaction with the Company's senior management, before making a purchasing decision. Accordingly, the Company's products typically have a lengthy sales cycle, which can range from six to 12 months, during which the Company may expend substantial financial resources and management time and effort with no assurance that a sale will result. EXPANSION OF CAPACITY Because the Company has been operating at close to full capacity, growth, if any, in the Company's net sales depends on the successful expansion by the Company of its manufacturing capacity. The Company recently completed construction of a new 124,000 square foot production facility at its Fremont, California site. The administrative office areas and four production scale sputtering lines were brought into service during the fourth quarter of fiscal 1997. The Company plans to install up to 12 additional production scale sputtering lines in this new facility. In addition, the Company completed the expansion of its facility in Eugene, Oregon during fiscal 1997, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. The Company currently expects to spend in excess of $200 million over the next twelve months for expansion of production capacity, a substantial majority of which will be spent on the Company's Fremont, California facility. Any delay in the completion of any of these expansion programs could have a material adverse effect on the Company's business, results of operations and financial condition. INTENSE COMPETITION The market for the Company's products is highly competitive, and the Company expects competition to continue in the future. Certain of the Company's competitors have significantly greater financial, technical and marketing resources than the Company. There can be no assurance that in the future the Company will be able to develop and manufacture products on a timely basis with the quality and features necessary in order to remain competitive. Competitors in the thin film disk industry fall into three groups: U.S. non-captive manufacturers, Japan-based manufacturers and U.S. captive manufacturers. Historically, each of these groups has supplied approximately one-third of the worldwide thin film disk unit output. The Company's primary U.S. non-captive competitors are Akashic, Komag and StorMedia. Japan-based competitors include Fuji, Mitsubishi, Showa Denko and Hoya. In addition, U.S. captive manufacturers, which include certain computer manufacturers, as well as disk drive manufacturers such as Seagate, Western Digital and an affiliate of Maxtor, manufacture disks or plan to manufacture disks for their internal use as part of their vertical integration programs. These companies could increase their internal production and reduce or cease purchasing from independent disk suppliers such as the Company. In the event of an oversupply of disks, these customers are likely to utilize their internal capacity prior to purchasing disks from independent suppliers such as the Company. Moreover, while captive manufacturers have, to date, sold only nominal quantities of thin film disks in the open market, there can be no assurance that such companies will not in the future do so in direct competition with the Company. Furthermore, there can be no assurance that other current and potential customers will not acquire or develop capacity to produce thin film disks for internal use. Any such changes could have a material adverse effect on the Company's business, operating results and financial condition. Announcement or implementation of any of the following by the Company's competitors could have a material adverse effect on the Company's business, operating results and financial condition: changes in pricing, product introductions, increases in production capacity, changes in product mix and technological innovation. Specifically, the thin film disk industry is characterized by intense price competition. The 15 18 Company has experienced pricing pressures in the past, and there can be no assurance that the Company will not experience increased price competition in the future. Pricing pressure has included, and may in the future include, demands for discounts, long-term supply commitments and extended payment terms. Any increase in price competition could have a material adverse effect on the Company's business, operating results and financial condition. The Company and certain of its competitors are currently engaged in substantial efforts to increase disk manufacturing capacity in light of the apparent imbalance between current levels of demand for disks and existing industry capacity. These efforts should result in significant additional capacity in the industry within the next one to two years. To the extent that these efforts result in industry capacity in excess of levels of demand, the Company could experience increased levels of competition, which could have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT OF GROWTH The Company has experienced a period of rapid expansion in its operations, including the organization and management of a significant expansion in manufacturing capacity that has placed, and may continue to place, a significant strain on the Company's management and other resources. The Company's status as a public company since its March 1996 initial public offering has placed additional demands on the Company's management, including its finance and accounting organization. The Company's ability to manage its operations effectively will require it to continue to improve its operational, financial and management information systems, and to train, motivate and manage its employees. If the Company's management is unable to manage its operations effectively, the Company's business, operating results and financial condition could be adversely affected. DEPENDENCE ON INTENSELY COMPETITIVE AND CYCLICAL HARD DISK DRIVE INDUSTRY The Company's operating results are dependent on current and anticipated demand for high-end, high-capacity hard disk drives, which in turn depend on the demand for high-end PCs, network servers and workstations. The disk drive industry is cyclical and historically has experienced periods of oversupply and reduced production levels, resulting in significantly reduced demand for thin film disks, as well as pricing pressures. The effect of these cycles on suppliers, including thin film disk manufacturers, has been magnified by hard disk drive manufacturers' practice of ordering components, including thin film disks, in excess of their needs during periods of rapid growth, which increases the severity of the drop in the demand for components during periods of reduced growth or contraction. In recent years, the disk drive industry has experienced significant growth, providing the Company with the opportunity to expand its capacity. There can be no assurance that such growth will continue, that the level of demand will not decline, or that future demand will be sufficient to support existing and future capacity. A decline in demand for hard disk drives would have a material adverse effect on the Company's business, operating results and financial condition. Additionally, the hard disk drive industry is intensely competitive, and, in the past, some disk drive manufacturers have experienced substantial financial difficulties. To date, the Company has not incurred significant bad debt expense. However, there can be no assurance that the Company will not face greater difficulty in collecting receivables or be required to offer more liberal payment terms in the future, particularly in a period of reduced demand. Any failure to collect or delay in collecting receivables could have a material adverse effect on the Company's business, operating results and financial condition. RAPID TECHNOLOGICAL CHANGE The thin film disk industry has been characterized by rapid technological development and short product life cycles. Product life cycles typically range from nine to twelve months. As a result, the Company must continually anticipate, and adapt its products to meet, demand for increased storage capacity. Although the Company is continually developing new products and production techniques, there can be no assurance that the Company will be able to anticipate technological advances in disk drives and develop products incorporating such advances in a timely manner or to compete effectively against its competitors' new products. In addition, there can be no assurance that customers will certify the Company's products for 16 19 inclusion in new disk drive products. The Company anticipates continued changes in the requirements of the disk drive industry and thin film disk manufacturing technologies, and there can be no assurance that the future technological innovations will not reduce demand for thin film disks. The Company's business, operating results and financial condition will be materially adversely affected if the Company's efforts are not successful, if the technologies that the Company has chosen not to develop prove to be competitive alternatives or if any trend develops toward technology that would replace thin film disks as a storage medium. DEPENDENCE ON SUPPLIERS The Company relies on a limited number of suppliers for many materials used in its manufacturing processes, including aluminum blanks, substrates, texturizers, plating chemicals, abrasive tapes and slurries, certifier heads, sputter targets and certain other materials. In general, the Company seeks to have two or three suppliers for its requirements; however, there can be no assurance that the Company can secure more than one source for all of its materials requirements in the future or that its suppliers will be able to meet the Company's requirements on a timely basis or on acceptable terms. Shortages have occurred in the past and there can be no assurance that shortages will not occur in the future, or that materials will be available without longer lead times. Moreover, changing suppliers for certain materials, such as lube or buffing tape, would require that the product be requalified with each customer. Requalification could prevent an early design-in, or could prevent or delay continued participation in disk drive programs for which the Company's products have been qualified. In addition, long lead times are required to obtain many materials. Regardless of whether these materials are available from established or new sources of supply, these lead times could impede the Company's ability to quickly respond to changes in demand and product requirements. Furthermore, a significant increase in the price of one or more of these materials could adversely affect the Company's business, operating results and financial condition. In addition, there are only a limited number of providers for thin film disk manufacturing equipment, such as sputtering machines, glide testers and certifiers, and ordering additional equipment for replacement or expansion requires long lead times, limiting the rate and flexibility of capacity expansion. Any limitations on, or delays in, the supply of materials or equipment could disrupt the Company's production volume and could have a material adverse effect on the Company's business, operating results and financial condition. While the Company has implemented procedures to monitor the quality of the materials received from its suppliers, there can be no assurance that materials will meet the Company's specifications and will not adversely impact manufacturing yields or cause other production problems. Minor variations from the Company's specifications could have a disproportionately adverse impact on manufacturing yields. For example, in the quarter ended March 31, 1995, the Company's operating results were materially adversely affected by chlorine contamination of its thin film disk products that it believes resulted from chlorine contamination of disk carriers provided by one of its suppliers. NEED FOR ADDITIONAL FINANCING The disk media business is capital intensive, and the Company believes that in order to remain competitive, it will need significant additional financing resources over the next several years for capital expenditures, working capital, and research and development. Among other things, the Company's customers prefer suppliers that can meet a substantial portion of their volume requirements, so the Company will need to expand its manufacturing capacity to remain competitive. The Company currently expects to spend in excess of $200 million on capital expenditures directed toward expansion of production capacity over the next twelve months. The Company believes that it will be able to fund planned expenditures over the next twelve months from a combination of funds available under its revolving credit facility, cash flow from operations and existing cash balances. If it were to accelerate or increase the scope of its facilities expansion, the Company could require additional capital prior to that time. As of March 31, 1997, the Company had approximately $71.8 million in working capital, including approximately $44.2 million in cash and cash equivalents. In addition, the Company's operations generated cash flow of $90.7 million during the year ended March 31, 1997. 