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EX-31 - HUTCHINSON TECHNOLOGY INCex31-2.htm
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EX-31 - HUTCHINSON TECHNOLOGY INCex31-1.htm
EX-24 - HUTCHINSON TECHNOLOGY INCex24-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

(Mark One)  
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended September 27, 2015
  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 1-34838

 

 

 

Hutchinson Technology Incorporated

(Exact name of registrant as specified in its charter)

 

Minnesota   41-0901840
(State or other jurisdiction of   (I.R.S. employer identification no.)
incorporation or organization)    
     
40 West Highland Park Drive NE    
Hutchinson, Minnesota   55350
(Address of principal executive offices)   (Zip code)

 

(320) 587-3797
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share
  Common Share Purchase Rights
   
Name of exchange on which registered: NASDAQ Global Select Market
   
Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. 

Yes ¨ No x

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ¨   No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes x  No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large Accelerated Filer ¨ Accelerated Filer x Non-accelerated Filer ¨ Smaller Reporting Company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No x

 

The aggregate market value of the common stock held by non-affiliates of the registrant as of March 27, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $88,846,000, based on the closing sale price for the registrant’s common stock on that date. For purposes of determining this number, all officers and directors of the registrant are considered to be affiliates of the registrant. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.

 

As of December 9, 2015, the registrant had 33,902,630 shares of common stock issued and outstanding.

 

 

  

Documents Incorporated By Reference

 

Portions of our Proxy Statement for the annual meeting of shareholders to be held in 2016 are incorporated by reference into Part III of this report.

 

Forward-Looking Statements

 

Statements contained in this Annual Report on Form 10-K that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, statements regarding the following: the pending merger transaction, demand for and shipments of the company’s products, the company’s market position, technology, development, program ramps, product mix, pricing, production capabilities and volumes, product costs, inventory levels, the company’s operations in the U.S. and Thailand, site consolidation efforts, capital spending, repayment of debt, additional liquidity, operating expenses, cost reductions, market adoption and our production of optical image stabilization actuators and the company’s business model, operating performance and financial results. Words such as “believe,” “anticipate,” “expect,” “intend,” “estimate,” “approximate,” “plan,” “goal” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these statements are reasonable, forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part I, Item 1A of this report. This list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which the statements are made, and we undertake no obligation to update any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. You should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth herein.

 

i

 

  

TABLE OF CONTENTS

 

PART I   1
Item 1. Business 1
Item 1A. Risk Factors 6
Item 2. Properties 15
Item 3. Legal Proceedings 15
     
PART II   16
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 16
Item 6. Selected Financial Data 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28
Item 9A. Controls and Procedures 28
     
PART III   31
Item 10. Directors, Executive Officers and Corporate Governance 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions, and Director Independence 32
Item 14. Principal Accountant Fees and Services 32
     
PART IV   32
Item 15. Exhibits and Financial Statement Schedules 32
     
FINANCIAL STATEMENTS F-1

 

ii

 

  

PART I

 

HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES

 

Item 1.Business

 

When we refer to “we,” “our,” “us,” or the “company,” we mean Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to “2016” mean our fiscal year ending September 25, 2016, references to “2015” mean our fiscal year ended September 27, 2015, references to “2014” mean our fiscal year ended September 28, 2014, references to “2013” mean our fiscal year ended September 29, 2013, references to “2012” mean our fiscal year ended September 30, 2012, references to “2011” mean our fiscal year ended September 25, 2011, and references to “2010” mean our fiscal year ended September 26, 2010.

 

Overview

 

We are a global supplier of critical precision component technologies. As a key supplier of suspension assemblies for disk drives, we help customers improve overall disk drive performance and meet the demands of an ever-expanding digital universe. Through our new business development initiatives, we focus on leveraging our unique precision manufacturing capabilities in new markets to improve product performance, reduce size, lower cost and reduce time to market.

 

Business

 

We manufacture suspension assemblies for all sizes and types of hard disk drives. Suspension assemblies are critical components of disk drives that hold the read/write heads in position above the spinning magnetic disks. We developed our position as a key supplier of suspension assemblies through an integrated manufacturing approach, research, development and design activities coupled with substantial investments in process capabilities, product features and manufacturing capacity. We manufacture our suspension assemblies with proprietary technology and processes with very low part-to-part variation. These processes require manufacturing to precise specifications that are critical to maintaining the necessary microscopic clearance between the head and disk and the electrical connectivity between the head and the drive circuitry.

 

We design our suspension assemblies with a focus on the increasing performance requirements of new disk drives, principally more complex, increased data density, improved head-to-disk stability during a physical shock event and reduced data access time. Increased capacity, improved reliability and performance, as well as the miniaturization of disk drives, generally require suspension assemblies with lower variability, specialized design, expanded functionality and greater precision. Manufacturing of these small and more complex suspension assemblies requires that we develop new manufacturing process capabilities. We will continue to invest, as needed, to advance suspension assembly technology, enhance our process capabilities and expand our production capacity. During 2015, we shipped 415 million suspension assemblies of all types, supplying all manufacturers of disk drives and head-gimbal assemblers.

 

As the disk drive industry has matured and consolidated, cost competitiveness has become an increasingly important factor to our customers. To meet this need, we have been reshaping the company with the intent of being the industry’s lowest cost producer of suspension assemblies. While we have continued to realize net operating losses, we have lowered our overall cost structure by significantly improving our operating efficiency, transitioning more assembly production to our lower cost Thailand operation and consolidating our U.S. operations. We believe that our vertically integrated model provides the best means to meet customers’ requirements and to be the low cost producer in the industry.

 

Pending Merger

 

As previously announced, on November 1, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Headway Technologies, Inc., a California corporation (“Parent”), and Hydra Merger Sub, Inc., a Minnesota corporation and wholly owned subsidiary of Parent (“Merger Subsidiary”). Pursuant to the Merger Agreement, Merger Subsidiary will merge with and into our company, and our company will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Subsidiary are each beneficially owned by TDK Corporation, a Japanese electronics company (“TDK”). The consummation of the Merger remains subject to customary certain closing conditions, including the approval of our shareholders and completion of regulatory review. Important information regarding certain risks associated with the Merger Agreement and Merger are discussed under the heading “Risk Factors” in Part I, Item 1A of this report.

 

Products

 

We categorize our current products as either suspension assemblies or other revenue, which consists primarily of revenue outside of the disk drive industry for precision component manufacturing, tool design, tool build and metrology, suspension assembly components, reimbursement for disk drive industry-related engineering services and specific disk drive program capacity and biomeasurement products.

 

 1 

 

  

The following table shows, for each of 2015, 2014 and 2013, the relative contribution to net sales, in millions of dollars and percentages, of each product category:

 

   2015   2014   2013 
   Amount   %   Amount   %   Amount   % 
Suspension assemblies  $240.8    95%  $250.8    96%  $240.5    97%
Other revenue   12.0    5    10.3    4    9.1    3 
Total net sales  $252.8    100%  $261.1    100%  $249.6    100%

 

See Note 10 to the consolidated financial statements included in this report for financial information with respect to a distribution of revenue and long-lived assets by geographic area for each of 2015, 2014 and 2013. See also the Selected Financial Data in Item 6 below.

 

Suspension Assemblies. During 2015, we shipped 415 million suspension assemblies, compared to 432 million and 404 million in 2014 and 2013, respectively. We shipped suspension assemblies incorporating our internally produced flexures, as well as suspensions using purchased flexures.

 

We have the capability to produce multiple variations of suspension assemblies. This capability permits us to assist customers’ design efforts and meet the varied and changing requirements of specific customers. We have developed significant proprietary capabilities in the design and production of suspension assemblies for both current and new generations of higher performance disk drives and read/write heads. The continual pursuit of increased data density and lower storage costs is leading to suspension assemblies with flexures that have finer electrical conductors, greater lead counts and increased complexity, and to the adoption of value-added features for suspension assemblies, such as formed and polished headlifts, larger dampers with through-hole features, co-located micro actuators and a variety of limiter configurations. We continue to see an increase in the volume of dual-stage actuated (“DSA”) suspensions, which carry a higher selling price and cost more to manufacture. DSA suspension shipments increased to 40% of our 2015 product mix compared to 26% in 2014.

 

We price our products to be competitive and our selling prices also are affected by changes in overall demand for our products, changes in the specific products our customers buy and a product’s life cycle. Our selling prices are subject to market pressure from our competitors and pricing pressure from our customers. Disk drive manufacturers seek low cost designs and suspension assembly pricing is highly competitive. A typical life cycle for our products begins with higher pricing when products are introduced and decreasing prices as they mature. To offset price decreases during a product’s life, we rely primarily on higher sales volume and improving our manufacturing yields and efficiencies to reduce our cost. If we cannot increase our sales volume or reduce our manufacturing costs as prices decline during our products’ life cycles, our business, financial condition and results of operations could be materially adversely affected.

 

Other Revenue. To derive additional value from the unique expertise and capabilities in precision component manufacturing, tool design, tool build and metrology that we have developed in our suspension manufacturing, we are offering these capabilities to targeted companies in several industries outside of the disk drive industry. In 2015, $10,250,000, or 4% of our revenues were from new business development initiatives, compared to $6,921,000, or 3% in 2014. In the early stages of this effort, the revenues generated have been somewhat unpredictable quarter to quarter. We continue to explore a range of opportunities.

 

We enter into arrangements with customers to be reimbursed for disk drive industry-related engineering services and specific program capacity, which partially offset the costs of our investment. We recognize the associated revenue over the estimated life of the program to which the services and capacity relate. In 2015, $1,527,000 was for reimbursement of these disk drive industry-related engineering services and specific disk drive program capacity, compared to $2,893,000 in 2014.

 

Manufacturing

 

Our manufacturing strategy focuses on reliably producing suspension assemblies in high volume with the consistent precision and features required by our customers. We have developed advanced proprietary process, inspection and measurement systems and controls, and related automated production equipment. We have adopted an integrated manufacturing approach that closely couples design, tooling and manufacturing, which has facilitated the development, implementation and high-volume production of new suspension assembly products. We believe that our integrated approach and dedicated development capability give us a competitive advantage in quickly supplying suspension assembly prototypes, ramping volume manufacturing and responding to short-term shifts in market demand.

 

New manufacturing processes for advanced suspension assembly features and suspension assembly types initially have lower manufacturing yields than those for more mature products and processes. Manufacturing yields generally improve as the process and product mature and production volumes increase. Manufacturing yields also vary depending on the complexity and uniqueness of products. Small variations in manufacturing yields can have a significant negative impact on gross profits.

 

Our products require several manufacturing processes, each dependent on different technical disciplines, to ensure the high degree of precision and the process control necessary to meet strict customer requirements. The manufacturing processes we employ include photoetching, stamping, chemical deburring, automated optical inspection, image processing, plasma etching, electrolytic and electroless plating, precision forming, laser ablation/polishing and welding, metal deposition, ultrasonic cleaning, precision adhesive, assembly technology, and automated die bonding.

 

 2 

 

  

Our critical raw material needs are available through multiple sources of supply, with the following exceptions. Certain types of stainless steel, polyimide, adhesives, purchased flexures and photoresists are currently single-sourced because the raw materials provided by these sources meet our strict specifications. To protect against the adverse effect of a short-term supply disruption, we maintain several weeks’ supply of these materials and have multi-site manufacturing available and other sourcing options available. Similarly, we obtain certain customized equipment and related repair parts from single sources because of the specialization of the equipment and the quality of these supply sources. We continue to look for options that may reduce our risk of supply disruption.

 

Our production processes require the storage, use and disposal of a variety of chemicals that are considered hazardous under applicable federal and state laws. Accordingly, we are subject to a variety of regulatory requirements for the handling of such materials. We do not anticipate any material effect on our capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters.

 

Our biomeasurement products are classified as medical devices and therefore are subject to governmental regulations.

 

Research and Development

 

The disk drive industry is subject to rapid technological change, and our ability to remain competitive depends on, among other things, our ability to anticipate and respond to changes and to continue our close working relationships with the engineering staffs of our customers. Our research and development efforts are directed at continuing to develop suspension assembly capabilities and features that enable our products to meet performance criteria desired by our customers for specific drive applications. Measurement, process development and process control are critical to improving capability related to static attitude, gram force and resonance, all performance characteristics important to suspension assemblies.

 

The development of more complex next-generation read/write heads and continuing improvement in data density necessitate the further miniaturization of suspension component features, including finer conductor lines and spaces on our TSA+ flexures and further improvement of suspension performance through DSA or other means. We have and will continue to implement alternative technologies, as needed, which we believe will be required for manufacturing future generations of our products.

 

We have devoted and expect to continue to devote substantial resources to research and development efforts. Our research and development expenses were $22,100,000, $17,316,000 and $14,621,000, in 2015, 2014 and 2013, respectively. The increases from 2013 were primarily related to higher expenses to support our new business development activity related to the development of our SMA OIS actuator for smartphone cameras.

 

As part of our new business development efforts, we have been developing an optical image stabilization (“OIS”) actuator for smartphone cameras. Our OIS actuator, based on shape memory alloy (“SMA”) technology, improves picture and video quality, particularly in low-light conditions, and offers performance and size advantages over current OIS solutions. We are bringing this product to market with Cambridge Mechatronics Ltd., a high technology design and engineering company based in Cambridge, England. Late in 2014, our first SMA OIS production line was installed. The first smartphone incorporating our SMA OIS actuator was introduced in January 2015 for the Taiwan market. It was a low volume offering which allowed us to promote our SMA OIS product and its performance and reliability. On July 30, 2015, we introduced a new SMA OIS actuator that is 70% thinner than our original product and that significantly lowers our capital investment and production costs. We believe this new design has fundamental advantages that bring superior value and capability to the marketplace and that the product is well aligned with the needs of camera module and smartphone manufacturers. During 2014 and 2015, product-related revenue was not material to our consolidated statement of operations and all of the costs of our SMA OIS initiative were classified as research and development expenses.

 

While we are in the early stages with this product and volumes initially will be low, the smartphone camera market represents a significant growth opportunity for us. More companies are adopting OIS as a feature of their smartphone cameras. Apple and Samsung each recently introduced a high-end smartphone that uses OIS technology to improve camera performance. These phones use an OIS solution that is different from our SMA OIS but we believe their use of any OIS technology is strong evidence that adoption and growth of OIS is very real. We believe there is growing interest in our solution among smartphone and camera module makers. We are focused on introducing our new offering to the market, earning positions on new smartphone programs, and optimizing our manufacturing processes for the new design.

 

Customers and Marketing

 

Our disk drive products are sold principally through our account management team operating primarily from our headquarters in Hutchinson, Minnesota. Through subsidiaries, we have managers, technical representatives and quality coordinators in Asia. We sell our suspension assemblies to original equipment manufacturers for use in their products and to a subassembler who sells to original equipment manufacturers. Our account management team is organized by individual customer, and contacts are typically initiated with both the customer’s purchasing agents and its engineers. Our engineers and account management team together actively participate in the selling process and in maintaining customer relationships.

 

 3 

 

  

We maintain “vendor managed inventory,” or VMI, facilities near the major production centers of certain individual customers to assure that we meet the customers’ inventory requirements. Certain agreements with our customers provide that we maintain minimum finished goods inventory levels. A significant majority of our suspension assembly shipments are distributed to our customers in Thailand, Hong Kong and the Philippines. We also utilize our Thailand manufacturing facility to provide product logistics support, technical support and measurement services.

 

We are a supplier to all manufacturers of disk drives and head-gimbal assemblers. The following table shows our three largest disk drive customers for 2015, 2014 and 2013 as a percentage of net sales.

 

Customer  2015   2014   2013 
Western Digital Corporation   52%   60%   52%
Seagate Technology, LLC   27%   18%   14%
SAE Magnetics, Ltd./TDK Corporation   16%   15%   24%

 

Sales to our three largest customers constituted 95%, 93% and 90% of net sales for 2015, 2014 and 2013, respectively. Significant portions of our revenue may be indirectly attributable to large manufacturers of disk drives, such as Western Digital, which may purchase read/write head assemblies that utilize our suspension assemblies from SAE Magnetics, Ltd./TDK Corporation (“SAE Magnetics”).

 

The disk drive industry has consolidated significantly in recent years. In December 2011, Seagate Technology, LLC acquired the hard disk drive business of Samsung Electronics Co., Ltd. In March 2012, Western Digital Corporation completed its acquisition of Hitachi Global Storage Technologies (HGST). We expect to continue to depend upon a limited number of customers for our disk drive industry sales, given the relatively small number of disk drive manufacturers and head-gimbal assemblers. Our results of operations could be adversely affected by reduced demand from any disk drive industry customer.

 

Backlog

 

We generally make our sales pursuant to purchase orders rather than long-term contracts. Our backlog of purchase orders was $20,537,000 at September 27, 2015, as compared to $32,067,000 at September 28, 2014. The September 27, 2015 backlog was lower due to one customer not providing its purchase order requirements for the first quarter of 2016 until after September 27, 2015. Our purchase orders may be changed or cancelled by customers on short notice. In addition, we believe that it is a common practice for disk drive manufacturers to place orders in excess of their needs during growth periods. Backlog should not be considered indicative of sales for any future period.

 

Seasonality

 

Historically, the disk drive industry has experienced seasonal demand, with higher levels of demand in the second half of the calendar year driven by consumer spending. Seasonal demand for our suspension assemblies generally tracks that of the disk drive industry and also may be delayed or accelerated by existing inventory levels in the supply chain.

 

Competition

 

We believe that the principal factors of competition in the suspension assembly market include price, reliability of volume supply, time to market, product performance, quality, and customer service. Disk drive manufacturers seek low cost designs and as the disk drive industry has matured and consolidated, cost competitiveness, and thus suspension assembly pricing, has become an increasingly important factor to our customers. Our customers’ operating results also depend on being the first-to-market and first-to-volume with new products at a low cost. Our development efforts typically have enabled us to shorten development cycles and achieve reliable high-volume output per manufacturing unit quickly.

 

Our principal competitors are Nihon Hatsujo Kabusikigaisha (“NHK”), Magnecomp Precision Technology Public Company Limited (“MPT”), a subsidiary of TDK Corporation, and NAT Peripheral (H.K.) Co., Ltd., (a joint venture of NHK and TDK Corporation). The NAT Peripheral joint venture has provided our customer, SAE Magnetics, the capability to produce suspension assemblies since calendar 2005. We believe that consolidation in the disk drive industry, including the affiliation between our competitor MPT and our customer SAE Magnetics, has resulted in shifts in certain industry supply chain alignments that have negatively impacted our competitive position since 2008. Our principal competitors in producing suspension flexures are Nitto Denko Corporation and Dai Nippon Corporation. Although we cannot be sure that the number of competitors will not increase in the future or that users of suspension assemblies will not develop internal capabilities to manufacture suspension assemblies or suspension assembly components, we believe that the number of entities that have the technical capability and capacity for producing precision suspension assemblies or components in large volumes will remain small.

 

 4 

 

  

We continually monitor technological developments in and potential threats to the disk drive storage market and we believe disk drives will remain the primary data storage technology for the foreseeable future. However, other types of data storage technology, such as solid state storage or flash (semiconductor) memory, have become competitive with certain disk drive applications, and therefore negatively affect the demand for our products. As an example, emerging applications requiring digital storage, particularly consumer electronics products that require lower storage capacity, are using flash memory, which has and may continue to limit growth opportunities for disk drive-based data storage.

 

Foreign Sales

 

Sales to foreign-based enterprises totaled $39,505,000, $49,648,000 and $79,691,000 for 2015, 2014 and 2013, respectively. Sales to foreign subsidiaries of United States corporations totaled $201,508,000, $203,895,000 and $162,120,000 for 2015, 2014 and 2013, respectively. The majority of these sales were to the Pacific Rim region.

 

In addition, we have sales to United States corporations that use our products in their offshore manufacturing sites. See Note 10 to the consolidated financial statements for additional information about geographic areas.

 

Intellectual Property

 

We regard much of the equipment, processes, information and knowledge that we generate and use in the manufacture of our products as proprietary and protectable under applicable trade secret, copyright, trademark and unfair competition laws. In addition, if we develop manufacturing equipment, products and processes for products where patents might enhance our position, we have pursued, and we will continue to pursue, patents in the United States and in other countries covering our products. We also have obtained certain trademarks for our products to distinguish them from our competitors’ products.

 

As of September 27, 2015, we held 219 United States patents and 16 foreign patents, and we had 26 patent applications pending in the United States and 30 patent applications pending in other countries. Internally, we protect intellectual property and trade secrets through physical security measures at our facilities, as well as through non-disclosure and non-competition agreements with all employees and confidentiality policies and non-disclosure agreements with consultants, strategic suppliers and customers.

 

We have entered into licensing and cross-licensing agreements relating to certain of our patents and patent applications allowing some of our competitors to produce products similar to ours in return for royalty payments and/or cross-license rights. The agreements include cross-licenses to certain existing and future suspension assembly technology. These agreements are renegotiated as needed.

 

From time to time, third parties have asserted patents against us or our customers that may relate to certain of our manufacturing equipment or products or to products that include our products as a component. Some of our competitors have experience with, and have developed patent portfolios relating to, technology associated with our TSA+ product. We also have litigated claims against a competitive supplier in the disk drive industry alleging infringement of our patents. In addition, some of our customers have been sued on patents having claims closely related to products we sell. As the number of patents issued continues to increase, the volume of intellectual property claims may increase.

 

Employees

 

As of September 27, 2015, we had 2,412 employees located primarily in the United States and Thailand.

 

Available Information

 

Our website is: http://www.htch.com. We make available, free of charge, through our website materials we file with or furnish to the SEC pursuant to Section 13(a) of the Exchange Act, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports. These materials are posted on our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC.

 

Members of the public may read and copy any materials we file with the SEC at its Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information about us and other issuers that file electronically at http://www.sec.gov.

 

 5 

 

  

Item 1A.Risk Factors

 

If the conditions set forth in the Merger Agreement are not satisfied or otherwise waived, or if the Merger Agreement is terminated in accordance with its terms, then the Merger will not occur.

 

The Merger Agreement provides that the consummation of the Merger is subject to a number of conditions. The obligation of Merger Subsidiary to consummate the Merger is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (1) determination of the amount of Additional Consideration; (2) approval, by the requisite affirmative vote of our shareholders of (a) a proposal to approve and adopt the Merger Agreement and (b) a proposal to increase the conversion rate of our 8.50% Convertible Senior Notes due 2019 (the “8.50% New Convertible Notes”) in connection with the Merger; (3) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); and (4) the absence of any law, order or injunction that prevents or prohibits the consummation of the Merger.

 

Each party’s obligation to consummate the Merger is subject to satisfaction or waiver of certain other conditions, including (1) the accuracy of the other party’s representations and warranties (subject to certain qualifications), and (2) the other party’s material compliance with its covenants and agreements contained in the Merger Agreement.

 

Parent’s and Merger Subsidiary’s obligations to consummate the Merger also are subject to satisfaction or waiver of additional conditions, including (1) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement); (2) if review by the Committee on Foreign Investment in the United States or the U.S. Department of the State’s Directorate of Defense Trade Controls (the “DDTC”) shall have concluded, the President of the United States of America or the DDTC, as applicable, shall have not taken any action to block or prevent consummation of the Merger or imposed any requirements or conditions that have had or would reasonably be expected to have a Company Material Adverse Effect; and (3) delivery by the company of customary payoff letters from holders of our outstanding indebtedness (other than capitalized lease obligations, the 8.50% New Convertible Notes, and our outstanding 8.50% Senior Secured Second Lien Notes due 2017 and 10.875% Senior Secured Second Lien Notes due 2017).

