<PAGE> 1
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 September 26, 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
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-2647125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
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Irvine, California 92618
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (949) 932-5000
REGISTRANT'S WEB SITE: HTTP://WWW.WESTERNDIGITAL.COM
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 outstanding of Common Stock, as of October 24, 1998 is
88,762,544.
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WESTERN DIGITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - Three-Month Periods
Ended September 27, 1997 and September 26, 1998................ 3
Consolidated Balance Sheets - June 27, 1998 and
September 26, 1998............................................. 4
Consolidated Statements of Cash Flows - Three-Month Periods
Ended September 27, 1997 and September 26, 1998................ 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
Item3. Quantitative and Qualitative Disclosures About Market Risk..... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 20
Signatures............................................................... 21
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
------------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Revenues, net .................................... $1,090,164 $ 650,858
Costs and expenses:
Cost of revenues ............................ 929,105 733,610
Research and development .................... 42,302 51,921
Selling, general and administrative ......... 46,694 57,332
---------- ----------
Total costs and expenses ................ 1,018,101 842,863
---------- ----------
Operating income (loss) .......................... 72,063 (192,005)
Net interest income (expense) .................... 2,588 (2,653)
---------- ----------
Income (loss) before income taxes ................ 74,651 (194,658)
Provision for income taxes ....................... 11,944 --
---------- ----------
Net income (loss) ................................ $ 62,707 $ (194,658)
========== ==========
Earnings (loss) per common share (Note 2):
Basic ................................... $ .72 $ (2.20)
========== ==========
Diluted ................................. $ .67 $ (2.20)
========== ==========
Common shares used in computing per share amounts:
Basic ................................... 86,742 88,545
========== ==========
Diluted ................................. 93,613 88,545
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 26,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 459,830 $ 404,153
Accounts receivable, less allowance for doubtful
accounts of $15,926 at June 27, 1998 and
$16,926 at Sept. 26, 1998................. 369,013 378,295
Inventories (Note 3)......................... 186,516 167,503
Prepaid expenses.............................. 36,763 35,572
---------- ----------
Total current assets...................... 1,052,122 985,523
Property and equipment at cost, net................ 346,987 350,888
Intangible and other assets, net................... 43,579 40,465
---------- ----------
Total assets.............................. $1,442,688 $1,376,876
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 330,130 $ 403,336
Accrued compensation.......................... 23,697 33,800
Accrued warranty.............................. 47,135 101,501
Accrued expenses.............................. 187,617 169,221
---------- ----------
Total current liabilities................. 588,579 707,858
Long-term debt..................................... 519,188 525,307
Deferred income taxes.............................. 17,163 16,949
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value;
Authorized: 5,000 shares
Outstanding: None........................ -- --
Common stock, $.01 par value;
Authorized: 225,000 shares
Outstanding: 101,332 shares at June 27,
1998 and at September 26, 1998............ 1,013 1,013
Additional paid-in capital.................... 326,244 326,883
Retained earnings............................. 197,849 3,191
Treasury stock-common stock at cost;
13,039 shares at June 27, 1998 and 12,629
shares at Sept. 26, 1998 (Note 4)......... (207,348) (204,325)
---------- ----------
Total shareholders' equity................ 317,758 126,762
---------- ----------
Total liabilities and shareholders' equity $1,442,688 $1,376,876
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
-------------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................ $ 62,707 $(194,658)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization .................. 21,960 33,597
Interest accrued on convertible debentures ..... -- 6,119
Changes in assets and liabilities:
Accounts receivable .......................... (22,377) (9,282)
Inventories .................................. (64,900) 19,013
Prepaid expenses ............................. 3,560 1,191
Accounts payable ............................. 58,187 73,206
Accrued compensation, accrued warranty and
accrued expenses ........................... (40,014) 46,073
Other assets ................................. 282 1,652
Deferred income taxes ........................ 8,349 (214)
--------- ---------
Net cash provided by (used for) operating
activities .............................. 27,754 (23,303)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ........................ (63,034) (36,036)
Increase in other assets ......................... (4,173) --
--------- ---------
Net cash used for investing activities .... (67,207) (36,036)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options, including tax benefit
in 1997......................................... 7,542 589
Proceeds from ESPP shares issued ................. 7,443 3,073
--------- ---------
Net cash provided by financing activities . 14,985 3,662
--------- ---------
Net decrease in cash and cash equivalents ........ (24,468) (55,677)
Cash and cash equivalents, beginning of period ... 208,276 459,830
--------- ---------
Cash and cash equivalents, end of period ......... $ 183,808 $ 404,153
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes .......... $ 9,904 $ 1,272
Cash paid during the period for interest .............. -- 1,012
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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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 as of and for the year ended June 27, 1998.
2. The following table illustrates the computation of basic and diluted
earnings (loss) per share under the provisions of SFAS No. 128 (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
------------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
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<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings (loss)
per share--net income (loss) ................ $ 62,707 $(194,658)
========= =========
Denominator:
Denominator for basic earnings (loss) per
share--weighted average number of common
shares outstanding during the period ........ 86,742 88,545
Incremental common shares attributable to
exercise of outstanding options and ESPP
contributions ............................... 6,871 --
--------- ---------
Denominator for diluted earnings (loss)
per share ................................... 93,613 88,545
========= =========
Basic earnings (loss) per share ............... $ .72 $ (2.20)
========= =========
Diluted earnings (loss) per share ............. $ .67 $ (2.20)
========= =========
</TABLE>
Substantially all options were included in the computation of diluted
earnings per share for the three-month period ended September 27, 1997.
In the quarter ended September 26, 1998, 13.9 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.
On September 10, 1998, the Company's board of directors authorized and
declared a dividend distribution of one Right for each share of Common
Stock of the Company outstanding at the close of business on November
30, 1998, and authorized the issuance of one Right for each share of
Common Stock of the Company issued from the Record Date until certain
dates as specified in the Company's Rights Agreement dated as of October
15, 1998, pursuant to which the Company's existing shareholders rights
plan will be replaced with a successor ten year plan. The Rights issued
become exercisable for common stock at a discount from market value upon
certain events related to a change in control.
