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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 28, 1996.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission file number 1-8703
WESTERN DIGITAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2647125
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92618
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (714) 932-5000
N/A
Former name, former address and former fiscal year if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Number of shares outstanding of Common Stock, as of November 1, 1996 is
44,097,913.
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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 Income - Three-Month Periods
Ended September 28, 1996 and September 30, 1995............... 3
Consolidated Balance Sheets - September 28, 1996 and
June 29, 1996................................................. 4
Consolidated Statements of Cash Flows - Three-Month Periods
Ended September 28, 1996 and September 30, 1995............... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 10
Signatures............................................................. 11
Exhibit Index.......................................................... 12
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE-MONTH PERIOD ENDED
-------------------------
SEPT. 28, SEPT. 30,
1996 1995
--------- ---------
Revenues, net ........................... $883,115 $558,149
Costs and expenses:
Cost of revenues ..................... 770,226 477,357
Research and development ............. 34,260 40,723
Selling, general and administrative... 42,860 33,904
-------- --------
Total costs and expenses ..... 847,346 551,984
-------- --------
Operating income ........................ 35,769 6,165
Interest and other income ............... 2,911 3,632
-------- --------
Income before income taxes .............. 38,680 9,797
Provision for income taxes .............. 5,802 1,470
-------- --------
Net income .............................. $ 32,878 $ 8,327
======== ========
Earnings per common and common
equivalent share (Note 2):
Primary ...................... $ .71 $ .16
======== ========
Fully diluted ................ $ .70 $ .16
======== ========
Common and common equivalent shares used
in computing per share amounts:
Primary ...................... 46,302 51,641
======== ========
Fully diluted ................ 46,824 51,643
======== ========
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)
SEPT. 28, JUNE 29,
1996 1996
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 210,664 $ 182,565
Short-term investments ............................. 12,947 36,598
Accounts receivable, less allowance for doubtful
accounts of $12,376 and $9,376 ................ 441,954 409,473
Inventories (Note 3) .............................. 146,282 142,622
Prepaid expenses ................................... 24,497 23,006
---------- ---------
Total current assets .......................... 836,344 794,264
Property and equipment at cost, net ...................... 184,227 148,258
Intangible and other assets, net ......................... 46,171 41,621
---------- ---------
Total assets .................................. $1,066,742 $ 984,143
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 384,294 $ 345,866
Accrued compensation ............................... 23,838 30,457
Accrued expenses ................................... 155,033 137,699
---------- ---------
Total current liabilities ..................... 563,165 514,022
Deferred income taxes .................................... 16,035 16,229
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.10 par value;
Authorized: 5,000 shares
Outstanding: None ............................ -- --
Common stock, $.10 par value;
Authorized: 95,000 shares
Outstanding: 50,666 shares at
September 28 and at June 29 ................... 5,066 5,066
Additional paid-in capital ......................... 345,079 349,773
Retained earnings .................................. 253,348 220,470
Treasury stock-common stock at cost;
6,585 shares at September 28 and
7,095 shares at June 29 (Note 4) .............. (115,951) (121,417)
---------- ---------
Total shareholders' equity .................... 487,542 453,892
---------- ---------
Total liabilities and shareholders' equity .... $1,066,742 $ 984,143
========== =========
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)
THREE-MONTH PERIOD ENDED
------------------------
SEPT. 28, SEPT. 30,
1996 1995
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 32,878 $ 8,327
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization ................. 14,998 12,363
Changes in current assets and liabilities:
Accounts receivable ...................... (32,481) (15,307)
Inventories .............................. (3,660) (48,153)
Prepaid expenses ......................... (1,491) (1,136)
Accounts payable and accrued expenses .... 49,143 15,865
Other assets .................................. 905 669
Deferred income taxes ......................... (194) 785
--------- ---------
Net cash provided by (used for) operating
activities ............................. 60,098 (26,587)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments ................. 23,651 7,487
Capital expenditures, net .......................... (48,984) (16,647)
Increase in other assets ........................... (7,438) (2,625)
--------- ---------
Net cash used for investing activities .... (32,771) (11,785)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised .............. 4,946 2,203
Proceeds from ESPP shares issued ................... 4,378 3,795
Repurchase of common stock (Note 4) ................ (8,552) (25,983)
--------- ---------
Net cash provided by (used for) financing
activities ............................. 772 (19,985)
--------- ---------
Net increase (decrease) in cash and cash equivalents 28,099 (58,357)
Cash and cash equivalents, beginning of period ..... 182,565 217,531
--------- ---------
Cash and cash equivalents, end of period ........... $ 210,664 $ 159,174
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for income taxes ............. $ 3,777 $ 1,127
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 29, 1996.
