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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
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 1-8703
WESTERN DIGITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 92-2647125
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8105 IRVINE CENTER DRIVE 92618
IRVINE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 932-5000
REGISTRANT'S WEB SITE: HTTP://WWW.WESTERNDIGITAL.COM
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A JUNIOR NEW YORK STOCK EXCHANGE
PARTICIPATING PREFERRED STOCK
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in 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]
As of July 25, 1998, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $1.0 billion.
As of July 25, 1998, the number of outstanding shares of Common Stock, par
value $.01 per share, of the Registrant was 88,330,178.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1998 fiscal year.
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WESTERN DIGITAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
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.................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 48
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 48
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THE INFORMATION CONTAINED IN THIS REPORT INCLUDES FORWARD-LOOKING
STATEMENTS. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "WILL," "FORECASTS," "PLANS," "FUTURE," "STRATEGY," OR
WORDS OF SIMILAR IMPORT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
OTHER STATEMENTS OF THE COMPANY'S PLANS AND OBJECTIVES MAY ALSO BE CONSIDERED TO
BE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLISH REVISED
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE URGED
TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY TO
ADVISE INTERESTED PARTIES OF CERTAIN RISKS AND OTHER FACTORS THAT MAY AFFECT THE
COMPANY'S BUSINESS AND OPERATING RESULTS, INCLUDING THE DISCLOSURES MADE UNDER
THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" IN THIS REPORT, AS WELL AS THE COMPANY'S OTHER PERIODIC
REPORTS ON FORMS 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
The Company's fiscal year is a 52 or 53-week year ending on the Saturday
nearest June 30. The 1996, 1997 and 1998 fiscal years ended on June 29, June 28,
and June 27, respectively, and consisted of 52 weeks each.
Unless otherwise indicated, references herein to specific years and
quarters are to the Company's fiscal years and fiscal quarters.
The Company's principal executive offices are located at 8105 Irvine Center
Drive, Irvine, California 92618; its telephone number is (949) 932-5000 and its
web site is http://www.westerndigital.com. The information on the web site is
not incorporated in this report.
PART I
ITEM 1. BUSINESS
GENERAL
Western Digital Corporation (the "Company" or "Western Digital") designs,
develops, manufactures and markets a broad line of rigid magnetic disk drives
("hard drives") for use in desktop personal computers ("PCs") and, since 1997,
in high-performance workstations, LAN servers and multi-user ("enterprise")
systems. The Company is one of the top four independent manufacturers of hard
drives. It is a leading manufacturer of hard drives for desktop PCs, and it is
the Company's goal to become a leading manufacturer of hard drives for
enterprise systems. The Company's products currently include 3.5-inch form
factor hard drives ranging in storage capacity from 2.0 gigabytes ("GB") to 10.1
GB. The Company sells its products worldwide to original equipment manufacturers
("OEMs") for inclusion in their computer systems or subsystems, and to
distributors, resellers and retailers.
Strategic Business Development
In June 1998, the Company and IBM Corporation ("IBM") entered into a
broad-based hard drive component supply and technology licensing agreement ("IBM
Agreement"). The IBM Agreement enables the Company to incorporate IBM's
industry-leading technology, designs, and hard drive components into the
Company's desktop PC products while giving IBM the benefit of the Company's
high-volume manufacturing
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expertise and improved access to the high-volume PC market for its heads and
drive components. Initially, the Company intends to combine IBM's research and
development with its own technology and manufacturing capabilities to design and
produce desktop PC hard drives that incorporate IBM's industry-leading giant
magneto-resistive ("GMR") heads. The Company expects these products to reach the
market within the first six months of calendar 1999. The IBM Agreement permits
the Company to utilize other technologies developed by IBM and to market
products incorporating IBM technologies, simultaneously with IBM's own use of
these technologies. The Company expects that access to IBM's hard drive research
and development will help the Company achieve its strategy of time-to-market and
time-to-volume leadership in the desktop PC hard drive market. The IBM Agreement
has a minimum three-year term and provides for extensions and licenses covering
new products, subject to negotiation by the parties of mutually agreeable terms.
The Company expects to purchase components for these hard drives from IBM and
other suppliers. In order to take advantage of the IBM relationship while
preserving the Company's own research and development capabilities, the
Company's desktop PC product development efforts will follow two concurrent
paths, one utilizing IBM technology, the other remaining independent of IBM
technology. These product development efforts will enable the Company to offer
market-leading products in the higher capacity and performance portions of the
desktop market as well as in the lower capacity, value oriented portion of the
desktop market. For further discussion of the IBM relationship, see
Products -- Desktop PC Products, Technology and Product Development, and Part
II, Item 7, Risk Factors Affecting the Company and/or the Hard Drive
Industry -- Technology License and Component Supply Transaction with IBM.
INDUSTRY
The Company designs, develops, manufactures and markets hard drives for use
in the desktop PC and enterprise markets. Users of computer systems in both
markets are increasingly demanding additional data storage capacity with higher
performance in order to (i) use more sophisticated applications software
including database management, CAD/CAM/CAE, desktop publishing, video editing
and enhanced graphics applications, and (ii) operate in multi-user,
multitasking, and multimedia environments.
Desktop PC Market
The desktop component of the worldwide personal computing market
represented greater than 75% of all hard drives shipped by the industry in
calendar 1997. Over 90% of Western Digital's hard drive unit shipments in 1998
were sold to this market. Desktop personal computers for entry level to
experienced users are used in both commercial and consumer environments.
The worldwide market for desktop hard drives experienced strong growth from
calendar 1993 through calendar 1997, with average unit growth of approximately
27% per year and average revenue growth of approximately 23% per year. Industry
sources expect continued double digit unit growth through calendar 2000,
although at lower than recent historical levels, but only single digit revenue
growth through calendar 2000. Current growth estimates are lower than last
year's estimates, reflecting the impact of recent industry oversupply and
competition. See Part II, Item 7, Risk Factors Affecting the Company and/or the
Hard Drive Industry -- Potential Impact of Changing Market Demands.
WORLDWIDE HARD DRIVE SHIPMENTS -- DESKTOP PCS
1993 1994 1995 1996 1997 1998E 1999E 2000E
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Units (MM)............... 38.8 52.8 68.8 81.2 100.5 111 127.1 146.4
% Growth................. N/A 36% 30% 18% 24% 10% 15% 15%
Revenues ($Bn)........... $ 7.5 $ 9.8 $12.4 $14.4 $ 16.9 $17.5 $ 18.6 $ 20.4
% Growth................. N/A 31% 27% 16% 18% 3% 6% 10%
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Source: International Data Corporation, August 1998.
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Desktop PCs are used in a number of environments, ranging from homes to
businesses and multi-user networks. Software applications are primarily word
processing, spreadsheet, desktop publishing, database management, multimedia and
other related applications. Desktop PCs typically utilize the Enhanced
Integrated Drive Electronics ("EIDE") interface for their hard drives. The
Company believes the minimum storage requirements in the past year for
entry-level PCs were generally 1.6 GB to 3.2 GB of formatted capacity. The entry
level capacities continue to increase. In addition, users of PCs, especially
entry-level PCs, have become increasingly price sensitive. Many PC system
manufacturers have recently introduced lower-cost, lower-performance systems
principally for the consumer marketplace. These systems have generally been
priced below $1,000 and typically contain hard drives with lower capacity and
performance. The Company currently participates in this market only to a limited
extent.
The market continues to demand increased capacity per unit as users' system
needs increase and technological and manufacturing advances continue to make
higher capacity drives more affordable. Industry sources believe that the trend
of increased storage capacity per unit shipped will continue for the foreseeable
future. As such, the Company believes that time-to-market, time-to-volume and
time-to-quality leadership with higher capacity drives at attractive price
levels is critical to its future success in serving this market.
Enterprise Market
Enterprise systems include high performance microcomputers, technical
workstations, servers and minicomputers. Applications operated by these systems
are characterized by compute-intensive and data-intensive solutions, such as
CAD/CAM/CAE, network management, larger database management systems, scientific
applications and small to medium-sized business applications such as materials
requirement planning, payroll, general ledger systems and related management
reports. Data integrity and rapid access to data are paramount in this
environment. Enterprise systems typically require hard drive storage capacities
of 4.0 GB and greater per drive, average seek times of less than 8 msec and
rotation speeds of 7,200 rpm to 10,000 rpm. Due to the leading edge
characteristics required by end-users of enterprise systems, manufacturers of
such systems emphasize performance as well as price as the key selling points.
Enterprise systems primarily use the Small Computer System Interface ("SCSI"),
although recently the Fibre Channel Arbitrated Loop ("FC-AL") interface is being
pioneered by some storage subsystem providers.
The worldwide market for enterprise hard drives experienced strong growth
from calendar 1993 through calendar 1997, with average unit growth of
approximately 27% per year and average revenue growth of approximately 11% per
year. Unit growth declined in calendar 1997 as compared to prior years and
revenues decreased from 1996. Industry sources expect slower unit and revenue
growth through calendar 2000, with unit growth outpacing revenue growth. Current
growth estimates are lower than last year's estimates. See Part II, Item 7, Risk
Factors Affecting the Company and/or the Hard Drive Industry -- Potential Impact
of Changing Market Demands.
WORLDWIDE HARD DRIVE SHIPMENTS -- ENTERPRISE
1993 1994 1995 1996 1997 1998E 1999E 2000E
---- ---- ---- ----- ----- ----- ----- -----
Units (MM).................... 5.3 7.2 9.2 11.4 13.6 15.0 17.2 20.1
% Growth...................... N/A 36% 28% 24% 19% 10% 15% 16%
Revenues ($Bn)................ $4.8 $5.4 $6.6 $ 7.3 $ 7.2 $7.5 $8.2 $ 9.1
% Growth...................... N/A 13% 22% 11% -1% 5% 8% 11%
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Source: International Data Corporation, August 1998.
PRODUCTS
The Company's WD Caviar brand products are designed to serve the desktop PC
portion of the hard drive market and its WD Enterprise brand products are
designed to serve the enterprise portion.
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Desktop PC Products
The WD Caviar family currently consists of 1.0" high, 3.5-inch form factor
products with capacities ranging from 2.0 GB to 10.1 GB. In July 1998, the
Company announced Data Lifeguard, an exclusive data reliability feature which
will be introduced in all versions of the 3.4 GB per platter hard drive
platform. Data Lifeguard, which the Company plans to implement in all future
desktop hard drives, protects end-user data by automatically detecting,
isolating, and repairing possible problem areas on the hard drive before data
loss can occur. The WD Caviar products utilize the EIDE interface, providing
high performance while retaining ease of use and overall low cost of connection.
The WD Caviar product line generally leverages a common architecture or
"platform" for various products with different capacities to serve the differing
needs of the desktop PC market. This platform strategy results in commonality of
components across different products, which reduces exposure to changes in
demand, facilitates inventory management and allows the Company to achieve lower
costs through economies of scale purchasing. This platform strategy also enables
OEM customers to leverage their qualification efforts onto successive product
models.
With the advent of the IBM relationship, the Company expects to maintain
two separate product development paths for the desktop market. One path will
integrate IBM technology, designs, and components to create products focused on
the higher end of the desktop market where capacity per system and performance
are most important. The other path will continue to utilize the Company's own
product platforms and technology to design desktop products independently of IBM
technology. These products will be focused on those portions of the market that
are most price sensitive, including the sub-$1,000 PC market. For the majority
of the desktop market, which product to produce and sell will be primarily
determined by the overall cost and performance attributes of the hard drive at
the particular capacity point as well as customer product transitions and
qualifications.
Enterprise Products
The Company began shipping WD Enterprise products in fiscal 1997. The
Company's current enterprise products offer storage capacities ranging from 2.1
GB to 9.1 GB, are 1.0" high, use the 3.5-inch form factor, feature seek times of
less than 8 msec, and are targeted at workstations, servers, multi-user systems
and storage subsystems. WD Enterprise products utilize the SCSI interface, (both
single-ended and low voltage differential) combined with a 7200 rpm spin rate to
provide the high performance required to meet the storage needs of enterprise
systems.
In order to continue to grow its enterprise business, the Company must
expand its product offerings to include the full range of enterprise products
demanded by OEM customers. See "Technology and Product Development." The IBM
Agreement is not applicable to the Company's enterprise business, so enterprise
product development must be achieved through the Company's own technological
developments.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Hard drives are used to record, store and retrieve digital data. Their
performance attributes are currently better than removable or floppy disks,
optical disk drives and tape, and they are more cost effective than
semiconductor technology. The primary measures of hard drive performance
include:
"Storage capacity" -- the amount of data that can be stored on the
hard drive -- commonly expressed in gigabytes.
"Average seek time" -- the time needed to position the heads over a
selected track on the disk surface -- commonly expressed in milliseconds.
"Internal data transfer rate" -- the rate at which data is transferred
to and from the disk -- commonly expressed in megabits per second.
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"Spindle rotational speed" -- the rotational speed of the disks inside
the hard drive -- commonly expressed in revolutions per minute.
All of the Company's hard drive products employ similar technology
consisting of one or more rigid disks attached to a spindle assembly which
rotates the disks at a constant speed around a hub. The rate at which the disks
spin affects the drive performance -- generally, the faster the disks spin the
higher the performance. The disks, or media, are where the actual data is stored
and retrieved. Each disk typically consists of a substrate of finely machined
aluminum or glass on which is deposited a thin layer of magnetic material.
One read/write head is generally associated with each side of each disk and
flies just above its surface. The heads are attached to arms that are linked
together to form the head stack assembly. Guided by instructions from the
internal controller, the head stack assembly is pivoted and swung across the
disk by a head actuator or motor until it reaches the selected track of a disk,
where the data is recorded or retrieved. The hard drive communicates with the
computer through its internal controller, which controls the drive and
interfaces with the host computer. Currently, the primary interface for desktop
PCs is EIDE, and for enterprise systems, SCSI. As performance improves, the hard
drive will need to deliver information faster than these current interfaces can
handle. Accordingly, enterprise systems have begun to incorporate the FC-AL
serial interface where very high data transfer rates are important, and the
desktop PC industry plans to transition to high speed serial interfaces such as
1394 to handle the higher data transfer rates. The Company is working to develop
products that will support the FC-AL and 1394 interfaces.
Storage capacity of the hard drive is determined by the number of disks and
each disk's areal density, which is a measure of the amount of data that can be
stored on the recording surface of the disk. Areal density is generally measured
in megabits per square inch of disk surface. The higher the areal density, the
more information can be stored on a single platter. As the areal density
increases, fewer disks and/or heads are required to achieve a given drive
capacity. For example, a 5 GB drive with areal density of 2.1 GB per disk will
require three disks and five heads. With an areal density of 2.5 GB per disk,
the same capacity can be achieved with two disks and four heads, with resulting
component cost savings. The Company employs a range of advanced technologies to
achieve high densities, including PRML (Partial Response Maximum Likelihood)
read/write channels, advanced servo systems, and laser textured media.
Head technology is one of the variables affecting areal density. The
desktop hard drive industry is completing a transition to MR head technology,
which allows significantly higher storage capacities than thin film head
technologies. Certain of the Company's competitors in the desktop hard drive
market moved more quickly than the Company into MR head technology, achieving
time-to-market leadership at higher capacity points. The Company pursued a
strategy of a more deliberate transition to this new technology in order to take
advantage of the hard drive industry's MR technology learning curve. In the
interim, the Company continued to refine and rely upon thin film head technology
for its products. The Company began volume shipments of its first MR-based hard
drive products for the desktop market in the first quarter of 1998, and
substantially completed its transition of desktop hard drives to MR head
technology by the end of 1998. The Company continues to manufacture drives with
thin film inductive heads for the lower capacity points of the enterprise
market.
Constant innovations in research and development are essential to the
Company's ability to compete. In particular, the Company must continue to
develop hard drive products that deliver ever-increasing storage capacities.
Areal density improvement is essential to this effort because increased areal
density per platter helps manufacturers reduce component costs and maintain
average margins. The IBM Agreement is expected to help enable the Company to
provide market-leading products in the higher end of the desktop PC market, but
the Company must continue its own independent research and product development
efforts to compete in the enterprise and low-cost desktop PC markets.
The Company must expand its product offerings in the enterprise market to
include half high (1.6" high), FC-AL interface, and 10,000 rpm drive products.
The Company's current line of enterprise products consists of SCSI low profile
1" high drives with capacity points up to 9.1 GBs. While these products address
approximately 70-80% of the enterprise market, that percentage is likely to
decrease as demand for FC-AL interface and 10,000 rpm drive products grows.
Technology available to the Company under the IBM
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Agreement is limited to the desktop PC market and may not be used by the Company
in its enterprise products, so the Company's own research and development is
crucial to its success in the enterprise market. The Company is currently in the
product design and development phase of these additional enterprise products,
and expects to bring them to market during the next 18 months. If the Company is
unable to build its enterprise infrastructure quickly enough to support this
development schedule or encounters development delays or quality issues, it may
miss the time-to-market windows on these new enterprise products.
