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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 28, 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
Irvine, California 92618
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (949) 932-5000
N/A
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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 April 25, 1998 is
88,174,629.
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WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - Three-Month Periods
Ended March 29, 1997 and March 28, 1998........................ 3
Consolidated Statements of Operations - Nine-Month Periods
Ended March 29, 1997 and March 28, 1998........................ 4
Consolidated Balance Sheets - June 28, 1997 and March 28, 1998. 5
Consolidated Statements of Cash Flows - Nine-Month Periods
Ended March 29, 1997 and March 28, 1998........................ 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities and Use of Proceeds...................... 19
Item 6. Exhibits and Reports on Form 8-K............................... 20
Signatures............................................................... 21
Exhibit Index...................................................................... 22
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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)
THREE-MONTH PERIOD ENDED
-------------------------------
MAR. 29, MAR. 28,
1997 1998
---------- ----------
Revenues, net...................................... $1,096,212 $ 831,294
Costs and expenses:
Cost of revenues.............................. 911,357 795,015
Research and development...................... 39,672 46,949
Selling, general and administrative........... 51,121 47,551
---------- ----------
Total costs and expenses.................. 1,002,150 889,515
---------- ----------
Operating income (loss)............................ 94,062 (58,221)
Net interest income (expense) (Note 3)............. 3,109 (536)
--------- ----------
Income (loss) before income taxes.................. 97,171 (58,757)
Provision (benefit) for income taxes............... 14,576 (13,735)
---------- ----------
Net income (loss).................................. $ 82,595 $ (45,022)
========== ==========
Earnings (loss) per common share (Note 2):
Basic..................................... $ .95 $ (.51)
========== ==========
Diluted................................... $ .88 $ (.51)
========== ==========
Common shares used in computing per share amounts
(Note 2):
Basic..................................... 87,212 87,812
========== ==========
Diluted................................... 94,036 87,812
========== ==========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE-MONTH PERIOD ENDED
-------------------------------
MAR. 29, MAR. 28,
1997 1998
---------- ----------
Revenues, net...................................... $3,097,974 $2,891,022
Costs and expenses:
Cost of revenues.............................. 2,636,841 2,749,232
Research and development...................... 109,933 133,723
Selling, general and administrative........... 149,534 141,423
---------- ----------
Total costs and expenses.................. 2,896,308 3,024,378
---------- ----------
Operating income (loss)............................ 201,666 (133,356)
Net interest income (expense) (Note 3)............. 9,749 4,067
---------- ----------
Income (loss) before income taxes.................. 211,415 (129,289)
Provision (benefit) for income taxes............... 31,713 (1,791)
---------- ----------
Net income (loss).................................. $ 179,702 $ (127,498)
========== ==========
Earnings (loss) per common share (Note 2):
Basic..................................... $ 2.05 $ (1.46)
========== ==========
Diluted................................... $ 1.92 $ (1.46)
========== ==========
Common shares used in computing per share amounts
(Note 2):
Basic..................................... 87,550 87,291
========== ==========
Diluted................................... 93,800 87,291
========== ==========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 28, MAR. 28,
1997 1998
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 208,276 $ 577,804
Accounts receivable, less allowance for doubtful
accounts of $11,706 at June 28, 1997 and
$14,615 at March 28, 1998................. 545,552 475,302
Inventories (Note 3)......................... 224,474 217,205
Prepaid expenses.............................. 39,593 57,987
---------- ----------
Total current assets...................... 1,017,895 1,328,298
Property and equipment at cost, net................ 247,895 347,382
Intangible and other assets, net................... 41,332 47,712
---------- ----------
Total assets (Note 6)..................... $1,307,122 $1,723,392
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 417,984 $ 430,003
Accrued compensation.......................... 59,227 25,099
Accrued expenses.............................. 176,494 233,730
---------- ----------
Total current liabilities................. 653,705 688,832
Long-term debt (Notes 6 and 8)..................... -- 513,149
Deferred income taxes.............................. 33,430 34,609
Commitments and contingent liabilities (Note 7)
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 28, 1997 and at March 28, 1998....... 1,013 1,013
Additional paid-in capital.................... 356,654 333,843
Retained earnings............................. 488,066 360,568
Treasury stock-common stock at cost;
15,436 shares at June 28, 1997 and
13,213 shares at March 28, 1998 (Note 4).. (225,746) (208,622)
---------- ----------
Total shareholders' equity................ 619,987 486,802
---------- ----------
Total liabilities and shareholders' equity $1,307,122 $1,723,392
========== ==========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE-MONTH PERIOD ENDED
-------------------------------
MAR. 29, MAR. 28,
1997 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 179,702 $ (127,498)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................. 46,368 73,834
Interest accrued on convertible debentures.... -- 3,020
Changes in current assets and liabilities:
Accounts receivable...................... (176,153) 70,250
Inventories.............................. (23,421) 7,269
Prepaid expenses......................... 1,129 (18,394)
Accounts payable, accrued compensation and
accrued expenses......................... 176,593 35,127
Other assets.................................. 535 1,335
Deferred income taxes......................... (827) 1,179
---------- ----------
Net cash provided by operating activities.. 203,926 46,122
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments................ 36,598 --
Capital expenditures, net......................... (105,360) (167,693)
Decrease (increase) in other assets............... (8,319) 4,825
---------- ----------
Net cash used for investing activities..... (77,081) (162,868)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debentures (Note 8)..... -- 460,129
Proceeds from issuance of bank debt (Note 6)...... -- 50,000
Debt issuance costs............................... -- (18,168)
Common stock repurchase program (Note 4).......... (102,209) (28,304)
Exercise of stock options, including tax benefit.. 11,176 9,933
Proceeds from ESPP shares issued.................. 9,127 12,684
---------- ----------
Net cash provided by (used for) financing
activities................................. (81,906) 486,274
---------- ----------
Net increase in cash and cash equivalents......... 44,939 369,528
Cash and cash equivalents, beginning of period.... 182,565 208,276
---------- ----------
Cash and cash equivalents, end of period.......... $ 227,504 $ 577,804
========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for income taxes........... $ 8,561 $ 14,519
Cash paid during the period for interest............... $ -- $ 996
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accounting policies followed by the Company are set forth in Note 1 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended June 28, 1997.
2. Effective December 27, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted
earnings (loss) per share with basic and diluted earnings (loss) per share.
Unlike primary earnings (loss) per share, basic earnings (loss) per share
excludes any dilutive effects of options. Diluted earnings (loss) per share
is very similar to the previously reported fully diluted earnings (loss) per
share. All earnings (loss) per share amounts have been restated to conform
to the SFAS No. 128 requirements.