 

The Merger Agreement also contains certain termination rights for both the company and Parent, including, among others, a mutual termination right and termination rights of either us or Parent, if the transactions contemplated by the Merger Agreement are not consummated on or before November 1, 2016, if the transactions contemplated by the Merger Agreement are legally prohibited, or if our shareholders fail to approve the Merger Agreement and the increase in the conversion rate of the 8.50% New Convertible Notes.

 

The company has the right to terminate the Merger Agreement in order to accept a superior proposal subject to the other applicable terms of the Merger Agreement.

 

If any of the conditions to the consummation of the Merger are not fulfilled or waived of if the Merger Agreement is terminated in accordance with its terms, then the Merger may not occur.

 

Termination of the Merger Agreement could negatively impact us.

 

If the Merger Agreement is terminated, our business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of our management on the Merger. In addition, if the Merger Agreement is terminated, the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. If the Merger Agreement is terminated and our Board seeks another merger or business combination, shareholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration offered by the Merger Agreement.

 

We have agreed to reimburse Parent for up to $1.4 million of its reasonable out-of-pocket expenses in connection with the Merger Agreement and the transactions contemplated thereby if the company terminates the Merger Agreement because shareholders fail to approve the Merger Agreement and the increase in the conversion rate of the 8.50% New Convertible Notes. Any such reimbursed expenses would be deducted from any termination fee that may subsequently be paid by the company to Parent. Upon termination of the Merger Agreement under specified circumstances, including in the event of a termination by the company in order to accept a superior proposal, we have agreed to pay Parent a termination fee of $4.2 million.

 

We are subject to business uncertainties and contractual restrictions while the Merger remains pending.

 

Uncertainty about the effect of the Merger on employees, customers and suppliers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with us to seek to change their existing business relationships with us. Retention of certain employees may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to the uncertainty or a desire not to remain with the business, our business could be negatively impacted. In addition, the Merger Agreement restricts us from taking certain actions without the consent of Parent until the Merger occurs. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Merger.

 

 6 

 

  

We may not be able to generate enough cash or secure enough capital to service our existing debt obligations or execute our current and future business plans.

 

Since 2009, we have experienced significant reductions in demand for and shipments of our suspension assemblies due primarily to our losses of market share resulting from supply chain realignments by our customers. Our operating results and cash flow from operations have been adversely affected by decreases in our demand. Our manufacturing capacity may continue to be underutilized in the future, which will negatively impact our operating results. Despite our workforce reductions and restructuring actions in recent years, we have continued to incur operating losses. Our unfavorable operating results have resulted in reduced cash flow from operations. Cash flow provided by operations was $18,765,000 for 2015, and cash flow used by operations was $1,474,000 for 2014. We will continue to have significant liquidity needs. Our outstanding $63,931,000 aggregate principal amount of 8.50% Senior Secured Second Lien Notes due 2017 (the “8.50% Secured Notes”) mature on January 15, 2017. Our outstanding $12,200,000 aggregate principal amount of 10.875% Senior Secured Second Lien Notes due 2017 (the “10.875% Notes”) also mature on January 15, 2017. Our outstanding $37,500,000 aggregate principal amount of 8.50% New Convertible Notes mature on October 31, 2019. Our term loan from PNC Bank, National Association (“PNC Bank”) is payable in quarterly installments of $750,000 on the first day of each calendar quarter. As of September 27, 2015, we had $13,500,000 outstanding.

 

A further deterioration in our business or disruption in the global credit and financial markets and related adverse economic conditions would impact our ability to generate cash flow from operations and our ability to obtain new financing. We may not be able to obtain new financing on terms acceptable to us, including covenants that we will be able to comply with in the short-term. If cash flow from operations together with cash and cash equivalents are not sufficient to fund operations, capital expenditures and debt obligations, and we are unable to secure alternative sources of financing, our results of operations, financial condition and liquidity would be materially adversely affected.

 

We will need a significant amount of funds over the next several years to achieve our long-term growth objectives and to meet our debt obligations.

 

Our business will require significant funds over the next several years. We would likely use these funds for capital expenditures, research and development, debt service and working capital. Our business is capital intensive. Our total capital expenditures were $17,940,000 in 2015, $17,283,000 in 2014 and $18,880,000 in 2013. In 2016, our capital expenditures are expected to be $10,000,000 to $15,000,000. In addition, our total research and development expenses were $22,100,000 or 9% of net sales, in 2015.

 

We have a revolving credit and security agreement with PNC Bank, National Association (“PNC Bank”). Our credit agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes each contain a number of financial covenants and other customary provisions. Our 8.50% Secured Notes and our 10.875% Notes mature in January 2017, and our 8.50% New Convertible Notes mature on October 31, 2019. Our term loan from PNC Bank is payable in quarterly installments of $750,000. We may pursue additional debt or equity financing or other forms of financing to supplement our current capital resources, if needed, in 2016 and beyond. Our ability to obtain additional financing will depend upon a number of factors, including our future performance and financial results and general economic and capital market conditions. We may not be able to maintain adequate capital or raise additional capital on reasonable terms or at all, if needed.

 

The following factors could affect our ability to obtain additional financing on favorable terms, or at all:

 

·our results of operations;
·general economic and capital market conditions and conditions in the disk drive industry;
·our financial condition;
·our ratio of debt to equity;
·the perception in the capital markets of our business;
·our business prospects;
·changes in interest rates; and
·our existing secured debt.

 

Our ability to execute our long-term strategy may depend on our ability to obtain additional long-term debt and equity capital. We cannot determine the precise amount and timing of our funding needs at this time. We may be unable to obtain additional financing on terms acceptable to us or at all. We also may need to refinance our indebtedness on a required repurchase date or at maturity. We may not be able to obtain additional capital on favorable terms to refinance our indebtedness or provide us with sufficient cash to serve our ongoing needs. An inability to refinance our indebtedness, if needed, could materially adversely affect our results of operations, financial condition and liquidity.

 

 7 

 

  

The terms of our credit agreement with PNC Bank and the indentures governing the 8.50% Secured Notes and the 10.875% Notes may prevent us from capitalizing on business opportunities.

 

The revolving credit and security agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes impose significant operating and financial restrictions on us. As a result of these covenants and restrictions, we will be limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The agreements also require us to meet certain financial ratios and financial conditions tests. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

 

Our failure to meet the financial ratios and financial condition tests described above or to comply with the restrictive covenants described above, as well as the terms of any future indebtedness we may incur from time to time, could result in an event of default, which, if not cured or waived, could require that we repay any borrowings before their due date. If we are forced to refinance any borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.

 

Future disruptions in the global credit and financial markets could limit our access to credit, which could negatively impact our business.

 

Domestic and foreign credit and financial markets have experienced extreme disruption, including volatility in security prices, diminished liquidity and credit availability, declining valuations of certain investments and significant changes in the capital and organizational structures of certain financial institutions. We are unable to predict the likely timing, duration and severity of disruptions in the credit and financial markets or of any related adverse economic conditions. Given these conditions, we may not be able to secure additional financing for future activities on satisfactory terms, or at all, which could materially adversely affect our results of operations, financial condition and liquidity.

 

Borrowings under our revolving credit and security agreement with PNC Bank and our 8.50% Secured Notes and our 10.875% Notes are secured by substantially all of the personal and real property of Hutchinson Technology Incorporated. In addition, our credit agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes each contain a number of financial covenants and other customary provisions. Deterioration in our business or disruptions in the global credit and financial markets could result in reductions in our access to credit, which could materially adversely affect our results of operations, financial condition and liquidity.

 

Future disruptions in the global credit and financial markets also could adversely affect our customers and suppliers. Our customers and their customers may experience difficulty obtaining financing for significant purchases and operations. A resulting decrease in orders could decrease the overall demand for our products. It is also possible that our customers could demand adjustments in pricing terms or postpone or cancel existing orders as a result of limited credit availability. Furthermore, we maintain significant balances due from customers and limitations on the credit available to our customers could impair our ability to collect those receivables on a timely basis. If we were not able to enter into new independent bill of exchange discounting transactions, our working capital would be negatively impacted. If our suppliers, of either raw materials or equipment, experience similar credit restrictions, they may become unable to meet our ongoing supply demands or tighten the terms of our purchases. Disruptions in the global credit markets that adversely affect our customers and suppliers could materially adversely affect our results of operations, financial condition and liquidity.

 

A slowdown in demand for computer systems and consumer electronics and enterprise storage products may cause a decline in demand for suspension assemblies.

 

Our suspension assemblies are components in computers and a variety of consumer electronics and enterprise storage products. The demand for these products can be volatile. In a weak economy, consumer spending tends to decline and retail demand for computer systems, other consumer electronics and enterprise storage products tends to decrease, as does business demand for computer systems. Demand for suspension assemblies therefore may be adversely impacted as a result of a weaker economy. During the second half of 2012, overall disk drive production capacity recovered from the flooding in Thailand; however, hard disk drive demand weakened in the world market and has remained relatively flat. Previously, demand for suspension assemblies weakened significantly in 2009, which resulted in shipments of our suspension assemblies declining 30% from 2008. In addition, in the past, unexpected slowdowns in demand for computer systems, other consumer electronics and enterprise storage products have caused sharp declines in demand for suspension assemblies, resulting in periods during which the supply of suspension assemblies exceeded demand. If in the future an unexpected slowdown in demand for suspension assemblies occurs or if demand decreases as a result of a weakening economy, our results of operations will be materially adversely affected as a result of lower revenue and gross profits.

 

 8 

 

  

Our sales are concentrated in a small customer base.

 

Although we supply all manufacturers of disk drives and head-gimbal assemblers, sales to our four largest customers constituted 95%, 97% and 98% of net sales for 2015, 2014 and 2013, respectively. The failure by any one of our largest customers to pay its account balance with us could have a material adverse effect on our results of operations. We currently enter into bill of exchange discounting transactions that enable us to reduce our balance of outstanding receivables. If we were not able to enter into new independent bill of exchange discounting transactions, our working capital would be negatively impacted.

 

Over the years, the disk drive industry has experienced numerous consolidations. TDK Corporation controls MPT, a competitive suspension assembly supplier, and our customer SAE Magnetics (which is owned by TDK Corporation), is affiliated with a competitive supplier of suspension assemblies. In December 2011, Seagate Technology, LLC acquired the hard disk drive business of Samsung Electronics Co., Ltd. In March 2012, Western Digital Corporation completed its acquisition of HGST. We believe that consolidation in the disk drive industry has negatively impacted our competitive position and future consolidation could have a similar result.

 

The following factors could adversely impact our market share:

 

·change in supply chain alignment by a customer due to disk drive industry consolidation, strategic sourcing decisions or otherwise;
·loss of one or more of our disk drive industry customers;
·development by any one customer of the capability to produce suspension assemblies in high volume for its own products;
·loss of market share by one of our major customers; and
·change in the type of suspension assembly or flexures used in suspension assemblies, such as our TSA+ flexure, used by a customer.

 

Any reduction in our market share could have a material adverse effect on our results of operations.

 

We may not be able to manufacture our products efficiently due to changes in product mix or technology, or other unforeseen events.

 

We manufacture a wide variety of suspension assemblies with different selling prices and manufacturing costs. Disk drive makers continue to expand their product lines to include drives offering performance characteristics optimized for specific applications, which has resulted in a proliferation of individual disk drive programs. We cannot produce products for certain low-volume disk drive programs as efficiently as we produce products for high-volume programs. Our product mix varies as market demand changes. Any substantial variation in product mix can lead to changes in utilization of our equipment and tooling, inventory obsolescence and overstaffing in certain areas, all of which could adversely impact our business, financial condition and results of operations.

 

Manufacturing yields, efficiencies and processing operations vary from product to product. Newer products often require new or additional manufacturing process steps and typically have lower initial manufacturing yields and efficiencies as we ramp up manufacturing. As a result, new products are frequently more expensive to produce and may not be profitable. We used new manufacturing processes to produce TSA+ suspension assemblies, which caused us to experience inefficiencies and lower yields in 2010 and 2011. We have experienced missed shipments and increased sales returns in the past as we ramp up manufacturing of new products, or as new features for our products are introduced, or as new manufacturing processes are implemented. In 2010, a defect in some of our TSA+ product resulted in decreased shipments. The measures we took to isolate and contain the product defect also reduced our yield, limited our output and increased our costs. We may in the future experience additional process issues that impact our ability to meet customer demand and cause us to incur higher costs. We also may in the future experience missed shipments or increased sales returns. In addition, we may be required to reimburse customers for product costs relating to the incorporation of defective suspension assemblies into our customers’ products. We may not attain our output goals and be profitable with regard to any of our suspension assembly products.

 

We may need to transfer production of certain suspension assemblies from one manufacturing site to another. In 2011, we started high-volume assembly operations at our Thailand plant and we expect to continue to transfer assembly manufacturing to that location. In the past, transfers between our manufacturing sites have lowered initial yields and/or manufacturing efficiencies. This results in higher manufacturing costs. Our manufacturing plants located in Minnesota, Wisconsin and Thailand can experience severe weather. Severe weather has, at times, resulted in lower production and decreased our shipments.

 

Our ability to conduct business could be impaired if our workforce were to be unionized and employees refused to work or if a significant number of our specialized employees were to leave and we could not replace them with comparable personnel. The locations of our plants and the broad span and technological complexity of our products and processes may limit the number of satisfactory engineering and other candidates for key positions. Our business may be adversely affected if we need to adjust the size of our workforce due to fluctuating demand. We significantly reduced our workforce in 2008, 2009 and 2011 and further restructured our business in each of the past four years. Past or future workforce reductions may impact our ability to recruit and retain employees, and we are uncertain if we will be able to adequately staff our operations if we need to increase our manufacturing capacity in the future.

 

 9 

 

 

Almost all of our sales depend on the disk drive industry, which is cyclical, subject to ongoing technological innovation and subject to intense price competition.

 

Sales of suspension assemblies and suspension assembly components historically have accounted for 95% or more of our net sales. The disk drive industry is intensely competitive and technology changes rapidly, such as during past industry transitions to smaller disks or higher density read/write heads. The industry’s demand for disk drive components also fluctuates. The disk drive industry experiences periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction. These cycles may affect suppliers to this industry because we believe that it is a common practice for disk drive manufacturers to place orders for disk drive components in excess of their needs during growth periods, and sharply reduce orders for these components during periods of contraction. In addition, there is continuous downward price pressure on disk drive manufacturers and their suppliers. If price reductions exceed our ability to reduce costs, our operating results could be negatively affected.

 

Industry transitions in head technology and data density improvements impact demand for suspension assemblies. During past industry transitions, production yields of head and disk drive manufacturers initially were reduced. Because a significant portion of head yield reduction occurs after the head is bonded onto the suspension assembly, low yields at our customers often result in increased demand for suspension assemblies. When our customers improve their production yields, overall demand for our products may be negatively impacted. Our results of operations could be materially adversely affected if a reduction in the industry’s component demand continues long-term or a future significant slowdown in the industry occurs.

 

Demand for our suspension assemblies will decline if we are unable to qualify our products in disk drive programs.

 

We must qualify our products with our customers. The qualification process for disk drive products can be complex and difficult. We cannot be sure that our suspension assemblies will continue to be selected for design into our customers’ products. If we are unable to obtain additional customer qualifications, or if we cannot qualify our products for high-volume production quantities, or at all, our business, financial condition and results of operations could be materially adversely affected.

 

We may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our operating results.

 

We increase our production capacity and the overhead that supports production based on anticipated market demand. Market demand, however, has not always developed as expected or remained at a consistent level. The underutilization that can result decreases our profitability. For example, in 2010 and 2011 demand for our suspension assemblies declined, primarily due to market share losses. In 2012, the flooding in Thailand temporarily constrained the overall production capacity of the hard disk drive supply chain, which also resulted in a material decrease in our suspension assembly demand. This resulted in underutilization of our manufacturing capacity. As a result, our profitability also was below our expectations.

 

A deterioration of our business could result in further underutilization of our manufacturing capacity and we may need to impair certain assets in the future. In 2009, we recorded non-cash impairment charges of $71,809,000 for the impairment of long-lived assets related to manufacturing equipment in our assembly and component operations. This impairment included the closure of our Sioux Falls, South Dakota facility at the end of June 2009. In 2012, we recorded flood-related costs of $20,360,000 for impairment of damaged facility equipment and fixtures, manufacturing equipment and tooling, inventory write-downs, and Thailand operating and site restoration costs. In 2014, we recorded non-cash impairment charges of $4,470,000 in connection with selling our Eau Claire, Wisconsin assembly building and again in 2015 when we recorded non-cash impairment charges of $1,620,000 related to our Development Center building in Hutchinson, Minnesota that is currently offered for sale.

 

The following factors complicate accurate capacity planning for market demand:

 

·changes in the demand for and mix of specific products our customers buy and the features they require;
·our ability to add and train staff to operate our production equipment in advance of demand;
·the market’s pace of technological change;
·variability in our manufacturing yields and productivity; and
·long lead times for most of our plant and equipment expenditures, requiring major financial commitments well in advance of actual production requirements.

 

Our inability to plan our capacity requirements accurately and efficiently utilize our production capacity, or our failure to put in place the technologies and capacity necessary to meet market demand, could adversely affect our business, financial condition and results of operations.

 

 10 

 

  

If our customers improve their manufacturing yields, demand for our suspension assemblies may decrease.

 

In the past, we believe that improvements in our sales and unit volumes have occasionally been due in part to manufacturing difficulties experienced by our customers as they transitioned to higher density read/write heads. These customers experienced higher levels of defective read/write heads, which they were unable to detect until after they had attached the read/write heads to our suspension assemblies and our customers required more suspension assemblies during those periods. If our customers’ production yields continue to improve in the future, or when they separate and re-use suspension assemblies or test the read/write head before attaching suspension assemblies, overall suspension assembly shipments could decline and our operating results could be negatively affected.

 

Our investment in developing new process capabilities could result in significant increases in our operating expenses and may result in a product that is not acceptable to our customers.

 

Rapid technological change in the disk drive industry, as well as the expanding use of disk drives in a growing range of consumer electronics and enterprise storage applications, has led to numerous suspension assembly design changes and tighter performance specifications. To maintain our position in the disk drive industry, we need to develop new process capabilities to achieve the ever-increasing performance requirements of our customers. Also, if processes change, we may need to replace, modify or design, build and install equipment. These changes may require additional capital expenditures and increased development and support expenses, which may adversely impact our operating results.

 

We expect to continue to have significant research and development expenses for the following new products:

 

·suspension assemblies that incorporate flexures produced using additive processing;
·suspension assemblies with tighter performance specifications than our customers currently require;
·suspension assemblies that require additional or smaller electrical conductors;
·suspension assemblies that incorporate new materials, such as thinner laminates and piezoelectric actuators used in DSA suspension assemblies, which are more difficult to handle in the manufacturing process;
·suspension assemblies for use with more complex read/write heads; and
·SMA OIS actuators for use in the smartphone camera market.

 

We have invested, and continue to invest, a substantial amount of engineering and manufacturing resources to develop process capabilities, as needed, to produce suspension assembly flexures and DSA suspension assemblies that meet the ever-increasing performance requirements of our customers. If high-volume manufacturing of our TSA+ suspension assemblies that are produced using additive processing capabilities cannot be produced profitably in the quantities and to the specifications required by our customers, we may need to purchase increased quantities of additive flexures. We may not be able to purchase the necessary quantity of such components on terms acceptable to us or at all.

 

The introduction of new process capabilities for our products also increases the likelihood of unexpected quality concerns, which may negatively impact our ability to bring products to market on time and at acceptable costs. When we started high-volume manufacturing of TSA+ suspension assemblies, we experienced higher cost due to yield loss, quality problems, startup and production inefficiencies and equipment problems. These TSA+ costs added a cost burden of approximately $30,400,000 in 2010, $32,000,000 in 2009 and $37,600,000 in 2008.

 

Our operating results are subject to fluctuations.

 

Our past operating results, and our gross profits, have fluctuated from period to period. We expect our future operating results and gross profits will continue to fluctuate from period to period. The following factors may cause these fluctuations:

 

·changes in overall demand for our products;
·changes in our manufacturing process, or problems related to our manufacturing process;
·changes in our manufacturing yields and related scrap recovery;
·increased costs when we start producing new products and features, and ramping up high-volume production;
·changes in our production efficiency;
·changes in utilization of existing or newly added production capacity;
·long disruptions in operations at any of our plants or our customers’ plants for any reason;
·changes in our selling prices;
·changes in the specific products our customers buy and features they require;
·changes in our infrastructure costs and expected production and shipping costs, and how we control them;
 ·changes in the cost of, or limits on, available materials and labor; and

·currency exchange rate fluctuations related to the Thai baht.

 

 11 

 

   

A deterioration of our business could result in further underutilization of our manufacturing capacity and we may need to impair certain assets in the future. In 2009, we recorded non-cash impairment charges of $71,809,000 for the impairment of long-lived assets related to manufacturing equipment in our assembly and component operations. If customer demand for suspension assemblies weakens, or if one or more customers reduce, delay or cancel orders, our business, financial condition and results of operations could be materially adversely affected. Furthermore, we may incur restructuring and asset impairment charges that would reduce our earnings, as we did in 2012, 2014 and 2015.

 

We typically allow customers to change or cancel orders on short notice. We plan our production and inventory based primarily on forecasts of customer demand. Our customers often prefer a dual source supply and, therefore, may allocate their demand among suppliers. Both customer demand and the resulting forecasts often fluctuate substantially. These factors, among others, create an environment where scheduled production and capacity utilization can vary, leading to variability in gross profits and difficulty in estimating our position in the marketplace.

 

Our selling prices are subject to market pressure from our competitors and pricing pressure from our customers. Disk drive manufacturers seek low cost designs and suspension assembly pricing is highly competitive. Our selling prices also are affected by changes in overall demand for our products, changes in the specific products our customers buy and a product’s life cycle. A typical life cycle for our products begins with higher pricing when products are introduced and decreasing prices as they mature. To offset price decreases during a product’s life, we rely primarily on higher sales volume and improving our manufacturing yields and efficiencies to reduce our cost. If we cannot reduce our manufacturing costs as prices decline during our products’ life cycles, our business, financial condition and results of operations could be materially adversely affected.

 

We may not be able to differentiate our product features or process capabilities in the future.

 

We historically held a market leadership position through innovation and technological advancement that has enabled our customers to deploy higher disk drive capacities at lower total costs. However, with the slowing of the areal density growth rate, the amount of technical innovation required to produce suspension assemblies also has decreased which has enabled our competitors to gain market share. If we can no longer differentiate our product features or process capabilities, competing suppliers may have access to a greater percentage of disk drive programs and program share. This inability to differentiate could be caused through our misunderstanding of market requirements, including technology changes, which could enable a competitor to take market share. The inability to differentiate our product offerings could also allow for supply chain alignments between our customers and other suppliers that could limit our access to available disk drive programs and corresponding market share. These alignments could include share agreements, sole-sourcing conditions or primary access to development programs. Any of the above scenarios could adversely impact our shipment volumes, average selling prices and operational costs.

 

Competing storage technology or reductions in demand for storage capacity may reduce demand for our products.

 

Other types of data storage technology, such as solid state storage or flash (semiconductor) memory compete with certain disk drive applications and negatively impact the demand for our products. Lower capacity storage needs increasingly are being met by flash memory. If flash memory suppliers overcome both the technical and economic limitations of flash memory storage and can offer better performance or more competitive cost per unit of capacity than disk drive products for higher capacity storage needs, demand for disk drives, and thus for our products, may decrease. Additionally, consumers’ demand for storage capacity may not continue to grow as expected as a result of how consumers store data, such as the emerging storage processes for cloud computing and storage virtualization. These factors, among others, could lead to lower capacity hard drives or solid state storage memory that could reduce demand for disk drive components, including our suspension assemblies. Our business, financial condition and results of operations could be materially adversely affected if the computer industry adopts technology that reduces or replaces disk drives as a computer data storage medium.

