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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1997.
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 95-2647125
(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: (714) 932-5000
N/A
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding, as of January 27, 1998, was
87,451,488.
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WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three-Month Periods Ended December
28, 1996 and December 27, 1997.............................................. 3
Consolidated Statements of Operations -- Six-Month Periods Ended December
28, 1996 and December 27, 1997.............................................. 4
Consolidated Balance Sheets -- June 28, 1997 and December 27, 1997.......... 5
Consolidated Statements of Cash Flows -- Six-Month Periods Ended December
28, 1996 and December 27, 1997.............................................. 6
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 20
Item 4. Submission of Matters to Vote of Security Holders........................... 21
Item 6. Exhibits and Reports on Form 8-K............................................ 22
Signatures............................................................................ 23
Exhibit Index......................................................................... 24
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE-MONTH PERIOD ENDED
--------------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
Revenues, net.................................................. $ 1,118,647 $ 969,564
Costs and expenses:
Cost of revenues............................................. 955,258 1,025,112
Research and development..................................... 36,001 44,472
Selling, general and administrative.......................... 55,553 47,178
---------- ----------
Total costs and expenses............................. 1,046,812 1,116,762
---------- ----------
Operating income (loss)........................................ 71,835 (147,198)
Interest and other income...................................... 3,729 2,015
---------- ----------
Income (loss) before income taxes.............................. 75,564 (145,183)
Provision for income taxes..................................... 11,335 --
---------- ----------
Net income (loss).............................................. $ 64,229 $ (145,183)
========== ==========
Earnings (loss) per common share (Note 2):
Basic..................................................... $ .73 $ (1.66)
========== ==========
Diluted................................................... $ .68 $ (1.66)
========== ==========
Common shares used in computing per share amounts (Note 2):
Basic..................................................... 87,950 87,319
========== ==========
Diluted................................................... 94,760 87,319
========== ==========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX-MONTH PERIOD ENDED
--------------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
Revenues, net.................................................. $ 2,001,762 $ 2,059,728
Costs and expenses:
Cost of revenues............................................. 1,725,484 1,954,217
Research and development..................................... 70,261 86,774
Selling, general and administrative.......................... 98,413 93,872
---------- ----------
Total costs and expenses............................. 1,894,158 2,134,863
---------- ----------
Operating income (loss)........................................ 107,604 (75,135)
Interest and other income...................................... 6,640 4,603
---------- ----------
Income (loss) before income taxes.............................. 114,244 (70,532)
Provision for income taxes..................................... 17,137 11,944
---------- ----------
Net income (loss).............................................. $ 97,107 $ (82,476)
========== ==========
Earnings (loss) per common share (Note 2):
Basic..................................................... $ 1.11 $ (.95)
========== ==========
Diluted................................................... $ 1.04 $ (.95)
========== ==========
Common shares used in computing per share amounts (Note 2):
Basic..................................................... 87,720 87,030
========== ==========
Diluted................................................... 93,682 87,030
========== ==========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
JUNE 28, DECEMBER 27,
1997 1997
---------- ------------
Current assets:
Cash and cash equivalents (Note 8)............................... $ 208,276 $ 119,339
Accounts receivable, less allowance for doubtful accounts of
$11,706 at June 28, 1997 and $13,491 at December 27, 1997..... 545,552 480,368
Inventories (Note 3)............................................. 224,474 285,404
Prepaid expenses and other assets................................ 39,593 38,598
---------- ----------
Total current assets..................................... 1,017,895 923,709
Property and equipment at cost, net................................ 247,895 316,841
Intangible and other assets, net................................... 41,332 30,886
---------- ----------
Total assets............................................. $1,307,122 $1,271,436
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 417,984 $ 394,515
Accrued compensation............................................. 59,227 30,379
Accrued expenses................................................. 176,494 271,140
---------- ----------
Total current liabilities................................ 653,705 696,034
Deferred income taxes.............................................. 33,430 34,542
Commitments and contingent liabilities (Notes 7 and 8)