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
------------------------ -----------------------
MAR. 29, MAR. 28, MAR. 29, MAR. 28,
1997 1998 1997 1998
--------- ---------- ---------- ----------
Numerator:
Numerator for basic and diluted
earnings (loss) per share -- net
income (loss)................. $ 82,595 $ (45,022) $ 179,702 $ (127,498)
========= ========== ========== ==========
Denominator:
Denominator for basic earnings
(loss) per share -- weighted
average number of common
shares outstanding during the
period........................ 87,212 87,812 87,550 87,291
Incremental common shares
attributable to exercise of
outstanding options, put options
and ESPP contributions........ 6,824 -- 6,250 --
--------- ---------- ---------- ----------
Denominator for diluted earnings
(loss) per share.............. 94,036 87,812 93,800 87,291
========= ========== ========== ==========
Basic earnings (loss) per share. $ .95 $ (.51) $ 2.05 $ (1.46)
========= ========== ========== ==========
Diluted earnings (loss) per share $ .88 $ (.51) $ 1.92 $ (1.46)
========= ========== ========== ==========
The computation of diluted loss per share for the three-month and nine-month
periods ended March 28, 1998 excluded the effect of incremental common
shares attributable to conversion of outstanding convertible subordinated
debentures into common stock and to the exercise of outstanding common stock
options, put options and ESPP contributions because their effect was
antidilutive. Substantially all options to purchase shares of common stock
were included in the computation of diluted earnings per share for the
three-month and nine-month periods ended March 29, 1997. As a result of
adopting FAS 128, diluted earnings (loss) per share for fiscal years
1993 through 1997 was ($.39), $.86, $1.23, $1.01 and $2.86, respectively.
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3. Supplemental Financial Statement Data (in thousands)
JUNE 28, MARCH 28,
1997 1998
---------- ----------
Inventories
Finished goods........................... $ 137,762 $ 134,254
Work in process.......................... 56,352 53,095
Raw materials and component parts........ 30,360 29,856
---------- ----------
$ 224,474 $ 217,205
========== ==========
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
------------------------ -----------------------
MAR. 29, MAR. 28, MAR. 29, MAR. 28,
1997 1998 1997 1998
--------- ---------- ---------- ----------
Net Interest Income (Expense)
Interest income............... $ 3,109 $ 3,792 $ 9,749 $ 8,395
Interest expense.............. -- (4,328) -- (4,328)
--------- ---------- ---------- ----------
Net interest income (expense). $ 3,109 $ (536) $ 9,749 $ 4,067
========= ========== ========== =========
4. During the nine months ended March 28, 1998, approximately 1,231,000 and
992,000 shares were distributed in connection with the Employee Stock
Purchase Plan ("ESPP") and common stock option exercises, respectively, for
$20.3 million. In addition, during the nine months ended March 28, 1998, the
Company paid $28.3 million to settle certain put option arrangements entered
into in connection with its open market stock repurchase program. Under this
program, the Company, since February 1995, has spent approximately $315
million in connection with the repurchase of approximately 22.2 million
shares of its common stock at an average price of $14.15 per share.
5. In the opinion of management, all adjustments necessary to fairly state the
consolidated financial statements have been made. All such adjustments are
of a normal recurring nature. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended June
28, 1997.
6. On January 28, 1998, the Company replaced its then existing revolving credit
facility with a secured revolving credit and term loan facility ("Senior
Bank Facility"). The Senior Bank Facility provides the Company with a $200
million revolving credit line and a $50 million term loan, both of which
expire in January 2001. The Senior Bank Facility is secured by the Company's
accounts receivable, inventory, 66% of its stock in its foreign subsidiaries
and the other assets (excluding real property) of the Company. At the option
of the Company, borrowings bear interest at either Libor plus a margin
determined by a total debt funded ratio or a base rate, with option periods
of one to six months. The Senior Bank Facility requires the Company to
maintain certain financial ratios, restricts the payment of dividends and
contains a number of other restrictive covenants. As of March 28, 1998, the
$50 million term loan was funded but there were no borrowings under the
revolving credit line.
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7. Between December 12, 1997 and February 24, 1998, eight class action suits
were filed against the Company and certain of its officers and directors.
The plaintiffs in the actions purport to represent purchasers of the
Company's common stock during various periods ranging from July 25, 1996
through December 2, 1997 (collectively, the "Class Periods"). The complaints
allege that the Company issued false and misleading statements during the
respective Class Periods concerning the outlook for the Company's operations
and earnings and that the Company issued false and misleading financial
statements in fiscal years 1996 and 1997 by improperly deferring the
write-down of obsolete inventory. The complaints seek compensatory damages
for the purported class members in an unspecified amount. On April 6, 1998,
the court ordered the cases consolidated and designated the plaintiffs in
the first case filed as the lead plaintiffs and the law firm representing
such plaintiffs as lead counsel. The lead counsel filed an amended
consolidated complaint on April 27, 1998. On May 11, 1998, the Company filed
a motion to dismiss the amended consolidated complaint. The Company's
directors & officers liability insurance carrier has been notified of these
claims and has acknowledged its responsibility to defend, subject to a
reservation of rights. Although there has been no discovery conducted in
these cases to date, the Company believes that it has meritorious defenses
to the claims and intends to vigorously defend itself. The Company does not
believe that the outcome of these matters will have a material adverse
effect on its consolidated financial position, results of operations or
liquidity. However, such litigation could result in substantial costs and a
diversion of resources and management's attention.
8. On February 18, 1998, the Company received gross proceeds of $460.1 million
(before the Initial Purchasers' discount) from a private offering of 5.25%
zero coupon convertible subordinated debentures due in 2018. The principal
amount at maturity of the debentures is $1.3 billion. The debentures are
subordinated to all senior debt; are convertible into 19.4 million shares of
the Company's common stock at the rate of 14.935 shares per $1,000 principal
amount at maturity; are redeemable at the option of the Company any time
after February 18, 2003 at the issue price plus accrued original issue
discount to the date of redemption; and will be repurchased by the Company,
at the option of the holder, as of February 18, 2003, February 18, 2008 or
February 18, 2013, or if there is a Fundamental Change (as defined), at the
issue price plus accrued original issue discount to the date of redemption.