SALES AND DISTRIBUTION
The Company sells its products globally to OEMs, OEM subcontractors
("ODMs"), distributors, value-added resellers, dealers, system integrators and
retailers. Sales to OEMs accounted for 68%, 72% and 69% of consolidated revenues
in fiscal years 1996, 1997 and 1998, respectively. Western Digital hard drives
are either incorporated into computer systems for resale or installed into end
user systems as upgrades.
The business models of computer manufacturers, which account for the
majority of the Company's sales, are in the process of changing, and these
changes have impacted and will continue to impact Western Digital's sales,
inventory and distribution patterns. The forecast-driven, long-production-run
logistics model, which most of the computer industry has used, exposes OEMs and
others in the distribution chain to the risk of carrying excess or obsolete
component inventories. The historical model limits the OEMs' flexibility to
react to rapid technology changes and component pricing fluctuations. The
Company is beginning to experience a new customer supply chain logistics model
that combines "build-to-order" (OEM does not build until there is an order
backlog) and "channel assembly" (OEM or component suppliers provide kits and/or
parts to dealers or other assemblers who assemble the computers). The Company is
adapting its logistics model to effectively align with this industry shift.
Western Digital already operates within these models with two of its major OEM
customers. These changes will require greater skill in managing finished goods
inventory and may require more flexibility in manufacturing, both of which in
turn will require even closer relationships between the Company and its OEM
customers. For an additional discussion of the changes in customer models, refer
to Part II, Item 7, Risk Factors Affecting the Company and/or the Hard Drive
Industry -- Customer Concentration and Changing Customer Models.
The Company maintains sales offices throughout North America, Eastern and
Western Europe, the Middle East, Japan and Southeast Asia. Field application
engineering is provided to strategic OEM accounts, and end-user technical
support services are provided within the United States and Europe. The Company's
end-user technical support is supplied by both employees and qualified
third-party support organizations through toll-free telephone support during
business hours in the United States, prepaid telephone cards in Europe and via
the Company's web site.
The Company's major OEM customers include Apple Computer, Compaq Computer,
Dell Computer, Fujitsu, Gateway 2000, Hewlett-Packard, IBM, Intel, Micron
Electronics and NEC. During 1996 and 1997, sales to Gateway 2000 and IBM
accounted for 11% and 13% of revenues, respectively. During 1998, sales to
Compaq accounted for 14% of revenues. The Company believes that its success
depends on its ability to maintain and improve its strong OEM customer
relationships. OEMs use the quality, storage capacity and performance
characteristics of hard drives to select their hard drive providers. High volume
PC OEMs typically seek to qualify three or four providers for a given hard drive
product generation; enterprise OEMs typically seek to qualify two or three. To
qualify consistently with OEMs, a hard drive provider must consistently execute
on its product development and manufacturing processes in order to be among the
first-to-market and first-to-volume production with each product generation
(typically defined by form factor, areal density, capacity, interface and
spindle speed). Once an OEM has chosen its qualified hard drive vendors for a
given product, it generally will purchase hard drives from those vendors for the
life of that product. If a qualification opportunity is missed, the Company may
lose significant market share with that OEM until the next generation of
products is introduced. The effect of missing a product qualification
opportunity is magnified by the limited number of high volume OEMs, most of
which continue to consolidate their share of the PC and enterprise markets.
Sales to any particular OEM may increase or decrease from year to year, and
historical sales levels are not necessarily indicative of future results. For an
additional discussion of customer
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concentration, see Part II, Item 7, Risk Factors Affecting the Company and/or
the Hard Drive Industry -- Customer Concentration and Changing Customer Models.
The Company also sells its products through its sales force to selected
resellers, which include major distributors, value-added resellers and mass
merchandisers. The Company's major distributor customers include Decision
Support Systems, Frank and Walter, Ingram Micro, Loeffelhardt, Marshall
Industries, Supercom, Synnex, and Tech Data. Major mass merchandiser customers
include Best Buy, Circuit City, Comp USA, Computer City, Office Depot, and Sam's
Club. In accordance with standard industry practice, the Company's agreements
with its resellers provide price protection for inventories held by the
resellers at the time of published list price reductions and, under certain
circumstances, stock rotation for slow-moving items. These agreements may be
terminated upon written notice by either party. In the event of termination, the
Company may be obligated to repurchase a certain portion of the resellers'
inventory.
The Company's international sales, which include sales to foreign
subsidiaries of U.S. companies, represented 51%, 47% and 43% of revenues for
fiscal years 1996, 1997 and 1998, respectively. Sales to international customers
may be subject to certain risks not normally encountered in domestic operations,
including exposure to tariffs, various trade regulations and fluctuations in
currency exchange rates. See Part II, Item 7, Risk Factors Affecting the Company
and/or the Hard Drive Industry -- Foreign Sales and Manufacturing Risks.
For information concerning revenue recognition, sales by geographic region
and significant customer information, see Notes 1 and 7, respectively, of Notes
to Consolidated Financial Statements.
The Company's marketing and advertising functions are performed both
internally and through outside firms. Advertising, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments.
Western Digital utilizes both consumer media and trade publications. The Company
has programs under which qualifying resellers and OEMs are reimbursed for
certain advertising expenditures. Western Digital has also invested in direct
marketing and customer satisfaction programs. The Company maintains ongoing
contact with end users through primary and secondary market research, focus
groups, product registrations and technical support databases.
COMPETITION
The hard drive industry is intensely competitive. Hard drives manufactured
by different competitors are highly substitutable due to the industry mandate of
technical form, fit and function standards. Hard drive manufacturers compete on
the basis of product quality and reliability, storage capacity, unit price,
product performance, production volume capabilities, delivery capability,
leadership in time-to-market, time-to-volume and time-to-quality and ease of
doing business. The relative importance of these factors varies among different
customer and market segments. The Company believes that it is generally
competitive in all of these factors. The Company believes that in the hard drive
business it cannot differentiate its products solely on attributes such as
storage capacity; therefore, the Company also differentiates itself by designing
and incorporating into its hard drives desirable product performance attributes
and by emphasizing rapid response with its OEM and distribution customers and
brand equity with its end users. These product performance attributes include
seek time, data transfer rates, failure prediction, remote diagnostics and data
recovery. Rapid response requires accelerated design cycles, customer delivery
and production flexibility, which contribute to customer satisfaction. Brand
equity is a relatively new concept for the hard drive industry. However, as data
storage has become strategically critical for computer end users, the Company
believes that trust in a manufacturer's reputation has become an important
factor in the selection of a hard drive, particularly within such a rapidly
changing technology environment.
During 1996 and 1997, the Company significantly increased its market share
in the desktop hard drive market. The Company's market share eroded in 1998,
primarily due to competitive conditions in the disk drive industry (with
resulting cut backs in production), the timing of the Company's transition from
thin film to MR head technology and certain manufacturing and performance issues
encountered as the Company pushed thin film head technology to its limits. There
can be no assurance that the Company will be able to recover recent market share
losses or avoid further erosion of market share. Seagate, Quantum, IBM, Maxtor,
Fujitsu
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and Samsung are the Company's major competitors in the data storage business,
and Maxtor, Fujitsu and Samsung have recently gained significant market share in
the desktop market.
The desktop market is characterized by more competitors and shorter product
life cycles than the enterprise market; therefore, it has traditionally been
subject to periods of severe price competition, and factors such as
time-to-market can have a more pronounced effect on the success of any
particular product.
The enterprise portion of the hard drive market is more concentrated than
the desktop portion, with the largest competitor, Seagate, having market share
in excess of 50% until the recent entrance of Quantum and the Company as
competitors. The other major competitors in this market are IBM and Fujitsu.
With the addition of Quantum and the Company as competitors, price competition
in the enterprise market has increased, and the Company expects that it will
continue to increase. Introduction of the WD Enterprise drives into the
enterprise market has been successful to date because of high product quality,
competitive product performance and the Company's ability to leverage its
customer and supplier relations from the desktop market; however, the Company's
continued success in the enterprise storage market is heavily dependent on the
successful development, timely introduction and market acceptance of new
products.
For an additional discussion of competition, see Part II, Item 7, Risk
Factors Affecting the Company and/or the Hard Drive Industry -- Highly
Competitive Industry.
SERVICE AND WARRANTY
Western Digital warrants its newly manufactured desktop products against
defects in materials and workmanship for a period of three years from the date
of sale. The Company's enterprise storage products have similar warranties for a
period of five years from the date of sale. The Company's warranty obligation is
generally limited to repair or replacement. The Company refurbishes or repairs
its products at in-house service facilities located in Singapore and at a
third-party return facility located in Germany. As a response to the large
increase in theft of high technology products and in an effort to deter the sale
of Western Digital products on the "black market," the Company does not warrant
product which is stolen.
MANUFACTURING
To be competitive, Western Digital must manufacture significant volumes of
high quality hard drives at low unit cost. One of the essential requirements for
the Company to benefit from the IBM Agreement will be its ability to utilize its
own high-volume manufacturing technologies for products based upon IBM
technologies, which historically have not been developed for high volume
production. The Company strives to maintain manufacturing flexibility, rapidly
achieve high manufacturing yields and acquire high-quality components in
required volumes at competitive prices. The critical elements of Western
Digital's hard drive production are high volume, low cost assembly, and testing
and establishment and maintenance of key vendor relationships in order to create
"virtual vertical integration." By establishing partner relationships with many
of its key strategic component suppliers, the Company believes it is able to
access "best-of-class" manufacturing quality without the substantial capital
investment associated with actual vertical integration. In addition, the Company
believes that its virtual vertical integration model enables it to have the
business flexibility needed to select the highest quality low cost suppliers as
product designs and technologies evolve.
Hard drive manufacturing is a complex process involving the assembly of
precision components with narrow tolerances and extensive testing to ensure
reliability. The assembly process occurs in a "clean room" environment which
demands skill in process engineering and efficient utilization of the "clean
room" layout in order to reduce the high operating costs of this manufacturing
environment. In 1998 the Company experienced decreases in manufacturing yields
as a result of tighter manufacturing tolerances associated with extending the
use of thin film heads in higher capacity drives as thin film technology reached
its technical limits. With the completed transition to MR head technology for
desktop PC hard drives, the Company has recently increased its factory yields on
desktop PC hard drives to its historically high levels.
The Company produces hard drives in its three plants, two in Singapore and
one in Malaysia. These plants have responsibility for all hard drives in volume
production, including manufacturing, purchasing,
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inventory management, assembly, testing, quality assurance and shipping of
finished units. The Company purchases most of the standard mechanical components
and micro controllers for its hard drives from external suppliers, although the
Company has a media manufacturing facility in Northern California which supplies
a significant portion of its media requirements. The Company's media
manufacturing facility runs substrates, acquired from third party vendors,
through various manufacturing processes of layering, coating and lubricating in
order to achieve the proper degree of final surface smoothness. After conducting
final quality assurance tests, the media plant delivers finished media to the
Company's overseas manufacturing facilities.
The Company continually evaluates its manufacturing processes in an effort
to increase productivity and decrease manufacturing costs. In order to address
inventory oversupply, the Company has implemented production cutbacks in its
manufacturing facilities and is now carrying excess manufacturing capacity that
must be addressed through production increases or plant closure. The Company
believes that more automated manufacturing processes may be required in the
future in order to be competitive in the hard drive industry and evaluates which
steps in the manufacturing process would benefit from automation and how
automated manufacturing processes support the Company's business plans.
For an additional discussion of manufacturing, see Part II, Item 7, Risk
Factors Affecting the Company and/or the Hard Drive Industry -- Foreign Sales
and Manufacturing Risks.
RESEARCH AND DEVELOPMENT
The Company devotes substantial resources to development of new products
and improvement of existing products. The Company focuses its engineering
efforts on coordinating its product design and manufacturing processes in order
to bring its products to market in a cost-effective and timely manner. Research
and development expenses totaled $150.1, $150.2 and $203.7 million in 1996, 1997
and 1998, respectively. Research and development expenditures included $24.5
million for microcomputer products in 1996 and approximately $22.0 million,
primarily related to the initiation of the IBM relationship, in 1998. The
microcomputer businesses were sold in 1996. Recurring research and development
expenditures for hard drive products increased by approximately $24.6 million
from 1996 to 1997 and by $31.5 million from 1997 to 1998.
For a discussion of product development, see Part II, Item 7, Risk Factors
Affecting the Company and/or the Hard Drive Industry -- Rapid Technological
Change and Product Development.
MATERIALS AND SUPPLIES
The principal components currently used in the manufacture of the Company's
hard drives are magnetic heads and related head stack assemblies, media,
controllers, spindle motors and mechanical parts used in the head-disk assembly.
In addition to its own proprietary semiconductor devices, the Company also uses
standard semiconductor components such as logic, memory and microprocessor
devices obtained from other manufacturers and a wide variety of other parts,
including connectors, cables, and switches.
Unlike some of its competitors, except for a portion of its media
requirements, the Company acquires all of the components for its products from
third-party suppliers. In general, the Company tries to have at least two or
three suppliers for each of its component requirements. For example, the Company
currently buys MR heads from IBM, Read-Rite and SAE. IBM will supply all of the
heads for the Company's desktop PC hard drives incorporating IBM technology
under the IBM Agreement. Media requirements not fulfilled internally are
purchased through several outside vendors including Komag, Trace Storage, HMT
Technology and Showa Denko. The Company purchases proprietary finished
integrated circuits, which are designed by the Company, from SGS-Thomson and
other externally designed integrated circuits from other sources.
For an additional discussion of component supplies, see Part II, Item 7,
Risk Factors Affecting the Company and/or the Hard Drive Industry -- Dependence
on Suppliers of Components.
BACKLOG
At August 7, 1998, the Company's backlog, consisting of orders scheduled
for delivery within the next twelve months, was approximately $270 million,
compared with a backlog at August 15, 1997 of approxi-
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mately $620 million. Historically, a substantial portion of the Company's orders
has been for shipments within 30 to 60 days of the placement of the order. The
Company generally negotiates pricing, order lead times, product support
requirements and other terms and conditions prior to receiving an OEM's first
purchase order for a product. OEM purchase orders typically may be canceled with
relatively short notice to the Company, subject to payment of certain costs, or
modified by customers to provide for delivery at a later date. Also, certain of
the Company's sales to OEMs are made under "just-in-time" delivery contracts
that do not generally require firm order commitments by the customer until the
time of sale. Therefore, backlog information as of the end of a particular
period is not necessarily indicative of future levels of the Company's revenue
and profit and may not be comparable to earlier periods.
PATENTS, LICENSES AND PROPRIETARY INFORMATION
The Company owns numerous patents and has many patent applications in
process. The Company believes that, although its patents and patent applications
have significant value, the successful manufacturing and marketing of its
products depends primarily upon the technical competence and creative ability of
its personnel. Accordingly, the patents held and applied for do not assure the
Company's future success.
In addition to patent protection of certain intellectual property rights,
the Company considers elements of its product designs and processes to be
proprietary and confidential. The Company believes that its nonpatentable
intellectual property, particularly some of its process technology, is an
important factor in its success. Western Digital relies upon employee,
consultant, and vendor non-disclosure agreements and a system of internal
safeguards to protect its proprietary information. Despite these safeguards,
there is a risk that competitors may obtain and use such information. The laws
of foreign jurisdictions in which the Company does business also may provide
less protection for confidential information than the United States.
The Company relies on certain technology that is licensed from other
parties in order to manufacture and sell its products. The Company has
cross-licensing agreements with several competitors, customers, and suppliers,
and the Company believes that it has adequate licenses and other agreements in
place in addition to its own intellectual property portfolio to compete
successfully in the hard drive industry.
From time to time, the Company receives claims of alleged patent
infringement or notice of patents from patent holders which typically contain an
offer to grant the Company a license. It is the Company's policy to evaluate
each claim and, if appropriate, enter into a licensing arrangement on
commercially reasonable terms. However, there is no assurance that such licenses
are presently obtainable, or if later determined to be required, could be
obtained.
For additional discussion of intellectual property, see Part II, Item 7,
Risk Factors Affecting the Company and/or the Hard Drive
Industry -- Intellectual Property.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of regulations in connection with its
operations. It believes that it has obtained or is in the process of obtaining
all necessary permits for its domestic operations.
EMPLOYEES
As of July 25, 1998, the Company employed a total of 13,045 full-time
employees worldwide. This represents a reduction in headcount of approximately
20% since November 1997, as the Company responded to the industry downturn and
its decrease in sales. The Company employed 2,757 employees in the United
States, of whom 1,267, 531 and 959 were engaged in engineering, sales and
administration, and manufacturing, respectively. The Company employed 4,816
employees at its hard drive manufacturing facilities in Malaysia, 5,314 at its
hard drive manufacturing facilities in Singapore, and 158 at its international
sales offices.