Subsequent event (Note 6)
Shareholders' equity:
Preferred stock, $0.01 par value; Authorized: 5,000 shares;
Outstanding: None............................................. -- --
Common stock, $0.01 par value; Authorized: 225,000 shares;
Issued: 101,332 shares at June 29, 1997 and at December 27,
1997.......................................................... 1,013 1,013
Additional paid-in capital....................................... 356,654 348,270
Retained earnings................................................ 488,066 405,590
Treasury stock -- common stock at cost; 15,436 shares at June 28,
1997 and 13,948 shares at December 27, 1997 (Note 4).......... (225,746) (214,013)
---------- ----------
Total shareholders' equity............................... 619,987 540,860
---------- ----------
Total liabilities and shareholders' equity............... $1,307,122 $1,271,436
========== ==========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX-MONTH PERIOD ENDED
-----------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 97,107 $ (82,476)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................. 28,323 47,385
Changes in assets and liabilities:
Accounts receivable......................................... (84,721) 65,184
Inventories................................................. (13,118) (60,930)
Prepaid expenses and other assets........................... (4,663) 995
Accounts payable, accrued compensation and accrued
expenses................................................... 136,358 42,329
Other assets................................................ 500 406
Deferred income taxes....................................... (213) 1,112
-------- ---------
Net cash provided by operating activities................ 159,573 14,005
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net........................................ (69,566) (111,791)
Decrease in short-term investments............................... 36,598 --
Decrease in other assets......................................... 4,503 5,500
-------- ---------
Net cash used for investing activities................... (28,465) (106,291)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchase program.................................. (49,840) (12,525)
Exercise of stock options, including tax benefit................. 5,758 8,431
Proceeds from ESPP shares issued................................. 4,378 7,443
-------- ---------
Net cash provided by (used for) financing activities..... (39,704) 3,349
-------- ---------
Net increase (decrease) in cash and cash equivalents............. 91,404 (88,937)
Cash and cash equivalents, beginning of period................... 182,565 208,276
-------- ---------
Cash and cash equivalents, end of period......................... $273,969 $ 119,339
======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for income taxes....................... $ 4,996 $ 12,308
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accounting policies followed by the Company are set forth in Note 1 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended June 28, 1997.
2. Effective December 27, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Unlike
primary earnings (loss) per share, basic earnings (loss) per share excludes
any diluted effects of options. Diluted earnings (loss) per share is very
similar to the previously reported fully diluted earnings (loss) per share.
All earnings (loss) per share amounts have been restated to conform to the
SFAS No. 128 requirements.
The following table illustrates the computation of basic and diluted earnings
(loss) per share:
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 28, DECEMBER 27,
1996 1997 1996 1997
------------ ------------ ------------ ------------
Numerator:
Numerator for basic and
diluted earnings (loss) per
share -- net income
(loss)...................... $ 64,229 $ (145,183) $ 97,107 $(82,476)
======== ======== ======== ========
Denominator:
Denominator for basic earnings
(loss) per share -- weighted
average number of common
shares outstanding during
the period.................. 87,950 87,319 87,720 87,030
Incremental common shares
attributable to exercise of
outstanding options, put
options and ESPP
contributions............... 6,810 -- 5,962 --
-------- -------- -------- --------
Denominator for diluted
earnings (loss) per share... 94,760 87,319 93,682 87,030
======== ======== ======== ========
Basic earnings (loss) per
share....................... $ .73 $ (1.66) $ 1.11 $ (.95)
======== ======== ======== ========
Diluted earnings (loss) per
share....................... $ .68 $ (1.66) $ 1.04 $ (.95)
======== ======== ======== ========
The computation of diluted loss per share for the three-month and six-month
periods ended December 27, 1997 excluded the effect of incremental common
shares attributable to the exercise of outstanding common stock options, put
options and ESPP contributions because their effect was antidilutive.
Substantially all options to purchase shares of common stock were included in
the computation of diluted earnings per share for the three-month and
six-month periods ended December 28, 1996.
3. Inventories comprised the following:
JUNE 28, DECEMBER 27,
1997 1997
-------- ------------
(IN THOUSANDS)
Finished goods....................................... $137,762 $169,922
Work in process...................................... 56,352 45,718
Raw materials and component parts.................... 30,360 69,764
-------- --------
$224,474 $285,404
======== ========
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. During the six months ended December 27, 1997, approximately 786,000 and
702,000 shares of common stock were distributed in connection with the
Employee Stock Purchase Plan ("ESPP") and common stock option exercises,
respectively, for $13.5 million.