2. Primary and fully diluted earnings per share amounts are based upon the
weighted average number of shares and dilutive common stock equivalents
for each period presented.
3. Inventories comprised the following:
SEPT. 28, JUNE 29,
1996 1996
-------- --------
(in thousands)
Finished goods...................... $ 58,634 $ 72,239
Work in process..................... 38,344 31,781
Raw materials and component parts... 49,304 38,602
-------- --------
$146,282 $142,622
======== ========
4. During the quarter ended September 28, 1996, the Company purchased
359,763 shares of its common stock in the open market at a cost of
approximately $8.6 million. During the same period, 289,777 and 579,791
shares were distributed in connection with the Employee Stock Purchase
Plan ("ESPP") and common stock option exercises, respectively, for
approximately $9.3 million.
5. In the opinion of management, all adjustments necessary to fairly state
the results of operations for the three-month periods ended September
28, 1996 and September 30, 1995 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 29, 1996.
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WHEN USED IN THIS DISCUSSION, 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 SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
BY THE COMPANY WHICH ATTEMPT TO ADVISE INTERESTED PARTIES OF THE FACTORS WHICH
AFFECT THE COMPANY'S BUSINESS, 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.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales were $883.1 million in the first quarter of 1997, compared
with $820.7 million in the immediately preceding quarter and $558.1 million in
the first quarter of 1996. The growth in revenues stemmed from 7% and 75%
increases in hard drive unit shipments over the immediately preceding quarter
and the corresponding quarter of the prior year, respectively. The higher volume
was partially offset by a decline in the average selling prices of hard drive
products. Also, the results in the first quarter of 1996 included revenues from
the Company's microcomputer products ("MCP") businesses, which were sold in
1996.
The consolidated gross margin percentage was 12.8% in the first quarter of 1997,
compared with 12.7% in the immediately preceding quarter and 14.5% in the first
quarter of 1996. The decrease in gross margin percentage from the first quarter
of 1996 was primarily due to the sale of the MCP businesses, which had higher
average gross profit margins than the Company's hard drive products. The gross
margin percentage for hard drive products only in the first quarter of 1996 was
13.0%.
Research and development ("R&D") expense for the current quarter was $34.3
million, or 3.9% of revenues, versus $34.0 million, or 4.1% of revenues, and
$40.7 million, or 7.3% of revenues, in the immediately preceding quarter and
first quarter of 1996, respectively. The decrease from the prior year is
primarily attributable to the elimination of MCP-related expenditures. This
decrease was partially offset by higher expenditures to support the development
of enterprise and mobile hard drive products. R&D expenses declined as a
percentage of revenues from the first and fourth quarters of 1996 primarily as a
result of the higher revenue base in the current quarter.
Selling, general and administrative ("SG&A") expenses for the first quarter of
1997 were $42.9 million, or 4.9% of revenues, as compared to $39.4 million, or
4.8% of revenues, and $33.9 million, or 6.1% of revenues, in the immediately
preceding quarter and first quarter of 1996, respectively. The increase from the
immediately preceding quarter is attributable to incremental selling, marketing
and other related expenses in support of the higher revenue levels. SG&A
expenses declined as a percentage of revenues from the first quarter of 1996
primarily as a result of the higher revenue base.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest and other income for the current quarter was $2.9 million, as
compared to $3.0 million in the immediately preceding quarter and $3.6 million
in the first quarter of 1996. The decrease from the first quarter of 1996 is
primarily the result of lower average cash and short-term investment balances
combined with lower average interest rates.