3. Supplemental Financial Statement Data (in thousands)
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 26,
1998 1998
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<S> <C> <C>
Inventories
Finished goods............................ $ 126,363 $ 98,515
Work in process........................... 28,287 33,220
Raw materials and component parts......... 31,866 35,768
---------- ----------
$ 186,516 $ 167,503
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
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<S> <C> <C>
Net Interest Income (Expense)
Interest income .......................... $ 2,588 $ 5,292
Interest expense.......................... -- (7,945)
---------- ----------
Net interest income (expense)............. $ 2,588 $ (2,653)
========== ===========
</TABLE>
6
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4. During the quarter ended September 26, 1998, the Company distributed 325,000
and 85,000 shares of its common stock in connection with the Employee Stock
Purchase Plan ("ESPP") and common stock option exercises, respectively, for
$3.7 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 as of and for the year
ended June 27, 1998.
6. In November 1998, the Company replaced its then existing secured revolving
credit and term loan facility with a new facility ("Senior Bank Facility").
The Senior Bank Facility provides the Company with a $150 million revolving
credit line and a $50 million term loan, both of which expire in November
2001. The term loan requires quarterly payments of $2.5 million beginning in
September 1999 with the remaining balance due in November 2001. The Senior
Bank Facility is secured by substantially all of the Company's assets. The
availability under the revolving portion of the Senior Bank Facility is
dependent on the borrowing base. At the option of the Company, borrowings
bear interest at either Libor or a base rate plus a margin determined by the
borrowing base, with option periods of one to three months. The Senior Bank
Facility requires the Company to maintain certain amounts of net equity and
prohibits the payment of dividends. The $50 million term loan outstanding as
of September 26, 1998 under the previous credit facility was repaid and
replaced with the $50 million term loan under the Senior Bank Facility.
7. 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. Trial of this case commenced October 5, 1998 and is
ongoing as of the date of this report. The Company believes that it has
meritorious defenses to Amstrad's claims and is vigorously defending itself
against the Amstrad claims and pressing 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.
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 complaints alleged that the Company issued false and misleading
statements from July 25, 1996, through December 2, 1997 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
Company filed a motion to dismiss the amended consolidated complaint which
was granted by the Court with prejudice, and on August 21, 1998, the case
was dismissed. No appeal of the case was filed.
7
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THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING
THE COMPANY'S INTENTIONS, PLANS, STRATEGIES, BELIEFS, FORECASTS OR CURRENT
EXPECTATIONS WITH RESPECT TO, AMONG OTHER THINGS: (I) THE FINANCIAL PROSPECTS OF
THE COMPANY; (II) THE COMPANY'S FINANCING PLANS; (III) TRENDS AFFECTING THE
COMPANY'S FINANCIAL CONDITION OR OPERATING RESULTS; (IV) THE COMPANY'S
STRATEGIES FOR GROWTH, OPERATIONS, AND PRODUCT DEVELOPMENT AND
COMMERCIALIZATION; AND (V) CONDITIONS OR TRENDS IN OR FACTORS AFFECTING THE HARD
DRIVE INDUSTRY. SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE ANTICIPATED. THESE RISKS INCLUDE, WITHOUT
LIMITATION, THE HIGHLY COMPETITIVE NATURE OF THE HARD DRIVE INDUSTRY, WHICH IS
CHARACTERIZED BY PERIODS OF SEVERE PRICE COMPETITION AND PRICE EROSION, WHICH
CAN RESULT IN SHIFTING MARKET SHARE; AND RAPID TECHNOLOGICAL CHANGES, WHICH
REQUIRE THE COMPANY TO CONTINUALLY DEVELOP NEW HARD DRIVE PRODUCTS INCORPORATING
NEW TECHNOLOGY ON A TIMELY AND COST-EFFECTIVE BASIS, AND WHICH CAN ALSO
ADVERSELY AFFECT THE VOLUME AND PROFITABILITY OF SALES OF EXISTING PRODUCTS AND
INCREASE THE RISK OF INVENTORY OBSOLESCENCE. 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. The three-month period ended
September 26, 1998 is referred to herein as the first quarter of 1999 or the
current quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the first quarter of 1999, the Western Digital Corporation (the "Company" or
"Western Digital") recorded special charges of approximately $85 million,
including $77 million to increase warranty reserves associated with the
Company's last generations of thin film desktop products. Western Digital
completed the transition in its desktop business to the newer magneto-resistive
("MR") head technology in the June 1998 quarter. The increase in the warranty
reserves is based on recent experience with thin film returns which indicated a
slightly higher return rate, higher cost of repair and a longer duration of
returns within the warranty period. The special charges also include a $7.5
million provision for losses on terminated hedging contracts in the Malaysia
Ringgit currency due to the Malaysian government's imposition of currency
controls.
Consolidated revenues were $650.9 million in the first quarter of 1999, a
decrease of 40% from the first quarter of the prior year. The lower revenues in
the current quarter resulted from a 26% decline in hard drive unit shipments
combined with reductions in the average selling prices ("ASP") of hard drive
products due to an intensely competitive hard drive business environment.
Consolidated revenues in the current quarter remained relatively unchanged from
the immediately preceding quarter.
The 28 percentage point decline in gross profit margin from the corresponding
period of the prior year was primarily related to competitive pricing pressures
experienced in the desktop storage market during the first quarter of 1999 and
the $77 million warranty-related special charges recorded to cost of sales in
the current
8
<PAGE> 9
quarter. Excluding the aforementioned warranty charge, the gross profit margin
in the first quarter of 1999 was (1)% as compared to 15% in the corresponding
period of the prior year and (6)% in the immediately preceding quarter. The
sequential improvement in gross profit margin was due to a slightly improved
pricing environment in the current quarter as excess inventories in the hard
drive industry declined to more sustainable levels. In addition, unit costs were
reduced for the Company's desktop storage products because yields for MR-based
products continued to improve with additional experience.