5. In the opinion of management, all adjustments necessary to fairly state the
consolidated financial statements have been made. All such adjustments are of
a normal recurring nature. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended June
28, 1997.
6. On January 28, 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 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, restricts the payment of dividends and contains a number of
other restrictive covenants. As of February 5, 1998, the $50 million term
loan was funded but there were no borrowings under the revolving credit line.
7. Since early December 1997, a number of securities class action lawsuits have
been filed against the Company and certain of its officers and directors in
United States District Court for the Central District of California. The
plaintiffs in these actions are persons who purchased shares of the Company's
common stock on the open market during calendar 1996 and 1997, and who are
asserting claims for monetary damages in an unspecified amount on behalf of
themselves and other similarly situated purchasers of the Company's common
stock. These actions followed the Company's announcement on December 2, 1997
of its plans to reduce production, accelerate its transition to MR head
technology, exit the 3-inch drive business, and take associated accounting
charges. The complaints allege essentially that during calendar 1996 and 1997
and before the December 2, 1997 announcement, the Company and its officers
knew the Company was experiencing and would continue to experience
difficulties with its transition from thin film to MR head technology which
would subject the Company to, among other things, low-end pricing pressures
and the risk of obsolete inventory. The complaints further allege that
nonetheless the Company made false and misleading statements concerning the
outlook for the Company's operations and earnings and issued financial
statements that were false and misleading in various ways, including improper
deferral of obsolete inventory write-downs. The complaints further assert
that the Company's officers made the alleged misleading statements in order
to keep the market price of the Company's stock at artificially high levels
for various reasons, including to facilitate the sale of their own shares and
to deter potential acquirors. The Company believes that additional suits may
be filed containing similar allegations. The Company's directors and officers
liability insurance carriers have been notified of the claims that have been
received. Although the Company has had only a limited time to review these
complaints, it believes that it has meritorious defenses to the claims and
intends to defend itself vigorously. However, such litigation could result in
substantial costs and a diversion of resources and management's attention.
8. During the third and fourth quarters of fiscal 1998, the Company is obligated
to settle certain put option arrangements entered into in connection with its
open market stock repurchase program. Under this program, the Company, since
February 1995, has spent approximately $300 million in connection with the
repurchase of approximately 22.2 million shares of its common stock at an
average price of $13.50 per share. The Company has the option to settle these
obligations in cash or by issuing additional common
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock, which would have a dilutive effect upon existing shareholders. The
amount of the settlements will be based upon the value of the Company's
common stock at the time of settlement, and the decision whether to make
these settlements in cash or stock, or a combination of both, will be made
based upon prevailing market conditions and other factors at the time of
settlement. At the market price for the Company's common stock on February 3,
1998, the total cash payment, if elected, would have been approximately $20.7
million. Pending settlement, approximately $26.4 million of the Company's
cash was restricted at December 27, 1997 to secure the Company's obligations
under these arrangements.
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THE INFORMATION INCLUDED IN THIS REPORT INCLUDES FORWARD-LOOKING
STATEMENTS. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "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.
Unless otherwise indicated, references herein to specific years and
quarters are to the Company's fiscal years and fiscal quarters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
Competitive market conditions in the hard drive industry, including
unusually severe pricing pressure, sustained oversupply, and increasing
availability of MR head products from competitors, prompted the Company in the
second quarter of fiscal 1998 to initiate a series of actions designed to reduce
its exposure to these competitive conditions and to sharpen the Company's focus
and resources on its desktop and enterprise storage product lines. These actions
included a reduction in the planned production of desktop hard drives, an
acceleration of the transition from thin film recording head technology to MR
head technology, and termination of the Company's 3-inch hard drive product line
targeted at the mobile PC marketplace. Primarily as a result of these actions,
the Company recorded $148 million of special charges in the second quarter of
fiscal 1998. The special charges include estimated component cancellation
charges, inventory and other asset write-downs, costs incurred during the
quarter on terminated mobile PC engineering programs, and other estimated
incremental costs related to the production, sale, and accelerated wind-down of
thin film and ramp-up of MR products. Of this amount, approximately $40 million
consists of non-cash items, approximately $35 million utilized cash in the
second quarter of fiscal 1998, and the majority of the balance will require cash
expenditures during the third and fourth quarters of fiscal 1998. The special
charges are based upon a number of estimates and assumptions, and although these
estimates and assumptions were based upon the best information available to the
Company at the time, the actual costs incurred by the Company in connection with
these actions may exceed the charges recorded.