 

If the rate of data density improves at a significantly faster rate than the rate of increase in the demand for disk drive storage, demand for suspension assemblies may decrease.

 

Disk drive manufacturers have been able to steadily increase data density, and we believe that they will continue to do so for the foreseeable future. Increasing data density permits drive manufacturers to reduce the average number of disks in each disk drive, which in turn reduces the number of components they need per drive, including suspension assemblies. If improvements in data density outpace growth in data storage capacity requirements, demand for our suspension assemblies may decline and we may not be able to maintain or expand our suspension assembly business.

 

 12 

 

  

We may have difficulty obtaining an adequate supply of raw materials that meet our strict specifications at reasonable prices.

 

Certain types of stainless steel, polyimide, adhesives, purchased flexures and photoresists are currently single-sourced because the raw materials provided by these sources meet our strict specifications. We have chosen to obtain certain other materials from a single or limited set of sources because of quality and pricing considerations. If we were not able to obtain an adequate supply of these materials from our current suppliers or if a current supplier were to exit the market, we could experience production delays and quality problems. Similarly, we obtain certain customized equipment and related repair parts from single sources because of the specialization of the equipment and the quality of these supply sources. We continue to look for options that may reduce our risk of supply disruption.

 

The price we pay for stainless steel periodically is reset and can fluctuate with changes in the value of the Japanese yen, which will impact our costs. The price we pay for gold and other precious metals has fluctuated in the past. We also have experienced increased expenses due to higher fuel costs related to freight and higher utility rates. During times of increased prices, we typically do not pass this higher price on to our customers. If we could not obtain the materials referred to above in the necessary quantities, with the necessary quality and at reasonable prices, our business, financial condition and results of operations could be materially adversely affected.

 

We may be unable to achieve our financial and strategic goals in connection with investments in our assembly operation in Thailand.

 

We may fail to identify significant issues in connection with manufacturing in a foreign location, such as issues related to its infrastructure, workforce, quality or reporting systems, local tax, legal and financial controls or contingencies. Additionally, our operations in Thailand may be subject to various political, economic, foreign currency exchange rates and other risks and uncertainties inherent in operating in foreign jurisdictions. Thailand has experienced political and civil unrest in the past and continued or future political or civil unrest in Thailand could adversely affect our ability to maintain operations in Thailand. From time to time, fluctuations in foreign exchange rates have negatively affected our profitability and there can be no assurance that these fluctuations will not adversely affect our operations and profitability in the future. An inability to manage these risks as part of our investment in this manufacturing location could materially adversely affect our business, financial condition and results of operations.

 

The future success of our optical image stabilization actuator remains uncertain.

 

We have been developing an OIS actuator for use in a smartphone. This new product is in the early stages and volumes initially will be low. We face significant manufacturing challenges as we ramp our first production line to volume and we may not meet the market’s product requirements, attain our manufacturing goals or achieve our cost targets. Our manufacturing process is capital intensive. We have very limited operating and marketing experience in the smartphone camera market. We do not know whether the product will generate sufficient revenue to offset expenditures related to product development and manufacturing start-up or become profitable. We do not know whether this product will be accepted by the market, the rate at which it will be accepted, if at all, or whether our product will be competitive with existing products already in the market or new technologies that may be introduced in the future. There can be no assurance that our investment in this new product line will not negatively impact our operating results and financial condition.

 

Natural disasters in certain regions could adversely affect our supply chain or our customer base, which, in turn, could have a negative impact on our business, our ability to deliver or receive products and demand for our products.

 

We cannot be certain what impact the occurrence of natural disasters in certain regions, such as earthquakes and tsunamis in Japan or flooding in Thailand, may have on demand for our products or our ability to produce and supply our products to our customers and to what extent our customers could decrease or cancel orders. For example, the 2012 flooding in Thailand resulted in the suspension of manufacturing at our Thailand assembly facility, and also constrained hard disk drive production in the near-term, which resulted in a material decrease in demand for suspension assemblies in 2012. Any such occurrences could cause sales of suspension assemblies and hard disk drives to be negatively affected by disruptions in the hard disk drive or PC supply chain, which could materially adversely affect our business, financial condition and results of operations.

 

Significant changes in the market price of our common stock could result in securities litigation claims against us.

 

Significant price and value fluctuations have occurred with respect to the publicly traded securities of technology companies generally. In the past, securities litigation claims have been filed against certain companies following a period of decline in the market price of their publicly traded securities. We may be the target of similar securities litigation claims in the future. Risks associated with litigation often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. Although we maintain director and officer insurance, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured. Future litigation, if any, may result in substantial costs and divert management’s attention and resources, which could materially adversely affect our results of operations, financial condition and liquidity.

 

 13 

 

  

Our ability to use our deferred tax assets is subject to certain annual limitations, and may be further limited by a “change of control.”

 

At September 27, 2015, our deferred tax assets included $31,660,000 of unused tax credits, of which $2,907,000 can be carried forward indefinitely and $23,526,000 expire at various dates beginning in 2018, and $5,225,000 of various state tax credits expire at various dates beginning in 2016, including $539,000 that will expire in 2016.

 

In addition, at September 27, 2015, our deferred tax assets included $197,400,000 of net operating loss (“NOL”) carryforwards that will begin to expire in 2021 if not otherwise used by us. As of September 27, 2015, we had an estimated NOL carryforward of $560,084,000 for United States federal tax return purposes.

 

A valuation allowance of $239,912,000 has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the deferred tax assets before they expire. Both our unused tax credits and our estimated NOL carryforwards may be used to offset taxable income, if any, generated by us in future years. Our ability to use these deferred tax assets is subject to an annual limitation imposed by certain change of control provisions under Section 382 of the Internal Revenue Code that may be triggered by an aggregate change in the beneficial ownership of our common stock. If we do not generate sufficient profits or the annual limitation under Section 382 is triggered, some or all of our deferred tax assets may expire or we may not be able to use them to offset taxes due in the applicable period.

 

We may not be able to adequately protect our intellectual property.

 

We attempt to protect our intellectual property rights through copyrights, patents, trademarks, trade secrets and other measures. We may not, however, be able to obtain rights to protect our technology. In addition, competitors may be able to develop similar technology independently. Our ability to remain competitive depends in large part on trade secrets relating to our proprietary manufacturing processes. We seek to protect trade secrets and our other proprietary technology in part by requiring each of our employees to enter into non-disclosure, assignment and non-competition agreements. In these agreements, the employee agrees to maintain the confidentiality of all of our proprietary information and, subject to certain exceptions, to assign to us all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, we regularly enter into non-disclosure agreements with third parties, such as consultants, strategic suppliers and customers. These agreements may, however, be breached, and we may not have an adequate remedy for any such breach. In addition, our competitors may otherwise learn or independently develop our trade secrets.

 

We believe that the patents we hold and may obtain are valuable, but that they will not independently determine our success. Moreover, we may not receive patents for our pending patent applications, and our issued patents may not be broad enough to protect our technology adequately. Our future technology may not be protected, and any patent issued to us may be challenged, invalidated, circumvented or infringed. In addition, we have only limited patent rights outside the United States, and the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.

 

In the past, we have entered into licensing and cross-licensing agreements relating to certain of our patents and patent applications allowing some of our competitors to produce products similar to ours in return for royalty payments and/or cross-license rights. The agreements also include cross-licenses to certain existing and future suspension assembly technology. These agreements are renegotiated as needed.

 

We and certain users of our disk drive industry products have received, and may receive, communications from third parties asserting patents against us or our customers that may relate to certain of our manufacturing equipment or to our products or to products that include our products as a component. Some of our competitors have experience with, and have developed patent portfolios relating to, technology associated with our TSA+ product. In addition, we and certain of our customers have been sued on patents having claims closely related to products we sell. If any third party makes a valid infringement claim against us and we are unable to obtain a license on terms acceptable to us, our business, financial condition and results of operations could be adversely affected. As the number of patents issued in connection with our disk drive industry business continues to increase, the volume of intellectual property claims made against us could increase. We may need to engage in litigation to:

 

·enforce patents issued or licensed to us;
·protect trade secrets or know-how owned by us; or
·determine the enforceability, scope and validity of our intellectual property rights or the rights of others.

 

In the past, we have litigated claims against a competitive disk drive industry supplier alleging infringement of our patents. We could incur substantial costs in other such litigation or other similar legal actions, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Item 2.Properties

 

We own four buildings on a site of approximately 163 acres in Hutchinson, Minnesota. The buildings have an aggregate of approximately 790,000 square feet of floor area, 20,000 of which are leased to a third party. This site serves as our corporate headquarters, our center for research and development, and for manufacturing of suspension assemblies and precision components for several industries outside of the disk drive industry. We have consolidated most of our Hutchinson, Minnesota Development Center into our headquarters building, taking advantage of the space made available by moving component manufacturing from Hutchinson to Eau Claire, Wisconsin in 2011, and the Development Center is currently offered for sale or lease. We also lease a 20,000 square foot warehouse and a 7,200 square foot fabrication shop near the Hutchinson site.

 

We own a manufacturing plant in Eau Claire, Wisconsin. This site includes component manufacturing operations and office space. During the second quarter of 2014, we vacated and sold 116,000 square feet of our Eau Claire, Wisconsin assembly building, and related real and personal property for net proceeds of $4,364,000. We will continue to own and operate the remaining portion of the Eau Claire facility, representing approximately 700,000 square feet of floor space.

 

We own a manufacturing plant in Ayutthaya, Thailand that is used for assembly manufacturing operations and office space. The plant is approximately 123,000 square feet. Early in 2012, severe flooding in Thailand required us to suspend assembly operations at our Thailand facility. By the end of 2012, we resumed production at that facility.

 

Through our wholly-owned subsidiaries, we also lease offices for customer service and support in the People’s Republic of China.

 

We believe that our existing facilities will be more than adequate to meet our anticipated requirements for 2016.

 

Item 3.Legal Proceedings

 

We and certain users of our disk drive industry products have from time to time received, and may in the future receive, communications from third parties asserting patents against us or our customers that may relate to certain of our manufacturing equipment or products or to products that include our products as a component. In addition, we and certain of our customers have been sued on patents having claims closely related to products sold by us. If any third party makes a valid infringement claim and a license were not available on terms acceptable to us, our operating results could be adversely affected. We expect that, as the number of patents issued continues to increase, the volume of intellectual property claims could increase. We may need to engage in litigation to enforce patents issued or licensed to us, protect trade secrets or know-how owned by us or determine the enforceability, scope and validity of our intellectual property rights or the rights of others. We could incur substantial costs in such litigation or other similar legal actions, which could have a material adverse effect on our results of operations.

 

Following the announcement of the Merger, three actions were filed by purported shareholders of the company. Two of the actions, captioned Ridler v. Hutchinson Technology Incorporated, et al. and Harnik v. Hutchinson Technology Incorporated, et al. were filed in the District Court, First Judicial District, McLeod County, State of Minnesota. Plaintiffs in the Ridler action purport to bring the action as a class action on behalf of the public shareholders of the company, and as a derivative action on behalf of the company as a nominal defendant. Plaintiff in the Harnik action purports to bring the action as a class action on behalf of the public shareholders of the company. Both complaints name as defendants the company, the members of its Board, Parent and Merger Subsidiary. The Harnik complaint also names TDK Corporation. Both complaints generally allege that the Board breached its fiduciary duties to company shareholders in connection with the merger because, among other reasons, the Board failed to fully inform themselves of the market value of the company, the Board failed to exercise valid business judgment, the Board failed to maximize shareholder value, the members of the Board were interested in the transaction, and certain provisions in the merger agreement unfairly preclude a third party from making an offer for the company. The Ridler complaint also alleges claims against the Board for waste and abuse of control, a claim against the Board, Parent and Merger Subsidiary for equitable relief under the Minnesota Business Corporation Act, and a claim against the company, Parent and Merger Subsidiary for aiding and abetting the Board’s alleged breaches of fiduciary duty. In addition to its allegations against the Board, the Harnik complaint alleges that TDK Corporation, Parent and Merger Subsidiary aided and abetted the Board’s alleged breaches of fiduciary duty. Both complaints seek compensatory damages, equitable relief, and injunctive relief, including an order enjoining the closing of the merger. Both complaints also seek an award of plaintiffs’ attorneys’ fees, costs, and disbursements.

 

The third action, captioned Erickson v. Hutchinson Technology Incorporated, et al., was filed in the United States District Court for the District of Minnesota. Plaintiff in the Erickson action purports to bring the action as a class action on behalf of the public shareholders of the company. The Erickson complaint names the company and its directors as defendants, and alleges that they have violated Sections 14(a) and 20(a), and Rule 14a-9, of the Securities Exchange Act of 1934 by filing a preliminary proxy statement that contains materially incomplete and misleading statements and omissions. The Erickson complaint seeks injunctive relief, including an order enjoining the filing of a definitive proxy statement and the closing of the merger until the alleged deficiencies in the preliminary proxy statement have been corrected; an accounting for damages in an unspecified amount; and an award of plaintiffs’ attorneys’ fees, costs, and disbursements.

 

We believe that the actions are without merit, and intend to vigorously defend against all claims asserted.

 

We are a party from time to time to ordinary routine litigation incidental to our business. The outcome of such claims, if any, is not expected to materially affect our current or future financial position, results of operations, liquidity, or cash flows.

 

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PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock, $.01 par value, trades on the NASDAQ Global Select Market under the symbol HTCH. For price information regarding our common stock, see Note 11 to the consolidated financial statements contained in Item 15 below. As of December 9, 2015, our common stock was held by 501 shareholders of record.

 

 Dividends

 

 We have never paid any cash dividends on our common stock. Further, the Merger Agreement, our revolving credit and security agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes each limits or prohibits our ability to pay dividends. We currently intend to retain all earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to payment of dividends will depend upon our financial condition and results of operations and such other factors as are deemed relevant by our board of directors.

  

Performance Graph

 

Set forth below is a graph comparing, for a period of five fiscal years ended September 27, 2015, the yearly cumulative total shareholder return of the S&P 500 Index and the NYSE Arca Disk Drive Index. The comparison of total shareholder returns assumes that $100 was invested on September 27, 2009, in each of the company, the S&P 500 Index and the NYSE Arca Disk Drive Index, and that dividends were reinvested when and as paid.

 

    2010     2011     2012     2013     2014     2015  
Hutchinson Technology Incorporated   $ 100.00     $ 59.17     $ 51.78     $ 104.73     $ 106.51     $ 41.72  
NYSE Arca Disk Drive Index (DDX)   $ 100.00     $ 85.65     $ 100.21     $ 106.10     $ 115.28     $ 81.45  
S&P 500 INDEX   $ 100.00     $ 98.93     $ 125.42     $ 147.28     $ 172.62     $ 168.14  

  

 

Stock Repurchase Program

 

On February 4, 2008, we announced that our board of directors had approved a share repurchase program authorizing us to spend up to $130,000,000 to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions. The board of directors terminated the plan on October 9, 2013, at which point $72,368,000 remained available for repurchase. No repurchases had been made since the fiscal year ended September 28, 2008.

 

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Equity Compensation Plan Information

 

The following table provides information as of September 29, 2015 for compensation plans under which securities may be issued:

 

 

Plan Category

  Securities to be Issued Upon
Exercise of Outstanding
Options, Warrants and Rights
   Weighted-Average Exercise
Price of Outstanding Options,
Warrants and Rights
   Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans
 
Equity Compensation Plans Approved by Securityholders   4,045,316(1)  $8.18    923,396(2)
                
Equity Compensation Plans Not Approved by Securityholders           49,481(3)
Total   4,045,313         972,877 

 

 

(1)Reflects securities to be issued under our 1996 Incentive Plan, as amended and restated October 10, 2008, and our 2011 Equity Incentive Plan.

 

(2)Includes securities available for future issuance under the 2011 Equity Incentive Plan other than upon the exercise of an outstanding option or the vesting of an outstanding restricted stock unit.

 

(3)Includes securities available for future issuance under our Non-Employee Directors Equity Plan, through which our non-employee directors can elect to receive some or all of the retainer payments to which they are entitled in the form of shares of our common stock.

 

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Item 6.Selected Financial Data

 

FIVE-YEAR SELECTED FINANCIAL DATA

Hutchinson Technology Incorporated and Subsidiaries

(In thousands, except per share data)

 

   2015   2014   2013   2012   2011 
FOR THE YEAR:                         
Net sales  $252,823   $261,087   $249,596   $248,589   $278,090 
Gross profit   30,032    23,901    16,425    3,521    10,351 
Percent of net sales   12%   9%   7%   1%   4%
Loss from operations  $(17,328)  $(23,601)  $(24,745)  $(40,127)  $(51,830)
Percent of net sales   (7)%   (9)%   (10)%   (16)%   (19)%
Net loss  $(39,098)  $(40,414)  $(35,076)  $(48,642)  $(55,565)
Percent of net sales   (15)%   (15)%   (14)%   (20)%   (20)%
Capital expenditures  $17,940   $17,283   $18,880   $27,880   $13,506 
Research and development expenses   22,100    17,316    14,621    16,474    14,592 
Depreciation expenses   31,945    36,205    37,787    38,779    46,941 
Cash flow provided (used) by operating activities   18,765    (1,474)   6,085    38,092    (2,538)
                          
AT YEAR END:                         
Receivables, net  $18,567   $26,865   $24,894   $25,318   $52,062 
Inventories   40,148    48,978    44,285    41,432    55,018 
Working capital   61,192    33,457    72,211    87,120    121,314 
Net property, plant and equipment   134,509    153,169    186,914    202,468    223,134 
Total assets   241,512    275,165    306,675    336,288    401,005 
Total debt, net and capital leases   131,564    142,472    131,093    136,930    154,840 
Total debt and capital leases as a percentage of total capitalization   65%   60%   49%   45%   43%
Shareholders’ equity  $70,875   $94,828   $134,233   $167,830   $206,322 
Return on shareholders’ equity   (47)%   (35)%   (23)%   (26)%   (24)%
Number of employees   2,412    2,489    2,436    2,060    2,317 
Shares of stock outstanding   33,540    28,102    27,581    23,900    23,387 
                          
PER SHARE INFORMATION:                         
Net loss — basic and diluted  $(1.20)  $(1.44)  $(1.35)  $(2.06)  $(2.38)
Shareholders’ equity (book value)   2.11    3.37    4.87    7.02    8.82 
Price range                         
High   4.50    4.85    6.69    2.64    4.37 
Low   1.23    1.96    1.35    1.20    1.99 

 

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with the selected historical consolidated financial data and consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.

 

General

 

Since the late 1980s, we have derived virtually all of our revenue from the sale of suspension assemblies to a small number of customers. We currently supply a variety of suspension assemblies to all manufacturers of disk drives and head-gimbal assemblers for all sizes of disk drives. Suspension assemblies are a critical component of disk drives, and our results of operations are highly dependent on the disk drive industry. The disk drive industry is intensely competitive, and demand for disk drive components fluctuates. Our results of operations are affected from time to time by disk drive industry demand changes, adjustments in inventory levels throughout the disk drive supply chain, technological changes that impact suspension assembly demand, shifts in our market position and our customers’ market position, changes in supply chain alignment by a customer, our customers’ production yields and our own product transitions, production yields and production capacity utilization.

 

The efforts we have been making to reduce our costs, shift more production to our Thailand assembly operation, streamline our U.S. operations and strengthen our overall competitive position have begun to benefit our financial performance. Our relationship and position with Western Digital continues to be very strong, and our business with Seagate has grown since late 2013. Although our suspension assembly shipments decreased to 415 million in 2015, down from 432 million in 2014, we have lessened our net operating losses and increased our cash flow from operations. We expect our business will generate profitability and positive cash flow as our volume grows over the long term.

 

The following table sets forth our quarterly suspension assembly shipment quantities in millions for the periods indicated:

 

   2014 by Quarter   2015 by Quarter 
   First   Second   Third   Fourth   First   Second   Third   Fourth 
Suspension assembly shipment quantities    116    102    98    116    122    101    87    105 

 

Our suspension assembly shipments totaled 122 million in the first quarter of 2015, up 5% compared with 116 million in the fourth quarter of 2014. The increase was primarily due to increased participation on customers’ disk drive programs and growth in the suspension assembly market. In the second quarter of 2015, suspension assembly shipments decreased 17% to 101 million. The decrease was primarily due to a seasonal decline and weakness in the personal computing (“PC”) market. In the third quarter of 2015, suspension assembly shipments decreased 14% to 87 million. The decline in shipments resulted from the seasonal slowdown in disk drive demand, weakness in PC demand and inventory reductions in the PC supply chain. In the fourth quarter of 2015, suspension assembly shipments increased to 105 million. Overall demand for suspension assemblies grew in what is typically a seasonally stronger period for disk drive production. Our sales to all of our major disk drive customers increased in the quarter and we also benefited from our market position on suspension assemblies for 2.5-inch disk drives.

 

We are also making progress with our new business development initiatives, which focus on leveraging our precision manufacturing capabilities and equipment capacity to produce components in markets outside the disk drive industry. In 2015, $10,250,000, or 4% of our revenues were from these activities compared to $6,921,000, or 3% in 2014. In the early stages of this effort, the revenues generated have been somewhat unpredictable quarter to quarter. We continue to explore a range of opportunities.

 

As part of our new business development efforts, we have been developing an OIS actuator for smartphone cameras. Our OIS actuator, which is based on SMA technology, improves picture and video quality, particularly in low-light conditions, and offers performance and size advantages over current OIS solutions. We are bringing this product to market with Cambridge Mechatronics Ltd., a high technology design and engineering company based in Cambridge, England. Late in 2014, our first SMA OIS production line was installed. The first smartphone incorporating our SMA OIS actuator was introduced in January 2015 for the Taiwan market. It was a low volume offering which allowed us to promote our SMA OIS product and its performance and reliability. On July 30, 2015, we introduced a new SMA OIS actuator that is 70% thinner than our original product and that significantly lowers our capital investment and production costs. We believe this new design has fundamental advantages that bring superior value and capability to the marketplace and that the product is well aligned with the needs of camera module and smartphone manufacturers. During 2014 and 2015, product-related revenue was not material to our consolidated statement of operations and all of the costs of our SMA OIS initiative were classified as research and development expenses.

 

While we are in the early stages with this product and volumes initially will be low, the smartphone camera market represents a significant growth opportunity for us. More companies are adopting OIS as a feature of their smartphone cameras. Apple and Samsung each introduced a high-end smartphone that uses OIS technology to improve camera performance. These phones use an OIS solution that is different from our SMA OIS but we believe their use of any OIS technology is strong evidence that adoption and growth of OIS is very real. We believe there is growing interest in our solution among smartphone and camera module makers. We are focused on introducing our new offering to the market, earning positions on new smartphone programs, and optimizing our manufacturing processes for the new design.

 

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We are continuing to carefully manage our cost structure and cash position to ensure that we will meet our debt obligations while preserving the ability to make investments that will enable us to respond to customer requirements and achieve profitability. In October 2014, we completed a debt offering that provided for the sale of $37,500,000 aggregate principal amount of 8.50% New Convertible Notes). We also completed an exchange of $15,000,000 of our 8.50% Secured Notes for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock of which 1,250,000 which were exercised in November 2014 and the remaining 1,250,000 were exercised in January 2015. Certain beneficial holders of the 8.50% New Convertible Notes had the right to require us to repurchase for cash up to $7,500,000 aggregate principal amount of the 8.50% New Convertible Notes, plus accrued and unpaid interest, if any, during the 120-day period commencing on October 23, 2014. Accordingly, $7,500,000 of the proceeds to us from the sale of the 8.50% New Convertible Notes was escrowed until this put right expired on February 20, 2015. Additionally, we were required to escrow at least $35,000,000 of cash that is restricted solely for the repayment, repurchase, redemption, defeasance or other acquisition for value of our 8.50% Convertible Notes, plus accrued but unpaid interest thereon. On January 15, 2015, we completed a redemption of the existing $39,822,000 of 8.50% Convertible Notes. To fund this, we used the escrowed $35,000,000 and our existing cash. As a result of the exchange transaction, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. During the first quarter of 2015, we also obtained a $15,000,000 term loan from PNC Bank, National Association (“PNC Bank”). The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015 and continuing through January 1, 2020. See the Liquidity and Capital Resources section below for a full discussion of our cash position, debt and other financing arrangements.