17 20 INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that the Company will be able to protect its technology adequately or that competitors will not be able to develop similar technology independently. Patents may not be issued with respect to the Company's pending patent applications, and its issued patents may not be sufficiently broad to protect the Company's technology. No assurance can be given that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide adequate protection to the Company's products. In addition, the Company has only limited patent rights outside the United States, and the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The Company may from time to time be notified by third parties that it may be infringing patents owned by such third parties. If necessary, the Company may have to seek a license under such patent or modify its products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that the Company could so avoid infringement of such patents, in which case the Company's business, operating results and financial condition could be materially adversely affected. On December 16, 1996, Virgil L. Hedgcoth filed a lawsuit against the Company and several other entities in the Federal District Court for the Northern District of California. In Hedgcoth v. Hitachi, Ltd., et al., Mr. Hedgcoth alleges that certain HMT disks infringe patents allegedly owned by him (the "Hedgcoth Patents"). The complaint seeks an injunction and unspecified damages, which are sought to be trebled. The Company has filed a counterclaim seeking a declaratory judgment that the Hedgcoth Patents are invalid and unenforceable and that they are not infringed by the HMT disks. The Company does not believe that the litigation Mr. Hedgcoth has pursued will have a material adverse effect on the Company's business, operating results or financial condition. Litigation may be necessary to enforce the Company's patents, copyrights or other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or claims for indemnification resulting from infringement claims by third parties. Such litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON KEY PERSONNEL The Company's future operating results depend in significant part upon the continued contributions of its officers and personnel, many of whom would be difficult to replace. The Company does not have employment agreements with any employee. The loss of its officers or other key personnel, who are critical to the Company's success, could have a material adverse effect on the business, operating results and financial condition of the Company. In addition, the Company's future operating results depend in part upon its ability to attract, train, retain and motivate other qualified management, technical, manufacturing, sales and support personnel for its operations. Competition for such personnel is intense, especially since many of the Company's competitors are located near the Company's facilities in Fremont, California. Among the competitive factors in attracting personnel are compensation and benefits, equity incentives and geographic location. There can be no assurance that the Company will be successful in attracting or retaining such personnel. The loss of the services of existing personnel as well as the failure to recruit additional personnel could materially adversely effect the Company's business, operating results and financial condition. DEPENDENCE ON FREMONT MANUFACTURING FACILITIES; ENVIRONMENTAL ISSUES The Company's Fremont facilities, which currently account for all of its finished products, are located near major earthquake faults. Disruption of operations for any reason, including power failures, work stoppages or natural disasters such as fire, floods or earthquakes, would cause delays in, or an interruption of, production 18 21 and shipment of products, which could materially adversely affect the Company's business, operating results and financial condition. The Company's operations and manufacturing processes are subject to certain environmental laws and regulations, which govern the Company's use, handling, storage, transportation, disposal, emission and discharge of hazardous materials and wastes, the pre-treatment and discharge of process waste waters and its emission of air pollutants. The Company has from time to time been notified of minor violations of environmental laws and regulations. These violations have been corrected in all material respects without undue expense. Additionally, existing waste water treatment facilities and air emission control devices are being upgraded to accommodate increased production and more restrictive environmental discharge levels. Environmental laws and regulations, however, may become more stringent over time, and there can be no assurance that the Company's failure to comply with either present or future laws or regulations, which may become more stringent, would not subject the Company to significant compliance expenses, production suspension or delay, restrictions on expansion or the acquisition of costly equipment. RISKS OF INTERNATIONAL SALES In fiscal 1996 and 1997, substantially all of the Company's net sales consisted of products delivered to customers in Asia, primarily foreign subsidiaries of U.S. companies, and the Company anticipates that the substantial majority of its products will be delivered to customers outside of the United States for the foreseeable future. Accordingly, the Company's operating results are subject to the risks of doing business in foreign jurisdictions, including compliance with, or changes in, the law and regulatory requirements of foreign jurisdictions, local content rules, taxes, tariffs or other barriers, and transportation delays and other interruptions. Although presently all of the Company's sales are made in U.S. dollars, there can be no assurance that future international sales will not be denominated in foreign currency. CONTROL BY EXISTING STOCKHOLDERS AND ANTI-TAKEOVER EFFECTS Based on shares outstanding at March 31, 1997, directors, officers and holders of 5% or more of the outstanding shares of Common Stock of the Company owned approximately 53% of the outstanding shares of Common Stock (33% assuming conversion of the 5 3/4% convertible subordinated notes and exercise of all outstanding options and warrants to purchase Common Stock ). As a result, the directors, officers and holders of 5% or more of the outstanding shares of the Company's Common Stock, acting together, will have the ability to elect all of the Company's directors and control most corporate actions. Certain provisions of the Company's Amended and Restated Certificate of Incorporation, Bylaws and Delaware law, including the provisions of Section 203 of the Delaware General Corporation Law, which restrict the ability of a substantial stockholder to acquire the Company, may also discourage certain transactions involving a change in control of the Company. In addition to the foregoing, the ability of the Board of Directors to issue "blank check" preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a change in control of the Company. SUBORDINATION AND ABSENCE OF FINANCIAL COVENANTS The 5 3/4% Convertible Subordinated Notes due 2004 ("Convertible Notes") are unsecured and subordinated in right of payment in full to all existing and future indebtedness of the Company which is not expressly subordinated in right of payment to the Convertible Notes ("Senior Debt") of the Company. As a result of such subordination, in the event of any insolvency of the Company, the assets of the Company will be available to satisfy obligations on the Convertible Notes only after all Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Convertible Notes then outstanding. The Indenture dated as of January 15, 1997, between the Company and State Street Bank and Trust Company of California, N.A., as Trustee ("Indenture") does not prohibit or limit the incurrence of Senior Debt or the incurrence of other indebtedness and other liabilities by the Company, and the incurrence of additional indebtedness and other liabilities by the Company could adversely affect the Company's ability to satisfy its obligations on the Convertible Notes. As of March 31, 1997, the Company had approximately $5.9 million of outstanding indebtedness that constituted Senior Debt. The Company anticipates that from 19 22 time to time it will incur additional indebtedness, including Senior Debt. Moreover, the cash flow and consequent ability of the Company to service debt, including the Convertible Notes, may become dependent in part upon the earnings from the business conducted by the Company through subsidiaries and the distribution of those earnings, or upon loans or other payments of funds by those subsidiaries, to the Company. The Indenture does not contain any financial performance covenants. Consequently, the Company is not required under the Indenture to meet any financial tests such as those that measure the Company's working capital, interest coverage, fixed charge coverage or net worth in order to maintain compliance with the terms of the Indenture. LIMITATIONS ON REPURCHASE UPON A DESIGNATED EVENT If a change in control were to occur or the Common Stock of the Company were not listed for trading at a U.S. stock exchange or approved for trading on an established U.S. over-the-counter trading market (each a "Designated Event"), there can be no assurance that the Company would have sufficient financial resources, or would be able to arrange financing, to pay the repurchase price for all Convertible Notes tendered by holders thereof. The Company's credit agreement with respect to its senior bank revolving credit facility prohibits the Company from repurchasing any Convertible Notes, which would constitute an event of default under such credit agreement. Any future credit agreements or other agreements relating to other indebtedness (including other Senior Debt) to which the Company becomes a party may contain similar restrictions and provisions. If the Company does not obtain a consent to any repurchase of the Convertible Notes upon a Designated Event, the Company would remain prohibited from repurchasing the Convertible Notes. Any failure by the Company to repurchase the Convertible Notes when required following a Designated Event would result in an event of default under the Indenture whether or not such repurchase is permitted by the subordination provisions of the Indenture. Any such default may, in turn, cause a default under Senior Debt of the Company. Moreover, the occurrence of a Designated Event may cause an event of default under Senior Debt of the Company. As a result, in each case, any repurchase of the Convertible Notes would, absent a waiver, be prohibited under the subordination provisions of the Indenture until the Senior Debt is paid in full. VOLATILITY OF CONVERTIBLE NOTE AND COMMON STOCK PRICES The trading price of the Company's Common Stock could be subject to wide fluctuations in response to a variety of factors, including quarterly variations in operating results, announcements of technological innovations or new products by the Company, its customers or its competitors, developments in patents or other intellectual property rights, general conditions in the computer or disk drive industry, and general economic and market conditions. Additionally, the stock market in general, and the market for technology stocks in particular, has experienced extreme price volatility in recent years. This volatility has often had a substantial effect on the market prices of many technology companies for reasons unrelated or disproportionate to the operating performance of such companies. Broad market fluctuations could have a significant impact on the market price of the Common Stock. Various factors such as changes in prevailing interest rates or changes in perceptions of the Company's creditworthiness could cause the market price of the Convertible Notes to fluctuate significantly. The trading price of the Convertible Notes could also be significantly affected by the market price of the Common Stock, which could be subject to wide fluctuations in response to a variety of factors, including quarterly variations in operating results, announcements of technological innovations or new products by the Company, its customers or its competitors, developments in patents or other intellectual property rights, general conditions in the computer or disk drive industry and general economic and market conditions. ITEM 2. PROPERTIES The Company owns a 57,776 square foot building, used for manufacturing and administration, on approximately 4.3 acres of land in Fremont, California. The Company recently completed construction of a 124,000 square foot manufacturing and administrative facility on an adjacent five acre parcel. The Company leases an adjacent 50,400 square foot building used primarily for manufacturing under a lease that expires in 20 23 December 1998 with four five-year extension options. The Company also leases a nearby 60,312 square foot building used for administration, engineering and distribution, under a lease that expires in May 1999. The Company also owns a 106,458 square foot building, used for manufacturing and administration, on approximately 4.6 acres in Eugene, Oregon. The Company leases a nearby 14,370 square foot building used for engineering and distribution, under a lease that expires in April 2001, with a five year extension option. The Company's Fremont facilities, which currently account for all of its finished disk production, are located near major earthquake faults. Disruption of operations for any reason, including power failures, work stoppages or natural disasters such as fire, floods or earthquakes, could materially adversely affect the Company's business, operating results and financial condition. ITEM 3. LEGAL PROCEEDINGS On December 16, 1996, Virgil L. Hedgcoth filed a lawsuit against the Company and several other entities in the Federal District Court for the Northern District of California. In Hedgcoth v. Hitachi, Ltd., et al., Mr. Hedgcoth alleges that certain HMT disks infringe patents allegedly owned by him (the "Hedgcoth Patents"). The complaint seeks an injunction and unspecified damages, which are sought to be trebled. The Company has filed a counterclaim seeking a declaratory judgment that the Hedgcoth Patents are invalid and unenforceable and that they are not infringed by the HMT disks. The Company does not believe that the litigation Mr. Hedgcoth has pursued will have a material adverse effect on the Company's business, operating results or financial condition; however, this forward looking statement is subject to risks and uncertainties, including those described in "Risk Factors -- Intellectual Property and Proprietary Rights". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 21 24 PART II ITEMS 5, 6, 7, 8 AND 9. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the calendar periods indicated, the range of high and low closing sales prices, as reported on the Nasdaq National Market from March 13, 1996 through March 31, 1997.