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RESULTS OF OPERATIONS
The following table expresses selected amounts obtained from the Company's
consolidated statements of operations as a percentage of net revenues:
THREE-MONTH ENDED SIX-MONTHS ENDED
--------------------------------------------- ---------------------------
DECEMBER 28, SEPTEMBER 27, DECEMBER 27, DECEMBER 28, DECEMBER 27,
1996 1997 1997 1996 1997
------------ --------------- ------------ ------------ ------------
Revenues, net................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 85.4% 85.2% 105.7% 86.2% 94.9%
----- ----- ----- ----- -----
Gross profit margin............. 14.6% 14.8% (5.7)% 13.8% 5.1%
Research and development
expense....................... 3.2% 3.9% 4.6% 3.5% 4.2%
Selling, general and
administrative expense........ 5.0% 4.3% 4.9% 4.9% 4.5%
----- ----- ----- ----- -----
Operating income (loss)......... 6.4% 6.6% (15.2)% 5.4% (3.6)%
Interest and other income....... .3% .2% .2% .3% .2%
----- ----- ----- ----- -----
Income (loss) before income
taxes......................... 6.7% 6.8% (15.0)% 5.7% (3.4)%
Provision for income taxes...... 1.0% 1.0% --% .8% .6%
----- ----- ----- ----- -----
Net income (loss)............... 5.7% 5.8% (15.0)% 4.9% (4.0)%
===== ===== ===== ===== =====
Consolidated revenues were $970 million in the second quarter of 1998, a
decrease of 13% and 11% from the second quarter of the prior year and the
immediately preceding quarter, respectively. Consolidated revenues were $2.1
billion in the first six months of 1998, up 3% from the corresponding period of
1997. The decline in revenues in the current quarter stemmed from 5% and 8%
reductions in hard drive unit shipments as compared to the corresponding quarter
of the prior year and the immediately preceding quarter, respectively. The
increase in revenues in the first six months of 1998 over the corresponding
period of the prior year resulted from an overall 10% increase in hard drive
unit shipments. An intensely competitive hard drive business environment,
particularly during the second quarter of 1998, resulted in reductions in the
average selling prices of hard drive products which in turn affected
consolidated revenues during the three and six-month periods ended December 27,
1997.
The reduction in gross profit margin from the immediately preceding quarter
and the corresponding period of 1997 was primarily related to three factors.
First, $148 million of special charges were recorded in the second quarter of
1998, primarily to cost of sales. See "Recent Developments." Second, unusually
severe competitive pricing pressures were experienced in the desktop storage
market during the second quarter of 1998. Finally, the Company experienced
higher manufacturing costs associated with extending the life of thin film head
technology in desktop storage products. Partially offsetting this reduction in
gross profit margin were incremental sales of the Company's enterprise storage
products, which have higher average gross profit margins than the Company's
desktop storage products.
Research and development ("R&D") expense for the current quarter was $44.5
million, an increase of $8.5 million and $2.2 million over the second quarter of
the prior year and the immediately preceding quarter, respectively. R&D expense
for the first six months of 1998 was $86.8 million, an increase of $16.5 million
over the corresponding period of the prior year. The increases in absolute
dollars spent over the corresponding periods of the prior year and the
immediately preceding quarter are primarily associated with higher expenditures
to support the development of desktop hard drives. The increases in R&D expense
as a percentage of revenues in the current quarter over the second quarter of
1997 and the immediately preceding quarter are primarily the result of the lower
revenue base.
Selling, general and administrative ("SG&A") expense for the second quarter
of 1998 was $47.2 million, a decrease of $8.4 million from the corresponding
quarter of 1997. SG&A expense for the first six months of 1998 was $93.8
million, a decrease of $4.6 million from the corresponding period of the prior
year. The decrease from the second quarter and the first six months of 1997 is
primarily the result of lower expenses for the Company's pay-for-performance and
profit sharing plans.
