UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 29, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14709
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HUTCHINSON TECHNOLOGY INCORPORATED
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0901840
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 WEST HIGHLAND PARK, HUTCHINSON, MINNESOTA 55350
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(Address of principal executive offices) (Zip code)
(320) 587-3797
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(Registrant's telephone number, including area code)
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(Former name, address or fiscal year, if changed since last report)
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 1, 1998 the registrant had 19,775,894 shares of Common Stock issued
and outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands)
March 29, September 28,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $160,549 $ 98,340
Securities available for sale 8,483 20,211
Trade receivables, net 56,807 51,467
GE lease receivable 5,945 31,073
Other receivables 2,045 3,504
Inventories 35,995 27,189
Prepaid taxes and other expenses 19,703 11,562
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Total current assets 289,527 243,346
Property, plant and equipment, net 291,892 175,253
Other assets 21,456 11,240
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$602,875 $429,839
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 4,613 $ 5,332
Accounts payable and accrued expenses 90,251 39,373
Accrued compensation 24,655 19,407
Accrued income taxes 3,695 6,078
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Total current liabilities 123,214 70,190
Long-term debt, less current maturities 70,322 72,862
Convertible subordinated notes 150,000 -
Other long-term liabilities 1,279 3,829
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares
authorized, 19,691,000 and 19,619,000 issued
and outstanding 197 196
Additional paid-in capital 151,676 150,676
Retained earnings 106,187 132,086
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Total shareholders' investment 258,060 282,958
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$602,875 $429,839
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See accompanying notes to condensed consolidated financial statements.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
Thirteen Weeks Ended Twenty-Six Weeks Ended
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March 29, March 30, March 29, March 30,
1998 1997 1998 1997
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Net sales $95,128 $124,259 $184,110 $231,165
Cost of sales 97,825 85,579 187,303 161,373
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Gross profit (loss) (2,697) 38,680 (3,193) 69,792
Selling, general and
administrative expenses 11,418 12,048 21,687 22,966
Research and development
expenses 5,524 4,747 10,685 10,486
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Income (loss) from operations (19,639) 21,885 (35,565) 36,340
Other income, net 548 861 1,115 1,167
Interest expense (404) (1,009) (551) (1,867)
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Income (loss) before income taxes (19,495) 21,737 (35,001) 35,640
Provision (benefit) for income taxes (5,070) 5,054 (9,102) 7,840
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Net income (loss) ($14,425) $ 16,683 ($25,899) $ 27,800
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Basic earnings (loss) per common share ($0.73) $0.95 ($1.32) $1.64
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Diluted earnings (loss) per common share ($0.73) $0.91 ($1.32) $1.57
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Weighted average common shares
outstanding 19,673 17,610 19,651 16,985
Weighted average common and
diluted shares outstanding 19,673 18,415 19,651 17,651
See accompanying notes to condensed consolidated financial statements.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
(Dollars in thousands)
Twenty-Six Weeks Ended
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March 29, March 30,
1998 1997
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Operating activities:
Net income (loss) ($25,899) $ 27,800
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 19,918 19,268
Deferred income taxes (4,685) 543
Change in operating assets and liabilities (Note 4) 16,886 5,688
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Cash provided by operating activities 6,220 53,299
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Investing activities:
Capital expenditures (114,848) (29,430)
Funding from GE lease receivable 24,055 1,450
Expenditures from GE lease receivable (7,463) (13,073)
Sales of marketable securities 16,542 2,195
Purchases of marketable securities (4,814) (19,393)
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Cash used for investing activities (86,528) (58,251)
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Financing activities:
Repayments of long-term debt (3,259) (3,255)
Net proceeds from issuance of long-term debt - 25,000
Net proceeds from issuance of convertible subordinated notes 145,320 -
Net proceeds from issuance of common stock 456 104,316
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Cash provided by financing activities 142,517 126,061
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Net increase in cash and cash equivalents 62,209 121,109
Cash and cash equivalents at beginning of period 98,340 22,884
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Cash and cash equivalents at end of period $160,549 $143,993
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See accompanying notes to condensed consolidated financial statements.
HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Dollars in thousands)
(1) ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in the condensed
consolidated financial statements include normal recurring adjustments and
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of such financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K. The quarterly results are not
necessarily indicative of the actual results that may occur for the entire
fiscal year.