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THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS REPORT AND
INCLUDE STATEMENTS REGARDING THE INTENTIONS, PLANS, STRATEGIES, BELIEFS OR
CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS 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. WHEN USED IN THIS
REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FORECASTS,"
"PLANS," "FUTURE," "STRATEGY," OR WORDS OF SIMILAR IMPORT ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS INCLUDING 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
OBSOLESENCE. 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 AND CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE
ANTICIPATED IN FORWARD-LOOKING STATEMENTS, INCLUDING THE DISCLOSURES MADE UNDER
THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" IN THIS REPORT, AS WELL AS THE COMPANY'S OTHER PERIODIC
REPORTS ON FORMS 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
Unless otherwise indicated, references herein to specific years and quarters
are to the Company's fiscal years and fiscal quarters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
On April 30, 1998 the Company and IBM Corporation ("IBM") entered into a
letter of intent for a broad-based hard drive component supply and technology
licensing agreement. The parties intend to include a wide range of options
involving the design and manufacture of desktop hard drives in the definitive
agreement. IBM plans to supply the Company with its giant magneto-resistive
("GMR") heads and other components for desktop hard drives. The Company
initially anticipates using the IBM technology and designs to simultaneously
integrate IBM's GMR heads and components into the Company's future hard drives.
The Company expects to introduce desktop hard drives based on IBM products and
designs in the first half of calendar year 1999. The parties are in the process
of establishing the final terms of the relationship which is expected to become
effective upon the execution of a definitive agreement. See "Certain Factors
Affecting Western Digital Corporation and/or the Disk Drive Industry -
Technology License and Component Supply Transaction with IBM."
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RESULTS OF OPERATIONS
The Company recorded $148 million of special charges in the second quarter of
1998. The special charges include estimated component cancellation charges,
inventory and other asset write-downs, costs incurred during the second quarter
on terminated mobile PC engineering programs, and other estimated incremental
costs related to the production, sale, and accelerated wind-down of thin film
products and ramp-up of products with magneto-resistive ("MR") heads. Of this
amount, approximately $50 million consisted of non-cash items, approximately $33
million and $23 million utilized cash in the second and third quarters of 1998,
respectively, and the majority of the balance will require cash expenditures
during the fourth quarter of 1998. While some of the Company's estimates of the
individual components of the special charges have changed since the second
quarter of 1998, the total amount is not expected to be materially different
than the original $148 million recorded in the second quarter of 1998. However,
the special charges are based upon a number of estimates and assumptions and the
actual costs incurred by the Company in connection with these actions may exceed
the charges recorded.
Consolidated revenues were $831.3 million in the third quarter of 1998, a
decrease of 24% and 14% from the third quarter of the prior year and the
immediately preceding quarter, respectively. Consolidated revenues were $2.9
billion in the first nine months of 1998, down 7% from the corresponding period
of 1997. The decline in revenues in the current quarter stemmed from 12% and 10%
reductions in hard drive unit shipments as compared to the corresponding quarter
of the prior year and the immediately preceding quarter, respectively, and
reductions in the average selling prices of hard drive products due to an
intensely competitive hard drive business environment. Revenues in the first
nine months of 1998 declined from the corresponding period of the prior year
despite a 2% overall increase in hard drive unit shipments primarily as a result
of reductions in the average selling prices of hard drive products. The decline
in average selling prices stemmed from an intensely competitive hard drive
business environment, particularly during the second and third quarters of 1998.
The reduction in gross profit margin from the corresponding periods of the
prior year was primarily related to unusually severe competitive pricing
pressures experienced in the desktop storage market during the second and third
quarters of 1998. The Company also experienced higher assembly costs associated
with extending the life of thin film head technology in desktop storage products
and transitioning to hard drives utilizing MR heads. The $148 million of special
charges recorded in the second quarter of 1998 also contributed to the decline
in gross profit margin in the first nine months of 1998 as compared to the
corresponding period of 1997. Partially offsetting these amounts were
incremental sales of the Company's enterprise storage products, which have
higher average gross profit margins than the Company's desktop storage products.
The improvement in gross profit margin from the immediately preceding quarter is
primarily the result of special charges recorded in the second quarter of 1998,
partially offset by abnormally large price declines during the current quarter.
Research and development ("R&D") expense for the current quarter was $46.9
million, an increase of $7.3 million and $2.5 million over the third quarter of
the prior year and the immediately preceding quarter, respectively. R&D expense
for the first nine months of 1998 was $133.7 million, an increase of $23.8
million over the corresponding period of the prior year. The increases in
absolute dollars spent over the corresponding periods of the prior year are
primarily associated with higher expenditures to support the development of hard
drives for the personal computer market. The increase in R&D expense over the
immediately preceding quarter primarily relates to incremental expenditures to
support the development of enterprise hard drives.
Selling, general and administrative ("SG&A") expense for the third quarter of
1998 was $47.6 million, a decrease of $3.6 million from the corresponding
quarter of 1997. SG&A expense for the first nine months of 1998 was $141.4
million, a decrease of $8.1 million from the corresponding period of the prior
year. The decrease from the third quarter of 1997 and the first nine months of
1997 is primarily the result of lower expenses for the Company's
pay-for-performance and profit sharing plans.
Net interest expense for the current quarter was $.5 million, compared with
net interest income of $3.1 million and $2.0 million in the third quarter of the
prior year and the immediately preceding quarter, respectively. Net interest
income for the first nine months of 1998 was $4.1 million, a decrease of $5.7
million from the corresponding period of the prior year. The declines in net
interest income are primarily attributable to interest expense incurred on the
Company's recently funded long-term debt consisting of a $50.0 million term
loan, which is part of the Company's Senior Bank Facility, and accrual of
original issue discount on the Company's
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convertible subordinated debentures due 2018. No debt was outstanding during any
of the comparable periods. Partially offsetting these decreases was incremental
interest income earned on the cash and cash equivalents balance in the current
quarter, which was higher than historical levels due to the proceeds from the
sale of the debentures and borrowings under the Senior Bank Facility.
The Company's effective tax rate for the three and nine-month periods ended
March 29, 1997 results primarily from the earnings of certain subsidiaries which
are taxed at substantially lower tax rates as compared with United States
statutory rates and changes in the deferred tax asset valuation allowance. The
income tax benefit recorded in the three and nine-month periods ended March 28,
1998 represents the expected benefit of loss carrybacks, partially offset by
provisions for income taxes recorded in certain jurisdictions that had positive
earnings.
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1998, the Company had $577.8 million in cash and cash
equivalents as compared to $208.3 million at June 28, 1997. Net cash provided by
operating activities was $46.1 million for the nine-month period ended March 28,
1998, compared to $203.9 million for the nine-month period ended March 29, 1997.
Cash flows from depreciation and amortization, lower accounts receivable and
inventory balances, and an increase in total operating liabilities were
partially offset by cash used to fund higher prepaid expense balances and the
net loss. Another significant use of cash during the first nine months of 1998
was capital expenditures of $167.7 million, which were incurred primarily in
connection with the transition to desktop and enterprise hard drives featuring
MR head technology, normal replacement of existing assets and the acquisition of
land for the Company's new headquarters.
