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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Fiscal Year Ended March 31, 1999
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)
(510) 490-3100
(Registrant's Telephone Number, Including Area Code)
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
Notes, 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. [X]
As of June 1, 1999 the aggregate market value of Common Stock held by
non-affiliates was approximately $135.6 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 1, 1999, 44,998,911 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).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement, which will be filed with
the Commission pursuant to Registration 14A in connection with the 1999 Annual
Meeting, are incorporated by reference in Part III of this Report.
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HMT TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K
PART I
Item 1. Business
This Annual Report on Form 10-K report contains forward-looking
statements. In some cases, these statements may be identified by
terminology such as "may" , "will", "should", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", or
"continue" or the negative of such terms and other comparable
terminology. These statements involve known and unknown risks and
uncertainties that may cause HMT's or its industry's results, level of
activity, performance or acheivements to be materially different from
those expressed or implied by the forward-looking statements. Factors
that may cause or contribute to such differences include, among others,
those discussed under the captions "Business", "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations". Forward-looking statements not specifically described
above also may be found in these and other sections of this report.
HMT Technology Corporation ("HMT" or the "Company") is an independent
supplier of high-performance thin film disks for high-end, high-capacity
and removable hard disk drives, which in turn are used in PCs, network
servers and workstations. HMT was incorporated in Delaware in December
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
calendar 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 and removable cartridges with storage capacities ranging from
1.0 to 20.4 gigabytes (using one to six disks), and all have coercivity
levels of 2100 Oersted 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 as well as the removable and emerging low cost hard
disk drive segments. HMT believes that its current 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, disk thicknesses
and disk sizes to match the design and performance requirements of each
particular customer. The Company's principal customers currently include
Maxtor Corporation ("Maxtor"), Western Digital Corporation ("Western
Digital"), Iomega Corporation ("Iomega"), and Samsung Electronic Company
Limited ("Samsung"). During fiscal 1999 and 1998, the Company shipped
disks to SyQuest Corporation ("SyQuest") and Micropolis Corporation
("Micropolis."), respectively. In February 1999, the Company announced it
had received qualification for, and would begin shipping disks to Conner
Technology ("Conner").
Industry Background
The Disk Drive Market
Market demand for disk drives has been growing steadily, stimulated by
the 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 Trend Focus, worldwide
shipments of PCs were 81 million units in calendar 1997 and 90 million
units in calendar 1998, and are projected to reach approximately 144
million units in calendar 2002. 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 calendar year
2001. Although unit shipments of PCs are expected to grow, the
introduction of the sub-$1,000 PC has had far-reaching effect throughout
the PC supplier base. As PC prices have fallen, the pressure on key
component manufacturers, such as disk drive manufacturers, has
intensified.
This pricing pressure was evident in calendar 1998; according to Trend
Focus, worldwide shipments of hard disk drives grew 11% to 145 million
units in calendar 1998 while revenues declined 0.1% to approximately
$25.8 billion. Analysts predict that growth in unit shipments will
outpace revenue growth over the next several years. Units are projected
to grow to 245 million in calendar 2002, producing revenues of $32
billion. More important for the media industry, however, was that the
disks-per-drive ratio continued to decline across all product platforms
after several years of modest increases. Slower growth and a falling
disks/drive ratio caused disk media shipments to contract for the first
time in the industry's recent history. According to Trend Focus, unit
shipments fell 2.3% to 407 million in calendar 1998, with an estimated
market value of $4 billion, down 16% from 1997. Shipments from OEM
sources declined sharply, as Captive manufacturers increased their
percentage of internal supply. This reflects a sustained vertical
integration move, and will make future competition more difficult for
independent media producers. Trend Focus projects that the significant
declines in units and revenues will abate in calendar 1999, and that the
total market for thin film disks will begin to expand again, reaching 610
million units in calendar 2002, with an estimated market value of $5.3
billion.
The applications being developed for PCs require greater storage
capacity and, as a result, have 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 98 or Windows NT.
Increasing use of the Internet and on-line data, including image storage
and retrieval, have been responsible for the stimulated 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 690 megabytes ("MB")
in calendar 1995 to 3.0 gigabytes ("GB") in calendar 1997 to 4.3 GB in
calendar 1998. This increase in storage capacity per platter has allowed
disk drive manufacturers to reduce the average number of disks per drive.
According to industry market analysts, this resulting reduction in the
average number of disks per drive will likely slow the growth rate of
disk shipments below the growth rate of disk drives during calendar 1999
and beyond. The significant amount of captive capacity employed by
certain disk drive manufacturers also continues to limit the market
opportunities for independent disk suppliers such as HMT.
While storage capacity has grown, the cost per GB has fallen from
$1,260 in calendar 1993 to $320 in calendar 1995 and to $15 in calendar
1999. 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
Fiscal 1999 was a difficult year of transition for the Company and the
disk drive industry. Disk drive programs utilizing newer, more advanced,
magnetoresistive ("MR") media and recording heads replaced older
generation programs utilizing inductive media and heads. By the end of
fiscal 1999, most disk drives were manufactured with MR components. An
MR disk is optimized for use with MR heads that use separate read and
write elements. The write element is made from conventional inductive
materials, but the read element is made of a material whose electrical
resistance changes when subjected to changes in a magnetic field. MR
heads are more sensitive to magnetic fields enabling them to read more
densely-packed, smaller-sized bits. The transition to MR disk drives has
led to significant, unprecedented increases in areal density. The
Company believes that the number of gigabits per square inch doubled in
fiscal 1998. During fiscal 1998, the Company began manufacturing both MR
and inductive media. The Company had largely completed its transition to
MR products by the second quarter of fiscal 1999 at which time MR media,
including more advanced giant magnetoresistive ("GMR") disks, accounted
for approximately 50% of the Company's unit sales. MR disks accounted
for 75% of unit sales and GMR disks accounted for 5% of unit sales in the
fourth quarter of fiscal 1999. The Company believes that MR and GMR
disks will continue to be the predominant media for disk drives in fiscal
2000.
Prior to fiscal 1997, market demand for advanced thin-film media
typically exceeded supply. In mid- fiscal 1997, the rate of growth in
demand for media slowed abruptly due in large measure to the
significant increases in storage capacity per disk achieved through
the use of MR technology. As a result, drive designs incorporated
fewer disks and recording heads to achieve the disk drive capacities
demanded by the market. In addition, based upon historical supply
shortages and forecasts for continued strong demand growth rates, the
Company and its competitors (both independent and captive suppliers)
began adding significant media manufacturing capacity in fiscal 1996
which for the most part became operational in fiscal 1997. The
increased supply of media generated by the expanded physical
capacity, coupled with the tremendous improvement in disk storage
capacity, allowed the overall supply of thin-film media to catch up to,
and then exceed, market demand. Captive media suppliers (owned by
vertically integrated disk drive customers) utilized their capacity at
the expense of independent suppliers, such as HMT, during this period.
As a result, in fiscal 1998 and fiscal 1999, the market for disks
produced by independent suppliers decreased sharply and pricing pressures
intensified. During fiscal 1999, the Company idled certain equipment
and facilities to more closely align its production capacity to
demand for its products.
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.
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 1.0 to 1.5 microinches (0.025
to 0.038 micron) and at data transfer rates of 180 to 270 megabits per
second. The combination of modern head and disk technologies enables this
drive to store data on 10,000 to 14,000 circumferential tracks per radial
inch on the disk with 200,000 to 280,000 bits of data per inch along each
track.
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 3000 to 3200 Oe, compared to a
range of 950 to 1200 Oe eight years ago. The Company believes that
most high-end disk drive manufacturers will require coercivities of
3000 Oe and above by the end of calendar 1999. HMT currently
manufactures and sells disks in commercial quantities with
coercivities ranging from 2100 to 3100 Oe, with over 50% of the
Company's revenues during the three months ended March 31, 1999
deriving from disks with coercivities of 2900 Oe and above. The
Company is also currently producing small quantities of disks for
use in customer development programs with coercivities of up to 3400
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 for advanced applications is 0.8 microinch, the Company
expects that glide heights will decrease to less than 0.7
microinches by the end of calendar 1999. The Company currently
manufactures and sells disks in commercial quantities with glide
heights of 1.2 microinches to 0.7 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. 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.
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.
The key elements of HMT's strategy are as follows:
o 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 3200 Oe level.
o Develop Collaborative Relationships with Leading Head and Disk
Drive Manufacturers. The Company works closely with head
manufacturers developing new technologies, including MR , Giant MR,
Dual Stripe MR ("DSMR"), and Proximity MR head compatible disk.