(2) BUSINESS AND CUSTOMERS
The Company is the world's leading supplier of suspension assemblies for hard
disk drives. Suspension assemblies hold the recording heads in position above
the spinning magnetic disks in the drive and are critical to maintaining the
necessary microscopic clearance between the head and disk. The Company
developed its leadership position in suspension assemblies through research,
development and design activities coupled with a substantial investment in
manufacturing technologies and equipment. The Company intends to maintain its
position by continuing to develop suspension assemblies which meet the
increasingly higher performance specifications of disk drive manufacturers, and
is committed to reliably producing its suspension assemblies in high volume,
with specialized design, expanded functionality and greater precision. The
Company also is engaged in the development of product opportunities in the
medical devices market but does not expect any medical-related revenue in fiscal
1998. A breakdown of customer sales is as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
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March 29, March 30, March 29, March 30,
Percentage of Net Sales 1998 1997 1998 1997
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Five Largest Customers 87% 84% 87% 84%
SAE Magnetics, Ltd./TDK 30 13 28 13
Seagate Technology Incorporated 23 35 20 35
IBM 15 10 14 10
Yamaha Corporation 10 13 11 13
Read-Rite Corporation 9 13 14 13
(3) CONVERTIBLE SUBORDINATED NOTES
In March 1998, the Company completed a private placement of $150,000,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2005 (the
"Convertible Notes") with interest payable semiannually commencing September
15, 1998. The Convertible Notes are convertible, at the option of the
holder, into Common Stock of the Company at any time prior to their stated
maturity, unless previously redeemed or repurchased, at a conversion price of
$28.35 per share. Beginning March 20, 2001, the Convertible Notes are
redeemable, in whole or in part, at the option of the Company at 103.43% of
their principal amount, and thereafter at prices declining to 100% at any
time on and after March 15, 2005. In addition, upon the occurrence of
certain events, each holder of the Convertible Notes may require the Company
to repurchase all or a portion of such holder's Convertible Notes at a
purchase price equal to 100% of the principal amount thereof, together with
accrued and unpaid interest and liquidated damages, if any, to the date of
the repurchase.
The Convertible Notes were issued by the Company and were sold in
transactions exempt from registration under the Securities Act of 1933, as
amended. The Company filed a Registration Statement registering the
Convertible Notes and the shares of Common Stock of the Company into which
the Convertible Notes are convertible.
(4) SUPPLEMENTARY CASH FLOW INFORMATION
Twenty-Six Weeks Ended
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March 29, March 30,
1998 1997
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Changes in operating assets and liabilities:
Receivables, net ($3,882) ($12,047)
Inventories (8,806) (625)
Prepaid and other expenses (4,202) 1,455
Accounts payable and accrued liabilities 36,326 18,941
Other non-current liabilities (2,550) (2,036)
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$16,886 $5,688
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Cash paid for:
Interest (net of amount capitalized) $44 $1,211
Income taxes $2,708 5,144
Capitalized interest for the twenty-six weeks ended March 29, 1998 was
$2,954,000 compared to $1,052,000 for the comparable period in fiscal 1997.
HUTCHINSON TECHNOLOGY INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company derives virtually all of its revenue from the sale of suspension
assemblies to a small number of customers. Suspension assemblies are a critical
component of hard disk drives and the Company's results of operations are highly
dependent on the hard disk drive industry. The hard disk drive industry is
intensely competitive and highly cyclical and the Company's results of
operations have been adversely affected from time to time during hard disk drive
industry slowdowns.
The Company experienced a significant reduction in demand for and shipments
of its conventional suspension assemblies during the last part of the third
quarter of fiscal 1997, the fourth quarter of fiscal 1997 and the first and
second quarters of fiscal 1998. The Company believes this reduction was due
to a slowdown in the disk drive industry's demand for disk drive components
because of excess inventory held by drive and recording head manufacturers.
The Company's operating results have been adversely affected by this
slowdown, and operating activities consequently have not provided the cash
needed to help fund planned capital expenditures that are necessary to meet
steadily rising demand for the Company's TSA suspension assemblies. The
Company believes that demand for its conventional suspension assemblies began
to recover in the last weeks of the fiscal 1998 second quarter as disk drive
inventory levels have been reduced; however, the Company believes shipments
of conventional suspensions will continue to trail prior year levels as
customer demand shifts towards TSA suspension assemblies.