Many of the Company's employees are highly skilled, and the Company's
continued success depends in part upon its ability to attract and retain such
employees. In an effort to attract and retain such employees, the Company
continues to offer employee benefit programs which it believes are at least
equivalent to those offered by its competitors. Despite these programs, the
Company has, along with most of its competitors,
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experienced difficulty at times in hiring and retaining certain skilled
personnel. In critical areas, the Company has utilized consultants and contract
personnel to fill these needs until full-time employees could be recruited. The
Company has never experienced a work stoppage, none of its domestic employees
are represented by a labor organization, and the Company considers its employee
relations to be good.
ITEM 2. PROPERTIES
The Company's headquarters, located on leased property in Irvine,
California (expires in June, 2000), house management, research and development,
administrative and sales personnel. The Company also leases facilities in San
Jose, California, and Rochester, Minnesota for research and development
activities. The Company operates two hard drive manufacturing facilities in
Singapore. One Singapore facility is leased and is used to produce desktop hard
drives. The other Singapore facility is owned and is used to produce enterprise
hard drives. Western Digital also owns a hard drive manufacturing facility in
Kuala Lumpur, Malaysia which provides the Company with additional capacity to
produce desktop hard drives. The Company's media processing facilities are
located on leased property in Santa Clara, California. The leases referenced
above expire at various times beginning in 1998 through 2015. The Company owns
approximately 34 acres of land in Irvine, California on which it intends to
construct a new corporate headquarters within the next two years.
The Company also leases office space in various other locations throughout
the world primarily for sales and technical support. The Company's present
facilities are adequate for its current needs, although the process of upgrading
its facilities to meet technological and market requirements is expected to
continue. The hard drive industry does not generally require long lead time to
develop and begin operations in new manufacturing facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleges that hard drives supplied by the
Company in calendar 1988 and 1989 were defective and caused damages to Amstrad
of $186.0 million in out-of-pocket expenses, lost profits, injury to Amstrad's
reputation and loss of goodwill. The Company filed a counterclaim for $3.0
million in actual damages in addition to exemplary damages in an unspecified
amount. The Company believes that it has meritorious defenses to Amstrad's
claims and intends to vigorously defend itself against the Amstrad claims and to
press its claims against Amstrad in this action. The case is scheduled for trial
in September 1998. Although the Company believes that the final disposition of
this matter will not have an adverse effect on the Company's financial condition
or operating results, if Amstrad were to prevail on its claims, a judgment for a
material amount could be awarded against the Company.
On June 10, 1994, Papst Licensing ("Papst") brought suit against the
Company in the United States District Court for the Central District of
California alleging infringement by Western Digital of five hard drive motor
patents owned by Papst. The patents relate to disk drive motors that the Company
purchases from motor vendors. On December 1, 1994, Papst dismissed its case
without prejudice but has notified the Company that it intends to reinstate the
suit if the Company does not agree to enter into a license agreement with Papst.
Papst has also put the Company on notice with respect to several additional
patents. The Company does not believe that the outcome of this matter will have
an adverse effect on its financial condition or operating results.
Between December 12, 1997 and February 24, 1998, eight class action suits
were filed against the Company and certain of its officers and directors. The
plaintiffs in the actions purport to represent purchasers of the Company's
common stock during various periods ranging from July 25, 1996, through December
2, 1997 (collectively, the "Class Periods"). The complaints allege that the
Company issued false and misleading statements during the respective Class
Periods concerning the outlook for the Company's operations and earnings and
that the Company issued false and misleading financial statements in fiscal
years 1996 and 1997 by improperly deferring the write-down of obsolete
inventory. The complaints seek compensatory damages for the purported class
members in an unspecified amount. The Court ordered the cases consolidated and
designated the plaintiffs in the first case filed as the lead plaintiffs and the
law firm representing such plaintiffs
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as lead counsel. The Company filed a motion to dismiss the amended consolidated
complaint which was granted by the Court with prejudice.
The Company is also subject to other legal proceedings and claims which
arise in the ordinary course of business. Although occasional adverse decisions
or settlements may occur, the Company believes that the final disposition of
such matters will not have an adverse effect on its financial condition or
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all the executive officers of the Company
as of August 20, 1998 are listed below, followed by a brief account of their
business experience during the past five years. Executive officers are normally
appointed annually by the Board of Directors at a meeting of the directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangements or understandings
between any officer and any other person pursuant to which an officer was
selected.
NAME AGE POSITION
---- --- --------
Charles A. Haggerty...................... 56 Chairman of the Board, President and Chief
Executive Officer
Matthew E. Massengill.................... 37 Executive Vice President and General Manager,
Personal Storage Division
Marc H. Nussbaum......................... 42 Senior Vice President, Advanced Development &
Chief Technical Officer
David W. Schafer......................... 45 Senior Vice President, Worldwide Sales
Russell R. Stern......................... 42 Senior Vice President, Engineering, Personal
Storage Division
Duston M. Williams....................... 40 Senior Vice President and Chief Financial Officer
Michael A. Cornelius..................... 56 Vice President, Law and Administration, and
Secretary
Steven M. Slavin......................... 47 Vice President, Taxes and Treasurer
Jack Van Berkel.......................... 38 Vice President, Human Resources
Messrs. Haggerty, Massengill, Nussbaum, Schafer, Slavin and Williams have
been employed by the Company for more than five years and have served in various
executive capacities with the Company before being appointed to their present
positions.
Mr. Cornelius joined the Company in his current position in January 1995.
Prior to joining the Company, he held the position of Vice President of
Corporate Affairs for Nissan North America for two years.
Mr. Stern joined the Company in November 1994 as Vice President, New
Product Introductions. He also served as Vice President, Asian Operations for
the Personal Storage Division. He was promoted to his current position in July
1998. Immediately prior to joining the Company, he served as Vice President,
Asian Operations for MiniStor Peripherals Corporation.
Mr. Van Berkel joined the Company in January 1995 as Director of Human
Resources for the Personal Storage Division and was promoted to his current
position in May 1997. Prior to joining the Company, he served as Vice President
of Human Resources for Walker Interactive Systems for five years.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Western Digital's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "WDC." The approximate number of holders of record of
common stock of the Company as of July 25, 1998 was 3,758.
The Company has not paid any cash dividends on its common stock and does
not intend to pay any cash dividends in the foreseeable future. The Company's
line of credit agreement prohibits the payment of cash dividends.
The high and low sales prices (retroactively adjusted for the two-for-one
stock split effected as a stock dividend in June 1997) of the Company's common
stock, as reported by the NYSE, for each quarter of 1997 and 1998 are as
follows:
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
1997
High.............................................. $20 5/8 $31 11/16 $38 5/8 $37 1/8
Low............................................... 9 15/16 19 3/16 26 1/4 26 5/16
1998
High.............................................. $54 3/4 $49 9/16 $20 7/16 $22 1/16
Low............................................... 30 5/8 14 1/2 14 3/4 10 1/4
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
YEARS ENDED
--------------------------------------------------------
JUNE 30, JULY 1, JUNE 29, JUNE 28, JUNE 27,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
Revenues, net.................. $1,539.7 $2,130.9 $2,865.2 $4,177.9 $3,541.5
Gross profit................... 317.9 394.1 382.1 650.3 100.1
Operating income (loss)........ 91.9 133.0 77.5 301.6 (295.8)
Net income (loss).............. $ 73.1 $ 123.3 $ 96.9 $ 267.6 $ (290.2)
Earnings (loss) per share:
Basic........................ $ .93 $ 1.34 $ 1.05 $ 3.07 $ (3.32)
Diluted...................... $ .86 $ 1.23 $ 1.01 $ 2.86 $ (3.32)
Working capital................ $ 261.7 $ 360.5 $ 280.2 $ 364.2 $ 463.5
Total assets................... $ 640.5 $ 858.8 $ 984.1 $1,307.1 $1,442.7
Total long-term debt........... $ 58.6 $ -- $ -- $ -- $ 519.2
Shareholders' equity........... $ 288.2 $ 473.4 $ 453.9 $ 620.0 $ 317.8
Number of employees............ 6,593 7,647 9,628 13,384 13,286
No cash dividends were paid for the years presented.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Western Digital is a leading supplier of hard drives for desktop and
enterprise computers. The hard drive industry is intensely competitive and has
experienced a great deal of growth, entry and exit of firms, and technological
change over the past several years. This industry is characterized as a
high-tech commodity business with short product life cycles, dependence upon
highly skilled engineering and other personnel, significant expenditures for
product development and recurring periods of under and over supply.
The Company's operating results during 1998 deteriorated primarily as a
result of increased competition, particularly in the desktop storage market, and
operating issues resulting from an accelerated transition from thin film
recording head technology to MR head technology. Although the business
environment was challenging in 1998, the Company continued to invest
significantly in its desktop and enterprise hard drive businesses.
In June 1998, the Company entered into a broad-based hard drive component
supply and technology licensing agreement with IBM ("IBM Agreement") for its
desktop PC products. As a result of the IBM Agreement, the Company expects to
begin shipping desktop hard drives featuring GMR heads in the first six months
of calendar 1999. The Company anticipates that these hard drives will augment
Western Digital's product offerings thereby improving its competitiveness in
terms of time-to-market, time-to-capacity and cost.
The Company has invested heavily in its enterprise storage business over
the past few years and has built its share of this market to approximately 8% as
of the end of 1998. The Company is planning a significant increase in its
research and development spending during 1999 to transform Western Digital into
a full-line supplier of enterprise hard drives by the middle of 2000. The
Company expects that having a full product line will help attract new OEM
customers, thereby increasing sales and operating profit.
RESULTS OF OPERATIONS
Comparison of 1996, 1997 and 1998
In 1996, the Company reported net income of $96.9 million compared with net
income of $267.6 million for 1997 and a net loss of $290.2 million for 1998. The
increase in operating income from 1996 to 1997 resulted from a 46% increase in
revenues, a two percentage point increase in gross margin, and a two percentage
point decline in operating expenses as a percentage of revenues. The
deterioration in operating performance from 1997 to 1998 occurred because of a
15% decrease in revenues, a 13 percentage point decline in gross profit margin
and a three percentage point increase in operating expenses as a percentage of
revenues. Net income for 1996 included a one-time, pre-tax gain of $17.3 million
on the sale of the Company's multimedia products business. The net loss in 1998
included special charges of $148 million recorded in the second quarter,
primarily to cost of sales, and $22 million of costs recorded in the fourth
quarter to research and development ("R&D") principally related to the start-up
of the IBM Agreement. The $148 million of special charges include estimated
component cancellation charges, inventory and other asset write-downs, costs
incurred on terminated mobile PC engineering programs, and other estimated
incremental costs related to the production, sale, and accelerated wind-down of
thin film products and ramp-up of products with MR heads.
Sales of hard drive products were $2.8, $4.2 and $3.5 billion in 1996, 1997
and 1998, respectively. Beginning in 1997, 100% of the Company's revenues were
generated from the sale of hard drive products. Unit shipments increased 51%
from 1996 to 1997, but declining average selling prices ("ASP") reduced the 1996
to 1997 hard drive revenue growth rate to 49%. The higher unit volume in 1997
primarily resulted from increased business with OEMs and, to a lesser extent,
incremental unit shipments to resellers. Also in 1997, the Company began
shipping products from its enterprise storage product line. During 1998, unit
shipments decreased 6% which, combined with reductions in the ASPs of hard drive
products due to an intensely competitive hard drive business environment,
resulted in a 15% decline in hard drive revenues from 1997.
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Gross profit margins were as follows:
1996 1997 1998
---- ---- ----
Hard drive products.................................... 12.8% 15.6% 2.8%
Microcomputer products................................. 36.8% --% --%
Overall................................................ 13.3% 15.6% 2.8%
The increase in gross profit margin for hard drive products in 1997 was
primarily the result of a change in sales mix to a greater percentage of higher
capacity desktop storage products combined with initial shipments of enterprise
storage products. The Company began shipping products from its enterprise
storage product line in 1997. These products have a higher average gross margin
percentage than the Company's desktop storage products. Also contributing to the
improvement in gross profit margin for hard drive products were year-over-year
reductions in the average cost of the Company's desktop storage products.
The reduction in gross profit margin in 1998 was primarily related to
unusually severe competitive pricing pressures experienced in the desktop
storage market during the last three quarters of 1998. The Company also
experienced higher assembly costs associated with extending the life of thin
film head technology in desktop storage products and the accelerated transition
to hard drives utilizing MR heads. The $148 million of special charges recorded
in the second quarter of 1998 also contributed to the decline in gross profit
margin. Partially offsetting these amounts were incremental sales of the
Company's higher margin enterprise storage products.
R&D expense was $150.1 million, or 5.2% of revenues, $150.2 million, or
3.6% of revenues, and $203.7 million, or 5.8% of revenues in 1996, 1997 and
1998, respectively. R&D expense remained consistent from 1996 to 1997 as higher
expenditures incurred to develop desktop, enterprise and mobile hard drive
products were offset by the elimination of expenditures related to the MCP
businesses which were sold in 1996. R&D expenses declined as a percentage of
revenues primarily as a result of the higher revenue base in 1997 as compared to
1996. The increase in absolute dollars spent from 1997 to 1998 was primarily
associated with higher expenditures to support the development of hard drives
for the desktop and enterprise storage markets and certain costs recorded in the
fourth quarter related principally to the start-up of the IBM Agreement.
Selling, general and administrative expenses ("SG&A") were $154.5 million,
or 5.4% of revenues, $198.5 million, or 4.8% of revenues and $192.1 million, or
5.4% of revenues, in 1996, 1997 and 1998, respectively. The increase in the
absolute dollars of SG&A expenses from 1996 to 1997 was primarily due to
incremental selling, marketing and other related expenses in support of the
higher revenue levels and higher expenditures for the Company's
pay-for-performance and profit sharing plans. The decline in SG&A expenses as a
percentage of revenues in 1997 was primarily due to the higher revenue base in
1997. The decrease in SG&A expense from 1997 to 1998 was primarily the result of
lower expenses for the Company's pay-for-performance and profit sharing plans,
partially offset by higher expenses associated with implementing the Company's
new computer information systems.
Net interest income was $13.1, $13.2 and $3.8 million in 1996, 1997 and
1998, respectively. The decline in net interest income from 1997 to 1998 was
primarily attributable to interest expense incurred on the Company's recently
funded long-term debt consisting of a $50.0 million term loan, which is part of
the Company's revolving credit and term loan facility ("Senior Bank Facility"),
and accrual of original issue discount on the Company's convertible subordinated
debentures due 2018 ("Debentures"). No debt was outstanding during either of the
comparable periods. Partially offsetting this decrease was incremental interest
income earned on the cash and cash equivalents balance in 1998, which was higher
than historical levels due to the proceeds from the sale of the Debentures and
borrowings under the Senior Bank Facility.
The Company's effective tax rate for 1996 and 1997 resulted primarily from
the earnings of certain subsidiaries which are taxed at substantially lower tax
rates as compared with United States statutory rates and changes in the deferred
tax asset valuation allowance (see Note 5 of Notes to Consolidated Financial
Statements). The increase in the tax rate from 1996 to 1997 reflects a change in
earnings among the Company's subsidiaries operating in various tax
jurisdictions. The income tax benefit recorded in 1998
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represents the expected benefit of loss carrybacks, partially offset by
provisions for income taxes recorded in certain jurisdictions that had positive
earnings.
ECONOMY OF ASIAN COUNTRIES
Several Asian countries recently have had large economic downturns and
significant declines in the value of their currencies relative to the U.S.
Dollar. The "Asian crisis" has reduced the market for the Company's products and
may have helped some Asian hard drive companies become more competitive since
they can pay some of their costs in devalued currency while receiving their
revenues in U.S. Dollars. The Company is unable to predict what effect, if any,
the factors associated with the Asian crisis will have on foreign economic
conditions, the Company's customers or vendors or the Company's ability to
compete in Asian markets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its components in annual and interim financial statements. SFAS 131
establishes standards for reporting financial and descriptive information about
an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or earnings (loss) per share data as currently reported.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of this accounting standard is
not expected to have a material impact on the Company's consolidated financial
position, results of operations or liquidity.
YEAR 2000
The Company has considered the impact of Year 2000 issues on its products,
computer systems and applications and has developed a remediation process.