 

In connection with consolidation of our operations, our development center building in Hutchinson, Minnesota was offered for sale or lease in 2013. During the fourth quarter of 2015, we received new market information that negatively impacted our valuation assumptions regarding our Development Center building. As a result, we evaluated the recoverability of the building based on these circumstances and recorded an impairment charge of $1,620,000 included in the line item “Asset impairment” in our consolidated statement of operations.

 

Our overall employment level was 2,436 at the end of 2013, 2,489 at the end of 2014, and 2,412 at the end of 2015. The increase in employment from 2013 to 2014 was due to ramping our assembly manufacturing operation in Thailand partially offset by continued consolidation of our U.S. manufacturing operations.

 

Market Trends

 

Our suspension assemblies are components in hard disk drives used in computers and a variety of consumer electronics and enterprise storage products. We believe that the continued growth of digital content world-wide requires increasingly higher storage capacity in order to store, aggregate, host, distribute, manage and backup content, which we believe will continue to result in increased demand for disk drives.

 

Non-compute applications, such as internet-based storage of consumer data, mobile devices, digital video recorders (“DVRs”), gaming devices and surveillance monitors are driving the broad, global growth of digital content through:

 

·creation and sharing of all types of digital content, such as high-resolution photos, high definition video and movies, and music by consumers and data by enterprises;
·collection and distribution of digital content through services and other company offerings utilizing cloud computing;
·network infrastructure, including broadband, cable and satellite, which is enabling the access, hosting and distribution of digital content;
·consumption of digital content through consumer electronic devices such as smartphones, DVRs and gaming consoles; and
·protection of content through storage backup devices and services.

 

The demand for disk drives and, therefore, suspension assemblies can be volatile, as experienced since calendar 2009, due to market and world economic conditions. In a weak economy, consumer and business spending tends to decline and demand for computer systems and other consumer electronics and enterprise storage products tends to decrease. Demand for suspension assemblies, therefore, may be adversely impacted as a result of a weaker economy.

 

In the long-term, however, we expect that the growth in digital content and the expanding use of enterprise computing and storage, desktop and mobile computers, increasingly complex software, the internet and cloud computing, as well as the data intensive non-compute market will increase demand for disk drives and, therefore, suspension assemblies. While the overall demand for disk drive storage remains strong, the components making up that demand are changing. Demand for higher capacity cloud storage applications is offsetting declines in drive demand associated with lower spending for desktop and portable computers. Meeting the growing demand for data storage is expected to require more data surfaces and, in turn, more suspension assemblies. The hard disk drive market segments with the strongest growth rates – personal storage and capacity-optimized enterprise storage for cloud computing – use more suspension assemblies per disk drive.

 

We also believe demand for disk drives will continue to be subject, as it has in the past, to rapid or unforeseen changes resulting from, among other things, changes in disk drive inventory levels, technological advances, responses to competitive price changes and unpredicted high or low market acceptance of new drive models and the end devices in which disk drives are used.

 

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As in past years, disk drives continue to be the primary storage device of choice for applications requiring shorter access times and higher capacities because of their speed and low cost per unit of stored data. The cost of storing data on disk drives continues to decrease primarily due to increasing data density, thereby increasing storage capacity in disk drives or reducing the number of components, including suspension assemblies, required in a disk drive. The continual pursuit of increased data density and lower storage costs is leading to suspension assemblies with flexures that have finer electrical conductors, greater lead counts and increased complexity such as DSA suspension designs, and to the adoption of value-added features for suspension assemblies, such as formed and polished headlifts, larger dampers with through-hole features, co-located micro actuation and a variety of limiter configurations.

 

The development of next-generation read/write technology and the introduction of new types or configurations of read/write head configurations and sizes, and the continuing improvement in data density and the use of disk drives in consumer electronics and enterprise storage applications will require even finer electrical conductors on the suspension assembly. Next-generation disk drives also will likely require additional electrical conductors. These changes may temporarily increase our development spending and reduce our manufacturing yields and efficiencies. We are investing in developing the process capabilities and related capital equipment required to meet new industry specifications in 2016 and beyond.

 

The advent of new disk drive technologies may initially decrease our customers’ yields with the result that we may experience temporary elevations of demand for some types of suspension assemblies. As programs mature, higher customer yields decrease the demand for suspension assemblies. In addition, disk drive manufacturers are increasingly seeking lower cost designs and suspension assembly pricing is highly competitive. While we are generally able to increase our selling price for suspension assemblies when they are introduced, our selling prices decrease as our products mature.

 

The following table sets forth our consolidated statements of operations as a percentage of net sales for each period presented.

 

   Percentage of Net Sales 
   2015   2014   2013 
Net sales   100%   100%   100%
Cost of sales   88    91    93 
Gross profit   12    9    7 
Research and development expenses   9    7    6 
Selling, general and administrative expenses   9    9    10 
Severance and site consolidation expenses   *    1    1 
Asset Impairment   1    1     
Loss from operations   (7)   (9)   (10)
Gain on extinguishment of long-term debt           2 
Other (expense) income, net   *    *    * 
Interest expense   (6)   (6)   (6)
Loss on Debt   (2)   

*

    

*

 
Loss before income taxes   (15)   (15)   (14)
(Benefit) provision for income taxes   

*

    

*

    

*

 
Net loss   (15)%   (15)%   (14)%

 

 

*Less than 1%.

 

2015 Operations to 2014 Operations

 

Net sales for 2015 were $252,823,000, compared to $261,087,000 for 2014, a decrease of $8,264,000. Suspension assembly sales decreased $9,915,000, primarily as a result of a 4% decrease in suspension assembly unit shipments, partially offset by our average selling price increasing to $0.59 in 2015 from $0.58 in 2014. The increase in our average selling price was due to the mix of products shipped that included more DSA suspension assemblies that carried higher pricing.

 

Gross profit for 2015 was $30,032,000, compared to $23,901,000 for 2014, an increase of $6,131,000. Gross profit was 12% of net sales in 2015, compared to 9% in 2014. Overall, the 2015 increase in gross profit was primarily due to benefits of the cost reductions achieved through our restructuring and site consolidation actions and improved operating performance, partially offset by decreased net sales.

 

Research and development expenses for 2015 were $22,100,000, compared to $17,316,000 for 2014, an increase of $4,784,000. The increase was primarily due to higher expenses to support our new business development activity related to the development of SMA OIS actuators for smartphone cameras. The increase was partially offset by the recognition of $1,520,000 of previously deferred income related to a former cost sharing agreement for our SMA OIS actuator. Research and development expenses were 9% of net sales in 2015 and 7% in 2014.

 

In 2015, we incurred $159,000 of site consolidation expenses, compared to $1,349,000 in 2014. These expenses were primarily due to internal labor and contractors related to the ongoing consolidation of our U.S. operations.

 

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During 2014, we eliminated approximately 130 positions at our Eau Claire, Wisconsin and Hutchinson, Minnesota sites to further reduce costs. This resulted in an estimated $1,377,000 of severance expense in 2014. All severance and benefits amounts owed have been paid in full.

 

In 2015, we recognized an asset impairment charge of $1,620,000 on our Hutchinson, Minnesota Development Center building, as discussed above. In 2014, we recognized an asset impairment charge of $4,470,000 on our Eau Claire, Wisconsin assembly building and related assets, as discussed above.

 

Other expense for 2015 included a foreign currency loss of $3,949,000, compared to a foreign currency loss of $2,076,000 for 2014. These were primarily related to purchases and advances denominated in U.S. dollars made by our Thailand operation.

 

In 2015, we entered into an agreement providing a private exchange of $15,000,000 aggregate principal amount of our 8.50% Secured Notes held by a certain holder for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock on a cashless basis at an exercise price of $0.01 per share. The fair value of the common stock and warrants was recorded in additional paid-in capital in the amount of $17,388,000. Applying debt extinguishment accounting, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. The loss included $1,232,000 of broker, legal and accounting fees related to the exchange transaction.

 

The income tax benefit for 2015 was $74,000, compared to the income tax expense of $761,000 in 2014. In 2015, the net benefit of $74,000 is made up of a credit for the refund of previously paid U.S. Federal Alternative Minimum Tax, offset primarily by various foreign withholding and income taxes we incur. In 2014, we recognized an $859,000 benefit due to reserves for certain tax refunds that were released due to the expiration of the applicable statute of limitations.

 

2014 Operations to 2013 Operations

 

Net sales for 2014 were $261,087,000, compared to $249,596,000 for 2013, an increase of $11,491,000. Suspension assembly sales increased $9,500,000, primarily as a result of a 7% increase in suspension assembly unit shipments. Our average selling price decreased to $0.58 in 2014 from $0.60 in 2013. We believe the increase in unit shipments was primarily a result of an increase in our market share.

 

Gross profit for 2014 was $23,901,000, compared to $16,425,000 for 2013, an increase of $7,476,000. Gross profit was 9% of net sales in 2014, compared to 7% in 2013. Overall, 2014 gross profit benefited from the higher shipment volume, the benefits of the cost reductions achieved through our restructuring and site consolidation actions and improved operating performance. This increase was partially offset by higher variable costs associated with shipping a higher mix of DSA product and product that uses purchased flexures and our average selling price decreased to $0.58 in 2014 from $0.60 in 2013.

 

Research and development expenses for 2014 were $17,316,000, compared to $14,621,000 for 2013, an increase of $2,695,000. The increase was primarily due to higher expenses to support our new business development activity related to the development of SMA OIS actuators for smartphone cameras. Research and development expenses were 7% of net sales in 2014 and 6% in 2013.

 

Selling, general and administrative expenses for 2014 were $22,990,000, compared to $23,676,000 for 2013, a decrease of $686,000. The lower selling, general and administrative expenses were primarily due to cost reduction actions.

 

In 2014, we incurred $1,349,000 of site consolidation expenses, compared to $1,661,000 in 2013. These expenses were primarily due to internal labor and contractors related to the ongoing consolidation of our U.S. operations.

 

During 2014, we eliminated approximately 130 positions at our Eau Claire, Wisconsin and Hutchinson, Minnesota sites to further reduce costs. This resulted in an estimated $1,377,000 of severance expense in 2014. We expect the total remaining 2014 severance and benefits payments of $27,000 will be complete by the end of our first quarter of 2015.

 

During the first quarter of 2013, we identified approximately 55 positions to be eliminated as part of our continued focus on overall cost reductions. This resulted in $1,212,000 of severance and other expenses for 2013. All 2013 severance and benefits amounts have been paid in full.

 

In 2014, we recognized an asset impairment charge of $4,470,000 on our Eau Claire, Wisconsin assembly building and related assets.

 

In 2013, we recognized a gain on short- and long-term investments of $272,000. The gain was due to payments we received under a settlement agreement. Auction rate securities (“ARS”) previously held by us were subsequently sold by the settlement parties at a price that was higher than the price identified in the settlement agreement.

 

Other expense for 2014 included a foreign currency loss of $2,076,000, compared to a foreign currency loss of $1,372,000 for 2013. These were primarily related to purchases and advances denominated in U.S. dollars made by our Thailand operation.

 

In January 2013, we repurchased $18,682,000 aggregate principal amount of our outstanding 8.50% Convertible Notes by making cash payments totaling $11,583,000, plus accrued and unpaid interest, which payments were funded by the proceeds of the sale of our 10.875% Notes. Applying debt extinguishment accounting, we recorded a gain on extinguishment of debt of $4,986,000.

 

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The income tax benefit for 2014 was $761,000, compared to the income tax expense of $16,000 in 2013. In 2014, we recognized an $859,000 benefit due to reserves for certain tax refunds that were released due to the expiration of the applicable statute of limitations.

 

Liquidity and Capital Resources

 

We continue to incur net losses which have dampened our ability to generate cash from operations. We currently believe that our cash and cash equivalents, restricted cash, short-term investments, cash flow from operations, our credit facility, leasing, bill of exchange transactions, and additional financing, if needed and as available given contractual restrictions, current credit market conditions and our operating performance, will be sufficient to meet our forecasted operating expenses, debt service and capital expenditures through 2016. As of September 27, 2015, we had outstanding $63,931,000 aggregate principal amount of our 8.50% Secured Notes and $12,200,000 aggregate principal amount of our 10.875% Notes, and $37,500,000 of our 8.50% New Convertible Notes. Our 8.50% Secured Notes and our 10.875% Notes mature on January 15, 2017 and our 8.50% New Convertible Notes mature on October 31, 2019.

 

During the first quarter of 2015, we obtained a $15,000,000 term loan from PNC Bank, National Association (“PNC Bank”). The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015 and continuing through January 1, 2020. As of September 27, 2015, we had $13,500,000 outstanding. See below for additional details.

 

In October 2014, we sold $37,500,000 aggregate principal amount of 8.50% New Convertible Notes. We exchanged $15,000,000 aggregate principal amount of 8.50% Secured Notes for 2,500,000 shares of common stock and warrants to purchase an additional 2,500,000 shares of which 1,250,000 warrants were exercised in November 2014 and the remaining 1,250,000 were exercised in January 2015. On January 15, 2015, we completed a redemption of the existing $39,822,000 of 8.50% Convertible Notes.

 

The Merger Agreement, our credit agreement with PNC Bank and the indentures governing the 8.50% Secured Notes and the 10.875% Notes each contain certain covenants that, among other things, limit our and our restricted subsidiaries’ ability to: incur additional indebtedness; pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; enter into agreements that restrict distributions from restricted subsidiaries; sell or otherwise dispose of assets, including capital stock of restricted subsidiaries; enter into transactions with affiliates; create or incur liens; enter into operating leases; merge, consolidate or sell substantially all of our assets; make capital expenditures; change the nature of our business; and expend the assets or free cash flow of certain subsidiaries. The indentures also limit the amount of our consolidated total assets and free cash flow that can be attributable to subsidiaries that have not guaranteed the 8.50% Secured Notes or, in certain cases, have not pledged their stock to secure the 8.50% Secured Notes.

 

Subject to applicable contractual limitations, we may from time to time seek to prepay or retire our outstanding debt through cash purchases in open market or privately negotiated transactions or otherwise. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Our ability to obtain additional financing will depend upon a number of factors, including our future and historical performance and financial results, contractual restrictions and general economic and capital market conditions. We cannot be certain that we will be able to raise additional financing on terms acceptable to us, including covenants that we will be able to comply with in the short term, or at all, if needed. We sold a portion of one of our facilities in the second quarter of 2014 and have a facility in Hutchinson, Minnesota currently offered for sale or lease, which may provide an additional source of cash.

 

Our principal sources of liquidity are cash and cash equivalents, short-term investments, cash flow from operations, our revolving credit facility with PNC Bank (the “Senior Secured Credit Facility”), leasing, bill of exchange transactions, and additional financing capacity, if available given contractual restrictions, current credit market conditions and our operating performance. Our cash and cash equivalents increased from $37,939,000 at September 28, 2014, to $39,454,000 at September 27, 2015. Our short-term investments remained at $965,000 and are restricted in use. In total, our cash and cash equivalents and short-term investments increased by $1,515,000.

 

Cash Provided by (Used for) Operating Activities

 

Cash provided by operating activities in 2015 was $18,765,000, compared to $1,474,000 of cash used for operating activities in 2014. The increase in operating cash flows was primarily due to favorable changes in our working capital primarily due to a decrease in our accounts receivable balance driven by the bill of exchange transactions and a reduction in inventories.

 

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Cash Used for Investing Activities

 

In 2015, cash used for investing activities was $14,337,000, compared to $4,428,000 of cash used for investing activities in 2014. The cash used in 2015 was primarily due to $17,940,000 of capital expenditures for manufacturing equipment for new process technology and capability improvements and product tooling, partially offset by $3,221,000 of equipment sale/leaseback transactions in the U.S. and Thailand, and other assets and the release of $382,000 of restricted cash that was temporarily held in our Senior Secured Credit Facility collections account. The cash used in 2014, was primarily due to $17,283,000 of capital expenditures for manufacturing equipment for new process technology and capability improvements and product tooling offset by $6,395,000 of equipment sale/leaseback transactions in the U.S. and Thailand, $4,563,000 in proceeds from the sale of a portion of our Eau Claire, Wisconsin facility and the release of $1,662,000 of restricted cash that was temporarily held in our Senior Secured Credit Facility collections account.

 

As of September 27, 2015, and September 28, 2014, we had $1,677,000 and $2,059,000, respectively, of cash and cash equivalents that were restricted in use. These amounts covered outstanding letters of credit and cash received and temporarily held in our Senior Secured Credit Facility collections account.

 

Cash (Used for) Provided by Financing Activities

 

Cash used for financing activities in 2015, was $3,829,000, compared to $3,873,000 of cash provided by financing activities in 2014. The cash used in 2015, was primarily due to the redemption of the existing $39,822,000 aggregate principal amount of 8.50% Convertible Notes, $9,533,000 in repayments of our Senior Secured Credit Facility, $3,175,000 of debt refinancing costs, $2,382,000 of capital lease payments and $1,500,000 in repayments of our term loan, offset by $37,500,000 in proceeds from the private placement of our 8.50% New Convertible Notes and $15,000,000 in proceeds from the PNC term loan. The cash provided in 2014, was primarily due to a $5,553,000 increase in borrowings from our Senior Secured Credit Facility, partially offset by $1,739,000 of capital lease payments.

 

Bill of Exchange Transactions

 

During 2015, we entered into multiple independent bill of exchange discounting transactions under an uncommitted facility with Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch (“HSBC”), under which our Thai subsidiary sold, without recourse, an aggregate of $105,476,000 of its accounts receivable to HSBC and was paid 95% of the face value of the receivable, less interest expense of LIBOR plus 1.75%. Upon full payment of the receivable by its customer to HSBC, our Thai subsidiary receives from HSBC the 5% remainder due on the receivable. As of September 27, 2015, there remained $1,228,000 to be paid to our Thai subsidiary from HSBC, all of which was included within the line item “Other receivables” on our consolidated balance sheets.

 

Late in 2015, we also entered into multiple independent bill of exchange discounting transactions under an uncommitted facility with Bank of America, N.A., Bangkok Branch (“Bank of America”), under which our Thai subsidiary can sell, without recourse, approximately 90% of its accounts receivable to Bank of America and be paid the full face value of that accounts receivable sold, less interest expense of LIBOR plus 1.50%. The approximately 10% remainder due on the receivable is included in our trade receivables balance until paid.. During 2015, our Thai Subsidiary sold $19,665,000 of its accounts receivable to Bank of America which has been paid in full.

 

Outstanding Indebtedness

 

Senior Secured Credit Facility - We are party to a revolving credit and security agreement with PNC Bank dated as of September 15, 2011, as amended from time to time (the “Credit Agreement”). On September 22, 2014, we amended the Credit Agreement to reduce the maximum principal amount of the Senior Secured Credit Facility from $35,000,000 to $20,000,000, extend the maturity date of the Senior Secured Credit Facility from October 1, 2014 to December 1, 2016, reduce the cash balance we are required to maintain in an account at PNC Bank from $15,000,000 to $2,500,000, and modify the fixed charge coverage covenant by eliminating the requirement for the four fiscal quarters ended September 28, 2014 and changing the measurement periods thereafter for the fixed charge coverage covenant by excluding from such measurement periods all fiscal quarters ended on or prior to September 28, 2014.

 

The Credit Facility, as amended, also required us to maintain cash on our balance sheet, including restricted cash, during the period from December 1, 2014 through January 16, 2015 (the day after the 2015 put date for our 8.50% Convertible Notes) and during the period from December 1, 2015 through January 16, 2016 (the day after the 2016 put date for our 8.50% Convertible Notes) in an amount not less than the aggregate principal amount of our 8.50% Convertible Notes then outstanding, and to establish a reserve against our borrowing base during each such period in the same amount. The Credit Agreement, as amended, permitted us to redeem, repurchase or repay our 8.50% Convertible Notes in whole or in part at any time as long as, after giving effect to such redemption, repurchase or repayment, no default or event of default exists under the credit agreement and we have liquidity of not less than $20,000,000, and permitted us to incur additional unsecured debt at any time prior to January 15, 2016 in an amount not to exceed the aggregate principal amount of our 8.50% Convertible Notes then outstanding as long as certain conditions are satisfied, including a requirement that, by the next put date for our 8.50% Convertible Notes, we reduce the aggregate principal balance of our 8.50% Convertible Notes by an amount equal to the principal amount of such additional unsecured debt then outstanding. We fully redeemed all outstanding 8.50% Convertible Notes on January 15, 2015.

 

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In April 2015, we further amended the Credit Agreement to maintain compliance with a preexisting financial covenant. This amendment modified the fixed charge coverage covenant under our credit agreement to eliminate the requirement for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015 and to change the measurement periods starting with our quarter ending December 27, 2015 by excluding from such measurement periods all quarters ended before September 27, 2015, and implemented an additional earnings before interest, taxes, and depreciation and amortization (“EBITDA”) covenant for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015.

 

Subsequent to our 2015 year end, on December 10, 2015, we entered into a ninth amendment to our Credit Agreement with PNC Bank. The amendment modifies the Credit Agreement to defer application of the fixed charge coverage covenant until December 25, 2016, impose a minimum EBITDA requirement for the remaining term of the Senior Secured Credit Facility, and add a new minimum liquidity requirement.

 

From time to time, we borrow funds under the Senior Secured Credit Facility. As of September 27, 2015, we had no outstanding borrowings. Our average outstanding balance in 2015 was $743,000. Amounts borrowed under the Senior Secured Credit Facility bear cash interest at a reduced rate equal to, at our election, either (i) PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 1.0% per annum, or (ii) LIBOR plus 3.5% per annum if no defaults or events of default exist under the Credit Agreement.

 

If we are unable to generate sufficient operating results in future quarters, we may not be able to comply with financial covenants in the Credit Agreement in future quarters. If necessary, we intend to negotiate a waiver of any noncompliance or an amendment of the financial covenant specific to the applicable period. As of September 27, 2015, we were in compliance with the covenants set forth in the Credit Agreement.

 

October 2014 Financing Transactions - On October 23, 2014, we issued $37,500,000 aggregate principal amount of 8.50% New Convertible Notes. The 8.50% New Convertible Notes bear interest at a rate of 8.50% per annum, payable semi-annually in arrears on April 30 and October 31 of each year, beginning April 30, 2015. The 8.50% New Convertible Notes are scheduled to mature on October 31, 2019. Each $1,000 principal amount of the 8.50% New Convertible Notes is convertible into 266.6667 shares of our common stock (which is equal to an initial conversion price of approximately $3.75 per share), subject to adjustment under certain circumstances. The 8.50% New Convertible Notes rank pari passu in right of payment with all existing and future senior indebtedness of the company. Certain beneficial holders of the 8.50% New Convertible Notes had the right to require us to repurchase for cash up to $7,500,000 aggregate principal amount of the 8.50% New Convertible Notes, plus accrued and unpaid interest, if any, during the 120-day period commencing on October 23, 2014. Accordingly, $7,500,000 of the proceeds to us from the sale of the 8.50% New Convertible Notes was escrowed until the put right expired on February 20, 2015. Additionally, we were required to escrow at least $35,000,000 of cash that is restricted solely for the repayment, repurchase, redemption, defeasance or other acquisition for value of our 8.50% Convertible Notes, plus accrued but unpaid interest thereon. On January 15, 2015, we completed a redemption of the existing $39,822,000 of 8.50% Convertible Notes that could have been put to us in January 2015. To fund this, we used the escrowed $35,000,000 and cash on hand.

