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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 1-8703
WESTERN DIGITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2647125
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8105 IRVINE CENTER DRIVE
IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 932-5000
REGISTRANT'S WEB SITE: HTTP://WWW.WDC.COM
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A JUNIOR NEW YORK STOCK EXCHANGE
PARTICIPATING PREFERRED STOCK
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of August 23, 1997, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $4.6 billion.
As of August 23, 1997, the number of outstanding shares of Common Stock,
par value $.01 per share, of the Registrant was 87,172,541.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1997 fiscal year.
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WESTERN DIGITAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 28, 1997
PAGE
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PART I
Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 11
Item 3. Legal Proceedings............................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 14
Item 6. Selected Financial Data....................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 14
Item 8. Financial Statements and Supplementary Data................................... 21
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 40
Item 11. Executive Compensation........................................................ 40
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 40
Item 13. Certain Relationships and Related Transactions................................ 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 40
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THE INFORMATION CONTAINED IN THIS REPORT INCLUDES FORWARD-LOOKING
STATEMENTS. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURE," "STRATEGY," OR WORDS OF
SIMILAR IMPORT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. OTHER
STATEMENTS OF THE COMPANY'S PLANS AND OBJECTIVES MAY ALSO BE CONSIDERED TO BE
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLISH REVISED
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE URGED
TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY TO
ADVISE INTERESTED PARTIES OF CERTAIN RISKS AND OTHER FACTORS THAT MAY AFFECT THE
COMPANY'S BUSINESS AND OPERATING RESULTS, INCLUDING THE DISCLOSURES MADE UNDER
THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" IN THIS REPORT, AS WELL AS THE COMPANY'S OTHER PERIODIC
REPORTS ON FORMS 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
The Company's fiscal year is a 52 or 53-week year ending on the Saturday
nearest June 30. Accordingly, the 1995, 1996 and 1997 fiscal years ended on July
1, June 29, and June 28, respectively.
Unless otherwise indicated, references herein to specific years and
quarters are to the Company's fiscal years and fiscal quarters.
The Company's principal executive offices are located at 8105 Irvine Center
Drive, Irvine, California 92618; its telephone number is (714) 932-5000 and its
web site is http://www.wdc.com.
PART I
ITEM 1. BUSINESS
GENERAL
Western Digital Corporation (the "Company" or "Western Digital") designs,
develops, manufactures and markets hard drives for use in computer systems
ranging from notebook and desktop personal computers ("PC") to high-performance
workstations, LAN servers and multi-user ("enterprise") systems. The Company is
one of the top three independent manufacturers of hard drives.
The Company's product lines include 3.5-inch form factor hard drives for
desktop PC systems ("WD Caviar"), 3.5-inch form factor hard drives for
enterprise systems ("WD Enterprise"), and 3.0-inch form factor hard drives for
mobile PCs ("WD Portfolio"). The WD Caviar family of products offers storage
capacities ranging from 1.2 gigabytes to 5.1 gigabytes ("GB"). These hard drives
utilize the Enhanced Integrated Drive Electronics ("EIDE") interface.
The Company began shipping the WD Enterprise class of products in 1997. The
WD Enterprise product line currently offers hard drives with storage capacities
of 2.1 GB and 4.3 GB and the Company intends to begin shipments of a 9 GB WD
Enterprise hard drive in 1998. These products use the 3.5-inch form factor and
the Small Computer System Interface ("SCSI") required by the
processing-intensive, multi-tasking workstation, LAN server and multi-user
system marketplace.
In 1997, Western Digital also began shipping a new product designed for
mobile PCs. The WD Portfolio product line is a low profile, 3.0-inch form factor
hard drive offering capacities from 1 GB to 2.1 GB.
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MARKETS
The global market for hard drive products is divided into three major
markets: (1) desktop PC systems, (2) mobile PCs, and (3) workstation systems and
server/multi-user systems. Each market has unique characteristics that affect
hard drive requirements, but all of them require hard drive manufacturers to
continually offer more storage capacity to meet the needs of increasingly
sophisticated users. The Company expects that new operating systems, desktop
publishing, video editing, database management, and the explosion of the
Internet will continue to drive growth in demand for data storage capacity.
The Company believes that the computer industry, of which the hard drive
industry is a part, is maturing. Overall computer industry growth rates are
beginning to slow somewhat although the industry is still experiencing double
digit year-over-year growth in both unit shipments and revenues.
Hard drives are sold as components in computer systems and as upgrade
components to end-users. Accordingly, the hard drive market is closely aligned
with the PC market but, because of sales in the end-user upgrade market, the
hard drive market is currently growing faster than the PC market in general.
Desktop PC Market
The Company designs, develops, manufactures and markets hard drives to meet
the storage needs of desktop PC systems. The desktop component of the worldwide
personal computing market represented greater than 75% of all hard drives
shipped by the industry in calendar 1996. Over 90% of Western Digital's hard
drive unit shipments in 1997 were sold to this market. Desktop personal
computers for entry level to experienced users are used in both commercial and
consumer environments.
The WD Caviar family's model uses common platforms for various products
with different capacities to serve the differing needs of the desktop PC market.
This platform strategy results in commonality of components across different
products, which reduces exposure to changes in demand, facilitates inventory
management and allows the Company to achieve lower costs through economies of
scale purchasing. The platform strategy also enables non-retail customers to
leverage their qualification efforts onto successive product models. The WD
Caviar family's product strategy helped Western Digital capture the number two
desktop supplier position in calendar year 1996.
Enterprise Market
The Company designs, develops, manufactures and markets hard drives to meet
the demanding storage needs of enterprise systems. Workstations include high
performance microcomputers, technical workstations, servers, and minicomputers.
Enterprise systems typically require higher performance hard drives with a
minimum of 2 GB of storage capacity. Data integrity is paramount in this
environment. Performance of the hard drive is also important because the
multi-user environment requires rapid access to data. Western Digital serves
this component of the market with the WD Enterprise hard drives.
Mobile PC Market
The mobile PC market is characterized by desktop-type computing performance
in a smaller "footprint" to allow portability of the system. The mobile PC
market has different classes of products, such as laptop, notebook and
sub-notebook computers, all of which have differing "footprints" to accommodate
their respective system features. The nature of the smaller "footprint" requires
a smaller hard drive that is rugged enough to sustain the shocks resulting from
portability of the system. Most portable computers utilize a 2.5-inch form
factor hard drive and, therefore, have less storage capacity than desktop PC
systems. The WD Portfolio product line utilizes a 3.0-inch form factor and
provides desktop-like capacities while maintaining the durability, power and
weight characteristics of its competitors' current mobile product offerings.
The mobile hard drive market is unique in that it is dominated by two large
suppliers, IBM and Toshiba, which supply to themselves and the market. It is
also different from either the desktop or enterprise markets in that there are
almost no sales to the distribution or retail channel. Approximately ninety-five
percent of mobile
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hard drives are sold to original equipment manufacturers ("OEMs") or their
subcontractors. These factors make a successful time-to-market strategy critical
for success.
Potential Change in Market
The information services business community is currently debating the "thin
client architecture" or "Net PC" model, which emphasizes central servers for
data storage and reduces the need for local desktop storage. The Company expects
that widespread conversion to this model, if it occurs, would increase demand
for enterprise storage products, which the Company recently began distributing,
and reduce demand for desktop storage products, which have been the Company's
strength. The WD Enterprise product line is the primary component of the
Company's strategic plan to prepare for the possibility of widespread adoption
of the thin client architecture.
PRODUCTS
Revenues from hard drive products were $1.9, $2.8, and $4.2 billion for
1995, 1996 and 1997, respectively. Revenues from microcomputer products were
$191.0 million and $70.1 million for 1995 and 1996, respectively. (The Company
sold its microcomputer products businesses in 1996.)
Technology and Product Development
Hard drives are used to record, store and retrieve digital data. Their
performance attributes are currently better than floppy disks, optical disk
drives and tape, and more cost effective than semiconductor technology. The
primary measures of hard drive performance include:
"Storage capacity" -- the amount of data that can be stored on the
hard drive -- commonly expressed in gigabytes.
"Average seek time" -- the time needed to position the heads over a
selected track on the disk surface -- commonly expressed in milliseconds.
"Internal data transfer rate" -- the rate at which data is transferred
to and from the disk -- commonly expressed in megabits per second.
"Spindle rotational speed" -- the rotational speed of the disks inside
the hard drive -- commonly expressed in revolutions per minute.
All of the Company's hard drive products employ similar technology
consisting of one or more rigid disks attached to a spindle assembly which
rotates the disks at a constant speed around a hub. The rate at which the disks
spin affects the drive performance -- generally, the faster the disks spin the
higher the performance. The disks, or media, are where the actual data is stored
and retrieved. Each disk typically consists of a substrate of finely machined
aluminum or glass on which is deposited a thin layer of magnetic material.
One read/write head is generally associated with each side of each disk and
flies just above its surface. The heads are attached to arms that are linked
together to form the head stack assembly. Guided by instructions from the
internal controller, the head stack assembly is pivoted and swung across the
disk by a head actuator or motor until it reaches the selected track of a disk,
where the data is recorded or retrieved. The hard drive communicates with the
computer through its internal controller, which controls the drive and
interfaces with the host computer. There are several industry standard
interfaces which can be used, including SCSI (Small Computer System Interface),
EIDE (Enhanced Integrated Drive Electronics), and FC-AL (Fibre Channel
Arbitrated Loop). As drive performance improves, the hard drive will deliver
information faster than these current interfaces can handle. Accordingly, the
industry plans to transition to high speed serial interfaces such as 1394 to
handle the higher speed drives. The Company is working to develop products that
will support the new 1394 interface, which is anticipated to replace EIDE as the
new industry standard for PCs.
Storage capacity of the hard drive is determined by the number of disks and
the hard drive's areal density, which is a measure of the amount of data that
can be stored on the recording surface of the disk. Areal density
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is generally measured in megabits per square inch of disk surface. The higher
the areal density, the more information can be stored on a single platter. The
Company employs a range of advanced technologies to achieve high densities,
including PRML (Partial Response Maximum Likelihood) read/write channels,
advanced servo systems, and close contact heads.
Western Digital plans to continue to increase areal densities of its hard
drive products to meet the growing storage demands created by more sophisticated
applications and users. Head technology is one of the variables affecting areal
density. The Company is in the process of introducing new products with magneto-
resistive ("MR") head technology, which allows significantly higher storage
capacities than thin film or metal-in-gap head technologies. Some of the
Company's competitors introduced products with MR heads last year, but Western
Digital has taken a deliberate, planned approach for its transition to MR heads,
thereby allowing it to take advantage of the hard drive industry's MR technology
learning curve. The Company's suppliers and customers have now had substantial
experience with MR-based products, and Western Digital expects to benefit from
that experience. MR is the current technology transition for heads, media and
related components, similar to metal-in-gap and thin film in the past, and
eventually, as technology evolves, MR heads are expected to be replaced by the
next head technology.
For additional discussion of MR head technology transition, refer to Part
II, Item 7, Risk Factors Affecting the Company and/or the Hard Drive
Industry -- Development and Production of Drives with MR Recording Heads.
Product Offerings
The Company's three categories of hard drive products (WD Caviar, WD
Portfolio, and WD Enterprise products) are designed to serve three distinct
areas of the hard drive market. The WD Caviar family consists of 1.0" high,
3.5-inch form factor products with capacities ranging from 1.2 GB to 5.1 GB for
the desktop personal computer market. The WD Caviar products feature CacheFlow,
the Company's proprietary adaptive disk caching system, which enhances the
drive's read/write performance as measured by the rate at which it can deliver
information to or receive information from the computer. The WD Caviar products
utilize the EIDE interface, providing high performance while retaining ease of
use and overall low cost of connection.