Remediation activities are underway, and the Company expects compliance and
testing to be completed by June 1999. Expenditures related to the Year 2000
project, which include normal replacement of existing capital assets were
approximately $5.0 million in 1998 and are expected to amount to approximately
$35.0 million in total. For an additional discussion of Year 2000 issues, see
Part II, Item 7, Risk Factors Affecting the Company and/or the Hard Drive
Industry -- Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1998, the Company had $459.8 million of cash and cash
equivalents as compared with $208.3 million at June 28, 1997. Net cash used for
operating activities was $39.0 million during 1998. Cash flows resulting from a
decrease in accounts receivable and lower inventories were more than offset by
cash used to fund a decrease in current liabilities and the net loss (net of
non-cash charges). Other significant uses of cash during 1998 were capital
expenditures of $198.6 million and payments of $35.8 million to settle certain
put option arrangements entered into in connection with the Company's open
market stock repurchase program. The capital expenditures were incurred
primarily in connection with the transition to desktop and enterprise hard
drives featuring MR head technology, normal replacement of existing assets,
acquisition and development of the Company's new computer information systems
and acquisition of land for the Company's new headquarters. Partially offsetting
these uses of cash was $491.4 million received in connection with the
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issuance of the Debentures and borrowings under the Senior Bank Facility. In
addition, $23.8 million was received in connection with stock option exercises
and Employee Stock Purchase Plan ("ESPP") purchases. The Company anticipates
that capital expenditures in 1999 will total approximately $135 million and will
relate to retooling of the Company's hard drive assembly lines in order to
accommodate new technologies and normal replacement of existing assets.
The Senior Bank Facility pursuant to which BankBoston, N.A. and other
lending institutions are providing a $200 million revolving credit line and a
$50 million term loan, both of which expire in January 2001, is secured by the
Company's accounts receivable, inventory, 66% of its stock in its foreign
subsidiaries and the other assets (excluding real property) of the Company. At
the option of the Company, borrowings bear interest at either LIBOR plus a
margin determined by a total debt funded ratio or a base rate, with option
periods of one to six months. The Senior Bank Facility, as amended in February
and June 1998, requires the Company to maintain certain financial ratios,
prohibits the payment of dividends and contains a number of other restrictive
covenants. As of the date hereof, the $50 million term loan was funded, but
there were no borrowings under the revolving credit line.
On February 18, 1998, the Company received gross proceeds of $460.1 million
(before the Initial Purchasers' discount) from a private offering of 5.25% zero
coupon convertible subordinated debentures due in 2018. The principal amount at
maturity of the Debentures is $1.3 billion. The Debentures are subordinated to
all senior debt; are convertible into 19.4 million shares of the Company's
common stock at the rate of 14.935 shares per $1,000 principal amount at
maturity; are redeemable at the option of the Company any time after February
18, 2003 at the issue price plus accrued original issue discount to the date of
redemption; and will be repurchased by the Company, at the option of the holder,
as of February 18, 2003, February 18, 2008 or February 18, 2013, or if there is
a Fundamental Change (as defined in the Debenture documents), at the issue price
plus accrued original issue discount to the date of redemption.
On December 29, 1997, the Company purchased approximately 34 acres of land
in Irvine, California for approximately $22 million. The Company intends to
negotiate lease financing for construction of a new corporate headquarters on
this site. The new headquarters facility is expected to lower the Company's
occupancy costs. However, there can be no assurance that the Company will be
successful in entering into a leasing arrangement for this property on terms
that will be satisfactory to the Company and other alternatives available to the
Company upon expiration of its current headquarters lease could be more costly.
The Company believes its current cash balances, combined with cash flow
from operations, will be sufficient to meet its working capital needs at least
through 1999. The Company has viewed the revolving credit line portion of its
Senior Bank Facility as a source of cash to meet its longer term working capital
requirements, if needed. The Company's recent financial results and current
condition have reduced availability under the Senior Bank Facility, and it is
uncertain, based on information currently available to the Company, whether the
Company will be in compliance with certain financial covenants under the Senior
Bank Facility at the end of its first quarter of 1999. Therefore, the Company
has been negotiating a new senior credit facility to replace the Senior Bank
Facility and has signed a non-binding term sheet. The new credit facility would
have more flexible borrowing requirements and covenants. There can be no
assurance that the Company will successfully complete the negotiations required
to obtain this new credit facility or that the Senior Bank Facility will
continue to be available, and the Company's ability to sustain its working
capital position is dependent upon a number of factors that are discussed below
under the heading "Risk Factors Affecting the Company and/or the Hard Drive
Industry."
RISK FACTORS AFFECTING THE COMPANY AND/OR THE HARD DRIVE INDUSTRY
Highly Competitive Industry
The desktop portion of the hard drive industry consists of many competitors
of various sizes and financial resources and is intensely competitive. The
desktop hard drive industry is currently experiencing a period of sustained
oversupply and unusually severe pricing pressures that the Company expects to
continue for at least the first six months of 1999, although the current
conditions in this market make it difficult to forecast the timing of any change
in competitive conditions.
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During 1996 and 1997, the Company significantly increased its market share
in the desktop hard drive market, but the Company's market share eroded in 1998,
primarily due to competitive conditions in the hard drive industry (with
resulting cutbacks in production), the timing of the Company's transition from
thin film to magneto-resistive ("MR") head technology and certain manufacturing
and performance issues encountered as the Company pushed thin film head
technology to its limits. There can be no assurance that the Company will be
able to recover recent market share losses or avoid further erosion of market
share. Seagate, Quantum, IBM, Maxtor, Fujitsu and Samsung are the Company's
major competitors in the data storage business, and Maxtor, Fujitsu and Samsung
have recently gained significant market share in the desktop market. The current
intensely competitive conditions in this market make it difficult to forecast
near-term operating results. This competitive environment has adversely affected
the Company's operating results for 1998, and the Company expects these
conditions to continue for at least the first half of 1999.
The enterprise portion of the hard drive industry is more concentrated than
the desktop portion, with the largest competitor, Seagate, having market share
in excess of 50% until the recent entrance of Quantum and the Company as
competitors. The other major competitors in this market are IBM and Fujitsu. The
number of competitors in this market has increased with the recent entry of
Quantum and the Company, and competition may continue to grow if Maxtor enters
the enterprise market. With more competitors, price competition in the
enterprise market is greater than in the past, and the Company expects that
price competition will continue to increase, with resulting pressure on margins.
In general, the unit price for a given product in both the desktop and
enterprise markets decreases over time as increases in industry supply and cost
reductions occur and as technological advancements are achieved. Cost reductions
result primarily from volume efficiencies, component cost reductions,
manufacturing experience and design enhancements that are generally realized
over the life of a product. Competitive pressures and customer expectations
compel manufacturers to pass these cost reductions along as reductions in
selling prices. The rate of general price decline accelerates when some
competitors lower prices to absorb excess capacity, liquidate excess inventories
or attempt to gain market share. Competition and continuing price erosion can
adversely affect the Company's financial condition or operating results in any
given quarter. Often, such adverse effects cannot be anticipated until late in
the quarter, as happened during 1998.
Rapid Technological Change and Product Development
The demands of hard drive customers for greater storage capacity and higher
performance have led to short product life cycles, which require the Company to
constantly develop and introduce new drive products on a cost-effective and
timely basis. The Company's ability to fund research and development to support
rapid technological change depends upon its operating results and cash flows;
reductions in such funding could impair the Company's ability to innovate and
compete. Because of the Company's anticipated reliance upon IBM technology for
new high-end desktop PC products, the Company will be subject to risks
associated with IBM's research and development as well as its own. See
"Technology License and Component Supply Transaction with IBM."
MR heads, which enable higher capacity per hard drive than conventional
thin film or MIG inductive heads, became the leading recording head technology
during 1998. Several of the Company's major competitors incorporated MR head
technology into their products much earlier than the Company and, with higher
capacity drives using MR heads, some of the Company's competitors achieved
time-to-market leadership with certain MR products. The Company substantially
completed its transition of desktop hard drives to MR head technology by the end
of 1998. The Company continues to manufacture hard drives with thin film
inductive heads for the lower capacity points of the enterprise market. Failure
of the Company to regain time-to-market leadership with products incorporating
MR head technology in a timely manner, to qualify these products with key OEM
customers, or to produce these products in sufficient volume could cause further
erosion of the Company's market share and have an adverse effect on the
Company's financial condition or operating results.
MR head technology has inherent areal density advantages which have
resulted in an increase in the slope of the areal density curve, i.e., areal
density is increasing at a more rapid rate than before. Because of the
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component cost savings inherent in increases in areal density, this more rapid
increase has shortened product life cycles and enhanced the importance of
time-to-market leadership. Use of GMR heads will result in a further increase in
areal density, and although the integration of GMR heads in hard drives is not
expected to be as complex or difficult as the transition from thin film to MR
technology, the Company needs to achieve time-to-market leadership with hard
drives incorporating GMR heads. Failure to achieve time-to-market leadership
could have an adverse effect on the Company's financial condition or operating
results.
Due to short product life cycles, the Company regularly engages in new
product qualification with its customers. This customer qualification process is
usually complicated, difficult and lengthy. Any failure or delay by the Company
in qualifying new products with customers could adversely affect the Company's
financial condition or operating results.
The Company's continued success in the enterprise hard drive market is
heavily dependent on the successful development, timely introduction and market
acceptance of new products, and failure to achieve such success could adversely
affect the Company's financial condition or operating results. The Company's
current line of enterprise products is based on a SCSI low profile (1" high)
drive with capacity points up to 9.1 GBs. These products serve approximately
70-80% of the existing enterprise market; however, the Company must expand its
product line to include designs for half high (1.6" high) drives, FC-AL
interface and 10,000 rpm in order to become a full-line supplier in the
enterprise market. Development, design, manufacturing and acceptance of these
new enterprise products are subject to the various business risks discussed
herein which are applicable to all hard drive product development. Additionally,
the Company is facing staffing challenges, since additional engineers must be
hired to complete the design and development process for the expansion of the
enterprise product line. Competition worldwide for such personnel is intense,
and there can be no assurance the Company will be able to attract and retain
such additional personnel. The Company is currently in the product design and
development phase of these additional enterprise products and expects to bring
them to market during the next 18 months. If the Company is unable to build its
enterprise infrastructure quickly enough to support this development schedule or
encounters development delays or quality issues, it may miss the time-to-market
windows on these new enterprise products, which could have an adverse effect on
the Company's financial condition or operating results.
The Company experiences fluctuations in manufacturing yields that can
materially affect the Company's operations, particularly in the start-up phase
of new products or new manufacturing processes, and also at the end of a
technology's life cycle, when refinements designed to reach the product's
technical limits can result in tighter manufacturing tolerances. With the
continued pressures to shorten the time required to introduce new products, the
Company must accelerate production learning curves to shorten the time to
achieve acceptable manufacturing yields and costs. The Company's future is
therefore dependent upon its ability to develop new products, qualify these new
products with its customers, successfully introduce these products to the market
on a timely basis and commence volume production to meet customer demands. If
not carefully planned and executed, the transition to new products may adversely
affect sales of existing products and increase risk of inventory obsolescence. A
delay in the introduction or production of more cost-effective and/or more
advanced products also can result in lower sales and lower gross margins.
Because of rapid technological changes, the Company anticipates that sales of
older products will decline as in the past and that sales of new products will
continue to account for a significant portion of its sales in the future.
Failure of the Company to execute its strategy of achieving time-to-market in
sufficient volume with new products, or any delay in the introduction of
advanced and cost-effective products, could result in significantly lower
revenue and gross margins. Some of these factors have adversely affected the
Company in connection with the maturation of and transition from thin film
recording head technology to MR head technology. Inability to introduce or
achieve volume production of competitive products on a timely basis has in the
past and could in the future adversely affect the Company's financial condition
or operating results.
Advances in magnetic, optical or other technologies, or the development of
entirely new technologies, could result in the creation of competitive products
that have better performance and/or lower prices than the Company's products.
Companies such as TeraStor and Seagate are currently developing
optically-assisted recording technologies. The initial products from such
companies are expected to be high capacity and high price. Based on preliminary
announcements, these products also appear to have lower performance attributes
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than the current enterprise storage products. The optically-assisted recording
approaches used by these two companies are different at this time and have
created some short-term confusion in the industry. Accordingly, the Company's
strategy is to view optically-assisted recording as a potentially valid solution
at some point in time, but to assume that the hard drive technologies currently
in use will serve the Company for the foreseeable future. However, if the
Company's assumption proves to be wrong, the Company could be late in its
integration of optically-assisted recording technology, which could have an
adverse effect on the Company's financial condition or operating results.
Technology License and Component Supply Transaction with IBM
Implementation of the IBM Agreement presents several significant challenges
to the Company including the need to adapt IBM's product designs to the high
volume, fast cycle time production environment that is necessary to achieve the
cost efficiencies required to compete in the high-volume desktop market. While
the Company intends to take advantage of IBM's technological leadership to
develop market leading hard drive products, the availability of IBM technology
does not assure the Company's success. Successful development of hard drive
products utilizing IBM technology will require the Company's engineers to
integrate IBM technology and product designs into Western Digital products while
continuing to conduct significant independent research and development
activities. The IBM Agreement does not alleviate the research and development
risk that has been inherent in the Company's business, and there can be no
assurance that the Company will be successful in translating IBM technologies or
components into successful products.
Additionally, since IBM will be the sole supplier of the head component for
these desktop drives, the Company's business and financial results would be
adversely affected if the heads manufactured by IBM fail to satisfy the
Company's quality requirements or if IBM is unable to meet the Company's volume
or delivery requirements. Western Digital believes that IBM's current and
planned manufacturing capacity should be adequate to meet the Company's
forecasted requirements. However, the future growth of sales of hard drives with
IBM technology is dependent upon, among other things, IBM continuing to devote
substantial financial resources to property, plant, equipment and working
capital to support the manufacture of the components, as to which there can be
no assurance.
The Company entered into the IBM Agreement with the expectation that IBM
will continue to lead the hard drive industry in areal density and performance
and that the Company will be able to translate that leadership into
time-to-market and time-to-volume leadership in the desktop PC hard drive
market. If IBM does not maintain its areal density leadership, the Company may
not be able to realize the competitive cost advantages in the high volume
portion of the market that result from such leadership.
Although the IBM Agreement contains certain restrictions on IBM's ability
to license the technology covered by it to third parties, the IBM Agreement is
not exclusive, and other hard drive manufacturers may also have access to heads
produced by IBM and possibly to IBM designs and technology. The IBM Agreement
has a minimum three-year term with the parties having the right to agree to
continue the relationship for future products subject to mutually acceptable
terms and conditions. If a party breaches the agreement or becomes subject to
bankruptcy or similar proceedings, the other party may terminate the IBM
Agreement. The IBM Agreement may also be terminated by a party upon a change of
control of the other party, subject to certain conditions.
Fluctuating Product Demand
Demand for the Company's hard drive products depends on the demand for the
computer systems manufactured by its customers and on storage upgrades to
computer systems, which in turn are affected by computer system product cycles,
end user demand for increased storage capacity and prevailing economic
conditions. Although market research indicates that total computer system unit
shipments are expected to continue to grow for the next several years, demand
may fluctuate significantly from period to period. Such fluctuations have in the
past and may in the future result in deferral or cancellation of orders for the
Company's products, which could have an adverse effect on the Company's
financial condition or operating results.
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The hard drive industry has also experienced seasonal fluctuations in
demand. The Company has historically experienced relatively flat demand in the
first quarter of the fiscal year as compared to the fourth quarter, while demand
in the second quarter has historically been much higher than in the first
quarter. Additionally, product shipments tend to be greatest in the third month
of each quarter. Any failure by the Company to accurately match its product
build plans to customer demand for any particular period could adversely affect
the Company's operating results for that period, as happened during 1998.
Customer Concentration and Changing Customer Models
High volume customers for hard drives are concentrated among a small number
of OEMs, distributors and retailers. Although the Company believes its
relationships with key customers such as these are generally good, the
concentration of sales to a relatively small number of major customers
represents a business risk that loss of one or more accounts could adversely
affect the Company's financial condition or operating results. Customer
concentration is especially significant for the Company's enterprise business.
The Company's customers are generally not obligated to purchase any minimum
volume and are generally able to terminate their relationship with the Company
at will. The Company has experienced reductions in its business, with resulting
loss of revenue, with certain OEM customers largely as a result of delays and
difficulties encountered in the Company's transition to MR head technology. If
any such changes in purchase volume or customer relationships continue to result
in decreased demand for the Company's drives, whether by loss of or delays in
orders, the Company's financial condition or operating results could be
adversely affected.
The hard drive industry is experiencing changes in its OEM customer
ordering models. The trend among computer manufacturers using the
"build-to-order" model is to utilize a "just-in-time" ("JIT") inventory
management requirements model. As a result, Western Digital's customers are
holding smaller inventories of components such as hard drives. This JIT ordering
requires the Company to maintain a certain base stock of product in a location
adjacent to its customers' manufacturing facilities. JIT ordering complicates
the Company's inventory management strategies and makes it more difficult to
match manufacturing plans with projected customer demand. The Company's failure
to manage its inventory in response to JIT demands could have an adverse effect
on its operating results.