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 the 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.
o 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.
o 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.
o Scale Manufacturing Capacity to Meet Demand. In fiscal 1997, the
Company completed construction of a new 124,000 square foot
production facility at its Fremont, California site. The Company
brought four production scale sputtering lines into service during
fiscal 1997, six in fiscal 1998, and an additional two in fiscal
1999. This building has capacity for four more lines. During
fiscal 1997, the Company completed the first phase of expansion of
its facility in Eugene, Oregon, commencing volume production of
aluminum substrates and nickel-plated and polished substrates at
that site. During the third quarter of fiscal 1999, the Company
completed the second phase of expansion of the Eugene facility,
adding more polishing capacity. During the third quarter of fiscal
1999, the Company idled seven sputtering lines and associated
equipment and facilities in connection with its restructuring
plan.
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 2100 Oe or higher and glide heights of
1.5 microinches or less. At March 31, 1999, 50% of revenue was generated
from disks with coercivities of 2900 Oe and above. The Company is also
currently producing small quantities of disks for use in customer
development programs with coercivities of up to 3400 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 December 31, 1996, 2000 Oe and
below products comprised 80% of total units shipped, as compared with the
three months ended March 31, 1999, where 2100 Oe and above products
comprised 100% of total units shipped.
The Company's disks are currently used by six disk drive manufacturers
in more than sixteen different 3 1/2-inch disk drive products. Currently,
these disks are used in fixed disk drives that have capacities ranging
from 4.3 GB to 20.4 GB with storage capacity per disk ranging from 1.0 GB
to 5.1 GB and removable disk drives that have capacities ranging from 1.0
GB to 2.2 GB with storage capacity per disk of approximately 500 MB to
2.2 GB. 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.
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 are scaleable and have been designed to be
installed, modified or expanded in a cost effective manner. 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:
Machine, Chamfer, Bake, Grind 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 machines the inner edges of the blank to
specified diameters, chamfers the inner and outer edges of the blank
and bakes the chamfered blank to relieve stress induced by the machine
and chamfer processes. 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,
and 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. HMT currently utilizes different texture processes,
including laser texturing, to address different customer requirements.
The wash process is developed to present a clean disk surface to the
sputter process. 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 optically and 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 blank into a final
product requires two days.
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:
o 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.
o 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.
o Process Quality. The Process Quality 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.
o 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
currently operates 19 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
currently operate seven days a week, 24 hours per day.
In fiscal 1997, the Company completed construction of a new 124,000
square foot production facility at its Fremont, California site. The
Company brought four production scale sputtering lines into service
during fiscal 1997, six in 1998, and an additional two in fiscal 1999.
This building has capacity for four more lines. During fiscal 1997, the
Company also completed the first phase of expansion of its facility in
Eugene, Oregon, commencing volume production of aluminum substrates and
nickel-plated and polished substrates at that site. During the third
quarter of fiscal 1999, the Company completed the second phase of
expansion of the Eugene facility, adding more polishing capacity. Also,
during the third quarter of fiscal 1999, the Company idled seven
sputtering lines and associated equipment and facilities in connection
with its restructuring plan.
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 precious metal alloys, based on a cobalt/
chromium/tantalum/platinum alloy, for future products with coercivities
that can support foreseeable demand for increased storage capacity. 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 texturing
process, a highly automated patented process, produces a controlled
roughness on the disk's surface to improve its stiction and defect
characteristics. HMT currently utilizes different texture processes,
including laser texturing to address different customer requirements.
This process provides increased protection where the head most often
comes into 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, has gone through significant evolution. Important
technologies, such as MR heads, and the new GMR heads, have emerged. MR
head technology separates 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 GMR head, which has even higher sensitivity than MR
heads, thereby producing more output, is emerging now and is the head 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 new alloy systems, 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 production lines, facilitating transition to high volume
commercial production and minimizing development expense. During the
fiscal years 1997, 1998 and 1999, the Company incurred $5.8 million, $8.8
million, and $9.7 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 1999, fiscal 1998 and fiscal 1997:
Fiscal Fiscal Fiscal
1999 1998 1997
--------- --------- ---------
Maxtor....................... 36.0% 23.4% 40.7%
Samsung...................... 17.8% 16.0% 19.8%
Iomega....................... 15.2% 28.9% 12.2%
Western Digital.............. 24.1% 19.0% 11.9%
Iomega utilizes the disks in its removable media hard disk drives. The
Company's other customers during fiscal 1999 included SyQuest. During
the third quarter of fiscal 1999, SyQuest filed for protection under
Chapter 11 of the Bankruptcy Code. The Company's other customers during
fiscal 1998 included Micropolis and Quantum Corporation ("Quantum").
During the third quarter of fiscal 1998, Micropolis filed for protection
under Chapter 11 of the Bankruptcy Code. 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 shipped products to MKE during fiscal 1998. 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.
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. This agreement 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. For example, Maxmedia, a division
of Hyundai Electronics America ("Maxmedia"), and an affiliate of Maxtor,
began internal media production of thin film disks during fiscal 1998.
There has also been a trend toward consolidation in the disk drive
industry that the Company expects to continue. For example, during fiscal
1998, StorMedia, one of the Company's competitors, acquired another of
the Company's competitors; Akashic Memories Corporation, a subsidiary of
Kubota, Inc. ("Akashic"). Then, during fiscal 1999, Stormedia filed for
protection under Chapter 11 of The Bankruptcy Code. Also during fiscal
1999 one of the Company's customers, Western Digital, announced it had
sold all of its media manufacturing operations to the Company's largest
U.S. competitor, Komag Incorporated ("Komag"). Western Digital also
signed a long term volume purchase agreement with Komag in connection
with the sale of its media manufacturing operations. 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, Asian-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 competitor is Komag. Asian-based
competitors include Fuji Electric Company Limited ("Fuji"), Mitsubishi
Kasei Corporation ("Mitsubishi"), Trace Corporation ("Trace"), 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 Technology, Inc. ("Seagate") and
an affiliate of Maxtor, 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 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.
The Company has experienced significant pricing pressures during fiscal
1999, and there can be no assurance that the Company will not face
similar pressure in fiscal 2000. Price competition has had and may
continue to 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 34 patents and 15
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.
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, see
"Risk Factors - Intellectual Property and Proprietary Rights."
Sources of Supply
The Company relies on a limited number of suppliers for many materials
used in its manufacturing processes, including substrates, 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, may require that the
product be requalified with each customer. Requalification could prevent
an early design, 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. 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, 1999, the Company had 1,902 full-time employees, with
1,679 in manufacturing, 76 in research and development, 95 in quality
assurance and 52 in administration and marketing. The Company believes it
generally has good relations with its employees. None of the Company's
employees are represented 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 (the "Series A
Preferred Stock") for an aggregate purchase price of approximately $59.0
million, $47.0 million of subordinated promissory notes (the
"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 (the "Management Plan") and 1995 Stock Option Plan (the "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 shares of Series A Preferred Stock were 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.
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 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 (nine as of March 31, 1999), 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. If production for
a disproportionate number of new products is commenced in a given quarter
or if manufacturing yields for such products do not improve in a timely
manner, the Company's operating results for such quarter could be
adversely affected. For example, during the quarter ended March 31, 1997,
the Company's operating results were adversely affected due partly to
lower yields associated with initial production of a significant number
of new 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 1999, the Company shipped most of its thin film disks to
four customers: Iomega, Maxtor, Western Digital, and Samsung. Aggregate
shipments to Iomega, Maxtor, Western Digital and Samsung represented
15.0%, 36.0%, 24.0% and 18.0%, respectively, of net sales in fiscal 1999.
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. During fiscal 1997, one of the Company's
customers, Micropolis, filed for protection under Chapter 11 of The
Bankruptcy Code. During fiscal 1998, SyQuest, another of the Company's
customers, filed for protection under Chapter 11 of The Bankruptcy Code.
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, an affiliate of Maxtor,
manufactures thin film disks for Maxtor's use. Also during 1999 one of
the Company's customers, Western Digital, announced it had sold all of
its media manufacturing operations to the Company's largest U.S.
competitor, Komag. Western Digital also signed a long-term volume
purchase agreement with Komag in connection with the sale of its media
manufacturing operations. 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 and Conner Peripherals, Inc., combined to form the
world's largest disk drive manufacturing company. In addition, during
fiscal 1996, Hewlett-Packard Co. exited the disk drive business. 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.
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. This agreement 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.
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. During fiscal 1999, the disk
drive industry has experienced declining demand. There can be no
assurance that current levels of demand will not continue to 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. For example, during 1997,
one of the Company's customers, Micropolis, filed for protection under
Chapter 11 of the Bankruptcy Code. Then, during fiscal 1998, SyQuest,
another of the Company's customers, filed for protection under Chapter 11
of the Bankruptcy Code. The Company is currently seeking recovery of more
than $2.3 million from these two customers. 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.