PRICE RANGE OF COMMON STOCK ---------------- HIGH LOW ---- --- FISCAL 1996 Fourth Quarter (beginning March 13, 1996)................ $11 1/2 $ 9 7/8 FISCAL 1997 First Quarter............................................ $28 1/4 $10 1/2 Second Quarter........................................... $21 3/4 $12 3/4 Third Quarter............................................ $21 11/16 $12 5/8 Fourth Quarter........................................... $22 $12 1/4
As of June 25, 1997, there were approximately 242 holders of record of the Common Stock. On June 25, 1997, the last sale price reported on the Nasdaq National Market for the Company's Common Stock was $12.9375 per share. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain all future earnings for use in its business, and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. In addition, the terms of the Company's revolving credit facility prohibit the payment of dividends without the banks' prior approval. See Notes 5 and 8 of Notes to Consolidated Financial Statements. 22 25 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEAR ENDED MARCH 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................... $263,209 $194,401 $ 72,893 $ 64,242 $ 70,987 Cost of sales............................... 156,277 119,803 67,539 67,648 76,237 -------- -------- -------- -------- -------- Gross profit (loss)......................... 106,932 74,598 5,354 (3,406) (5,250) -------- -------- -------- -------- -------- Operating expenses: Research and development.................. 5,812 3,803 3,130 2,781 2,499 Selling, general and administrative....... 11,803 7,774 4,230 5,115 4,725 Recapitalization expenses................. -- 4,347 -- -- -- -------- -------- -------- -------- -------- Total operating expenses.......... 17,615 15,924 7,360 7,896 7,224 -------- -------- -------- -------- -------- Operating income (loss)..................... 89,317 58,674 (2,006) (11,302) (12,474) Interest expense, net....................... 3,329 8,578 6,915 6,001 4,806 -------- -------- -------- -------- -------- Income (loss) before income tax provision (benefit) and extraordinary debt extinguishment costs...................... 85,988 50,096 (8,921) (17,303) (17,280) Income tax provision (benefit).............. 25,400 2,590 20 22 (224) -------- -------- -------- -------- -------- Net income (loss) before extraordinary debt extinguishment costs...................... 60,588 47,506 (8,941) (17,325) (17,056) Extraordinary debt extinguishment costs, net of income taxes........................... -- 1,127 -- -- -- -------- -------- -------- -------- -------- Net income (loss)........................... 60,588 46,379 (8,941) (17,325) (17,056) Accretion reversal (accretion) for dividends on Mandatorily Redeemable Series A Preferred Stock........................... 1,157 (1,157) -- -- -- -------- -------- -------- -------- -------- Net income (loss) available for common stockholders.............................. $ 61,745 $ 45,222 $ (8,941) $(17,325) $(17,056) ======== ======== ======== ======== ======== Net income (loss) available for common stockholders per share(1) Primary................................... $ 1.40 $ 1.28 $ (0.26) $ (0.50) $ (0.49) ======== ======== ======== ======== ======== Fully diluted............................. $ 1.35 $ 1.28 $ (0.26) $ (0.50) $ (0.49) ======== ======== ======== ======== ======== Shares used in computing per share amounts(1) Primary................................... 44,185 35,224 34,822 34,822 34,822 Fully diluted............................. 46,027 35,224 34,822 34,822 34,822
MARCH 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit)................... $ 71,827 $ 45,899 $(82,715) $(71,175) $(55,720) Total assets................................ 373,389 165,786 75,936 84,104 92,432 Long-term and senior bank debt, less current portion................................... -- -- 9,750 12,200 34,650 Subordinated promissory notes payable to stockholders.............................. -- 47,000 -- -- -- Mandatorily Redeemable Series A Preferred Stock..................................... -- 60,157 -- -- -- 5 3/4% Convertible Subordinated Notes....... 230,000 -- -- -- -- Total stockholders' equity (deficit)........ 95,442 19,524 (51,550) (46,093) (28,768)
- --------------- (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share amounts. 23 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1 under the heading entitled "Risk Factors." OVERVIEW The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. HMT Technology Corporation is an independent supplier of high-performance thin film disks for high-end, high-capacity hard disk drives, which in turn are used in high-end PCs, network servers and workstations. HMT was incorporated in 1988 as a subsidiary of Hitachi Metals for the purpose of acquiring certain assets and certain liabilities of the thin film division of Xidex Corporation, which had been producing thin film disks since 1983. Since completing the Xidex acquisition, the Company has continued to supply thin film disks to manufacturers of hard disk drives. On November 30, 1995, the Company effected the Leveraged Recapitalization pursuant to which the Company repurchased from Hitachi Metals, then the sole stockholder of the Company, all of the outstanding shares of Common Stock of the Company, and certain investment funds, members of management and Hitachi Metals, purchased Common Stock, Mandatorily Redeemable Series A Preferred Stock and subordinated promissory notes. During March and April 1996, the Company sold 9,660,000 shares of Common Stock at $10.00 per share (including exercise of the underwriters' over-allotment option) through its initial public offering. The net proceeds (after underwriter's discounts and commissions and other costs associated with the initial public offering) totaled $88.7 million. In January 1997, the Company completed a $230 million private placement of the Convertible Notes to qualified institutional investors, resulting in net proceeds of approximately $222.5 million (after offering costs). Proceeds from the issuance of the Convertible Notes were used to fully redeem the $59 million of Mandatorily Redeemable Series A Preferred Stock and to prepay the $47 million principal balance of the subordinated promissory notes issued pursuant to the Leverage Recapitalization plus accrued interest and to fully repay $41 million in long-term borrowings outstanding. Beginning in fiscal 1995, HMT's management team, many of whom had joined the Company since February 1994, refocused the strategy and operations of the Company. The new management concentrated on the 3 1/2-inch disk form factor, focused on the high-end, high-capacity segment of the disk drive market and expanded the Company's customer base. In addition, HMT implemented an extensive quality assurance program, developed proprietary manufacturing processes and optimized production capacity utilization. These changes resulted in higher production volumes, lower unit costs, and higher average selling prices primarily associated with new high-end products. As a result, the Company has increased sales and improved gross margins, achieving net income of $60.6 million for fiscal 1997 compared with a net loss of $8.9 million for fiscal 1995. The rate of improvement in the Company's operating results experienced over the past two years is not expected to continue in future periods. The Company recently completed construction of a new 124,000 square foot production facility at its Fremont, California site. The administrative office areas and four production scale sputtering lines were brought into service during the fourth quarter of fiscal 1997. The Company plans to install up to 12 additional production scale sputtering lines in this new facility. In addition, the Company completed the expansion of its facility in Eugene, Oregon during fiscal 1997, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. The Company derives substantially all of its sales from the sale of thin film disks to a small number of customers. Loss of or a reduction in orders from one or more of the Company's customers could result in a substantial reduction in net sales. Because many of the Company's expense levels are based, in part, on its expectations as to future revenues, decreases in net sales may result in a disproportionately greater negative impact on operating results. Due to the rapid technological change and frequent development of new disk drive 24 27 products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter. At any one time the Company typically supplies disks in volume for fewer than ten disk drive products. The Company has experienced a period of rapid expansion in its operations, including the organization and management of a significant expansion in manufacturing capacity that has placed, and may continue to place, a significant strain on the Company's management and other resources. The Company's status as a public company since its March 1996 initial public offering has placed additional demands on the Company's management, including its finance and accounting organization. The Company's ability to manage its operations effectively will require it to continue to improve its operational, financial and management information systems, and to train, motivate and manage its employees. If the Company's management is unable to manage its operations effectively, the Company's business, operating results and financial condition could be adversely affected. Due to the changes in ownership resulting from the Leveraged Recapitalization, utilization of net operating losses is limited to approximately $0.8 million per year over the loss carryforward period (expiring between 2008 and 2010). The benefit from the net operating losses was recorded in the quarter ended December 31, 1995. Had the Company been obligated to pay taxes at the statutory rates for fiscal 1996, net income would have been $30.7 million. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
YEAR ENDED MARCH 31, --------------------------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales...................................... 59.4 61.6 92.7 105.3 107.4 ----- ----- ----- ----- ----- Gross profit (loss)................................ 40.6 38.4 7.3 (5.3) (7.4) Operating expenses: Research and development......................... 2.2 2.0 4.3 4.3 3.5 Selling, general and administrative.............. 4.5 4.0 5.8 8.0 6.7 Recapitalization expenses........................ -- 2.2 -- -- -- ----- ----- ----- ----- ----- Total operating expenses................. 6.7 8.2 10.1 12.3 10.2 ----- ----- ----- ----- ----- Operating income (loss)............................ 33.9 30.2 (2.8) (17.6) (17.6) Interest expense, net.............................. 1.3 4.4 9.4 9.3 6.7 ----- ----- ----- ----- ----- Income (loss) before income tax provision (benefit) and extraordinary debt extinguishment costs...... 32.6 25.8 (12.2) (26.9) (24.3) Income tax provision (benefit)..................... 9.6 1.3 0.1 0.1 (0.3) Extraordinary debt extinguishment costs, net of income taxes..................................... -- 0.6 -- -- -- ----- ----- ----- ----- ----- Net income (loss).................................. 23.0% 23.9% (12.3)% (27.0)% (24.0)% ===== ===== ===== ===== =====
FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995 Net Sales. Net sales were $263.2 million in fiscal 1997, $194.4 million in fiscal 1996, and $72.9 million in fiscal 1995. This represented an increase of 35.4% from fiscal 1996 to fiscal 1997, and an increase of 166.7% from fiscal 1995 to fiscal 1996. The increase in net sales in fiscal 1997 was primarily attributable to an increase in manufacturing capacity, resulting from the addition of new sputtering lines, and improved utilization of existing capacity and improved manufacturing processes, resulting in higher production volume and unit shipments. The unit sales volume increased 60% from fiscal 1996 to fiscal 1997 while average selling prices declined 16% over the same period. The increase in net sales in fiscal 1996 compared to fiscal 1995 was primarily attributable to an increase in manufacturing capacity, primarily from improved utilization of existing 25 28 capacity, improved manufacturing processes, and increased yields, resulting in higher production volume and unit shipments, as well as higher average selling prices primarily associated with the sale of new high-end products. The Company anticipates that average selling prices will fluctuate with industry supply and demand. Substantially all of the Company's net sales consist of products delivered to customers in Asia, primarily foreign subsidiaries of U.S. companies. Gross Profit. Gross margin was 40.6% in fiscal 1997, 38.4% in fiscal 1996 and 7.3% in fiscal 1995. The increases in gross margin in fiscal 1997 and fiscal 1996 were primarily a result of decreased unit production costs, improved utilization of manufacturing capacity, improved manufacturing processes, and the absorption of fixed costs over higher unit production volume. Production of aluminum and nickel plated substrates at the Eugene, Oregon manufacturing facility (which was acquired during the first quarter of fiscal 1997) and lower substrate and other raw material prices also contributed to a decrease in the unit cost during fiscal 1997. Increased yields in fiscal 1996, and a manufacturing disruption experienced during the last quarter of fiscal 1995 also contributed to improved margins in fiscal 1996 compared to fiscal 1995. Research and Development. Research and development expenses were $5.8 million, or 2.2% of net sales, in fiscal 1997, $3.8 million, or 2.0% of net sales, in fiscal 1996, and $3.1 million, or 4.3% of net sales, in fiscal 1995. Research and development expenses increased in absolute dollars in fiscal 1997 and 1996 due to an increase in headcount related to the Company's new product introductions, as well as increased efforts to expand research and to provide enabling technology elements for advanced products. The decrease of research and development expenses as a percentage of net sales in fiscal 1996 was primarily a result of the substantial increase in net sales over the same period. The Company develops manufacturing processes for new products directly on active production lines during the research and development phase, avoiding the need for substantial capital investment in dedicated research equipment. The Company anticipates that research and development expenses will increase in absolute dollars in future periods, although as a percentage of net sales, research and development expenses may fluctuate. Selling, General and Administrative. Selling, general and administrative expenses were $11.8 million, or 4.5% of net sales, in fiscal 1997, $7.8 million, or 4.0% of net sales, in fiscal 1996 and $4.2 million, or 5.8% of net sales, in fiscal 1995. The fiscal 1997 and fiscal 1996 increase in selling, general and administrative expenses in absolute dollars primarily reflected increased headcount necessary to support higher production volume and unit shipments. The fiscal 1996 decline in selling, general and administrative expenses as a percentage of net sales primarily reflected the increase in net sales over the same period, partially offset by an increase in the selling, general and administrative expenses in absolute dollars. The Company anticipates that selling, general and administrative expenses will continue to increase in absolute dollars as headcount is increased to support anticipated higher levels of production volume, although as a percentage of net sales, selling general and administrative expenses may fluctuate from period to period. Recapitalization Expenses. The Company effected the Leveraged Recapitalization on November 30, 1995, and recorded a $4.3 million charge for related expenses for the quarter ended December 31, 1995. Interest Expense, Net. Interest expense, net was $3.3 million, or 1.3% of net sales, in fiscal 1997, $8.6 million, or 4.4% of net sales, in fiscal 1996 and $6.9 million or 9.4% of net sales in fiscal 1995. The fiscal 1997 decrease was primarily a result of interest earned on excess cash balances, lower average debt balances and a $2.4 million increase in capitalized interest. The fiscal 1996 increase in absolute dollars was primarily a result of higher average debt balances and interest rates, as compared to fiscal 1995. The Company anticipates interest expense, net will increase in absolute dollars as a result of higher average debt balances (a result of the completion of the sale of the Convertible Notes in January 1997), lower invested cash balances and lower capitalized interest as construction-in-progress balances decrease. Provision for Income Taxes. The Company recorded income tax provisions of $25.4 million, $2.6 million and $20,000 in fiscal 1997, 1996 and 1995, respectively. The fiscal 1997 tax rate of approximately 30% reflected statutory federal and state rates, reduced primarily by benefits realized from the establishment of a foreign sales corporation, utilization of state credits and implementation of other state tax planning strategies. 26 29 During fiscal 1996, the Company assessed the recoverability of deferred tax assets and, based on expectations about operating results for the fiscal year ending March 31, 1997 and future years, determined it was more likely than not that the entire balance of deferred tax assets would be recovered. As the facts that supported the reduction of the valuation allowance related to the period immediately following the Leveraged Recapitalization, the Company reduced its fiscal 1996 income tax expense by approximately $6.9 million to reflect the tax benefit associated with recognition of deferred tax assets at December 31, 1995. The recognition of deferred tax assets and the utilization of $12.7 million of net operating loss carryforwards produced an effective tax rate of 5.2% for fiscal 1996. Due to a loss in fiscal 1995, the Company required no federal income tax provision. The income tax provision recorded during fiscal 1995 was based upon state income taxes of Hitachi Metals allocated to the Company. Extraordinary debt extinguishment costs, net of income taxes. The Company repaid the balance of a senior bank term loan incurred in connection with the Leveraged Recapitalization on March 14, 1996, after completion of its initial public offering. As a result, the Company recorded a one-time non-cash charge of $1.1 million, net of income taxes, for the write-off of the portion of unamortized debt issue costs related to the senior bank term loan during fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1997 and fiscal 1996, the Company financed its cash requirements through cash from financing activities and operations. In fiscal 1995, the Company financed its cash requirements primarily through cash from operations. The Company's operations provided net cash of $90.7 million, $50.4 million and $8.7 million for fiscal 1997, 1996 and 1995, respectively. Cash generated during fiscal 1997 reflected net income plus depreciation and amortization, an increase in total liabilities, and the utilization of deferred tax assets, partially offset by increases in inventories and receivables. Increased sales and improved margins contributed to the positive cash flow provided by operations in each of the past two fiscal years. For fiscal 1997 and fiscal 1996, net cash used in investing activities was $208.2 million and $35.5 million, respectively. The Company invested $199.4 million and $39.6 million in property, plant and equipment during fiscal 1997 and fiscal 1996, respectively. During fiscal 1997 and 1996, net cash from financing activities was $125.9 million and $20.0 million, respectively. Cash provided by financing activities for fiscal 1997 reflects the issuance of $230.0 million in Convertible Notes, and the related redemption of $59.0 million in Series A Preferred Stock, prepayment of the $47.0 million in subordinated promissory notes, and repayment of $41.0 million in long-term borrowings, as well as the receipt of $11.7 million from the exercise of the underwriters' over-allotment option pursuant to the Company's initial public offering. As of March 31, 1997, the Company's principal sources of liquidity consisted of $55.1 million in cash, cash equivalents and short-term investments, and a $50.0 million unsecured revolving credit facility under which there were no borrowings. At March 31, 1997, the Company had indebtedness of $230.0 million in Convertible Notes, that require semi-annual interest payments beginning July 15, 1997. The Company expects to spend in excess of $200.0 million on capital expenditures directed toward expansion of production capacity over the next twelve months. The Company believes existing cash balances, cash generated from operations, and funds available under its credit facilities will provide adequate cash to fund its operations for at least the next twelve months. While operating activities are expected to provide cash in certain periods, continued expansion of the Company's manufacturing capacity may require the Company to obtain additional sources of financing. Additional sources of long-term liquidity could include cash generated from operations and debt and equity financings. The Company continues to have significant future obligations and expects that it may require additional capital to support continued expansion of the Company's manufacturing capacity and growth, if any. There can be no assurance that the Company will be able to obtain alternative sources of financing on favorable terms, if at all, at such time or times as the Company may require such capital. 27 30 Recent pronouncements. During February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (SFAS No. 128) which establishes standards for computing and presenting earnings per share (EPS) more comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. While the Company studies the impact of the pronouncement, it continues to calculate EPS based on Accounting Pronouncements Board Opinion No. 15, "Earnings per Share." SFAS No. 128 will be effective for the Company's 1998 fiscal year, including interim periods, with a restatement of all prior-period EPS data presented. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements required by this item are set forth on pages 32 through 49 and the related consolidated financial statement schedule is set forth on page 50. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In December 1995, the Company decided to retain Coopers & Lybrand L.L.P. as the independent accountants for the Company and dismissed Ernst & Young L.L.P., the Company's former accountants. The decision to change independent accountants was approved by the Company's Board of Directors and was made in connection with the Leveraged Recapitalization. There were no disagreements with the former accountants regarding any matters with respect to accounting principles or practices, financial statement disclosure or auditing scope or procedure through December 1995, or with respect to the Company's financial statements for the fiscal years ended March 31, 1994 and 1995. The former accountants' reports as of and for the fiscal years ended March 31, 1994 and 1995 are not a part of the consolidated financial statements of the Company included in this annual report on Form 10-K and the related consolidated financial statement schedules included elsewhere in this report. Such reports did not contain an adverse opinion or disclaimer of an opinion or qualifications as to uncertainty, audit scope or accounting principles. Prior to retaining Coopers & Lybrand L.L.P., the Company had not consulted with Coopers & Lybrand L.L.P. regarding accounting principles. However, Hitachi Metals and certain stockholders of HMT had consulted Coopers & Lybrand L.L.P. for the limited purpose of determining appropriate accounting treatment of the Leveraged Recapitalization. 28 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the information under the captions "Election of Directors" and "Other Matters" contained in the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company's 1997 Annual Meeting of Stockholders to be held on August 14, 1997 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information under the captions "Election of Directors-Compensation of Directors," "Executive Compensation" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information under the caption "Certain Transactions" contained in the Proxy Statement. 29 32 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. FINANCIAL STATEMENTS. See Index to Consolidated Financial Statements and Financial Statement Schedules included on page 32. 2. FINANCIAL STATEMENT SCHEDULES. See "Schedule II -- Valuation and Qualifying Accounts" included on page 50. All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. 3. LIST OF EXHIBITS. See Index of Exhibits included on pages 50 and 51. (b) Reports on Form 8-K: During the quarter ended March 31, 1997, a report on Form 8-K was filed by the Company on January 21, 1997, in which the Company reported the sale of $230 million aggregate principal amount of 5 3/4% Convertible Subordinated Notes, due 2004. (c) Exhibits: The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index beginning on page 50. 30 33 SIGNATURES Pursuant to the requirements 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. HMT TECHNOLOGY CORPORATION (Registrant) Date: September 2, 1997 By: /s/ Peter S. Norris ------------------------------------ Peter S. Norris Vice President, Finance and Chief Financial Officer Date: September 2, 1997 By: /s/ Ronald L. Schauer ------------------------------------ Ronald L. Schauer President and Chief Executive Officer 31 34 HMT TECHNOLOGY CORPORATION CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants..................................................... 33 Consolidated Financial Statements: Consolidated Balance Sheets...................................................... 34 Consolidated Statements of Operations............................................ 35 Consolidated Statements of Stockholders' Equity (Deficit)........................ 36 Consolidated Statements of Cash Flows............................................ 37 Notes to Consolidated Financial Statements.......................................... 38 Schedules: II -- Valuation and qualifying accounts.......................................... 50