The Company has a credit facility ("Senior Bank Facility"), pursuant to which
BankBoston, N.A. and other lending institutions are providing a $200 million
revolving credit line and a $50 million term loan, both of which expire in
January 2001. The Senior Bank Facility is secured by the Company's accounts
receivable, inventory, 66% of its stock in its foreign subsidiaries and the
other assets (excluding real property) of the Company. At the option of the
Company, borrowings bear interest at either LIBOR plus a margin determined by a
total debt funded ratio or a base rate, with option periods of one to six
months. The Senior Bank Facility requires the Company to maintain certain
financial ratios, restricts the payment of dividends and contains a number of
other restrictive covenants. As of the date hereof, the $50 million term loan
was funded but there were no borrowings under the revolving credit line. The
Senior Bank Facility is intended to meet short-term working capital requirements
which may arise from time to time.
On February 18, 1998, the Company received gross proceeds of $460.1 million
(before the Initial Purchasers' discount) from a private offering of 5.25% zero
coupon convertible subordinated debentures due in 2018. The principal amount at
maturity of the debentures is $1.3 billion. The debentures are subordinated to
all senior debt; are convertible into 19.4 million shares of the Company's
common stock at the rate of 14.935 shares per $1,000 principal amount at
maturity; are redeemable at the option of the Company any time after February
18, 2003 at the issue price plus accrued original issue discount to the date of
redemption; and will be repurchased by the Company, at the option of the holder,
as of February 18, 2003, February 18, 2008 or February 18, 2013, or if there is
a Fundamental Change (as defined), at the issue price plus accrued original
issue discount to the date of redemption.
On December 29, 1997, the Company purchased approximately 34 acres of land in
Irvine, California for approximately $22 million. The Company is negotiating
synthetic lease financing for construction of a new corporate headquarters on
this site. The new headquarters facility is not expected to materially increase
the Company's occupancy costs. However, there can be no assurance that the
Company will be successful in entering into a 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
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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 financial statements. SFAS 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or earnings per share as currently reported.
YEAR 2000
The Company is currently assessing the cost to remediate its Year 2000
issues. Although the actual cost to remediate these issues is not yet fully
known, based upon information to date, it is not expected that the remediation
will have a material adverse effect on the Company's financial position, results
of operations or liquidity. See "Certain Factors Affecting Western Digital
Corporation and/or the Disk Drive Industry - Year 2000 Issue."
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. The
desktop hard drive industry is currently experiencing a period of sustained
oversupply and unusually severe pricing pressures which have resulted in price
competition and price erosion that the Company expects to continue for the
foreseeable future.
During 1996 and 1997, the Company significantly increased its market share in
the desktop hard drive market, but some of the Company's market share eroded in
the second and third quarter of 1998, primarily due to competitive conditions in
the disk drive industry (with resulting cut backs in production) and the timing
of the Company's transition from thin film to magneto-resistive ("MR") head
technology. There can be no assurance that the Company will be able to recover
recent market share losses or that it will not suffer further market share
erosion. Seagate, Quantum, IBM, Maxtor, Fujitsu and Samsung are the major
competitors in the data storage business, and Maxtor, Fujitsu and Samsung have
recently gained significant market share in the desktop market. The current
intensely competitive conditions in this market make it difficult to forecast
near-term operating results. This competitive environment has adversely affected
the Company's operating results for the first three quarters of 1998, and the
Company expects these conditions to continue for at least the remainder of 1998
and first half of 1999.
The enterprise portion of the hard drive market is more concentrated than the
desktop portion, with the largest competitor, Seagate, having a market share in
excess of 50% in recent years. The Company entered this market in 1997 and
competes with Seagate, Quantum, IBM and Fujitsu. Because the number of
competitors in this market has increased, the Company expects that price
competition in the enterprise market will increase. The Company's continued
success in the enterprise hard drive market is heavily dependent on the
successful development, timely introduction and market acceptance of new
products, and failure to achieve such success could adversely affect the
Company's financial condition or operating results.
In general, the unit price for a given product in both the desktop and
enterprise markets decreases over time as increases in industry supply and cost
reductions occur and as technological advancements are achieved. Cost reductions
result primarily from volume efficiencies, component cost reductions,
manufacturing experience and design enhancements that are generally realized
over the life of a product. Competitive pressures and customer expectations
compel manufacturers to pass these cost reductions along as reductions in
selling prices. The rate of general price decline accelerates when some
competitors lower prices to absorb
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excess capacity, liquidate excess inventories or attempt to gain market share.
Competition and continuing price erosion could adversely affect the Company's
financial condition or operating results in any given quarter. Often, such
adverse effects cannot be anticipated until late in the quarter.
Rapid Technological Change and Product Development. The demands of hard drive
customers for greater storage capacity and higher performance have led to short
product life cycles, which require the Company to constantly develop and
introduce new drive products on a cost-effective and timely basis. The Company's
expenditure of research and development funds to support rapid technological
change depends upon its revenues and profitability, and reductions in such
expenditures could impair the Company's ability to innovate and compete.
The Company experiences fluctuations in manufacturing yields that can
materially affect the Company's operations, particularly in the start-up phase
of new products or new manufacturing processes, and also at the end of a
technology's life cycle, when refinements designed to reach the product's
technical limits can result in tighter manufacturing tolerances. With the
continued pressures to shorten the time required to introduce new products, the
Company must accelerate production learning curves to shorten the time to
achieve acceptable manufacturing yields and costs. The Company's future is
therefore dependent upon its ability to develop new products, qualify these new
products with its customers, successfully introduce these products to the market
on a timely basis and commence volume production to meet customer demands. If
not carefully planned and executed, the transition to new products may adversely
affect sales of existing products and increase risk of inventory obsolescence. A
delay in the introduction or production of more cost-effective and/or more
advanced products also can result in lower sales and lower gross margins.
Because of rapid technological changes, the Company anticipates that sales of
older products will decline as in the past and that sales of new products will
continue to account for a significant portion of its sales in the future.
Failure of the Company to execute its strategy of achieving time-to-market in
sufficient volume with new products, or any delay in the introduction of
advanced and cost-effective products, could result in significantly lower
revenue and gross margins. Some of these factors have adversely affected the
Company in connection with the maturation of and transition from thin film
recording head technology.
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, although
cost-effective per gigabyte. The optically-assisted recording approaches used by
these two companies are different at this time and have created some short-term
confusion in the industry. Accordingly, the Company's strategy is to view
optically-assisted recording as a potentially valid solution at some point in
time, but to assume that the hard drive technologies currently in use will serve
the Company for the foreseeable future. However, if the Company's assumption
proves to be wrong, the Company could be late in its integration of
optically-assisted recording technology, which could have an adverse effect on
the Company's financial condition or operating results.