 

On October 23, 2014, we exchanged $15,000,000 aggregate principal amount of 8.50% Secured Notes for 2,500,000 shares and warrants to purchase an additional 2,500,000 shares, exercisable on a cashless basis at a price of $0.01 per share. On November 25, 2014, 1,250,000 warrants were exercised, resulting in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,428 shares of common stock. No warrants remain outstanding. Applying debt extinguishment accounting, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. The loss included $1,232,000 of broker, legal, and accounting fees related to the exchange transaction.

 

To accommodate the October 2014 debt transactions described above, on October 20, 2014, we entered into supplemental indentures governing our 8.50% Secured Notes and 10.875% Secured Notes and amended with the Credit Agreement to reflect PNC Bank’s consent to the transactions discussed above.

 

PNC Term Loan – On December 23, 2014, we amended the Credit Agreement to establish a $15,000,000 term loan with PNC. The covenants in the Credit Agreement also apply to this term loan. The amount borrowed under the term loan may consist of domestic rate loans, with a per annum interest rate equal to PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 2.50%, or LIBOR rate loans, with a per annum interest rate equal to 3.50% plus the greater of the LIBOR rate (as defined in the Credit Agreement) or 1.00%, or a combination thereof. As a result, our interest rate for the term loan has been 4.5%. The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015 and continuing through January 1, 2020. In the event that the Credit Agreement is not extended beyond December 1, 2016, the balance due on the term loan will also become due on December 1, 2016. Once repaid, amounts borrowed under the term loan may not be reborrowed. As of September 27, 2015, we had $13,500,000 outstanding.

 

Capital Leases – As of September 27, 2015, we had remaining capital lease payment obligations of $6,408,000.

 

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Contractual Obligations

 

The following table presents our contractual obligations at September 27, 2015 (in thousands):

 

   Payments Due by Period 
   Total   Less Than
One Year
   One to
Three Years
   Three to
Five Years
   More Than
Five Years
 
Total debt  $127,131   $2,250   $81,381   $5,250   $38,250 
Credit facility                    
Interest expense   25,037    10,921    11,167    2,781    169 
Capital leases   6,408    2,276    3,569    563     
Operating leases   1,782    922    787    73     
Total  $160,358   $16,369   $96,904   $8,667   $38,419 

 

As of September 27, 2015, the liability balance for uncertain tax positions was $6,218,000. We are not able to reasonably estimate in which future periods these amounts will ultimately be settled.

 

We currently have outstanding $63,931,000 aggregate principal amount of our 8.50% Secured Notes, $12,200,000 aggregate principal amount of our 10.875% Notes, $37,500,000 of our 8.50% New Convertible Notes and $13,500,000 of our term loan from PNC Bank. Our 8.50% Secured Notes and our 10.875% Notes mature on January 15, 2017 and our 8.50% New Convertible Notes mature on October 31, 2019. The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015 and continuing through January 1, 2020.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following are our most critical accounting policies that affect significant areas and involve judgment and estimates. If these estimates differ materially from actual results, the impact on the consolidated financial statements may be material.

 

Revenue Recognition

 

We recognize revenue from the sale of our products when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Amounts billed to customers for shipping and handling costs associated with products sold are classified as revenue.

 

For all sales, we use a binding purchase order as evidence of an arrangement. Delivery generally occurs when product is delivered to a common carrier. Certain of our products are delivered on an FOB destination basis. We defer our revenue associated with these transactions until the product has been delivered to the customer’s premises.

 

We also store inventory in “vendor managed inventory,” or VMI facilities, which are warehouses located close to the customer’s manufacturing facilities. Revenue is recognized on sales from such facilities upon the transfer of title and risk of loss, following the customer’s acknowledgement of the receipt of the goods.

 

We also enter into arrangements with customers that provide us with reimbursement for engineering services and specific program capacity to partially offset the costs of our investment. We recognize the associated revenue over the estimated life of the program to which the services and capacity relate.

 

Inventory Valuation

 

Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs and inventory balances.

 

We are dependent on a limited number of customers and a limited number of product programs for each customer. Because our products are custom built, we typically cannot shift work-in-process or finished goods from customer to customer or from one program to another for a particular customer. We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. We write down excess and obsolete inventory to the lower of cost or market based on the analysis.

 

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Long-Lived Assets

 

We evaluate the carrying value of long-lived assets, consisting primarily of property, plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn or significant reductions in projected future cash flows. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, the assets will be written down based on the excess of the carrying amount over the fair value of the assets. Fair value would generally be determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows.

 

Income Taxes

 

We account for income taxes in accordance with FASB guidance on accounting for income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be realized based on future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we must include an expense or a benefit within the tax provision in our statement of operations.

 

Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Valuation allowances arise due to the uncertainty of realizing deferred tax assets. At September 27, 2015, and September 28, 2014, we had valuation allowances of $239,912,000 and $227,219,000, respectively. The FASB guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under the guidance, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance was appropriate. Accordingly, we concluded that a full valuation allowance is appropriate. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.

 

Recent Accounting Pronouncements

 

See Note 1 to the consolidated financial statements contained in Item 15 below for a discussion of recent accounting pronouncements.

 

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

 

We have no earnings or cash flow exposure due to market risk on our debt obligations that are subject to fixed interest rates. Interest rate changes, however, would affect the fair market value of this fixed rate debt. At September 27, 2015, we had fixed rate debt of $113,631,000, with a fair market value of $109,387,000. We used trading activity to determine the fair market value of the 8.50% Convertible Notes and the 8.50% Secured Notes. The 10.875% Notes had no trading activity, therefore the estimate was based on the closing market price of comparable debt as of the end of the fiscal year.

 

As of September 27, 2015 we had no outstanding borrowings under our Senior Secured Credit Facility. Such borrowings, if any, are eligible to bear cash interest at a reduced rate equal to either (i) PNC Bank’s alternate base rate plus 1.0% per annum, or (ii) LIBOR plus 3.5% per annum if no defaults or events of default exist under the Credit Agreement.

 

The amount borrowed under the term loan may consist of domestic rate loans, with a per annum interest rate equal to PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 2.50%, or LIBOR rate loans, with a per annum interest rate equal to 3.50% plus the greater of the LIBOR rate (as defined in the Credit Agreement) or 1.00%, or a combination thereof. As a result, our interest rate for the term loan has been 4.5%.

 

Our investing activities are guided by an investment policy, which is reviewed at least annually by our board of directors, and whose objectives are preservation and safety of capital, maintenance of necessary liquidity and maximizing of the rate of return within the stated guidelines. Our policy provides guidelines as to the maturity, concentration limits and credit quality of our investments, as well as guidelines for communication, authorized securities and other policies and procedures in connection with our investing activities.

 

We are exposed to various market risks and potential loss arising from changes in interest rates and foreign currency exchange rates. Fluctuations could impact our operating results or negatively affect our cash, cash equivalents and marketable securities held in investment accounts.

 

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Item 8.Financial Statements and Supplementary Data

 

The financial statements and notes thereto required pursuant to this Item begin on page F-1 of this Annual Report on Form 10-K.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.

 

We performed an evaluation under the supervision and with the participation of our management, including our principal executive and principal financial officers, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act. Based on that evaluation, our management, including our principal executive and principal financial officers, concluded that our disclosure controls and procedures were effective as of September 27, 2015.

 

Changes in Internal Control over Financial Reporting

 

We have not identified any change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Management’s Report on Internal Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets;
·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

We performed an evaluation under the supervision and with the participation of our management, including our principal executive and principal financial officers, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act as of September 27, 2015. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on that criteria, our management concluded that our internal control over financial reporting was effective as of September 27, 2015.

 

Our consolidated financial statements as of and for the year ended September 27, 2015, have been audited by Deloitte & Touche LLP, our independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Deloitte & Touche LLP has also audited our internal control over financial reporting as of September 27, 2015, as stated in its attestation report included in this Annual Report on Form 10-K.

 

December 11, 2015

 

  

/s/ Richard J. Penn
  President and Chief Executive Officer
   
  /s/ David P. Radloff
  Vice President and Chief Financial Officer

 

 29 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Hutchinson Technology Incorporated

Hutchinson, Minnesota:

 

We have audited the internal control over financial reporting of Hutchinson Technology Incorporated and subsidiaries (the “Company”) as of September 27, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 27, 2015 of the Company and our report dated December 11, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.

 

/s/ Deloitte & Touche LLP

 

Minneapolis, Minnesota
December 11, 2015

  

 30 

 

 

PART III

 

Certain information required by Part III will be incorporated by reference from our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 2015 (the “Proxy Statement”), which we expect to file with the SEC pursuant to Regulation 14A within 120 days after September 27, 2015. Except for those portions specifically incorporated in this Annual Report on Form 10-K by reference to our Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this Annual Report on Form 10-K.

 

Item 10.Directors, Executive Officers and Corporate Governance

 

Incorporated into this item by reference is the information appearing under the headings “Proposal No. 1 – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.

 

Our executive officers are as follows:

 

Name   Age   Position
Richard J. Penn   59   President, Chief Executive Officer and Director
David P. Radloff   56   Vice President and Chief Financial Officer
Connie L. Pautz   57   Vice President of Human Resources & Corporate Communications
Dale M. Ruzicka   55   Vice President of Operations
D. Mark Jelkin   53   Vice President of Engineering

 

Mr. Penn became President and Chief Executive Officer in October 2012. Previously, he had served as Senior Vice President and President of the Disk Drive Components Division since March 2011. He was Senior Vice President and President of the BioMeasurement Division from April 2007 to March 2011, Senior Vice President and President of the Disk Drive Components Division from 2005 to April 2007, and Vice President of Operations from 2003 to 2005. Mr. Penn has been with our company since 1981.

 

Mr. Radloff became Vice President and Chief Financial Officer in September 2010. Previously, he had served as Corporate Controller since January 2009. He served as Vice President of Corporate Finance from December 2007 to January 2009 and as Chief Information Officer from February 2000 to January 2009. He has been with our company since 1986.

 

Ms. Pautz became Vice President of Human Resources & Corporate Communications in December 2009. Previously, she had served as Human Resources Director since January 2009. She served as Corporate Communications Director from March 2001 to December 2009. She has been with our company since 1984.

 

Mr. Ruzicka became Vice President of Operations in December 2012. Previously, he had served as plant manager since May 2008. He served as Director of Manufacturing Strategy from 2006 to May 2008 and Director of Asian Operations from 2000 to 2006. He has been with our company since 1982.

 

Mr. Jelkin became Vice President of Engineering in June 2014. Previously, he had served as Director of Engineering and Program Development since 2006. He has been with our company since 1988.

 

Executive officers are appointed annually by our board of directors and serve a one-year period or until their successors are elected.

 

None of the above executive officers is related to each other or to any of our directors.

 

We have adopted a Code of Ethics and Conduct, which applies to our members of the board of directors, chief executive officer, chief financial officer, controller and other employees performing similar functions as designated by our chief executive officer. A copy of our Code of Ethics and Conduct is available on our website at http://www.htch.com. We intend to post on our website any amendments to, or waivers from, our Code of Ethics and Conduct pursuant to the rules of the SEC and the NASDAQ Stock Market.

 

Item 11.Executive Compensation

 

Incorporated into this item by reference is the information appearing under the heading “Compensation of Executive Officers,” the information regarding compensation committee interlocks and insider participation under the heading “Corporate Governance” and the information regarding compensation of non-employee directors under the heading “Proposal No. 1 – Election of Directors” in our Proxy Statement.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Incorporated into this item by reference is the information appearing under the headings “Security Ownership of Principal Shareholders and Management” and “Equity Compensation Plan Information” in our Proxy Statement.

  

 31 

 

  

Item 13.Certain Relationships and Related Transactions, and Director Independence

 

Incorporated into this item by reference is the information regarding director independence under the heading “Proposal No. 1 – Election of Directors” and the information regarding related person transactions under the heading “Corporate Governance” in our Proxy Statement.

 

Item 14.Principal Accountant Fees and Services

 

Incorporated into this item by reference is the information under the heading “Proposal No. 3 – Ratification of Independent Registered Public Accounting Firm” in our Proxy Statement.

 

PART IV

 

Item 15.Exhibits and Financial Statement Schedules

 

(a)Documents Filed as Part of this Annual Report on Form 10-K:

 

1.Consolidated Financial Statements:

 

Consolidated Statements of Operations for the fiscal years ended September 27, 2015, September 28, 2014 and September 29, 2013

 

Consolidated Statements of Comprehensive Loss for the fiscal years ended September 27, 2015, September 28, 2014 and September 29, 2013

 

Consolidated Balance Sheets as of September 27, 2015 and September 28, 2014

 

Consolidated Statements of Cash Flows for the fiscal years ended September 27, 2015, September 28, 2014 and September 29, 2013

 

Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 27, 2015, September 28, 2014 and September 29, 2013

 

Notes to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

 

2.Financial Statement Schedule:

 

Schedule II — Valuation and Qualifying Accounts

 

All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.

 

(b)Exhibits:

 

Unless otherwise indicated, all documents incorporated into this Annual Report on Form 10-K by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 1-34838.

 

 

 

Exhibit No.   Description
3.1   Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended 12/29/2002; File No. 0-14709).
     
3.2   Restated By-Laws, as amended December 16, 2013 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed 12/18/2013).
     
4.1   Instruments defining the rights of security holders. The registrant agrees to furnish to the SEC upon request copies of instruments with respect to long-term debt.
     
4.2   Rights Agreement dated as of July 29, 2010, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A filed 7/30/2010); First Amendment to Rights Agreement dated as of May 6, 2011, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 2 to Registration Statement on Form 8-A/A filed 5/6/2011); Second Amendment to Rights Agreement, dated February 24, 2012, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 3 to Registration Statement on Form 8-A/A filed 2/24/2012); Third Amendment to Rights Agreement, dated March 27, 2102, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 4 to Registration Statement on Form 8-A/A filed 3/27/2012); Fourth Amendment to Rights Agreement dated as of October 20, 2014, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 5 to Registration Statement on Form 8-A/A filed 10/20/2014).

 

 32 

 

  

Exhibit No.   Description
4.3   Indenture, dated February 11, 2011, with Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 2/11/2011); First Supplemental Indenture, dated June 17, 2011 (incorporated by reference to Exhibit 4.8 to Amendment No. 3 to Registration Statement on Form S-4; File No. 333-173970).
     
4.4   Form of 8.50% Convertible Senior Note due 2026 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed 2/11/2011).
     
4.5   Intercreditor Agreement, dated March 30, 2012, by and between PNC Bank, National Association, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed 4/2/2012); First Amendment to Intercreditor Agreement, dated January 22, 2013 (incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed 1/28/2013).
     
4.6   8.50% Senior Secured Second Lien Note Indenture, dated March 30, 2012, with Wells Fargo Bank, National Association, as Trustee (including form of 8.50% Senior Secured Second Lien Note due 2017) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 4/2/2012); First Supplemental Indenture, dated January 22, 2013 (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed 1/28/2013); Second Supplemental Indenture, dated October 20, 2014 (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed 10/23/2014).
     
4.7   Form of Warrant (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed 4/2/2012).
     
4.8   10.875% Senior Secured Second Lien Note Indenture, dated January 22, 2013, with Wells Fargo Bank, National Association, as trustee (including form of 10.875% Senior Secured Second Lien Note due 2017) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 1/28/2013); First Supplemental Indenture, dated October 20, 2014 (incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K file 10/23/2014).
     
4.9   Intercreditor Agreement, dated January 22, 2013, between Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed 1/28/2013).
     
4.10   Senior Indenture, dated October 20, 2014, with U.S. Bank National Association, as trustee (including form of 8.50% Convertible Senior Notes due 2019) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 10/23/2014); First Supplemental Indenture, dated October 20, 2014 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K file 10/23/2014).
     
4.11   Common Stock Warrant issued October 23, 2014 (incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K file 10/23/2014).
     
10.1   Office/Warehouse Lease with OPUS Corporation, dated December 29, 1995 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended 3/24/96; File No. 0-14709), First Amendment to Office/Warehouse Lease dated April 30, 1996 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended 6/23/96; File No. 0-14709); and Second Amendment to Office/Warehouse Lease with VV Minneapolis, L.P., as successor-in-interest to OPUS Corporation, dated April 14, 2004 (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the year ended 9/25/2005; File No. 0-14709).
     
10.2   Patent License Agreement, effective as of September 1, 1994, with International Business Machines Corporation (incorporated by reference to Exhibit 10.11 to Quarterly Report on Form 10-Q/A for the quarter ended 6/25/95; File No. 0-14709).
     
10.3*   Amended and Restated 1996 Incentive Plan (as amended and restated October 10, 2008) (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
     
10.4*   Form of Non-Statutory Stock Option Agreement (Employee) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
     
10.5*   Form of Incentive Stock Option Agreement (Employee) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
     
10.6*   Form of Non-Statutory Stock Option Agreement (Director) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).

 

 33 

 

  

Exhibit No.   Description
10.7*   Form of Restricted Stock Agreement (Director) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed 12/7/2004; File No. 0-14709).
     
10.8*   Non-Employee Directors Equity Plan (as amended and restated January 25, 2012) (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended 9/30/2012).
     
10.9*   Form of Severance and Change in Control Agreement for Senior Executives (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to Current Report on Form 8-K/A filed 10/14/2010).
     
10.10*   Severance Pay Plan (as amended and restated March 8, 2011) (incorporated by reference to Exhibit 10.1 to Amendment No. 1 on Form 10-Q/A for the quarter ended 3/27/2011).
     
10.11*   Employee Stock Purchase Plan (as amended and restated January 20, 2011) (incorporated by reference to Appendix B to Definitive Proxy Statement on Schedule 14A filed 12/10/2010).
     
10.12*   2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended 12/26/2010).
     
10.13*   Form of Director Stock Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended 12/26/2010).
     
10.14*   Form of Employee Non-Statutory Stock Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
     
10.15*   Form of Employee Incentive Stock Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
     
10.16*   Form of Employee Restricted Stock Unit Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
     
10.17*   Form of Senior Management Restricted Stock Unit Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
     
10.18*   Description of Fiscal Year 2015 Executive Annual Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 10/14/2015).
     
10.19   Revolving Credit and Security Agreement with PNC Bank, National Association, dated September 16, 2011 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 9/21/2011); Consent and Amendment No. 1 to Revolving Credit and Security Agreement, dated February 6, 2012 (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement on Form S-1, filed 2/27/2012; File No. 333-179384); Amendment to Consent and Amendment No. 1 to Revolving Credit and Security Agreement, dated March 28, 2012 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed 4/2/2012); Amendment No. 2 to Revolving Credit and Security Agreement, dated July 23, 2012 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 7/26/2012); Consent and Amendment No. 3 to Revolving Credit and Security Agreement, dated January 22, 2013 (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed 1/28/2013); Waiver and Amendment No. 4 to Revolving Credit and Security Agreement, dated as of October 28, 2013 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 10/31/2013); Amendment No. 5 to Revolving Credit and Security Agreement, dated September 22, 2014 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 9/25/2014); Amendment No. 6 to Revolving Credit and Security Agreement, dated October 20, 2014 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed 10/23/2014); Amendment No. 7 to Revolving Credit and Security Agreement, dated December 23, 2014 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 12/24/2014); Amendment No. 8 to Revolving Credit and Security Agreement, dated April 30, 2015 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 4/30/2015).
     
10.20   Securities Purchase Agreement, dated March 28, 2012 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 4/2/2012).
     
10.21   Securities Purchase Agreement, dated October 20, 2014 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 10/23/2014).

 

 34 

 

  

Exhibit No.   Description
10.22   Exchange Agreement with Liberty Harbor Master Fund I, L.P. dated October 20, 2014 (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended 12/28/2014).
     
21.1   List of Subsidiaries (incorporated by reference to Exhibit 21.1 to Annual Report on form 10-K for the fiscal year ended September 28, 2014).
     
23.1   Consent of Independent Registered Public Accounting Firm.
     
24.1   Powers of Attorney.
     
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
     
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
     
32.1   Section 1350 Certifications.
     
101   The following financial statements and footnotes from the Annual Report on Form 10-K for the fiscal year ended September 27, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Cash Flows; (iv) Consolidated Statements of Shareholders’ Equity; and (v) Notes to Consolidated Financial Statements.

 

 

*Management contract, compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.

 

 35 

 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 11, 2015.

 

    HUTCHINSON TECHNOLOGY INCORPORATED
     
  By /s/ Richard J. Penn
    Richard J. Penn,
    President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 11, 2015.

 

/s/ Richard J. Penn   /s/ David P. Radloff
Richard J. Penn,   David P. Radloff,
President and Chief Executive Officer   Vice President and Chief Financial Officer
(Principal Executive Officer) and Director   (Principal Financial Officer and Principal Accounting Officer)
     
*   *
Martha Goldberg Aronson, Director   Frank P. Russomanno, Director
     
*   *
Wayne M. Fortun, Director   Philip E. Soran, Director
     
*   *
Russell Huffer, Director   Thomas R. VerHage, Director

 

 

*Richard J. Penn, by signing his name hereto, does hereby sign this document on behalf of each of the above-named directors of the Registrant pursuant to powers of attorney duly executed by such persons.