Large OEMs are also considering or have implemented a "channel assembly"
model in which the OEM ships a minimal computer system to the dealer or other
assembler, and component suppliers such as hard drive manufacturers are
requested to ship parts directly to the assembler for installation at its
location. With this model, fragmentation of manufacturing facilities exposes the
Company to some risk of inventory mismanagement by both the OEMs and the
assemblers. The shift requires effective inventory management by the Company,
and any increase in the number of "ship to locations" may increase freight costs
and the number of accounts to be managed. Additionally, if the assemblers are
not properly trained in manufacturing processes, it could also increase the
number of product returns resulting from damage during assembly or improper
installation. This model requires proper alignment between the OEM and the
Company and requires the Company to retain more of its product in inventory. The
Company is therefore exposed to increased risk of inventory obsolescence with
the channel assembly model as well as the JIT model. The Company's OEM customer
relationships have traditionally been strong, but a material adverse change in
an OEM relationship could adversely affect demand for the Company's products,
especially with the impact of these new models.
Dependence on Suppliers of Components
The Company is dependent on qualified suppliers for components, including
recording heads, head stack assemblies, media and integrated circuits. A number
of the components used by the Company are available from a single or limited
number of outside suppliers. Some of these materials may periodically be in
short supply, and the Company has, on occasion, experienced temporary delays or
increased costs in obtaining these materials. As a result, the Company must
allow for significant lead times when procuring certain materials and supplies.
In addition, cancellation of orders for components due to cut-backs in
production precipitated by
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market oversupply or transition to new products or technologies can result in
payment of significant cancellation charges to suppliers. Because the Company is
less vertically integrated than its competitors, an extended shortage of
required materials and supplies or the failure of key suppliers to meet the
Company's quality, yield or production requirements could affect the Company
more severely than competitors.
The Company's product development efforts must include components designed
by and purchased from third party vendors since the Company does not manufacture
the components, except for a significant portion of its media, for its hard
drives. The success of the Company's products depends in part on the Company's
ability to acquire and integrate components with leading-edge technology. The
successful integration of third party components depends upon the timely
availability and quality of components, the ability to integrate the different
products from several vendors and management of scheduling and delivery. The
Company's success depends on its continued good relationships with key component
suppliers, its identification of the most advantageous suppliers for specific
products, and its ability to manage the various complexities involved in the
integration of components in product development. Additionally, difficult
industry conditions may severely impact the Company's suppliers. Since the
Company is not vertically integrated, it may be more adversely affected by the
ability of its vendors to survive or adjust to market conditions. These risks
may be particularly acute for products incorporating IBM technology because the
Company is required to use IBM-supplied heads with those products. See
"Technology License and Component Supply Agreement with IBM."
Intellectual Property
The hard drive industry has been characterized by significant litigation
relating to patent and other intellectual property rights. From time to time,
the Company receives claims of alleged patent infringement or notice of patents
from patent holders, which typically contain an offer to grant the Company a
license. On June 10, 1994, Papst brought suit against the Company in the United
States District Court for the Central District of California alleging
infringement by the Company of five hard drive motor patents owned by Papst. The
patents relate to disk drive motors that the Company purchases from motor
vendors. On December 1, 1994, Papst dismissed its case without prejudice, but
has recently notified the Company that it intends to reinstate the suit if the
Company does not agree to enter into a license agreement with Papst. Papst has
also put the Company on notice with respect to several additional patents.
Although the Company does not believe that the outcome of this matter will have
an adverse effect on its financial condition or operating results, adverse
resolution of any intellectual property litigation could subject the Company to
substantial liabilities and require it to refrain from manufacturing certain
products. In addition, the costs of defending such litigation may be
substantial, regardless of the outcome.
The Company's success depends in significant part on the proprietary nature
of its technology. Patents issued to the Company may not provide the Company
with meaningful advantages and may be challenged. In addition to patent
protection of certain intellectual property rights, the Company considers
elements of its product designs and processes to be proprietary and
confidential. The Company believes that its non-patentable intellectual
property, particularly some of its process technology, is an important factor in
its success. The Company relies upon employee, consultant, and vendor
non-disclosure agreements and a system of internal safeguards to protect its
proprietary information. Despite these safeguards, to the extent that a
competitor of the Company is able to reproduce or otherwise capitalize on the
Company's technology, it may be difficult or impossible for the Company to
obtain necessary intellectual property protection in the United States or other
countries where such competitor conducts its operations. Moreover, the laws of
foreign countries may not protect the Company's intellectual property to the
same extent as do the laws of the United States.
Use of Estimates
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities. Such estimates include, but
are not limited to, accruals for warranty against product defects, price
protection and stock rotation reserves on product sold to resellers, and
reserves for excess, obsolete and slow moving inventories. The rapidly changing
market conditions in the hard drive industry make it difficult to estimate such
accruals and reserves and actual results may differ significantly from the
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Company's estimates and assumptions. Additionally, actual warranty costs could
have a negative impact on the Company if the actual rate of drive failure or the
cost to repair a drive is greater than what the Company used to estimate the
warranty expense accrual. Differences between actual results and such estimates
and assumptions can result in adverse effects on the Company's financial
condition or operating results.
Potential Impact of Changing Market Demands
The information services business community is currently debating the "thin
client architecture" or network computer ("NC") model, which emphasizes central
servers for data storage and reduces the need for local desktop storage.
Although industry analysts expect these products to account for a small fraction
of the personal computer market over the next several years, broader than
expected adoption of the NC model would reduce demand for desktop storage
products while increasing demand for enterprise storage products. Given the
Company's current business concentration in desktop hard drives and its
relatively recent entry into enterprise hard drives, if such a scenario occurred
on an accelerated basis, it would place the Company at a disadvantage relative
to competitors which have a stronger market position in enterprise products.
In addition, certain of the large desktop PC system manufacturers have
recently introduced lower cost, lower performance systems principally for the
consumer marketplace. These systems have generally been priced below $1,000 and
typically contain lower capacity and performance hard drives. The Company
currently participates in this market only to a limited extent. There can be no
assurance that the Company will be able to develop lower cost hard drives that
will successfully compete in this growing market.
Foreign Sales and Manufacturing Risks
Western Digital products are currently manufactured in Singapore and
Malaysia. The Company is subject to certain risks associated with foreign
manufacturing, including obtaining requisite United States and foreign
governmental permits and approvals, currency exchange fluctuations, currency
restrictions, political instability, transportation delays, labor problems,
trade restrictions, import, export, exchange and tax controls and reallocations,
loss or non-renewal of favorable tax treatment under agreements with foreign tax
authorities and changes in tariff and freight rates.
Several Asian countries recently have had large economic downturns and
significant declines in the value of their currencies relative to the U.S.
Dollar. The "Asian crisis" has reduced the market for the Company's products as
well as helped some Asian hard drive companies become more competitive since
they can pay some of their costs in devalued currency while receiving their
revenue in U.S. Dollars. The Company is unable to predict what effect, if any,
the factors associated with the Asian crisis will have on foreign economic
conditions, the Company's customers or vendors or the Company's ability to
compete in the Asian market.
Price Volatility of Common Stock
The market price of the Company's common stock has been, and may continue
to be, extremely volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products introduced by the
Company or its competitors, periods of severe pricing pressures, developments
with respect to patents or proprietary rights, conditions and trends in the hard
drive industry, changes in financial estimates by securities analysts, general
market conditions and other factors. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many high technology companies that have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock, and there can be no assurance that the market price of the common
stock will not decline.
Future Capital Needs
The hard drive industry is capital intensive, and in order to remain
competitive, the Company will need to maintain adequate financial resources for
capital expenditures, working capital and research and development. If the
Company decides to increase its capital expenditures further, or sooner than
presently contemplated, or
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if results of operations do not meet the Company's expectations, the Company
could require additional debt or equity financing, and such equity financing
could be dilutive to the Company's existing shareholders. There can be no
assurance that such additional funds will be available to the Company or
available on favorable terms. The Company may also require additional capital
for other purposes not presently contemplated. If the Company is unable to
obtain sufficient capital, it could be required to curtail its capital equipment
and research and development expenditures, which could adversely affect the
Company's financial condition or operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Foreign Exchange Contracts
The Company manages the impact of foreign currency exchange rate changes on
certain underlying assets, liabilities and commitments for operating expenses
denominated in foreign currencies by entering into short-term, forward exchange
contracts. With this approach, the Company expects to minimize the impact of
changing foreign exchange rates on the Company's operations. However, there can
be no assurance that all foreign currency exposures will be adequately covered,
and that the Company's financial condition or operating results will not be
affected by changing foreign exchange rates.
Year 2000 Issue
The Year 2000 issue is the result of computer programs, microprocessors,
and embedded date reliant systems using two digits rather than four to define
the applicable year. If such programs are not corrected, date data concerning
the Year 2000 could cause many systems to fail, lock up or generate erroneous
results. The Company considers a product to be "Year 2000 compliant" if the
product's performance and functionality are unaffected by processing of dates
prior to, during and after the Year 2000, but only if all products (for example
hardware, software and firmware) used with the product properly exchange
accurate date data with it. As storage devices, the Company's hard drives are
transparent to Year 2000 requirements. The Company believes its hard drive
products are Year 2000 compliant, although other products previously sold by the
Company may not be Year 2000 compliant. The Company anticipates that litigation
may be brought against vendors, including the Company, of all component products
of systems that are unable to properly manage data related to the Year 2000. The
Company's agreements with customers typically contain provisions designed to
limit the Company's liability for such claims. It is possible, however, that
these measures will not provide protection from liability claims, as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. Any such claims, with or without merit, could result in a
material adverse effect on the Company's business, financial condition and
results of operations, customer satisfaction issues and potential lawsuits.
The Company has committed personnel and resources to resolve potential Year
2000 issues, both internally and externally (with respect to the Company's
suppliers and customers) for both information technology assets and
non-information technology assets. The Company is identifying Year 2000
dependencies in its systems, equipment, and processes and is implementing
changes to such systems, updating or replacing such equipment, and modifying
such processes to make them Year 2000 compliant. The Company has completed its
assessment of internal Year 2000 issues and is in the process of remediation of
the critical systems. The Company has also initiated formal communications with
all of its significant suppliers and financial institutions to evaluate their
Year 2000 compliance plans and state of readiness and to determine whether any
Year 2000 issues will impede the ability of such suppliers to continue to
provide goods and services to the Company. As a general matter, the Company is
vulnerable to its key suppliers' failure to remedy their own Year 2000 issues,
which could delay shipments of essential components, thereby disrupting or
halting the Company's manufacturing operations. Further, the Company also
relies, both domestically and internationally, upon governmental agencies,
utility companies, telecommunication service companies and other service
providers outside of the Company's control. There is no assurance that such
suppliers, governmental agencies, financial institutions, or other third parties
will not suffer business disruption caused by a Year 2000 issue. Such failures
could have a material adverse effect on the Company's financial condition and
results of operations. Additionally, the Company is in the process of
communicating with its large
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customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remedy their own Year 2000 issues.
The Company anticipates that its systems, equipment and processes will be
substantially Year 2000 compliant by the end of June 1999. Although a budget has
been established, the cost to the Company of achieving Year 2000 compliance is
evolving; however, it is not expected to have a material effect on the Company's
financial condition or results of operations. While the Company currently
expects that the Year 2000 issue will not pose significant operational problems,
delays in the Company's remediation efforts, or a failure to fully identify all
Year 2000 dependencies in the systems, equipment or processes of the Company or
its vendors, customers or financial institutions could have material adverse
consequences, including delays in the manufacture, delivery or sale of products.
Therefore, the Company is in the process of developing contingency plans along
with its remediation efforts for continuing operations in the event such
problems arise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars,
some transactions are based in various foreign currencies. The Company purchases
short-term, forward exchange contracts to hedge the impact of foreign currency
fluctuations on certain underlying assets, liabilities and commitments for
operating expenses denominated in foreign currencies. The purpose of entering
into these hedge transactions is to minimize the impact of foreign currency
fluctuations on the results of operations. A majority of the increases or
decreases in the Company's local currency operating expenses are offset by gains
and losses on the hedges. The contracts have maturity dates that do not exceed
twelve months. The unrealized gains and losses on these contracts are deferred
and recognized in the results of operations in the period in which the hedged
transaction is consummated. The Company does not purchase short-term forward
exchange contracts for trading purposes.
As of June 27, 1998, the Company had outstanding the following purchased
foreign currency forward contracts (in millions, except average contract rate):
JUNE 27, 1998
------------------------------------------
CONTRACT WEIGHTED AVERAGE UNREALIZED
AMOUNT CONTRACT RATE LOSS*
-------- ---------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
Foreign currency forward contracts:
Singapore Dollar.............................. $178.9 1.60 $ 8.8
Malaysian Ringgit............................. 61.4 3.66 8.3
British Pound Sterling........................ 1.6 1.63 --
------ -----
$241.9 $17.1
====== =====
- ---------------
* The unrealized losses on these contracts are deferred and recognized in the
results of operations in the period in which the hedged transactions are
consummated, at which time the loss is offset by the reduced U.S. Dollar value
of the local currency operating expense.
DISCLOSURE ABOUT OTHER MARKET RISKS
At June 27, 1998, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $335 million,
compared to the related carrying value of $469.2 million. The convertible
debentures will be repurchased by the Company, at the option of the holder, as
of February 18, 2003, February 18, 2008, or February 18, 2013, or if there is a
Fundamental Change (as defined in the Debenture documents), at the issue price
plus accrued original issue discount to the date of redemption.
27
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE(S)
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................. 29
Consolidated Statements of Operations -- Three Years Ended
June 27, 1998.......................................... 30
Consolidated Balance Sheets -- June 28, 1997 and June 27,
1998................................................... 31
Consolidated Statements of Shareholders' Equity -- Three
Years Ended June 27, 1998.............................. 32
Consolidated Statements of Cash Flows -- Three Years Ended
June 27, 1998.......................................... 33
Notes to Consolidated Financial Statements................ 34 - 46
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Consolidated Valuation and Qualifying
Accounts -- Three Years Ended June 27, 1998............ 47
28
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Western Digital Corporation:
We have audited the consolidated financial statements of Western Digital
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Western
Digital Corporation and subsidiaries as of June 28, 1997 and June 27, 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended June 27, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related 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.
KPMG PEAT MARWICK LLP
Orange County, California
July 27, 1998
29
30
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
--------------------------------------
JUNE 29, JUNE 28, JUNE 27,
1996 1997 1998
---------- ---------- ----------
Revenues, net.......................................... $2,865,219 $4,177,857 $3,541,525
Costs and expenses:
Cost of revenues..................................... 2,483,155 3,527,574 3,441,475
Research and development............................. 150,112 150,157 203,733
Selling, general and administrative (Note 8)......... 154,497 198,530 192,142
---------- ---------- ----------
Total costs and expenses..................... 2,787,764 3,876,261 3,837,350
---------- ---------- ----------
Operating income (loss)................................ 77,455 301,596 (295,825)
Net interest income (Note 2)........................... 13,134 13,223 3,817
Gain on sale of multimedia business (Note 8)........... 17,275 -- --
---------- ---------- ----------
Income (loss) before income taxes...................... 107,864 314,819 (292,008)
Provision (benefit) for income taxes (Note 5).......... 10,970 47,223 (1,791)
---------- ---------- ----------
Net income (loss)...................................... $ 96,894 $ 267,596 $ (290,217)
========== ========== ==========
Earnings (loss) per common share (Note 9):
Basic................................................ $ 1.05 $ 3.07 $ (3.32)
========== ========== ==========
Diluted.............................................. $ 1.01 $ 2.86 $ (3.32)
========== ========== ==========
Common shares used in computing per share amounts
(Note 9):
Basic................................................ 92,559 87,261 87,525
========== ========== ==========
Diluted.............................................. 96,248 93,522 87,525
========== ========== ==========
See notes to consolidated financial statements.
30
31
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
JUNE 28, JUNE 27,
1997 1998
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 208,276 459,830
Accounts receivable, less allowance for doubtful accounts
of $11,706 in 1997 and $15,926 in 1998................. 545,552 369,013
Inventories (Note 2)...................................... 224,474 186,516
Prepaid expenses and other assets (Note 5)................ 39,593 36,763
---------- ----------
Total current assets.............................. 1,017,895 1,052,122
Property and equipment at cost, net (Note 2).............. 247,895 346,987
Intangible and other assets, net.......................... 41,332 43,579
---------- ----------
Total assets...................................... $1,307,122 $1,442,688
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 417,984 330,130
Accrued compensation...................................... 59,227 23,697
Accrued expenses.......................................... 176,494 234,752
---------- ----------
Total current liabilities......................... 653,705 588,579
Long-term debt (Note 3)................................... -- 519,188
Deferred income taxes (Note 5)............................ 33,430 17,163
Commitments and contingent liabilities (Note 4)
Shareholders' equity (Note 6):
Preferred stock, $.01 par value; Authorized -- 5,000
shares; Outstanding -- None............................
Common stock, $.01 par value; Authorized -- 225,000
shares; Outstanding -- 101,332 shares in 1997 and
1998................................................... 1,013 1,013
Additional paid-in capital................................ 356,654 326,244
Retained earnings......................................... 488,066 197,849
Treasury stock-common shares at cost; 15,436 shares in
1997 and 13,039 shares in 1998......................... (225,746) (207,348)
---------- ----------
Total shareholders' equity........................ 619,987 317,758
---------- ----------
Total liabilities and shareholders' equity........ $1,307,122 $1,442,688
========== ==========
See notes to consolidated financial statements.