FINANCIAL CONDITION
Cash and short-term investments totaled $223.6 million at September 28, 1996 as
compared with $219.2 million at June 29, 1996. Net cash provided by operating
activities was $60.1 million for the quarter ended September 28, 1996. Cash flow
from earnings, depreciation and an increase in current liabilities were
partially offset by cash used to fund increases in accounts receivable and
inventories. Other significant uses of cash during the first three months of
1997 were $49.0 million of capital expenditures, which were incurred primarily
to support increased production of hard drives and related components, and the
acquisition of approximately .4 million shares of the Company's common stock in
the open market for $8.6 million.
The Company has an $150 million revolving credit agreement with certain
financial institutions extending through April 1999. This facility is intended
to meet short-term working capital requirements which may arise from time to
time. The Company believes that its current cash and short-term investments
combined with cash flow from operations and its revolving credit agreement will
be sufficient to meet its working capital needs for the foreseeable future.
However, the Company's ability to sustain its favorable working capital position
is dependent upon a number of factors that are discussed below and in the
Company's Annual Report on Form 10-K for the year ended June 29, 1996 under the
heading "Certain Factors Affecting Future Operating Results."
CERTAIN FACTORS AFFECTING WESTERN DIGITAL CORPORATION AND THE DISK DRIVE
INDUSTRY
The hard drive industry in which the Company competes is subject to a number of
risks which have affected the Company's operating results in the past and could
affect its future operating results. Demand for the Company's hard drive
products depends on the demand for the computer systems manufactured by its
customers and storage upgrades to computer systems, which in turn are affected
by computer systems product cycles, end user demand for increased storage
capacity, and prevailing economic conditions.
The computing industry is intensely competitive and has been characterized by
significant price erosion over the life of a product, periodic rapid price
declines due to industry over-capacity or other competitive factors,
technological changes, changing market requirements, occasional shortages of
materials, dependence upon a limited number of vendors for certain components,
dependence upon highly skilled engineering and other personnel, and significant
expenditures for product development. The hard drive market in particular has
been subject to recurring periods of severe price competition. The Company's
principal competitors are Quantum Corporation ("Quantum"), Seagate Technology,
Inc. ("Seagate Technology") and large computer manufacturers such as IBM that
manufacture drives for use in their own products and for sale to others. In
February 1996, Seagate Technology merged with Conner Peripherals, Inc.
("Conner") formerly one of the Company's principal competitors. This merger
changed the industry dynamics by reducing the number of competitors and by
significantly increasing the size of Seagate Technology. The Company is unable
to predict the long-term effects that the merger will have on this industry
and/or the Company. The Company has increased its market share recently in part
by capitalizing on some missteps made by its competitors. While the Company
believes that its products and its marketing efforts will continue to be
competitive, there can be no assurance that its competitors will not improve
their position in the market through new product introduction or other means.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Even during periods of consistent demand, the hard drive industry has been
characterized by intense competition and ongoing price erosion over the life of
a given drive product, and the Company expects that price erosion in the data
storage industry will continue for the foreseeable future. In general, the unit
price for a given product in all of the Company's markets decreases over time as
increases in industry supply and cost reductions occur and as technological
advancements are achieved. Cost reductions are primarily achieved as volume
efficiencies are realized, component cost reductions are achieved, experience is
gained in manufacturing the product and design enhancements are made.
Competitive pressures and customer expectations result in these cost
improvements being passed along as reductions in selling prices. At times, the
rate of general price decline is accelerated when some competitors lower prices
to absorb excess capacity, to liquidate excess inventories and/or to gain market
share. The competition and continuing price erosion could adversely affect the
Company's results of operations in any given quarter, and such adverse effect
often cannot be anticipated until late in any given quarter.
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. Because the Company is less
vertically integrated than its competitors, an extended shortage of required
materials and supplies could have a more severe effect on the Company's revenues
and earnings as compared to its competition. The Company must allow for
significant lead times when procuring certain materials and supplies. The
Company has more than one available source of supply for most of its required
materials. Where there is only one source of supply, the Company has entered
into close technical and manufacturing relationships, has access to more than
one manufacturing location in most instances, and believes that a second source
could be obtained over a period of time. However, no assurance can be given that
the Company's results of operations would not be adversely affected until a new
source could be secured. The supply of headstack assemblies is a critical issue
for the Company as it commences volume production of the initial enterprise
storage products. It is currently purchasing headstack components from a single
vendor but expects to qualify another supplier by the end of December 1996. A
shortage in the supply of headstack assemblies could adversely affect the
Company's ability to meet customer demand for enterprise storage products. In
addition, the increased customer demand for the Company's desktop storage
products has increased the requirements for headstack assemblies, the
availability of which may limit the Company's ability to increase production
above its current planned levels.