Introduced in 1996, the WD Portfolio family consists of 10.5mm high,
3.0-inch form factor hard drives with capacities ranging from 1.0 GB to 2.1 GB
for the mobile PC market. WD Portfolio products are designed to fit into the
smaller cabinets of portable computers, yet feature most of the attributes of WD
Caviar products.
The Company began shipping WD Enterprise products in 1997. The first two
products offer storage capacities of 2.1 GB and 4.3 GB, respectively, are 1.0"
high, use the 3.5-inch form factor, and are targeted at workstations, LAN
servers and multi-user systems. The WD Enterprise products utilize the SCSI
interface combined with a 7200 rpm spin rate to provide the high performance
required to meet the storage needs of enterprise systems. The designs have
minimized power consumption for enhanced reliability. WD Enterprise products
leverage many of the successful WD Caviar product and process attributes.
SALES AND DISTRIBUTION
The Company sells its products globally to OEMs, OEM subcontractors
("ODMs"), distributors, value-added resellers, dealers, system integrators and
retailers. Sales to OEMs accounted for 73%, 68% and 72% of consolidated revenues
in 1995, 1996, and 1997, respectively. Western Digital hard drives are either
incorporated into computer systems for resale or installed into end user systems
as upgrades.
The business models of computer manufacturers, which account for the
majority of the Company's sales, are in the process of changing, and these
changes will impact Western Digital's sales, inventory and distribution
patterns. The forecast-driven, long-production-run logistics model, which most
of the computer industry has used, exposes OEMs and others in the distribution
chain to the risk of carrying excess or obsolete component inventories. The
historical model limits the OEMs' flexibility to react to rapid technology
changes and component pricing fluctuations. The Company is beginning to
experience a new customer supply chain
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logistics model that combines "build-to-order" (OEM does not build until there
is an order backlog) and "channel assembly" (OEM supplies kits to distributors
or assembly houses who assemble the computers). Western Digital is adapting its
logistics model to effectively align with this industry shift. Western Digital
already operates within these models with two of its major OEM customers. These
changes will require greater skill in managing finished goods inventory and may
require more flexibility in manufacturing, both of which in turn will require
even closer relationships between the Company and its OEM customers. For an
additional discussion of the changes in customer models, refer to Part II, Item
7, Risk Factors Affecting the Company and/or the Hard Drive Industry -- Customer
Concentration and Changing Customer Models.
The Company maintains sales offices throughout North America, Eastern and
Western Europe, Japan and Southeast Asia. Field application engineering is
provided to strategic OEM accounts, and end-user technical support services are
provided within the United States and Europe. The Company's end-user technical
support is supplied by both employees and qualified third-party support
organizations through no-charge toll telephone support during business hours in
the United States, prepaid telephone cards in Europe and via the Company's web
site.
The Company's sales organization is structured so that each OEM customer is
served by a sales team. Each sales team is responsible for providing timely
feedback to engineering regarding the customer's new product requirements. This
structure promotes early identification of and response to the customer's full
range of product needs. Later, in the production stage, the team focus enables
the Company to improve customer fulfillment and overall service. The Company's
major OEM customers include Apple Computer, AST Research, Compaq Computer, Dell
Computer, Digital Equipment Corporation, Fujitsu, Gateway 2000, Hewlett-Packard,
IBM, Intel, Micron Technology, NEC and Siemens. During 1995 and 1996, sales to
Gateway 2000 accounted for 11% of revenues. During 1997, sales to IBM accounted
for 13% of revenues. For an additional discussion of customer concentration,
refer to Part II, Item 7, Risk Factors Affecting the Company and/or the Hard
Drive Industry -- Customer Concentration and Changing Customer Models.
The Company also sells its products through its sales force to selected
resellers, which include major distributors, mass merchandisers and value-added
resellers. The Company's major distributor customers include Decision Support
Systems, Frank and Walter, Ingram Micro, Loeffelhardt, Supercom, Synnex and Tech
Data. Major mass merchandiser customers include Best Buy, Computer City,
CompUSA, Egghead Software and Office Depot. In accordance with standard industry
practice, the Company's agreements with its resellers provide price protection
for inventories held by the resellers at the time of published list price
reductions and, under certain circumstances, stock rotation for slow-moving
items. These agreements may be terminated upon written notice by either party.
In the event of termination, the Company may be obligated to repurchase a
certain portion of the resellers' inventory.
The Company's international sales, which include sales to foreign
subsidiaries of U.S. companies, represented 44%, 51%, and 47% of revenues for
1995, 1996 and 1997, respectively. Sales to international customers may be
subject to certain risks not normally encountered in domestic operations,
including exposure to tariffs, various trade regulations and fluctuations in
currency exchange rates.
For information concerning revenue recognition, sales by geographic region
and significant customer information, see Notes 1 and 7, respectively, of Notes
to Consolidated Financial Statements.
The Company's marketing and advertising functions are performed both
internally and through outside firms. Advertising, direct marketing, worldwide
packaging, and marketing materials are targeted to various end-user segments.
Western Digital utilizes both consumer media and trade publications. The Company
has programs under which qualifying resellers and OEMs are reimbursed for
certain advertising expenditures. Western Digital has also invested in direct
marketing and customer satisfaction programs. The Company maintains ongoing
contact with end users through primary and secondary market research, focus
groups, product registrations, and technical support databases. The Company
recently launched a new global campaign emphasizing the Western Digital brand
attributes of being accessible, secure, smart and empowering.
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COMPETITION
General
The hard drive industry is a highly competitive high-technology commodity
marketplace. Similar to general commodities, hard drives are highly
substitutable due to the industry mandate of technical form, fit, and function
standards. Hard drive manufacturers compete on the basis of product quality and
reliability, storage capacity, unit price, product performance, production
volume capabilities, and ease of doing business. The relative importance of
these factors varies among different customer and market segments. The Company
believes that it is generally competitive in all of these factors. The Company
believes that in a high-technology commodity business, it cannot differentiate
its product based on attributes such as storage capacity; therefore, the Company
differentiates itself by emphasizing rapid response with its OEM and
distribution customers and brand equity with its end users. Rapid response
requires accelerated design cycles, customer delivery and production flexibility
which contribute to customer satisfaction. Brand equity is a relatively new area
for the hard drive industry. However, as data storage has become strategically
critical for all computer end users, the Company believes that trust in a
manufacturer's reputation has become key in the selection of a component,
particularly within such a rapidly changing technology environment.
The Company's principal competitors are Seagate Technology, Inc.
("Seagate"), Quantum Corporation ("Quantum"), Hyundai Electronics America
(Maxtor Corporation), and large computer manufacturers such as IBM that
manufacture hard drives for use in their own products and for sale to others.
Additionally, several large foreign companies such as Samsung and Fujitsu have
entered the data storage business. 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 aggressive pricing, new product introduction or other means.
The Company also competes with other companies offering products based on
alternative data storage technologies. Technological advances in optical or
other technologies could result in the introduction of products with superior or
equal performance and lower costs, which could adversely affect the Company's
competitive position.
The competition in the information storage product business can be further
discussed on the basis of product lines as follows:
Desktop Storage Products
Western Digital's desktop products compete primarily with the product
offerings of Seagate and Quantum, each of which has a market share of
approximately 20% to 25%. The Company's market share in desktop storage is
approximately 25%. Hyundai, IBM and Fujitsu are the other competitors of note.
The Company was able to gain market share in the desktop market during the past
two years because of higher volume product availability at desired capacity
points, marketing missteps by the Company's competitors, and brand equity.
However, the Company's rapid gain in desktop market share over the previous two
years is not expected to continue.
The desktop market is characterized by more competitors and shorter product
life cycles than the hard drive market in general; therefore, it has
traditionally been subject to periods of severe price competition and factors
such as time-to-market can have a more pronounced effect on the success of any
particular product.
Enterprise Storage Products
The competitive landscape in the enterprise hard drive market is dominated
by Seagate with a market share in excess of 50%. The Company entered this market
in 1997 to compete with Seagate, Quantum, IBM and Fujitsu. Quantum is also a
relatively recent entrant into this market. Because of the increase in the
number of competitors, the Company expects that price competition in the
enterprise market will increase. The Company expects to respond to the increased
competition by applying the business principles of superior quality, rapid
production and strong customer relations. Introduction of the first generation
of WD Enterprise drives has been successful because of high product quality,
competitive product performance, and the
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Company's ability to leverage its customer and supplier relations from the
desktop market; however, the Company's continued success in the high-capacity
market is heavily dependent on the successful development, timely introduction
and market acceptance of new products.
Mobile Storage Products
IBM and Toshiba, who supply to themselves as mobile computer manufacturers
as well as to other manufacturers, have a combined mobile hard drive market
share of approximately 80%. Western Digital currently offers mobile hard drives
with a maximum capacity of 2.1GB, which is less capacity than is being offered
by its competitors in the marketplace. The Company is working to increase the
capacity of its mobile hard drives. The Company believes that the WD Portfolio
3-inch form factor provides significant packaging benefits because of its low
height and potentially significant capacity benefits because it has more surface
area per disk than the 2.5-inch form factor. However, the Company has not yet
been able to realize this higher capacity potential. Notebook manufacturers
other than IBM and Toshiba(who may be reluctant to buy hard drives from their
competitors) are key to the successful adoption of the 3-inch form factor.
Long-term success of the Company's current mobile hard drive products depends on
other industry hard drive suppliers producing 3-inch form factor hard drives.
The Company anticipates that more OEMs will design the larger slot needed to
accommodate the 3-inch form factor into their computers if these hard drives are
available from multiple vendors.
For an additional discussion of competition, refer to Part II, Item 7, Risk
Factors Affecting the Company and/or the Hard Drive Industry -- Highly
Competitive Industry.
SERVICE AND WARRANTY
Western Digital warrants its newly manufactured desktop and mobile products
against defects in materials and workmanship for a period of three years from
the date of sale. The Company's enterprise storage products have similar
warranties for up to five years from the date of sale. The Company's warranty
obligation is generally limited to repair or replacement. The Company
refurbishes or repairs its products at an in-house service facility located in
Singapore and at a third-party return facility located in Germany. As a response
to the large increase in theft of high technology products and in an effort to
deter the sale of Western Digital products on the "'black market", the Company
does not warrant product which is stolen.
RESEARCH AND DEVELOPMENT
The Company devotes substantial resources to development of new products
and improvement of existing products. The Company focuses its engineering
efforts on coordinating its product design and manufacturing processes in order
to bring its products to market in a cost-effective and timely manner. Research
and development expenses totaled $130.8, $150.1 and $150.2 million in 1995, 1996
and 1997, respectively. Although total expenditures were level from 1996 to
1997, research and development expenditures in 1996 included $24.5 million for
microcomputer products. The microcomputer businesses were sold in 1996.
Accordingly, research and development expenditures for hard drive products
increased by approximately $24.6 million from 1996 to 1997.
For a discussion of product development, refer to Part II, Item 7, Risk
Factors Affecting the Company and/or the Hard Drive Industry -- Rapid
Technological Change and Product Development.
MANUFACTURING
As a manufacturing company with a high-technology commodity product,
Western Digital must manufacture significant volumes of high quality hard drives
at low unit cost. The Company strives to maintain manufacturing flexibility,
rapidly achieve high manufacturing yields, and acquire high-quality components
in required volumes at competitive prices. The critical elements of Western
Digital's hard drive production are high volume low cost assembly and
reliability testing, and establishment and maintenance of key vendor
relationships in order to create "virtual vertical integration."
