======================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 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 incorporation or organization) identification number) 1055 PAGE AVENUE, FREMONT, CA 94538 ----------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (510) 490-3100 ======================================================================== 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 [ ] --- --- As of November 10, 1999, 45,794,115 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. ======================================================================== HMT Technology Corporation QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1999 and March 31, 1999 .................... 3 Condensed Consolidated Statements of Operations for the three and six month periods ended September 30, 1999 and 1998 ................ 4 Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 1999 and 1998 ........................................ 5 Notes to Condensed Consolidated Financial Statements ..... 6 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations ............ 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk .............................................. 11 PART II OTHER INFORMATION Item 4 Submission of Matters to a Vote of the Security Holders ................................................ 12 Item 6. Exhibits and Reports on Form 8-K ................. 13 Signatures ......................................... 14 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS HMT TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, March 31, 1999 1999 ------------ ------------ (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents.................... $50,934 $53,077 Receivables, net............................. 32,925 29,572 Inventories.................................. 13,682 26,585 Deposits, prepaid expenses and other assets.. 541 588 Deferred tax assets, short term.............. 5,133 5,133 ------------ ------------ Total current assets................. 103,215 114,955 Property, plant and equipment, net............. 297,113 321,508 Other assets................................... 5,529 6,077 ------------ ------------ Total assets......................... $405,857 $442,540 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................. $15,127 $20,732 Accrued liabilities.......................... 9,233 8,498 Obligations under capital leases -- current portion............................ 215 555 ------------ ------------ Total current liabilities............ 24,575 29,785 Long-term liabilities.......................... 2,074 2,680 Convertible subordinated promissory notes...... 230,000 230,000 Deferred tax liability, long term.............. 14,127 14,127 ------------ ------------ Total liabilities.................... 270,776 276,592 Stockholders' equity: Common stock................................. 45 44 Additional paid-in capital................... 115,169 113,661 Retained earnings ........................... 96,516 128,892 Distribution in excess of basis.............. (76,649) (76,649) ------------ ------------ Total stockholders' equity........... 135,081 165,948 ------------ ------------ Total liabilities and stockholders' equity. $405,857 $442,540 ============ ============ See accompanying notes HMT TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATION (in thousands, except per share data) Three Months Ended Six Months Ended September 30, September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Net sales ................... $44,791 $56,999 $89,690 $113,764 Cost of sales ............... 55,818 48,953 121,014 96,392 ------------ ------------ ------------ ------------ Gross profit (Loss)........ (11,027) 8,046 (31,324) 17,372 ------------ ------------ ------------ ------------ Operating expenses: Research and development .. 2,294 2,382 4,435 4,817 Selling, general and administrative ........... 2,518 2,214 4,980 4,878 ------------ ------------ ------------ ------------ Total operating expenses . 4,812 4,596 9,415 9,695 ------------ ------------ ------------ ------------ Operating income (loss) ..... (15,839) 3,450 (40,739) 7,677 Interest expense, net ....... 2,781 2,729 5,513 5,396 ------------ ------------ ------------ ------------ Income (loss) before income tax provision (benefit).... (18,620) 721 (46,252) 2,281 Income tax provision (benefit) ................. (5,586) 216 (13,876) 684 ------------ ------------ ------------ ------------ Net income (loss) ........ ($13,034) $505 ($32,376) $1,597 ============ ============ ============ ============ Net income (loss) available for common stockholders per share: Basic..................... ($0.29) $0.01 ($0.72) $0.04 ============ ============ ============ ============ Diluted................... ($0.29) $0.01 ($0.72) $0.04 ============ ============ ============ ============ Shares used in computing per share amounts: Basic..................... 45,124 43,570 44,709 43,493 ============ ============ ============ ============ Diluted................... 45,124 43,570 44,709 43,493 ============ ============ ============ ============ See accompanying notes HMT TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended September 30, ------------------------- 1999 1998 ------------ ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................ ($32,376) $1,597 Adjustments to reconcile net income (loss) to net cash used in operations: Depreciation and amortization ................. 