The demand of hard drive customers for greater storage capacity and higher
performance has led to short product life cycles that require the Company to
constantly develop and introduce new drive products such as the enterprise
storage products on a cost effective and timely basis. Failure of the Company to
execute its strategy of achieving time-to-market in volume leadership with these
new products, or any delay in introduction of more advanced and more cost
effective products, could result in significantly lower gross margins. The
Company's future is therefore dependent upon its ability to develop new
products, to qualify these new products with its customers, to successfully
introduce these products to the market on a timely basis, and to commence volume
production to meet customer demands.
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. 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. In this regard, the Company's new enterprise
storage products are expected to achieve volume production and contribute to
sales beginning in the second quarter of 1997. The Company's inability to
successfully achieve its sales goals for its enterprise storage products would
significantly impact the Company's future operating results. The Company's
future operating results may also be adversely affected if it is unsuccessful in
marketing the 3.0-inch form factor hard drive to the mobile PC market.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the Company's hard drive products currently utilize conventional thin
film inductive head technology. The Company believes that MR heads, which enable
higher capacity per disk than conventional thin film inductive heads, will
eventually replace thin film inductive heads as the leading recording head
technology. Several of the Company's major competitors incorporate MR head
technology into some of their current products. Failure of the Company to
successfully manufacture and market products incorporating MR head technology in
a timely manner could have a material adverse effect on the Company's business
and results of operations.
The Company's operating results have been and may in the future be subject to
significant quarterly fluctuations as a result of a number of other factors.
These factors have included the timing of orders from and shipment of products
to major customers, product mix, pricing, delays in product development,
introduction in production, competing technologies, variations in product cost,
component availability due to single or limited sources of supply, foreign
exchange fluctuations, increased competition and general economic and industry
fluctuations. The Company's future operating results may also be adversly
affected by an adverse judgement or settlement in the legal procedings in which
the Company is currently involved. This statement should be read in conjunction
with "PART I, Item 3. Legal Proceedings" included in the Company's Annual Report
on Form 10-K for the year ended June 29, 1996.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
10.12.1 Amendment Number One to the Company's Extended
Severance Plan
11 Computation of Per Share Earnings.
27 Financial Data Schedule
(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: November 11, 1996
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
10.12.1 Amendment Number One to the Company's Extended
Severance Plan...................................
11 Computation of Per Share Earnings................
27 Financial Data Schedule..........................
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1
EXHIBIT 10.12.1
AMENDMENT NUMBER ONE
TO
WESTERN DIGITAL CORPORATION
EXTENDED SEVERANCE PLAN
THIS AMENDMENT NUMBER ONE (this "Amendment") is made as of the 1st
day of September, 1995 and, as set forth below, amends and modifies the Western
Digital Corporation Extended Severance Plan (the "Plan") established by Western
Digital Corporation, a Delaware corporation (the "Company") as of January 18,
1990. Capitalized terms that are not otherwise defined herein shall have the
meanings given them in the Plan.
1. DELETION OF SECTION 280G LIMITATION. Section 4.8 of the Plan,
entitled "Section 280G Limitation," is hereby deleted in its entirety and shall
no longer be of any force or effect.
2. SUBSTITUTION OF TAX INDEMNIFICATION PROVISION. A new Section 4.8
of the Plan, entitled "Indemnification for Excise Tax", is hereby added to and
made a part of the Plan, effective the date of this Amendment. The complete text
of this new Section 4.8 of the Plan is attached hereto as Exhibit A and
incorporated herein by this reference.
3. NO OTHER CHANGES. Except as set forth in this Amendment, the
provisions of the Plan remain unaltered and in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be
adopted and to be effective as of the date first above written.
WESTERN DIGITAL CORPORATION
By: /s/ Michael A. Cornelius
-------------------------
Title: V.P., Law
----------------------
By: -------------------------
Title:
----------------------
1.