Expansion of Capacity
While the industry is currently suffering from excess capacity, a
rebound in demand could require the Company to resume its capacity
expansion. During fiscal 1998 and 1997 the Company was operating at
close to full capacity. In fiscal 1997, the Company completed
construction of a new 124,000 square foot production facility at its
Fremont, California site. The Company brought four production scale
sputtering lines into service during fiscal 1997, six in 1998, and an
additional two in fiscal 1999. This building has capacity for four more
lines. During fiscal 1997, the Company completed the first phase of
expansion of its facility in Eugene, Oregon, commencing volume production
of aluminum substrates and nickel-plated and polished substrates at that
site. During the third quarter of fiscal 1999, the Company completed the
second phase of expansion of the Eugene facility, adding more polishing
capacity. During the third quarter of fiscal 1999, the Company idled
seven sputtering lines and associated equipment and facilities in
connection with its restructuring plan.
The Company currently expects to spend in excess of $25 million over
the next twelve months for maintenance and upgrades to production
equipment, a substantial majority of which will be spent on the Company's
Fremont, California facility.
Intense Competition
The market for the Company's products is highly competitive, and the
Company expects competition to continue in the future. 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,
Asian-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 competitor is Komag. Asian-based competitors include Fuji,
Mitsubishi, Trace, Showa Denko and Hoya. In addition, U.S. captive
manufacturers, which include certain computer manufacturers, as well as
disk drive manufacturers such as Seagate and an affiliate of Maxtor,
manufacture disks for their internal use as part of their vertical
integration programs. During periods of industry excess capacity, such as
was experienced during fiscal 1999, these customers favor their internal
capacity over 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. These companies could increase their
internal production and reduce or cease purchasing from independent disk
suppliers such as the Company. Also consolidation of customers and
competitors could reduce demand for the Company's products. For example,
during fiscal 1999, Komag purchased Western Digital's U.S. media
manufacturing operations and Western Digital signed a long-term volume
purchase agreement in connection with the sale.
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 Company
experienced significant pricing pressure during fiscal 1999, 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.
During fiscal 1999, many of the Company's competitors and customers
had excess disk manufacturing capacity, resulting in industry capacity in
excess of levels of demand. As a result, the Company and many of its
customers and competitors have experienced poor operating results.
During fiscal 1999, the Company recorded a net loss of $21.0 million,
primarily a result of declining demand and increased competition.
These increased levels of competition, could have further material
adverse effects on the Company's business, operating results and
financial condition.
Rapid Technological Change
Rapid technological development and short product life cycles have
characterized the thin film disk industry. 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 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, sputter targets, plating chemicals, abrasive tapes and
slurries, certifier heads 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,
may 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.
Process Quality Control Risks
The manufacture of the Company's high-performance thin film disks
requires a tightly controlled multi-stage process and the use of high-
quality materials. Efficient production of the Company's products
requires utilization of advanced manufacturing techniques and clean room
facilities. Disk fabrication occurs in a highly controlled, clean
environment to minimize dust and other yield- and quality-limiting
contaminants. Despite stringent manufacturing controls, weaknesses in
process control or minute impurities in materials may cause a substantial
percentage of the disks in a lot to be defective. The success of the
Company's manufacturing operation depends in part on the Company's
ability to maintain process control and minimize such impurities in order
to maximize its yield of acceptable high-quality disks. 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. While the Company has implemented procedures to
monitor its manufacturing process and the quality of production
materials, there can be no assurance that such procedures will be
adequate.
Need for Additional Financing
The disk media business is capital intensive, and the Company believes
that in order to remain competitive, it may require 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 $25 million on capital expenditures principally directed
towards the maintenance and upgrade of production equipment over the next
twelve months. The Company believes that existing cash balances, cash
generated from operations, and funds available under its credit facility
will provide adequate cash to fund its operations for at least the next
twelve months. Additional sources of long-term liquidity could include
cash generated from operations and debt and equity financings. If it were
to resume a facilities expansion, the Company could require additional
capital. As of March 31, 1999, the Company had approximately $85.7
million in working capital, including approximately $53.1 million in cash
and cash equivalents. In addition, the Company's operations generated
cash flow of $68.3 million during the year ended March 31, 1999.
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. The Company has 34 patents and 15
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 is from time to time 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.
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 the Company's 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 at any of the Company's facilities 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 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 1999, 1998 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.
Anti-Takeover Effects
Certain provisions of the Company's Amended and Restated Certificate
of Incorporation, and 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
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.
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,
comments made by analysts, including charges in analysts estimates and
general economic and market conditions. Additionally, the stock markets
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 Company's 5 _% Convertible Subordinated Notes due
calendar 2004 (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 as discussed
above.
Item 2. Properties
The Company owns one 57,776 square foot building, used for
manufacturing and administration, on approximately 4.3 acres of land in
Fremont, California and another 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 December 2003 with three
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 2004.
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, Virgle 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., case no. C-96 21055 JW ("Hedgcoth I"), Mr. Hedgcoth
alleged that certain HMT disks infringed three patents allegedly owned
by him (the "Hedgcoth I Patents"). On July 1, 1997, Mr. Hedgcoth filed a
second 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., case no. C-97 20581 JW ("Hedgcoth
II"), Mr. Hedgcoth alleged that certain HMT disks infringed a fourth
patent allegedly owned by him (the "Hedgcoth II Patent"). Each of the
Hedgcoth I and Hedgcoth II complaints sought an injunction and
unspecified damages, which were sought to be trebled. The Company filed
counterclaims in Hedgcoth I and Hedgcoth II seeking declaratory judgments
that the Hedgcoth I Patents and the Hedgcoth II Patent were invalid and
unenforceable and that they were not infringed by the HMT disks. On
November 6, 1998, the Federal District Court issued an order dismissing
with prejudice Hedgcoth's claims against HMT and HMT's counterclaims
against Hedgcoth in both Hedgcoth I and Hedgcoth II, pursuant to the
parties' stipulation.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The following table sets forth, for each quarter of fiscal year
1998 and 1999, the range of high and low closing sales prices, as
reported on the Nasdaq National Market.
PRICE RANGE OF
COMMON STOCK
----------------------
High Low
---------- ----------
Fiscal 1998
First Quarter........................ $14 5/8 $10
Second Quarter....................... $17 $12 3/8
Third Quarter........................ $20 $12 1/2
Fourth Quarter....................... $13 3/4 $9 15/16
Fiscal 1999
First Quarter........................ 14 5/8 8 13/16
Second Quarter....................... 10 13/16 5 3/4
Third Quarter........................ 13 15/16 10 1/32
Fourth Quarter....................... 15 9/16 3 1/2
As of June 1, 1999, there were approximately 245 holders of
record of the Common Stock. On June 1, 1999, the last sale price
reported on the Nasdaq National Market for the Company's Common Stock
was $4.00 per share.
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.
Item 6. Selected Consolidated Financial Data
(In thousands, except per share data)
Fiscal Year Ended March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $239,531 $356,194 $263,209 $194,401 $72,893
Cost of sales............................... 221,495 225,599 156,277 119,803 67,539
--------- --------- --------- --------- ---------
Gross profit (loss)......................... 18,036 130,595 106,932 74,598 5,354
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................. 9,728 8,825 5,812 3,803 3,130
Selling, general and administrative....... 11,655 13,679 11,803 7,774 4,230
Recapitalization expenses................. -- -- -- 4,347 --
Restructuring expenses.................... 15,662 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 37,045 22,504 17,615 15,924 7,360
--------- --------- --------- --------- ---------
Operating income (loss)..................... (19,009) 108,091 89,317 58,674 (2,006)
Interest expense, net....................... 10,994 8,194 3,329 8,578 6,915
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... (30,003) 99,897 85,988 50,096 (8,921)
Income tax provision (benefit).............. (9,001) 29,969 25,400 2,590 20
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs...................... (21,002) 69,928 60,588 47,506 (8,941)
Extraordinary debt extinguishment costs, net
of income taxes........................... -- -- -- 1,127 --
--------- --------- --------- --------- ---------
Net income (loss)........................... (21,002) 69,928 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.............................. ($21,002) $69,928 $61,745 $45,222 ($8,941)
========= ========= ========= ========= =========
Net income (loss) available for common
stockholders per share(1)
Basic................................... ($0.48) $1.66 $1.52 $1.28 ($0.26)
========= ========= ========= ========= =========
Diluted............................. ($0.48) $1.40 $1.35 $1.28 ($0.26)
========= ========= ========= ========= =========
Shares used in computing per share
amounts(1)
Basic................................... 43,720 42,196 40,493 35,224 34,822
Diluted............................. 43,720 54,542 46,019 35,224 34,822
March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................... $85,170 $88,699 $71,827 $45,899 ($82,715)
Total assets................................ 442,540 478,223 373,389 165,786 75,936
Long-term and senior bank debt, less current
portion................................... -- -- -- -- 9,750
Subordinated promissory notes payable to
stockholders.............................. -- -- -- 47,000 --
Mandatorily Redeemable Series A Preferred
Stock..................................... -- -- -- 60,157 --
5 3/4% Convertible Subordinated Notes....... 230,000 230,000 230,000 -- --
Total stockholders' equity (deficit)........ 165,948 182,452 95,442 19,524 (51,550)
- ----------------
(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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. 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
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 December 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 calendar 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.