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Net interest and other income for the current quarter was $2.0 million, a
decrease of $1.7 million and $.6 million from the second quarter of the prior
year and the immediately preceding quarter, respectively. Interest and other
income for the first six months of 1998 was $4.6 million, a decrease of $2.0
million from the corresponding period of the prior year. The decreases are
primarily the result of lower average cash and cash equivalent balances in the
current periods as compared to corresponding periods of the prior year and the
immediately preceding quarter.
The Company's effective tax rate for the three and six-month periods ended
December 28, 1996 results 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. The
provision for income taxes recorded in the first half of 1998 results primarily
from positive earnings at certain of the Company's international subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1997, the Company had $119.3 million in cash and cash
equivalents as compared to $208.3 million at June 28, 1997. Net cash provided by
operating activities was $14.0 million for the six-month period ended December
27, 1997, compared to $159.6 million for the six-month period ended December 28,
1996. Cash flows from depreciation and amortization, lower accounts receivable
balances, and an increase in total operating liabilities were partially offset
by cash used to fund higher inventory balances and the net loss. Another
significant use of cash during the first six months of 1998 was capital
expenditures of $111.8 million, which were incurred primarily in connection with
the transition to desktop and enterprise hard drives featuring MR head
technology and increased capacity to support future production of hard drives
and related components.
The Company's previously existing $150 million revolving credit line, which
had an outstanding balance of $24 million drawn on December 29, 1997, was repaid
and terminated on January 28, 1998. To replace this $150 million facility, the
Company entered into a credit facility ("Senior Bank Facility") on January 28,
1998, 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. 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, restricts 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. The Senior Bank Facility is intended to meet short-term working
capital requirements which may arise from time to time.
On December 29, 1997, the Company purchased approximately 34 acres of land
in Irvine, California for approximately $22 million. The Company is exploring
various financing alternatives for construction of a new corporate headquarters
on this site. The new headquarters facility is not expected to materially
increase the Company's occupancy costs. However, there can be no assurance that
the Company will be successful in entering into a financing arrangement for this
property on terms that will be satisfactory to the Company and
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other alternatives available to the Company upon expiration of its current
headquarters lease could be more costly.
During the third and fourth quarters of 1998, the Company is obligated to
settle certain put option arrangements entered into in connection with its open
market stock repurchase program. Under this program, the Company, since February
1995, has spent approximately $300 million in connection with the repurchase of
approximately 22.2 million shares of its common stock at an average price of
$13.50 per share. The Company has the option to settle these obligations in cash
or by issuing additional common stock, which would have a dilutive effect upon
existing shareholders. The amount of the settlements will be based upon the
value of the Company's common stock at the time of settlement, and the decision
whether to make these settlements in cash or stock, or a combination of both,
will be made based upon prevailing market conditions and other factors at the
time of settlement. At the market price for the Company's common stock on
February 3, 1998, the total cash payment, if elected, would have been
approximately $20.7 million. Pending settlement, approximately $26.4 million of
the Company's cash was restricted at December 27, 1997 to secure the Company's
obligations under these arrangements.
The Company believes that its current cash balances combined with cash flow
from operations and the Senior Bank Facility will be sufficient to meet its
working capital needs for the foreseeable future. However, the Company's ability
to sustain its working capital position is dependent upon a number of factors
that are discussed below under the heading "Certain Factors Affecting Western
Digital Corporation and/or the Hard Drive Industry."
NEW ACCOUNTING PRONOUNCEMENTS
Effective December 28, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Unlike
primary earnings (loss) per share, basic earnings (loss) per share excludes any
dilutive effects of options and convertible securities. Diluted earnings (loss)
per share is very similar to the previously reported fully diluted earnings
(loss) per share. All earnings (loss) per share amounts for all periods have
been restated to conform to the SFAS No. 128 requirements.
YEAR 2000
Many existing software programs use only two digits to identify the year in
the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail, lock-up or generate
erroneous results. As storage devices, the Company's hard drives are transparent
to Year 2000 requirements and can be deemed Year 2000 compliant when used in
accordance with Company product documentation and provided that all hardware,
firmware, middleware and software used in combination with the hard drive
exchange accurate data therewith.