Research and development ("R&D") expense for the current quarter was $51.9
million, an increase of $9.6 million over the first quarter of the prior year
and a decrease of $18.1 million from the immediately preceding quarter. The
increase in absolute dollars spent from the corresponding period of the prior
year is consistent with the Company's decision to develop a full line of
enterprise storage products and to focus on regaining time to market leadership
with its desktop storage products. The decrease in R&D expense from the
immediately preceding quarter was primarily related to certain costs recorded in
the fourth quarter of 1998 related principally to the start-up of the
broad-based hard drive component supply and technology licensing agreement with
IBM.
Selling, general and administrative ("SG&A") expense for the first quarter of
1999 was $57.3 million, an increase of $10.6 million and $6.6 million over the
corresponding quarter of the prior year and the immediately preceding quarter,
respectively. The increases relate primarily to the $7.5 million of foreign
currency-related special charges recorded in the current quarter. The remaining
increase over the first quarter of 1998 was the result of higher depreciation
expense associated with the Company's recently implemented computer information
systems.
Net interest expense for the current quarter was $2.7 million, compared with net
interest income of $2.6 million in the corresponding quarter of 1998 and net
interest expense of $.3 million in the immediately preceding quarter. The change
from the first quarter of 1998 was primarily attributable to interest expense
incurred on the Company's $50 million term loan, which was part of the Company's
old revolving credit and term loan facility, and accrual of original issue
discount on the Company's convertible subordinated debentures due 2018
("Debentures"). No debt was outstanding during the first quarter of 1998.
Partially offsetting this increase was incremental interest income earned on the
cash and cash equivalents balance in the current period, which was higher than
historical levels due to the proceeds from the sale of the Debentures and
borrowings under the Senior Bank Facility. The increase in net interest expense
from the immediately preceding quarter was primarily the result of lower average
cash and cash equivalent balances in the current quarter.
The Company's effective tax rate of 16% recorded in the first quarter of the
prior year resulted primarily from the earnings of certain subsidiaries which
are taxed at substantially lower tax rates as compared with United States
statutory rates. The Company did not provide income tax benefit on the loss
incurred in the current quarter as it is not more likely than not that the
resulting deferred tax assets could be realized.
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 because
they have been able to pay some of their costs in devalued currency while
receiving their revenues in U.S. Dollars. In addition, recent events in Malaysia
have heightened management's concerns about political instability and the
associated risk to the Company's manufacturing operations in Malaysia. 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, the Company had $404.2 million of cash and cash
equivalents as compared with $459.8 million at June 27, 1998. Net cash used for
operating activities was $23.3 million during the current quarter as compared to
net cash provided by operating activities of $27.8 million in the corresponding
period of the prior year. Cash flows resulting from lower inventories and higher
current liabilities were more than offset by cash used to fund higher accounts
receivable and the net loss (net of non-cash charges). Another significant use
of cash during the current quarter was capital expenditures of $36.0 million,
incurred primarily to upgrade the Company's media production capability and for
normal replacement of existing assets.
9
<PAGE> 10
In November 1998, the Company replaced its then existing secured revolving
credit and term loan facility with a new facility ("Senior Bank Facility"). The
Senior Bank Facility provides the Company with a $150 million revolving credit
line and a $50 million term loan, both of which expire in November 2001. The
term loan requires quarterly payments of $2.5 million beginning in September
1999 with the remaining balance due in November 2001. The Senior Bank Facility
is secured by substantially all of the Company's assets. The availability under
the revolving portion of the Senior Bank Facility is dependent on the borrowing
base. At the option of the Company, borrowings bear interest at either Libor or
a base rate plus a margin determined by the borrowing base, with option periods
of one to three months. The Senior Bank Facility requires the Company to
maintain certain amounts of net equity and prohibits the payment of dividends.
The $50 million term loan outstanding as of September 26, 1998 under the
previous credit facility was repaid and replaced with the $50 million term loan
under the Senior Bank Facility.
The Company owns approximately 34 acres of land in Irvine, California upon
which, when business conditions are more favorable, it intends to obtain lease
financing to construct new corporate headquarters. 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
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 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
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. For the period ended September 26, 1998 and all prior periods
presented, the Company has not possessed any of the components of other
comprehensive income. 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 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 readiness and
testing to be completed by June 1999 and full integration testing completed by
July, 1999. Expenditures related to the Year 2000 project, which include normal
replacement of existing capital assets, were approximately $5.0 million in 1998,
$1.3 million in the current quarter and are expected to amount to approximately
$35.0 million in total. For an additional discussion of Year 2000 issues, see
Certain Risk Factors Affecting Western Digital Corporation and/or the Hard Drive
Industry -- Year 2000 Issue.
10
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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 and is intensely competitive. The desktop
hard drive industry continues to experience sustained oversupply and severe
pricing pressures that the Company expects to continue during 1999. Current
conditions in this market make it difficult to forecast the timing of any change
in competitive conditions.
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 MR head technology and certain manufacturing and performance issues
encountered as the Company continued thin film head technology at higher per
platter capacities than its competitors. There can be no assurance that the
Company will recover from these 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 adversely affected
the Company's operating results for 1998 and for the first quarter of 1999 and
make it difficult to forecast near-term operating results. The Company expects
these conditions to continue during 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%. 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 a
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 collaboration with IBM for high-end desktop
hard drive technology, 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, achieved time-to-market leadership with certain MR
products. The Company completed its transition of desktop hard drives to MR head
technology by the end of the fourth quarter of 1998 but continues to manufacture
hard drives with thin film inductive heads for the lower capacity points of the
enterprise market. The Company's focus is on regaining time-to-market leadership
with its desktop MR products. Accordingly, the Company is currently qualifying
its WD Caviar 3.4 and 4.3 GB per platter desktop MR drives with OEMs and
collaborating with IBM to develop new products incorporating giant magneto-
resistive ("GMR") head technology, the successor technology to MR. Failure
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<PAGE> 12
of the Company to regain time-to-market leadership with products incorporating
MR and GMR 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 component cost
savings inherent in increases in areal density, the rapid increase has shortened
product life cycles and heightened the importance of time-to-market leadership.