2
EXHIBIT A
4.8 INDEMNIFICATION FOR EXCISE TAX.
(a) Notwithstanding anything to the contrary contained herein, in
the event it shall be determined that any payment, benefit or distribution
provided or to be provided by the Company (or by any person whose actions result
in a Change of Control or any person affiliated with the Company or such person)
to or for the benefit of a Participant (whether provided, or to be provided,
pursuant to the terms of the Plan or under any other agreement, plan or
arrangement with the Company (or with any person whose actions result in a
Change of Control or any person affiliated with the Company or such person), but
determined without regard to any additional payments required under this Section
4.8) (a "Payment"), would be subject to any excise tax imposed by Section 4999
of the code or any comparable federal, state or local excise tax (such excise
tax, together with any related interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Participant shall be
entitled to receive from the Company an additional payment (a "Gross-Up
Payment") in such an amount that after the payment of all taxes on the Payment
and on the Gross-Up Payment (including interest and penalties attributable to
all taxes on the Gross-Up Payment or the Excise Tax but excluding interest and
penalties attributable to the Payment itself), the Participant shall retain an
amount equal to the Payment minus all applicable taxes on the Payment itself
(other than the Excise Tax on the Payment); provided, however, that a
Participant will be entitled to receive a Gross-Up Payment only if the amount of
"parachute payment" as defined in Section 280G(b)(2) of the Code exceeds the sum
of (A) the lesser of (I) $100,000 or (ii) ten (10) percent of the Payment plus
(B) 2.99 times the Participant's "base amount" as defined in Section 280G(b)(3)
of the Code, and provided, further, that if a Participant is not entitled to
receive a Gross-Up Payment, the Participant will receive only an amount of total
Payment that would not include any "excess parachute payment" as defined in
Section 280G(b)(1) of the Code. The intent of the parties is that, unless a
Payment is reduced under the circumstances provided immediately above, the
Company shall be solely responsible for, and shall pay, any Excise Tax on any
Payment and Gross-Up Payment and any income and employment taxes (including,
without limitation, penalties and interest) imposed on any Gross-Up Payment, as
well as any loss of tax deduction caused by the Gross-Up Payment. An example of
a calculation of the Gross-Up Payment is appended.
(b) All determinations required to be made under this Section ,
including, without limitation, whether and when a Gross-Up Payment is required
and the amount of such Gross-Up payment and the assumptions to be utilized in
arriving at such determinations, shall be made by Price Waterhouse or any other
nationally recognized accounting firm which is the Company's outside auditor at
the time of such determinations, which firm must be reasonably acceptable to the
Participant (the
1.
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"Accounting Firm"). The Company shall cause the Accounting Firm to provide
detailed supporting calculations to the Company and the Participant within
fifteen (15) business days after notice is given by the Participant to the
Company that there has been a Payment, or such earlier time as is requested by
the Company. Within two (2) business days after said notice is given to the
Company, the Company shall instruct the Accounting Firm to timely provide the
data required by this Section 4.8 to the Participant. All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment
as determined pursuant to this Section 4.8 shall be paid, or caused to be paid,
by the Company to the Internal Revenue Service and/or other appropriate taxing
authority on the Participant's behalf within five (5) days after receipt of the
Accounting Firm's determination. If the Accounting Firm determines that there is
substantial authority (within the meaning of Section 6662 of the Code) that no
Excise Tax is payable by the Participant, the Accounting Firm shall furnish the
Participant with a written opinion that failure to disclose or report the Excise
Tax on the Participant's federal income tax return will not constitute a
substantial understatement of tax or be reasonably likely to result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and the Participant in the
absence of material mathematical or legal error. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that a Gross-Up
Payment will not have been made by the Company that should have been made
("Underpayment") or that a Gross-Up Payment is made that should not have been
made ("Overpayment"), in each case, consistent with the calculations required to
be made hereunder. In the event that the Company exhausts its remedies pursuant
to Paragraph (c) below and the Participant thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of
Underpayment that has occurred and any such Underpayment shall be promptly paid,
or caused to be paid, by the Company to the Internal Revenue Service or other
appropriate taxing authority on the Participant's behalf or, if such
Underpayment has been previously paid by the Participant, to the Participant. In
the event that the Accounting Firm determines that an Overpayment has been made,
any such Overpayment shall be treated for all purposes as a loan to the
Participant with interest at applicable federal rate provided for in Section
7872(f)(2) of the Code, due and payable within ninety (90) days after written
demand to the Participant by the Company; provided, however, that the
Participant shall have no duty or obligation whatsoever to repay said loan
unless and then to the extent the Participant's receipt of the Overpayment, or
any portion thereof, is includible in the Participant's income and the
Participant's repayment of the same is not deductible by the Participant for
federal and state income tax purposes.