The Company's gross margins have fluctuated and will continue to fluctuate
quarterly and annually based upon a variety of factors such as the level of
utilization of the Company's production capacity, changes in demand, product
mix, selling prices and manufacturing yields, increases in production and
engineering costs associated with initial production of new products and changes
in the cost of or limitations on availability of materials. Cost-effective
high-volume production of TSA suspensions has not yet been achieved by the
Company in connection with its ramp-up of TSA suspension capacity. These
production inefficiencies have resulted in significantly declining gross
margins which have adversely affected operating results.
The Company's ability to introduce new products on a timely basis is an
important factor in its continued success. New products initially have lower
manufacturing yields and are produced in lower quantities than more mature
products. Manufacturing yields generally improve as the product matures and
production volumes increase. Manufacturing yields also vary depending on the
complexity and uniqueness of product specifications. Because the Company's
business is capital intensive and requires a high level of fixed costs, gross
margins are also extremely sensitive to changes in volume. Assuming fixed
product prices, small variations in capacity utilization or manufacturing
yields generally have a significant impact on gross margins. The Company
typically allows its customers to change or cancel orders without penalty up
until approximately two weeks before scheduled shipment. Due to the absence
of substantial noncancellable backlog, the Company plans its production and
inventory based on forecasts of customer demands, which often fluctuate
substantially. These factors, among others, create an environment where
demand can vary significantly from week to week.
Growth in the Company's net sales depends, in part, on the successful expansion
by the Company of its manufacturing capacity, manufacturing workforce and
corporate infrastructure. In order to meet current and anticipated future
demand for TSA suspension assemblies, the Company is continuing its planned
expansion of TSA suspension production capacity. The Company currently
anticipates spending approximately $200,000,000 during fiscal 1998 for plant
construction and for expansion of TSA suspension production capacity. The
Company anticipates that continued significant capital expenditures will be
necessary in fiscal 1999 and 2000 for continued expansion of its TSA suspension
production capacity as the Company transitions from conventional suspension
assembly production to high volume TSA suspension assembly production, and to
accommodate anticipated market growth. If the Company is not able to complete
its current expansion plans in a timely manner and within acceptable budgets,
its quarterly and annual results of operations will be materially and adversely
affected.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 29, 1998 VS. THIRTEEN WEEKS ENDED MARCH 30, 1997.
Net sales for the thirteen weeks ended March 29, 1998 were $95,128,000, a
decrease of $29,131,000 or 23% compared to the comparable period in fiscal 1997.
This decrease was primarily due to decreased suspension assembly sales volume.
Gross loss for the thirteen weeks ended March 29, 1998 was $2,697,000, compared
to a gross profit of $38,680,000 for the comparable period in fiscal 1997, and
gross profit (loss) as a percent of net sales decreased from 31% to (3)%,
primarily due to lower conventional suspension assembly sales volume and higher
manufacturing costs associated with increased TSA suspension assembly
production.
Selling, general and administrative expenses for the thirteen weeks ended March
29, 1998 were $11,418,000, a decrease of $630,000 or 5% compared to the
comparable period in fiscal 1997. The decreased expenses were due primarily to
decreased profit sharing and other incentive compensation costs of $3,430,000,
offset by fees related to certain financing agreements of $1,290,000, increased
labor expenses of $775,000, higher depreciation and lease expense of $477,000
and higher bad debt provision of $415,000. As a percent of net sales, selling,
general and administrative expenses increased from 10% in the second quarter of
fiscal 1997 to 12% in the second quarter of fiscal 1998.
Research and development expenses for the thirteen weeks ended March 29, 1998
were $5,524,000 compared to $4,747,000 for the thirteen weeks ended March 30,
1997. The increase was mainly due to increased expenses related to
development of the Company's medical product and further TSA product
development.
Other income, net, for the thirteen weeks ended March 29, 1998 was $548,000, a
decrease of $313,000. The decrease was primarily due to a decrease in interest
income as a result of a lower average investment balance.
Interest expense for the thirteen weeks ended March 29, 1998 was $404,000, a
decrease of $605,000 from the comparable period in fiscal 1997, primarily due to
an increase in capitalization of interest of $915,000 partially offset by higher
average outstanding debt.
The income tax benefit for the thirteen weeks ended March 29, 1998 was based on
an estimated effective tax rate for the fiscal year of 26% which was below the
statutory federal rate primarily due to the large portion of sales that
qualifies for the benefit of the Company's Foreign Sales Corporation.