 

  By /s/ Richard J. Penn
    Richard J. Penn,
    Attorney-in-Fact

 

 

  

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Hutchinson Technology Incorporated and Subsidiaries

 

   Fiscal Years Ended 
   September 27, 2015   September 28, 2014   September 29, 2013 
   (In thousands, except per share data) 
Net sales  $252,823   $261,087   $249,596 
Cost of sales   222,791    237,186    233,171 
Gross profit   30,032    23,901    16,425 
Research and development expenses   22,100    17,316    14,621 
Selling, general and administrative expenses   23,481    22,990    23,676 
Severance and site consolidation expenses (Note 1)   159    2,726    2,873 
Asset impairment (Note 1)   1,620    4,470     
Loss from operations   (17,328)   (23,601)   (24,745)
Other expense, net   (3,538)   (1,738)   (550)
(Loss) gain on extinguishment of long-term debt (Note 2)   (4,318)       4,986 
Interest income   40    73    98 
Interest expense, including non-cash accretion of $1,963, $3,343 and $3,335   (14,028)   (15,909)   (15,121)
Gain on short- and long-term investments           272 
Loss before income taxes   (39,172)   (41,175)   (35,060)
(Benefit) provision for income taxes   (74)   (761)   16 
Net loss  $(39,098)  $(40,414)  $(35,076)
Basic loss per share  $(1.20)  $(1.44)  $(1.35)
Diluted loss per share  $(1.20)  $(1.44)  $(1.35)
Weighted-average common shares outstanding   32,711    27,993    25,981 
Weighted-average diluted shares outstanding   32,711    27,993    25,981 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-1 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

Hutchinson Technology Incorporated and Subsidiaries

 

   Fiscal Years Ended 
   September 27, 2015   September 28, 2014   September 29, 2013 
       (In thousands)     
             
Net loss  $(39,098)  $(40,414)  $(35,076)
Other comprehensive loss:               
Foreign currency translation, net of income taxes of $0   (3,766)   (395)   (19)
Other comprehensive loss   (3,766)   (395)   (19)
Comprehensive loss  $(42,864)  $(40,809)  $(35,095)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-2 

 

 

CONSOLIDATED BALANCE SHEETS

 

Hutchinson Technology Incorporated and Subsidiaries

 

   September 27, 2015   September 28, 2014 
   (In thousands) 
ASSETS          
Current assets:          
Cash and cash equivalents (Note 1)  $39,454   $37,939 
Short-term investments restricted (Note 1)   965    965 
Trade receivables, net   15,860    23,971 
Other receivables   2,707    2,894 
Inventories   40,148    48,978 
Other current assets   3,588    4,323 
Total current assets   102,722    119,070 
           
Property, plant and equipment:          
Land, buildings and improvements   195,008    205,765 
Equipment   638,682    639,251 
Property under capital lease   11,564    9,770 
Construction in progress   3,626    6,106 
Less: Accumulated depreciation   (714,371)   (707,723)
Net property, plant and equipment   134,509    153,169 
Other assets   4,281    2,926 
Total assets  $241,512   $275,165 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Current debt, net of discount (Note 2)  $3,000   $48,731 
Current portion of capital lease obligation   2,188    2,109 
Accounts payable   19,877    19,055 
Accrued compensation   9,388    9,312 
Accrued expenses and other   4,239    3,973 
Accrued interest   2,838    2,433 
Total current liabilities   41,530    85,613 
           
Long-term debt, net of discount (Note 2)   122,156    87,168 
Capital lease obligation   4,220    4,464 
Other long-term liabilities   2,731    3,092 
Commitments and contingencies (Notes 2, 5 and 6)          
Shareholders’ equity:          
Common stock, $.01 par value, 100,000,000 shares authorized,
33,540,000 and 28,102,000 issued and outstanding
   335    281 
Additional paid-in capital   452,165    433,308 
Accumulated other comprehensive loss   (4,309)   (543)
Accumulated loss   (377,316)   (338,218)
Total shareholders’ equity   70,875    94,828 
Total liabilities and shareholders’ equity  $241,512   $275,165 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-3 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Hutchinson Technology Incorporated and Subsidiaries

 

   Fiscal Years Ended 
   September 27, 2015   September 28, 2014   September 29, 2013 
   (In thousands) 
OPERATING ACTIVITIES:               
Net loss  $(39,098)  $(40,414)  $(35,076)
Adjustments to reconcile net loss to cash provided by (used for) operating activities:               
Depreciation and amortization   31,945    37,204    38,891 
Stock-based compensation   1,415    1,345    1,140 
Gain on short- and long-term investments           (272)
Loss (gain) on disposal of assets   63    (57)   98 
Asset impairment charge (Note 1)   1,620    4,470     
Non-cash interest expense   1,963    3,343    3,335 
Loss (gain) on extinguishment of debt (Note 2)   4,318        (4,986)
Severance and site consolidation expenses (Note 1)   (27)   27     
Changes in operating assets and liabilities (Note 7)   16,566    (7,392)   2,955 
Cash provided by (used for) operating activities   18,765    (1,474)   6,085 
                
INVESTING ACTIVITIES:               
Capital expenditures   (17,940)   (17,283)   (18,880)
Proceeds from sale/leaseback of equipment   3,221    6,395    5,025 
Proceeds from the sale of building and other assets       4,563     
Change in restricted cash   382    1,662    1,698 
Purchases of marketable securities   (1,930)   (2,395)   (1,200)
Sales/maturities of marketable securities   1,930    2,630    1,472 
Cash used for investing activities   (14,337)   (4,428)   (11,885)
                
FINANCING ACTIVITIES:               
Proceeds from issuance of common stock   83    59    358 
Repayments of capital lease   (2,382)   (1,739)   (783)
Repayments of revolving credit line   (127,773)   (189,389)   (237,525)
Proceeds from revolving credit line and loan   118,240    194,942    241,505 
Repayments of debt (Note 2)   (41,322)       (23,470)
Proceeds from private placement of debt (Note 2)   37,500        11,590 
Proceeds from term loan   15,000         
Debt refinancing costs (Note 2)   (3,175)       (359)
Cash (used for) provided by financing activities   (3,829)   3,873    (8,684)
Effect of exchange rate changes on cash   916    565    234 
Net increase (decrease) in cash and cash equivalents   1,515   (1,464)   (14,250)
Cash and cash equivalents at beginning of year   37,939    39,403    53,653 
Cash and cash equivalents at end of year  $39,454   $37,939   $39,403 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-4 

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

Hutchinson Technology Incorporated and Subsidiaries

 

   Common Stock  

Additional

Paid-In

  

Accumulated

Other

Comprehensive

   Accumulated   Total
Shareholders’
 
   Shares   Amount   Capital   Income (Loss)   Loss   Equity 
   (In thousands) 
Balance, September 30, 2012   23,900   $239   $430,448   $(129)  $(262,728)  $167,830 
Exercise of stock options   107    1    321            322 
Exercise of warrants   3,409                     
Issuance of common stock   165    36    26            62 
Stock-based compensation (Note 5)           1,114            1,114 
Components of comprehensive loss:                              
Foreign currency translation, net of income taxes of $0               (19)       (19)
Net loss                   (35,076)   (35,076)
                               
Balance, September 29, 2013   27,581   $276   $431,909   $(148)  $(297,804)  $134,233 
Exercise of stock options   45        54            54 
Issuance of common stock   476    5    108            113 
Stock-based compensation (Note 5)           1,237            1,237 
Components of comprehensive loss:                              
Foreign currency translation, net of income taxes of $0               (395)       (395)
Net loss                   (40,414)   (40,414)
                               
Balance, September 28, 2014   28,102   $281   $433,308   $(543)  $(338,218)  $94,828 
Exercise of stock options           7            7 
Exercise of warrants   2,493    25                25 
Issuance of common stock   445    4    17            21 
Stock-based compensation (Note 5)           1,445            1,445 
Common stock and equity component of debt exchange   2,500    25    17,388            17,413 
Components of comprehensive loss:                              
Foreign currency translation, net of income taxes of $0               (3,766)       (3,766)
Net loss                   (39,098)   (39,098)
                               
Balance, September 27, 2015   33,540   $335   $452,165   $(4,309)  $(377,316)  $70,875 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-5 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries

(Columnar dollar amounts in thousands except per share amounts)

 

1.Basis of Presentation and Summary of Significant Accounting Policies

 

Organization

 

We are a global supplier of critical precision component technologies. As a key supplier of suspension assemblies for disk drives, we help customers improve overall disk drive performance and meet the demands of an ever-expanding digital universe. Through our new business development initiatives, we focus on leveraging our unique precision manufacturing capabilities in new markets to improve product performance, reduce size, lower cost and reduce time to market.

 

We manufacture suspension assemblies for all sizes and types of hard disk drives. Suspension assemblies are critical components of disk drives that hold the read/write heads in position above the spinning magnetic disks. We developed our position as a key supplier of suspension assemblies through an integrated manufacturing approach, research, development and design activities coupled with substantial investments in process capabilities, product features and manufacturing capacity. We manufacture our suspension assemblies with proprietary technology and processes with very low part-to-part variation. These processes require manufacturing to precise specifications that are critical to maintaining the necessary microscopic clearance between the head and disk and the electrical connectivity between the head and the drive circuitry.

 

We design our suspension assemblies with a focus on the increasing performance requirements of new disk drives, principally more complex, increased data density, improved head-to-disk stability during a physical shock event and reduced data access time. Increased capacity, improved reliability and performance, as well as the miniaturization of disk drives, generally require suspension assemblies with lower variability, specialized design, expanded functionality and greater precision. Manufacturing of these smaller and more complex suspension assemblies requires that we develop new manufacturing process capabilities. We will continue to invest, as needed, to advance suspension assembly technology, enhance our process capabilities and expand our production capacity.

 

Our business is comprised of a single operating and reportable segment. Our chief operating decision maker assesses financial performance of our company as a whole.

 

Entry into Merger Agreement

 

On November 1, 2015, subsequent to our 2015 year end, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Headway Technologies, Inc. (“Parent”) and Hydra Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Subsidiary”). Pursuant to the Merger Agreement, Merger Subsidiary will merge with and into our company and our company will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Subsidiary are each beneficially owned by TDK Corporation, a Japanese electronics company (“TDK”).

 

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our capital stock (other than shares held (1) by Parent or Merger Subsidiary or any direct or indirect subsidiary of our company or Parent, and (2) by shareholders who have perfected and not withdrawn a demand for dissenters’ rights or who have not otherwise lost dissenters’ rights under Minnesota law with respect to such shares), will be cancelled and extinguished and automatically converted into the right to receive:

 

·$3.62 in cash, without interest, plus

 

·up to $0.38 in cash, without interest (the “Additional Consideration”).

 

The Additional Consideration will be determined prior to consummation of the Merger and will be an amount equal to approximately $0.01 per share for each $500,000 of our Net Cash (as defined in the Merger Agreement) over $17,500,000 as of a fiscal period end within 45 days prior to the consummation of the Merger. We cannot predict the amount of Additional Consideration, if any, that will be payable to shareholders. As of September 27, 2015, our Net Cash position was $41,900,000.

 

Each party’s obligation to consummate the Merger is subject to satisfaction or waiver of a number of conditions set forth in the Merger Agreement.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Hutchinson Technology Incorporated and its subsidiaries (“we,” “our,” “us” and the “company”), all of which are wholly-owned. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) 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. 

 

 F-6 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

Accounting Pronouncements

 

In May 2014, the FASB issued authoritative guidance related to revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB confirmed a one year deferral of the effective date of the new revenue standard and allows early adoption as of the original effective date. The updated guidance will be effective for our first quarter of 2019. We are in the process of assessing the impact, if any, this guidance will have on our consolidated financial statements.

 

In April 2015, the FASB issued authoritative guidance related to simplifying the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for our first quarter of 2017. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. We are in the process of assessing the impact this guidance will have on our consolidated financial statements.

 

Fiscal Year

 

Our fiscal year is a fifty-two/fifty-three week period ending on the last Sunday in September. The fiscal years ended September 27, 2015, September 28, 2014, and September 29, 2013, were fifty-two week periods.

 

Revenue Recognition

 

We recognize revenue from the sale of our products when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Amounts billed to customers for shipping and handling costs associated with products sold are classified as revenue.

 

For all sales, we use a binding purchase order as evidence of an arrangement. Delivery generally occurs when the product is delivered to a common carrier. Certain of our products are delivered on an FOB destination basis. We defer our revenue associated with these transactions until the product has been delivered and accepted at the customer’s premises.

 

We also store inventory in “vendor managed inventory,” or VMI, facilities, which are warehouses located close to the customer’s manufacturing facilities. Revenue is recognized on sales from such facilities upon the transfer of title and risk of loss, following the customer’s acknowledgement of the receipt of the goods.

 

We also enter into arrangements with customers that provide us with reimbursement for engineering services and specific program capacity to partially offset the costs of our investment. We recognize the associated revenue over the estimated life of the program to which the services and capacity relate. The deferred revenue related to these reimbursements, as recorded on our consolidated balance sheets as of September 27, 2015, and September 28, 2014, was $940,000 and $1,135,000, respectively, included in the line item “Accrued expenses and other” and $1,649,000 and $1,891,000, respectively, included in the line item “Other long-term liabilities.”

 

Cash and Cash Equivalents

 

Cash equivalents consist of all highly liquid investments with original maturities of three months or less.

 

The cash and cash equivalents that were restricted in use, as recorded on our consolidated balance sheets as of September 27, 2015, and September 28, 2014, was $1,677,000 and $2,059,000, respectively included in the line item “Other current assets”. As of September 27, 2015, and September 28, 2014, these amounts covered outstanding letters of credit and cash received and temporarily held in our senior secured credit facility collections account.

 

The revolving credit and security agreement between us and PNC Bank, National Association’s (“PNC Bank”), as amended, requires that we maintain a $2,500,000 compensating balance to draw proceeds on the corresponding credit facility. The $2,500,000 balance is maintained under the credit agreement to assure future credit availability. 

 

Investments

 

Our short-term investments are comprised of United States government debt securities. We account for securities available for sale in accordance with Financial Accounting Standards Board (“FASB”) guidance regarding accounting for certain investments in debt and equity securities, which requires that available-for-sale and trading securities be carried at fair value. Unrealized gains and losses deemed to be temporary on available-for-sale securities are reported as other comprehensive income (“OCI”) within shareholders’ equity. Fair value of the securities is based upon quoted market prices in active markets or estimated fair value when quoted market prices are not available. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. We classify our available-for-sale securities as short- or long-term based upon management’s intent and ability to hold these investments.

 

 F-7 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

A summary of our investments as of September 27, 2015, and September 28, 2014, is as follows:

 

   September 27, 2015 
       Gross Realized   Gross Unrealized     
   Cost Basis   Gains   Losses   Gains   Losses   Recorded Basis 
Available-for-sale securities                              
Short-term investments restricted                              
U.S. government debt securities  $965   $   $   $   $   $965 

 

   September 28, 2014 
       Gross Realized   Gross Unrealized     
   Cost Basis   Gains   Losses   Gains   Losses   Recorded Basis 
Available-for-sale securities                              
Short-term investments restricted                              
U.S. government debt securities  $965   $   $   $   $   $965 

 

As of September 27, 2015, and September 28, 2014, our short-term investments mature within one year.

 

As of September 27, 2015, and September 28, 2014, we had $965,000 and $965,000, respectively, of short-term investments that were restricted in use. The amounts are required by the State of Minnesota to be held as security for our self-insured workers compensation programs.

 

Trade Receivables

 

We grant credit to our customers, but generally do not require collateral or any other security to support amounts due. Trade receivables of $15,860,000 at September 27, 2015, and $23,971,000 at September 28, 2014, are net of allowances for sales returns of $623,000 and $497,000, respectively.

 

During 2015, we entered into multiple independent bill of exchange discounting transactions under an uncommitted facility with Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch (“HSBC”), under which our Thai subsidiary, Hutchinson Technology Operations (Thailand) Co. Ltd., sold, without recourse, an aggregate of $105,476,000 of its accounts receivable to HSBC and was paid 95% of the face value of the accounts receivable, less interest expense of LIBOR plus 1.75%. Upon full payment of the receivable by its customer to HSBC, our Thai subsidiary receives from HSBC the 5% remainder due on the receivable. The balance remaining to be paid to our Thai subsidiary from HSBC, as recorded on our consolidated balance sheets as of September 27, 2015, and September 28, 2014, was $1,228,000 and $1,777,000, respectively, included within the line item “Other receivables” on our consolidated balance sheet.

 

Late in 2015, we also entered into multiple independent bill of exchange discounting transactions under an uncommitted facility with Bank of America, N.A., Bangkok Branch (“Bank of America”), under which our Thai subsidiary can sell, without recourse, approximately 90% of its accounts receivable to Bank of America and be paid the full face value of that accounts receivable sold, less interest expense of LIBOR plus 1.50%. The approximately 10% remainder due on the receivable is included in our trade receivables balance until paid. During 2015, our Thai Subsidiary sold $19,665,000 of its accounts receivable to Bank of America which has been paid in full.

 

We generally warrant that the products sold by us will be free from defects in materials and workmanship for a period of one year or less following delivery to our customer. Upon determination that the products sold are defective, we typically accept the return of such products and refund the purchase price to our customer. We record a provision against revenue for estimated returns on sales of our products in the same period that the related revenues are recognized. We base the allowance on historical product returns, as well as existing product return authorizations. The following table reconciles the changes in our allowance for sales returns under warranties: 

 

Fiscal Year  Beginning Balance  

Increases in the

Allowance Related to

Warranties Issued

  

Reductions in the

Allowance for Returns

Under Warranties

   Ending Balance 
2015  $497   $3,845   $(3,719)  $623 
2014  $656   $1,968   $(2,127)  $497 

 

 F-8 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

Inventories

 

Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs and inventory balances. Inventories consisted of the following at September 27, 2015, and September 28, 2014:

 

   2015   2014 
Raw materials  $19,236   $21,376 
Work in process   9,537    11,860 
Finished goods   11,375    15,742 
   $40,148   $48,978 

 

Property and Depreciation

 

Property, plant and equipment are stated at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We also use straight-line depreciation methods for income tax reporting purposes.

 

Costs of renewals and betterments that substantially extend the useful life of an asset are capitalized and depreciated. Maintenance and repairs are charged directly to expense as incurred.

 

Property under capital lease is comprised of equipment used in our operations. The related depreciation for capital leases is included in depreciation expense. The carrying value of property under capital lease was $11,564,000 at September 27, 2015, net of accumulated depreciation of $3,842,000.

 

Estimated useful lives for financial reporting purposes are as follows:

 

Buildings 25 to 35 years
Leasehold improvements 5 to 10 years
Equipment 1 to 15 years
Capital leases 1 to 15 years

 

Other Comprehensive Loss

 

The components of accumulated OCI, net of income taxes, were as follows:

 

   September 27,
2015
   September 28,
2014
 
Foreign currency translation  $(4,309)  $(543)

 

Our Thailand operation uses their local currency as its functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated OCI. Foreign currency translation, net of income taxes of $0, was a $3,766,000 loss in 2015, a $395,000 loss in 2014 and a $19,000 loss in 2013.

 

Transaction gains and losses that arise from the exchange rate changes on transactions denominated in a currency other than the local currency are included in “Other expense, net” in the consolidated statements of operations. We recognized a foreign currency loss of $3,949,000 in 2015, a loss of $2,076,000 in 2014 and a loss of $1,372,000 in 2013 primarily related to purchases denominated in U.S. dollars made by our Thailand operation.

 

Engineering and Process Development

 

Our engineers and technicians are responsible for the implementation of new technologies, as well as process and product development and improvements. Expenditures related to these activities totaled $54,622,000 in 2015, $47,397,000 in 2014 and $39,657,000 in 2013. Of these amounts, $22,100,000 in 2015, $17,316,000 in 2014 and $14,621,000 in 2013 were classified as research and development expenses, with the remainder relating to quality, engineering and manufacturing support, classified as cost of sales.

 

 F-9 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued) 

 

Severance and Site Consolidation Expenses

 

A summary of our severance and site consolidation expenses as of September 27, 2015, is as follows:

 

  

Severance and

Benefits

  

Site Consolidation

Expenses

   Total 
Accrual balances, September 30, 2012  $   $   $ 
Restructuring charges   1,212    1,661    2,873 
Cash payments   (1,212)   (1,661)   (2,873)
Accrual balances, September 29, 2013            
Restructuring charges   1,377    1,349    2,726 
Cash payments   (1,350)   (1,349)   (2,699)
Accrual balances, September 28, 2014   27        27 
Restructuring charges   (19)   178    159 
Cash payments   (8)   (178)   (186)
Accrual balances, September 27, 2015  $   $   $ 

 

All severance and benefits amounts owed have been paid in full.

 

In recent years, we had multiple severance and manufacturing consolidation and restructuring plans in place to support efforts to improve operating results and liquidity through improved utilization of our facilities in both the U.S. and Thailand.

 

During the first quarter of 2013, we eliminated approximately 55 positions as part of our continued focus on overall cost reductions. As of September 29, 2013, we had incurred $2,873,000 of severance and site consolidation expenses, primarily internal labor, contractors and freight, related to the consolidation.

 

During the second and third quarters of 2014, we identified a total of approximately 170 positions to be eliminated as part of our continued consolidation effort and our continued focus on overall cost reductions. During the fourth quarter of 2014, we retained approximately 40 of those positions for manufacturing of our shape memory alloy optical image stabilization product. This and our site consolidation activities resulted in $2,726,000 of severance and site consolidation expenses.

 

During the first quarter of 2015, we recorded site consolidation expenses of $178,000. The site consolidation expenses consisted primarily of internal labor and contractors.

 

Asset Impairment

 

When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. Factors affecting impairment of assets held for use include the ability of the specific assets to generate positive cash flows. Changes in any of these factors could necessitate impairment recognition in future periods for other assets held for use.

 

In connection with this consolidation of our operations, two of our facilities were offered for sale or lease in 2013, including the Eau Claire, Wisconsin assembly building and the Development Center building on our Hutchinson, Minnesota campus. During the first quarter of 2014, we received third-party interest in purchasing the Eau Claire assembly building. Based on the discussions regarding the potential sale of this building, we modified our forecast model to increase the probability of a sale of our Eau Claire assembly building and decrease the probability of a lease. Using these new weightings for sale and lease, the carrying value of our assets exceeded the expected undiscounted cash flows indicating a trigger of potential impairment. As a result, we evaluated the recoverability of the Eau Claire assembly building based on these circumstances and recorded an impairment charge of $4,470,000 included in the line item “Asset impairment” in our consolidated statement of operations. The building and related assets had remaining useful lives ranging from 15 to 30 years. We determined the long-lived assets did not meet the criteria to be classified as assets held for sale. During the second quarter of 2014, we sold the Eau Claire, Wisconsin assembly building, and related real and personal property for net proceeds of $4,364,000. We will continue to own and operate the remaining portion of the Eau Claire facility, representing approximately 700,000 square feet of floor space.

 

During the fourth quarter of 2015, we received new market information that negatively impacted our valuation assumptions regarding our Development Center building. The valuation assumptions of the building were determined based on the estimated sales value of the building less the costs to sell. Using those new valuation assumptions, we determined that the carrying value of our assets exceeded the expected undiscounted cash flows indicating a trigger of potential impairment. As a result, we evaluated the recoverability of the Development Center building based on these circumstances and recorded an impairment charge of $1,620,000 included in the line item “Asset impairment” in our consolidated statement of operations. The building and related assets had remaining useful lives ranging from 1 to 18 years. We determined the long-lived assets did not meet the criteria to be classified as assets held for sale.

 

Income Taxes

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be realized based on future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we must include an expense or a benefit within the tax provision in our consolidated statement of operations.

 

 F-10 

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Valuation allowances arise due to the uncertainty of realizing deferred tax assets. At September 27, 2015, and September 28, 2014, we had valuation allowances of $239,912,000 and $227,219,000 respectively. The FASB guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under the guidance, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance is appropriate. Accordingly, we concluded that a full valuation allowance was appropriate. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.

 

Loss per Share

 

Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per share identifies the dilutive effect of potential common shares using net income (loss) available to common shareholders and is computed using the treasury stock method for outstanding stock options and the if-converted method for the 8.50% Convertible Notes, and the 8.50% New Convertible Notes. A reconciliation of these amounts is as follows:

 

   2015   2014   2013 
Net loss  $(39,098)  $(40,414)  $(35,076)
                
Weighted-average common shares outstanding   32,711    27,993    25,981 
Dilutive potential common shares            
Weighted-average diluted shares outstanding   32,711    27,993    25,981 
                
Basic loss per share  $(1.20)  $(1.44)  $(1.35)
Diluted loss per share  $(1.20)  $(1.44)  $(1.35)

 

Diluted loss per share for 2015 excludes potential common shares of 189,000 using the treasury stock method and potential common shares of 10,715,000 using the if-converted method for the 8.50% Convertible Notes and the 8.50% New Convertible Notes, as they were anti-dilutive. Diluted loss per share for 2014 excludes potential common shares of 366,000 using the treasury stock method and potential common shares of 4,630,000 using the if-converted method for the 8.50% Convertible Notes, as they were anti-dilutive. Diluted loss per share for 2013 excludes potential common shares of 533,000 using the treasury stock method and potential common shares of 5,305,000 using the if-converted method for the 8.50% Convertible Notes, as they were anti-dilutive.