(c) The Participant shall notify the Company in writing of any claim
by the Internal Revenue Service or state or local taxing authority that, if
successful, would result in any Excise Tax or an Underpayment ("Claim"). Such
notice shall be given as soon as practicable but no later than fifteen (15)
business days after the
2.
4
Participant is informed in writing of the Claim and shall fully inform the
Company of the nature of the Claim, the administrative or judicial appeal
period, and the date on which any payment of the Claim must be paid. The
Participant shall not pay any portion of the Claim prior to the expiration of
the thirty (30) day period following the date on which he gives such notice to
the Company (or such shorter period ending on the date that any amount under the
Claim is due). If the Company notifies the Participant in writing prior to the
expiration of such thirty (30) day period that it desires to contest the Claim,
the Participant shall:
(A) give the Company any information reasonably requested by the
Company relating to the Claim;
(B) take such action in connection with the contesting the Claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation concerning the Claim by an
attorney selected by the Company who is reasonably acceptable to the
Participant; and
(C) cooperate with the Company in good faith in order to effectively
contest the Claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties and
attorneys' fees) incurred in such contests and shall indemnify and hold the
Participant harmless, on an after-tax basis, for any Excise Tax or income tax
(including, without limitation, interest and penalties thereon) imposed as a
result of such representation. Without limitation upon the foregoing provisions
of this Section 4.8(c) and except as provided below, the Company shall control
all proceedings concerning such contest and, at its sole option, may pursue or
forego any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority pertaining to the Claim. At the written request of the
Company and upon payment to the Participant of an amount at least equal to the
Claim plus any additional amount necessary to obtain the jurisdiction of the
appropriate tribunal and/or court ("Additional Sum"), the Participant shall pay
the same and sue for a refund. The Participant agrees to prosecute any contest
of a Claim to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company requests the Participant t pay
the Claim and sue for a refund, it shall indemnify and hold the Participant
harmless on an after-tax basis from any Excise Tax or income tax (including,
without limitation, interest and penalties thereon) imposed on such advance or
for any imputed income on such advance. Any extension of the statute of
limitations relating to assessment of any Excise Tax for the taxable year of the
Participant which is the subject of the Claim is to be limited solely to the
Claim. Furthermore, the Company's control of the contest shall be limited to
issues for which a Gross-Up Payment would be
3.
5
payable hereunder. The Participant shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by the Participant of an amount advanced
by the Company pursuant to Section 4.8(c) above, the Participant receives any
refund of a Claim and/or any Additional Sum, the Participant shall promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Participant of an amount advanced by the Company pursuant to Section 4.8(c)
above, a determination is made that the Participant shall not be entitled to any
refund of the Claim and the Company does not notify the Participant in writing
of its intent to contest such denial of refund of a Claim prior to the
expiration of thirty (30) days after such determination, then the portion of
such advance attributable to a Claim shall be forgiven and shall not be required
to be repaid. The amount of such advance attributable to a Claim shall offset,
to the extent thereof, the amount of the Underpayment required to be paid by the
Company to the Participant.
(e) If, after the advance of an Additional Sum by the Company, there
is a "Final Determination" (as defined below) made by the taxing authority that
the Participant is not entitled to any refund of such Additional Sum, or any
portion thereof, then such nonrefundable amount shall be repaid to the Company
by the Participant within thirty (30) days after the Participant receives notice
of such Final Determination. A "Final Determination" shall occur when the period
to contest or otherwise appeal any decision by an administrative tribunal or
court of initial jurisdiction has been waived or the time for contesting or
appealing same has expired.
4.