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Hard drive manufacturing is a complex process involving the assembly of
precision components with narrow tolerances and extensive testing to ensure
reliability. The assembly process occurs in a "clean room" environment which
demands skill in process engineering and efficient utilization of the "clean
room" layout in order to reduce the high operating costs of this manufacturing
environment.
The Company produces hard drives in its three plants, two in Singapore and
one in Malaysia. These plants have complete responsibility for all hard drives
in volume production, including manufacturing, purchasing, inventory management,
assembly, testing, quality assurance and shipping of finished units. The Company
purchases most of the standard mechanical components and micro controllers for
its hard drives from external suppliers, although the Company has a media
manufacturing facility in Northern California which supplies a portion of its
media requirements. The Company's media manufacturing facility runs substrates,
acquired from third party vendors, through various manufacturing processes of
layering, coating and lubricating in order to achieve the proper degree of final
surface smoothness. After conducting final quality assurance tests, the media
plant delivers finished media to the Company's overseas manufacturing
facilities.
The Company continually evaluates its manufacturing processes in an effort
to increase productivity and decrease manufacturing costs. The Company believes
that more automated manufacturing processes may be required in the future in
order to be competitive in the hard drive industry and selectively evaluates
which steps in the manufacturing process would benefit from automation and how
automated manufacturing processes support the Company's business plans.
For an additional discussion of manufacturing, refer to Part II, Item 7,
Risk Factors Affecting the Company and/or the Hard Drive Industry -- Foreign
Manufacturing Risks.
MATERIALS AND SUPPLIES
The principal components currently used in the manufacture of the Company's
hard drives are magnetic heads (thin film, metal-in-gap ("MIG") and MR) and
related head stack assemblies, media, controllers, spindle motors and mechanical
parts used in the head-disk assembly. The Company also uses standard
semiconductor components such as logic, memory and microprocessor devices
obtained from other manufacturers as well as proprietary semiconductor devices
designed by and manufactured for the Company and a wide variety of other parts,
including connectors, cables, and switches.
Unlike some of its competitors, except for a portion of its media
requirements, the Company acquires all of the components for its products from
third-party suppliers. Substantially all of the Company's thin film head
requirements are purchased from Read-Rite, SAE and AMC Corporation. These same
vendors plus IBM are expected to be the Company's primary suppliers of MR heads.
The Company also uses MIG heads, which are supplied by multiple vendors. Media
requirements not fulfilled internally are purchased through several outside
vendors including Komag Inc., Trace Storage, Akashic, HMT Technology and Showa
Denko. The Company has an agreement with SGS Thompson to purchase finished
integrated circuits, which were previously manufactured internally.
For an additional discussion of component supplies, refer to Part II, Item
7, Risk Factors Affecting the Company and/or the Hard Drive
Industry -- Dependence on Suppliers of Components.
BACKLOG
At August 15, 1997, the Company's backlog, consisting of orders scheduled
for delivery within the next twelve months, was approximately $620 million,
compared with a backlog at August 15, 1996 of approximately $410 million.
Historically, a substantial portion of the Company's orders has been for
shipments within 30 to 60 days of the placement of the order. The Company's
sales are made under contracts and purchase orders that, pursuant to industry
practice, may be canceled with relatively short notice to the Company, subject
to payment of certain costs, or modified by customers to provide for delivery at
a later date. Also, certain of the Company's sales to OEMs are made under
"just-in-time" delivery contracts that do not generally require firm order
commitments by the customer until the time of sale. Therefore, backlog
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information as of the end of a particular period is not necessarily indicative
of future levels of the Company's revenue and profit.
PATENTS, LICENSES AND PROPRIETARY INFORMATION
The Company owns numerous patents and has many patent applications in
process. The Company believes that, although its patents and patent applications
have significant value, the successful manufacturing and marketing of its
products depends primarily upon the technical competence and creative ability of
its personnel. Accordingly, the patents held and applied for do not assure the
Company's future success.
In addition to patent protection of certain intellectual property rights,
the Company considers elements of its product designs and processes to be
proprietary and confidential. The Company believes that its nonpatentable
intellectual property, particularly some of its process technology, is an
important factor in its success. Western Digital relies upon employee,
consultant, and vendor non-disclosure agreements and a system of internal
safeguards to protect its proprietary information. Despite these safeguards,
there is a risk that competitors may obtain and use such information. The laws
of foreign jurisdictions in which the Company does business also may provide
less protection for confidential information than the United States.
The Company relies on certain technology that is licensed from other
parties in order to manufacture and sell its products. The Company has
cross-licensing agreements with several competitors, customers, and suppliers
and the Company believes that it has adequate licenses and other agreements in
place in addition to its own intellectual property portfolio to compete
successfully in the hard drive industry.
From time to time, the Company receives claims of alleged patent
infringement or notice of patents from patent holders which typically contain an
offer to grant the Company a license. It is the Company's policy to evaluate
each claim and, if appropriate, enter into a licensing arrangement on
commercially reasonable terms. However, there is no assurance that such licenses
are presently obtainable, or if later determined to be required, could be
obtained.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of regulations in connection with its
operations, and believes that it has obtained or is in the process of obtaining
all necessary permits for its domestic operations. See Part I, Item 3, Legal
Proceedings.
EMPLOYEES
As of July 26, 1997, the Company employed a total of 13,507 full-time
employees worldwide. The Company employed 2,410 employees in the United States,
of whom 1,244, 416 and 750 were engaged in engineering, sales and
administration, and manufacturing, respectively. The Company employed 5,287
employees at its hard drive manufacturing facilities in Malaysia, 5,656 at its
hard drive manufacturing facilities in Singapore, and 154 at its international
sales offices.
Many of the Company's employees are highly skilled, and the Company's
continued success depends in part upon its ability to attract and retain such
employees. In an effort to attract and retain such employees, the Company
continues to offer employee benefit programs which it believes are at least
equivalent to those offered by its competitors. Despite these programs, the
Company has, along with most of its competitors, experienced difficulty at times
in hiring and retaining certain skilled personnel. In critical areas, the
Company has utilized consultants and contract personnel to fill these needs
until full-time employees could be recruited. The Company has never experienced
a work stoppage, none of its domestic employees are represented by a labor
organization, and the Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's headquarters, located on leased property in Irvine,
California (expiring in 2000), house management, research and development,
administrative and sales personnel. The Company also leases facilities in San
Jose, California, and Rochester, Minnesota for research and development
activities. The
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Company operates two hard drive manufacturing facilities in Singapore. One
Singapore facility is leased and is used to produce desktop hard drives. The
other Singapore facility is owned and is used to produce enterprise hard drives.
Western Digital also owns a hard drive manufacturing facility in Kuala Lumpur,
Malaysia which provides the Company with additional capacity to produce desktop
hard drives. The Company's media processing facilities are located on leased
property in Santa Clara, California. The leases referenced above expire at
various times beginning in 1998 through 2006.
The Company also leases office space in various other locations throughout
the world primarily for sales and technical support. The Company's present
facilities are adequate for its current needs, although the process of upgrading
its facilities to meet technological and market requirements is expected to
continue. The hard drive industry does not generally require long lead time to
develop and begin operations in new manufacturing facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company was sued by Amstrad plc ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleges that hard drives supplied by the
Company in 1988 and 1989 were defective and caused damages to Amstrad of $186.0
million for out-of-pocket expenses, lost profits, injury to Amstrad's reputation
and loss of goodwill. The Company filed a counterclaim for $3.0 million in
actual damages plus exemplary damages in an unspecified amount.
The Company's errors and omissions insurance carrier has acknowledged its
responsibility to defend the case and to afford coverage. The policy limits,
however, are well below the amount of damages sought by Amstrad. 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 the final
disposition of this matter will not have a material adverse effect on the
Company's financial position, results of operations or liquidity, if Amstrad
were to prevail on its claims, a judgment in a material amount could be awarded
against the Company.
On June 10, 1994, Papst Licensing ("Papst") brought suit against the
Company in the United States District Court for the Central District of
California. The suit alleged infringement by Western Digital of five hard drive
motor patents owned by Papst. The patents relate to disk drive motors that the
Company purchases from motor vendors. On December 1, 1994, Papst dismissed its
case without prejudice, but has recently notified the Company that it intends to
reinstate the suit if the Company does not agree to enter into a license
agreement with Papst. Papst has also put the Company on notice with respect to
several additional patents. The Company does not believe that the outcome of
this matter will have a material adverse effect on its financial position,
results of operations or liquidity.
On May 9, 1997, the Bay Area Air Quality Management District ("District")
filed suit against the Company in Santa Clara Superior Court. The complaint
alleges that isopropyl alcohol dryers at the Company's Santa Clara media
facility do not comply with the District's emission control requirements and the
conditions of the permit issued by the District to the Company for the dryers.
The complaint seeks damages of $300,000. The Company is in discussion with the
District concerning the complaint and has proposed a resolution of the matter.
The Company does not believe that the outcome of this matter will have a
material adverse effect on its financial position, results of operations or
liquidity.
The Company is also subject to other legal proceedings and claims which
arise in the ordinary course of its business. Although occasional adverse
decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on its
financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all the executive officers of the Company
as of August 1997 are listed below, followed by a brief account of their
business experience during the past five years. Executive officers are normally
appointed annually by the Board of Directors at a meeting of the directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangements or understandings
between any officer and any other person pursuant to which an officer was
selected.
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
Charles A. Haggerty....................... 56 Chairman of the Board, President and Chief
Executive Officer
Kathryn A. Braun.......................... 46 President and Chief Operating Officer,
Personal Storage Division
Matthew H. Massengill..................... 36 Senior Vice President and General Manager,
Enterprise Storage Group
Marc H. Nussbaum.......................... 41 Senior Vice President, Engineering,
Personal Storage Division
David W. Schafer.......................... 45 Senior Vice President, Worldwide Sales
Duston M. Williams........................ 39 Senior Vice President and Chief Financial
Officer
Michael A. Cornelius...................... 55 Vice President, Law and Administration,
and Secretary
Steven M. Slavin.......................... 46 Vice President, Taxes and Treasurer
Jack Van Berkel........................... 37 Vice President, Human Resources
Messrs. Haggerty, Massengill, Nussbaum, Schafer, Slavin and Williams and
Ms. Braun have been employed by the Company for more than five years and have
served in various executive capacities with the Company before being appointed
to their present positions.
Mr. Cornelius joined the Company in January 1995. Prior to joining the
Company, he served in various positions with U.S. affiliates of Nissan Motor
Company, Inc. for 19 years. From 1990 to 1992, he served as Nissan North
America's Vice President of Legal and Public Affairs. Immediately prior to
joining the Company, he held the position of Vice President of Corporate Affairs
for Nissan North America.
Mr. Van Berkel joined the Company in January 1995 as Director of Human
Resources for the Personal Storage Division and was promoted to his current
position in May 1997. Prior to joining the Company, he served as Vice President
of Human Resources for Walker Interactive Systems for five years.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Western Digital's common stock is listed on the New York Stock Exchange
("NYSE"). The approximate number of holders of record of common stock of the
Company as of August 20, 1997 was 3,160.
The Company has not paid any cash dividends on its common stock and does
not intend to pay any cash dividends in the foreseeable future. The Company's
line of credit agreement restricts the payment of cash dividends.