 

2.Financing Arrangements

 

Debt

 

   2015   2014 
8.50% Convertible Notes  $   $39,822 
8.50% Convertible Notes debt discount       (624)
8.50% Secured Notes   63,931    78,931 
8.50% Secured Notes debt discount   (1,742)   (3,575)
10.875% Notes   12,200    12,200 
10.875% Notes debt discount   (233)   (388)
8.50% New Convertible Notes   37,500     
PNC Term Loan   13,500     
Credit Facility       9,533 
Total debt, net of discounts   125,156    135,899 
Less: Current maturities, net of discount   (3,000)   (48,731)
Total long-term debt, net of discounts  $122,156   $87,168 

 

 F-11 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

At September 27, 2015, the future maturities of short- and long-term debt consisted of the following:

 

2016  $3,000 
2017   79,131 
2018   3,000 
2019   3,000 
2020   39,000 
Thereafter    
   $127,131 

 

October 2014 Financing Transactions and 8.50% New Convertible Notes

 

On October 23, 2014, we issued $37,500,000 aggregate principal amount of 8.50% New Convertible Notes. The 8.50% New Convertible Notes bear interest at a rate of 8.50% per annum, payable semi-annually in arrears on April 30 and October 31 of each year, beginning April 30, 2015. The 8.50% New Convertible Notes are scheduled to mature on October 31, 2019. Each $1,000 principal amount of the 8.50% New Convertible Notes is convertible into 266.6667 shares of our common stock (which is equal to an initial conversion price of approximately $3.75 per share), subject to adjustment under certain circumstances. The 8.50% New Convertible Notes rank pari passu in right of payment with all existing and future senior indebtedness of the company. Certain beneficial holders of the 8.50% New Convertible Notes had the right to require us to repurchase for cash up to $7,500,000 aggregate principal amount of the 8.50% New Convertible Notes, plus accrued and unpaid interest, if any, during the 120-day period commencing on October 23, 2014. Accordingly, $7,500,000 of the proceeds to us from the sale of the 8.50% New Convertible Notes was escrowed until the put right expired on February 20, 2015. Additionally, we were required to escrow at least $35,000,000 of cash that was restricted solely for the repayment, repurchase, redemption, defeasance or other acquisition for value of our 8.50% Convertible Notes, plus accrued but unpaid interest thereon. On January 15, 2015, we completed a redemption of the existing $39,822,000 of 8.50% Convertible Notes that could have been put to us in January 2015. To fund this, we used the escrowed $35,000,000 and cash on hand.

 

On October 23, 2014, we exchanged $15,000,000 aggregate principal amount of 8.50% Secured Notes for 2,500,000 shares and warrants to purchase an additional 2,500,000 shares, exercisable on a cashless basis at a price of $0.01 per share. On November 25, 2014, 1,250,000 warrants were exercised, resulting in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,428 shares of common stock. No warrants remain outstanding. The fair value of the common stock and warrants was recorded in additional paid-in capital in the amount of $17,388,000. Applying debt extinguishment accounting, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. The loss also included $1,232,000 of broker, legal and accounting fees related to the exchange transaction.

 

To accommodate the October 2014 debt transactions described above, on October 20, 2014, we entered into supplemental indentures governing our 8.50% Secured Notes and 10.875% Senior Secured Second Lien Notes due 2017 (the “10.875% Notes”) and amended the Credit Agreement, as discussed below, to reflect PNC Bank’s consent to the transactions contemplated by the 8.50% New Convertible Notes and the exchange transactions discussed above.

 

8.50% Convertible Notes

 

On January 15, 2015, we completed a redemption of the existing $39,822,000 aggregate principal amount of 8.50% Convertible Notes. The 8.50% Convertible Notes were issued in February 2011 as part of a tender/exchange pursuant to an indenture dated as of February 11, 2011 and in July 2011 by exchange.

 

8.50% Secured Notes

 

In March 2012, we issued $78,931,000 aggregate principal amount of 8.50% Secured Notes. Of that total amount, $38,931,000 aggregate principal amount of 8.50% Secured Notes were issued pursuant to an effective registration statement relating to an offer to purchase for cash or exchange for new securities any and all of our outstanding 3.25% Notes (the “3.25% Tender/Exchange Offer”). The remaining $40,000,000 aggregate principal amount of 8.50% Secured Notes was issued in a private placement that included the issuance of warrants to purchase 3,869,000 shares of our common stock. The warrants were exercisable on a cashless basis for $0.01 per share for ten years after their issuance. The total purchase price for the 8.50% Secured Notes and warrants issued in the private placement was $39,400,000. The fair value of the warrants was recorded in additional paid-in capital in the amount of $8,489,000. As of May 2013, all 3,869,000 warrants had been exercised and there were no warrants outstanding.

 

The 8.50% Secured Notes bear interest at a rate of 8.50% per annum, payable semiannually in arrears on January 15 and July 15 of each year, beginning July 15, 2012, and mature on January 15, 2017, unless redeemed or repurchased in accordance with their terms. The 8.50% Secured Notes are secured by liens on all assets securing our existing or future senior secured credit facilities (other than certain excluded assets), which liens rank junior in priority to any liens securing our senior secured credit facilities and other permitted priority liens.

 

 F-12 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued) 

 

We may redeem all or part of the 8.50% Secured Notes at any time by paying 100% of the principal amount redeemed, plus a make-whole premium (and accrued and unpaid interest on the principal amount redeemed to) as of the date of redemption (subject to the rights of holders of the 8.50% Secured Notes on the relevant record date to receive interest due on the relevant interest payment date as and to the extent provided in the indenture). The indenture governing the 8.50% Secured Notes contains certain covenants that, among other things, will limit our and our restricted subsidiaries’ ability to incur additional indebtedness, pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments, enter into agreements that restrict distributions from restricted subsidiaries, sell or otherwise dispose of assets, including capital stock of restricted subsidiaries, enter into transactions with affiliates, create or incur liens and enter into operating leases.

 

On October 23, 2014, we entered into an agreement providing for the private exchange of $15,000,000 aggregate principal amount of our 8.50% Secured Notes held by a certain holder for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock on a cashless basis at an exercise price of $0.01 per share. On November 25, 2014, 1,250,000 warrants were exercised which resulted in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised which resulted in the issuance of 1,246,428 shares of common stock and no warrants remain outstanding.

 

10.875% Notes

 

In January 2013, we issued $12,200,000 aggregate principal amount of 10.875% Notes for a total purchase price of $11,590,000. The 10.875% Notes were issued in a private placement pursuant to an indenture dated as of January 22, 2013, and bear interest at a rate of 10.875% per annum, payable semiannually in arrears on January 15 and July 15 of each year, beginning July 15, 2013. The 10.875% Notes are secured by liens on all assets securing our senior secured credit facilities (other than capital stock of subsidiaries of the company to the extent that inclusion of such capital stock would require the filing of separate financial statements for such subsidiaries with the SEC), which liens rank junior in priority to the liens securing our senior secured credit facilities and other permitted priority liens and on an equal and ratable basis with the liens securing our 8.50% Secured Notes. The 10.875% Notes are scheduled to mature on January 15, 2017 unless redeemed or repurchased in accordance with their terms. We may redeem all or a portion of the 10.875% Notes at any time by paying 100% of the principal amount redeemed, plus a make-whole premium as of, and accrued and unpaid interest to, the date of redemption.

 

To accommodate the January 2013 debt transactions described above, on January 22, 2013, we entered into (i) a first supplemental indenture to the indenture dated as of March 30, 2012, which governs the 8.50% Secured Notes, and (ii) a consent and third amendment to our revolving credit and security agreement.

 

Debt refinancing costs of $359,000 were capitalized and are being amortized until the maturity date. The amortization expense is included in interest expense.

 

Senior Secured Credit Facility

 

We are party to a revolving credit and security agreement with PNC Bank dated as of September 15, 2011, as amended from time to time (the “Credit Agreement”). On September 22, 2014, we amended the Credit Agreement to reduce the maximum principal amount of the revolving credit facility provided by the Credit Agreement (the “Senior Secured Credit Facility”) from $35,000,000 to $20,000,000, extend the maturity date of the Senior Secured Credit Facility from October 1, 2014 to December 1, 2016, reduce the cash balance we are required to maintain in an account at PNC Bank from $15,000,000 to $2,500,000, and modify the fixed charge coverage covenant by eliminating the requirement for the four fiscal quarters ending September 28, 2014 and changing the measurement periods thereafter for the fixed charge coverage covenant by excluding from such measurement periods all fiscal quarters ended on or prior to September 28, 2014.

 

The Credit Agreement required us to maintain cash on our balance sheet, including restricted cash, during the period from December 1, 2014 through January 16, 2015 (the day after the 2015 put date for our 8.50% Convertible Notes) and during the period from December 1, 2015 through January 16, 2016 (the day after the 2016 put date for our 8.50% Convertible Notes) in an amount not less than the aggregate principal amount of our 8.50% Convertible Notes then outstanding, and established a reserve against our borrowing base during each such period in the same amount. The Credit Agreement, as amended, permitted us to redeem, repurchase or repay our 8.50% Convertible Notes in whole or in part at any time as long as, after giving effect to such redemption, repurchase or repayment, no default or event of default exists under the credit agreement and we have liquidity of not less than $20,000,000, and permitted us to incur additional unsecured debt at any time prior to January 15, 2016 in an amount not to exceed the aggregate principal amount of our 8.50% Convertible Notes then outstanding as long as certain conditions are satisfied, including a requirement that, by the next put date for our 8.50% Convertible Notes, we reduce the aggregate principal balance of our 8.50% Convertible Notes by an amount equal to the principal amount of such additional unsecured debt then outstanding. We fully redeemed all outstanding 8.50% Convertible Notes on January 15, 2015.

 

On April 30, 2015, we further amended the Credit Agreement to maintain compliance with a preexisting financial covenant. This amendment modified the fixed charge coverage covenant under our credit agreement to eliminate the requirement for our quarter ended March 29, 2015, June 28, 2015 and September 27, 2015 and to change the measurement periods starting with our quarter ending December 27, 2015 by excluding from such measurement periods all quarters ended before September 27, 2015, and implemented an additional earnings before interest, taxes, depreciation and amortization (“EBITDA”) covenant for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015.

 

 F-13 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued) 

 

Subsequent to our 2015 year end, on December 10, 2015, we entered into a ninth amendment to our Credit Agreement with PNC Bank. The amendment modifies the Credit Agreement to defer application of the fixed charge coverage covenant until December 25, 2016, impose a minimum EBITDA requirement for the remaining term of the Senior Secured Credit Facility, and add a new minimum liquidity requirement.

 

From time to time, we borrow funds under the Senior Secured Credit Facility. As of September 27, 2015, we had no outstanding balance. Our average outstanding balance in 2015 was $743,000. Amounts borrowed under the Senior Secured Credit Facility bear cash interest at a reduced rate equal to, at our election, either (i) PNC Bank’s alternate base rate (as defined in the Credit Facility) plus 1.0% per annum, or (ii) LIBOR plus 3.5% per annum if no defaults or events of default exist under the Credit Agreement.

 

If we are unable to generate sufficient operating results in future quarters, we may not be able to comply with financial covenants in the Credit Agreement in future quarters. If necessary, we intend to negotiate a waiver of any noncompliance or an amendment of the financial covenant specific to the applicable period.

 

PNC Term Loan

 

On December 23, 2014, we further amended Credit Agreement to establish a $15,000,000 term loan with PNC. The covenants in the Credit Facility agreement apply to this term loan. Amounts borrowed under the term loan may consist of domestic rate loans, with a per annum interest rate equal to PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 2.50%, or LIBOR rate loans, with a per annum interest rate equal to 3.50% plus the greater of the LIBOR rate (as defined in the Credit Agreement) or 1.00%, or a combination thereof. As a result, our interest rate for the term loan has been 4.5%. The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015 and continuing through January 1, 2020. In the event that the Credit Agreement is not extended beyond December 1, 2016, the balance due on the term loan will also become due on December 1, 2016. Once repaid, amounts borrowed under the term loan may not be reborrowed. As of September 27, 2015, we had $13,500,000 outstanding. 

 

3.Income Taxes

 

The (benefit) provision for income taxes consists of the following:

 

   2015   2014   2013 
Current:               
Federal  $(171)  $(845)  $(195)
Foreign   81    77    205 
State   16    7    6 
Deferred            
   $(74)  $(761)  $16 

 

In the fourth quarter of 2008, we established a full valuation allowance against our deferred tax assets. The accounting guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under that standard, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance is appropriate. Accordingly, we concluded that a full valuation allowance is appropriate. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.

 

The deferred provision is composed of the following:

 

   2015   2014   2013 
Asset bases, lives and depreciation methods  $(2,358)  $(2,512)  $(1,341)
Reserves and accruals not currently deductible   2,710    958    458 
Tax credits and NOL carryforwards   (13,046)   (10,167)   (11,081)
Deferred tax liability on 3.25% Notes           (69)
Valuation allowance   12,694    11,721    12,033 
   $   $   $ 

 

 F-14 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:

 

   2015   2014   2013 
Statutory federal income tax rate   (35.0)%   (35.0)%   (35.0)%
Effect of:               
Foreign and state income taxes, net of federal income tax benefits   0.2    0.2    0.6 
Valuation allowance on deferred tax assets and/or use of tax credits   34.3    32.6    34.1 
Other permanent differences   0.3    0.3    0.3 
    (0.2)%   (1.9)%   0.0%

 

The following table shows the significant components of our deferred tax assets:

 

   2015   2014 
Current deferred tax assets:          
Receivable allowance  $218   $174 
Inventories   2,757    2,526 
Accruals and other reserves   3,909    2,587 
Tax credits expiring within 1 year   539    255 
Valuation allowance   (7,423)   (5,542)
Total current deferred tax assets        
Long-term deferred tax assets:          
Property, plant and equipment   (484)   (2,842)
Stock based compensation   3,923    3,998 
Long-term capital loss       888 
Deferred income   140    208 
Tax credits   31,121    30,265 
NOL carryforwards   197,400    185,493 
Other debt-related   389    3,667 
Valuation allowance   (232,489)   (221,677)
Total long-term deferred tax assets        
Total deferred tax assets  $   $ 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At September 27, 2015, our deferred tax assets included $31,660,000 of unused tax credits. Of the total, $2,907,000 can be carried forward indefinitely, $23,526,000 of US federal tax credits expire at various dates beginning in 2018, and $5,225,000 of various state tax credits expire at various dates beginning in 2016, including $539,000 that will expire in 2016. 

 

In addition, at September 27, 2015, our deferred tax assets included $197,400,000 of NOL carryforwards that will begin to expire in 2021 if not otherwise used by us. As of September 27, 2015, we had an estimated NOL carryforward of $560,084,000 for United States federal tax return purposes.

 

A valuation allowance of $239,912,000 has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the deferred tax assets before they expire.

 

Gross unrecognized tax benefits as of September 27, 2015, and September 28, 2014, were $6,218,000 and $6,065,000, respectively. For 2015, $5,834,000 of our gross unrecognized tax benefits would decrease our effective tax rate if realized.

 

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

 

   2015   2014   2013 
Gross unrecognized tax benefits at beginning of year  $6,065   $7,021   $7,483 
Gross increases in tax positions for prior year   159        230 
Gross decreases in tax positions for prior year   (118)   (167)   (816)
Gross increases in tax positions for current year   112    70    124 
Settlements            
Lapse in statute of limitations       (859)    
Gross unrecognized tax benefits at end of year  $6,218   $6,065   $7,021 

 

Our policy is to record interest expense and penalties within the provision for income taxes on the consolidated statements of operations. No interest expense or penalties have been included in the gross amount of unrecognized tax benefits due to existing tax credits and NOL carryforwards.

 

 F-15 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

The major jurisdictions in which we file income tax returns are United States federal, various U.S. states and Thailand. In the United States federal jurisdiction we are no longer subject to examination for fiscal years prior to 2012. For state jurisdictions we are no longer subject to examination for fiscal years prior to 2011. Although certain years are no longer subject to examinations by the IRS and various state taxing authorities, NOL carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a future period. In Thailand we operate under various tax holidays that currently are scheduled to fully expire as early as 2024. For 2015 and prior fiscal years, these holidays had no impact on our tax provision or our net loss.

  

The timing of the resolution of uncertain tax positions is dependent on numerous factors and therefore is highly uncertain; however, we believe it is reasonably possible in the next 12 months that the gross unrecognized tax benefits could be reduced approximately $100,000 due to tax attributes expiring unused.

 

In September 2013, the U.S. Department of the Treasury and the IRS issued final regulations addressing the acquisition, production, and improvement of tangible personal property, and also proposed regulations addressing the disposition of property. These regulations replace previously issued temporary regulations and are effective for tax years beginning on or after January 1, 2014. The adoption of the new regulations did not have a material impact on the company’s consolidated financial statements.

 

4.Fair Value of Financial Instruments

 

We follow fair value measurement accounting with respect to (i) nonfinancial assets and liabilities that are recognized or disclosed at fair value in our financial statements on a recurring basis, and (ii) all financial assets and liabilities. 

 

The fair value measurement guidance defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. Under the guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability, developed based upon the best information available in the circumstances. The fair value hierarchy prescribed by the guidance is broken down into three levels as follows:

 

Level 1 –Unadjusted quoted prices in an active market for the identical assets or liabilities at the measurement date.

 

Level 2 –Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

 

·Quoted prices for similar assets or liabilities in active markets;
·Quoted prices for identical or similar assets in nonactive markets;
·Inputs other than quoted prices that are observable for the asset or liability; and
·Inputs that are derived principally from or corroborated by other observable market data.

 

Level 3 –Unobservable inputs that reflect the use of significant management judgment. These values are generally determined using pricing models for which assumptions utilize management’s estimates of market participant assumptions.

 

Cash and Cash Equivalents

 

Cash equivalents consist of highly liquid investments purchased with a maturity of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities. 

 

Available-for-Sale Securities

 

Our available-for-sale securities are comprised of United States government debt securities. The fair value is based on quoted market prices in active markets.

 

 F-16 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis.

 

  

Fair Value Measurements at

September 27, 2015

 
   Level 1   Level 2   Level 3 
Assets               
Cash and cash equivalents  $39,454   $   $ 
Available-for-sale securities               
U.S. government debt securities  $965   $   $ 
Total assets  $40,419   $   $ 

 

  

Fair Value Measurements at

September 28, 2014

 
   Level 1   Level 2   Level 3 
Assets               
Cash and cash equivalents  $37,939   $   $ 
Available-for-sale securities               
U.S. government debt securities  $965   $   $ 
Total assets  $38,904   $   $ 

 

Debt

 

The fair values of our 8.50% Convertible Notes and our 8.50% Secured Notes were determined based on the closing market price of the respective Notes as of the most recent trading date before the end of the fiscal year. The fair values of our 8.50% Convertible Notes and our 8.50% Secured Notes were classified in Level 2 of the fair value hierarchy.

 

Our 10.875% Notes have not experienced trading activity; therefore the fair value estimate was based on the closing market prices of comparable debt as of the end of the fiscal year. Our 8.50% New Convertible Notes have not experienced trading activity; therefore the fair value estimate was based on market variables combined with variables specific to the 8.50% New Convertible Notes to determine the theoretical value. The fair values of the 10.875% Notes and the 8.50% New Convertible Notes were classified in Level 2 of the fair value hierarchy.

 

The fair values of the PNC Bank credit facility and term loan’s carrying values are a reasonable estimate of fair value because of their short-term nature. The fair values of the credit facility and tem loan were classified in Level 2 of the fair value hierarchy.

 

The estimated fair values of our short- and long-term debt are as follows:

 

   2015   2014 
  

Carrying

Amount

   Fair Value  

Carrying

Amount

   Fair Value 
8.50% Convertible Notes  $   $   $39,822   $39,125 
8.50% Secured Notes   63,931    64,011    78,931    79,720 
10.875% Notes   12,200    12,972    12,200    13,025 
8.50% New Convertible Notes   37,500    32,404         
PNC term loan   13,500    13,500         
Credit Facility           9,533    9,533 

  

Other

 

Our financial instruments other than those presented in the disclosures above, include accounts receivable, accounts payable, and other payables. The carrying value of accounts receivable, accounts payable, and other payables approximate fair value because of the short-term nature of these instruments. The fair values of these items were classified as Level 1 of the fair value hierarchy.

 

Nonrecurring Fair Value Measurements

 

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These include certain long-lived assets that are written down to fair value when they are determined to be impaired. In the fourth quarter of 2015, we recognized an impairment of $1,620,000 related to our Hutchinson Development Center building using a valuation methodology based on Level 3 inputs. In the first quarter of 2014, we recognized an impairment of $4,470,000 related to our Eau Claire assembly building using a valuation methodology based on Level 3 inputs. See Note 1 to the consolidated financial statements for additional details regarding this impairment.

 

 F-17 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

5.Employee Benefits

 

In March 2009, our board of directors approved the suspension of our employee stock purchase plan, effective April 1, 2009. Prior to this date, our employee stock purchase plan provided for the sale of our common stock at discounted purchase prices. The cost per share under this plan was 85% of the lesser of the fair market value of our common stock on the first or last day of the purchase period, as defined.

 

Stock Options

 

Under our equity incentive plans, stock options have been granted to employees and directors, including our officers, at an exercise price not less than the fair market value of our common stock at the date the options are granted. The options granted generally expire ten years from the date of grant or at an earlier date as determined by the committee of our board of directors that administers the plans. Options granted prior to November 2005 generally were exercisable one year from the date of grant. Options granted from November 2005 to October 2011 are exercisable two to three years from the date of grant. Options granted under the plans since November 2011 are exercisable one to three years from the date of grant.

 

Under our equity incentive plan, we also issued restricted stock units (“RSUs”) to employees, including our officers. RSUs generally vest over three years in annual installments commencing one year after the date of grant. We recognize compensation expense for the RSUs over the service period equal to the fair market value of the stock units on the date of issuance. Upon vesting, RSUs convert to shares in accordance with the terms of our equity incentive plan.

 

On January 20, 2011, our shareholders approved (i) our 2011 Equity Incentive Plan, which authorizes the issuance of 1,200,000 shares of our common stock (plus any shares that remained available on that date for future grants under our 1996 Incentive Plan) for equity-based awards (no further awards will be made under our 1996 Incentive Plan), and (ii) the amendment and restatement of our employee stock purchase plan, to increase the maximum number of shares of our common stock authorized for issuance under that plan by 1,000,000 shares, to a total of 2,500,000, and provide means by which eligible employees of our foreign subsidiaries may participate in that plan.

 

We recorded stock-based compensation expense related to our stock options, RSUs and common stock, included in selling, general and administrative expenses, of $1,415,000, $1,345,000 and $1,140,000 for 2015, 2014 and 2013, respectively. As of September 27, 2015, $2,116,000 of unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted-average period of approximately 17 months. 

 

We use the Black-Scholes option pricing model to determine the weighted-average fair value of options. The weighted-average fair value of options granted during 2015, 2014, and 2013 was $2.42, $2.34, and $1.27, respectively. The fair value of options at the date of grant and the weighted-average assumptions utilized to determine such values are indicated in the following table:

 

   2015   2014   2013 
Risk-free interest rate   2.0%   2.3%   1.3%
Expected volatility   70%   80%   80%
Expected life (in years)   8.0    8.0    8.0 
Dividend yield            

 

The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. We considered historical data in projecting expected stock price volatility. We estimated the expected life of stock options and stock option forfeitures based on historical experience.

 

Option transactions during 2015 are summarized in the following table:

 

   Number of Shares  

Weighted-Average

Exercise Price ($)

  

Weighted-Average

Remaining

Contractual
Life (yrs.)

Outstanding at September 28, 2014   3,134,042    9.80   5.3
Granted   370,000    3.44    
Exercised   (2,500)   3.03    
Expired/Canceled   (162,825)   29.22    
Outstanding at September 27, 2015   3,338,717    8.15   5.1
              
Options exercisable at September 27, 2015   2,632,697    9.52   4.2

 

The aggregate intrinsic value at year-end of our stock options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) outstanding for 2015, 2014 and 2013 was $0, $1,813,000 and $1,573,000, respectively. The aggregate intrinsic value at year-end of our stock options exercisable for 2015 was $0, for 2014 was $1,079,000 and for 2013 was $421,000.