28,405 26,992 Changes in operating assets and liabilities: Receivables ................................. (3,353) 16,894 Inventories ................................. 12,903 (9,882) Deposits, prepaid expenses and other assets . 47 (246) Accounts payable ............................ (5,605) (5,275) Accrued liabilities ......................... 735 2,708 Long term liabilities ....................... (606) (653) ------------ ------------ Net cash provided by operating activities. 150 32,135 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment ... (3,975) (30,215) Decrease in other assets ......................... 514 762 ------------ ------------ Net cash used in investing activities .... (3,461) (29,453) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on obligations under capital leases ........................................ (340) (2,375) Proceeds from issuance of common stock ........... 1,508 1,734 ------------ ------------ Net cash provided by (used in) financing activities...................................... 1,168 (641) ------------ ------------ Net increase in cash and cash equivalents ........ (2,143) 2,041 Cash and cash equivalents at beginning of period .. 53,077 24,985 ------------ ------------ Cash and cash equivalents at end of period ........ $50,934 $27,026 ============ ============ See accompanying notes HMT TECHNOLOGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared by HMT Technology Corporation ("the Company") without audit in accordance with generally accepted accounting principles for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair representation have been included. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. Operating results for the quarter ended September 30, 1999 may not necessarily be indicative of the results to be expected for any other interim period or for the full year. 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. Inventories Inventories are stated at the lower of cost or market, and are reported net of reserves. Cost is determined using the first-in, first-out basis. Inventories Inventories are stated at the lower of cost or market, and are reported net of reserves. Cost is determined using the first-in, first-out basis. September 30, March 31, 1999 1999 ------------ ------------ (in thousands) Raw materials............................ $5,772 $5,575 Work-in-process.......................... 5,275 3,569 Finished goods........................... 2,635 17,441 ------------ ------------ $13,682 $26,585 ============ ============ Recent Accounting 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, "Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). 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. 2. COMPUTATION OF NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ende Six Months Ended September 30, September 30, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Basic: Weighted average shares outstanding for the period..................... 45,124 43,570 44,709 43,461 ---------- ---------- ---------- ---------- Shares used in computing per share amounts.................. 45,124 43,570 44,709 43,461 ========== ========== ========== ========== Net income (loss) available for common stockholders................ ($13,034) $505 ($32,376) $1,597 ========== ========== ========== ========== Net income (loss) available for common stockholders per share...... ($0.29) $0.01 ($0.72) $0.04 ========== ========== ========== ========== Diluted (1): Weighted average shares outstanding for the period..................... 45,124 43,570 44,709 43,461 Net effect of dilutive stock options based on the treasury stock method using average market price.............................. -- -- -- 1,804 Assumed conversion of 5 3/4% convertible subordinated notes..... -- -- -- -- ---------- ---------- ---------- ---------- Shares used in computing per share amounts.................. 45,124 43,570 44,709 45,265 ========== ========== ========== ========== Net income (loss) available for common stockholders................ ($13,034) $505 ($32,376) $1,597 Add 5 3/4% convertible subordinated note interest, net of interest capitalized and income tax effect.. -- -- -- -- ---------- ---------- ---------- ---------- Net income (loss) available for common stockholders................ ($13,034) $505 ($32,376) $1,597 ========== ========== ========== ========== Net income (loss) available for common stockholders per share...... ($0.29) $0.01 ($0.72) $0.04 ========== ========== ========== ========== (1) Diluted EPS for the six months ended September 30, 1999 and 1988 does not assume conversion of the Company's 5 3/4% convertible subordinated notes, as the effect would be anti-dilutive. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including without limitation those described below and in the Company's Annual Report on Form 10-K for the year ended March 31, 1999, which has been filed with the Securities and Exchange Commission. Actual results may differ materially from the results discussed in the forward-looking statements. Overview HMT Technology Corporation (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 work-stations. The Company derives substantially all of its sales from the sale of thin film disks to a small number of customers. Loss of or a reduction in orders from one or more of the Company's customers could result in a substantial reduction in net sales. Because many of the Company's expense levels are based, in part, on its expectations as to future revenues, decreases in net sales may result in a disproportionately greater negative impact on operating results. Due to the rapid technological change and frequent development of new disk drive products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter. At any one time the Company typically supplies disks in volume for fewer than twelve disk drive products. Results of Operations Net Sales Three Months Ended September 30, 1998 and 1999. Net sales for the three months ended September 30, 1999 were $44.8 million, down 21.4% from the $57.0 million reported in the three months ended September 30, 1998. For the first six months of fiscal 2000 net sales of $89.7 million were $24.1 million, or 21.2% lower than the same period in fiscal 1999. Unit sales volume decreased 5.7% during the three months ended September 30, 1999 and average selling prices declined 16.8%, compared to the three months ended September 30, 1998. Media manufacturers expanded capacity in calendar 1996 and 1997 to meet anticipated demand. Beginning in 1998, demand for media slowed as storage capacity per disk increased and drive designs incorporated fewer disks to meet the storage capacities demanded by the market. The increase in production capacity coupled with increased storage capacity per disk allowed the supply of disks to meet and then exceed the market demand. The excess media supply also heightened price competition among independent media suppliers, causing the decline in average selling prices. Future revenue will depend largely upon customer demand, unit shipments and production volumes. During the three months ended September 30, 1999, three customers, and in the comparable period in 1998 four customers, each accounted for at least ten percent of consolidated net sales. The Company expects that it will continue to derive a substantial portion of its sales from a relatively small number of customers, although the identity of such customers may change from period to period. Gross Profit. Gross margin (loss) was (24.6)% of net sales for the three months ended September 30, 1999, compared with 14.1% for the three months ended September 30, 1998. The decline in gross margin during the three months ended September 30, 1999 was a result of higher unit production costs and the decline in average selling prices versus the comparable period in fiscal 1999. Unit production costs rose as fixed costs were absorbed over lower unit production volumes. Production volumes decreased 24.4% in the second quarter of fiscal 2000, compared with the second quarter of fiscal 1999. Research and Development. Research and development expenses decreased $0.1million in the three months ended September 30, 1999, compared to the same period in 1998. The Company anticipates that operating expenses will continue to fluctuate somewhat from period to period due to changes in products and operations. Selling, General and Administrative. Selling, general and administrative expenses increased $0.3 million in the three months ended September 30, 1999, compared to the same period in the prior fiscal year. The Company anticipates that operating expenses will continue to fluctuate somewhat from period to period due to changes in products and operations. Interest Expense, Net. Net interest expense increased $0.1 million during the three months ended September 30, 1999, compared to the same period in fiscal 1999. The increase in interest expense, net, was primarily the result of a decrease in capitalized interest partially offset by an increase in interest income from improved cash balances. Provision for Income Taxes. For the three months ended September 30, 1999 and 1998, the Company recorded income taxes at its estimated annual effective tax rate of 30%. 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 by the Company, its customers or its competitors; order cancellations, modifications and quantity adjustments and shipment rescheduling; 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 effected. 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. Liquidity and Capital Resources Cash and cash equivalents decreased by $2.1 million to $50.9 million at September 30, 1999 from March 31, 1999. Cash flows from operations were $151,000 for the six-month period ended September 30, 1999 as compared to $32.1 million in the comparable period of 1998. Cash generated during the six months ended September 30, 1999 reflected a net loss of $32.4 million offset by $28.4 million in depreciation and amortization. Increased accounts receivable, decreased accounts payable and decreased long-term liabilities served to decrease cash while decreased inventory levels and increased accrued liabilities generated cash. Decreased sales and lower margins contributed to the decline in positive cash flow provided by operations during the six months ended September 30, 1999 as compared to the six months ended September 30, 1998. The Company invested $4.0 million and $30.2 million in property, plant and equipment during the six months ended September 30, 1999 and 1998, respectively. The Company currently expects to spend approximately $20 million over the next twelve months on property, plant and equipment. Cash used by financing activities for the first six months of fiscal 2000 reflected $0.3 million in principal payments on capital leases, offset by $1.5 million in cash received for employee stock purchases. As of September 30, 1999, the Company's principal sources of liquidity consisted of cash, cash equivalents and short-term investments, as well as the full balance of a $50 million revolving credit facility. 