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Development and Production of Drives with MR Recording Heads. The majority of
the Company's hard drive products currently utilize conventional thin film or
metal-in-gap ("MIG") inductive head technologies. MR heads, which enable higher
capacity per hard drive than conventional thin film or MIG inductive heads, have
replaced thin film and MIG inductive heads as the leading recording head
technology. Several of the Company's major competitors are substantially ahead
of the Company in incorporating MR head technology into some of their current
products and, with higher capacity drives using MR heads, some of the Company's
competitors achieved time-to-market leadership with certain MR products. In
September 1997, the Company commenced volume production of its first desktop
drive product incorporating MR head technology, a 2.1 GB per platter drive, and
with that introduction, the Company achieved time-to-market leadership at that
capacity point. Additionally, the Company commenced volume production in
December 1997 of the new low-profile 9.1 GB enterprise drive incorporating MR
head technology. As with most new products, the Company anticipates that the new
MR-based products may have lower initial manufacturing yields and higher initial
component costs than some more mature products. Based on anticipated overall
unit shipments, the Company expects to have MR heads in approximately 80% of
products shipped by the end of the fourth quarter of 1998. This plan depends
upon achieving the anticipated overall unit shipments and the continued success
in MR head technology throughout the full production process, and no assurance
can be given that these goals will be achieved. Failure of the Company to
successfully execute the transition to MR head technology in a timely manner, to
produce these products, and/or to qualify these products with the OEM customers
in sufficient volume during 1998 could cause further erosion of the Company's
market share and have an adverse effect on the Company's financial condition or
operating results.
Fluctuating Product Demand. Demand for the Company's hard drive products
depends on the demand for the computer systems manufactured by its customers and
on storage upgrades to computer systems, which in turn are affected by computer
system product cycles, end user demand for increased storage capacity and
prevailing economic conditions. Although market research indicates total
computer system unit shipments are expected to continue to grow for the next
several years, demand may fluctuate significantly from period to period. Such
fluctuations have in the past and may in the future result in deferral or
cancellation of orders for the Company's products, which could have an adverse
effect on the Company's financial condition or operating results.
The hard drive industry has also experienced seasonal fluctuations in demand.
The Company has historically experienced relatively flat demand in the first
quarter of the fiscal year as compared to the fourth quarter, while demand in
the second quarter has historically been much higher than in the first quarter.
However, the Company has not experienced this historical pattern during 1998.
Additionally, product shipments tend to be greatest in the third month of each
quarter. The inability of the Company to accurately match its product build
plans to customer demand for any particular period could adversely affect the
Company's operating results for that period.
Customer Concentration and Changing Customer Models. High volume customers
for hard drives are concentrated among a small number of OEMs, distributors and
retailers. Although the Company believes its relationships with key customers
such as these are generally very good, the concentration of sales to a
relatively small number of major customers represents a business risk that loss
of one or more accounts could adversely affect the Company's financial condition
or operating results. The Company's customers are generally not obligated to
purchase any minimum volume and are generally able to terminate their
relationship with the Company at will. If any such change in purchase volume or
customer relationships resulted in decreased demand for the Company's drives,
whether by loss of or delays in orders, the Company's financial condition or
operating results could be adversely affected.
The hard drive industry is experiencing changes in its OEM customer ordering
models. The trend among computer manufacturers using the "build-to-order" model
is to utilize a "just-in-time" ("JIT") inventory management requirements model.
As a result, the Company'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.
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Large OEMs are also considering or have implemented a "channel assembly"
model in which the OEM ships a minimal computer system to the dealer or other
assembler, and component suppliers such as hard drive manufacturers are
requested to ship parts directly to the assembler for installation at its
location. With this model, fragmentation of manufacturing facilities exposes the
Company to some risk of inventory mismanagement by both the OEMs and the
assemblers. The shift requires effective inventory management by the Company,
and any increase in the number of "ship to locations" may increase freight costs
and the number of accounts to be managed. Additionally, if the assemblers are
not properly trained in manufacturing processes, it could also increase the
number of product returns resulting from damage during assembly or improper
installation. This model requires proper alignment between the OEM and the
Company and requires the Company to retain more of its product in inventory. The
Company is therefore exposed to increased risk of inventory obsolescence with
the channel assembly model as well as the JIT model. The Company's OEM customer
relationships have traditionally been strong, but a material adverse change in
an OEM relationship could adversely affect demand for the Company's products,
especially with the impact of these new models.
Dependence on Suppliers of Components. The Company is dependent on qualified
suppliers for components, including recording heads, head stack assemblies,
media and integrated circuits. A number of the components used by the Company
are available from a single or limited number of outside suppliers. Some of
these materials may periodically be in short supply, and the Company has, on
occasion, experienced temporary delays or increased costs in obtaining these
materials. As a result, the Company must allow for significant lead times when
procuring certain materials and supplies. In addition, cancellation of orders
for components due to cut-backs in production precipitated by market oversupply
or transition to new products or technologies can result in payment of
significant cancellation charges to suppliers. Because the Company is less
vertically integrated than its competitors, an extended shortage of required
materials and supplies or the failure of key suppliers to meet the Company's
quality, yield or production requirements could affect the Company more severely
than competitors.
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 a material adverse effect on its
financial condition or operating results, adverse resolution of any intellectual
property litigation could subject the Company to substantial liabilities and
require it to refrain from manufacturing certain products. In addition, the
costs of defending such litigation may be substantial, regardless of the
outcome.
The Company's success depends in significant part on the proprietary nature
of its technology. Patents issued to the Company may not provide the Company
with meaningful advantages and may be challenged. In addition to patent
protection of certain intellectual property rights, the Company considers
elements of its product designs and processes to be proprietary and
confidential. The Company believes that its non-patentable intellectual
property, particularly some of its process technology, is an important factor in
its success. The Company relies upon employee, consultant, and vendor
non-disclosure agreements and a system of internal safeguards to protect its
proprietary information. Despite these safeguards, to the extent that a
competitor of the Company is able to reproduce or otherwise capitalize on the
Company's technology, it may be difficult or impossible for the Company to
obtain necessary intellectual property protection in the United States or other
countries where such competitor conducts its operations. Moreover, the laws of
foreign countries may not protect the Company's intellectual property to the
same extent as do the laws of the United States.
Use of Estimates. The Company's management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities. Such estimates
include, but are not limited to, accruals for warranty against product defects,
price protection and stock rotation reserves on product sold to resellers, and
reserves
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for excess, obsolete and slow moving inventories. The rapidly changing market
conditions in the hard drive industry make it difficult to estimate such
accruals and reserves, and actual results may differ significantly from the
Company's estimates and assumptions, including those used in determining the
special charges in the second quarter of 1998. Differences between actual
results and such estimates and assumptions can result in adverse effects on the
Company's financial condition or operating results.