Net loss for the thirteen weeks ended March 29, 1998 was $14,425,000, compared
to net income of $16,683,000 for the comparable period in fiscal 1997. As a
percent of net sales, net income decreased from 13% to (15)% primarily due to
the lower sales volume and higher manufacturing costs, noted above.
TWENTY-SIX WEEKS ENDED MARCH 29, 1998 VS. TWENTY-SIX WEEKS ENDED MARCH 30, 1997.
Net sales for the twenty-six weeks ended March 29, 1998 were $184,110,000, a
decrease of $47,055,000 or 20% compared to the comparable period in fiscal 1997.
This decrease was primarily due to decreased suspension assembly sales volume.
Gross loss for the twenty-six weeks ended March 29, 1998 was $3,193,000,
compared to a gross profit of $69,792,000 for the comparable period in fiscal
1997, and gross profit (loss) as a percent of net sales decreased from 30% to
(2)%, primarily due to lower conventional suspension assembly sales volume and
higher manufacturing costs associated with increased TSA suspension assembly
production.
Selling, general and administrative expenses for the twenty-six weeks ended
March 29, 1998 were $21,687,000, a decrease of $1,279,000 or 6% compared to
the comparable period in fiscal 1997. The decreased expenses were due
primarily to decreased profit sharing and other incentive compensation costs
of $6,174,000, partially offset by increased labor expenses of $1,536,000,
fees related to certain financing agreements of $1,290,000, higher bad debt
provision of $804,000, higher depreciation and lease expense of $607,000 and
increased recruitment and relocation expenses of $525,000. As a percent of
net sales, selling, general and administrative expenses increased from 10%
for the twenty-six weeks ended March 30, 1997 to 12% for the twenty-six weeks
ended March 29, 1998.
Research and development expenses for the twenty-six weeks ended March 29,
1998 were $10,685,000 compared to $10,486,000 for the twenty-six weeks ended
March 30, 1997. The increase was mainly due to increased expenses related to
development of the Company's medical product and further TSA product
development, offset partially by lower development expenses related to
production of TSA prototype suspensions.
Other income, net, for the twenty-six weeks ended March 29, 1998 was
$1,115,000, a decrease of $52,000. The decrease was due to a decrease in
interest income as a result of a lower average investment balance.
Interest expense for the twenty-six weeks ended March 29, 1998 was $551,000, a
decrease of $1,316,000 from the comparable period in fiscal 1997, primarily due
to an increase in capitalization of interest of $1,901,000, offset partially by
higher average outstanding debt.
The income tax benefit for the twenty-six weeks ended March 29, 1998 was based
on an estimated effective tax rate for the fiscal year of 26% which was below
the statutory federal rate primarily due to the large portion of sales that
qualifies for the benefit of the Company's Foreign Sales Corporation.
Net loss for the twenty-six weeks ended March 29, 1998 was $25,899,000, compared
to net income of $27,800,000 for the comparable period in fiscal 1997. As a
percent of net sales, net income decreased from 12 to (14)% primarily due to the
lower sales volume and higher manufacturing costs, noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash balances, cash flow
from operations and additional financing capacity. The Company's cash and
cash equivalents increased to $160,549,000 at March 29, 1998 as compared to
$36,069,000 at December 28, 1997 and as compared to $98,340,000 at September
28, 1997. The increase is a result of the private placement of convertible
subordinated notes by the Company described below. The Company generated
cash from operating activities of $6,220,000 for the twenty-six weeks ended
March 29, 1998.
Cash used for capital expenditures totaled $114,848,000 for the twenty-six weeks
ended March 29, 1998, an increase of $85,418,000 from the comparable period in
fiscal 1997. The expenditures for the twenty-six weeks ended March 29, 1998
were primarily related to expansion of TSA suspension capacity, including
manufacturing and support equipment, construction costs for the Company's Sioux
Falls, South Dakota plant and construction of an expansion to the Company's
Hutchinson, Minnesota plant.
In March 1998, the Company issued and sold $150,000,000 aggregate principal
amount of its 6% Convertible Subordinated Notes due 2005 (the "Convertible
Notes") to NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc., which resold the Convertible Notes to qualified institutional
buyers and institutional accredited investors. The Company intends to use
the net proceeds from the issuance and sale of the Convertible Notes
primarily to fund capital expenditures to expand TSA suspension capacity.