32 35 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Stockholders HMT Technology Corporation We have audited the consolidated financial statements and financial statement schedule of HMT Technology Corporation and its subsidiary listed in Item 14(a)(1) and (2) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HMT Technology Corporation and its subsidiary as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Jose, California April 22, 1997 33 36 HMT TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
MARCH 31, --------------------- 1997 1996 -------- -------- Current assets: Cash and cash equivalents............................................. $ 44,225 $ 35,843 Short-term investments................................................ 10,833 -- Receivables -- trade, net of allowance for doubtful accounts of $1,055 and $612 at March 31, 1997 and 1996, respectively.................. 35,771 31,070 Other receivables..................................................... 23 357 Inventories........................................................... 11,837 7,129 Deposits, prepaid expenses and other assets........................... 474 879 Deferred income taxes................................................. 6,532 5,028 -------- -------- Total current assets.......................................... 109,695 80,306 Construction in progress................................................ 76,433 15,745 Property, plant and equipment, net...................................... 178,875 63,383 Other assets............................................................ 8,386 1,415 Deferred income taxes................................................... -- 4,937 -------- -------- Total assets.................................................. $373,389 $165,786 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 26,424 $ 13,911 Accrued liabilities................................................... 8,765 16,682 Obligations under capital leases -- current portion................... 2,679 3,814 -------- -------- Total current liabilities..................................... 37,868 34,407 Obligations under capital leases, net of current portion................ 3,172 4,698 Other long-term liabilities............................................. 3,562 -- Deferred income taxes................................................... 3,345 -- Subordinated promissory notes payable to stockholders................... -- 47,000 5 3/4% Convertible Subordinated Notes, due 2004......................... 230,000 -- -------- -------- Total liabilities............................................. 277,947 86,105 Commitments (Note 6) Mandatorily Redeemable Series A Preferred Stock, $0.001 par value with a redemption value of $10.00 per share; authorized: 9,100,000 and 15,000,000 shares at March 31, 1997 and March 31, 1996, respectively; issued and outstanding: none and 5,900,000 shares at March 31, 1997 and 1996, respectively................................................ -- 60,157 -------- -------- Common Stock, $0.001 par value; authorized: 100,000,000 shares; issued and outstanding: 41,046,360 and 38,719,178 shares at March 31, 1997 and 1996, respectively................................................ 41 39 Additional paid-in capital.............................................. 92,084 77,913 Retained earnings....................................................... 79,966 18,221 Distribution in excess of basis (Note 1)................................ (76,649) (76,649) -------- -------- Total stockholders' equity.................................... 95,442 19,524 -------- -------- Total liabilities and stockholders' equity.................... $373,389 $165,786 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 34 37 HMT TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED MARCH 31, --------------------------------- 1997 1996 1995 -------- -------- ------- Net sales................................................... $263,209 $194,401 $72,893 Cost of sales............................................... 156,277 119,803 67,539 -------- -------- ------- Gross profit.............................................. 106,932 74,598 5,354 Operating expenses: Research and development.................................. 5,812 3,803 3,130 Selling, general and administrative....................... 11,803 7,774 4,230 Recapitalization expenses................................. -- 4,347 -- -------- -------- ------- Total operating expenses.......................... 17,615 15,924 7,360 -------- -------- ------- Operating income (loss)........................... 89,317 58,674 (2,006) Interest expense, net....................................... 3,329 8,578 6,915 -------- -------- ------- Income (loss) before income tax provision and extraordinary debt extinguishment costs......... 85,988 50,096 (8,921) Income tax provision........................................ 25,400 2,590 20 -------- -------- ------- Net income (loss) before extraordinary debt extinguishment costs..................................................... 60,588 47,506 (8,941) Extraordinary debt extinguishment costs, net of income taxes of $692................................................... -- 1,127 -- -------- -------- ------- Net income (loss)................................. 60,588 46,379 (8,941) Accretion reversal (accretion) for dividends on Mandatorily Redeemable Series A Preferred Stock....................... 1,157 (1,157) -- -------- -------- ------- Net income (loss) available for common stockholders......... $ 61,745 $ 45,222 $(8,941) ======== ======== ======= Primary net income (loss) available for common stockholders per share before extraordinary debt extinguishment costs..................................................... $ 1.40 $ 1.31 $ (0.26) ======== ======== ======= Extraordinary debt extinguishment costs per share, net of income taxes....................................... -- 0.03 -- -------- -------- ------- Net income (loss) available for common stockholders per share Primary................................................... $ 1.40 $ 1.28 $ (0.26) ======== ======== ======= Fully diluted............................................. $ 1.35 $ 1.28 $ (0.26) ======== ======== ======= Shares used in computing net income per share Primary................................................... 44,185 35,224 34,822 ======== ======== ======= Fully diluted............................................. 46,027 35,224 34,822 ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 35 38 HMT TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
DISTRIBUTIONS RETAINED TOTAL COMMON STOCK ADDITIONAL IN EXCESS EARNINGS STOCKHOLDERS' --------------------- PAID-IN OF NET BOOK (ACCUMULATED EQUITY SHARES AMOUNT CAPITAL VALUE DEFICIT) (DEFICIT) ---------- -------- ---------- ------------- ------------ ------------- Balances, April 1, 1994........... 4,650 $ 15,000 -- -- $(61,093) $ (46,093) Capital contribution............ -- -- $ 3,484 -- -- 3,484 Net loss........................ -- -- -- -- (8,941) (8,941) ---------- -------- ------- -------- -------- -------- Balances, March 31, 1995.......... 4,650 15,000 3,484 -- (70,034) (51,550) Net income for the period from April 1, 1995 through November 30, 1995...................... -- -- -- -- 27,001 27,001 Distribution to stockholders.... (4,650) (15,000) (3,484) $ (76,649) 43,033 (52,100) Common Stock issued upon the Leveraged Recapitalization.... 29,656,057 30 927 -- -- 957 Initial Public Offering of $0.001 par value Common Stock, net of offering expenses...... 8,400,000 8 76,924 -- -- 76,932 Common Stock issued under Stock Option Plans.................. 663,121 1 62 -- -- 63 Net income for the period from December 1, 1995 through March 31, 1996...................... -- -- -- -- 19,378 19,378 Accretion for dividends on Mandatorily Redeemable Series A Preferred Stock............. -- -- -- -- (1,157) (1,157) ---------- -------- ------- -------- -------- -------- Balances, March 31, 1996.......... 38,719,178 39 77,913 (76,649) 18,221 19,524 Over-allotment on Initial Public Offering of $0.001 par value Common Stock, net of offering expenses...................... 1,260,000 1 11,741 -- -- 11,742 Common Stock issued under Employee Stock Purchase Plans......................... 121,744 -- 1,035 -- -- 1,035 Common Stock issued under Stock Option Plans.................. 945,438 1 1,395 -- -- 1,396 Net income...................... -- -- -- -- 60,588 60,588 Reversal of accretion, net, for dividends on Mandatorily Redeemable Series A Preferred Stock............... -- -- -- -- 1,157 1,157 ---------- -------- ------- -------- -------- -------- Balances, March 31, 1997.......... 41,046,360 $ 41 $ 92,084 $ (76,649) $ 79,966 $ 95,442 ========== ======== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 36 39 HMT TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED MARCH 31, ---------------------------------- 1997 1996 1995 --------- -------- ------- Cash flows from operating activities: Net income (loss).................................................... $ 60,588 $ 46,379 $(8,941) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization........................................ 20,839 12,291 11,492 Provision for loss on inventories.................................... 3,801 (2,938) 2,536 Loss (gain) on sale or disposal of assets............................ 2,988 181 (16) Deferred income taxes................................................ 6,778 (9,965) -- Changes in operating assets and liabilities: Receivables -- trade................................................. (4,701) (23,539) 4,361 Other receivables.................................................... 334 29 188 Inventories.......................................................... (8,509) 6,623 (2,327) Deposits, prepaid expenses and other assets.......................... 405 840 90 Accounts payable..................................................... 12,513 6,940 1,776 Accrued liabilities.................................................. (7,917) 13,573 (452) Long term liabilities................................................ 3,562 -- -- --------- -------- ------- Net cash provided by operating activities............................ 90,681 50,414 8,707 --------- -------- ------- Cash flows from investing activities: Expenditures for property, plant and equipment....................... (197,395) (39,629) (7,317) Purchase of short-term investments................................... (10,833) -- -- Proceeds from sale of equipment...................................... -- 2,205 18 Decrease in other assets............................................. -- 1,961 12 --------- -------- ------- Net cash used in investing activities................................ (208,228) (35,463) (7,287) --------- -------- ------- Cash flows from financing activities: Principal payments on obligations under capital leases............... (4,744) (9,994) (4,701) Net proceeds from (repayments on) short-term borrowings.............. -- (86,700) 26,600 Repayment of long-term notes payable................................. -- (12,200) (22,450) Proceeds from long-term borrowings................................... 41,000 -- -- Repayments on long-term borrowings................................... (41,000) -- -- Proceeds from issuance of senior bank term loan...................... -- 60,000 -- Repayments on senior bank term loan.................................. -- (60,000) -- Financing costs...................................................... (7,500) (2,944) -- Proceeds from issuance of 5 3/4% Convertible Subordinated Notes...... 230,000 -- -- Proceeds from (repayment of) subordinated promissory notes payable to stockholders....................................................... (47,000) 47,000 -- Distribution to stockholders......................................... -- (52,100) -- Proceeds from issuance of Common Stock............................... 14,173 77,952 -- Proceeds from issuance (redemption) of Mandatorily Redeemable Series A Preferred Stock.................................................. (59,000) 59,000 -- --------- -------- ------- Net cash provided by (used in) financing activities.................. 125,929 20,014 (551) --------- -------- ------- Net increase in cash and cash equivalents............................ 8,382 34,965 869 Cash and cash equivalents at beginning of period..................... 35,843 878 9 --------- -------- ------- Cash and cash equivalents at end of period........................... $ 44,225 $ 35,843 $ 878 ========= ======== ======= Supplemental disclosure of cash flow information: Cash paid for interest during the period............................. $ 4,859 $ 8,776 $ 5,698 Cash paid for income taxes during the period......................... $ 27,925 $ 3,522 $ -- Supplemental disclosure of noncash investing and financing activities: Machinery and equipment acquired pursuant to a capital lease......... $ 2,083 $ -- $ -- Refinancing of existing capital lease obligations.................... $ -- $ 13,105 $14,930 Accretion (accretion reversal) for dividends on Mandatorily Redeemable Series A Preferred Stock................................ $ (1,157) $ 1,157 $ --