The high and low sales prices (retroactively adjusted for the two-for-one
stock split effected as a stock dividend in June 1997) of the Company's common
stock, as reported by the NYSE, for each quarter of 1996 and 1997 are as
follows:
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
1996
High............................................... $11-1/16 $ 9-7/16 $10-11/16 $ 14-1/2
Low................................................ 7-9/16 7-3/16 8-1/16 9-7/16
1997
High............................................... $20-5/8 $ 31-11/16 $38-5/8 $ 37-1/8
Low................................................ 9-15/16 19-3/16 26-1/4 26-5/16
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
YEARS ENDED
------------------------------------------------------------
JUNE 30, JUNE 30, JULY 1, JUNE 29, JUNE 28,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
Revenues, net.......................... $1,225.2 $1,539.7 $2,130.9 $2,865.2 $4,177.9
Gross profit........................... 182.0 317.9 394.1 382.1 650.3
Operating income (loss)................ (10.0) 91.9 133.0 77.5 301.6
Net income (loss)...................... $ (25.1) $ 73.1 $ 123.3 $ 96.9 $ 267.6
Earnings (loss) per share*:
Primary.............................. $ (.39) $ .88 $ 1.28 $ 1.01 $ 2.86
Fully diluted........................ $ (.39) $ .85 $ 1.23 $ 1.00 $ 2.85
Working capital........................ $ 111.5 $ 261.7 $ 360.5 $ 280.2 $ 364.2
Total assets........................... $ 531.2 $ 640.5 $ 858.8 $ 984.1 $1,307.1
Total long-term debt................... $ 182.6 $ 58.6 $ -- $ -- $ --
Shareholders' equity................... $ 131.0 $ 288.2 $ 473.4 $ 453.9 $ 620.0
Number of employees.................... 7,322 6,593 7,647 9,628 13,384
No cash dividends were paid for the years presented.
- ---------------
* Reflects retroactive recognition of the two-for one stock split effected as a
stock dividend in June 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Western Digital operates in an highly competitive industry which has
experienced a great deal of growth, competitive consolidation and technological
change over the past several years. This industry is characterized as a
high-tech commodity business with short product life cycles, dependence upon
highly skilled engineering and other personnel, significant expenditures for
product development and recurring periods of under and over supply.
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The Company has invested a significant amount during the past two years in
the development of a new hard drive product line for the enterprise storage
market. The Company began shipping these products in volume during 1997. The
Company anticipates that the enterprise product line will be profitable in 1998.
The Company's strategy is to be the time-to-market and time-to-volume
leader as well as a time-to-quality innovator. Successful implementation of a
quality-driven strategy during the past four years has resulted in a significant
increase in unit shipments of desktop hard drives with attendant improvements in
factory utilization and manufacturing efficiency, lower component costs, overall
reductions in the defective product rate and increased brand loyalty. The
Company has achieved these quality improvements through design with its
"platform" based architecture and through a virtual vertically integrated
business model with key strategic suppliers. Virtual integration allows the
Company to be more flexible in choosing when to incorporate technology advances
into its products.
RESULTS OF OPERATIONS
Comparison of 1995, 1996 and 1997
In 1995, the Company reported net income of $123.3 million compared with
net income of $96.9 million for 1996 and $267.6 million for 1997. Net income for
1996 included a one-time, pre-tax gain of $17.3 million on the sale of the
Company's multimedia products business. The decrease in net income from 1995 to
1996 occurred because of a decline in gross profit margin percentage of
approximately five percentage points and an increase in operating expenses as
the Company invested in new storage-related product lines. The increase in net
income in 1997 over 1996 resulted from a 46% increase in revenues, a two
percentage point increase in gross margin percentage, and a two percentage point
decline in operating expenses as a percentage of revenues. A five percentage
point increase in the consolidated income tax rate from 1996 to 1997 and the
one-time gain recorded in 1996 partially offset these improvements.
Sales of hard drive products were $1.9, $2.8 and $4.2 billion in 1995, 1996
and 1997, respectively. Beginning in 1997, 100% of the Company's revenues were
generated from the sale of hard drive products. During 1996, unit shipments
increased 50% which, combined with a modest decline in average selling prices
("ASPs") resulted in hard drive revenues increasing 44% over 1995. Although
increased sales to OEMs during 1996 accounted for the majority of the increase
in unit shipments, a year-over-year increase in reseller units was also a
significant factor. During 1997, unit shipments increased 51% from 1996, but
declining ASPs reduced the 1996 to 1997 hard drive revenue growth rate to 49%.
The revenue increase in 1997 primarily resulted from increased business with
OEMs and, to a lesser extent, incremental unit shipments to resellers. Also in
1997, the Company began shipping products from its enterprise storage product
line. During the past few years, the Company has grown its hard drive unit
shipments and revenues at a considerably higher rate than the industry average,
but this extraordinary rate of growth is not expected to continue and the
Company expects future growth in unit shipments and revenues to be closer to
industry norms.
Gross profit margins were as follows:
1995 1996 1997
---- ---- ----
Hard drive products.................................... 16.2% 12.8% 15.6%
Microcomputer products................................. 41.8% 36.8% --%
Overall................................................ 18.5% 13.3% 15.6%
The decrease in gross profit margin in 1996 was primarily due to three
factors. First, in 1996 higher-capacity products were introduced at lower
average selling prices as a result of competitive pricing pressures. Second, the
Company shipped a broader mix of hard drives during 1996. This resulted in
higher shipments of lower-capacity products at lower price points, which
generally have smaller gross margins. Finally, fewer microcomputer products
(which had higher average gross margin percentages) were sold during 1996
because of the sale of the MCP businesses.
The decline in microcomputer product gross margin in 1996 was generally
attributable to the relationship between fixed costs and the lower revenue base
experienced as the non-drive related products lines were divested in 1996.
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The increase in gross profit margin for hard drive products in 1997 was
primarily the result of a change in sales mix to a greater percentage of
higher-capacity desktop storage products combined with initial shipments of
enterprise storage products. The Company began shipping products from its
enterprise storage product line in 1997. These products had a higher average
gross margin percentage than the Company's desktop storage products. Also
contributing to the improvement in gross profit margin for hard drive products
were year-over-year reductions in the average cost of the Company's desktop
storage products.
Research and development expense ("R&D") was $130.8 million, or 6.1% of
revenues, $150.1 million, or 5.2% of revenues, and $150.2 million, or 3.6% of
revenues in 1995, 1996 and 1997, respectively. The $19.3 million increase in R&D
expenses in 1996 was primarily the result of higher expenditures to support the
development of enterprise and mobile storage products, partially offset by lower
expenditures for microcomputer products. R&D expense remained consistent from
1996 to 1997 as higher expenditures incurred to develop desktop, enterprise and
mobile hard drive products were offset by the elimination of expenditures
related to the MCP businesses which were sold in 1996. R&D expenses declined as
a percentage of revenues primarily as a result of the higher revenue base in
1997 as compared to 1996 and 1995.
Selling, general and administrative expenses ("SG&A") were $130.3 million,
or 6.1% of revenues, $154.5 million, or 5.4% of revenues and $198.5 million, or
4.8% of revenues, in 1995, 1996 and 1997, respectively. The increases in the
absolute dollars of SG&A expenses incurred in 1997 as compared to 1996 and 1995
were primarily due to incremental selling, marketing and other related expenses
in support of the higher revenue levels. The other major factors that
contributed to the increases in SG&A expenses were higher expenditures for the
Company's pay-for-performance and profit sharing plans in 1997 and higher
royalty expense in 1996. The decline in SG&A expenses as a percentage of
revenues in 1997 as compared to 1996 and 1995 was primarily due to the higher
revenue base.
Net interest and other income was $12.0 million in 1995, $13.1 million in
1996 and $13.2 million in 1997. The improvement from 1995 to 1996 was the result
of the elimination of the Company's outstanding debt in June 1995, partially
offset by lower average cash and short-term investment balances.
The Company's effective tax rate of 15%, 10% and 15% recorded in 1995, 1996
and 1997, respectively, 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 (see Note 5 of Notes to Consolidated Financial Statements). The
fluctuation in the tax rate reflects a change in earnings among the Company's
subsidiaries operating in various tax jurisdictions.
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars,
some transactions are based in various foreign currencies. The Company enters
into short-term, forward exchange contracts to hedge the impact of foreign
currency fluctuations on certain underlying assets, liabilities and anticipated
cash flows for operating expenses denominated in foreign currencies. The purpose
of entering into these hedge transactions is to minimize the impact of foreign
currency fluctuations on the results of operations. A majority of the increases
or decreases in the Company's local currency operating expenses are offset by
gains and losses on the hedges. The contracts have maturity dates that do not
exceed twelve months. The unrealized gains and losses on these contracts are
deferred and recognized in the results of operations in the period in which the
hedged transaction is consummated.
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As of June 28, 1997, the Company had outstanding the following foreign
currency forward contracts (in millions, except average contract rate):
JUNE 28, 1997
----------------------------------------
CONTRACT WEIGHTED AVERAGE UNREALIZED
AMOUNT CONTRACT RATE LOSS*
-------- ---------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
Foreign currency forward contracts:
Singapore Dollar.................................. $162.9 1.40 $ (2.3)
Malaysian Ringgit................................. 90.3 2.52 (.5)
Japanese Yen...................................... 10.4 115.40 (.1)
British Pound Sterling............................ 3.0 1.64 --
------ -----
$266.6 $ (2.9)
====== =====
- ---------------
* The unrealized gains and losses on these contracts are deferred and recognized
in the results of operations in the period in which the hedged transactions
are consummated.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted" earnings
per share with "diluted" earnings per share. Earlier application is not
permitted. When adopted, all previously reported earnings per share amounts must
be restated based on the provisions of the new standard. Pro forma basic and
diluted earnings per share calculated in accordance with SFAS No. 128 is
provided below:
YEAR ENDED
-------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
Basic earnings per share............................ $1.34 $ 1.05 $ 3.07
===== ===== =====
Diluted earnings per share.......................... $1.23 $ 1.01 $ 2.86
===== ===== =====
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 data as currently reported.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 1997, the Company had $208.3 million in cash and short-term
investments as compared with $219.2 million at June 29, 1996. Net cash provided
by operating activities was $254.2 million during 1997. Cash flows from
earnings, depreciation and amortization, and an increase in current liabilities
were partially offset by cash used to fund higher accounts receivable and
inventory balances. Other significant uses of cash during 1997 were capital
expenditures of $156.0 million, which were incurred primarily to support
increased production of hard drives and related components, and the acquisition
of 5.2 million shares of the Company's common stock in the open market for
$144.6 million. Partially offsetting these uses of cash was $43.1 million
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received in connection with stock option exercises (including tax benefit) and
Employee Stock Purchase Plan ("ESPP") purchases. The Company anticipates that
capital expenditures in 1998 will total approximately $250 million and will
relate to increased hard drive and media capacity and normal replacement of
existing assets. In addition, the Company may purchase up to an additional 10.0
million shares of its common stock under the current Board of Directors'
authorization, which expires in March 1999.
The Company has an $150 million revolving credit agreement with certain
financial institutions extending through April 2000. 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 balances 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 under the heading "Risk
Factors Affecting the Company and/or the Hard Drive Industry."
RISK FACTORS AFFECTING THE COMPANY AND/OR THE HARD DRIVE INDUSTRY
The Company's business is subject to a number of risks, trends and
uncertainties, some of which are related to the hard drive industry in general
and others related more specifically to Western Digital. As a result of the
risks and uncertainties described below as well as other risks presented
elsewhere in this report, there can be no assurance that the Company will
continue to be as successful as it was in the past few years or maintain its
current market position. Some of these factors have affected the Company's
operating results in the past, and all of these factors could affect its future
operating results. The Company does not expect that the percentage increases in
revenues, operating income and net income during the past few years represent a
consistent reliable trend that can be expected to continue in the future. The
hard drive business remains challenging and cyclical.