Use of GMR heads will further increase 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's
ability to achieve time-to-market leadership will be dependent on its ability to
qualify and effectively transition to 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, because 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 twelve 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 fully exploit the product's technical
potential 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 ensure timely achievement of
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 revenues in the future.
Failure of the Company to execute its strategy to achieve 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 already 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.
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<PAGE> 13
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
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 to integrate
optically-assisted recording technology, which, in turn, could adversely effect
the Company's financial condition or operating results.
Technology License and Component Supply Transaction with IBM
Several significant challenges to the Company have resulted from the IBM
Agreement, 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 utilize 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 incorporating the IBM technologies or components into successful
products.
Additionally, because 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 leverage 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
further license the subject technology 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. Although the IBM
Agreement has an initial term extending until 2001, maintenance of the agreement
requires the Company to subscribe to particular product programs and to purchase
specified quantities of components from IBM. If either party breaches the
agreement or becomes subject to bankruptcy or similar proceedings, the other
party may terminate the 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
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<PAGE> 14
continue to grow over the next several years, demand may fluctuate significantly
from period to period, including potential increases in demand in response to
Year 2000 remediation and potential decreases in demand in response to any
declines in capital spending by U.S. businesses. 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.
The hard drive industry has also experienced seasonal fluctuations in demand.
The Company has historically experienced relatively flat demand in the first
quarter of a 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.
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 experienced reductions in its business with certain OEM
customers in 1998, with resulting loss of revenue, largely as a result of delays
and difficulties encountered in the Company's transition to MR head technology.
If the Company encounters similar transition issues related to future products,
customers' demand for the Company's drives can be expected to decline and 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
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<PAGE> 15
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. Because the Company is less vertically integrated than
certain of 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.
Under the Company's virtual vertical integration model, the Company does not
manufacture the components for its hard drives, except for a significant portion
of its media and printed circuit boards. Instead, the Company acquires
components from third party vendors. The success of the Company's products
depends in part on the timely availability and quality of leading-edge
components, and the Company's ability to continue good relationships with key
component suppliers, identify the most advantageous suppliers for specific
products, and integrate components from various suppliers in product development
and manufacturing. Additionally, difficult industry conditions may severely
impact the Company's suppliers. Because 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 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 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 important for 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
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. Additionally, actual warranty costs could have a negative impact on
the Company if the actual rate of drive failure or the cost of drive repair 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.
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<PAGE> 16
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, lower cost, lower performance PC systems now account for a
significant percentage of total PC sales. These systems, principally intended
for the consumer marketplace, 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,
with substantially all of the printed circuit boards for the Company's desktop
hard drive products being manufactured in 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. Recent events in Malaysia have heightened concerns
about political instability and the associated risk to the Company's
manufacturing operations in Malaysia.
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
because they have been able to 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 Asian markets.
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. The Company
may also require additional capital for other purposes not presently
contemplated. If results of operations do not provide sufficient cash flow to
meet the Company's needs for such expenditures, the Company could require
additional debt or equity financing, and such equity financing could be dilutive
to the
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<PAGE> 17
Company's existing shareholders. There can be no assurance that such additional
funds will be available to the Company or available on favorable terms. If the
Company is unable to obtain sufficient capital, it could be required to curtail
its capital equipment, working capital, 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's practice has been to manage 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. Historically, the Company has focused on hedging its foreign
currency risk related to the Singapore Dollar and the Malaysian Ringgit. With
the establishment of currency controls and the prohibition of purchases or sales
of the Malaysian Ringgit by offshore companies, the Company has discontinued
hedging its Malaysian Ringgit currency risk. Future hedging of this currency
risk will depend on currency conditions in Malaysia. 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 or microprocessors 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 identify and 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.
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
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<PAGE> 18
governmental agencies, utility companies, telecommunication service companies
and other service providers outside of the Company's control. The Company has
also initiated formal communications with all of its significant suppliers and
financial institutions to evaluate their Year 2000 readiness plans and state of
readiness and to determine whether any Year 2000 issues will impede the ability
of such suppliers and financial institutions to continue to provide goods and
services to the Company. While all suppliers are being notified of Western
Digital's Year 2000 compliance requirements, the Company has established
specific Year 2000 compliance reviews with 144 critical suppliers in an effort
to ensure that supply of production materials will not be interrupted. Specific
Year 2000 program goals and timetables have been communicated to these suppliers
and they are required to report their progress to the Company on a quarterly
schedule. The Company is continuing to monitor the progress being reported by
these suppliers and is actively engaged with a small number of companies who
have fallen behind schedule. 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 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 is identifying Year 2000 dependencies in its internal 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
ready. The Company has completed an internal assessment of Year 2000 issues and
is in the process of remediating critical systems. Each of the Company's
business sites has identified critical administrative and operational systems
for which contingency plans are being developed to ensure back-up processes are
available in the event of a disruption caused by the Year 2000 problem. The
Company's primary business transaction application developed by Oracle
Corporation is undergoing extensive Year 2000 testing. By the end of November,
1998 testing of the base application, associated modifications and
interfaces will be completed. Unit testing and systems level testing for all
other key systems is currently being executed at each business site. It is
anticipated that the results of these tests will be used to determine additional
contingency requirements. Company-wide integration testing is scheduled for
completion by the end of July, 1999.