The accompanying notes are an integral part of these consolidated financial statements. 37 40 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation HMT Technology Corporation (the "Company"), operates in a single industry segment, and designs, manufactures and markets thin film magnetic disks for use in computer hard drives. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, HMT FSC Ltd. (incorporated on February 14, 1996). All significant intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year The Company uses a 52-week fiscal year ending on March 31 and thirteen- to fourteen-week quarters that end on the Sunday closest to the calendar quarter end. Recapitalization On November 30, 1995, the Company effected a leveraged recapitalization (the "Leveraged Recapitalization") pursuant to which the Company repurchased from Hitachi Metals, Ltd. ("Hitachi Metals"), then the sole stockholder of the Company, all of the outstanding shares of Common Stock of the Company, and certain investment funds, members of management and Hitachi Metals purchased newly issued Common Stock, Mandatorily Redeemable Series A Preferred Stock ("Series A Preferred Stock") and subordinated promissory notes ("Subordinated Notes") of the Company. As of November 30, 1995 (immediately prior to the Leveraged Recapitalization), the Company had approximately $98.5 million in assets (unaudited) and approximately $122.7 million in liabilities (unaudited). Immediately following the Leveraged Recapitalization, the Company had $110.9 million in assets (unaudited), and $132.1 million in liabilities (unaudited) (including $60.0 million of senior bank term loan and $47.0 million of Subordinated Notes to stockholders) and $59.0 million of Series A Preferred Stock. The Leveraged Recapitalization has been accounted for as a recapitalization, and accordingly, no change in the accounting basis of the Company's assets has been made in the accompanying financial statements. The amount of cash paid and securities issued to the stockholders of the Company exceeded the Company's net assets on the date of the transaction and has been recorded in the equity section as distributions in excess of net book value. Stock Split The Company's Board of Directors effected a 31-for-1 stock split on March 13, 1996. All shares and per share data in the accompanying financial statements have been retroactively restated to reflect the stock split. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase and money market funds to be cash equivalents. The Company maintains deposits with several financial institutions in the United States. Deposits in banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. 38 41 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Short-Term Investments The Company invests its excess cash in short-term, interest bearing, investment grade securities. At March 31, 1997, all such investments are designated as available-for-sale. Unrealized holding gains and losses, if any, are reported net of related taxes as a separate component of stockholders' equity. Realized gains and losses on sales of all such securities are reported in earnings and computed using the specific identification method and interest on investments is included in interest income. At March 31, 1997, short-term investments are stated at cost which approximates fair value. Short-term investments consist of interest bearing, investment grade commercial paper maturing before August 1997. There were no unrealized gains or losses on these securities as of March 31, 1997. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out basis. The Company's inventories include high-technology materials that may be specialized in nature or subject to rapid technological obsolescence. While the Company has programs to minimize the required inventories on hand and considers technological obsolescence in estimating reserves to reduce recorded amounts to market value, such estimates could change in the future. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation and amortization is provided using the straight-line method over estimated useful lives of ten to 35 years for the building and improvements; five to ten years or the lease term, whichever is shorter, for leasehold improvements; and three to five years for the machinery, equipment and furniture and fixtures. The Company's policy is to regularly review the carrying amount of specialized assets and to evaluate the remaining life and recoverability of such equipment in light of current market conditions. Upon disposal, the assets and related accumulated depreciation are removed from the Company's accounts, and resulting gains or losses are reflected in operations. Other Assets Other assets are comprised principally of debt issue costs which are capitalized and amortized to interest expense using the effective interest method over the term of the related debt. Warranties The Company's products are generally warrantied for a period of 60 days from customer receipt. Estimated future costs of repair, replacement, or customer accommodations are reflected in the accompanying financial statements. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the liability method is used for accounting for income taxes. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Revenue Recognition Revenue is generally recognized upon shipment of product to the customer. Sales are reported net of a provision for estimated product returns. 39 42 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Research and Development Research and development expenditures are charged to operations as incurred. Foreign Currency Accounting Substantially all of the Company's sales are denominated in U.S. dollars. Foreign currency transactions during the period are immaterial and are included in operations. Concentration of Risks Three customers accounted for 76.8% and 84.3% of accounts receivable at March 31, 1997 and 1996, respectively. Significant customers accounted for the following percentages of net sales in fiscal 1997, 1996 and 1995:
MARCH 31, ---------------------- 1997 1996 1995 ---- ---- ---- Maxtor Corporation..................................... 40.7% 40.5% 73.7% Samsung Electronics Company Limited.................... 19.8 0.1 0.3 Iomega Corporation..................................... 12.2 2.4 -- Western Digital Corporation............................ 11.9 35.8 5.9 Micropolis Corporation................................. 8.4 9.1 11.2
The Company sells substantially all of its production to Asian subsidiaries of U.S. companies. The Company performs ongoing credit evaluations of its customers. The Company does not require collateral for its receivables and maintains an allowance for potential credit losses, which have been insignificant to date. The Company's Fremont facilities currently account for all of its finished goods production. Disruption of operations at either of the two Company's production facilities could cause delays in, or an interruption of, production and shipment of products, which could materially adversely affect the Company's business, operating results and financial condition. The Company maintains its short term investments at one financial institution. The Company has not experienced material losses on any of its investments. Public Offering During March 1996, the Company sold 8,400,000 shares of Common Stock at $10.00 per share through its initial public offering ("IPO"), all of which were sold by the Company. The net proceeds (after underwriter's discounts and commissions and other costs associated with the IPO) totaled $76.9 million. On April 12, 1996, the Company sold an additional 1,260,000 shares of common stock at $10.00 per share pursuant to the underwriters' over-allotment option, resulting in net proceeds of approximately $11.7 million. Computation of Net Income Per Share Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common shares consist of stock options and warrants as if exercised for all periods presented. Accretion (reversal) of the Series A Preferred Stock dividend reduces (increases) earnings available for holders of Common Stock in the computation of earnings per share. Net income used in the computation of fully diluted income per share assumes the conversion of the 5 3/4% convertible subordinated notes. For the relevant periods, the Company has computed common and dilutive common share equivalents in determining the number of shares used in calculating earnings per share pursuant to the Securities and 40 43 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. SAB 83 requires the Company to include all common share equivalents issued during the 12 months preceding the filing date of an initial public offering in its calculation of the number of shares used to determine earnings per share as if shares used to determine earnings per share had been outstanding for all periods presented. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, other receivables and accrued liabilities are a reasonable estimate of their fair value due to their short term nature. The carrying values of the Company's long term debt and Series A Preferred Stock are a reasonable estimate of their fair value based on interest rates as of March 31, 1996 for issues with similar remaining maturities. The estimated fair value amounts of the Company's financial instruments have been determined by the Company, using appropriate market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value, thus, the estimates provided herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The Company calculates the fair value of financial instruments and includes this additional information in the notes to financial statements when the fair value is different than the book value of those financial instruments. When the fair value is equal to the book value no additional disclosure is made. The Company uses quoted market prices whenever available to calculate these fair values. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments which take into account the present value of estimated future cash flows. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Pronouncements During February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (SFAS No. 128) which establishes standards for computing and presenting earnings per share (EPS) more comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. While the Company studies the impact of the pronouncement, it continues to calculate EPS based on Accounting Pronouncements Board Opinion No. 15, "Earnings per Share." SFAS No. 128 will be effective for the Company's 1998 fiscal year, including interim periods, with a restatement of all prior-period EPS data presented. Reclassifications Certain amounts in the consolidated financial statements have been reclassified to conform with the current year's presentation. The reclassification has no impact on previously reported net income or stockholders' equity (deficit). 41 44 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. BALANCE SHEET DETAIL
MARCH 31, --------------------- 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) Inventories: Raw materials....................................... $ 4,307 $1,284 Work-in-process..................................... 5,843 5,123 Finished goods...................................... 1,687 722 ------- ------ $11,837 $7,129 ======= ======
Inventories reflect reserves of approximately $5.3 million and $1.5 million as of March 31, 1997 and 1996, respectively.
MARCH 31, --------------------- 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) Property, Plant and Equipment, Net: Land................................................ $ 4,869 $ 4,636 Building and improvements........................... 80,417 13,814 Leasehold improvements.............................. 22,187 15,501 Machinery, equipment and furniture and fixtures..... 124,415 71,742 -------- -------- 231,888 105,693 Less accumulated depreciation and amortization...... 53,013 42,310 -------- -------- $178,875 $63,383 ======== ========
Construction in progress was approximately $76.4 million and $15.7 million at March 31, 1997 and 1996, respectively. Additions to construction in progress include capitalized interest of approximately $2.4 million, $278,000, and $8,000 during fiscal 1997, 1996 and 1995, respectively.