During the first quarter of fiscal 1997, the Company signed a Master Lease
Agreement with General Electric Capital Corporation ("GE"), providing for
leasing of manufacturing equipment in fiscal 1997. During the fourth quarter of
fiscal 1997, the Company signed an amendment to the Master Lease Agreement with
GE, providing for leasing of up to $30,000,000 of manufacturing equipment in
fiscal 1998, $24,055,000 of which had been funded at March 29, 1998. The
Company serves as a purchasing agent on behalf of GE. As such, amounts expended
on GE's behalf, but not yet reimbursed, are included on the accompanying
consolidated balance sheet under GE lease receivable.
The Company established a $25,000,000 unsecured credit facility ("Credit
Facility") with The First National Bank of Chicago during the first quarter of
fiscal 1996. In March 1998, the Company amended the Credit Facility solely to
permit a letter of credit of $1,425,000, as security for its variable rate
demand note with the City of Hutchinson, which letter of credit was outstanding
at March 29, 1998. The Company is not permitted to incur any additional
borrowings under the Credit Facility, and the Company currently does not have
available, and has no commitments for, a revolving credit or other similar
borrowing facility.
The Company's financing agreements contain various restrictive covenants. As of
March 29, 1998, the Company was in compliance with all such covenants.
The Company currently anticipates fiscal 1998 capital expenditures of
approximately $200,000,000, primarily related to expansion of TSA suspension
capacity, including manufacturing and support equipment, construction of the
Company's Sioux Falls assembly plant and the expansion of the Company's
Hutchinson, Minnesota plant. These capital expenditures will support the
Company's continued development of, and capacity expansion for, TSA suspension
assemblies. The Company believes the net proceeds from the issuance and sale of
the Convertible Notes by the Company in March 1998, any cash generated from
operations and anticipated future revenue will be sufficient to meet its
operating expenses, debt service requirements under the Convertible Notes and
other outstanding indebtedness and capital expenditure requirements through
fiscal 1999, as the Company continues to transition from conventional suspension
assembly production to high-volume TSA suspension assembly production.
The Company anticipates that continued significant capital expenditures will
be necessary in fiscal 1999 and 2000 for continued expansion of its TSA
suspension production capacity, and to accommodate anticipated market growth.
In that regard, beyond fiscal 1999 the Company may require significant
additional external financing to fund operations, debt service and capital
expenditures. The Company's ability to fund its future liquidity needs
depends on its future performance and financial results, which, to a certain
extent, are subject to general conditions in the hard disk drive industry as
well as general economic, financial, competitive and other factors that are
beyond its control. If forecasted operating results do not meet the Company's
expectations or if the Company is unable to obtain adequate financing at such
time or times as such financing is required, the Company's future financial
results and liquidity could be materially adversely affected. There can be
no assurance that the Company's business will generate sufficient cash flow
from operations, that anticipated revenue growth and operating improvements
will be realized or that the Company will be able to obtain additional
financing in an amount sufficient to enable the Company to service its
indebtedness (including the Convertible Notes), make necessary capital
expenditures or fund its operations.
In connection with the sale of the Convertible Notes by the Company in
March 1998, the Company incurred $150 million in additional indebtedness which
increased the ratio of total debt to total capitalization from 22.3%, at
February 22, 1998, to 46.6% at March 29, 1998. As a result of this increased
leverage, the Company's interest obligations increased substantially. To the
extent that a substantial portion of the Company's cash flow from operations is
used to pay the principal of, and interest on, its indebtedness, such cash flow
will not be available to fund future operations and capital expenditures. There
is no assurance that the Company's operating cash flow will be sufficient to
meet its debt service requirements or to repay the Convertible Notes at maturity
or upon a Repurchase Event (as defined in the Indenture for such Convertible
Notes).
The Company uses technology throughout its operations that will be affected
by Year 2000 issues. During fiscal 1997, the Company implemented remediation
steps to make the core business systems which are part of the Company's
computer systems Year 2000 compliant. The Company also has initiated a
company-wide project, to be completed during the current fiscal year, to
identify and assess other Company systems for Year 2000 compliance and the
Year 2000 compliance status of its critical suppliers. The expenses relating
to Year 2000 compliance incurred in fiscal 1997 and for the twenty-six weeks
ended March 29, 1998 were not material, and the Company believes the amounts
that will be required to be expensed in the future for such compliance will
not have a material impact on its results of operations, liquidity and
capital resources.