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). The Company is in the process of identifying and
assessing its mission-critical systems related to the Year 2000. Although the
Company plans to address Year 2000 issues with respect to the Company's
mission-critical internal systems in sufficient time prior to the century
rollover, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences.
The Company is currently assessing the cost to remediate its Year 2000
issues. Although the actual cost to remediate these issues is not yet fully
known, based upon information to date, it is not expected that the remediation
will have a material impact on the Company's financial condition or operating
results.
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14
CERTAIN FACTORS AFFECTING WESTERN DIGITAL CORPORATION AND/OR THE DISK DRIVE
INDUSTRY
Highly Competitive Industry. The desktop portion of the hard drive industry
consists of many competitors of various sizes and financial resources. Although
price competition and price erosion were not as severe in 1997 as in some
previous years, the desktop hard drive industry is currently experiencing a
period of sustained oversupply and unusually severe pricing pressures which have
resulted in price competition and price erosion that the Company expects to
continue for the foreseeable future.
During 1996 and 1997, the Company significantly increased its market share
in the desktop hard drive market, but some of these market share gains eroded in
the second quarter of 1998, primarily due to competitive conditions in the disk
drive industry (with resulting cut backs in production) and the timing of the
Company's transition from thin film to magneto-resistive ("MR") head technology.
There can be no assurance that the Company will be able to recover recent market
share losses or increase its market share beyond historical levels. Maxtor and
Fujitsu have joined Seagate, Quantum and IBM as major competitors in the data
storage business, and Fujitsu has already gained significant market share in the
desktop market as a result of its aggressive pricing strategy and competitive
products. Maxtor has also recently gained market share due to several factors,
including improved product offerings. The current intense 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 the first half of 1998, and the Company expects these conditions to continue
for at least the remainder of 1998. See "Recent Developments."
The enterprise portion of the hard drive market is more concentrated than
the desktop portion, with the largest competitor, Seagate, having a market share
in excess of 50% in recent years. The Company entered this market in 1997 and
competes with Seagate, Quantum, IBM and Fujitsu. Because the number of
competitors in this market has increased, the Company expects that price
competition in the enterprise market will increase. 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.
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 could
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 has happened during the first two quarters of 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
expenditure of research and development funds to support rapid technological
change depends upon its revenues and profitability, and reductions in such
expenditures could impair the Company's ability to innovate and compete.
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
14
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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. For a discussion of this transition from thin film
recording head technology to MR head technology and associated special charges
in the second quarter of 1998, see "Recent Developments."
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.
For example, the next generation of head technology, known as "Giant MR," has
already been introduced on a limited basis by IBM. Additionally, 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, although cost-effective per gigabyte. 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.
Development and Production of Drives with MR Recording Heads. The majority
of the Company's hard drive products currently utilize conventional thin film or
metal-in-gap ("MIG") inductive head technologies. MR heads, which enable higher
capacity per hard drive than conventional thin film or MIG inductive heads, have
replaced thin film and MIG inductive heads as the leading recording head
technology. Several of the Company's major competitors are substantially ahead
of the Company in incorporating MR head technology into some of their current
products and, with higher capacity drives using MR heads, some of the Company's
competitors achieved time-to-market leadership with certain MR products. In
September 1997, the Company commenced volume production of its first desktop
drive product incorporating MR head technology, a 2.1 GB per platter drive, and
with that introduction, the Company regained time-to-market leadership at that
capacity point. Additionally, the Company commenced volume production in
December 1997 of the new low-profile 9.1 GB enterprise drive incorporating MR
head technology. The Company and IBM are currently the industry's sole suppliers
of low-profile 9.1 GB enterprise drives. As with most new products, the Company
anticipates that the new MR-based products may have lower initial manufacturing
yields and higher initial component costs than some more mature products. The
Company's ramp to volume production of MR head products has been successful to
date. However, the Company plans to have MR heads in 40% of products shipped by
the end of the third quarter of 1998, and in excess of 80% of products shipped
by the end of the fourth quarter of 1998. This plan depends upon continued
success in MR head technology throughout the full production process and no
assurance can be given that these goals will be achieved. Failure of the Company
to successfully execute the transition to MR head technology in a timely manner
and/or in sufficient volume during 1998 could cause further erosion of the
Company's market share and have an adverse effect on the Company's financial
condition or operating results.