Rapid Technological Change and Product Development
The information storage industry is characterized by rapid technological
developments, short product life cycles and competitive pressures, including
price erosion. This business environment results in rapid erosion of gross
margins on specific hard drive products. 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 availability of research and
development funds to support the rapid technological change depends upon the
Company's 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. 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, 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. If not
carefully planned and executed, the introduction of 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 smaller 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 introduction of advanced
and cost effective products, could result in significantly lower revenue and
gross margins.
Technological advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could result in the creation of
competitive products which have superior performance to and/or lower prices than
the Company's products. Companies such as TeraStor and Seagate are currently
developing
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optically assisted recording technologies; the initial products 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 for the
industry. Accordingly, the Company's strategy is to view optically assisted
recording as a 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 position, results
of operations or liquidity.
Highly Competitive Industry
During the years preceding the merger between Seagate Technology, Inc. and
Conner Peripherals, Inc. in 1996, the desktop hard drive industry consisted of
many competitors of various sizes and financial resources. Competition during
these years was based largely on price. Although price competition and price
erosion were not as severe in 1997, the Company still expects price competition
and price erosion will continue for the foreseeable future for various reasons.
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. The
rate of general price decline can be and has been accelerated when some
competitors lower prices to absorb excess capacity, liquidate excess
inventories, or attempt 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 affect often cannot be anticipated until late in
the quarter.
Fluctuating Product Demand
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 system product cycles, end user
demand for increased storage capacity, and prevailing economic conditions.
Although market research indicates total computer system unit shipments will
grow at an annual compounded rate of approximately 13% through fiscal year 2000,
near term demand may experience significant fluctuations. Such fluctuations have
in the past and may in the future result in deferral or cancellation of orders
for Western Digital products, which could have a material adverse effect on the
Company.
The hard drive industry has also experienced seasonal fluctuations in
demand. The Company has historically experienced relatively flat demand in the
first quarter of the fiscal year as compared to the fourth quarter, while demand
in the second quarter has historically been much higher than in the first
quarter. Additionally, product shipments tend to be greatest in the third month
of each quarter, although this pattern may be affected by changes in customer
requirements, which are discussed below. To the extent this trend continues,
failure by the Company to adequately prepare itself for such fluctuations or to
complete shipments at the end of each quarter could adversely affect the
Company's operating results for that quarter.
Customer Concentration and Changing Customer Models
High purchase-volume customers for hard drives are concentrated within a
small number of OEMs, distribution channels and system integrators. While
Western Digital believes its relationships with key customers such as these are
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 operating results. Western Digital'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 resulted in decreased demand for the Company's drives, whether by loss of
or delays in orders, the Company's operating results could be materially
adversely affected.
19
20
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 meet more "just-in-time" ("JIT") customer
requirements; therefore, Western Digital's customers are holding smaller
inventories of components such as hard drives. This JIT ordering model 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 increasingly difficult to
balance manufacturing plans with projected customer demand. The Company's
failure to manage its inventory in response to JIT demands could have a material
adverse effect on its financial position, results of operations or liquidity.
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
assembler, and component suppliers such as hard drive manufacturers are
requested to ship parts directly to the dealer 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 assembly
houses. 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 the 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 negative
change in an OEM relationship could adversely affect demand for Western Digital
products, especially with the impact of these new models.
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. The
Company believes that magneto-resistive ("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 have incorporated MR head
technology into some of their current products and, with higher capacity drives
using MR heads, the Company's competitors have achieved time-to-market
leadership. The Company is already shipping mobile products with MR head
technology and expects to ship a desktop product with MR head technology that
will achieve time-to-market areal density leadership early in 1998. As with most
new products, the Company anticipates that the new MR products will have lower
initial manufacturing yields and higher initial component costs than some more
mature products. Failure of the Company to successfully manufacture and market
products incorporating MR head technology in a timely manner and/or in
sufficient volume during 1998 could cause erosion of the Company's market share
and have a material adverse effect on the Company's business and financial
position, results of operations or liquidity.
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. 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 for most of its required materials,
but 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.
20
21
Although the Company obtains headstack assemblies from several sources, the
supply of these components at the desired technology levels is a critical issue
for the Company as it plans to meet the anticipated demand for desktop storage
products. The Company believes that the supply of headstack assemblies may
continue to be a constraint over the next 12 months, and a continued shortage at
the desired technology levels could adversely affect the Company's ability to
meet anticipated increases in customer demand for its products.
Foreign Manufacturing Risks
Western Digital products are currently manufactured in Singapore and
Malaysia. Although the manufacturing is performed by the Company's subsidiaries,
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, and changes in tariff and
freight rates.
Volatility of Stock Price
The Company's stock price, like other high-technology companies' stock
prices, is subject to wide fluctuations. The stock price volatility can be a
response to actual or anticipated variations in operating results, announcements
of new products or developments by the Company or its competitors, developments
in relationships with customers or suppliers and other events or factors. Even a
modest underperformance against the expectations of the investment community by
the Company can lead to a significant decline in the market price of the
Company's stock. Broad stock market fluctuations, which may be unrelated to the
operating performance of the Company, may also adversely affect the market price
of the Company's stock.
Other Risk Factors
The Company's operating results have been and may in the future be subject
to significant periodic 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 and/or
introduction to production, competing technologies, variations in product cost,
component availability due to single or limited sources of supply, foreign
exchange fluctuations, increased competition and general economics and industry
fluctuations, both foreign and domestic. The Company's future operating results
may also be adversely affected by an adverse judgment or settlement in the legal
proceedings in which the Company is currently involved (see "Part I, Item 3.
Legal Proceedings").
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE(S)
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report...................................................... 22
Consolidated Statements of Income -- Three Years Ended June 28, 1997.............. 23
Consolidated Balance Sheets -- June 29, 1996 and June 28, 1997.................... 24
Consolidated Statements of Shareholders' Equity -- Three Years Ended June 28,
1997........................................................................... 25
Consolidated Statements of Cash Flows -- Three Years Ended June 28, 1997.......... 26
Notes to Consolidated Financial Statements........................................ 27-38
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Consolidated Valuation and Qualifying Accounts -- Three Years Ended
June 28, 1997.................................................................. 39
21
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Western Digital Corporation:
We have audited the consolidated financial statements of Western Digital
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Western
Digital Corporation and subsidiaries as of June 29, 1996 and June 28, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended June 28, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Orange County, California
July 16, 1997
22
23
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
-----------------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
----------- ----------- -----------
Revenues, net........................................... $ 2,130,867 $ 2,865,219 $ 4,177,857
Costs and expenses:
Cost of revenues...................................... 1,736,761 2,483,155 3,527,574
Research and development.............................. 130,789 150,112 150,157
Selling, general and administrative (Note 8).......... 130,286 154,497 198,530
---------- ---------- ----------
Total costs and expenses...................... 1,997,836 2,787,764 3,876,261
---------- ---------- ----------
Operating income........................................ 133,031 77,455 301,596
Net interest and other income (Note 2).................. 12,002 13,134 13,223
Gain on sale of multimedia business (Note 8)............ -- 17,275 --
---------- ---------- ----------
Income before income taxes.............................. 145,033 107,864 314,819
Provision for income taxes (Note 5)..................... 21,731 10,970 47,223
---------- ---------- ----------
Net income.............................................. $ 123,302 $ 96,894 $ 267,596
========== ========== ==========
Earnings per common and common equivalent share:
Primary............................................... $ 1.28 $ 1.01 $ 2.86
========== ========== ==========
Fully diluted......................................... $ 1.23 $ 1.00 $ 2.85
========== ========== ==========
Common and common equivalent shares used in computing
per share amounts:
Primary............................................... 96,396 96,248 93,521
========== ========== ==========
Fully diluted......................................... 102,840 96,560 93,880
========== ========== ==========
See notes to consolidated financial statements.
23
24
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
JUNE 29, JUNE 28,
1996 1997
--------- ----------
Current assets:
Cash and cash equivalents......................................... $ 182,565 $ 208,276
Short-term investments............................................ 36,598 --
Accounts receivable, less allowance for doubtful accounts of
$9,376 in 1996 and $11,706 in 1997............................. 409,473 545,552
Inventories (Note 2).............................................. 142,622 224,474
Prepaid expenses and other assets (Note 5)........................ 23,006 39,593
--------- ----------
Total current assets...................................... 794,264 1,017,895
Property and equipment at cost, net (Note 2)........................ 148,258 247,895
Intangible and other assets, net.................................... 41,621 41,332
--------- ----------
Total assets.............................................. $ 984,143 $1,307,122
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 345,866 $ 417,984
Accrued compensation.............................................. 30,457 59,227
Accrued expenses.................................................. 137,699 176,494
--------- ----------
Total current liabilities................................. 514,022 653,705
Deferred income taxes (Note 5)...................................... 16,229 33,430
Commitments and contingent liabilities (Note 4)
Shareholders' equity (Note 6):
Preferred stock, $.01 par value; Authorized -- 5,000 shares;
Outstanding -- None............................................
Common stock, $.01 par value; Authorized -- 225,000 shares;
Outstanding -- 101,332 shares in 1996 and 1997................. 1,013 1,013
Additional paid-in capital........................................ 353,826 356,654
Retained earnings................................................. 220,470 488,066
Treasury stock-common shares at cost; 14,190 shares in 1996 and
15,436 shares in 1997.......................................... (121,417) (225,746)
--------- ----------
Total shareholders' equity................................ 453,892 619,987
--------- ----------
Total liabilities and shareholders' equity................ $ 984,143 $1,307,122
========= ==========
See notes to consolidated financial statements.
24
25
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED JUNE 28, 1997
(IN THOUSANDS)
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
---------------- ------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ------- --------- ---------- -------- ------------
BALANCE AT JUNE 30, 1994............ 89,790 $ 898 -- $ -- $ 287,067 $ 274 $ 288,239
Exercise of stock options (Note
6)................................ 2,152 21 -- -- 5,669 -- 5,690
ESPP shares issued (Note 6)......... 968 10 -- -- 5,595 -- 5,605
Common stock issued upon conversion
of debentures (Note 3)............ 8,054 80 -- -- 57,310 -- 57,390
Income tax benefit from stock
options exercised (Note 5)........ -- -- -- -- 4,022 -- 4,022
Purchase of treasury stock.......... -- -- (1,610) (10,822) -- -- (10,822)
Net income.......................... -- -- -- -- -- 123,302 123,302
------- ------ ------- --------- -------- -------- ---------
BALANCE AT JULY 1, 1995............. 100,964 1,009 (1,610) (10,822) 359,663 123,576 473,426
Purchase of treasury stock.......... -- -- (15,440) (132,114) -- -- (132,114)
Exercise of stock options (Note
6)................................ 368 4 1,568 12,833 (5,528) -- 7,309
ESPP shares issued (Note 6)......... -- -- 1,292 8,686 (309) -- 8,377
Net income.......................... -- -- -- -- 96,894 96,894
------- ------ ------- --------- -------- -------- ---------
BALANCE AT JUNE 29, 1996............ 101,332 1,013 (14,190) (121,417) 353,826 220,470 453,892
Purchase of treasury stock.......... -- -- (5,172) (135,506) (9,068) -- (144,574)
Exercise of stock options (Note
6)................................ -- -- 2,790 22,087 (8,350) -- 13,737
ESPP shares issued (Note 6)......... -- -- 1,136 9,090 37 -- 9,127
Income tax benefit from stock
options exercised (Note 5)........ -- -- -- -- 20,209 -- 20,209
Net income.......................... -- -- -- -- -- 267,596 267,596
------- ------ ------- --------- -------- -------- ---------
BALANCE AT JUNE 28, 1997............ 101,332 $1,013 (15,436) $(225,746) $ 356,654 $488,066 $ 619,987
======= ====== ======= ========= ======== ======== =========
See notes to consolidated financial statements.