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 increased
sales and improved gross margins, achieving net income of $60.6 million
for fiscal 1997 and $69.9 million for fiscal 1998, compared with a net
loss of $8.9 million for fiscal 1995.
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 Leveraged Recapitalization plus
accrued interest and to fully repay $41 million in long-term borrowings
outstanding.
In fiscal 1997, the Company completed construction of a new 124,000
square foot production facility at its Fremont, California site. The
Company brought four production scale sputtering lines into service
during fiscal 1997, six in fiscal 1998, and an additional two in fiscal
1999. This building has capacity for four more lines. During fiscal
1997, the Company completed the first phase of expansion of its facility
in Eugene, Oregon, commencing volume production of aluminum substrates
and nickel-plated and polished substrates at that site. During the third
quarter of fiscal 1999, the Company completed the second phase of
expansion of the Eugene facility, adding more polishing capacity. During
the third quarter of fiscal 1999, the Company idled seven sputtering
lines and associated equipment and facilities in connection with its
restructuring plan.
During fiscal 1999, the rate of growth in demand for media slowed
abruptly due in large measure to the significant increase in storage
capacity per disk. As a result, drive designs incorporated fewer disks
and recording heads to achieve the disk drive capacities demanded by the
market. In addition, based upon historical supply shortages and forecasts
for continued strong demand growth rates, the Company and its
competitors (both independent and captive suppliers) began adding
significant media manufacturing capacity in calendar 1996 which for the
most part became operational in calendar 1997. The increased supply
of media generated by the expanded physical capacity, coupled with
the increase in disk storage capacity, allowed the overall supply of
thin-film media to catch up to, and then exceed, market demand. Captive
media suppliers (owned by vertically integrated disk drive customers)
utilized their capacity at the expense of independent suppliers, such
as HMT, during this period. As a result, in fiscal 1999, the market for
disks produced by independent suppliers decreased sharply and pricing
pressures intensified. In response to these market conditions, the
Company idled certain equipment and facilities during the third
quarter of fiscal 1999 to more closely align its production capacity to
demand for its products. These restructuring activities resulted in
significant restructuring charges.
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:
Fiscal Year Ended March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 92.5% 63.3% 59.4% 61.6% 92.7%
--------- --------- --------- --------- ---------
Gross profit (loss)......................... 7.5% 36.7% 40.6% 38.4% 7.3%
Operating expenses:
Research and development.................. 4.1% 2.5% 2.2% 2.0% 4.3%
Selling, general and administrative....... 4.8% 3.9% 4.5% 4.0% 5.8%
Recapitalization expenses................. -- -- -- 2.2% --
Restructuring expenses.................... 6.5% -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 15.4% 6.4% 6.7% 8.2% 10.1%
--------- --------- --------- --------- ---------
Operating income (loss)..................... -7.9% 30.3% 33.9% 30.2% -2.8%
Interest expense, net....................... 4.6% 2.3% 1.2% 4.4% 9.4%
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... -12.5% 28.0% 32.7% 25.8% -12.2%
Income tax provision (benefit).............. -3.7% 8.4% 9.7% 1.4% 0.1%
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs...................... -8.8% 19.6% 23.0% 24.4% -12.3%
Extraordinary debt extinguishment costs, net
of income taxes........................... -- -- -- 0.5% --
--------- --------- --------- --------- ---------
Net income (loss)........................... -8.8% 19.6% 23.0% 23.9% -12.3%
========= ========= ========= ========= =========
Fiscal Years Ended March 31, 1999, 1998 and 1997
Net Sales. Net sales were $239.5 million in fiscal 1999, $356.2
million in fiscal 1998, and $263.2 million in fiscal 1997. The decrease
in net sales during 1999 was a result of a 23.4% decline in unit sales
volume from fiscal 1998 to fiscal 1999 and a 12.2% decline in average
selling prices over the same period. The decline in both units sales
volume and average selling prices was generated by the imbalance in
supply and demand for thin-film media during fiscal 1999.
The 35.3% increase in net sales in fiscal 1998 was primarily
attributable to a 54.6% increase in unit sales volume from fiscal 1997 to
fiscal 1998 partially offset by a 12.5% decline in average selling prices
over the same period. During 1998, the Company increased manufacturing
capacity, by adding six sputtering lines, and improving the utilization
of existing capacity and manufacturing processes, resulting in higher
production volumes. Price reductions are common on individual product
offerings in the thin-film media industry. The Company anticipates that
the decline in average selling prices will continue as a result of the
excess industry supply. 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 7.5% in fiscal 1999, 36.7% in fiscal
1998, and 40.6% in fiscal 1997. The Company operated below capacity
during much of fiscal 1999 in order to match unit production volume to
lower demand. The decrease in gross margin in fiscal 1999 was a result
of lower average selling prices and higher unit production costs related
to underutilized capacity. The increase in unit production cost caused by
lower production volumes was partially offset by reduced salaries as the
company responded to lower demand by reducing the work force,
implementing two shutdown periods, curtailing the use of temporary
personnel and suspending the accruals for profit sharing and bonuses for
all of the Company's personnel.
The decrease in gross margin in fiscal 1998 was primarily a result of
lower average selling prices, somewhat offset by decreased unit
production costs, improved utilization of manufacturing capacity,
improved manufacturing processes and the absorption of fixed costs over
higher unit production volume.
Research and Development. Research and development expenses were $9.7
million, or 4.1% of net sales, in fiscal 1999, $8.8 million, or 2.5% of
net sales, in fiscal 1998, and $5.8 million, or 2.2% of net sales, in
fiscal 1997. Research and development expenses increased in absolute
dollars in fiscal 1999, 1998 and 1997 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 Company develops manufacturing processes for
new products directly on production lines during the research and
development phase, avoiding the need for substantial capital investment
in dedicated research equipment. Costs associated with developing
products on the production lines are included as research and development
expenses. 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 $11.7 million, or 4.9% of net sales, in
fiscal 1999, $13.7 million or 3.9% of net sales, in fiscal 1998, and
$11.8 million, or 4.5% of net sales, in fiscal 1997. The decrease in
selling, general and administrative expenses was primarily a result of
reduced salaries as the Company responded to lower demand by reducing the
work force, implementing two shutdown periods, curtailing the use of
temporary personnel and suspending accruals for profit sharing and
bonuses. Selling, general and administrative expenses in fiscal 1999 also
included a $1.7 million charge for uncollectible receivables.
The increase in selling, general and administrative expenses in
absolute dollars from fiscal 1997 to fiscal 1998 primarily reflected
increased headcount necessary to support higher production volume and
unit shipments. The Company anticipates that selling, general and
administrative expenses will fluctuate in both absolute dollars and as a
percentage of net sales as headcount is modified to support anticipated
levels of production volume.
Restructuring Charge. During the third quarter of fiscal 1999, the
Company announced and implemented a restructuring plan, which included a
work force reduction of approximately 300 employees and the
consolidation of the Company's manufacturing operations. The plan was
primarily aimed at improving costs efficiencies by retiring older
equipment and eliminating excess capacity. The Company recorded a total
charge of $15.7 million, which included a non-cash charge of $13.7
million for equipment and related spare parts taken out of service during
the quarter. The restructuring charge also included a charge of $1.8
million for severance costs, which were paid in full during the third
fiscal quarter, and a provision of $200,000 for contract services in
connection with the restructuring plan.
Interest Expense, Net. Interest expense, net was $11.0 million, or
4.6% of net sales, in fiscal 1999, $8.2 million, or 2.3% of net sales, in
fiscal 1998, and $3.3 million, or 1.3% of net sales, in fiscal 1997. The
fiscal 1999 increase in interest expense, net was primarily a result of a
$2.1 million decrease in capitalized interest and an $0.8 million
decrease in interest income as construction-in-progress and average
invested cash balances declined versus fiscal 1998. The fiscal 1998
increase in interest expense, net was primarily a result of the $13.8
million interest expense recorded on the Company's Convertible Notes
(issued in January 1997), somewhat offset by a $2.1 million increase in
capitalized interest. The Company anticipates interest expense, net will
fluctuate in absolute dollars as interest income (driven by average
invested cash balances) and capitalized interest (driven by construction-
in-progress balances) change as a result of the Company's operating and
investing activities.
Provision for Income Taxes. The Company recorded an income tax benefit
of $9.0 million in fiscal 1999 and income tax provisions of $30.0 million
and $25.4 million in fiscal 1998 and 1997, respectively. The 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.
The Company has assessed the recoverability of deferred tax assets
and, based on expectations about operating results for the fiscal year
ending March 31, 2000 and future years, determined it was more likely
than not that the entire balance of deferred tax assets would be
recovered. Accordingly, the Company has not recorded a valuation
allowance for deferred tax assets.