Potential Impact of Changing Market Demands. The information services
business community is currently debating the "thin client architecture" or
network computer ("NC") model, which emphasizes central servers for data storage
and reduces the need for local desktop storage. Although industry analysts
expect these products to account for a small fraction of the personal computer
market over the next several years, broader than expected adoption of the NC
model would reduce demand for desktop storage products while increasing demand
for enterprise storage products. Given the Company's current business
concentration in desktop disk drives and its relatively recent entry into
enterprise disk drives, if such a scenario occurred on an accelerated basis, it
would place the Company at a disadvantage relative to competitors which have a
stronger market position in enterprise products.
In addition, some of the large desktop PC system manufacturers have
introduced lower cost, lower performance systems principally for the consumer
marketplace. These systems have generally been priced below $1,000 per system
and typically contain hard drives with lower capacity. The Company currently
participates in this market only to a limited extent, and if this market
continues to grow rapidly, the Company will need to develop appropriate
lower-cost disk drive products for these systems to avoid losing market share.
Foreign Manufacturing Risks. Western Digital products are currently
manufactured in Singapore and Malaysia. The Company is subject to certain risks
associated with foreign manufacturing, including obtaining requisite United
States and foreign governmental permits and approvals, currency exchange
fluctuations, currency restrictions, political instability, transportation
delays, labor problems, trade restrictions, import, export, exchange and tax
controls and reallocations, loss or non-renewal of favorable tax treatment under
agreements with foreign tax authorities and changes in tariff and freight rates.
Possible Price Volatility of Common Stock. The market price of the Company's
common stock has been, and may continue to be, extremely volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products introduced by the Company or its competitors, periods of severe pricing
pressures, developments with respect to patents or proprietary rights,
conditions and trends in the hard drive industry, changes in financial estimates
by securities analysts, general market conditions and other factors. In
addition, the stock market has experienced extreme price and volume fluctuations
that have particularly affected the market price for many high technology
companies that have often been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of the Company's common stock, and there can be no assurance that the market
price of the common stock will not decline.
Future Capital Needs. The hard drive industry is capital intensive, and in
order to remain competitive, the Company will need to maintain adequate
financial resources for capital expenditures, working capital and research and
development. If the Company decides to increase its capital expenditures
further, or sooner than presently contemplated, or if results of operations do
not meet the Company's expectations, the Company could require additional debt
or equity financing, and such equity financing could be dilutive to the
Company's existing shareholders. There can be no assurance that such additional
funds will be available to the Company or available on favorable terms. The
Company may also require additional capital for other purposes not presently
contemplated. If the Company is unable to obtain sufficient capital, it could be
required to curtail its capital equipment and research and development
expenditures, which could adversely affect the Company's financial condition or
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Foreign Exchange Contracts. The Company manages the impact of foreign
currency exchange rate changes on certain underlying assets, liabilities and
anticipated cash flows for operating expenses denominated in foreign currencies
by entering into short-term, forward exchange contracts. With this approach, the
Company expects to minimize the impact of changing foreign exchange rates on the
Company's operations. However, there can be no assurance that all foreign
currency exposures will be adequately
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covered, and that the Company's financial condition or operating results will
not be affected by changing foreign exchange rates.
Year 2000 Issue. Many existing software programs use only two digits to
identify the year in the date field. If such programs are not corrected, date
data concerning the Year 2000 could cause many computer applications to fail,
lock-up or generate erroneous results. Virtually all companies will be affected
by the Year 2000 issue. As storage devices, the Company's hard drives are
transparent to Year 2000 requirements and can be deemed Year 2000 compliant when
used in accordance with Company product documentation and provided that all
hardware, firmware, middleware and software used in combination with the hard
drive exchange accurate data therewith.
The Company has committed personnel and resources to resolve potential Year
2000 issues, both internally and externally (with respect to the Company's
suppliers and customers). The Company has completed the process of identifying
and assessing its mission-critical systems related to the Year 2000. Although
the Company plans to address Year 2000 issues with respect to the Company's
mission-critical internal systems in sufficient time prior to the century
rollover, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. Any failure to
effectively monitor, implement or improve the Company's internal and external
operational, financial, management and technical support systems could have a
material adverse effect on the Company's financial condition or operating
results.
Technology License and Component Supply Transaction with IBM. As described in
"Recent Developments" section, the Company and IBM have entered into a letter of
intent to form a broad-based technology licensing and component supply agreement
in the desktop hard drive business. This letter of intent imposes no binding
obligation on either party and there can be no assurance that the Company and
IBM will agree upon definitive terms and conditions and execute a binding
agreement.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between December 12, 1997 and February 24, 1998, eight class action suits
were filed against the Company and certain of its officers and directors. The
plaintiffs in the actions purport to represent purchasers of the Company's
common stock during various periods ranging from July 25, 1996 through December
2, 1997 (collectively, the "Class Periods"). The complaints allege that the
Company issued false and misleading statements during the respective Class
Periods concerning the outlook for the Company's operations and earnings and
that the Company issued false and misleading financial statements in fiscal
years 1996 and 1997 by improperly deferring the write-down of obsolete
inventory. The complaints seek compensatory damages for the purported class
members in an unspecified amount. On April 6, 1998, the court ordered the cases
consolidated and designated the plaintiffs in the first case filed as the lead
plaintiffs and the law firm representing such plaintiffs as lead counsel. The
lead counsel filed an amended consolidated complaint on April 27, 1998. On May
11, 1998, the Company filed a motion to dismiss the amended consolidated
complaint. The Company's directors & officers liability insurance carrier has
been notified of these claims and has acknowledged its responsibility to defend,
subject to a reservation of rights. Although there has been no discovery
conducted in these cases to date, the Company believes that it has meritorious
defenses to the claims and intends to vigorously defend itself. The Company does
not believe that the outcome of these matters will have a material adverse
effect on its consolidated financial position, results of operations or
liquidity. However, such litigation could result in substantial costs and a
diversion of resources and management's attention.
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 suit also seeks punitive damages. The
Company filed a counterclaim for $3.0 million in actual damages in addition to
exemplary damages in an unspecified amount. Substantial discovery in the case
has been conducted. The Court has set a trial date of September 14, 1998. The
Company believes that it has meritorious defenses to Amstrad's claims and
intends to vigorously defend itself against the Amstrad claims and to press its
claims against Amstrad in this action. Although the Company believes that the
final disposition of this matter will not have an adverse effect on the
Company's financial condition or operating results, if Amstrad were to prevail
on its claims, a judgment for a material amount could be awarded against the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 18, 1998, the Company issued $1,297,200,000 principal amount at
maturity of its Convertible Subordinated Debentures due 2018. The Debentures
were sold for $344.07 per $1,000 principal amount at maturity (approximately
$446.3 million in the aggregate) to Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co., and Smith Barney Inc. as Initial Purchasers, and the Initial
Purchasers re-sold the Debentures to qualified institutional buyers and certain
accredited investors for $354.71 per $1,000 principal amount at maturity
(approximately $460.1 million in the aggregate including the Initial Purchasers'
discount of approximately $13.8 million). These transactions were exempt from
registration under the Securities Act pursuant to Rule 144A and Regulation D
thereunder.