MARCH 31, ----------------------- 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) Accrued Liabilities: Interest payable.................................. $2,473 $ 2,088 Income taxes payable.............................. -- 8,620 Payroll related items............................. 2,957 1,599 Other............................................. 3,335 4,375 ------ ------- $8,765 $16,682 ====== =======
42 45 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RELATED PARTY TRANSACTIONS The Company had the following transactions with a certain stockholder and its affiliates:
MARCH 31, ----------------------------- 1997 1996 1995 ------- ------ ------ (DOLLARS IN THOUSANDS) Hitachi Metals Trading Purchases of raw materials.................... $11,139 $8,755 $3,044 Sales......................................... 2 19 12 Hitachi Metals America Purchases of raw materials.................... 1,450 2,274 1,038 Hitachi Metals Research Ltd. Contract research and development services.... -- 514 202 Hitachi Metals Limited Purchases of raw materials.................... -- -- 14 Interest under capital lease obligations...... -- -- 737 Hitachi Kizoku Shoji Sales......................................... -- -- 1,522
4. OBLIGATIONS UNDER CAPITAL LEASES Assets under capital lease obligations as of March 31, 1997 consist of machinery and equipment with a cost of $16.6 million and accumulated amortization of $8.5 million ($26.9 million and $10.4 million, respectively, at March 31, 1996). Minimum future lease payments under capital lease obligations, together with the present value of the net minimum lease payments, are as follows:
PERIOD ENDING MARCH 31, 1997 ---------------------- (DOLLARS IN THOUSANDS) 1998..................................................... $3,206 1999..................................................... 2,827 2000..................................................... 574 ------ Minimum lease payments................................... 6,607 Less amount representing interest........................ 756 ------ Present value of minimum lease payments.................. 5,851 Less current portion..................................... 2,679 ------ Capital lease obligation, net of current portion.... $3,172 ======
In November 1995, in connection with the Leveraged Recapitalization, the Company entered into an agreement to refinance an existing capital lease under which the majority of assets under the existing lease plus assets with a net book value of approximately $5.0 million were conveyed to the new lessor. The appraised value of the assets conveyed to the new lessor exceeded their net book value on the date transferred. The new lease agreement, classified as a capital lease, required an initial payment of $6.1 million and 36 monthly payments of $0.2 million. Upon maturity, the Company has the option to renew the lease, purchase the equipment at fair market value, or return it to the lessor with a restocking fee. 5. DEBT On November 30, 1995, in connection with the Leveraged Recapitalization, the Company paid off the entire balance of short-term borrowings and long-term notes outstanding at that time. The Company partially financed the Leveraged Recapitalization through a $60.0 million senior bank term loan and $47.0 million in 43 46 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12% Subordinated Notes sold to stockholders. The Subordinated Notes were repaid in full with proceeds from the sale of 5 3/4% convertible subordinated notes. Extraordinary debt extinguishment costs, net of income taxes. Pursuant to the credit agreement, the Company repaid the balance of a senior bank term loan on March 14, 1996, after completion of the IPO. As a result, the Company recorded a one-time non-cash charge of $1.1 million (or $0.03 per share), net of income taxes, for the write-off of the portion of unamortized debt issue costs related to the senior bank term loan. On August 28, 1996, the Company amended and restated the revolving credit agreement originally entered into in 1995 pursuant to the Leveraged Recapitalization. This unsecured $50 million revolving credit agreement is with a consortium of banks and expires August 28, 1999. The credit agreement contains certain covenants relating to profitability, minimum levels of tangible net worth, limitations on additional debt, minimum levels of liquidity and prohibit the cash payment of dividends on common stock. At March 31, 1997 and 1996, the Company had no borrowings under this facility. Issuance of 5 3/4% Convertible Subordinated Notes In January, 1997 the Company completed a $230 million private placement of the Convertible Notes to qualified institutional investors, resulting in net proceeds of approximately $222.5 million (after estimated offering costs). Proceeds from the issuance of the Convertible Notes were used to repay the $47 million principal balance of the subordinated notes plus accrued interest and to redeem the $59 million of Series A Preferred Stock issued pursuant to the Leverage Recapitalization, and to fully repay the $41 million in long-term borrowings outstanding. The Convertible Notes have an interest rate of 5 3/4% payable semiannually at January 15 and July 15, are convertible into shares of common stock of the Company at a conversion price of $23.75 per share, subject to adjustment in certain events, and mature January, 2004. The Convertible Notes are not redeemable prior to January 19, 2000. Thereafter the Company may redeem the Convertible Notes initially at 103.286% and at decreasing prices thereafter to 100% at maturity, in each case together with accrued interest. As of March 31, 1997, the fair value of the Convertible Notes, which is determined based on quoted market price, was $194.4 million. 6. COMMITMENTS The Company leases office and manufacturing facilities under operating lease agreements. Future minimum payments under these noncancelable operating leases are as follows:
(DOLLARS PERIOD ENDING MARCH 31, IN THOUSANDS) ------------------------------------------------ ------------- 1998............................................ $ 859 1999............................................ 720 2000............................................ 131 2001............................................ 4 ------- $ 1,714 =======
Rent expense was approximately $0.8 million, $0.8 million and $0.9 million for the years ended March 31, 1997, 1996 and 1995, respectively. Equipment and Facilities Purchase Commitments As of March 31, 1997, the Company had commitments to purchase $43.2 million and $12.5 million of equipment and facilities, respectively. 44 47 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. MANDATORILY REDEEMABLE PREFERRED STOCK On November 30, 1995, in connection with the Leveraged Recapitalization, the Company issued 5,900,000 shares of Series A Preferred Stock. Dividends on the Preferred Stock were accreted based on the effective interest method from the date of issuance. During the fourth quarter of fiscal 1997, the Company redeemed the Series A Preferred Stock with proceeds from the issuance of the Convertible Notes. As a result, the Company recorded a one-time reversal of approximately $3.8 million during the fourth quarter of 1997 for cumulative accreted dividends. The Board of Directors is authorized without further action by the Company's stockholders, to issue 9,100,000 shares of Preferred Stock, in one or more series and to fix the rights, preferences and privileges thereof. 8. STOCKHOLDERS' EQUITY (DEFICIT) Common Stock The holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities. The Common Stock has no preemptive rights or other subscription rights. All outstanding shares of Common Stock are fully paid and nonassessable. The Company has reserved 9,684,210 shares of Common Stock in the event of conversion of the Convertible Notes. The Company has not declared or paid cash dividends as of March 31, 1997. Warrants In connection with the Leveraged Recapitalization, the Company issued to the banks that provided the senior bank term loan warrants to purchase 701,344 shares of Common Stock. During the fourth quarter of fiscal 1996, pursuant to the terms of the warrant agreement, the Company exercised its right to repurchase 40% of the outstanding warrants for an immaterial amount, leaving a balance of warrants to purchase 420,794 shares of common stock. The warrants are exercisable at a purchase price of $0.0003 per share at any time prior to November 30, 2002. Stock Option Plans In November 1995, the Board of Directors authorized and reserved an aggregate of 12,400,000 shares of Common Stock for issuance under the 1995 Management Stock Option Plan and the 1995 Stock Option Plan (together, as the "Stock Plans"). In January 1996, the Board of Directors adopted the 1996 Non-Employees Directors' Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of options to purchase shares of Common Stock to nonemployee directors of the Company (other than employees or affiliates of Summit Partners, L.P. or Hitachi Metals). In the event of a merger, consolidation, reverse merger or reorganization, options outstanding under the Directors' Plan will automatically become fully vested and will terminate if not exercised prior to such event. No option granted under the Directors' Plan may be exercised after the expiration of ten years from the date it was granted. The exercise price of options under the Directors' Plan will equal the fair market value of the Common Stock on the date of grant. The Directors' Plan will terminate in January 2006, unless earlier terminated by the Board of Directors. 45 48 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In January 1996 the Board of Directors adopted the 1996 Equity Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for grants of incentive stock options to employees (including officers and employee directors) and of nonstatutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights to employees (including officers and directors) and consultants of the Company. The combined maximum number of shares of Common Stock authorized to be issued pursuant to options granted under the Directors' Plan and the Incentive Plan is 3,000,000 shares. A summary of activity under the Stock Plans is as follows:
OUTSTANDING OPTIONS ------------------------------------------------- AGGREGATE WEIGHTED AVERAGE AVAILABLE NUMBER OF EXERCISE EXERCISE PRICE FOR GRANT OPTIONS PER SHARE PRICE PER SHARE ----------- ---------- ---------------- ----------- ---------------- Authorized................ 15,400,000 -- Granted................... (12,284,150) 12,284,150 $ 0.03 - $10.00 $ 1,566,837 $ 0.13 Cancellations............. 15,306 (15,306) -$ 0.03 $ (493) $ 0.03 Exercised................. (8,351,121) $ 0.03 - 10.00 $ (311,497) $ 0.04 ----------- ---------- --------------- ----------- ----------- Balances, March 31, 1996.................... 3,131,156 3,917,723 $ 0.03 - 10.00 $ 1,254,847 $ 0.32 Granted................... (556,700) 556,700 $ 15.81 - 16.25 $ 8,911,396 $16.01 Cancellations............. 224,088 (224,036) $(1,752,432) $ 7.87 Exercised................. (945,438) $ 0.097 - $ 8.50 $ (48,022) $ 0.05 ----------- ---------- --------------- ----------- ----------- Balances, March 31, 1997.................... 2,797,136 3,304,949 $ 0.03 - 18.50 $ 8,365,789 $ 2.53
Upon grant, 1,550,000 options vested immediately and were exercised. During fiscal 1997 and 1996, an additional 373,612 and 1,464,048 options vested upon achievement of certain other performance goals, respectively. The majority of remaining outstanding options will vest ratably over a four year period. Of the options to purchase 12,284,150 shares granted to all optionees, options to purchase 8,339,000 shares were exercised pursuant to early exercise provisions contained in the holders' stock option agreements. As of March 31, 1997, 3,200,045 shares of Common Stock exercised pursuant to early exercise provisions were subject to repurchase at prices ranging from $0.03 to $0.10 per share upon termination of employment. The options expire no later than ten years after the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the 1995 Plan. Had compensation cost for the 1996 Plan been determined based on the fair value at the grant date for the options granted in fiscal 1997 consistent with the provisions of SFAS 123, the Company's net income for fiscal 1997 would have been reduced to the pro forma amounts indicated below:
1997 1996 ------- ------- Net income -- as reported................................ $61,744 $45,222 Net income -- pro forma.................................. $60,348 $44,876 Earnings per share -- as reported Primary.................................................. $ 1.40 $ 1.28 Fully Diluted............................................ $ 1.35 $ 1.28 Earnings per share -- pro forma Primary.................................................. $ 1.37 $ 1.27 Fully Diluted............................................ $ 1.31 $ 1.27
46 49 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The fair value of each option grant for the 1996 Plan is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Risk-free interest rate............................... 5.36% - 5.53% Expected life......................................... 2-5 years Expected volatility................................... 0.77 Expected dividend..................................... $--
The weighted average expected life was calculated based on the vesting period and the anticipated exercise behavior of the employees. The following table summarizes the stock options outstanding at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- -------------- $0.03 - $ 0.10 2,725,699 8.68 $ 0.04 279,151 $ 0.04 $10.00 103,750 8.95 $10.00 25,000 $10.00 $13.13 33,000 9.29 $13.13 -- $ -- $13.38 79,000 9.88 $13.38 -- $ -- $14.50 68,200 9.34 $14.50 -- $ -- $14.88 31,300 9.24 $14.88 -- $ -- $15.00 10,000 9.70 $15.00 -- $ -- $16.25 250,000 9.77 $16.25 -- $ -- $18.50 4,000 9.47 $18.50 -- $ -- -------------- --------- ---- ------ ------- ------ $0.03 - $18.50 3,304,949 8.83 $ 2.53 304,151 $ 0.86
Employee Stock Purchase Plan In January 1996, the Board adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 500,000 shares of Common Stock. Under the Purchase Plan substantially all employees may be granted the opportunity to purchase shares of common stock at 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the specified purchase date (generally April 30 and October 31 of each year). 9. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED MARCH 31, ---------------------------- 1997 1996 1995 ------- ------- ---- (DOLLARS IN THOUSANDS) Current: Federal........................................ $22,046 $10,095 $ -- State.......................................... 65 2,460 20 Deferred: Federal........................................ 3,289 (9,291) -- State.......................................... -- (674) -- ------- ------- ---- $25,400 $ 2,590 $ 20 ======= ======= ====
47 50 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's effective tax rate differs from the statutory federal income tax rate as follows:
YEAR ENDED MARCH 31, ------------------------ 1997 1996 1995 ---- ----- ----- Income tax provision (benefit) at statutory rate..... 35.0% 35.0% (34.0)% ---- ----- ----- Net operating loss benefit........................... -- -- 34.0 Benefit of foreign sales corporation................. (4.1) (1.0) -- State income taxes................................... 3.2 2.6 0.2 Benefit of operating losses.......................... -- (25.5) -- State credits........................................ (3.2) -- -- Other................................................ (1.4) 7.4 -- Change in valuation allowance........................ -- (13.3) -- ---- ----- ----- Effective tax rate................................. 29.5% 5.2% 0.2% ==== ===== =====
The components of the deferred tax assets and liabilities are as follows:
YEAR ENDED MARCH 31, ------------------- 1997 1996 ------- ------- (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued vacation......................................... $ 405 $330 State credits............................................ 148 -- Inventory reserve........................................ 2,447 953 Depreciation............................................. -- 873 Allowances and other accrued liabilities................. 3,437 3,650 Net operating loss carryforward.......................... 3,686 4,159 ------- ------ Total deferred tax assets........................ 10,123 9,965 Deferred tax liabilities: Depreciation............................................. (6,936) -- ------- ------ Less valuation allowance................................... -- -- ------- ------ Net deferred tax assets.......................... $ 3,187 $9,965 ======= ======
Although realization of the deferred tax assets is not assured, the Company believes that it is more likely than not that all of the deferred tax assets will be realized. At March 31, 1997, the Company had federal net operating loss carryforwards of approximately $10.5 million available to offset future taxable income. These net operating loss carryforwards expire in the years 2008 to 2010. Because the Leveraged Recapitalization caused an ownership change, as defined by tax law, the Company's ability to use its net operating loss carryforwards from November 30, 1995 is limited to a specified dollar amount each year. Prior to the Leveraged Recapitalization, the Company was a member of a combined group for California tax reporting purposes and began to report on a single entity basis after the Leveraged Recapitalization. The Company's current state provision for the year ended March 31, 1996 represents its share of the combined group's California tax liability through November 30, 1995, plus its California tax liability for the period from December 1, 1995 through March 31, 1996, computed on a single entity basis. 48 51 HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. 401(K) PLAN The Company has a deferred tax savings 401(k) plan and generally matches 50% of employee contributions up to 4% of gross salaries. The employer contributions do not vest until the employee's second year of service, at which time the contributions vest 100%. All employees employed for at least six months are eligible to participate under the plan. The Company contributed to the plan approximately $0.7 Million, $0.3 million, $0.2 million in fiscal 1997, 1996 and 1995, respectively. 11. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following quarterly financial information should be read in conjunction with Note 1.