Liquidity and Capital Resources
During fiscal 1999 and fiscal 1998, the Company financed its cash
requirements through cash from operating and financing activities. The
Company's operations provided net cash of $68.3 million, $84.9 million,
and $90.7 million for fiscal 1999, 1998 and 1997, respectively. Cash
generated from operations during fiscal 1999 reflected a net loss of
$21.0 million, offset by $53.5 million in depreciation and amortization,
$12.8 million in equipment writedowns, $2.3 million in deferred income
taxes and $22.1 million provided by changes in operating assets and
liabilities. Increased sales and improved margins contributed to the
positive cash flow provided by operations in fiscal 1998.
For fiscal 1999 and fiscal 1998, net cash used in investing activities
was $42.1 million and $118.5 million, respectively. The Company invested
$43.4 million and $130.3 million in property, plant and equipment during
fiscal 1999 and fiscal 1998, respectively.
During fiscal 1999 and 1998, net cash from financing activities was
$1.8 million and $14.4 million, respectively. Cash provided by financing
activities for fiscal 1999 reflects cash received for Common Stock issued
in connection with the Company's employee stock purchase plan, and the
incentive stock option ("ISO") plans, as well as a $1.1 million tax
benefit for disqualifying dispositions related to the Company's ISO
plans.
Cash provided by financing activities for fiscal 1998 reflects the
$13.4 million received for the common stock issued in connection with the
Company's follow-on offering, employee stock purchase plan, and the ISO
plans, as well as a $2.0 million tax benefit for disqualifying
dispositions related to the Company's ISO plans.
As of March 31, 1999, the Company's principal sources of liquidity
consisted of $53.1 million in cash, cash equivalents and short-term
investments, and a $50.0 million revolving credit facility under which
there were no borrowings. The Company must comply with certain
restrictive financial covenants and conditions as defined in the
revolving credit facility. As of March 31,1999, the Company was not in
compliance with certain covenants of this agreement but received a waiver
for this instance of non-compliance. At March 31, 1999, the Company had
indebtedness of $230.0 million in Convertible Notes, that require semi-
annual interest payments, which began July 15, 1997. The Company expects
to spend in excess of $25.0 million on capital expenditures for the
upgrade and maintenance of production equipment 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.
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 would require
additional capital if it were to undertake a substantial expansion of
manufacturing capacity. 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.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. SFAS 131 generally
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." Under SFAS 131,
operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance. Generally, financial information is required
to be reported on the basis it is used internally. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997,
and restatement of comparative information for earlier years is required.
However, SFAS 131 is not required to be applied to interim financial
statements in the initial year of application. Based upon the criteria
of SFAS 131, the Company has a single operating segment. Accordingly, the
financial statements provided herein satisfy the standard for reporting.
Geographic information about revenues, operating income and identifiable
assets are provided in the notes to the financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June
15, 1999. The Company does not currently hold derivative instruments or
engage in hedging activities.
Year 2000 Compliance
The Company has reviewed both its internal computer systems and its
products that could be affected by the "Year 2000" issue and has
identified some systems that will be affected. In the ordinary course of
replacing computer equipment and software, the Company attempts to obtain
replacements that are Year 2000 compliant. Utilizing both internal and
external resources to identify and assess needed Year 2000 remediation,
the Company currently anticipates that its internal Year 2000
identification, assessment, remediation and testing efforts, which began
in October 1997, will be substantially complete during calendar 1999, and
that such efforts will be completed prior to any currently anticipated
impact on its internal computer equipment and software.
The Company presently believes, with modification to existing
software and conversion to new software, the "Year 2000" issues relating
to internal computer systems and products will not cause significant
operational problems or computer problems. Furthermore, the cost of
implementing these solutions is not anticipated to be material to the
financial position or results of operations of the Company. However, if
such modifications and conversions are not made, or not completed on a
timely basis, the Year 2000 issue could have a material adverse effect on
the Company. Furthermore, the costs of such conversions and updates are
based on estimates, which are derived utilizing numerous assumptions of
future events, including, but not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer code and similar uncertainties. There can be no
assurance that the Company will be able to upgrade any or all of its
major systems or, once upgraded, that the systems will be Year 2000
compliant. Should the Company fail to upgrade such systems in a timely
manner, or should those upgrades fail to be Year 2000 compliant, the
Company may be unable to conduct business or manufacture its products,
which could cause a material adverse effect on the Company.
The Company initiated formal communications with all of its
significant suppliers and large customers during fiscal 1999 to determine
the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There can be no
guarantee that the systems or products of other companies or significant
suppliers will be Year 2000 compliant. A failure to take appropriate
remediation measures by another company, or remediation that is
incompatible with the Company's systems, could have a material adverse
effect on the Company. As of June 1, 1999, the Company had received
responses from all critical vendors, and all have provided written
assurances that they expect to address all of their significant Year 2000
issues on a timely basis. Of these responses, 95% are considered to be
adequate.
The Company is currently working with its customers and suppliers to
address their Year 2000 compliance in a timely manner. The Company
anticipates completion of this effort during calendar 1999; however,
should the Company's customers or suppliers fail to address Year 2000
issues, the Company could be adversely affected. Should any of the
Company's suppliers encounter Year 2000 problems that cause them to delay
manufacturing or shipments of key components, the Company may be forced
to delay or cancel shipments of its products, which could have a
material adverse effect on the Company. Additionally, any inability of
customers to become Year 2000 compliant which would cause them to delay
or cancel substantial purchase orders or delivery of products could also
have a material adverse effect on the Company.
Currently, the Company does not have a contingency plan in place
should the Company be unsuccessful in its efforts to become Year 2000
compliant. However, the Company intends to create such a contingency
plan during calendar 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 1999 and 1998, the Company's investment portfolio
consisted of fixed income securities of $52.6 million and $24.5 million,
respectively. These securities, like all fixed income instruments, are
subject to interest rate risk and will decline in value if market
interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels as of March 31, 1999 and
1998, the decline in the fair value of the portfolio would not be
material. Additionally, the Company has the ability to hold its fixed
income investments until maturity and, therefore, the Company would not
expect to recognize such an adverse impact in income or cash flows.
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
None.
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
"Management" contained in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company's 1999 Annual Meeting of
Stockholders to be held on July 28, 1999 (the "Proxy Statement").
Item 11. Executive Compensation
The information required by this item is incorporated by reference
from the information under the caption "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.
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
53. 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 52 and 53.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
(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 52.