25
26
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
----------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $123,302 $ 96,894 $267,596
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 43,612 51,643 63,485
Gain on sale of multimedia business................... -- (17,275) --
Changes in assets and liabilities, excluding the
effects of business sales (Note 8):
Accounts receivable................................. (102,329) (107,532) (136,079)
Inventories......................................... (19,350) (69,180) (81,852)
Prepaid expenses and other assets................... (6,746) (5,478) 2,184
Accounts payable, accrued compensation and accrued
expenses......................................... 93,858 110,311 139,683
Deferred income taxes............................... (2,072) 417 (1,570)
Other assets........................................ (8,958) (1,519) 712
-------- -------- --------
Net cash provided by operating activities........ 121,317 58,281 254,159
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net................................ (54,774) (108,696) (155,958)
Proceeds from sale of businesses (Note 8)................ -- 85,486 --
Purchases of short-term investments...................... (148,896) (34,685) --
Sales and maturities of short-term investments........... 58,719 88,264 36,598
Increase in other assets................................. (6,287) (7,188) (7,587)
-------- -------- --------
Net cash provided by (used for) investing
activities..................................... (151,238) 23,181 (126,947)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options, including tax benefit......... 9,712 7,309 33,946
Proceeds from ESPP shares issued......................... 5,605 8,377 9,127
Redemption of convertible debentures (Note 3)............ (527) -- --
Repurchase of common stock............................... (10,822) (132,114) (144,574)
-------- -------- --------
Net cash provided by (used for) financing
activities..................................... 3,968 (116,428) (101,501)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (25,953) (34,966) 25,711
Cash and cash equivalents at beginning of year............. 243,484 217,531 182,565
-------- -------- --------
Cash and cash equivalents at end of year................... $217,531 $182,565 $208,276
======== ======== ========
See notes to consolidated financial statements.
26
27
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Western Digital Corporation ("Western Digital" or the "Company") has
prepared its financial statements in accordance with generally accepted
accounting principles and has adopted accounting policies and practices which
are generally accepted in the industry in which it operates. Following are the
Company's significant accounting policies:
Fiscal Year
Effective July 1, 1994, the Company changed its fiscal year end from June
30 to a 52 or 53-week year ending on the Saturday nearest June 30. Accordingly,
the 1995, 1996 and 1997 fiscal years ended on July 1, June 29 and June 28,
respectively. All general references to years relate to fiscal years unless
otherwise noted.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The accounts of foreign
subsidiaries have been remeasured using the U.S. dollar as the functional
currency. As such, foreign exchange gains or losses resulting from remeasurement
of these accounts are reflected in the results of operations. Monetary and
nonmonetary asset and liability accounts have been remeasured using the exchange
rate in effect at each year end and using historical rates, respectively. Income
statement accounts have been remeasured using average monthly exchange rates.
Cash Equivalents and Short-Term Investments
The Company's cash equivalents represent highly liquid investments,
primarily money market funds and commercial paper, with original maturities of
three months or less. Short-term investments represent investments in U.S.
Treasury Bills with original maturities beyond three months and less than twelve
months and are considered held to maturity.
Concentration of Credit Risk
The Company designs, develops, manufactures and markets hard drives to
personal computer manufacturers, resellers and retailers throughout the world.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. The Company maintains reserves
for potential credit losses, and such losses have historically been within
management's expectations. The Company also has cash equivalent and short-term
investment policies that limit the amount of credit exposure to any one
financial institution or investment instrument, and require that investments be
made only with financial institutions or in investment instruments evaluated as
highly credit-worthy.
Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. Cost
is on a first-in, first-out basis for raw materials and is computed on a
currently adjusted standard basis (which approximates first-in, first-out) for
work in process and finished goods.
Depreciation and Amortization
The cost of property and equipment is depreciated over the estimated useful
lives of the respective assets. Depreciation is computed on a straight-line
basis for financial reporting purposes and on an accelerated basis for income
tax purposes. Leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets or the related lease terms. Goodwill and
purchased technology, which are included in other assets, are capitalized at
cost and amortized on a straight-line basis over their estimated lives of five
to fifteen years.
27
28
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviews identifiable
intangibles, goodwill and other long-lived assets for impairment whenever events
or circumstances indicate the carrying amounts may not be recoverable. If the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of an asset, an impairment loss is
recognized.
Revenue Recognition
The Company recognizes revenue at time of shipment and records a reserve
for price adjustments, warranty and estimated sales returns. In accordance with
standard industry practice, the Company's agreements with its resellers provide
price protection for inventories held by the resellers at the time of published
list price reductions and, under certain circumstances, stock rotation for
slow-moving items. These agreements may be terminated upon written notice by
either party. In the event of termination, the Company may be obligated to
repurchase a certain portion of the resellers' inventory.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and
administrative expenses of the Company include advertising costs of $4.4
million, $9.5 million and $16.3 million in 1995, 1996 and 1997, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
This method generally provides that deferred tax assets and liabilities be
recognized for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss ("NOL") carryforwards. The Company records a
valuation allowance for certain temporary differences for which it is not
certain it will receive future tax benefits. The impact on deferred taxes of
changes in tax rates and laws, if any, are applied to the years during which
temporary differences are expected to be settled and reflected in the financial
statements in the period of enactment.
Two-For-One Stock Split
On May 2, 1997, the Company declared a two-for-one stock split, effected in
the form of a stock dividend on June 3, 1997 to shareholders of record on May
20, 1997. All share and per share amounts included in the consolidated financial
statements reflect retroactive recognition of the two-for-one stock split.
Per Share Information
Primary earnings per share amounts are based upon the weighted average
number of shares and dilutive common stock equivalents for each period
presented. For 1995, fully diluted earnings per share also include the dilutive
effects of shares assumed to be issued upon conversion of the Company's
convertible subordinated debentures which were all converted or redeemed in
1995.
Increase in Authorized Common Stock and Change in Par Value of Common Stock
and Preferred Stock
On March 11, 1997, the Company's shareholders approved the amendment to the
Company's Certificate of Incorporation to increase the Company's authorized
common stock and to reduce the par value of the common stock and preferred stock
from $.10 to $.01 per share. Par value information in the consolidated financial
statements reflects retroactive recognition of the change in the par value.
28
29
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
Effective June 30, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). SFAS No. 123 establishes the financial accounting and reporting
standards for stock-based compensation plans. The Company elected to continue
accounting for stock-based employee compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations (APB Opinion No. 25), as SFAS No. 123
permits, and to follow the pro forma net income, pro forma earnings per share,
and stock-based compensation plan disclosure requirements set forth in SFAS No.
123. See Note 6 of Notes to Consolidated Financial Statements.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted" earnings
per share with "diluted" earnings per share. Earlier application is not
permitted. When adopted, all previously reported earnings per share amounts must
be restated based on the provisions of the new standard. Pro forma basic and
diluted earnings per share calculated in accordance with SFAS No. 128 is
provided below:
YEAR ENDED
---------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
Basic earnings per share.......................... $1.34 $ 1.05 $ 3.07
===== ====== ======
Diluted earnings per share........................ $1.23 $ 1.01 $ 2.86
===== ====== ======
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 data as currently reported.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value
for all periods presented because of the short-term maturity of these financial
instruments. The carrying amounts of all other financial instruments in the
consolidated balance sheets approximate fair values.
Foreign Exchange Contracts
The Company enters into short-term, forward exchange contracts to hedge the
impact of foreign currency fluctuations on certain underlying assets,
liabilities and anticipated cash flows for operating expenditures denominated in
foreign currencies. These contracts are not entered into for trading purposes,
have maturity dates that do not exceed twelve months, and are accounted for as
hedges. The unrealized gains and losses on these contracts are deferred and
recognized in the results of operations in the period in which the hedged
29
30
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transactions are consummated. Costs associated with entering into such contracts
are typically amortized over the life of the instrument. At June 29, 1996 and
June 28, 1997, the Company had outstanding $177.6 and $266.6 million,
respectively, of forward exchange contracts with commercial banks. As of June
29, 1996 and June 28, 1997, the unrealized gains and losses on outstanding
forward exchange contracts were not material. Realized gains and losses are
primarily recorded in cost of revenues in the accompanying consolidated
statements of income.
In response to the Company's underlying foreign currency exposures, the
Company may, from time to time, adjust its foreign currency hedging position by
taking out additional contracts or by terminating or offsetting existing foreign
currency forward exchange contracts. Gains or losses on terminated contracts and
offsetting contracts are recognized in the results of operations in the periods
in which the hedged transactions occur.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the
current year presentation.
NOTE 2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
1995 1996 1997
------- --------- ---------
Net Interest and Other Income
Interest income.......................................... $12,976 $ 13,134 $ 13,223
Other income............................................. 3,056 -- --
Interest expense......................................... (4,030) -- --
------- --------- ---------
Net interest and other income............................ $12,002 $ 13,134 $ 13,223
======= ========= =========
Cash paid for interest................................... $ 4,471 $ -- $ --
======= ========= =========
Inventories
Finished goods........................................... $ 72,239 $ 137,762
Work in process.......................................... 31,781 56,352
Raw materials and component parts........................ 38,602 30,360
--------- ---------
$ 142,622 $ 224,474
========= =========
Property and Equipment
Land and buildings....................................... $ 34,165 $ 53,080
Machinery and equipment.................................. 199,614 285,986
Furniture and fixtures................................... 10,617 13,260
Leasehold improvements................................... 47,352 63,335
--------- ---------
291,748 415,661
Accumulated depreciation and amortization................ (143,490) (167,766)
--------- ---------
Net property and equipment............................... $ 148,258 $ 247,895
========= =========
NOTE 3. DEBT
Line of Credit
In April 1996, the Company entered into an unsecured revolving credit
agreement with certain financial institutions which provides for borrowings up
to $150 million. Borrowings under the agreement bear interest at either the
banks' base rate or the Federal Funds Effective Rate plus a margin. The
agreement, which expires
30
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in April 2000, is intended to meet short-term working capital requirements which
may arise from time to time. The agreement requires the Company to maintain
certain financial ratios and restricts payment of dividends. The Company was in
compliance with the terms of this agreement as of June 28, 1997. No borrowings
were made under this agreement during 1996 or 1997.
Subordinated Debt
During 1995, $58.1 million of the Company's 9% convertible subordinated
debentures, due 2014, were converted into 8.1 million shares of the Company's
common stock. In connection with this conversion, the Company charged $.7
million of unamortized costs to shareholders' equity. The remaining $.5 million
of the Company's debentures were redeemed for cash.
NOTE 4. COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases
The Company leases certain facilities and equipment under long-term,
non-cancelable operating leases which expire at various dates through 2006.
Rental expense under these leases, including month-to-month rentals, was $25.5,
$27.2, and $32.2 million in 1995, 1996, and 1997, respectively.