The Debentures are convertible into common stock of the Company at any time
after 90 days following the latest date of original issuance thereof and prior
to maturity at the option of the holder thereof, unless previously redeemed or
otherwise purchased by the Company, at a rate (subject to adjustment in certain
circumstances) of 14.935 shares per $1,000 principal amount at maturity of
Debentures. The Debentures are also redeemable by the Company at its option at
any time after February 18, 2003, and must be repurchased by the Company at the
option of the holder on February 18, 2003, 2008 or 2013, or upon a Fundamental
Change (as defined), for the issue price plus accrued original issue discount to
the date of redemption or repurchase.
The net proceeds received by the Company from the sale of the Debentures
will be used for general corporate purposes, including working capital.
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The Debentures, as indebtedness of the Company, represent a claim on the
Company's assets that is prior to the rights of holders of the Company's common
stock. The indenture governing the Debentures requires that, subject to certain
exceptions, if the Company pays any dividends on its common stock it must set
aside an equivalent amount per share for delivery upon conversion of the
Debentures or adjust the conversion rate of the Debentures to reflect the
dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1 Purchase Agreement dated February 12, 1998, by and between the
Company and the Initial Purchasers named therein. (1)
4.2 Indenture, dated as of February 18, 1998, between the Company
and State Street Bank and Trust Company of California, N.A. (1)
4.3 Registration Rights Agreement, dated as of February 18, 1998, by
and between the Company and the Initial Purchasers named
therein. (1)
4.4 Form of the Company's Zero Coupon Convertible Subordinated
Debenture due 2018. (1)
4.5 Form of Common Stock Certificate. (1)
10.38.1 First Amendment to Revolving Credit and Term Loan Agreement,
dated as of February 13, 1998, among the Company, BankBoston,
N.A. and other lending institutions named therein.*
27 Financial Data Schedule
* New exhibit filed with this Report.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-___) as filed with the Securities and Exchange Commission on
May 12, 1998.
(b) REPORTS ON FORM 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION
------------------------------------
Registrant
/s/Duston Williams
------------------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Date: May 12, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1 Purchase Agreement dated February 12, 1998, by and between the
Company and the Initial Purchasers named therein. (1)
4.2 Indenture, dated as of February 18, 1998, between the Company
and State Street Bank and Trust Company of California, N.A. (1)
4.3 Registration Rights Agreement, dated as of February 18, 1998, by
and between the Company and the Initial Purchasers named
therein. (1)
4.4 Form of the Company's Zero Coupon Convertible Subordinated
Debenture due 2018. (1)
4.5 Form of Common Stock Certificate. (1)
10.38.1 First Amendment to Revolving Credit and Term Loan Agreement,
dated as of February 13, 1998, among the Company, BankBoston,
N.A. and other lending institutions named therein.*
27 Financial Data Schedule
* New exhibit filed with this Report.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-___) as filed with the Securities and Exchange Commission on
May 12, 1998.
1
EXHIBIT 10.38.1
FIRST AMENDMENT
TO
REVOLVING CREDIT AND TERM LOAN AGREEMENT
First Amendment dated as of February 13, 1998 to Revolving Credit and Term
Loan Agreement (the "First Amendment"), by and among WESTERN DIGITAL
CORPORATION, a Delaware corporation (the "Borrower") and BANKBOSTON, N.A. and
the other lending institutions listed on Schedule 1 to the Credit Agreement (as
hereinfter defined) (the "Banks"), amending certain provisions of the Revolving
Credit and Term Loan Agreement dated as of January 28, 1998 (as amended and in
effect from time to time, the "Credit Agreement") by and among the Borrower,
the Banks and BankBoston, N.A. as agent for the Banks (in such capacity, the
"Agent"). Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms
and conditions of the Credit Agreement as specifically set forth in this First
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
Section 1. Amendment to Section 1 of the Credit Agreement. Section 1.1 of
the Credit Agreement is hereby amended by deleting the definitions of
"Subordinated Indenture," "Subordinated Notes", "Subordinated Purchase
Agreement" and "Subordinated Registration Rights Agreement" in their entirety
and restating such definitions as follows:
Subordinated Indenture. The Indenture dated on or about February 18,
1998 between the Borrower and the Indenture Trustee relating to the
Subordinated Notes, which Indenture shall be in substantially the form and
substance as Exhibit A attached hereto, with such changes and/or modifications
thereto as may be approved in writing by the Agent.
Subordinated Notes. The Zero Coupon Convertible Subordinated
Debentures due 2018 in the initial aggregate principal amount at maturity of
$1,128,000,000 to be issued pursuant to the Subordinated Indenture, and which
shall be in substantially the form and substance as Exhibit B attached hereto,
with such changes and/or modifications thereto as may be approved in writing by
the Agent.
Subordinated Purchase Agreement. The Purchase Agreement as such term
is defined in the Subordinated Indenture, relating to the issuance and sale by
the Borrower of the Subordinated Notes.
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SUBORDINATED REGISTRATION RIGHTS AGREEMENT. The Registration
Rights Agreement, as such term is defined in the Subordinated Indenture,
relating to the issuance and sale by the Borrower of the Subordinated Notes.
Sec. 2. AMENDMENT TO SEC. 8 OF THE CREDIT AGREEMENT. Section 8 of the
Credit Agreement is hereby amended by inserting the following immediately after
the end of the text of Sec. 8.24:
8.25. MANDATORY REDEMPTIONS AND REPURCHASES. The Borrower has
no obligations pursuant to any of the Subordinated Debt Documents to make any
mandatory repurchases or redemptions of the Subordinated Notes prior to and
until February 18, 2003 other than upon the occurrence of a Fundamental Change
(as such term is defined in the Subordinated Indenture) and the exercise by the
holders of the Subordinated Notes of resulting rights after such Fundamental
Change to require the Borrower to repurchase all or any portion of the
Subordinated Notes.