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 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
15
16
the Company's products, which could have an adverse effect on the Company's
financial condition or operating results.
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. The inability of 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.
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 very 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. During each of 1995 and 1996, sales to Gateway 2000
accounted for 11% of revenues. During 1997, sales to IBM accounted for 13% of
revenues. For the six months ended December 27, 1997, sales to Compaq and IBM
accounted for 14% and 12% of revenues, respectively. 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. If any such change in
purchase volume or customer relationships resulted 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 market
oversupply or transition to new products or technologies can result in payment
of significant cancellation charges to suppliers. See "Recent Developments."
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.
16
17
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 Licensing
("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.
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. 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.
Since early December 1997, a number of securities class action lawsuits
have been filed against the Company and certain of its officers and directors in
United States District Court for the Central District of California. The
plaintiffs in these actions are persons who purchased shares of the Company's
common stock on the open market during calendar 1996 and 1997, and who are
asserting claims for monetary damages in an unspecified amount on behalf of
themselves and other similarly situated purchasers of the Company's common
stock. These actions followed the Company's announcement on December 2, 1997 of
its plans to reduce production, accelerate its transition to MR head technology,
exit the 3-inch drive business, and take associated accounting charges. The
complaints allege essentially that during calendar 1996 and 1997 and before the
December 2, 1997 announcement, the Company and its officers knew that the
Company was experiencing and would continue to experience difficulties with its
transition from thin film to MR head technology which would subject the Company
to, among other things, low-end pricing pressures and the risk of obsolete
inventory. The complaints further allege that nonetheless the Company made false
and misleading statements concerning the outlook for the Company's operations
and earnings and issued financial statements that were false and misleading in
various ways, including improper deferral of obsolete inventory write-downs. The
complaints further assert that the Company's officers made the alleged
misleading statements in order to keep the market price of the Company's stock
at artificially high levels for various reasons, including to facilitate the
sale of their own shares and to deter potential acquirors. The Company believes
that additional
17
18
suits may be filed containing similar allegations. The Company's directors and
officers liability insurance carriers have been notified of the claims that have
been received. Although the Company has had only a limited time to review these
complaints, it believes that it has meritorious defenses to the claims and
intends to defend itself vigorously. However, such litigation could result in
substantial costs and a diversion of resources and management's attention.
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.
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 Company's estimates and assumptions, including those used
in determining the special charges in the second quarter of 1998 described in
"Recent Developments." 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 disk drives and its relatively recent entry into
enterprise disk 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 per
system and typically contain hard drives with lower capacity. The Company
currently participates in this market only to a limited extent, and if this
market continues to grow rapidly, the Company will need to develop appropriate
lower-cost disk drive products for these systems to avoid losing market share.
Foreign 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.
Possible 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. Securities class action
litigation suits are often brought against companies following periods of
volatility in the market price of their securities, and a number of such suits
have been filed against the Company since early December 1997. See
18
19
"Legal Proceedings." Any such litigation against the Company could result in
substantial costs and a diversion of resources and management's attention.
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 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
anticipated cash flows 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. Many existing software programs use only two digits to
identify the year in the date field. If such programs are not corrected, date
data concerning the Year 2000 could cause many computer applications to fail,
lock-up or generate erroneous results. Virtually all companies will be affected
by the Year 2000 issue. As storage devices, the Company's hard drives are
transparent to Year 2000 requirements and can be deemed Year 2000 compliant when
used in accordance with Company product documentation and provided that all
hardware, firmware, middleware and software used in combination with the hard
drive exchange accurate data therewith.
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). The Company is in the process of identifying and
assessing its mission-critical systems related to the Year 2000. Although the
Company plans to address Year 2000 issues with respect to the Company's
mission-critical internal systems in sufficient time prior to the century
rollover, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. Any failure to
effectively monitor, implement or improve the Company's internal and external
operational, financial, management and technical support systems could have a
material adverse effect on the Company's financial condition or operating
results.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 9, 1997, the Bay Area Air Quality Management District ("District")
filed suit against the Company in Santa Clara Superior Court. The complaint
alleged that isopropyl alcohol dryers at the Company's Santa Clara Media
facility do not comply with the District's emission control requirements and the
conditions of the permit issued by the District to the Company for the dryers
and sought damages of $300,000. The Company entered into a Settlement Agreement
with the District pursuant to which the District will dismiss the suit with
prejudice.