Future minimum rental payments under non-cancelable operating leases as of
June 28, 1997 are as follows (in thousands):
1998........................................................... $ 30,982
1999........................................................... 26,419
2000........................................................... 19,752
2001........................................................... 10,622
2002........................................................... 5,844
Thereafter..................................................... 12,319
--------
Total future minimum rental payments................. $105,938
========
Legal Proceedings
The Company was sued by Amstrad plc ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleges that hard drives supplied by the
Company in 1988 and 1989 were defective and caused damages to Amstrad of $186.0
million for out-of-pocket expenses, lost profits, injury to Amstrad's reputation
and loss of goodwill. The Company filed a counterclaim for $3.0 million in
actual damages plus exemplary damages in an unspecified amount.
The Company's errors and omissions insurance carrier has acknowledged its
responsibility to defend the case and to afford coverage. The policy limits,
however, are well below the amount of damages sought by Amstrad. 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 the final
disposition of this matter will not have a material adverse effect on the
Company's financial position, results of operations or liquidity, if Amstrad
were to prevail on its claims, a judgment in a material amount could be awarded
against the Company.
The Company is also subject to other legal proceedings and claims which
arise in the ordinary course of its business. Although occasional adverse
decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on its
financial position, results of operations or liquidity.
31
32
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES
The domestic and international components of income before income taxes are
as follows (in thousands):
1995 1996 1997
-------- -------- --------
United States.............................. $ 26,421 $(10,877) $105,884
International.............................. 118,612 118,741 208,935
-------- -------- --------
Income before income taxes................. $145,033 $107,864 $314,819
======== ======== ========
The components of the provision for income taxes are as follows (in
thousands):
1995 1996 1997
------- ------- -------
Current
United States........................... $ 3,321 $ 400 $29,153
International........................... 15,941 10,262 9,964
State................................... 1,353 310 8,106
------- ------- -------
20,615 10,972 47,223
Deferred, net
United States........................... 1,867 -- --
International........................... (751) (2) --
------- ------- -------
1,116 (2) --
------- ------- -------
Provision for income taxes................ $21,731 $10,970 $47,223
======= ======= =======
The tax benefits associated with the exercise of non-qualified stock
options, the disqualifying disposition of stock acquired with incentive stock
options, and the disqualifying disposition of stock acquired under the employee
stock purchase plan reduced taxes currently payable as shown above by $4.0
million, $0 and $20.2 million for 1995, 1996 and 1997, respectively. Such
benefits are credited to additional paid-in capital when realized.
The total cash paid for income taxes was $4.9 million, $4.5 million and
$19.2 million for the years ended July 1, 1995, June 29, 1996 and June 28, 1997,
respectively.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at June 29, 1996 and June 28,
1997 are as follows (in thousands):
1996 1997
--------- --------
Deferred tax assets:
NOL carryforward.................................... $ 36,574 $ 11,079
Business credit carryforward........................ 26,714 25,502
Reserves and accrued expenses not
currently deductible............................. 49,538 67,155
All other........................................... 6,160 8,858
---------- ----------
118,986 112,594
Valuation allowance................................. (118,605) (86,608)
---------- ----------
Total deferred tax assets................... $ 381 $ 25,986
========== ==========
Deferred tax liabilities:
Unremitted income of foreign subsidiaries........... $ 16,229 $ 40,640
All other........................................... 381 5
---------- ----------
Total deferred tax liabilities.............. $ 16,610 $ 40,645
========== ==========
32
33
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS 109 requires deferred taxes to be determined for each tax paying
component of an enterprise within each tax jurisdiction. Certain of the deferred
tax assets indicated above are attributable to tax jurisdictions where a history
of earnings has not been established. The taxable earnings in these tax
jurisdictions is subject to volatility. Therefore, the Company believes a
valuation allowance is needed to reduce the total deferred tax asset to an
amount that is more likely than not to be realized. Due to recent improvements
of the earnings in the jurisdictions to which these certain deferred assets
relate, the Company has reduced its valuation allowance by $32.0 million.
Reconciliation of the United States Federal statutory rate to the Company's
effective tax rate is as follows:
1995 1996 1997
----- ----- -----
U.S. Federal statutory rate......................... 35.0% 35.0% 35.0%
State income taxes, net............................. 0.2 0.2 1.7
Tax rate differential on international income....... (19.3) (30.7) (12.7)
Effect of valuation allowance....................... (5.5) 3.8 (10.0)
Other............................................... 4.6 1.9 1.0
----- ----- -----
Effective tax rate.................................. 15.0% 10.2% 15.0%
===== ===== =====
Certain income of selected subsidiaries is taxed at substantially lower
income tax rates as compared with local statutory rates. The lower rates reduced
income taxes and increased net earnings by $33.2 million ($.32 per share, fully
diluted), $30.1 million ($.31 per share, fully diluted) and by $58.5 million
($.62 per share, fully diluted) in 1995, 1996 and 1997, respectively. These
lower rates are in effect through 2004.
At June 28, 1997, the Company had federal net operating loss carryforwards
and tax credits of $31.7 million and $21.0 million, respectively. The loss
carryforward expires in fiscal year 2008, and the credit carryforwards expire in
fiscal years 1998 through 2012.
Net undistributed earnings from international subsidiaries at June 28, 1997
were $460.7 million. The net undistributed earnings are intended to finance
local operating requirements. Accordingly, an additional United States tax
provision has not been made.
NOTE 6. SHAREHOLDERS' EQUITY
The following table summarizes all shares of common stock reserved for
issuance at June 28, 1997 (in thousands):
NUMBER
OF SHARES
---------
Issuable in connection with:
Exercise of stock options, including options available for
grant......................................................... 17,596
Employee stock purchase plan..................................... 1,603
------
19,199
======
Stock Option Plans
Western Digital's Employee Stock Option Plan ("Employee Plan") is
administered by the Compensation Committee of the Board of Directors, which
determines the vesting provisions, the form of payment for the shares and all
other terms of the options. Terms of the Employee Plan require that the exercise
price of options be not less than the fair market value on the date of grant.
Options granted generally vest 25% one year from the date of grant and in twelve
quarterly increments thereafter and have a ten-year term. As of June 28, 1997,
2,915,631 options were exercisable and 7,204,154 options were available for
grant. Participants in the
33
34
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Plan may be permitted to utilize stock purchased previously as
consideration to exercise options or to exercise on a cashless basis, pursuant
to the terms of the Employee Plan.
In 1985, the Company adopted the Stock Option Plan for Non-Employee
Directors ("Director Plan") and reserved 1.6 million shares for issuance
thereunder. The Director Plan was restated and amended in 1995. The Director
Plan provides for initial option grants to new directors of 30,000 shares per
director and additional grants of 7,500 options per director each year upon
their reelection as a director at the annual shareholders' meeting. Terms of the
Director Plan require that options have a ten-year term and that the exercise
price of options be not less than the fair market value at the date of grant. As
of June 28, 1997, 103,125 options were exercisable and 805,464 options were
available for grant. The following table summarizes activity under the Employee
and Director Plans combined (in thousands, except per share amounts):
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ----------------
OPTIONS OUTSTANDING AT JUNE 30, 1994............... 9,132 $ 3.86
Granted............................................ 2,938 7.77
Exercised, net of value of redeemed shares......... (2,152) 2.72
Canceled or expired................................ (742) 4.48
------ ------
OPTIONS OUTSTANDING AT JULY 1, 1995................ 9,176 5.33
Granted............................................ 3,904 9.30
Exercised, net of value of redeemed shares......... (1,936) 4.00
Canceled or expired................................ (1,802) 7.32
------ ------
OPTIONS OUTSTANDING AT JUNE 29, 1996............... 9,342 6.90
Granted............................................ 3,630 17.26
Exercised, net of value of redeemed shares......... (2,790) 5.11
Canceled or expired................................ (596) 9.80
------ ------
OPTIONS OUTSTANDING AT JUNE 28, 1997............... 9,586 $11.20
====== ======
The following tables summarize information about options outstanding and
exercisable under the Employee and Director Plans combined at June 28, 1997 (in
thousand, except per share amounts):
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED NUMBER WEIGHTED AVERAGE
PRICES OF SHARES (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
---------------------- --------- ---------------- -------------- --------- ----------------
$ 1.44 - $ 7.56....... 2,662 6.40 $ 5.62 1,854 $ 5.01
7.69 - 8.81....... 2,507 8.04 8.56 903 8.57
8.88 - 11.88....... 2,850 8.90 11.41 189 9.44
12.69 - 35.25....... 1,567 9.41 24.62 73 14.18
----- ---- ------ ----- ------
Total....... 9,586 8.06 $11.20 3,019 $ 6.59
===== ==== ====== ===== ======
Stock Purchase Rights
In 1989, the Company implemented a plan to protect shareholders' rights in
the event of a proposed takeover of the Company. Under the plan, each share of
the Company's outstanding common stock carries one Right to Purchase Series "A"
Junior Participating Preferred Stock ("the Right"). The Right enables the
holder, under certain circumstances, to purchase common stock of Western Digital
or of the acquiring Company at a substantially discounted price ten days after a
person or group publicly announces it has acquired or has tendered an offer for
15% or more of the Company's outstanding common stock. The Rights are redeemable
by the Company at $.01 per Right and expire in 1999.
34
35
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Purchase Plan
During 1994, the Company implemented an employee stock purchase plan
("ESPP") in accordance with Section 423 of the Internal Revenue Code whereby
eligible employees may authorize payroll deductions of up to 10% of their salary
to purchase shares of the Company's common stock at 85% of the fair market value
of common stock on the date of grant or the exercise date, whichever is less.
Approximately 5.0 million shares of common stock have been reserved for issuance
under this plan. Approximately 968,000, 1,292,000 and 1,136,000 shares were
issued under this plan during 1995, 1996 and 1997, respectively.
Savings and Profit Sharing Plan
Effective July 1, 1991, the Company adopted an annual Savings and Profit
Sharing Plan covering eligible domestic employees. The Company authorized 8%,
6.5% and 4.1% of defined pre-tax profits to be allocated to the participants in
1995, 1996 and 1997, respectively. Payments to participants of the Savings and
Profit Sharing Plan were $11.3, $7.1, and $12.6 million in 1995, 1996 and 1997,
respectively.
Pro Forma Information
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as if
the Company had accounted for its stock options (including shares issued under
the Stock Option Plans and the ESPP, collectively called "options") granted
subsequent to July 1, 1995, under the fair value method of that statement.
The fair value of options granted in 1996 and 1997 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
STOCK OPTION
PLANS ESPP PLAN
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
Option life (in years)............................ 5.0 4.0 2.0 2.0
Risk-free interest rate........................... 6.5 % 6.0 % 6.5 % 6.0 %
Stock price volatility............................ .49 .58 .49 .58
Dividend yield.................................... -- -- -- --
The following is a summary of the per share weighted average fair value of
stock options granted in the years listed below:
1996 1997
------ ------
Options granted under the Stock Option Plans............... $ 4.90 $ 9.10
Shares granted under the ESPP Plan......................... $ 4.20 $ 6.75
The Company applies APB Opinion No. 25 in accounting for its stock option
and ESPP plans and, accordingly, no compensation expense has been recognized for
the options in the consolidated financial statements. Had the Company determined
compensation expense based on the fair value at the grant date for its options
under SFAS No. 123, the Company's net income and net earnings per share would
have been reduced to the amounts indicated below:
YEAR ENDED
-----------------------
JUNE 29, JUNE 28,
1996 1997
-------- ---------
Pro forma net income (in thousands)................... $ 92,870 $ 254,831
Pro forma net earnings per share:
Primary............................................. $ .96 $ 2.72
Fully diluted....................................... $ .96 $ 2.71
35
36
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma net income and net earnings per share reflects only options
granted in the years ended June 29, 1996 and June 28, 1997. Therefore, the full
impact of calculating compensation expense for options under SFAS No. 123 is not
reflected in the pro forma net income amounts presented above because
compensation expense is reflected over the options' vesting period and
compensation expense for options granted before July 2, 1995 is not considered.