HMT TECHNOLOGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants 32
Consolidated Financial Statements:
Consolidated Balance Sheets 33
Consolidated Statements of Operations 34
Consolidated Statements of Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37
Schedules: II - Valuation and qualifying accounts 50
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders HMT Technology Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows, and
stockholders' equity present fairly, in all material respects,
the financial position of HMT Technology Corporation. and its
subsidiaries at March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 16, 1999
HMT TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31,
-------------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents..................... $53,077 $24,985
Receivables -- trade, net of allowance for
doubtful accounts of $3,054 and $1,327 at
March 31, 1999 and 1998, respectively...... 29,559 70,016
Other receivables............................. 13 644
Inventories................................... 26,585 18,400
Deposits, prepaid expenses and other assets... 588 629
Deferred income taxes......................... 5,133 12,249
---------- ----------
Total current assets.................. 114,955 126,923
Property, plant and equipment, net.............. 321,508 343,856
Other assets.................................... 6,077 7,444
---------- ----------
Total assets.......................... $442,540 $478,223
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $20,732 $27,301
Accrued liabilities........................... 8,498 8,270
Obligations under capital leases -- current
portion.................................... 555 2,653
---------- ----------
Total current liabilities............. 29,785 38,224
Obligations under capital leases, net of
current portion............................... 0 555
Other long-term liabilities..................... 2,680 7,984
Deferred income taxes........................... 14,127 19,008
5 3/4% Convertible Subordinated Notes, due 2004. 230,000 230,000
---------- ----------
Total liabilities..................... 276,592 295,771
---------- ----------
Commitments (Note 6)
Common Stock, $0.001 par value; authorized:
100,000,000 shares; issued and outstanding:
44,299,557 and 43,157,143 shares at March 31,
1999 and 1998, respectively................... 44 43
Additional paid-in capital...................... 113,661 109,164
Retained earnings............................... 128,892 149,894
Distribution in excess of basis (Note 1)........ (76,649) (76,649)
---------- ----------
Total stockholders' equity............ 165,948 182,452
---------- ----------
Total liabilities and stockholders'
equity.............................. $442,540 $478,223
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION
(in thousands, except per share data)
Years Ended March 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Net sales................................. $239,531 $356,194 $263,209
Cost of sales............................. 221,495 225,599 156,277
---------- ---------- ----------
Gross profit............................ 18,036 130,595 106,932
---------- ---------- ----------
Operating expenses:
Research and development................ 9,728 8,825 5,812
Selling, general and administrative..... 11,655 13,679 11,803
Restructuring expenses.................. 15,662 -- --
---------- ---------- ----------
Total operating expenses............. 37,045 22,504 17,615
---------- ---------- ----------
Operating income (loss).............. (19,009) 108,091 89,317
Interest expense, net..................... 10,994 8,194 3,329
---------- ---------- ----------
Income (loss) before income tax...... (30,003) 99,897 85,988
Income tax provision (benefit)............ (9,001) 29,969 25,400
---------- ---------- ----------
Net income (loss)............... (21,002) 69,928 60,588
Accretion reversal for dividends on
Mandatorily Redeemable Series A
Preferred Stock......................... -- -- 1,157
---------- ---------- ----------
Net income (loss) available for common
stockholders............................ ($21,002) $69,928 $61,745
========== ========== ==========
Net income (loss) available for common
stockholders per share
Basic................................... ($0.48) $1.66 $1.52
========== ========== ==========
Diluted................................. ($0.48) $1.40 $1.35
========== ========== ==========
Shares used in computing net income per
share
Basic................................... 43,720 42,196 40,493
========== ========== ==========
Diluted................................. 43,720 54,542 46,019
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Distributions Retained Total
Common Stock Additional In Excess of Earnings Stockholders'
--------------------- Paid-in Net Book Equity
Shares Amount Capital Value
----------- -------- ----------- ------------ ------------ -----------
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
Plan........................... 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
Follow-On Offering of $0.001
par value Common Stock, net
of offering expenses........... 1,000,000 1 13,350 -- -- 13,351
Common Stock issued under
Employee Stock Purchase
Plan........................... 278,255 -- 2,575 -- -- 2,575
Common Stock issued under Stock
Option Plans................... 832,528 1 1,155 -- -- 1,156
Net income....................... -- -- -- -- 69,928 69,928
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1998...........43,157,143 43 109,164 (76,649) 149,894 182,452
Common Stock issued under
Employee Stock Purchase
Plan........................... 371,777 -- $3,334 -- -- 3,334
Common Stock issued under Stock
Option Plans................... 770,637 $1 $1,163 -- 1,164
Net income....................... -- -- -- -- (21,002) (21,002)
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1999...........44,299,557 $44 $113,661 ($76,649) $128,892 $165,948
=========== ======== =========== ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEAR ENDED MARCH 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income (loss).................................($21,002) $69,928 $60,588
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization..................... 53,425 41,771 20,839
Equipment Writedowns - Restructuring.............. 12,839 -- --
Provision (Reversal) for loss on inventories...... (2,509) 1,844 3,801
Provision for doubtful accounts receivable........ 1,727 272 460
Loss (gain) on sale or disposal of assets......... (480) -- 2,988
Deferred income taxes............................. 2,235 9,946 6,778
Changes in operating assets and liabilities:
Receivables -- trade.............................. 38,730 (34,517) (5,161)
Other receivables................................. 631 (621) 334
Inventories....................................... (5,676) (8,407) (8,509)
Deposits, prepaid expenses and other assets....... 41 (155) 405
Accounts payable.................................. (6,569) 877 12,513
Accrued liabilities............................... 228 (495) (7,917)
Long term liabilities............................. (5,304) 4,422 3,562
--------- --------- ---------
Net cash provided by operating activities......... 68,316 84,865 90,681
--------- --------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment.... (43,436) (130,320) (197,395)
Sale (Purchase) of short-term investments......... -- 10,833 (10,833)
Decrease in other assets.......................... 1,367 942 --
--------- --------- ---------
Net cash used in investing activities............. (42,069) (118,545) (208,228)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on obligations under capital
leases.......................................... (2,653) (2,642) (4,744)
Proceeds from long-term borrowings................ -- -- 41,000
Repayments on long-term borrowings................ -- -- (41,000)
Financing costs................................... -- -- (7,500)
Proceeds from issuance of 5 3/4% Convertible
Subordinated Notes.............................. -- -- 230,000
Proceeds from (repayment of) subordinated
promissory notes payable to stockholders........ -- -- (47,000)
Proceeds from issuance of Common Stock............ 4,498 17,082 14,173
Proceeds from issuance (redemption) of
Mandatorily Redeemable Series A Preferred
Stock........................................... -- -- (59,000)
--------- --------- ---------
Net cash provided by financing activities......... 1,845 14,440 125,929
--------- --------- ---------
Net increase in cash and cash equivalents......... 28,092 (19,240) 8,382
Cash and cash equivalents at beginning of period.. 24,985 44,225 35,843
--------- --------- ---------
Cash and cash equivalents at end of period........ $53,077 $24,985 $44,225
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period.......... $13,495 $13,582 $4,859
Cash paid for income taxes during the period...... $11,588 $20,860 $27,925
Supplemental disclosure of noncash investing and
financing activities:
Machinery and equipment acquired pursuant to a
capital lease................................... $2,792 $1,633 $2,083
Accretion reversal for dividends on
Mandatorily Redeemable Series A Preferred Stock. $ -- $ -- ($1,157)
The accompanying notes are an integral part of these consolidated financial
statements.
HMT TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
HMT Technology Corporation ("HMT" or the "Company") is an independent
supplier of high-performance thin film disks for high-end, high-capacity
and removable hard disk drives, which in turn are used in 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.
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, 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.
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.
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.
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 74.2% and 77.9% of accounts receivable at March
31, 1999 and 1998, respectively. Significant customers accounted for the
following percentages of net sales in fiscal 1999, 1998 and 1997:
Years Ended March 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Maxtor Corporation................... 36.0% 23.4% 40.7%
Samsung Electronics Company Limited.. 17.8% 16.0% 19.8%
Iomega Corporation................... 15.2% 28.9% 12.2%
Western Digital Corporation.......... 24.1% 19.0% 11.9%
Micropolis Corporation............... -- 0.1% 8.4%
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 the Eugene
or Fremont site 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. On August 13, 1997, the Company sold an
additional 1,000,000 shares of Common Stock at $13.89 per share through a
follow-on offering, resulting in net proceeds of approximately $13.4
million.
Income Per Common Share
Basic income per common share is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted income per common share is
computed giving effect to all potentially dilutive common shares that
were outstanding during the period
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 value of the Company's long-term
debt is a reasonable estimate of their fair value based on interest rates
as of March 31, 1999 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
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.
SFAS 131 generally supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise."
Under SFAS 131, operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis it is used
internally. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997, and restatement of comparative
information for earlier years is required. However, SFAS 131 is not
required to be applied to interim financial statements in the initial
year of application. Based upon the criteria of SFAS 131, the Company
has a single operating segment. Accordingly, the financial statements
provided herein satisfy the standard for reporting. Geographic
information about revenues, operating income and identifiable assets are
provided in the notes to the financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June
15, 1999. The Company does not currently hold derivative instruments or
engage in hedging activities.
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).
2. BALANCE SHEET DETAIL
March 31,
--------------------
1999 1998
--------- ---------
(dollars in thousands)
Inventories:
Raw materials..................... $5,575 $7,498
Work-in-process................... 3,569 6,024
Finished goods.................... 17,441 4,878
--------- ---------
$26,585 $18,400
========= =========
Inventories reflect reserves of approximately $4.7 million and $7.1 million
as of March 31, 1999 and 1998, respectively.
March 31,
--------------------
1999 1998
--------- ---------
(dollars in thousands)
Property, Plant and Equipment, Net:
Land................................ $4,869 $4,869
Building and improvements........... 110,393 110,393
Leasehold improvements.............. 36,790 30,501
Machinery, equipment, furniture
and fixtures...................... 280,471 237,112
Construction in Progress............ 18,770 53,373
--------- ---------
451,293 436,248
Less accumulated depreciation
and amortization.................. 129,785 92,392
--------- ---------
$321,508 $343,856
========= =========
Additions to construction in progress include capitalized interest of
approximately, $2.4 million, $4.5 million and $2.4 million during
fiscal 1999, 1998 and 1997, respectively.
March 31,
--------------------
1999 1998
--------- ---------
(dollars in thousands)
Accrued Liabilities:
Interest payable.................... $2,878 $2,822
Payroll related items............... 4,397 4,618
Other............................... 1,223 830
--------- ---------
$8,498 $8,270
========= =========
3. RELATED PARTY TRANSACTIONS
The Company had the following transactions with a certain stockholder and
its affiliates:
Years Ended March 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Hitachi Metals Trading
Purchases of raw materials......... -- $1,237 $11,139
Sales.............................. -- -- 2
Hitachi Metals America
Purchases of raw materials......... 259 1,241 1,450
As of March 31, 1999, the parties listed above owned less than 5% of the
outstanding stock.