Sec. 3. AMENDMENT TO SEC. 10 OF THE CREDIT AGREEMENT. Section 10 of the
Credit Agreement is hereby amended as follows:
(a) Section 10.1(i) of the Credit Agreement is hereby amended by
deleting the text of Sec. 10.1(i) in its entirety and substituting in place
thereof the words "the Indebtedness evidenced by the Subordinated Debt
Documents";
(b) Section 10.2 of the Credit Agreement is hereby amended by (i)
deleting the period which appears at the end of the text of Sec. 10.2(xi) and
substituting in place thereof a semicolon; and (ii) inserting immediately after
the text of Sec. 10.2(xi) the following:
(xii) liens in favor of the Indenture Trustee to the extent
expressly provided in Section 7.07 of the Subordinated Indenture; and
(xiii) the transfer of property or assets of the Borrower to
the extent expressly provided in the Subordinated Indenture for the sole
purpose of making any payments (including any such transfers required upon
conversion of Subordinated Debt) permitted or required to be made thereunder
and not otherwise prohibited by the terms of the subordination provisions
contained in the Subordinated Indenture.
(c) Section 10.3(e) of the Credit Agreement is hereby amended by
deleting Sec. 10.3(e) in its entirety and restating it as follows:
(e) Investments consisting or required by the terms of the
Subordinated Notes (and not otherwise prohibited by the terms of the
subordination provisions contained in the Subordinated Indenture) and
Investments with respect to Indebtedness permitted by Sec. 10.1(g) so long such
entities remain Guarantors, and Investments with respect to Indebtedness
permitted by Sec. 10.1(h) so long as such entities remain Subsidiaries of the
Borrower;
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3
(d) Section 10.4 of the Credit Agreement is hereby amended by inserting
immediately after the words "Restricted Payments" which appear in Section 10.4
the words "other than payments of cash in lieu of fractional shares of Common
Stock (as such term is defined in the Subordinated Indenture) in accordance
with Article 11 of the Subordinated Indenture."
(e) Section 10.8 of the Credit Agreement is hereby amended deleting
Section 10.8 in its entirety and restating it as follows:
10.8 Subordinated Debt. The Borrower will not, and will not
permit any of its Subsidiaries to, amend, supplement or otherwise
modify the terms of any of the Subordinated Debt or voluntarily
prepay, redeem or repurchase for any consideration other than shares
of the Borrower's capital stock any of the Subordinated Debt or send
any notice of voluntary redemption, repayment or repurchase for any
consideration other than shares of the Borrower's capital stock or
defeasance with respect to any of the Subordinated Debt.
Notwithstanding the foregoing, the Borrower may make payments in cash
in lieu of fractional shares of Common Stock (as such term is defined
in the Subordinated Indenture) in accordance with Article 11 of the
Subordinated Indenture. In addition, the Borrower will not make any
mandatory redemptions or repurchases of all or any portion of the
Subordinated Debt except in accordance with the express terms of the
Subordinated Notes as in effect on February 18, 1998.
Section 4. Amendment to Section 14 of the Credit Agreement. Section 14.1
of the Credit Agreement is hereby amended by deleting each of Section 14.1(p)
and 14.1(q) of the Credit Agreement in their entirety and restating each such
section as follows:
(p) the holders of all or any part of the Subordinated Debt shall
accelerate the maturity of all or any part of the Subordinated Debt;
(q) a "Fundamental Change" (or any analogous term used therein)
as such term is defined in the Subordinated Indenture or any similar
agreement governing any other Subordinated Debt occurs unless the
Borrower shall have satisfied its obligation to repurchase or redeem
all Subordinated Notes required by the holder or holders thereof to
be so redeemed or repurchased solely by issuance of shares of the
Borrower's capital stock;
Section 5. Amendment to Section 26 of the Credit Agreement. Section 26 of
the Credit Agreement is hereby amended by inserting immediately after the words
"the definition of Majority Banks" which appears in Section 26 the words "or the
definition of Supermajority Banks."
Section 6. Conditions to Effectiveness. This First Amendment shall not
become effective until the Agent receives a counterpart of this First Amendment,
executed by the Borrower, the Guarantor and the Majority Banks.
Section 7. Representations and Warranties. The Borrower hereby repeats, on
and as of the date hereof, each of the representations and warranties made by
it in Section 8 of the Credit Agreement, and such representations and
warranties remain true as of the date hereof (except
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4
to the extent of changes resulting from transactions contemplated or permitted
by the Credit Agreement and the other Loan Documents and changes occurring in
the ordinary course of business that singly or in the aggregate are not
materially adverse, and to the extent that such representations and warranties
relate expressly to an earlier date), provided, that all references therein to
the Credit Agreement shall refer to such Credit Agreement as amended hereby. In
addition, the Borrower hereby represents and warrants that the execution and
delivery by the Borrower of this First Amendment and the performance by the
Borrower of all of its agreements and obligations under the Credit Agreement as
amended hereby are within the corporate authority of each the Borrower and has
been duly authorized by all necessary corporate action on the part of the
borrower.
Section 8. Ratification, Etc. Except as expressly amended herby, the
Credit Agreement, the Security Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. The Credit Agreement and this First
Amendment shall be read and construed as a single agreement. All references in
the Credit Agreement or any related agreement or instrument to the Credit
Agreement shall hereafter refer to the Credit Agreement as amended hereby.
Section 9. No Waiver. Nothing contained herein shall constitute a
waiver of, impair or otherwise affect any Obligations, any other obligation of
the Borrower or any rights of the Bank Agents or the Banks consequent thereon.
Section 10. Counterparts. This First Amendment may be executed in one
or more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
Section 11. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
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IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as a document under seal as of the date first above written.
WESTERN DIGITAL CORPORATION
By: /s/ STEVEN M. SLAVIN
----------------------------
Title: Vice President, Treasurer
BANKBOSTON, N.A.
By:
----------------------------
Title:
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IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as a document under seal as of the date first above written.
WESTERN DIGITAL CORPORATION
By:
-----------------------------
Title:
BANKBOSTON, N.A.
By: [SIG]
-----------------------------
Title: Vice President
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RATIFICATION OF GUARANTY
The undersigned guarantor hereby acknowledges and consents to the
foregoing First Amendment as of February 18, 1998, and agrees that the
Guaranty dated as of January 28, 1998 from the undersigned (the "Guarantor") in
favor of the Agent and each of the Banks remains in full force and effect, and
the Guarantor confirms and ratifies all of its obligations thereunder.
By: [SIG]
-------------------------------------
Title: President
7
5
1,000
9-MOS
JUN-27-1998
JUN-29-1997
MAR-28-1998
577,804
0
489,917
14,615
217,205
1,328,298
575,074
227,692
1,723,392
688,832
513,149
0
0
881
485,921
1,723,392
2,891,022
2,891,022
2,749,232
2,749,232
275,146
3,354
4,067
(129,289)
(1,791)
(127,498)
0
0
0
(127,498)
(1.46)
(1.46)