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 and anticipated capital expenditures at least through September 30, 2000. Should improved market conditions result in a need for a substantial expansion in the Company's manufacturing capacity, the Company may need to obtain additional sources of financing. There can be no assurance that the Company will be able to obtain any needed alternative sources of financing on favorable terms, if at all, at such time or times as the Company may require such capital. 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 would be affected. In the ordinary course of replacing computer equipment and software, the Company attempts to obtain replacements that are Year 2000 compliant. The Company has used both internal and external resources to identify and assess needed Year 2000 remediation. The Company's internal Year 2000 identification, assessment, remediation and testing efforts, which began in October 1997, have been completed. The Company has completed modifications to existing software and conversions to new software. The Company believes 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 to date is not material to the financial position or results of operations of the Company. We are not currently estimating significant additional costs will be incurred. However, there can be no guarantee that new costs will not be exposed after January 1, 2000. There can be no assurance that, once upgraded, that the systems will be Year 2000 compliant. Should the 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 their significant Year 2000 issues on a timely basis. Of these responses, all are considered to be adequate. The Company has worked with its customers and suppliers to address their Year 2000 compliance in a timely manner. The Company has completed this effort. However, this effort does not ensure customer or supplier compliance. 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. The Company has a contingency plan in place for operation without its computer based manufacturing control systems. However, there are scenarios for failure of suppliers or infrastructure for which no contingency exists. Item 3 Quantitative and Qualitative Disclosures About Market Risk There is no material change from that reported in the Company's Annual Report on Form 10K for the year ended March 31, 1999 Part II, OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Stockholders was held on July 28, 1999. (b) The following individuals, each of whom served as directors of the Company prior to the annual meeting, were elected to serve as directors until the next annual meeting: Total Vote For Total Vote Withheld Each Director From Each Director ----------------- ------------------ Ronald L. Schauer 41,767,396 243,434 Donald P. Beadle 41,779,736 231,094 Bruce C. Edwards 41,781,636 229,194 Richard S. Love 41,779,436 231,394 Harry G. Van Wickle 41,780,036 230,794 (c) At the annual meeting, the Stockholders voted as follows: 1. A proposal to approve the Company's Employee Stock Purchase Plan, as amended, to increase the aggregate number of shares of Common Stock authorized for issuance under such plan by 1,500,000 shares was approved: 35,116,579 shares were voted in favor of the proposal, 6,398,588 shares were voted against the proposal, 495,663 shares abstained and 3,021,804 shares were broker non- votes. 2. The ratification of the selection of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ended March 31, 2000 was approved: 41,926,170 shares were voted in favor of the proposal, 39,264 shares were voted against the proposal, 45,396 shares abstained and 3,021,804 shares were broker non-votes. Item 5. Other Information Pursuant to the Company's bylaws, stockholders who wish to bring matters or propose nominees for director at the Company's 1999 annual meeting of stockholders must provide specified information to the Company between April 20, 2000 and May 20, 2000 (unless such matters are included in the Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended). Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1.1 First Amendment to Fleet Revolving Credit Agreement, dated August 16, 1999, between the Company and Fleet National Bank and Credit Suisse First Boston. 10.1.2 First Amendment to Fleet Security Agreement, dated August 16, 1999, between the Company and Fleet National Bank and Credit Suisse First Boston. 27.1 Financial Data Schedule Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HMT Technology Corporation (Registrant) Date: November 12, 1999 BY: /s/ Peter S. Norris Peter S. Norris Vice President and Chief Financial Officer Date: November 12, 1999 BY: /s/ Ronald L. Schauer Ronald L. Schauer President and Chief Executive Officer EXHIBIT INDEX Exhibit No. 10.1.1 First Amendment to Fleet Revolving Credit Agreement, dated August 16, 1999, between the Company and Fleet National Bank and Credit Suisse First Boston 10.1.2 First Amendment to Fleet Security Agreement, dated August 16, 1999, between the Company and Fleet National Bank and Credit Suisse First Boston 27.1 Financial Data Schedule.