MARKET TRENDS AND CERTAIN CONTINGENCIES
The Company expects that the expanding use of personal computers, enterprise
computing and storage, increasingly complex software and the emergence of new
applications for disk storage that have contributed to the historical
year-to-year increases in disk drive production will continue for the
foreseeable future. The Company also believes demand for disk drives will
continue to be subject, as it has in the past, to rapid short-term changes
resulting from, among other things, changes in disk drive inventory levels,
responses to competitive price changes and unpredicted high or low market
acceptance of new drive models.
As in past years, disk drives continue to be the storage device of choice for
applications requiring low access times and higher capacities because of their
speed and low cost per megabyte of stored data. The cost of storing data on
disk drives continues to decrease primarily due to increasing areal density, the
amount of data which can be stored on magnetic disks. Improvements in areal
density have been attained by lowering the fly height of the read/write head,
using smaller read/write heads with advanced air bearing designs, improving
other components such as motors and media and using new read/write head types
such as those of magneto-resistive (MR) design. The move to MR heads, which
require more electrical leads, and the transition to smaller or pico-sized
heads, which are more sensitive to mechanical variation, may compel drive
manufacturers to use newer suspension technologies, such as the Company's TSA
suspension assemblies. Although customer demand for TSA suspensions is growing,
the Company expects that conventional suspensions will make up a majority of its
shipments for the current fiscal year.
The continual pursuit of increasing areal density may lead to further
value-added features for TSA suspensions which incorporate a second stage
actuator on the suspension to improve head positioning over increasingly tighter
data tracks, or which mount preamplifiers near the head to improve data transfer
signals. These changes require the Company to develop the competencies of an
electromechanical system supplier so that multiple functions may be consolidated
on the suspension assembly.
The introduction of new types or sizes of read/write heads and new disk drive
designs tends to initially decrease customers' yields with the result that the
Company may experience temporary elevations of demand for some types of
suspension assemblies. The advent of new heads and new drive designs may
require rapid development and implementation of new suspension types which
temporarily may reduce the Company's manufacturing yields and efficiencies.
There can be no assurance that such changes will not continue to affect the
Company.
The Company generally experiences fluctuating selling prices due to product
maturity, competitive pricing pressures and new product offerings. While many
of the Company's current products are reaching or are in the mature phase of
their life cycle and thus are experiencing declining prices, its newer products,
such as TSA suspensions, have initially much higher selling prices.
The statements above under the headings "General" and "Market Trends and
Certain Contingencies" about demand for disk drives and suspension
assemblies, including TSA suspensions, manufacturing yields and selling
prices, and the statements above under the headings "General" and "Liquidity
and Capital Resources" about anticipated capital expenditures and capital
resources, and the statements above under the heading "Liquidity and Capital
Resources" about Year 2000 compliance expenditures, are forward-looking
statements based on current expectations. These statements are subject to
risks and uncertainties, including fluctuating order rates and product mix,
slower or faster customer acceptance of the Company's new products,
difficulties in producing its TSA suspensions, difficulties in financing and
expanding capacity, changes in manufacturing efficiencies, difficulties in
implementing Year 2000 compliance and the other risks and uncertainties
discussed above. These factors may cause the Company's actual future results
to differ materially from historical earnings and from the financial
performance of the Company presently anticipated. Additional discussion of
these and other factors may be found in the Company's Registration Statement
on Form S-3, filed on April 15, 1998.
The Company and certain users of the Company's products have from time to time
received, and may in the future receive, communications from third parties
asserting patents against the Company or its customers which may relate to
certain of the Company's manufacturing equipment or products or to products
which include the Company's products as a component. Although the Company to
date has not been a party to any material intellectual property litigation,
certain of its customers have been sued on patents having claims closely related
to products sold by the Company. In the event any third party were to make a
valid infringement claim and a license were not available on terms acceptable to
the Company, the Company's operating results could be adversely affected. The
Company expects that, as the number of patents issued continues to increase, and
as the Company grows, the volume of intellectual property claims could increase.