The Company anticipates that its systems, equipment and processes will be
substantially Year 2000 ready by the end of June 1999. Expenditures related to
the Year 2000 project, which include normal replacement of existing capital
assets, were approximately $5.0 million in 1998, $1.3 million in the current
quarter and are expected to amount to approximately $35.0 million in total.
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 3. 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.
Historically, the Company has focused on hedging its foreign currency risk
related to the Singapore Dollar and the Malaysian Ringgit. With the
establishment of currency controls and the prohibition of purchases or sales of
the Malaysian Ringgit by offshore companies, the Company has discontinued
hedging its Malaysian Ringgit currency risk. Future hedging of this currency
will depend on currency conditions in Malaysia. The imposition of exchange
controls by the Malaysian government resulted in a $7.5 million realized loss on
terminated hedging contracts in the current quarter.
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As of September 26, 1998, the Company had outstanding the following purchased
foreign currency forward contracts (in millions, except average contract rate):
<TABLE>
<CAPTION>
SEPTEMBER 26, 1998
---------------------------------------
CONTRACT WEIGHTED AVERAGE UNREALIZED
AMOUNT CONTRACT RATE LOSS*
-------- ---------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
<S> <C> <C> <C>
Foreign currency forward contracts:
Singapore Dollar..................... $96.2 1.66 $3.0
===== ==== ====
</TABLE>
- ------------
* 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 losses are offset by the decreased U.S. Dollar
value of the local currency operating expenses.
DISCLOSURE ABOUT OTHER MARKET RISKS
At September 26, 1998, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $290 million,
compared to the related carrying value of $475.3 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.
PART II. OTHER INFORMATION
ITEM 1. 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. Trial of this case commenced October 5, 1998 and is ongoing as of the
date of this report. The Company believes that it has meritorious defenses to
Amstrad's claims and is vigorously defending itself against the Amstrad claims
and pressing 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.
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
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
complaints alleged that the Company issued false and misleading statements from
July 25, 1996, through December 2, 1997 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 Company filed a motion to dismiss the
amended consolidated complaint which was granted by the Court with prejudice,
and on August 21, 1998, the case was dismissed. No appeal of the case was filed.
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.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Purchase Agreement dated February 12, 1998, by and between the
Company and the Initial Purchasers named therein.(2)
4.2. Indenture, dated as of February 18, 1998, between the Company
and State Street Bank and Trust Company of California, N.A.(2)
4.3 Registration Rights Agreement, dated as of February 18, 1998,
by and between the Company and the Initial Purchasers named
therein.(2)
4.4 Form of the Company's Zero Coupon Convertible Subordinated
Debenture due 2018.(1)
4.5 Form of Common Stock Certificate.(2)
10.16.2 Western Digital Corporation Executive Retention Plan.* **
10.34 Fiscal Year 1999 Western Digital Management Incentive Plan.* **
27 Financial Data Schedule.
</TABLE>
- -------------
* 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 quarterly report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1997.
(2) 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:
On August 27, 1998, the Company filed a current report on Form 8-K
to file its press release dated July 27, 1998 announcing its fourth
quarter and fiscal year end results.
20
<PAGE> 21
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
Registrant
/s/ DUSTON WILLIAMS
----------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Date: November 10, 1998
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
4.1 Purchase Agreement dated February 12, 1998, by and between the Company
and the Initial Purchasers named therein.(2)
4.2 Indenture, dated as of February 18, 1998, between the Company and State
Street Bank and Trust Company of California, N.A.(2)
4.3 Registration Rights Agreement, dated as of February 18, 1998, by and
between the Company and the Initial Purchasers named therein.(2)
4.4 Form of the Company's Zero Coupon Convertible Subordinated Debenture
due 2018.(1)
4.5 Form of Common Stock Certificate.(2)
10.16.2 Western Digital Corporation Executive Retention Plan* **
10.34 Fiscal Year 1999 Western Digital Management Incentive Plan* **
27 Financial Data Schedule
</TABLE>
- -------------
* 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 quarterly report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1997.
(2) 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.
<PAGE> 1
EXHIBIT 10.16.2
WESTERN DIGITAL CORPORATION
EXECUTIVE RETENTION PLAN
1. PURPOSE.
The purpose of the Western Digital Corporation Executive Retention Plan
(the "PLAN") is to provide additional incentive compensation to a select
group of employees who are considered critical to the management and
successful operation of Western Digital Corporation (the "COMPANY").
2. DEFINITIONS.
As used herein, the following terms shall have the meanings ascribed
thereto below:
(a) "ACCOUNT" means a bookkeeping account maintained by the Company
for each Award to track vesting and value pursuant to Sections 5
and 6.
(b) "AWARD" means the commitment of the Company to make payments
under the Plan to an Eligible Employee selected pursuant to
Section 4 in amounts determined in accordance with Sections 5
and 6.
(c) "BASE AMOUNT" means the amount of an Award at the time of its
grant, denominated in U.S. Dollars.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CHANGE IN CONTROL" has the meaning set forth in the Deferred
Compensation Plan.
(f) "COMMITTEE" means a committee of the Board consisting solely of
two (2) or more Non-employee Directors.
(g) "COMMON STOCK" means the common stock of the Company.
(h) "DEFERRED COMPENSATION PLAN" means the Company's Deferred
Compensation Plan as amended or restated.
(i) "ELIGIBLE EMPLOYEE" means an employee who is part of management
or highly compensated (within the meaning of Title I of the
Employee Retirement Income Security Act of 1974) regularly
employed by the Company or any of its subsidiaries.
(j) "EMPLOYEE STOCK OPTION PLAN" means the Company's Employee Stock
Option Plan as amended or restated.
1
<PAGE> 2
(k) "NON-EMPLOYEE DIRECTOR" means a director who is both a
"non-employee director" as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, and an "outside
director" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended.
(l) "PARTICIPANT" means any Eligible Employee to whom an Award is
granted.