31
32
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED JUNE 27, 1998
(IN THOUSANDS)
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
----------------- -------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ------- --------- ---------- -------- -------------
BALANCE AT JULY 1, 1995............. 100,964 $1,009 (1,610) $ (10,822) $359,663 $123,576 $ 473,426
Common stock repurchase program
(Note 6).......................... -- -- (15,440) (132,114) -- -- (132,114)
Exercise of stock options (Note
6)................................ 368 4 1,568 12,833 (5,528) -- 7,309
ESPP shares issued (Note 6)......... -- -- 1,292 8,686 (309) -- 8,377
Net income.......................... -- -- -- -- -- 96,894 96,894
------- ------ ------- --------- -------- -------- ---------
BALANCE AT JUNE 29, 1996............ 101,332 1,013 (14,190) (121,417) 353,826 220,470 453,892
Common stock repurchase program
(Note 6).......................... -- -- (5,172) (135,506) (9,068) -- (144,574)
Exercise of stock options (Note
6)................................ -- -- 2,790 22,087 (8,350) -- 13,737
ESPP shares issued (Note 6)......... -- -- 1,136 9,090 37 -- 9,127
Income tax benefit from stock
options exercised (Note 5)........ -- -- -- -- 20,209 -- 20,209
Net income.......................... -- -- -- -- -- 267,596 267,596
------- ------ ------- --------- -------- -------- ---------
BALANCE AT JUNE 28, 1997............ 101,332 1,013 (15,436) (225,746) 356,654 488,066 619,987
Common stock repurchase program
(Note 6).......................... -- -- -- -- (35,828) -- (35,828)
ESPP shares issued (Note 6)......... -- -- 1,231 9,506 3,178 -- 12,684
Exercise of stock options (Note
6)................................ -- -- 1,166 8,892 (99) -- 8,793
Income tax benefit from stock
options exercised (Note 5)........ -- -- -- -- 2,339 -- 2,339
Net loss............................ -- -- -- -- -- (290,217) (290,217)
------- ------ ------- --------- -------- -------- ---------
BALANCE AT JUNE 27, 1998............ 101,332 $1,013 (13,039) $(207,348) $326,244 $197,849 $ 317,758
======= ====== ======= ========= ======== ======== =========
See notes to consolidated financial statements.
32
33
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
---------------------------------
JUNE 29, JUNE 28, JUNE 27,
1996 1997 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 96,894 $ 267,596 $(290,217)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization............................. 51,643 63,485 106,550
Interest accrued on convertible debentures................ -- -- 9,059
Gain on sale of multimedia business....................... (17,275) -- --
Changes in assets and liabilities, excluding the effects
of business sales (Note 8):
Accounts receivable.................................... (107,532) (136,079) 176,539
Inventories............................................ (69,180) (81,852) 37,958
Prepaid expenses and other assets...................... (5,478) 2,184 2,830
Accounts payable, accrued compensation and accrued
expenses............................................. 110,311 139,683 (65,126)
Deferred income taxes.................................. 417 (1,570) (16,267)
Other assets........................................... (1,519) 712 (299)
--------- --------- ---------
Net cash provided by (used for) operating
activities...................................... 58,281 254,159 (38,973)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net................................... (108,696) (155,958) (198,641)
Proceeds from sale of businesses (Note 8)................... 85,486 -- --
Purchases of short-term investments......................... (34,685) -- --
Sales and maturities of short-term investments.............. 88,264 36,598 --
Decrease (increase) in other assets......................... (7,188) (7,587) 9,758
--------- --------- ---------
Net cash provided by (used for) investing
activities...................................... 23,181 (126,947) (188,883)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures (Note 3)... -- -- 460,129
Proceeds from issuance of bank debt (Note 3)................ -- -- 50,000
Debt issuance costs......................................... -- -- (18,707)
Exercise of stock options, including tax benefit............ 7,309 33,946 11,132
Proceeds from ESPP shares issued............................ 8,377 9,127 12,684
Common stock repurchase program (Note 6).................... (132,114) (144,574) (35,828)
--------- --------- ---------
Net cash provided by (used for) financing
activities...................................... (116,428) (101,501) 479,410
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (34,966) 25,711 251,554
Cash and cash equivalents at beginning of year.............. 217,531 182,565 208,276
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 182,565 $ 208,276 $ 459,830
========= ========= =========
See notes to consolidated financial statements.
33
34
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Western Digital Corporation ("Western Digital" or the "Company") has
prepared its consolidated financial statements in accordance with generally
accepted accounting principles and has adopted accounting policies and practices
which are generally accepted in the industry in which it operates. Following are
the Company's significant accounting policies:
Fiscal Year
The Company's fiscal year end is a 52 or 53-week year ending on the
Saturday nearest June 30. Accordingly, the 1996, 1997 and 1998 fiscal years
ended on June 29, June 28, and June 27, respectively, and included 52 weeks
each. All general references to years relate to fiscal years unless otherwise
noted.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The accounts of foreign
subsidiaries have been remeasured using the U.S. dollar as the functional
currency. As such, foreign exchange gains or losses resulting from remeasurement
of these accounts are reflected in the results of operations. Monetary and
nonmonetary asset and liability accounts have been remeasured using the exchange
rate in effect at each year end and using historical rates, respectively. Income
statement accounts have been remeasured using average monthly exchange rates.
Cash Equivalents
The Company's cash equivalents represent highly liquid investments,
primarily money market funds and commercial paper, with original maturities of
three months or less.
Concentration of Credit Risk
The Company designs, develops, manufactures and markets hard drives to
personal computer manufacturers, resellers and retailers throughout the world.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. The Company maintains reserves
for potential credit losses, and such losses have historically been within
management's expectations. The Company also has cash equivalent policies that
limit the amount of credit exposure to any one financial institution or
investment instrument, and require that investments be made only with financial
institutions or in investment instruments evaluated as highly credit-worthy.
Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. Cost
is on a first-in, first-out basis for raw materials and is computed on a
currently adjusted standard basis (which approximates first-in, first-out) for
work in process and finished goods.
Depreciation and Amortization
The cost of property and equipment is depreciated over the estimated useful
lives of the respective assets. Depreciation is computed on a straight-line
basis for financial reporting purposes and on an accelerated basis for income
tax purposes. Leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets or the related lease terms. Goodwill and
purchased technology, which are included in other assets, are capitalized at
cost and amortized on a straight-line basis over their estimated lives of five
to fifteen years.
34
35
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company reviews identifiable intangibles, goodwill and other long-lived
assets for impairment whenever events or circumstances indicate the carrying
amounts may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
an asset, an impairment loss is recognized.
Revenue Recognition
The Company recognizes revenue at time of shipment and records a reserve
for price adjustments, warranty and estimated sales returns. In accordance with
standard industry practice, the Company's agreements with its resellers provide
price protection for inventories held by the resellers at the time of published
list price reductions and, under certain circumstances, stock rotation for
slow-moving items. These agreements may be terminated upon written notice by
either party. In the event of termination, the Company may be obligated to
repurchase a certain portion of the resellers' inventory.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and
administrative expenses of the Company include advertising costs of $9.5
million, $16.3 million and $17.4 million in 1996, 1997 and 1998, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). This method generally provides that deferred tax
assets and liabilities be recognized for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities and expected benefits of utilizing net operating loss ("NOL")
carryforwards. The Company records a valuation allowance for certain temporary
differences for which it is not certain it will receive future tax benefits. The
impact on deferred taxes of changes in tax rates and laws, if any, are applied
to the years during which temporary differences are expected to be settled and
reflected in the consolidated financial statements in the period of enactment.
Two-For-One Stock Split
On May 2, 1997, the Company declared a two-for-one stock split, effected in
the form of a stock dividend on June 3, 1997 to shareholders of record on May
20, 1997. All share and per share amounts included in the consolidated financial
statements reflect retroactive recognition of the two-for-one stock split.
Per Share Information
Effective December 27, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings (loss) per share amounts for all
periods have been presented and restated to conform to the SFAS No. 128
requirements (see Note 9).
Increase in Authorized Common Stock and Change in Par Value of Common Stock
and Preferred Stock
On March 11, 1997, the Company's shareholders approved the amendment to the
Company's Certificate of Incorporation to increase the Company's authorized
common stock and to reduce the par value of the common stock and preferred stock
from $.10 to $.01 per share. Par value information in the consolidated financial
statements reflects retroactive recognition of the change in the par value.
35
36
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123
establishes the financial accounting and reporting standards for stock-based
compensation plans. The Company elected to continue accounting for stock-based
employee compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations (APB Opinion No. 25), as SFAS No. 123 permits, and to follow the
pro forma net income, pro forma earnings per share, and stock-based compensation
plan disclosure requirements set forth in SFAS No. 123. See Note 6 of Notes to
Consolidated Financial Statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its components in annual and interim financial statements. SFAS 131
establishes standards for reporting financial and descriptive information about
an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or earnings (loss) per share data as currently reported.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of this accounting standard is
not expected to have a material impact on the Company's consolidated financial
position, results of operations or liquidity.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value
for all periods presented because of the short-term maturity of these financial
instruments. The fair value of the Company's convertible debentures is estimated
by reference to quoted information from market sources. At June 27, 1998, the
market value of the Company's convertible debentures was approximately $335
million, compared to the related carrying value of $469.2 million. The carrying
amounts of all other financial instruments in the consolidated balance sheets
approximate fair values.
Foreign Exchange Contracts
The Company enters into short-term, forward exchange contracts to hedge the
impact of foreign currency fluctuations on certain underlying assets,
liabilities and commitments for operating expenditures denominated in foreign
currencies. These contracts are not entered into for trading purposes, have
maturity dates that do not exceed twelve months, and are accounted for as
hedges. The unrealized gains and losses on these contracts are deferred and
recognized in the results of operations in the period in which the hedged
transactions are consummated. Costs associated with entering into such contracts
are typically amortized over the life of the instrument. At June 28, 1997 and
June 27, 1998, the Company had outstanding $266.6 and $241.9 million,
respectively, of forward exchange contracts with commercial banks. As of June
28, 1997 and June 27, 1998,
36
37
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the unrealized gains and losses on outstanding forward exchange contracts were
not material. Realized gains and losses are primarily recorded in cost of
revenues in the accompanying consolidated statements of operations.
In response to the Company's underlying foreign currency exposures, the
Company may, from time to time, adjust its foreign currency hedging position by
taking out additional contracts or by terminating or offsetting existing foreign
currency forward exchange contracts. Gains or losses on terminated contracts and
offsetting contracts are recognized in the results of operations in the periods
in which the hedged transactions occur.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the
current year presentation.
NOTE 2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
1996 1997 1998
------- --------- ---------
Net Interest Income
Interest income..................................... $13,134 $ 13,223 $ 15,952
Interest expense.................................... -- -- 12,135
------- --------- ---------
Net interest income................................. $13,134 $ 13,223 $ 3,817
======= ========= =========
Cash paid for interest.............................. $ -- $ -- $ 2,073
======= ========= =========
Inventories
Finished goods...................................... $ 137,762 $ 126,363
Work in process..................................... 56,352 28,287
Raw materials and component parts................... 30,360 31,866
--------- ---------
$ 224,474 $ 186,516
========= =========
Property and Equipment
Land and buildings.................................. $ 53,080 $ 92,234
Machinery and equipment............................. 285,986 415,469
Furniture and fixtures.............................. 13,260 14,060
Leasehold improvements.............................. 63,335 79,490
--------- ---------
415,661 601,253
Accumulated depreciation and amortization........... (167,766) (254,266)
--------- ---------
Net property and equipment.......................... $ 247,895 $ 346,987
========= =========
NOTE 3. LONG-TERM DEBT
Line of Credit
In January 1998, and as amended in February and June 1998, the Company
replaced its then existing revolving credit facility with a secured revolving
credit and term loan facility ("Senior Bank Facility"). The Senior Bank Facility
provides the Company with a $200 million revolving credit line and a $50 million
term
37
38
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loan, both of which expire in January 2001. The Senior Bank Facility is secured
by the Company's accounts receivable, inventory, 66% of its stock in its foreign
subsidiaries and the other assets (excluding real property) of the Company. At
the option of the Company, borrowings bear interest at either Libor plus a
margin determined by a total debt funded ratio or a base rate, with option
periods of one to six months. The Senior Bank Facility requires the Company to
maintain certain financial ratios, prohibits the payment of dividends and
contains a number of other restrictive covenants. As of June 27, 1998, the $50
million term loan was funded but there were no borrowings under the revolving
credit line.
Convertible Debentures
On February 18, 1998, the Company received gross proceeds of $460.1 million
(before the Initial Purchasers' discount) from a private offering of 5.25% zero
coupon convertible subordinated debentures due in 2018. The principal amount at
maturity of the Debentures is $1.3 billion. The Debentures are subordinated to
all senior debt; are convertible into 19.4 million shares of the Company's
common stock at the rate of 14.935 shares per $1,000 principal amount at
maturity; are redeemable at the option of the Company any time after February
18, 2003 at the issue price plus accrued original issue discount to the date of
redemption; and will be repurchased by the Company, at the option of the holder,
as of February 18, 2003, February 18, 2008 or February 18, 2013, or if there is
a Fundamental Change (as defined in the Debenture documents), at the issue price
plus accrued original issue discount to the date of redemption.
NOTE 4. COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases
The Company leases certain facilities and equipment under long-term,
non-cancelable operating leases which expire at various dates through 2015.
Rental expense under these leases, including month-to-month rentals, was $27.2,
$32.2, and $39.3 million in 1996, 1997, and 1998, respectively.
Future minimum rental payments under non-cancelable operating leases as of
June 27, 1998 are as follows (in thousands):
1999...................................................... 40,665
2000...................................................... 30,525
2001...................................................... 19,052
2002...................................................... 9,010
2003...................................................... 3,505
Thereafter................................................ 29,975
--------
Total future minimum rental payments............ $132,732
========
Legal Proceedings
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleges that hard drives supplied by the
Company in calendar 1988 and 1989 were defective and caused damages to Amstrad
of $186.0 million in out-of-pocket expenses, lost profits, injury to Amstrad's
reputation and loss of goodwill. The Company filed a counterclaim for $3.0
million in actual damages in addition to exemplary damages in an unspecified
amount. The Company believes that it has meritorious defenses to Amstrad's
claims and intends to vigorously defend itself against the Amstrad claims and to
press its claims against Amstrad in this action. The case is scheduled for trial
in September 1998. Although the Company believes that the final disposition of
this matter will not have an adverse effect on the Company's financial condition
or operating results, if Amstrad were to prevail on its claims, a judgment for a
material amount could be awarded against the Company.
38
39
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Between December 12, 1997 and February 24, 1998, eight class action suits
were filed against the Company and certain of its officers and directors. The
plaintiffs in the actions purport to represent purchasers of the Company's
common stock during various periods ranging from July 25, 1996, through December
2, 1997 (collectively, the "Class Periods"). The complaints allege that the
Company issued false and misleading statements during the respective Class
Periods concerning the outlook for the Company's operations and earnings and
that the Company issued false and misleading financial statements in fiscal
years 1996 and 1997 by improperly deferring the write-down of obsolete
inventory. The complaints seek compensatory damages for the purported class
members in an unspecified amount. The Court ordered the cases consolidated and
designated the plaintiffs in the first case filed as the lead plaintiffs and the
law firm representing such plaintiffs as lead counsel. The Company filed a
motion to dismiss the amended consolidated complaint which was granted by the
Court with prejudice.
The Company is also subject to other legal proceedings and claims which
arise in the ordinary course of its business. Although occasional adverse
decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on its
financial position, results of operations or liquidity.
NOTE 5. INCOME TAXES
The domestic and international components of income (loss) before income
taxes are as follows (in thousands):
1996 1997 1998
-------- -------- ---------
United States......................................... $(10,877) $105,884 $(348,397)
International......................................... 118,741 208,935 56,389
-------- -------- ---------
Income (loss) before income taxes..................... $107,864 $314,819 $(292,008)
======== ======== =========
The components of the provision (benefit) for income taxes are as follows
(in thousands):
1996 1997 1998
-------- -------- ---------
Current
United States....................................... $ 400 $ 29,153 $ (6,195)
International....................................... 10,262 9,964 4,905
State............................................... 310 8,106 (501)
-------- -------- ---------
10,972 47,223 (1,791)
Deferred, net......................................... (2) -- --
-------- -------- ---------
Provision (benefit) for income taxes.................. $ 10,970 $ 47,223 $ (1,791)
======== ======== =========
The tax benefits associated with the exercise of non-qualified stock
options, the disqualifying disposition of stock acquired with incentive stock
options, and the disqualifying disposition of stock acquired under the employee
stock purchase plan reduce taxes currently payable as shown above by $20.2 and
$2.3 million for 1997 and 1998, respectively. Such benefits are credited to
additional paid-in capital.