4. OBLIGATIONS UNDER CAPITAL LEASES
Assets under capital lease obligations as of March 31, 1999 consist of
machinery and equipment with a cost of $1.6 million and accumulated
amortization of $.6 million ($16.3 million and $12.0 million, respectively, at
March 31, 1998). Minimum future lease payments under capital lease obligations,
together with the present value of the net minimum lease payments, are as
follows (in thousands):
Period
Ending
March 31,
1999
---------
2000............................................. 574
---------
Minimum lease payments........................... 574
Less amount representing interest................ 19
---------
Present value of minimum lease payments.......... 555
Less current portion............................. 555
---------
Capital lease obligation, net of current portion. $0
=========
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. During
the first quarter of fiscal 1999, the Company purchased the equipment
remaining under this lease for $2.3 million.
5. Debt
The Company partially financed the Leveraged Recapitalization through
a $60.0 million senior bank term loan and $47.0 million in 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.
On November 17, 1997, the Company amended and restated the revolving
credit agreement originally entered into in 1995 pursuant to the
Leveraged Recapitalization. This unsecured $100 million revolving credit
agreement was with a consortium of banks and had an expiration date of
November 17, 2000. On November 2, 1998, the Company terminated this
credit agreement and entered into a new $50 million credit agreement with
two banks expiring November 2, 2000. Interest rates for loans under the
agreement vary with the loan type and the level of various published
interest rates. The credit agreement contains certain covenants relating
to profitability, minimum levels of tangible net worth, limitations on
additional debt, minimum levels of liquidity and prohibits the cash
payment of dividends on common stock. At March 31, 1999, the Company was
not in compliance with certain covenants, but received a waiver for this
instance of noncompliance. At March 31, 1999 and 1998, 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 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, 1999, the fair value
of the Convertible Notes, which is determined based on quoted market
price, was $201.3 million.
6. COMMITMENTS
The Company leases equipment and office and manufacturing
facilities under operating lease agreements. Future minimum payments
under these noncancelable operating leases are as follows:
(dollars
in
Fiscal Year Ending March 31, thousands)
- ---------------------------------------- ---------
2000............................ $4,266
2001............................ 4,313
2002............................ 4,342
2003............................ 4,348
2004............................ 2,222
Thereafter 61
---------
$19,552
=========
Rent expense was approximately $4.1 million, $1.0 million, and
$0.8 million for the years ended March 31, 1999, 1998, and 1997
respectively.
Equipment and Facilities Purchase Commitments
As of March 31, 1999, the Company had commitments to purchase
$7.0 million and $3.2 million of equipment and facilities,
respectively.
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 Series A 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
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,
1999.
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. The remaining warrants to purchase 420,794 shares of Common Stock
were exercised during the first and third quarters of fiscal 1998.
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 (the
"1995 Plan").
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.
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.
During 1999, the stockholders approved an amendment to the Incentive Plan
increasing the total number of shares authorized by 2,500,000 shares.
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 5,500,000 shares.
A summary of activity under the Stock Plans is as follows:
Outstanding Options
--------------------------------------
Weighted
Available Number Aggregate Average
for of Exercise Exercise
Grant Options Per Share Price Price
------------ ----------- ---------------- ------------ --------
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
Granted................... (1,701,000) 1,701,000 $10.00 - $14.50 19,523,015 $11.48
Cancellations............. 237,478 (237,478) (1,433,675) $6.03
Exercised................. (742,186) $0.03 - 14.88 (314,585) $0.42
------------ ----------- ------------
Balances, March 31, 1998.. 1,333,614 4,026,285 $0.03 - $18.50 26,140,544 $6.50
Authorized................ 2,500,000
Granted................... (1,188,650) 1,188,650 $7.67 $7.94 9,267,191 $7.80
Cancellations............. 671,894 (671,894) (7,722,078) $11.49
Exercised................. (791,185) $0.03 $11.06 (447,811) $0.57
------------ ----------- ------------
Balances, March 31, 1999.. 3,316,858 3,751,856 27,237,846 $7.26
============ =========== ============ ========
Upon grant, 1,550,000 options vested immediately and were exercised.
During fiscal 1997, an additional 373,612 options vested upon achievement
of certain other performance goals, respectively. The majority of
remaining outstanding options will vest ratably through November 1999. 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, 1999, 660,920 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 1999, 1998 and
1997 consistent with the provisions of SFAS 123, the Company's net income for
fiscal 1999, 1998 and 1997 would have been reduced to the pro forma amounts
indicated below (amounts in thousands, except per share):
Years Ended March 31,
-------------------------------------
1999 1998 1997
---------- ------------ -----------
Net income -- as reported............... ($21,002) $69,928 $61,744
Net income -- pro forma................. ($24,379) $65,605 $60,348
Earnings per share -- as reported
Basic................................. ($0.48) $1.66 $1.52
Diluted............................... ($0.48) $1.40 $1.35
Earnings per share -- pro forma
Basic................................. ($0.56) $1.55 $1.49
Diluted............................... ($0.56) $1.32 $1.32
The effects of applying SFAS 123 on pro forma disclosures of net
income and net income per share for fiscal 1999, 1998, and 1997 are not
likely to be representative of the pro forma effects on net income and
earnings per share in future years.
The fair value of each option grant for the Incentive Plan is
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
1999 1998 1997 and 1996
------------- -------------- --------------
Risk-free interest rate ....... 4.18% - 5.63% 5.72% - 6.74% 5.36% - 5.53%
Expected life ................. 2-5 Years 2-5 years 2-5 years
Expected volatility ........... 0.81 0.69 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,
1999:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------- ----------- ----------- ----------- ----------- ----------
$0.03 - $ 0.10 1,059,887 6.68 $0.04 526,107 $0.0360
$6.00 - $10.625 1,213,797 9.23 $7.96 215,977 $8.28
$11.06 - $14.50 1,441,268 8.14 $11.80 416,975 $12.14
$14.875- $18.50 36,904 7.40 $15.30 23,665 $15.29
----------- -----------
$0.03 - $18.50 3,751,856 8.07 $7.27 1,182,724 $6.11
=========== ===========
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 terms of the Purchase Plan, employees may elect to
contribute up to 15% of their compensation toward the purchase of shares
of the Company's Common Stock. The purchase price per share is the lesser
of 85% of the fair market value of the stock on the first day of
enrollment during the six month offering period or the last day within
the six month offering period (generally April 30 and October 31 of each
year). The total number of shares of stock issuable under the Purchase
Plan aggregated 1,500,000 shares as of March 31, 1999. In May 1999 the
Board approved an amendment to the Purchase Plan, subject to stockholder
approval, to increase the number of shares authorized for issuance under
the Purchase Plan by 1,500,000 shares from 1,500,000 shares to 3,000,000
shares. In April 1999, the Company's Board of Directors approved an
amendment to the Purchase Plan, creating a two-year window which allows
participants to purchase stock at the lesser of 85% of the fair market
value of the stock on the first day of enrollment or the last day of each
of four six-month offering periods. Shares issued under the Purchase
Plan were 371,103 and 278,255 in fiscal 1999 and 1998, respectively.
For purposes of pro forma disclosure, the fair value of employee's
purchase rights has been estimated using the Black-Scholes model assuming
risk-free interest rates ranging from 4% to 7% in fiscal 1999 and 1998.
Volatility factors of the expected market price were 81% and 69% for
fiscal 1999 and 1998, respectively. The weighted-average expected life of
the purchase rights was eight months for fiscal 1999 and 1998. The
weighted-average fair value of the purchase rights granted in fiscal 1999
and 1998 was $7.80 and $11.48, respectively.
9. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended March 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
(dollars in thousands)
Current:
Federal............................... ($11,235) $19,756 $22,046
State................................. -- 268 65
Deferred:
Federal............................... 2,694 13,218 3,289
State................................. (460) (3,273) --
----------- ---------- ----------
($9,001) $29,969 $25,400
=========== ========== ==========
The Company's effective tax rate differs from the statutory federal income
tax rate follows:
Years Ended March 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
Income tax provision (benefit) at
statutory rate........................ (35.00%) 35.00% 35.00%
Benefit of foreign sales corporation.... -- (3.10%) (4.10%)
State income taxes...................... (1.40%) 3.20% 3.20%
State credits........................... (5.10%) (5.20%) (3.20%)
Other................................... 11.50% 0.10% (1.40%)
Change in valuation allowance........... -- -- --
----------- ---------- ----------
Effective tax rate.................... (30.00%) 30.00% 29.50%
=========== ========== ==========
The components of the deferred tax assets and liabilities are as follows:
March 31,
----------------------
1999 1998
---------- ----------
(dollars in thousands)
Deferred tax assets:
Accrued vacation................................... $551 $631
State credits...................................... 5,337 4,986
Inventory reserve.................................. 1,778 2,736
Allowances and other accrued liabilities........... 15,905 3,802
Net operating loss carryforward.................... 3,402 94
---------- ----------
Total deferred tax assets.................. 26,973 12,249
---------- ----------
Deferred tax liabilities:
Depreciation....................................... (35,966) (22,316)
Net operating loss carryforward.................... -- 3,308
---------- ----------
(35,966) (19,008)
---------- ----------
Less valuation allowance............................. -- --
---------- ----------
Net deferred tax assets.................... ($8,993) ($6,759)
========== ==========
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. Accordingly, no valuation
allowance has been recorded.