(m) "UPSIDE OPTIONS" means the options awarded, if any, pursuant to
the Employee Stock Option Plan, to a Participant to give them the
opportunity to increase the value of the award.
3. ADMINISTRATION OF THE PLAN.
3.1 ADMINISTRATOR. The Plan shall be administered by the Board, which
shall have complete discretion and authority to interpret and
construe the Plan and any Awards issued thereunder, decide all
questions of eligibility and benefits (including underlying
factual determinations), and adjudicate all claims and disputes.
3.2 ADMINISTRATIVE RULES. The Board may (a) adopt, amend, and rescind
rules and regulations relating to the Plan; (b) determine the
Base Amount and any other terms and provisions of Awards not
inconsistent with the Plan, (c) construe the provisions of the
Plan and Awards; and (d) make all determinations necessary or
advisable for administering the Plan. Any such actions by the
Board shall be consistent with the provisions of the Plan. The
Board may correct any defect or supply any omission or reconcile
any inconsistency in the Plan or any Award in the manner and to
the extent it shall deem expedient to carry the Plan or Award
into effect, and it shall be the sole and final judge of such
expediency. The determinations of the Board on the matters
referred to in this Section 3.2 shall be final and binding on all
interested parties.
3.3 DELEGATION. The Board may delegate any of its responsibilities
with respect to the Plan to the Committee.
4. AWARDS.
4.1 ELIGIBILITY AND GRANTS OF AWARDS. Subject to the express
provisions of the Plan, Awards may be granted to Eligible
Employees by the Board or the Committee. Upon the date of any
such grant, or any effective date of such grant specified by the
Board or Committee different from the date the grant decision is
made, the Award shall be effective and the recipient thereof
shall be a Participant with respect to that Award. Each Award
granted pursuant to the Plan shall be evidenced by a memorandum
from the Company to the recipient specifying the Base Amount of
the Award and such other terms as the Board or Committee shall
deem necessary or desirable.
2
<PAGE> 3
4.2 Awards may consist of all cash or Upside Options but will, in
general, consist of both a cash portion and Upside Options. All
Upside Option grants will be made at the fair market value of the
stock on the date of grant pursuant to the Employee Stock Option
Plan.
4.2 CONTINUED EMPLOYMENT. The grant of an Award to an Eligible
Employee pursuant to the Plan shall not give the Eligible
Employee any right to be retained in the employ of the Company;
and the right and power of the Company to dismiss or discharge
any Eligible Employee or Participant, with or without cause, for
any reason or no reason, is specifically reserved.
4.3 NO PROPERTY RIGHTS. The grant of an Award to an Eligible Employee
pursuant to the Plan shall not be deemed the grant of a property
interest in any assets of the Company. Each Award evidences only
a general obligation of the Company to comply with the terms and
conditions of the Plan and make payments in accordance with the
Plan from the assets of the Company that are available for the
satisfaction of obligations to creditors. The Company shall not
segregate any assets in respect of any Awards or Accounts. The
rights of a Participant to benefits under this Plan shall be
solely those of a general, unsecured creditor of the Company.
4.4 NO RIGHTS AS A SHAREHOLDER. A Participant shall have no dividend,
voting, or any other rights as a shareholder with respect to any
Award.
5. CREDITS TO ACCOUNTS.
5.1 CREDITS
(a) The Company will not increase or decrease the value of the
Award.
(b) The potential increase or decrease in the value of the
overall Award will be reflected in the Upside Options
granted to the Participant.
6. VESTING AND PAYMENT.
6.1 VESTING. Except as provided below, Participants will have no
vested interest in any Award prior to vesting thereof or in
excess of the amount thereof vested. Each Award shall vest in a
manner described by the Board of Directors. The Upside Options
shall vest according to the same schedule as the Award.
Notwithstanding the foregoing, however, vesting shall immediately
cease upon termination of the Participant's employment with the
Company for any reason, and no vesting credit shall be given for
partial years, regardless of the reason for termination of the
Participant's employment with the Company. If a participant's
employment with the Company terminates for any reason , he or she
shall immediately forfeit all nonvested Awards and account
balances.
3
<PAGE> 4
6.2 CHANGE IN CONTROL. Notwithstanding the foregoing, all Awards
shall vest in their entirety immediately prior to any Change in
Control.
6.3 PAYMENTS. Within sixty (60) days of vesting, the Company shall
pay to the Participant an amount equal to the product of the cash
portion of the Award and the applicable vesting percentage.
6.4 PAYMENTS ONLY TO PARTICIPANT. Payments pursuant to any Award
shall be made only to the Participant recipient of that Award or
his or her survivors.
6.5 TAX LIMITS. Notwithstanding anything herein to the contrary, if
the Company's tax deduction for any payment under the Plan would
be disallowed under Section 162(m) or 280G of the Internal
Revenue Code of 1986, as amended, or for any other reason, the
Company may, in its discretion, defer payment of the excess
amount, but only to the extent that, and for so long as, the
Company's tax deduction for the payment would be disallowed.
Amounts that are deferred for this reason will accrue interest at
the rate described in the Deferred Compensation Plan.
6.6 DEFERRAL.
(a) A Participant may elect prior to beginning of the calendar
year during which a portion of the Award will vest to
defer receipt of any or all cash payments due in the
following calendar year under the Plan. Such election
shall be made, and any such deferral shall be effected and
administered, in accordance with the Deferred Compensation
Plan.
(b) The value derived from the Upside Options are not eligible
for deferral under the Deferred Compensation Plan.
7. TAXES.
7.1 WITHHOLDING. The amounts payable to a Participant under the Plan
shall be reduced by any amount that the Company is required to
withhold with respect to such payments under applicable law.
7.2 PARTICIPANT TAXES. The Company is not responsible for, and makes
no representation or warranty whatsoever in connection with, the
tax treatment hereunder, and each Participant should consult his
or her own tax advisor.