6
GROSS-UP FACTOR
APPLICABLE TAX RATES
INCOME TAXES:
FEDERAL MAXIMUM RATE 36.000%
FEDERAL SURTAX 3.600%
FEDERAL TAX EFFECT OF ITEMIZED
DEDUCTION PHASE OUT 1.188%
------
TOTAL FEDERAL INCOME TAX RATE 40.788%
CALIFORNIA MAXIMUM RATE 11.000 %
Less: FEDERAL BENEFIT OF DEDUCTION (4.356)%
------
NET CALIFORNIA INCOME TAX RATE 6.64%
------
TOTAL INCOME TAX RATE 47.432%
EMPLOYMENT TAXES:
RATE FOR HI PORTION OF FICA 1.450%
------
RATE OF INCOME AND EMPLOYMENT TAXES
IMPOSED ON GROSS-UP PAYMENT 48.882%
======
EXCISE TAX:
RATE OF FEDERAL EXCISE TAX ON EXCESS
PARACHUTE PAYMENTS AND GROSS-UP
PAYMENT 20.000%
======
THE GROSS-UP PAYMENT ("GUP") IS AN AMOUNT SUFFICIENT TO SATISFY THE LIABILITY
FOR FEDERAL EXCISE TAX ON THE EXCESS PARACHUTE PAYMENTS ("EPP") EXCLUSIVE OF THE
GROSS-UP PAYMENT, THE EXCISE TAX ON THE GROSS-UP PAYMENT, AND THE INCOME AND
EMPLOYMENT TAXES IMPOSED ON THE GROSS-UP PAYMENT.
EXPRESSED ALGEBRAICALLY...
GUP = .2EPP + .2GUP + .48882GUP
GUP = .2EPP + .68882GUP
.31118GUP = .2EPP
GUP = .6427148EPP
THEREFORE, GIVEN THE TAX RATE ASSUMPTIONS SET FORTH ABOVE, THE GROSS-UP PAYMENT
WOULD EQUAL 64.27148% OF THE EXCESS PARACHUTE PAYMENT.
5.
7
EXAMPLE:
PARACHUTE PAYMENTS 500,000
BASE AMOUNT 100,000
--------
EXCESS PARACHUTE PAYMENTS 400,000
GROSS-UP FACTOR 64.27148 %
--------
GROSS-UP PAYMENT 257,086
PARACHUTE PAYMENTS 500,000
-------
TOTAL PAYMENTS 757,086
LESS EXCISE TAX ON EXCESS PARACHUTE
PAYMENTS AND GROSS-UP PAYMENT
(.2 x [400,000 + 257,086]) (131,417)
LESS INCOME AND EMPLOYMENT TAXES ON GROSS-UP
PAYMENT (.48882 x 257,086) (125,669)
--------
NET PAYMENT RETAINED BY THE PARTICIPANT 500,000
========
6.
1
EXHIBIT 11
WESTERN DIGITAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE-MONTH PERIOD ENDED
------------------------
SEPT. 28, SEPT. 30,
1996 1995
-------- -------
PRIMARY
Net income .................................... $32,878 $ 8,327
======= =======
Weighted average number of common
shares outstanding during the period .......... 43,744 49,574
Incremental common shares attributable
to exercise of outstanding options,
warrants, put options and ESPP contributions... 2,558 2,067
------- -------
Total shares ............................. 46,302 51,641
======= =======
Net income per share .......................... $ .71 $ .16
======= =======
FULLY DILUTED
Net income .................................... $32,878 $ 8,327
======= =======
Weighted average number of common
shares outstanding during the period .......... 43,744 49,574
Incremental common shares attributable
to exercise of outstanding options,
warrants, put options and ESPP contributions 3,080 2,069
------- -------
Total shares ............................. 46,824 51,643
======= =======
Net income per share .......................... $ .70 $ .16
======= =======
5
1,000
U.S. DOLLAR
3-MOS
JUN-28-1997
JUN-30-1996
SEP-28-1996
1
210,664
12,947
454,330
12,376
146,282
24,497
333,339
149,112
1,066,742
563,165
0
0
0
4,407
483,135
1,066,742
883,115
883,115
770,226
770,226
77,120
3,000
2,911
38,680
5,802
32,878
0
0
0
32,878
.71
.70