The total cash paid for income taxes was $4.5 million, $19.2 million and
$16.9 million for the years ended June 29, 1996, June 28, 1997 and June 27,
1998, respectively.
39
40
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at June 28, 1997, and June 27,
1998 are as follows (in thousands):
1997 1998
-------- ---------
Deferred tax assets:
NOL carryforward.......................................... $ 11,079 $ 83,649
Business credit carryforward.............................. 30,104 29,323
Reserves and accrued expenses not currently deductible.... 69,557 122,454
All other................................................. 1,854 18,920
-------- ---------
112,594 254,346
Valuation allowance....................................... (86,608) (254,297)
-------- ---------
Total deferred tax assets......................... $ 25,986 $ 49
======== =========
Deferred tax liabilities:
Unremitted income of foreign subsidiaries................. $ 40,640 $ 17,163
All other................................................. 5 3,148
-------- ---------
Total deferred tax liabilities.................... $ 40,645 $ 20,311
======== =========
SFAS 109 requires deferred taxes to be determined for each tax paying
component of an enterprise within each tax jurisdiction. The deferred tax assets
indicated above are attributable to tax jurisdictions where a history of
earnings has not been established. The taxable earnings in these tax
jurisdictions is also subject to volatility. Therefore, the Company believes a
valuation allowance is needed to reduce the deferred tax asset to an amount that
is more likely than not to be realized. The Company increased this valuation
allowance in 1998 because of the losses incurred in these jurisdictions.
Reconciliation of the United States Federal statutory rate to the Company's
effective tax rate is as follows:
1996 1997 1998
----- ----- -----
U.S. Federal statutory rate............................. 35.0% 35.0% (35.0)%
State income taxes, net................................. 0.2 1.7 (0.2)
Tax rate differential on international income........... (30.7) (12.7) (15.5)
Effect of valuation allowance........................... 3.8 (10.0) 46.5
Other................................................... 1.9 1.0 3.6
----- ----- -----
Effective tax rate...................................... 10.2% 15.0% (0.6)%
===== ===== =====
Certain income of selected subsidiaries is taxed at substantially lower
income tax rates as compared with local statutory rates. The lower rates reduced
income taxes and increased net earnings or reduced the net loss by $30.1 million
($.31 per share, diluted), $58.5 million ($.63 per share, diluted) and by $17.1
million ($.20 per share, diluted) in 1996, 1997 and 1998, respectively. These
lower rates are in effect through fiscal year 2004.
At June 27, 1998, the Company had federal net operating loss carryforwards
and tax credits of $218.1 million and $29.3 million, respectively. The loss
carryforwards expire in fiscal years 2008 through 2013 and the credit
carryforwards expire in fiscal years 1999 through 2012.
Net undistributed earnings from international subsidiaries at June 27, 1998
were $523.7 million. The net undistributed earnings are intended to finance
local operating requirements.
40
41
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY
The following table summarizes all shares of common stock reserved for
issuance at June 27, 1998 (in thousands):
NUMBER
OF SHARES
---------
Issuable in connection with:
Convertible debentures.................................... 19,374
Exercise of stock options, including options available for
grant.................................................. 16,430
Employee stock purchase plan.............................. 2,373
------
38,177
======
Stock Option Plans
Western Digital's Employee Stock Option Plan ("Employee Plan") is
administered by the Compensation Committee of the Board of Directors, which
determines the vesting provisions, the form of payment for the shares and all
other terms of the options. Terms of the Employee Plan require that the exercise
price of options be not less than the fair market value of the common stock on
the date of grant. Options granted generally vest 25% one year from the date of
grant and in twelve quarterly increments thereafter and have a ten-year term. As
of June 27, 1998, 4,659,113 options were exercisable and 3,327,523 options were
available for grant. Participants in the Employee Plan may be permitted to
utilize stock purchased previously as consideration to exercise options or to
exercise on a cashless basis, pursuant to the terms of the Employee Plan.
In 1985, the Company adopted the Stock Option Plan for Non-Employee
Directors ("Director Plan") and reserved 1.6 million shares for issuance
thereunder. The Director Plan was restated and amended in 1995. The Director
Plan provides for initial option grants to new directors of 30,000 shares per
director and additional grants of 7,500 options per director each year upon
their reelection as a director at the annual shareholders' meeting. Terms of the
Director Plan require that options have a ten-year term and that the exercise
price of options be not less than the fair market value at the date of grant. As
of June 27, 1998, 153,750 options were exercisable and 750,964 options were
available for grant. The following table summarizes activity under the Employee
and Director Plans combined (in thousands, except per share amounts):
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ----------------
OPTIONS OUTSTANDING AT JULY 1, 1995.................. 9,176 $ 5.33
Granted.............................................. 3,904 9.30
Exercised, net of value of redeemed shares........... (1,936) 4.00
Canceled or expired.................................. (1,802) 7.32
------ ------
OPTIONS OUTSTANDING AT JUNE 29, 1996................. 9,342 6.90
Granted.............................................. 3,630 17.26
Exercised, net of value of redeemed shares........... (2,790) 5.11
Canceled or expired.................................. (596) 9.80
------ ------
OPTIONS OUTSTANDING AT JUNE 28, 1997................. 9,586 11.20
Granted.............................................. 4,433 27.17
Exercised, net of value of redeemed shares........... (1,166) 7.54
Canceled or expired.................................. (502) 20.00
------ ------
OPTIONS OUTSTANDING AT JUNE 27, 1998................. 12,351 $16.92
====== ======
41
42
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize information about options outstanding and
exercisable under the Employee and Director Plans combined at June 27, 1998 (in
thousand, except per share amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE
NUMBER CONTRACTUAL LIFE WEIGHTED NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
------------------------ --------- ---------------- -------------- --------- ----------------
$ 1.44 - $ 8.81................... 4,201 6.24 $ 7.11 3,248 $ 6.76
8.88 - 18.56................... 3,321 8.14 12.71 1,272 11.96
18.63 - 34.19................... 4,387 9.20 27.11 244 27.53
34.50 - 48.50................... 442 8.99 40.66 49 34.94
------ ---- ------ ----- ------
Total................... 12,351 7.90 $16.92 4,813 $ 9.48
====== ==== ====== ===== ======
Stock Purchase Rights
In 1989, the Company implemented a plan to protect shareholders' rights in
the event of a proposed takeover of the Company. Under the plan, each share of
the Company's outstanding common stock carries one Right to Purchase Series "A"
Junior Participating Preferred Stock ("the Right"). The Right enables the
holder, under certain circumstances, to purchase common stock of Western Digital
or of the acquiring Company at a substantially discounted price ten days after a
person or group publicly announces it has acquired or has tendered an offer for
15% or more of the Company's outstanding common stock. The Rights are redeemable
by the Company at $.01 per Right and expire in 1999.
Employee Stock Purchase Plan
During 1994, the Company implemented an employee stock purchase plan
("ESPP") in accordance with Section 423 of the Internal Revenue Code whereby
eligible employees may authorize payroll deductions of up to 10% of their salary
to purchase shares of the Company's common stock at 85% of the fair market value
of common stock on the date of grant or the exercise date, whichever is less.
Approximately 7.0 million shares of common stock have been reserved for issuance
under this plan. Approximately 1,292,000, 1,136,000 and 1,231,000 shares were
issued under this plan during 1996, 1997 and 1998, respectively.
Savings and Profit Sharing Plan
Effective July 1, 1991, the Company adopted an annual Savings and Profit
Sharing Plan covering eligible domestic employees. The Company authorized 6.5%
and 4.1% of defined pre-tax profits to be allocated to the participants in 1996
and 1997, respectively. Payments to participants of the Savings and Profit
Sharing Plan were $7.1 and $12.6 million in 1996 and 1997, respectively. No
amounts were paid under the plan in 1998.
Common Stock Repurchase Program
In February 1995, the Company established an open market stock repurchase
program. Under this program, the Company has spent $323.4 million in connection
with the repurchase of 22.2 million shares of its common stock at an average
price of $14.55 per share. The $323.4 million includes the acquisition price of
Western Digital common stock and amounts paid to settle certain put option
arrangements entered into in connection with the open market stock repurchase
program.
Pro Forma Information
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123. This information is required to be determined
as if the Company had accounted for its stock options
42
43
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(including shares issued under the Stock Option Plans and the ESPP, collectively
called "options") granted subsequent to July 1, 1995, under the fair value
method of that statement.
The fair value of options granted in 1996, 1997 and 1998 reported below has
been estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
STOCK OPTION PLANS ESPP PLAN
-------------------- --------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
Option life (in years)............ 5.0 4.0 4.5 2.0 2.0 2.0
Risk-free interest rate........... 6.5% 6.0% 5.5% 6.5% 6.0% 5.5%
Stock price volatility............ .49 .58 .76 .49 .58 .76
Dividend yield.................... -- -- -- -- -- --
The following is a summary of the per share weighted average fair value of
stock options granted in the years listed below:
1996 1997 1998
----- ----- ------
Options granted under the Stock Option Plans....... $4.90 $9.10 $17.10
Shares granted under the ESPP Plan................. $4.20 $6.75 $ 7.39
The Company applies APB Opinion No. 25 in accounting for its stock option
and ESPP plans and, accordingly, no compensation expense has been recognized for
the options in the consolidated financial statements. Had the Company determined
compensation expense based on the fair value at the grant date for its options
under SFAS No. 123, the Company's net income (loss) and net earnings (loss) per
share would have been reduced to the amounts indicated below:
YEAR ENDED
---------------------------------
JUNE 29, JUNE 28, JUNE 27,
1996 1997 1998
-------- -------- ---------
Pro forma net income (loss) (in
thousands)............................... $92,870 $254,831 $(324,178)
Pro forma net earnings (loss) per share:
Basic.................................... $ 1.00 $ 2.92 $ (3.70)
Diluted.................................. $ .96 $ 2.72 $ (3.70)
Pro forma net income (loss) and net earnings (loss) per share reflects only
options granted in the years ended June 29, 1996, June 28, 1997, and June 27,
1998. Therefore, the full impact of calculating compensation expense for options
under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts
presented above because compensation expense is reflected over the options'
vesting period and compensation expense for options granted before July 2, 1995
is not considered.
NOTE 7. BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
Western Digital currently operates in one industry segment -- the design,
development, manufacture and marketing of hard drives for the computer
marketplace. During 1996 and 1997, sales to Gateway 2000 and to IBM accounted
for 11% and 13% of the Company's revenues, respectively. During 1998, sales to
Compaq accounted for 14% of the Company's revenues.
The Company's operations outside the United States include manufacturing
facilities in Singapore and Malaysia as well as sales offices throughout the
world.
The following table summarizes operations by entities located within the
indicated geographic areas for the past three years. United States revenues to
unaffiliated customers include export sales to various countries in Eastern
Europe and Asia of $674.1, $763.5, and $606.7 million in 1996, 1997, and 1998,
respectively.
43
44
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transfers between geographic areas are accounted for at prices comparable
to normal sales through outside distributors. General and corporate expenses of
$61.5, $62.8, and $77.6 million in 1996, 1997, and 1998, respectively, have been
excluded in determining operating income (loss) by geographic region.
UNITED
STATES EUROPE ASIA ELIMINATIONS TOTAL
------ ------ ------ ------------ ------
(IN MILLIONS)
Year ended June 29, 1996
Sales to unaffiliated customers.................. $2,084 $ 735 $ 46 $ -- $2,865
Transfers between geographic areas............... 869 96 2,540 (3,505) --
------ ------ ------ ------- ------
Revenues, net.................................... $2,953 $ 831 $2,586 $(3,505) $2,865
====== ====== ====== ======= ======
Operating income................................. $ 21 $ 9 $ 113 $ (4) $ 139
====== ====== ====== ======= ======
Identifiable assets.............................. $ 569 $ 143 $ 276 $ (4) $ 984
====== ====== ====== ======= ======
Year ended June 28, 1997
Sales to unaffiliated customers.................. $2,980 $1,107 $ 91 $ -- $4,178
Transfers between geographic areas............... 1,340 167 3,646 (5,153) --
------ ------ ------ ------- ------
Revenues, net.................................... $4,320 $1,274 $3,737 $(5,153) $4,178
====== ====== ====== ======= ======
Operating income................................. $ 158 $ 15 $ 200 $ (8) $ 365
====== ====== ====== ======= ======
Identifiable assets.............................. $ 733 $ 186 $ 404 $ (16) $1,307
====== ====== ====== ======= ======
Year ended June 27, 1998
Sales to unaffiliated customers.................. $2,630 $ 886 $ 26 $ -- $3,542
Transfers between geographic areas............... 998 166 3,324 (4,488) --
------ ------ ------ ------- ------
Revenues, net.................................... $3,628 $1,052 $3,350 $(4,488) $3,542
====== ====== ====== ======= ======
Operating income (loss).......................... $ (271) $ 7 $ 66 $ (20) $ (218)
====== ====== ====== ======= ======
Identifiable assets.............................. $ 907 $ 116 $ 455 $ (35) $1,443
====== ====== ====== ======= ======
NOTE 8. SALE OF BUSINESSES
Sale of Multimedia Business
In October 1995, the Company sold its multimedia business to Philips
Semiconductors, Inc. ("Philips") for $51.9 million cash, resulting in a
one-time, pre-tax gain of $17.3 million. Through this transaction, Philips
acquired specific intellectual properties and assumed certain liabilities
directly related to the multimedia business.
Sale of High Speed Fiber-Optic Communication Links Business
In March 1996, the Company sold its high speed fiber-optic communication
links business to Vixel Corporation for $1.2 million cash as well as other
non-cash consideration. This transaction was not material to the Company's
financial position or results of operations.
44
45
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sale of Input/Output Products Business
During April 1996, the Company disposed of its input/output products
business, which represented the final element of its microcomputer products
group. The transaction included the sale of related assets and resulted in a
restructuring of the Company's other support organizations. The restructuring
resulted in a personnel reduction of 102 people, not including employees that
were hired by the purchaser, Adaptec, Inc. The net result of the asset sale and
related restructuring charges is included in selling, general and administrative
expenses and was not material to the Company's 1996 results of operations. The
consideration received and related costs associated with the sale of the
input/output products business are as follows (in millions):
Sales price................................................. $ 32.4
Assets sold or written off:
Inventory, net............................................ (18.0)
Property and equipment.................................... (2.5)
Prepaid expenses.......................................... (.5)
------
Total assets sold or written off............................ (21.0)
Accruals for severance, facilities, contractual commitments
and other miscellaneous items............................. (11.4)
------
$ --
======
As of June 29, 1996, $8.7 million of the accruals for severance,
facilities, contractual commitments and other miscellaneous items remained.
Substantially all of these accruals were utilized in 1997 to settle obligations
resulting from the sale and related restructuring.
NOTE 9. EARNINGS (LOSS) PER SHARE
As discussed in Note 1, the Company adopted SFAS No. 128 effective December
27, 1997. The following table illustrates the computation of basic and diluted
earnings (loss) per share under the provisions of SFAS No. 128.
YEARS ENDED
-------------------------------
JUNE 29, JUNE 28, JUNE 27,
1996 1997 1998
-------- -------- ---------
Numerator:
Numerator for basic and diluted earnings (loss)
per share -- net income (loss)................. $96,894 $267,596 $(290,217)
Denominator:
Denominator for basic earnings (loss) per share --
weighted average number of common shares
outstanding during the period.................. 92,559 87,261 87,525
Incremental common shares attributable to exercise
of outstanding options, put options and ESPP
contributions.................................. 3,689 6,261 --
------- -------- ---------
Denominator for diluted earnings (loss) per share... 96,248 93,522 87,525
======= ======== =========
Basic earnings (loss) per share..................... $ 1.05 $ 3.07 $ (3.32)
======= ======== =========
Diluted earnings (loss) per share................... $ 1.01 $ 2.86 $ (3.32)
======= ======== =========
Substantially all options were included in the computation of diluted
earnings per share for 1996 and 1997. In 1998, 12.4 million shares relating to
the possible exercise of outstanding stock options and 19.4 million shares
issuable upon conversion of the convertible debentures were not included in the
computation of diluted loss per share as their effect would have been
anti-dilutive.