8. AMENDMENT OR TERMINATION.
The Board may, from time to time, amend, modify, change, suspend, or
terminate, in whole or in part, any or all provisions of the Plan,
except that no amendment, modification, change, suspension, or
termination may affect any right of any Participant, without his or her
consent, with respect to any Award granted prior to the effective date
of such amendment, modification, change, suspension, or termination.
4
<PAGE> 5
9. ASSIGNMENT.
No right or interest to or in any Award, payment or benefit to a
Participant shall be assignable by such Participant except by will or
the laws of descent and distribution. No right, benefit or interest of a
Participant hereunder shall be subject to anticipation, alienation,
sale, assignment, encumbrance, charge, pledge, hypothecation or set off
in respect of any claim, debt or obligation, or to execution,
attachment, levy or similar process or assignment by operation of law.
Any attempt, voluntarily or involuntarily, to effect any action
specified in the immediately preceding sentences shall, to the full
extent permitted by law, be null, void and of no effect; provided,
however, that this provision shall not preclude a Participant from
designating one or more beneficiaries to receive any amount that may be
payable to such Participant under the Plan after his or her death and
shall not preclude the legal representatives of the Participant's estate
from assigning any right hereunder to the person or persons entitled
thereto under his or her will, or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy
applicable to his or her estate.
10. GENERAL.
10.1 LAWS GOVERNING. The substantive laws of the State of California
shall govern the validity, construction, enforcement and
interpretation of the Plan and all Awards, unless otherwise
specified therein.
10.2 GOOD FAITH DETERMINATIONS. No member of the Committee or the
Board shall be liable, with respect to the Plan or any Award, for
any act, whether of commission or omission, taken by any other
member or by any officer, agent, or employee of the Company, nor,
excepting circumstances involving his or her own bad faith, for
anything done or omitted to be done by himself or herself. The
Company shall indemnify and hold harmless each member of the
Committee and Board from and against any liability or expense
hereunder, except in the case of such member's own bad faith.
10.3 EFFECT OF HEADINGS. Section headings contained in the Plan are
for convenience only and shall not affect the construction or
interpretation of the Plan.
10.4 INVALID PROVISIONS. If any provision of the Plan or any Award
granted hereunder is held to be illegal, invalid or unenforceable
under present or future laws effective during the term of the
Plan, such provision shall be fully severable; the Plan or such
Award shall be construed and enforced as if such illegal, invalid
or unenforceable provision had never been a part of the Plan or
such Award; and the remaining provisions of the Plan or such
Award shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or
severance from the Plan or such Award. Furthermore, in lieu of
such illegal, invalid or unenforceable provision there shall be
added automatically as part of the Plan or such Award a provision
as similar in terms to such illegal, invalid or unenforceable
provision as is possible and still be legal, valid and
enforceable.
5
<PAGE> 6
10.5 SET-OFF. The Company shall be entitled, at its option and not in
lieu of any other remedies to which it may be entitled, to set
off any amounts due the Company or any affiliate of the Company
against any amount due and payable by the Company or any
affiliate of the Company to a Participant pursuant to this Plan
or otherwise.
10.6 WAIVERS. No waiver of any term or condition hereof shall be
binding unless it is in writing and signed by the Company and the
affected Participant. The waiver by any party of a breach of any
provision of this Plan shall not operate or be construed as a
waiver of any subsequent breach by any party.
10.7 INUREMENT. The rights and obligations under the Plan and any
related agreements shall inure to the benefit of, and shall be
binding upon the Company, its successors and assigns, and the
Participants and their beneficiaries and legal representatives.
10.8 ENTIRE AGREEMENT. This Plan constitutes the entire agreement
between the Company and the Participants concerning the subject
matter hereof, and supersedes all other agreements, whether
written or oral, with respect to such subject matter.
6
<PAGE> 1
EXHIBIT 10.34
FISCAL YEAR 1999
WESTERN DIGITAL MANAGEMENT INCENTIVE PROGRAM (MIP)
PURPOSE
----------------------------------------------------
The purpose of this program is to focus participants
on achieving key financial and strategic objectives
at the corporate and business group levels that will
lead to the creation of value for the Company's
shareholders and provide participants the
opportunity to earn significant awards, commensurate
with performance.
ELIGIBILITY
----------------------------------------------------
Program eligibility is extended to all employees of
Western Digital and selected employees of its
domestic subsidiaries who are in, or who are hired
into, salary grades 68 and above (or equivalent) on
or before January 4, 1999.
Eligibility may also be granted to employees who
have an authorized written agreement that grants
them eligibility.
Employees of Western Digital and its domestic
subsidiaries who are in salary grades 67 or below
(or equivalent) are eligible for awards generated by
a secondary bonus pool.
DESCRIPTION OF THE PROGRAM
----------------------------------------------------
The 1999 Management Incentive Program will pay as
cash awards to participants for the achievement of
predetermined performance goals. Each participant
will be assigned a pool or target bonus percentage,
which when multiplied by the participant's annual
base salary as of June 30, 1999, will determine the
pool or target bonus payout.
Predetermined performance goals will be established
and approved by the Compensation Committee of the
Board of Directors before the end of the first
quarter of the fiscal year.
The actual performance achieved will determine the
percentage used to calculate the award at the end of
the program year. The size of the actual award can
vary between 0% and 200% of the pool or target
award.
In addition, individual and pool awards may be
adjusted upward or downward by the Chief Executive
Officer from the amount generated by the formula.
The Chief Executive Officer's award may be adjusted
upward or downward by the Compensation Committee.