 

 F-18 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

The following table summarizes the status of options that remain subject to vesting:

 

   Number of Shares  

Weighted-Average

Grant Date Fair

Value ($)

  

Weighted-Average

Remaining

Contractual Life

(yrs.)

Unvested at September 28, 2014   625,565    1.86   8.6
Granted   370,000    2.42    
Vested   (289,545)   1.70    
Canceled           
Unvested at September 27, 2015   706,020    2.22   8.6

 

The following table summarizes information about stock options outstanding at September 27, 2015:

 

   Options Outstanding   Options Exercisable

Range of Exercise

Prices ($)

 

Number

Outstanding

  

Weighted-

Average

Remaining

Contractual

Life (yrs)

 

Weighted-

Average Price ($)

  

Number

Exercisable

  

Weighted-

Average

Exercise

Price ($)

  1.45  –  3.00   912,387   7.3   2.12    596,367   1.90
  3.01  –  5.00   1,207,322   6.0   3.18    817,322   3.05
  5.01 – 10.00   514,383   4.2   7.33    514,383   7.33
10.01 – 37.95   704,625   1.3   25.08    704,625   25.08
Total   3,338,717   5.1   8.15    2,632,697   9.52

 

RSU transactions for 2015 are summarized as follows:

 

   Number of Shares  

Weighted-Average

Grant Date Fair

Value ($)

Unvested at September 28, 2014   782,091   2.17
Granted   361,850   3.43
Vested   (423,095)  2.02
Canceled   (28,947)  2.67
Unvested at September 27, 2015   691,899   2.90

  

Employee Benefit Plans

 

We have a defined contribution plan covering our employees in the U.S. Our contributions to the plan were $1,251,000 in 2015, $1,221,000 in 2014 and $1,154,000 in 2013. We also have a provident fund covering our employees in Thailand. Our contributions to the plan were $144,000 in 2015, $120,000 in 2014 and $79,000 in 2013.

 

We sponsor a self-insured comprehensive medical and dental plan for qualified U.S. employees that is funded by contributions from plan participants and from us. We recognized expense related to these plans of $9,044,000 in 2015, $6,935,000 in 2014 and $7,387,000 in 2013. We also recognized $217,000 and $361,000 in 2015 and 2014, respectively, related to a post–employment benefit upon retirement obligation related to our Thailand facility employees under the Thai Labor Protection Act. 

 

6.Commitments and Contingencies

 

Lease Commitments

 

We are committed under various operating lease agreements. Total lease expense under these operating leases was $1,782,000 in 2015, $1,717,000 in 2014 and $2,381,000 in 2013.

 

We also have leased manufacturing equipment that has been treated as capital leases for accounting purposes. Assets acquired under capital leases are depreciated over the useful life of the asset.

 

 F-19 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

The future minimum lease payments under our capital and operating leases by fiscal year at September 27, 2015, are as follows:

 

  

Capital

Leases

  

Operating

Leases

 
2016  $2,568   $922 
2017   2,408    320 
2018   1,362    249 
2019   569    218 
Thereafter       73 
Total  future minimum lease payments   6,907    1,782 
Less: Interest   (499)    
Total future minimum lease payments excluding interest  $6,408   $1,782 

 

Legal Proceedings

 

We and certain users of our products have from time to time received, and may in the future receive, communications from third parties asserting patents against us or our customers that may relate to certain of our manufacturing equipment or products or to products that include our products as a component. In addition, we and certain of our customers have been sued on patents having claims closely related to products sold by us. If any third party makes a valid infringement claim and a license was not available on terms acceptable to us, our operating results could be adversely affected. We expect that, as the number of patents issued continues to increase, and as we grow, the volume of intellectual property claims could increase. We may need to engage in litigation to enforce patents issued or licensed to us, protect trade secrets or know-how owned by us or determine the enforceability, scope and validity of the intellectual property rights of others. We could incur substantial costs in such litigation or other similar legal actions, which could have a material adverse effect on our results of operations.

 

Following the announcement of the Merger, three actions were filed by purported shareholders of the company. Two of the actions, captioned Ridler v. Hutchinson Technology Incorporated, et al. and Harnik v. Hutchinson Technology Incorporated, et al. were filed in the District Court, First Judicial District, McLeod County, State of Minnesota. Plaintiffs in the Ridler action purport to bring the action as a class action on behalf of the public shareholders of the company, and as a derivative action on behalf of the company as a nominal defendant. Plaintiff in the Harnik action purports to bring the action as a class action on behalf of the public shareholders of the company. Both complaints name as defendants the company, the members of its Board, Parent and Merger Subsidiary. The Harnik complaint also names TDK Corporation. Both complaints generally allege that the Board breached its fiduciary duties to company shareholders in connection with the merger because, among other reasons, the Board failed to fully inform themselves of the market value of the company, the Board failed to exercise valid business judgment, the Board failed to maximize shareholder value, the members of the Board were interested in the transaction, and certain provisions in the merger agreement unfairly preclude a third party from making an offer for the company. The Ridler complaint also alleges claims against the Board for waste and abuse of control, a claim against the Board, Parent and Merger Subsidiary for equitable relief under the Minnesota Business Corporation Act, and a claim against the company, Parent and Merger Subsidiary for aiding and abetting the Board’s alleged breaches of fiduciary duty. In addition to its allegations against the Board, the Harnik complaint alleges that TDK Corporation, Parent and Merger Subsidiary aided and abetted the Board’s alleged breaches of fiduciary duty. Both complaints seek compensatory damages, equitable relief, and injunctive relief, including an order enjoining the closing of the merger. Both complaints also seek an award of plaintiffs’ attorneys’ fees, costs, and disbursements.

 

The third action, captioned Erickson v. Hutchinson Technology Incorporated, et al., was filed in the United States District Court for the District of Minnesota. Plaintiff in the Erickson action purports to bring the action as a class action on behalf of the public shareholders of the company. The Erickson complaint names the company and its directors as defendants, and alleges that they have violated Sections 14(a) and 20(a), and Rule 14a-9, of the Securities Exchange Act of 1934 by filing a preliminary proxy statement that contains materially incomplete and misleading statements and omissions. The Erickson complaint seeks injunctive relief, including an order enjoining the filing of a definitive proxy statement and the closing of the merger until the alleged deficiencies in the preliminary proxy statement have been corrected; an accounting for damages in an unspecified amount; and an award of plaintiffs’ attorneys’ fees, costs, and disbursements.

 

We believe that the actions are without merit, and intend to vigorously defend against all claims asserted.

 

We are a party from time to time to ordinary routine litigation incidental to our business. The outcome of such claims, if, any, is not expected to materially affect our current or future financial position or results of operations.

 

 F-20 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

7.Supplementary Cash Flow Information

 

   2015   2014   2013 
Changes in operating assets and liabilities:               
Receivables, net  $6,626   $(2,386)  $386 
Inventories   7,071    (4,769)   (2,968)
Other assets   (249)   (111)   (621)
Accounts payable and accrued expenses   3,394    (731)   5,212 
Other long-term liabilities   (276)   605    946 
   $16,566   $(7,392)  $2,955 
                
Cash paid for:               
Interest (net of amount capitalized)  $10,872   $11,696   $11,031 
Income taxes   14    169    46 
Assets acquired through capital lease   3,051    4,261    4,822 
                
Non-cash investing activities:               
Capital expenditures in accounts payable   964    1,813    4,264 
                
Non-cash financing activities:               
Exchange of debt for equity (see Note 2)   15,000    -    - 

  

Capitalized interest was $789,000 in 2015, $650,000 in 2014 and $1,278,000 in 2013. Interest is capitalized using an overall borrowing rate for assets that are being constructed or otherwise produced for our own use. Interest capitalized during 2015 was primarily for additional manufacturing equipment for new process technology and capability improvements and tooling.

 

8.Shareholders’ Equity

 

Stock Repurchase Program

 

On February 4, 2008, we announced that our board of directors had approved a share repurchase program authorizing us to spend up to $130,000,000 to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions. The board of directors terminated the plan on October 9, 2013, at which point $72,368,000 remained available for repurchase and no repurchases had been made since 2008.

 

9.Share Rights Plan

 

In July 2010, our board of directors declared a dividend of one common share purchase right for each outstanding share of common stock held by shareholders of record as of the close of business on August 10, 2010. Under certain conditions, each right may be exercised to purchase one-tenth of a share of common stock at an exercise price of $3.00, subject to adjustment. The rights generally will become exercisable after any person or group acquires beneficial ownership of 15% or more of our common stock or announces a tender or exchange offer that would result in that person or group beneficially owning 15% or more of our common stock. If any person or group becomes a beneficial owner of 15% or more of our common stock, each right will entitle its holder (other than the 15% owner) to purchase, at an adjusted exercise price equal to ten times the previous purchase price, shares of our common stock having a market value of two times the right’s adjusted exercise price. 

 

In May 2011, we amended the rights agreement to accommodate the exchange of 3.25% Notes for 8.50% Convertible Notes in an exchange offer to avoid one or more participants inadvertently becoming “acquiring persons” with respect to the rights. In each of February and March 2012, we further amended the rights agreement to similarly accommodate the issuance of common stock warrants in connection with the private placement of 8.50% Secured Notes to avoid the warrant holders inadvertently becoming acquiring persons with respect to the rights. In October 2014, subsequent to year-end, we further amended the rights agreement to accommodate the issuance of the 8.50% New Convertible Notes to avoid one or more participants and the warrant holders inadvertently becoming acquiring persons with respect to the rights.

 

The rights, which do not have voting rights, expire on August 10, 2020 and may be redeemed by us at a price of $0.001 per right, subject to adjustment, at any time prior to their expiration or a person’s or group’s acquisition of beneficial ownership of at least 15% of our common stock. In certain circumstances, at the option of our board of directors, we may exchange the rights for shares of our common stock, delay or temporarily suspend the exercisability of the rights or reduce the stock-ownership threshold of 15% to not less than 10%.

 

In the event that we are acquired in certain merger or other business-combination transactions, or sell 50% or more of our assets or earnings power, each holder of a right shall have the right to receive, at the right’s adjusted exercise price, common shares of the acquiring company having a market value of twice the right’s adjusted exercise price.

 

 F-21 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

Amendment of Share Rights Plan

 

On November 1, 2015, subsequent to our 2015 year end, we and Wells Fargo Bank, N.A. (the “Rights Agent”) entered into a Fifth Amendment to the Rights Agreement, dated as of July 29, 2010, as amended (the “Rights Agreement”) in connection with the execution and delivery of the Merger Agreement to, among other things, render the Rights Agreement inapplicable to the Merger Agreement and the voting agreements executed and delivered in connection therewith.

 

10.Geographic Information and Major Customers

 

Net Sales by Product

 

The following table represents net sales by product:

 

   2015   2014   2013 
Net sales:               
Suspension assemblies  $240,805   $250,741   $240,462 
Other products   12,018    10,346    9,134 
Total net sales  $252,823   $261,087   $249,596 

 

Geographic Information

 

Sales to foreign locations were as follows:

 

   2015   2014   2013 
Foreign-based enterprises  $39,505   $49,648   $79,691 
Foreign subsidiaries of United States corporations   201,508    203,895    162,120 
   $241,013   $253,543   $241,811 

  

The majority of these foreign location sales were to the Pacific Rim region. In addition, we have sales to United States corporations that used our products in their offshore manufacturing sites.

 

Revenue assigned based on product shipment location and long-lived assets by geographic area were as follows:

 

   2015   2014   2013 
Revenue:               
Thailand  $198,862   $203,858   $140,949 
Hong Kong   31,431    33,832    42,505 
Philippines   10,391    15,597    36,931 
Malaysia   130    62    21,171 
United States   11,592    7,544    7,784 
Other foreign countries   417    194    256 
   $252,823   $261,087   $249,596 
                
Long-lived assets:               
United States  $113,202   $129,051   $162,231 
Thailand   21,288    24,092    24,659 
Other foreign countries   19    26    24 
   $134,509   $153,169   $186,914 

 

Major Customers

 

Sales to customers in excess of 10% of net sales were as follows:

 

   2015   2014   2013 
Western Digital Corporation   52%   60%   52%
Seagate Technology, LLC   27%   18%   14%
SAE Magnetics, Ltd./TDK Corporation   16%   15%   24%

 

 F-22 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries – (Continued)

 

11.Summary of Quarterly Information (unaudited)

 

The following table summarizes unaudited financial data for 2015 and 2014. The price range per share reflects the high and low sales prices as reported on the NASDAQ Global Select Market during each quarter.

 

   2015 by Quarter   2014 by Quarter 
   First   Second   Third   Fourth   First   Second   Third   Fourth 
Net sales  $72,423   $62,359   $54,675   $63,366   $70,312   $60,699   $59,772   $70,304 
Gross profit   11,464    6,262    4,829    7,477    5,530    5,863    3,557    8,951 
Loss from operations   (722)1   (6,683)   (6,062)   (3,861)2   (9,337)3   (5,388)4   (7,412)5   (1,465)6
Loss before income taxes   (10,044)7   (9,671)   (10,145)8   (9,312)9   (16,162)10   (8,681)   (11,192)   (5,141)
Net loss   (9,899)   (9,703)   (10,160)   (9,336)   (15,346)   (8,706)   (11,207)   (5,156)
Net (loss) income per share:                                        
Basic   (0.32)   (0.29)   (0.30)   (0.28)   (0.55)   (0.31)   (0.40)   (0.18)
Diluted   (0.32)   (0.29)   (0.30)   (0.28)   (0.55)   (0.31)   (0.40)   (0.18)
Price range per share:                                        
High   3.79    4.50    2.90    2.25    4.25    4.35    2.99    4.85 
Low   2.98    2.52    1.78    1.23    2.75    2.70    1.96    2.05 

  

 

1During the first quarter of 2015, we recorded $159,000 of site consolidation expenses.
2During the fourth quarter of 2015, we recorded a $1,620,000 of impairment related to our Hutchinson Development Center.
3During the first quarter of 2014, we recorded $4,470,000 of impairment related to our Eau Claire assembly building and $300,000 of site consolidation expenses.
4During the second quarter of 2014, we recorded $400,000 for severance expenses and $600,000 of site consolidation expenses.
5During the third quarter of 2014, we recorded $1,300,000 for severance expenses and $200,000 of site consolidation expenses.
6During the fourth quarter of 2014, we recorded a $300,000 reversal of previously recorded severance expenses and $300,000 of site consolidation expenses.
7During the first quarter of 2015, we recorded $4,318,000 loss on extinguishment of debt.
8During the third quarter of 2015, we recorded $1,100,000 loss on foreign currency.
9During the fourth quarter of 2015, we recorded $2,400,000 loss on foreign currency.
10During the first quarter of 2014, we recorded $3,200,000 loss on foreign currency.

 

12. Subsequent Events

 

On November 1, 2015, we entered into the Merger Agreement with Headway Technologies, Inc. and Hydra Merger Sub, Inc., as discussed in Note 1 above.

 

On November 1, 2015, we and Wells Fargo Bank, N.A. entered into a Fifth Amendment to the Rights Agreement, as discussed in Note 9 above.

 

On December 10, 2015, we entered into a ninth amendment to our Credit Agreement with PNC Bank, as discussed in Note 2 above. 

 

 F-23 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Hutchinson Technology Incorporated

Hutchinson, Minnesota:

 

We have audited the accompanying consolidated balance sheets of Hutchinson Technology Incorporated and subsidiaries (the “Company”) as of September 27, 2015 and September 28, 2014, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended September 27, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15 (a)2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hutchinson Technology Incorporated and subsidiaries at September 27, 2015 and September 28, 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 27, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 27, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 11, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ Deloitte & Touche LLP

 

Minneapolis, Minnesota

December 11, 2015

 

 F-24 

 

 

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

Hutchinson Technology Incorporated and Subsidiaries

 

   Balance at
Beginning of
Period
   Additions
(Deductions)
Charged to Costs
and Expenses
   Other Changes
Add (Deduct)
   Balance at End of
Period
 
   (In thousands) 
2013:                    
Allowance for doubtful accounts receivable  $   $   $   $ 
Reserve for sales returns and allowances   44    2,094    

(1,482

) 1   656 
   $44   $2,094   $(1,482)  $656 
2014:                    
Allowance for doubtful accounts receivable  $   $   $   $ 
Reserve for sales returns and allowances   656    1,968    

(2,127

) 1   497 
   $656   $1,968   $(2,127)  $497 
2015:                    
Allowance for doubtful accounts receivable  $   $   $   $ 
Reserve for sales returns and allowances   497    3,845    

(3,719

) 1   623 
   $497   $3,845   $(3,719)  $623 

 

 

1 Returns honored and credit memos issued.

 

 

 

 

Exhibit Index

 

Exhibit No.   Description   Method of Filing
3.1   Amended and Restated Articles of Incorporation.   Incorporated by Reference
         
3.2   Restated By-Laws, as amended December 16, 2013.   Incorporated by Reference
         
4.1   Instruments defining the rights of security holders. The registrant agrees to furnish to the SEC upon request copies of instruments with respect to long-term debt.    
         
4.2   Rights Agreement dated as of July 29, 2010, with Wells Fargo Bank, N.A., as Rights Agent; First Amendment to Rights Agreement dated as of May 6, 2011, with Wells Fargo Bank, N.A., as Rights Agent; Second Amendment to Rights Agreement, dated February 24, 2012, with Wells Fargo Bank, N.A., as Rights Agent; Third Amendment to Rights Agreement, dated March 27, 2102, with Wells Fargo Bank, N.A., as Rights Agent; Fourth Amendment to Rights Agreement dated as of October 20, 2014, with Wells Fargo Bank, N.A., as Rights Agent.   Incorporated by Reference
         
4.3   Indenture, dated February 11, 2011, with Wells Fargo Bank, National Association, as Trustee; First Supplemental Indenture, dated June 17, 2011.   Incorporated by Reference
         
4.4   Form of 8.50% Convertible Senior Note due 2026.   Incorporated by Reference
         
4.5   Intercreditor Agreement, dated March 30, 2012, by and between PNC Bank, National Association, and Wells Fargo Bank, National Association; First Amendment to Intercreditor Agreement, dated January 22, 2013.   Incorporated by Reference
         
4.6   8.50% Senior Secured Second Lien Note Indenture, dated March 30, 2012, with Wells Fargo Bank, National Association, as Trustee (including form of 8.50% Senior Secured Second Lien Note due 2017); First Supplemental Indenture, dated January 22, 2013; Second Supplemental Indenture, dated October 20, 2014.   Incorporated by Reference
         
4.7   Form of Warrant.   Incorporated by Reference
         
4.8   10.875% Senior Secured Second Lien Note Indenture, dated January 22, 2013, with Wells Fargo Bank, National Association, as trustee (including form of 10.875% Senior Secured Second Lien Note due 2017); First Supplemental Indenture, dated October 20, 2014.   Incorporated by Reference
         
4.9   Intercreditor Agreement, dated January 22, 2013, between Wells Fargo Bank, National Association.   Incorporated by Reference
         
4.10   Senior Indenture, dated October 20, 2014, with U.S. Bank National Association, as trustee (including form of 8.50% Convertible Senior Notes due 2019); First Supplemental Indenture, dated October 20, 2014.   Incorporated by Reference
         
4.11   Common Stock Warrant issued October 23, 2014.   Incorporated by Reference
         
10.1   Office/Warehouse Lease with OPUS Corporation, dated December 29, 1995; First Amendment to Office/Warehouse Lease dated April 30, 1996; and Second Amendment to Office/Warehouse Lease with VV Minneapolis, L.P., as successor-in-interest to OPUS Corporation, dated April 14, 2004.   Incorporated by Reference
         
10.2   Patent License Agreement, effective as of September 1, 1994, with International Business Machines Corporation.   Incorporated by Reference

 

 

 

 

Exhibit No.   Description   Method of Filing
10.3*   Amended and Restated 1996 Incentive Plan (as amended and restated October 10, 2008).   Incorporated by Reference
         
10.4*   Form of Non-Statutory Stock Option Agreement (Employee) under Amended and Restated 1996 Incentive Plan.   Incorporated by Reference
         
10.5*   Form of Incentive Stock Option Agreement (Employee) under Amended and Restated 1996 Incentive Plan.   Incorporated by Reference
         
10.6*   Form of Non-Statutory Stock Option Agreement (Director) under Amended and Restated 1996 Incentive Plan.   Incorporated by Reference
         
10.7*   Form of Restricted Stock Agreement (Director) under Amended and Restated 1996 Incentive Plan.   Incorporated by Reference
         
10.8*   Non-Employee Directors Equity Plan (as amended and restated January 25, 2012).   Incorporated by Reference
         
10.9*   Form of Severance and Change in Control Agreement for Senior Executives.   Incorporated by Reference
         
10.10*   Severance Pay Plan (as amended and restated March 8, 2011).   Incorporated by Reference
         
10.11*   Employee Stock Purchase Plan.   Incorporated by Reference
         
10.12*   2011 Equity Incentive Plan.   Incorporated by Reference
         
10.13*   Form of Director Stock Option Agreement under 2011 Equity Incentive Plan.   Incorporated by Reference
         
10.14*   Form of Employee Non-Statutory Stock Option Agreement under 2011 Equity Incentive Plan.   Incorporated by Reference
         
10.15*   Form of Employee Incentive Stock Option Agreement under 2011 Equity Incentive Plan.   Incorporated by Reference
         
10.16*   Form of Employee Restricted Stock Unit Agreement under 2011 Equity Incentive Plan.   Incorporated by Reference
         
10.17*   Form of Senior Management Restricted Stock Unit Agreement under 2011 Equity Incentive Plan.   Incorporated by Reference
         
10.18*   Description of Fiscal Year 2015 Executive Annual Cash Incentive Plan.   Incorporated by Reference
         
10.19   Revolving Credit and Security Agreement with PNC Bank, National Association, dated September 16, 2011; Consent and Amendment No. 1 to Revolving Credit and Security Agreement, dated February 6, 2012; Amendment to Consent and Amendment No. 1 to Revolving Credit and Security Agreement, dated March 28, 2012; Amendment No. 2 to Revolving Credit and Security Agreement, dated July 23, 2012; Consent and Amendment No. 3 to Revolving Credit and Security Agreement, dated January 22, 2013; Waiver and Amendment No. 4 to Revolving Credit and Security Agreement, dated as of October 28, 2013; Amendment No. 5 to Revolving Credit and Security Agreement, dated September 22, 2014; Amendment No. 6 to Revolving Credit and Security Agreement, dated October 20, 2014; Amendment No. 7 to Revolving Credit and Security Agreement, dated December 23, 2014; Amendment No. 8 to Revolving Credit and Security Agreement, dated April 30, 2015.   Incorporated by Reference
         
10.20   Securities Purchase Agreement, dated March 28, 2012.   Incorporated by Reference
         
10.21   Securities Purchase Agreement, dated October 20, 2014.   Incorporated by Reference

 

 

 

 

Exhibit No.   Description   Method of Filing
10.22   Exchange Agreement with Liberty Harbor Master Fund I, L.P. dated October 20, 2014.   Incorporated by Reference
         
21.1   List of Subsidiaries.   Incorporated by Reference
         
23.1   Consent of Independent Registered Public Accounting Firm.   Filed Electronically
         
24.1   Powers of Attorney.   Filed Electronically
         
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.   Filed Electronically
         
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.   Filed Electronically
         
32.1   Section 1350 Certifications.   Filed Electronically
         
101   The following financial statements and footnotes from the Annual Report on Form 10-K for the fiscal year ended September 27, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Cash Flows; (iv) Consolidated Statements of Shareholders’ Equity; and (v) Notes to Consolidated Financial Statements.   Filed Electronically