45
46
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND* THIRD FOURTH**
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Revenues, net................................. $ 883,115 $1,118,647 $1,096,212 $1,079,883
Gross profit.................................. 112,889 163,389 184,855 189,150
Operating income.............................. 35,769 71,835 94,062 99,930
Net income.................................... 32,878 64,229 82,595 87,894
Basic earnings per share...................... .38 .73 .95 1.02
Diluted earnings per share.................... $ .36 $ .68 $ .88 $ .95
========== ========== ========== ==========
1998
Revenues, net................................. $1,090,164 $ 969,564 $ 831,294 $ 650,503
Gross profit (loss)........................... 161,059 (55,548) 36,279 (41,740)
Operating income (loss)....................... 72,063 (147,198) (58,221) (162,469)
Net income (loss)............................. 62,707 (145,183) (45,022) (162,719)
Basic earnings (loss) per share............... .72 (1.66) (.51) (1.84)
Diluted earnings (loss) per share............. $ .67 $ (1.66) $ (.51) $ (1.84)
========== ========== ========== ==========
- ---------------
* Second quarter 1998 results include special charges of $148 million recorded
primarily to cost of sales.
** Fourth quarter 1998 results include $22 million of costs recorded to research
and development principally related to the start-up of the IBM Agreement.
46
47
WESTERN DIGITAL CORPORATION
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 27, 1998
(IN THOUSANDS)
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS
-------------
Balance at July 1, 1995..................................... $ 9,309
Charges to operations..................................... 1,279
Deductions................................................ (1,212)
-------
Balance at June 29, 1996.................................... 9,376
Charges to operations..................................... 7,116
Deductions................................................ (4,786)
-------
Balance at June 28, 1997.................................... 11,706
Charges to operations..................................... 4,674
Deductions................................................ (454)
-------
Balance at June 27, 1998.................................... $15,926
=======
47
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended June 27, 1998.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the captions "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Stock Performance Graph,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended June 27, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the caption "Security Ownership of Beneficial Owners," which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended June 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related Transactions,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended June 27, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) INDEX TO FINANCIAL STATEMENTS
The financial statements included in Part II, Item 8 of this document
are filed as part of this Report.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule included in Part II, Item 8 of
this document is filed as part of this Report.
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
Separate consolidated financial statements of the Company have been omitted
as the Company is primarily an operating company and its subsidiaries are wholly
owned and do not have minority equity interests and/or indebtedness to any
person other than the Company in amounts which together exceed 5% of the total
consolidated assets as shown by the most recent year-end consolidated balance
sheet.
48
49
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.2.2 By-laws of the Company, as amended March 20, 1997(14)
3.3 Certificate of Agreement of Merger(2)
3.4.1 Certificate of Amendment and Restatement of Certificate of
Incorporation dated March 27, 1997(14)
4.1 Rights Agreement between the Company and First Interstate
Bank, Ltd., as Rights Agent, dated as of December 1, 1988
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K as filed with the Securities and
Exchange Commission on December 12, 1988)
4.2 Amendment No. 1 to Rights Agreement by and between the
Company and First Interstate Bank, Ltd. dated as of August
10, 1990 (incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on August 14, 1990)
4.2.1 Amendment No. 2 to Rights Agreement dated as of January 19,
1997, by and between Western Digital Corporation and
American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K as filed with the Securities and
Exchange Commission on February 5, 1997)
4.3 Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock of the Company
(incorporated by reference to Exhibit A of Exhibit 1 to the
Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on December 12, 1988)
4.4 Purchase Agreement dated February 12, 1998, by and between
the Company and the Initial Purchasers named therein(19)
4.5 Indenture, dated as of February 18, 1998, between the
Company and State Street Bank and Trust Company of
California, N.A.(19)
4.6 Registration Rights Agreement, dated as of February 18,
1998, by and between the Company and the Initial Purchasers
named therein(19)
4.7 The Company's Zero Coupon Convertible Subordinated Debenture
due 2018 and the Global Form of the Company's Zero Coupon
Convertible Subordinated Debenture due 2018 (which is
identical to the Company's Zero Coupon Convertible
Subordinated Debenture due 2018, except for certain
provisions as marked)(19)
10.1.3 Western Digital Corporation Amended and Restated Employee
Stock Option Plan, as amended on November 13, 1997* **
10.3.2 Western Digital Corporation 1993 Employee Stock Purchase
Plan, as amended on November 13, 1997* **
10.4 Receivables Contribution and Sale Agreements, dated as of
January 7, 1994 by and between the Company, as seller, and
Western Digital Capital Corporation, as buyer(5)
10.5 Receivables Purchase Agreement, dated as of January 7, 1994,
by and among Western Digital Capital Corporation, as seller,
the Company, as servicer, the Financial Institutions listed
therein, as bank purchasers and J.P. Morgan Delaware, as
administrative agent(5)
10.6 First Amendment to Receivables Purchase Agreement, dated
March 23, 1994, by and between Western Digital Corporation,
as seller and the Financial Institutions listed therein as
bank purchasers and administrative agents(5)
10.7 Assignment Agreement, dated as of March 23, 1994, by and
between J. P. Morgan Delaware as Bank Purchaser and Assignor
and the Bank of California, N.A. and the Long-term Credit
Bank of Japan, LTD., Los Angeles Agency, as Assignees(5)
10.8 Asset Purchase Agreement dated December 16, 1993 by and
between Motorola, Inc. and Western Digital regarding the
sale and purchase of Western Digital's wafer fabrication
facilities and certain related assets(4)
10.10.1 Western Digital Corporation Deferred Compensation Plan, as
amended and restated effective January 1, 1998(16)**
49
50
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.11 The Western Digital Corporation Executive Bonus Plan(6)**
10.11.1 Amendment No. 1 to the Western Digital Corporation Executive
Bonus Plan* **
10.12 The Extended Severance Plan of the Registrant(6)**
10.12.1 Amendment No. 1 to the Company's Extended Severance
Plan(11)**
10.13 Manufacturing Building Lease between Wan Tien Realty Pte Ltd
and Western Digital (Singapore) Pte Ltd dated as of November
9, 1993 (incorporated by reference to Exhibit 10.17.1 to the
Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on January 25, 1994)
10.16.1 Western Digital Long-Term Retention Plan, as amended July
10, 1997(15)**
10.17 Subleases between Wan Tien Realty Pte Ltd and Western
Digital (Singapore) Pte Ltd dated as of September 1, 1991(1)
10.18 Sublease between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of October 12, 1992(1)
10.21.1 The Company's Non-Employee Directors Stock-For-Fees Plan,
Amended and Restated as of January 9, 1997(14)**
10.22 Office Building Lease between The Irvine Company and the
Company dated as of January 13, 1988 (incorporated by
reference to Exhibit 10.11 to Amendment No. 2 to the
Company's Annual Report to Form 10-K as filed on Form 8 with
the Securities and Exchange Commission on November 18,
1988)(8)
10.30 The Company's Savings and Profit Sharing Plan(9)**
10.31 First Amendment to the Company's Savings and Profit Sharing
Plan(9)**
10.32 Second Amendment to the Company's Savings and Profit Sharing
Plan(10)**
10.32.1 Third Amendment to the Company's Retirement Savings and
Profit Sharing Plan(12)**
10.32.2 Fourth Amendment to the Company's Retirement Savings and
Profit Sharing Plan(14)**
10.32.3 Fifth Amendment to the Company's Retirement Savings and
Profit Sharing Plan* **
10.33 The Company's Amended and Restated Stock Option Plan for
Non-Employee Directors, amended as of July 10, 1997(15)**
10.34 Fiscal Year 1998 Western Digital Management Incentive
Plan(15)**
10.38 Revolving Credit and Term Loan Agreement, dated as of
January 28, 1998, among Western Digital Corporation,
BankBoston, N.A. and other lending institutions listed
therein(17)
10.38.1 First Amendment to Revolving Credit and Term Loan Agreement,
dated as of February 13, 1998, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein(18)
10.38.2 Second Amendment to Revolving Credit and Term Loan
Agreement, dated as of February 25, 1998, among Western
Digital Corporation, BankBoston, N.A. and other lending
institutions named therein*
10.38.3 Third Amendment to Revolving Credit and Term Loan Agreement,
dated as of June 26, 1998, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein*
10.40 OEM Component Supply and Technology License Agreement, dated
June 7, 1998, between Western Digital Corporation and IBM
Corporation***
10.41 OEM Sales and Purchase Agreement, dated June 7, 1998,
between Western Digital Corporation and IBM Corporation***
21 Subsidiaries of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
50
51
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 Press Release Regarding Judgment against Seagate Technology,
Inc. in favor of Amstrad plc by the English Court(14)
- ---------------
* New exhibit filed with this Report.
** Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
*** New exhibit filed with this Report, with confidential treatment requested.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 28, 1992.
(2) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (No. 33-54968) as filed with the Securities and
Exchange Commission on January 26, 1993.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 33-51725) as filed with the Securities and Exchange Commission on
December 28, 1993.
(4) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on January 5, 1994.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 23, 1994.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 16, 1995.
(8) Subject to confidentiality order dated November 21, 1988.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 27, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 16, 1996.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on November 11, 1996.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 10, 1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 5, 1997.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1997.
(15) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 12, 1997.
(16) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-41423) as filed with the Securities and Exchange Commission on
December 3, 1997.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 5, 1998.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 12, 1998.
(19) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-52463) as filed with the Securities and Exchange Commission on
May 12, 1998.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1998.
51
52
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.
WESTERN DIGITAL CORPORATION
By: DUSTON M. WILLIAMS
------------------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Dated: September 1, 1998
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 September 1, 1998.
SIGNATURE TITLE
--------- -----
CHARLES A. HAGGERTY Chairman of the Board, President and
- -------------------------------------------------------- Chief Executive Officer (Principal
Charles A. Haggerty Executive Officer)
DUSTON M. WILLIAMS Senior Vice President and Chief
- -------------------------------------------------------- Financial Officer (Principal Financial
Duston M. Williams and Accounting Officer)
JAMES A. ABRAHAMSON Director
- --------------------------------------------------------
James A. Abrahamson
PETER D. BEHRENDT Director
- --------------------------------------------------------
Peter D. Behrendt
I. M. BOOTH Director
- --------------------------------------------------------
I. M. Booth
IRWIN FEDERMAN Director
- --------------------------------------------------------
Irwin Federman
ANDRE R. HORN Director
- --------------------------------------------------------
Andre R. Horn
ANNE O. KRUEGER Director
- --------------------------------------------------------
Anne O. Krueger
THOMAS E. PARDUN Director
- --------------------------------------------------------
Thomas E. Pardun
52
53
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.2.2 By-laws of the Company, as amended March 20, 1997(14)
3.3 Certificate of Agreement of Merger(2)
3.4.1 Certificate of Amendment and Restatement of Certificate of
Incorporation dated March 27, 1997(14)
4.1 Rights Agreement between the Company and First Interstate
Bank, Ltd., as Rights Agent, dated as of December 1, 1988
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K as filed with the Securities and
Exchange Commission on December 12, 1988)
4.2 Amendment No. 1 to Rights Agreement by and between the
Company and First Interstate Bank, Ltd. dated as of August
10, 1990 (incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on August 14, 1990)
4.2.1 Amendment No. 2 to Rights Agreement dated as of January 19,
1997, by and between Western Digital Corporation and
American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K as filed with the Securities and
Exchange Commission on February 5, 1997)
4.3 Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock of the Company
(incorporated by reference to Exhibit A of Exhibit 1 to the
Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on December 12, 1988)
4.4 Purchase Agreement dated February 12, 1998, by and between
the Company and the Initial Purchasers named therein(19)
4.5 Indenture, dated as of February 18, 1998, between the
Company and State Street Bank and Trust Company of
California, N.A.(19)
4.6 Registration Rights Agreement, dated as of February 18,
1998, by and between the Company and the Initial Purchasers
named therein(19)
4.7 The Company's Zero Coupon Convertible Subordinated Debenture
due 2018 and the Global Form of the Company's Zero Coupon
Convertible Subordinated Debenture due 2018 (which is
identical to the Company's Zero Coupon Convertible
Subordinated Debenture due 2018, except for certain
provisions as marked)(19)
10.1.3 Western Digital Corporation Amended and Restated Employee
Stock Option Plan, as amended on November 13, 1997* **
10.3.2 Western Digital Corporation 1993 Employee Stock Purchase
Plan, as amended on November 13, 1997* **
10.4 Receivables Contribution and Sale Agreements, dated as of
January 7, 1994 by and between the Company, as seller, and
Western Digital Capital Corporation, as buyer(5)
10.5 Receivables Purchase Agreement, dated as of January 7, 1994,
by and among Western Digital Capital Corporation, as seller,
the Company, as servicer, the Financial Institutions listed
therein, as bank purchasers and J.P. Morgan Delaware, as
administrative agent(5)
10.6 First Amendment to Receivables Purchase Agreement, dated
March 23, 1994, by and between Western Digital Corporation,
as seller and the Financial Institutions listed therein as
bank purchasers and administrative agents(5)
10.7 Assignment Agreement, dated as of March 23, 1994, by and
between J. P. Morgan Delaware as Bank Purchaser and Assignor
and the Bank of California, N.A. and the Long-term Credit
Bank of Japan, LTD., Los Angeles Agency, as Assignees(5)
10.8 Asset Purchase Agreement dated December 16, 1993 by and
between Motorola, Inc. and Western Digital regarding the
sale and purchase of Western Digital's wafer fabrication
facilities and certain related assets(4)
54
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10.1 Western Digital Corporation Deferred Compensation Plan, as
amended and restated effective January 1, 1998(16)**
10.11 The Western Digital Corporation Executive Bonus Plan(6)**
10.11.1 Amendment No. 1 to the Western Digital Corporation Executive
Bonus Plan* **
10.12 The Extended Severance Plan of the Registrant(6)**
10.12.1 Amendment No. 1 to the Company's Extended Severance
Plan(11)**
10.13 Manufacturing Building Lease between Wan Tien Realty Pte Ltd
and Western Digital (Singapore) Pte Ltd dated as of November
9, 1993 (incorporated by reference to Exhibit 10.17.1 to the
Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on January 25, 1994)
10.16.1 Western Digital Long-Term Retention Plan, as amended July
10, 1997(15)**
10.17 Subleases between Wan Tien Realty Pte Ltd and Western
Digital (Singapore) Pte Ltd dated as of September 1, 1991(1)
10.18 Sublease between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of October 12, 1992(1)
10.21.1 The Company's Non-Employee Directors Stock-For-Fees Plan,
Amended and Restated as of January 9, 1997(14)**
10.22 Office Building Lease between The Irvine Company and the
Company dated as of January 13, 1988 (incorporated by
reference to Exhibit 10.11 to Amendment No. 2 to the
Company's Annual Report to Form 10-K as filed on Form 8 with
the Securities and Exchange Commission on November 18,
1988)(8)
10.30 The Company's Savings and Profit Sharing Plan(9)**
10.31 First Amendment to the Company's Savings and Profit Sharing
Plan(9)**
10.32 Second Amendment to the Company's Savings and Profit Sharing
Plan(10)**
10.32.1 Third Amendment to the Company's Retirement Savings and
Profit Sharing Plan(12)**
10.32.2 Fourth Amendment to the Company's Retirement Savings and
Profit Sharing Plan(14)**
10.32.3 Fifth Amendment to the Company's Retirement Savings and
Profit Sharing Plan* **
10.33 The Company's Amended and Restated Stock Option Plan for
Non-Employee Directors, amended as of July 10, 1997(15)**
10.34 Fiscal Year 1998 Western Digital Management Incentive
Plan(15)**
10.38 Revolving Credit and Term Loan Agreement, dated as of
January 28, 1998, among Western Digital Corporation,
BankBoston, N.A. and other lending institutions listed
therein(17)
10.38.1 First Amendment to Revolving Credit and Term Loan Agreement,
dated as of February 13, 1998, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein(18)
10.38.2 Second Amendment to Revolving Credit and Term Loan
Agreement, dated as of February 25, 1998, among Western
Digital Corporation, BankBoston, N.A. and other lending
institutions named therein*
10.38.3 Third Amendment to Revolving Credit and Term Loan Agreement,
dated as of June 26, 1998, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein*
10.40 OEM Component Supply and Technology License Agreement, dated
June 7, 1998, between Western Digital Corporation and IBM
Corporation***
10.41 OEM Sales and Purchase Agreement, dated June 7, 1998,
between Western Digital Corporation and IBM Corporation***
55
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21 Subsidiaries of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
99.1 Press Release Regarding Judgment against Seagate Technology,
Inc. in favor of Amstrad plc by the English Court(14)
- ---------------
* New exhibit filed with this Report.
** Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
*** New exhibit filed with this Report, with confidential treatment requested.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 28, 1992.
(2) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (No. 33-54968) as filed with the Securities and
Exchange Commission on January 26, 1993.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 33-51725) as filed with the Securities and Exchange Commission on
December 28, 1993.
(4) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on January 5, 1994.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 23, 1994.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 16, 1995.
(8) Subject to confidentiality order dated November 21, 1988.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 27, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 16, 1996.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on November 11, 1996.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 10, 1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 5, 1997.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1997.
(15) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 12, 1997.
(16) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-41423) as filed with the Securities and Exchange Commission on
December 3, 1997.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 5, 1998.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 12, 1998.
(19) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-52463) as filed with the Securities and Exchange Commission on
May 12, 1998.