1
<PAGE> 2
----------------------------------------------------
OPERATION OF THE PROGRAM
----------------------------------------------------
PROGRAM YEAR: July 1, 1998 to June 30, 1999
AWARD OPPORTUNITIES: The award for participants will be expressed as a
percentage of salary, and determined according to
salary grade, as follows:
<TABLE>
<CAPTION>
Salary Grade Bonus Opportunity
(or equivalent) As a % of Base Salary
------------------------------ ---------------------
ECP Marketing Regular Pool Target
-------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
68 7.5%
84 44 10%
69 12.5%
85 to 86 45 70 to 71 27.5%
72 35%
73 to 74 45%
75 to 77 65%
</TABLE>
One-half of your Bonus target as of 8/1/98 was
replaced with options with performance accelerated
vesting. The number of options granted to you was
determined by formula and was void of management
discretion. This formula was one-half your 8/1/98
cash bonus target divided by the expected stock price
gain. The expected stock price gain is exactly the
same as that which allows the options to vest 100% in
August 1999. This gain represents a significant
increase in the value of the stock price (nearly
double). In determining this gain the Board of
Directors projected the Company's stock price based
on achieving the goals, at target, set forth in this
program.
PERFORMANCE MEASURES: Performance will be measured at the corporate and
business group levels. Performance measures that will
be used in the 1999 Program are as follows:
o Profitability
o Time to Market
o Time to Volume
o Time to Quality
1999 GOALS AND Each business group will have goals at the corporate
WEIGHTING: and/or business group level, and each goal will have
an assigned weighting. EWS employees will be a
weighted participant, 70%/30%, in the actual results
of PSG/ESG respectively. Business group Vice
Presidents and Senior Directors will have a portion
of their results determined by the other business
group.
2
<PAGE> 3
The percentage of target bonus opportunity earned
(before discretionary adjustments) will vary from the
target bonus opportunity based on actual performance
achieved relative to the performance goals.
ADDITIONAL PROVISIONS
-----------------------------------------------------
AWARD THRESHOLDS: Corporate operating profit/loss must be at a minimum
level for incentives to be paid under any aspect of
the Program.
In addition, each business group will have a
predetermined operating profit/loss threshold below
which no incentives will be paid for that business
group.
TOTAL AWARD CAP: Total awards paid under this Program may not exceed a
preset percentage of corporate operating profit as
determined by the Compensation Committee. Any award
reductions attributable to the preset percentage cap
will be made by the Chief Executive Officer.
AWARD ADJUSTMENT: Group award levels may be adjusted upward or downward
by up to 25% by the Chief Executive Officer provided
that total awards do not exceed the amounts generated
by formula.
After application of the group performance,
individual awards may be adjusted upward or downward
based on the adjustment table below. Approval from
the Chief Executive Officer is required for
adjustments outside of these limits. The Chief
Executive Officer's award may be adjusted upward or
downward by the Compensation Committee. The
adjustments by salary grade level (or equivalent) are
as follows:
Salary Grade Upward Downward
(or equivalent) Adjustment Adjustment
---------------- ---------- ----------
All Participants +100% -100%
All awards under this program are discretionary. The
amount of the award including adjustments is
determined by Western Digital in its sole discretion.
No employee has any contractual right to receive an
award pursuant to this program due to his/her
employment at Western Digital.
EXTRAORDINARY EVENTS: The Compensation Committee, in its discretion, may
adjust the basis upon which performance is measured
to reflect the effect of significant changes that
include, but are not limited to, unbudgeted
acquisitions/divestitures, unusual or extraordinary
accounting items, or significant, unplanned changes
in the economic or regulatory environment.
3
<PAGE> 4
TERMINATION: Participants must be employed by the Company at the
end of the program year to receive an award. If a
participant terminates for reason of retirement,
total and permanent disability, or death, the
Compensation Committee has the discretion to pay
prorated awards based upon the percentage of the year
worked.
PARTIAL YEAR The Compensation Committee, in its discretion, may
PARTICIPATION: pay prorated awards to people hired or promoted into
eligible positions after July 1, 1998. In general,
awards will be prorated for participants who begin
before January 4, 1999 while those hired after
January 4, 1999 will not be eligible to participate
in the program.
:
DEFERRED PAYOUT Before the end of the calendar year, the participant
may elect to defer payout of all or part of the award
in accordance with Western Digital's Deferred
Compensation Plan. The deferred amount will be
credited with a rate as specified in the Western
Digital's Deferred Compensation Plan.
PAYOUT OF AWARD: Awards will be paid in cash as soon as possible
following the end of the program year or according to
the participant's deferral election. Options which
vest will be exercisable at the discretion of the
participant subject to the terms and conditions of
the Employee Stock Option Plan.
SECONDARY POOL: Secondary award pools will be created for employees
in salary grades 67 or below (or equivalent) for all
corporate and business groups. The formula used to
generate a secondary pool for each group is:
Pool =
Formula generated result [0% to 200%]
x
(2.5% of grades 43 & 83 salaries
+
1.67% of grades 41-42, 64-67, 81-82 salaries
+
1% of grades 63 and below salaries)
Management has the discretion to award any one
individual up a maximum of 10% of salary. Approval of
the CEO is required for discretion above this limit.
The intent of this pool is to allow for the top 10%
of the remaining population to receive 5% of their
salary as a bonus at target levels of performance.
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEETS OF WESTERN DIGITAL
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY
REPORT ON FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 26, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1999
<CASH> 404,153
<SECURITIES> 0
<RECEIVABLES> 395,221
<ALLOWANCES> 16,926
<INVENTORY> 167,503
<CURRENT-ASSETS> 985,523
<PP&E> 634,125
<DEPRECIATION> 283,237
<TOTAL-ASSETS> 1,376,876
<CURRENT-LIABILITIES> 707,858
<BONDS> 525,307
0
0
<COMMON> 887
<OTHER-SE> 125,875
<TOTAL-LIABILITY-AND-EQUITY> 1,376,876
<SALES> 650,858
<TOTAL-REVENUES> 650,858
<CGS> 733,610
<TOTAL-COSTS> 733,610
<OTHER-EXPENSES> 109,253
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 2,653
<INCOME-PRETAX> (194,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> (194,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (194,658)
<EPS-PRIMARY> (2.20)
<EPS-DILUTED> (2.20)
</TABLE>