The Company is party to certain other claims arising in the ordinary course of
business. In the opinion of management, the outcome of such claims will not
materially affect the Company's current or future financial position or results
of operations.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 18, 1998, the Company issued and sold $150,000,000 aggregate
principal amount of its 6% Convertible Subordinated Notes due 2005 (the
"Convertible Notes") to NationsBanc Montgomery Securities LLC and First
Chicago Capital Markets, Inc. (the "Initial Purchasers") in a transaction
exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to Section 4(2) of the Securities
Act. The discount to the Initial Purchasers on the aggregate offering price
of $150,000,000 was 3%, or $4,500,000, resulting in net proceeds to the
Company of $145,500,000 (before deducting offering expenses payable by the
Company). The Initial Purchasers resold the Convertible Notes, in
transactions not requiring registration under the Securities Act, to persons
the Initial Purchasers reasonably believed to be qualified institutional
buyers in reliance on Rule 144A under the Securities Act and to a limited
number of institutional accredited investors within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act. The Convertible Notes
are convertible, at the option of the holder of such Convertible Notes, into
Common Stock of the Company at any time prior to their stated maturity,
unless previously redeemed or repurchased, at an initial conversion price of
$28.35 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1998 Annual Meeting of Shareholders held on January 28th, 1998,
the shareholders approved the following:
(a) the election of directors to serve until their successors are duly
elected. Each nominated director was elected as follows:
Director - Nominee Votes For Votes Withheld
------------------ ---------- --------------
W. Thomas Brunberg 18,699,642 71,085
Archibald Cox, Jr. 18,707,132 63,595
James E. Donaghy 18,705,192 65,535
Harry C. Ervin, Jr. 18,701,528 69,199
Wayne M. Fortun 18,708,332 62,395
Jeffrey W. Green 18,707,132 63,595
Steven E. Landsburg 18,693,888 76,839
Richard N. Rosett 18,701,058 69,669
(b) a proposal to approve the Hutchinson Technology Incorporated
Incentive Bonus Plan. The proposal received 17,958,585 votes for, and
405,791 votes against, approval. There were 129,388 abstentions and
276,963 broker non-votes.
(c) a proposal to ratify the appointment of Arthur Andersen LLP to serve
as independent public accountants of the Company for the fiscal year
ending September 27, 1998. The proposal received 18,662,925 votes for,
and 43,549 votes against, ratification. There were 64,253 abstentions
and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) EXHIBITS.
3.1 Restated Articles of Incorporation of the Company, as amended by Articles
of Amendment dated January 27, 1988 and as amended by Articles of
Amendment dated January 21, 1997 (incorporated by reference to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 29, 1997, File No. 0-14709).
3.2 Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 29, 1996, File No. 0-14709).
4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and Exchange
Commission upon request copies of instruments with respect to long-term
debt.
4.2 Indenture dated as of March 18, 1998 between the Company and U.S. Bank
National Association, as Trustee (incorporated by reference to Exhibit 4.6
to Registration Statement No. 333-50143).
4.3 Purchase Agreement dated March 12, 1998 by and among the Company,
NationsBanc Montgomery Securities LLC and First Chicago Capital Markets,
Inc. (incorporated by reference to Exhibit 4.7 to Registration Statement
No. 333-50143).
4.4 Shelf Registration Agreement dated as of March 18, 1998 by and among the
Company, NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc. (incorporated by reference to Exhibit 4.8 to Registration
Statement No. 333-50143).
10.1 Lease with Right of Refusal between Donald Wendorff and Laura Wendorff,
Lessors, and the Company, Lessee, dated September 6, 1995 (incorporated
by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 24, 1995, File No. 0-14709).
10.2 Office/Warehouse Lease between OPUS Corporation, Lessor, and the Company,
Lessee, dated December 29, 1995 (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 24, 1996, File No. 0-14709), and First Amendment to
Office/Warehouse Lease dated April 30, 1996 (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 23, 1996, File No. 0-14709).
10.3 Building Lease dated April 1988 and Amendment to Building Lease dated
August 29, 1988 (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended September
25, 1988, File No. 0-14709), Second Amendment to Building Lease dated as
of September 18, 1989, relating to the Company's Sioux Falls, South
Dakota facility (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1990, File No. 0-14709), Third Amendment to Building Lease dated
September 19, 1991, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 29, 1991, File No. 0-14709), Fourth Amendment to
Commercial Lease dated September 29, 1992, relating to the Company's
Sioux Falls, South Dakota facility (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended September 27, 1992, File No. 0-14709), Fifth Amendment to
Commercial Lease dated February 11, 1993, relating to the Company's Sioux
Falls, South Dakota facility (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 24, 1995, File No. 0-14709), Sixth Amendment to Commercial
Lease dated February 17, 1995, relating to the Company's Sioux Falls,
South Dakota facility (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended September
24, 1995, File No. 0-14709), and Seventh Amendment to Commercial Lease
dated April 1, 1995, relating to the Company's Sioux Falls, South Dakota
facility (incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 24, 1995,
File No. 0-14709).