YEAR ENDED MARCH 31, 1997 ------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales........................... $76,420 $62,080 $61,243 $63,466 Gross profit........................ 32,406 26,717 24,872 22,937 Operating income.................... 28,110 22,708 20,325 18,174 Net income.......................... 16,778 17,501 13,983 12,326 Net income available for common stockholders...................... 15,895 16,605 13,074 16,171 Net income (loss) available for common stockholders per share Primary........................... $ 0.36 $ 0.38 $ 0.30 $ 0.37 Fully diluted..................... $ 0.36 $ 0.38 $ 0.30 $ 0.32 Shares used in computing net income per share Primary........................... 44,015 44,205 44,229 44,291 Fully diluted..................... 44,015 44,205 44,229 51,660
YEAR ENDED MARCH 31, 1996 ------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales........................... $28,589 $44,422 $56,346 $65,044 Gross profit........................ 6,618 17,215 23,546 27,219 Operating income.................... 4,429 14,797 15,959 23,489 Net income.......................... 2,567 12,320 19,912 11,580 Net income available for common stockholders...................... 2,567 12,320 19,912 10,423 Net income (loss) available for common stockholders per share Primary........................... $ 0.07 $ 0.35 $ 0.57 $ 0.29 Fully diluted..................... $ 0.07 $ 0.35 $ 0.57 $ 0.29 Shares used in computing net income per share Primary........................... 34,822 34,822 34,822 36,431 Fully diluted..................... 34,822 34,822 34,822 36,431
Net sales and net income are subject to fluctuations as a result of customer actions including the timing of mandated delivery schedules. 49 52 HMT TECHNOLOGY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END ACCOUNT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - -------------------------------------------- ---------- ---------- ---------- ---------- ---------- Year ended March 31, 1995 Provision for loss on inventory........... $1,920 $5,045 -- $ (2,509) $4,456 Allowance for doubtful accounts receivable............................. 120 (135) -- (152) 137 Year ended March 31, 1996 Provision for loss on inventory........... 4,456 635 -- (3,573) 1,518 Allowance for doubtful accounts receivable............................. 137 450 -- 25 612 Year ended March 31, 1997 Provision for loss on inventory........... 1,518 3,865 -- (63) 5,320 Allowance for doubtful accounts receivable............................. 612 60 $400 (17) 1,055
INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------------------------------------------------------------------- 2.1 Recapitalization Agreement by and among the Company and the Investors listed on Exhibit A thereto dated October 31, 1995.(1) 2.2 Redemption Agreement by and between the Company and Hitachi Metals, dated November 30, 1995.(1) 3.2 Restated Certificate of Incorporation, dated March 27, 1997.(3) 3.3 Bylaws of the Registrant.(1) 4.1 Reference is made to Exhibits 3.2 through 3.3.(1) 4.2 Specimen stock certificate.(1) 4.3 Intentionally Blank 4.4 Intentionally Blank 4.5 Form of Restricted Global Convertible Subordinated Note due 2004 (2) 4.6 Form of Unrestricted Global Convertible Subordinated Note due 2004(2) 4.7 Form of Certificated Convertible Subordinated Note due 2004(2) 4.8 Indenture, dated as of January 15, 1997, between HMT Technology Corporation (the "Company") and State Street Bank and Trust Company of California, N.A., as Trustee.(2) 4.9 Registration Agreement, dated as of January 15, 1997, among the Company, Salomon Brothers, Alex Brown & Sons Incorporated, Hambrecht & Quist LLC and Robertson, Stephens & Company LLC (collectively, the "Initial Purchasers").(2) 4.10 Purchase Agreement, dated January 15, 1997, between the Company and the Initial Purchasers.(2) 4.11 Amended and Restated Revolving Credit Agreement, dated as of August 28, 1996.(2) 4.12 First Amendment to Amended and Restated Revolving Credit Agreement, dated January 14, 1997.(2) 10.1 Lease Agreement between the Company and Sun Life Assurance Company of Canada, dated January 5, 1989, as amended.(1) 10.2 Sublease Agreement between the Company and McKenzie Socket Technology, dated December 22, 1992, as amended.(1) 10.3 Lease Agreement between the Company and Amorok/Wells Venture, dated August 15, 1990, as amended.(1)
50 53
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------------------------------------------------------------------- 10.4 Form of Indemnity Agreement entered into between the Registrant and its directors and executive officers.(1) 10.5 Registrant's 1995 Stock Option Plan (the "1995 Plan").(1) 10.6 Form of Incentive Stock Option under the 1995 Plan.(1) 10.7 Form of Early Exercise Agreement under the 1995 Plan.(1) 10.8 Registrant's 1995 Management Stock Option Plan (the "Management Plan").(1) 10.9 Form of Incentive Stock Option under the Management Plan.(1) 10.10 Form of Early Exercise Agreement under the Management Plan.(1) 10.11 Registrant's 401(k) Profit Sharing Plan.(1) 10.12 Revolving Credit and Term Loan Agreement by and among the Company, First National Bank of Boston and Banque Paribas, dated November 30, 1995 (the "Credit Agreement").(1) 10.12.1 First Amendment to the Credit Agreement dated February 22, 1996.(1) 10.12.2 Second Amendment to the Credit Agreement dated March 31, 1996.(1) 10.12.3 Third Amendment to the Credit Agreement dated August 28, 1996.(1) 10.14 Warrant Purchase Agreement by and among the Company, First National Bank of Boston and Banque Paribas dated November 30, 1995.(1) 10.15 Example of Common Stock Purchase Warrant dated November 30, 1995.(1) 10.16 Example of Subordinated Promissory Note dated November 30, 1995.(1) 10.17 Master Lease Agreement by and between the Company and Comdisco, dated November 30, 1995.(1) 10.18 Investor Rights Agreement by and among the Company, certain of the Company's officers, and the Investors listed on Exhibit A of the Recapitalization Agreement, dated November 30, 1995.(1) 10.20 Registrant's 1996 Equity Incentive Plan (the "Incentive Plan").(1) 10.21 Form of Incentive Stock Option under the Incentive Plan.(1) 10.22 Form of Non-statutory Stock Option under the Incentive Plan.(1) 10.23 Registrant's Employee Stock Purchase Plan.(1) 10.24 Registrant's Non-Employee Directors' Stock Option Plan (the "Directors' Plan").(1) 10.25 Form of Non-Statutory Stock Option under the Directors' Plan.(1) 10.26 Registrant's Executive Severance Plan.(1) 11.1 Statement Regarding Calculation of Net Income (loss) per share.(3) 16.1 Letter from Ernst & Young LLP regarding change in certifying accountant.(1) 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule.(3) 99.1 Press Release, titled "HMT Technology Corporation Announces Completion of Private Placement of Convertible Subordinated Notes," dated January 22, 1997.(2)
- --------------- (1) Previously filed in Registration Statement No. 333-450. (2) Previously filed in Form 8-K, dated as of January 21, 1997 (3) Previously filed in Form 10-K, dated as of June 28, 1997 51 EX-23.1 2 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of HMT Technology Corporation on Form S-3 (File Nos. 333-24385 and 333-32025) of our report dated April 22, 1997, on our audits of the consolidated financial statements and financial statement schedule of HMT Technology Corporation and its subsidiary as of March 31, 1997 and 1996, and for the years ended March 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K/A. COOPERS & LYBRAND L.L.P. San Jose, California September 1, 1997 -----END PRIVACY-ENHANCED MESSAGE-----