Since early December 1997, a number of securities class action lawsuits
have been filed against the Company and certain of its officers and directors in
United States District Court for the Central District of California. The
plaintiffs in these actions are persons who purchased shares of the Company's
Common Stock on the open market during calendar 1996 and 1997, and who are
asserting claims for monetary damages in an unspecified amount on behalf of
themselves and other similarly situated purchasers of the Company's Common
Stock. These actions followed the Company's announcement on December 2, 1997 of
its plans to reduce production, accelerate its transition to MR head technology,
exit the 3-inch drive business, and take associated accounting charges. The
complaints allege essentially that during calendar 1996 and 1997 and before the
December 2, 1997 announcement, the Company and its officers knew the Company was
experiencing and would continue to experience difficulties with its transition
from thin film to MR head technology which would subject the Company to, among
other things, low-end pricing pressures and the risk of obsolete inventory. The
complaints further allege that nonetheless the Company made false and misleading
statements concerning the outlook for the Company's operations and earnings and
issued financial statements that were false and misleading in various ways,
including improper deferral of obsolete inventory write-downs. The complaints
further assert that the Company's officers made the alleged misleading
statements in order to keep the market price of the Company's Common Stock at
artificially high levels for various reasons, including to facilitate the sale
of their own shares and to deter potential acquirors. The Company believes that
additional suits may be filed containing similar allegations. The Company's
directors and officers liability insurance carriers have been notified of the
claims that have been received. Although the Company has had only a limited time
to review these complaints, it believes that it has meritorious defenses to the
claims and intends to defend itself vigorously. However, such litigation could
result in substantial costs and a diversion of resources and management's
attention.
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21
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 13, 1997. The
shareholders elected the following eight directors to hold office until the next
annual meeting and until their successors are elected and qualified:
NUMBER OF VOTES
----------------------
FOR WITHHELD
---------- -------
James A. Abrahamson................................... 78,891,122 252,719
Peter D. Behrendt..................................... 78,894,906 248,935
I. M. Booth........................................... 78,887,390 256,451
Irwin Federman........................................ 78,895,212 248,628
Charles A. Haggerty................................... 78,963,499 243,274
Andre R. Horn......................................... 78,890,390 253,450
Anne O. Krueger....................................... 78,893,611 250,230
Thomas E. Pardun...................................... 78,894,931 248,910
In addition, the shareholders approved the following proposals:
NUMBER OF VOTES
------------------------
FOR AGAINST*
---------- ---------
1. To approve the amendment to the Company's Employee
Stock Purchase Plan authorizing an additional
2,000,000 shares.................................. 77,536,283 1,670,316
3. To ratify the selection of KPMG Peat Marwick LLP
as independent accountants for the Company for the
fiscal year ended June 27, 1998................... 78,854,402 352,198
- ---------------
* includes abstentions
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- ----------------------------------------------------------------------------
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(1)
10.10.2 Western Digital Corporation Deferred Compensation Plan, as amended and
restated effective January 1, 1998(2)
10.11.1 Amendment No. 1 to the Western Digital Corporation Executive Bonus Plan* **
10.32.3 Fifth Amendment to the Company's Retirement Savings and Profit Sharing Plan*
**
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*
27 Financial Data Schedule*
- ---------------
* 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.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-42991) as filed with the Securities and Exchange Commission on
December 22, 1997.
(2) 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.
(b)REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION
--------------------------------------
/s/ DUSTON WILLIAMS
--------------------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Date: February 5, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
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(1)
10.10.2 Western Digital Corporation Deferred Compensation Plan, as amended and
restated effective January 1, 1998(2)
10.11.1 Amendment No. 1 to the Western Digital Corporation Executive Bonus Plan* **
10.32.3 Fifth Amendment to the Company's Retirement Savings and Profit Sharing Plan*
**
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*
27 Financial Data Schedule
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* 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.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-42991) as filed with the Securities and Exchange Commission on
December 22, 1997.
(2) 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.
24