10.4 Hutchinson Technology Incorporated 401-K Plan and related 401-K Trust
(incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1990, File
No. 0-14709), Amendment effective April 1, 1995 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 24, 1996, File No. 0-14709), and Amendment
effective April 1, 1996 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 23,
1996, File No. 0-14709).
10.5 Directors' Retirement Plan effective as of January 1, 1992 (incorporated
by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 27, 1992, File No. 0-14709), and
Amendment to Directors' Retirement Plan effective as of November 19, 1997
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 28, 1997, File No.
0-14709).
10.6 Description of Bonus Program for Key Employees of Hutchinson Technology
Incorporated (incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 27, 1992,
File No. 0-14709).
10.7 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended September
25, 1988, File No. 0-14709), Amendment to the 1988 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 26, 1993, File No.
0-14709), and Amendment to the 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 26, 1995, File No. 0-14709).
*10.8 Technology Transfer and Development Agreement, effective as of September
1, 1994, between Hutchinson Technology Incorporated and International
Business Machines Corporation (incorporated by reference to Exhibit 10.10
to the Company's Quarterly Report on Form 10-Q/A for the quarter ended
June 25, 1995, File No. 0-14709), and Amendment dated December 11, 1995
to the Technology Transfer and Development Agreement between International
Business Machines Corporation and Hutchinson Technology Incorporated
executed June 15, 1995 (incorporated by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
24, 1995, File No. 0-14709).
*10.9 Patent License Agreement, effective as of September 1, 1994, between
Hutchinson Technology Incorporated and International Business Machines
Corporation (incorporated by reference to Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended June 25, 1995, File
No. 0-14709).
10.10 Lease Agreement between Meridian Eau Claire LLC and Hutchinson Technology
Incorporated, dated May 1, 1996 (incorporated by reference to Exhibit
10.10 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 23, 1996, File No. 0-14709).
10.11 Master Lease Agreement dated as of December 19, 1996 between General
Electric Capital Corporation, as Lessor ("GE"), and Hutchinson Technology
Incorporated, as Lessee (incorporated by reference to Exhibit 10.11 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 29, 1996, File No. 0-14709), Amendment dated June 30, 1997 to the
Master Lease Agreement between GE and Hutchinson Technology Incorporated
(incorporated by reference to Exhibit 10.11 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 28, 1997, File No. 0-14709),
and letter amendment dated March 5, 1998 to the Master Lease Agreement
between GE and Hutchinson Technology Incorporated.
10.12 Hutchinson Technology Incorporated 1996 Incentive Plan (incorporated by
reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 29, 1996, File No. 0-14709).
10.13 Hutchinson Technology Incorporated Incentive Bonus Plan (incorporated by
reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 28, 1997, File No. 0-14709).
11.1 Statement Regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule.
* Exhibits 10.8 and 10.9 contain portions for which confidential
treatment has been granted by the Securities and Exchange
Commission.
B) REPORTS ON FORM 8-K.
The following Current Reports on Form 8-K were filed by the Company
during the thirteen weeks ended March 29, 1998:
1. Current Report on Form 8-K dated February 27, 1998; and
2. Current Report on Form 8-K dated March 18, 1998.
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.
HUTCHINSON TECHNOLOGY INCORPORATED
Date: May 7, 1998 By /s/ Wayne M. Fortun
---------------------- ---------------------------------------
Wayne M. Fortun
President, Chief Executive Officer and
Chief Operating Officer
Date: May 7, 1998 By /s/ John A. Ingleman
---------------------- ---------------------------------------
John A. Ingleman
Vice President, Chief Financial Officer
and Secretary
INDEX TO EXHIBITS
Exhibit
No. Page
- ----------- -------------
10.11 Letter amendment dated March 5, 1998 to the Master Electronically
Agreement between General Electric Capital Filed
Lease Corporation and Hutchinson Technology
Incorporated
11.1 Statement Regarding Computation of Per Share Electronically
Earnings Filed
27.1 Financial Data Schedule Electronically
Filed