At March 31, 1999, the Company had federal net operating loss
carryforwards of approximately $9.7 million, as well as R&D and AMT
credit carryforwards of $11.5 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
$810,000 each year. The R&D credit and AMT credit can be carried forward
for twenty years and indefinitely, respectively.
At March 31, 1999, the Company also had California net operating loss
carryforwards of approximately $10.6 million which expire in the year
2004.
10. EARNINGS PER SHARE
Reconciliation of the numerator and denominator of both basic and diluted EPS
is provided as follows:
(in thousands, except per share amounts)
Years Ended March 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Basic:
Weighted average shares outstanding.... 43,720 42,196 40,493
---------- ---------- ----------
Shares used in computing per
share amounts ....................... 43,720 42,196 40,493
========== ========== ==========
Net income (loss) available for common
stockholders ........................ ($21,002) $69,928 $61,745
========== ========== ==========
Net income (loss) available for common
stockholders per share .............. ($0.48) $1.66 $1.52
========== ========== ==========
Diluted:
Weighted average shares outstanding.... 43,720 42,196 40,493
Net effect of dilutive stock options-
based on the treasury stock method
using average market price .......... -- 2,662 3,684
Assumed conversion of 5 3/4%
convertible subordinated notes ...... -- 9,684 1,842
---------- ---------- ----------
Shares used in computing per share
amounts ............................. 43,720 54,542 46,019
========== ========== ==========
Net income (loss) available for common
stockholders ........................ ($21,002) $69,928 $61,745
Add 5 3/4% convertible subordinated
note interest, net of interest
capitalized and income tax effect ... -- 6,580 587
---------- ---------- ----------
Net income (loss) available for common
stockholders ........................ ($21,002) $76,508 $62,332
========== ========== ==========
Net income ( loss) available for common
stockholders per share .............. ($0.48) $1.40 $1.35
========== ========== ==========
11. 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 regular, full-
time employees are eligible to participate under the plan. The Company
contributed to the plan approximately $0.6 million, $0.5 million and $0.4
million in fiscal 1999, 1998 and 1997, respectively.
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information should be read in conjunction
with Note 1.
Year Ended March 31, 1999
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
Net sales........................... $56,765 $56,999 $69,792 $55,974
Gross profit........................ 9,326 8,046 7,210 (6,546)
Operating income.................... 4,227 3,450 (14,876) (11,810)
Net income.......................... 1,092 505 (12,354) (10,245)
Net income available for common
stockholders...................... 1,092 505 (12,354) (10,245)
Net income (loss) available for
common stockholders per share
Basic............................. $0.03 $0.01 ($0.28) ($0.23)
Diluted........................... $0.03 $0.01 ($0.28) ($0.23)
Shares used in computing net income
per share
Basic............................. 43,415 43,570 43,822 44,138
Diluted........................... 43,415 43,570 43,822 44,138
Year Ended March 31, 1998
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
Net sales........................... $76,837 $90,446 $98,556 $90,355
Gross profit........................ 29,331 34,724 37,018 29,523
Operating income.................... 23,611 29,152 31,381 23,947
Net income.......................... 15,339 19,094 20,470 15,024
Net income available for common
stockholders...................... 15,339 19,094 20,470 15,024
Net income (loss) available for
common stockholders per share
Basic............................. $0.37 $0.46 $0.48 $0.35
Diluted........................... $0.31 $0.38 $0.40 $0.31
Shares used in computing net income
per share
Basic............................. 41,135 41,832 42,768 43,048
Diluted........................... 53,808 54,482 55,099 54,779
Net sales and net income are subject to fluctuations as a result of
customer actions including the timing of mandated delivery schedules.
SCHEDULE II
HMT TECHNOLOGY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at end
Description of Year Expenses Accounts Deductions of Year
- ---------------------------------- ---------- ----------- ----------- --------- ----------
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
Year ended March 31, 1998:
Provision for loss on inventory.. $5,320 1,844 -- -- $7,164
Allowance for doubtful accounts
receivable.................... $1,055 $272 -- -- $1,327
Year ended March 31, 1999:
Provision for loss on inventory.. $7,164 -- 1,928 (4,437) $4,655
Allowance for doubtful accounts
receivable.................... $1,327 $260 -- $1,467 $3,054
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HMT TECHNOLOGY CORPORATION
By:
Ronald L. Schauer
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald L. Schauer and Peter S.
Norris, and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and
all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or his substitutes, may lawfully do or cause to be done
by virtue, hereof.
Pursuant to the Securities Act of 1934, this report has been signed by
the following persons on behalf of the Registrant in the capacities and
on the dates indicated.
Signature Title Date
- ------------------------- ----------------------------------- -------------
/s/ RONALD L. SCHAUER President, Chief Executive Officer June 16, 1999
- ----------------------- and Chairman of the Board
Ronald L. Schauer (Principal Executive Officer)
/s/ PETER S. NORRIS Vice President, Finance, Chief June 16, 1999
- ----------------------- Financial Officer and Treasurer
Peter S. Norris (Principal Financial Officer)
/s/ BRUCE C. EDWARDS Director June 16, 1999
- -----------------------
Bruce C. Edwards
/s/ WALTER G. KORTSCHAK Director June 16, 1999
- -----------------------
Walter G. Kortschak
/s/ DONALD P. BEADLE Director June 16, 1999
- -----------------------
Donald P. Beadle
/s/ RICHARD S. LOVE Director June 16, 1999
- -----------------------
Richard S. Love
/s/ HARRY G. VAN WICKLE Director June 16, 1999
- -----------------------
Harry G. Van Wickle
INDEX OF EXHIBITS
Exhibit
Number Description of Document
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 Form of Restricted Global Convertible Subordinated Note due 2004(2)
4.4 Form of Unrestricted Global Convertible Subordinated Note due 2004(2)
4.5 Form of Certificated Convertible Subordinated Note due 2004(2)
4.6 Indenture, dated as of January 15, 1997, between the Company and
State Street Bank and Trust Company of California, N.A., as
Trustee.(2)
10.1 Credit Suisse First Boston and Fleet National Bank Credit Agreement
dated November 2, 1998. (4)
10.2 Lease Agreement between the Company and Sun Life Assurance Company
of Canada, dated January 5, 1989, as amended.(1)
10.3 Form of Indemnity Agreement entered into between the Registrant and
its directors and executive officers.(1)
10.4 Registrant's 1995 Stock Option Plan (the "1995 Plan").(1)
10.5 Form of Incentive Stock Option under the 1995 Plan.(1)
10.6 Form of Early Exercise Agreement under the 1995 Plan.(1)
10.7 Registrant's 1995 Management Stock Option Plan (the "Management
Plan").(1)
10.8 Form of Incentive Stock Option under the Management Plan.(1)
10.9 Form of Early Exercise Agreement under the Management Plan.(1)
10.10 Registrant's 401(k) Profit Sharing Plan.(1)
10.11 Master Lease Agreement by and between the Company and Comdisco,
dated November 30, 1995.(1)
10.12 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)
10.13 Registrant's 1996 Equity Incentive Plan (the "Incentive Plan").(1)
10.14 Form of Incentive Stock Option under the Incentive Plan.(1)
10.15 Form of Non-statutory Stock Option under the Incentive Plan.(1)
10.16 Registrant's Employee Stock Purchase Plan.(1)
10.17 Registrant's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan").(1)
10.18 Form of Non-Statutory Stock Option under the Directors' Plan.(1)
10.19 Registrant's Executive Severance Plan.(1)
10.20 Fifth Amendment dated November 10, 1998 of Lease Agreement between
the Company and Sun Life of Canada, dated January 5, 1989 as
amended.
10.21 Lease Agreement between the Company and CalWest Industrial
Properties, LLC , dated April 22, 1999
10.22 Lease Agreement between the Company and Third Street Services, Inc.,
dated June 9, 1998.
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant.(1)
23.1 Report of Independent Accountants on Financial Statements Schedule
23.2 Consent of PricewaterhouseCoopers L.L.P.
27.1 Financial Data Schedule.
__________
(1) Registration Statement on Form S-1 No. 333-450 and amendments
thereto.
(2) Form 8-K, dated as of January 21, 1997.
(3) Form 10-K, for the fiscal year ended March 31, 1997.
(4) Form 10-Q, for the fiscal quarter ended December 31, 1998.