NOTE 7. BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
Western Digital currently operates in one industry segment -- the design,
development, manufacture and marketing of hard drives for the computer
marketplace. During 1995 and 1996, sales to Gateway 2000 accounted for 11% of
the Company's revenues. During 1997, sales to IBM accounted for 13% of the
Company's revenues.
The Company's operations outside the United States include manufacturing
facilities in Singapore and Malaysia as well as sales offices throughout the
world.
The following table summarizes operations by entities located within the
indicated geographic areas for the past three years. United States revenues to
unaffiliated customers include export sales to various countries in Eastern
Europe and Asia of $399.2, $674.1, and $763.5 million in 1995, 1996, and 1997,
respectively.
Transfers between geographic areas are accounted for at prices comparable
to normal sales through outside distributors. General and corporate expenses of
$49.6, $61.5, and $62.8 million in 1995, 1996, and 1997, respectively, have been
excluded in determining operating income by geographic region.
UNITED
STATES EUROPE ASIA ELIMINATIONS TOTAL
------ ------ ------ ------------ ------
(IN MILLIONS)
Year ended July 1, 1995
Sales to unaffiliated customers............... $1,596 $ 485 $ 50 $ -- $2,131
Transfers between geographic areas............ 139 57 1,216 (1,412) --
------ ------ ------ ------- ------
Revenues, net................................. $1,735 $ 542 $1,266 $ (1,412) $2,131
====== ====== ====== ======= ======
Operating income.............................. $ 64 $ 6 $ 117 $ (4) $ 183
====== ====== ====== ======= ======
Identifiable assets........................... $ 597 $ 78 $ 185 $ (1) $ 859
====== ====== ====== ======= ======
Year ended June 29, 1996
Sales to unaffiliated customers............... $2,084 $ 735 $ 46 $ -- $2,865
Transfers between geographic areas............ 869 96 2,540 (3,505) --
------ ------ ------ ------- ------
Revenues, net................................. $2,953 $ 831 $2,586 $ (3,505) $2,865
====== ====== ====== ======= ======
Operating income.............................. $ 21 $ 9 $ 113 $ (4) $ 139
====== ====== ====== ======= ======
Identifiable assets........................... $ 569 $ 143 $ 276 $ (4) $ 984
====== ====== ====== ======= ======
Year ended June 28, 1997
Sales to unaffiliated customers............... $2,980 $1,107 $ 91 $ -- $4,178
Transfers between geographic areas............ 1,340 167 3,646 (5,153) --
------ ------ ------ ------- ------
Revenues, net................................. $4,320 $1,274 $3,737 $ (5,153) $4,178
====== ====== ====== ======= ======
Operating income.............................. $ 158 $ 15 $ 200 $ (8) $ 365
====== ====== ====== ======= ======
Identifiable assets........................... $ 733 $ 186 $ 404 $ (16) $1,307
====== ====== ====== ======= ======
36
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SALE OF BUSINESSES
Sale of Multimedia Business
In October 1995, the Company sold its multimedia business to Philips
Semiconductors, Inc. ("Philips") for $51.9 million cash, resulting in a
one-time, pre-tax gain of $17.3 million. Through this transaction, Philips
acquired specific intellectual properties and assumed certain liabilities
directly related to the multimedia business.
Sale of High Speed Fiber-Optic Communication Links Business
In March 1996, the Company sold its high speed fiber-optic communication
links business to Vixel Corporation for $1.2 million cash as well as other
non-cash consideration. This transaction was not material to the Company's
financial position or results of operations.
Sale of Input/Output Products Business
During April 1996, the Company disposed of its input/output products
business, which represented the final element of its microcomputer products
group. The transaction included the sale of related assets and resulted in a
restructuring of the Company's other support organizations. The restructuring
resulted in a personnel reduction of 102 people, not including employees that
were hired by the purchaser, Adaptec, Inc. The net result of the asset sale and
related restructuring charges is included in selling, general and administrative
expenses and was not material to the Company's 1996 results of operations. The
consideration received and related costs associated with the sale of the
input/output products business are as follows (in millions):
Sales price......................................................... $ 32.4
Assets sold or written off:
Inventory, net.................................................... (18.0)
Property and equipment............................................ (2.5)
Prepaid expenses.................................................. (.5)
------
Total assets sold or written off.................................... (21.0)
Accruals for severance, facilities, contractual commitments and
other miscellaneous items......................................... (11.4)
------
$ --
======
As of June 29, 1996, $8.7 million of the accruals for severance,
facilities, contractual commitments and other miscellaneous items remained.
Substantially all of these accruals were utilized in 1997 to settle obligations
resulting from the sale and related restructuring.
37
38
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
-------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996
Revenues, net.................................. $558,149 $ 757,992 $ 728,362 $ 820,716
Gross profit................................... 80,792 103,379 93,324 104,569
Operating income............................... 6,165 21,175 19,014 31,101
Net income..................................... 8,327 36,393 19,438 32,736
Primary earnings per share..................... .08 .38 .21 .36
Fully diluted earnings per share............... $ .08 $ .37 $ .21 $ .36
======== ========== ========== ==========
1997
Revenues, net.................................. $883,115 $1,118,647 $1,096,212 $1,079,883
Gross profit................................... 112,889 163,389 184,855 189,150
Operating income............................... 35,769 71,835 94,062 99,930
Net income..................................... 32,878 64,229 82,595 87,894
Primary earnings per share..................... .36 .68 .88 .95
Fully diluted earnings per share............... $ .35 $ .68 $ .88 $ .95
======== ========== ========== ==========
38
39
WESTERN DIGITAL CORPORATION
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 28, 1997
(IN THOUSANDS)
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS
-------------
Balance at June 30, 1994........................................................ $10,825
Charges to operations......................................................... 250
Deductions.................................................................... (1,682)
Other......................................................................... (84)
-------
Balance at July 1, 1995......................................................... 9,309
Charges to operations......................................................... 1,279
Deductions.................................................................... (1,212)
Other......................................................................... --
-------
Balance at June 29, 1996........................................................ 9,376
Charges to operations......................................................... 7,116
Deductions.................................................................... (4,786)
Other......................................................................... --
-------
Balance at June 28, 1997........................................................ $11,706
=======
39
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended June 28, 1997.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the captions "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Stock Performance Graph,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended June 28, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the caption "Security Ownership of Beneficial Owners," which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended June 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related Transactions,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended June 28, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) INDEX TO FINANCIAL STATEMENTS
The financial statements included in Part II, Item 8 of this
document are filed as part of this Report.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule included in Part II, Item 8 of
this document is filed as part of this Report.
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
Separate financial statements of the Company have been omitted as the
Company is primarily an operating company and its subsidiaries are wholly owned
and do not have minority equity interests and/or indebtedness to any person
other than the Company in amounts which together exceed 5% of the total
consolidated assets as shown by the most recent year-end consolidated balance
sheet.
40
41
(3) EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
3.2.2 By-laws of the Company, as amended March 20, 1997(14)..................
3.3 Certificate of Agreement of Merger(2)..................................
3.4.1 Certificate of Amendment and Restatement of Certificate of
Incorporation dated March 27, 1997(14).................................
4.1 Rights Agreement between the Company and First Interstate Bank, Ltd.,
as Rights Agent, dated as of December 1, 1988 (incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 12,
1988)..................................................................
4.2 Amendment No. 1 to Rights Agreement by and between the Company and
First Interstate Bank, Ltd. dated as of August 10, 1990 (incorporated
by reference to Exhibit 1 to the Company's Current Report on Form 8-K
as filed with the Securities and Exchange Commission on August 14,
1990)..................................................................
4.2.1 Amendment No. 2 to Rights Agreement dated as of January 19, 1997, by
and between Western Digital Corporation and American Stock Transfer &
Trust Company, as Rights Agent (incorporated by reference to Exhibit 1
to the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on February 5, 1997)................
4.3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company (incorporated by reference
to Exhibit A of Exhibit 1 to the Company's Current Report on Form 8-K
as filed with the Securities and Exchange Commission on December 12,
1988)..................................................................
10.1.1 Western Digital Corporation Amended and Restated Employee Stock Option
Plan, as amended on November 14, 1996(12)**............................
10.1.2 Western Digital Corporation Amended and Restated Employee Stock Option
Plan, as amended on March 20, 1997* **.................................
10.3.1 Western Digital Corporation 1993 Employee Stock Purchase Plan, as
amended on November 14, 1996(12)**.....................................
10.4 Receivables Contribution and Sale Agreements, dated as of January 7,
1994 by and between the Company, as seller, and Western Digital Capital
Corporation, as buyer(5)...............................................
10.5 Receivables Purchase Agreement, dated as of January 7, 1994, by and
among Western Digital Capital Corporation, as seller, the Company, as
servicer, the Financial Institutions listed therein, as bank purchasers
and J.P. Morgan Delaware, as administrative agent(5)...................
10.6 First Amendment to Receivables Purchase Agreement, dated March 23,
1994, by and between Western Digital Corporation, as seller and the
Financial Institutions listed therein as bank purchasers and
administrative agents(5)...............................................
10.7 Assignment Agreement, dated as of March 23, 1994, by and between J. P.
Morgan Delaware as Bank Purchaser and Assignor and the Bank of
California, N.A.
and the Long-term Credit Bank of Japan, LTD., Los Angeles Agency, as
Assignees(5)...........................................................
10.8 Asset Purchase Agreement dated December 16, 1993 by and between
Motorola, Inc. and Western Digital regarding the sale and purchase of
Western Digital's wafer fabrication facilities and certain related
assets(4)..............................................................
41
42
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
10.10.1 Western Digital Corporation Deferred Compensation Plan, Amended and
Restated as of January 9, 1997 (14)**..................................
10.11 The Western Digital Corporation Executive Bonus Plan(6)**..............
10.12 The Extended Severance Plan of the Registrant(6)**.....................
10.12.1 Amendment No. 1 to the Company's Extended Severance Plan (11)**........
10.13 Manufacturing Building Lease between Wan Tien Realty Pte Ltd and
Western Digital (Singapore) Pte Ltd dated as of November 9, 1993
(incorporated by reference to Exhibit 10.17.1 to the Company's
Quarterly Report on Form 10-Q as filed with the Securities and Exchange
Commission on January 25, 1994)........................................
10.16.1 Western Digital Long-Term Retention Plan, as amended July 10,
1997* **...............................................................
10.17 Subleases between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of September 1, 1991(1)...................
10.18 Sublease between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of October 12, 1992(1)....................
10.21.1 The Company's Non-Employee Directors Stock-For-Fees Plan, Amended and
Restated as of January 9, 1997(14)**...................................
10.22 Office Building Lease between The Irvine Company and the Company dated
as of January 13, 1988 (incorporated by reference to Exhibit 10.11 to
Amendment No. 2 to the Company's Annual Report to Form 10-K as filed on
Form 8 with the Securities and Exchange Commission on November 18,
1988)(8)...............................................................
10.30 The Company's Savings and Profit Sharing Plan(9)**.....................
10.31 First Amendment to the Company's Savings and Profit Sharing
Plan(9)**..............................................................
10.32 Second Amendment to the Company's Savings and Profit Sharing
Plan(10)**.............................................................
10.32.1 Third Amendment to the Company's Retirement Savings and Profit Sharing
Plan(12)**.............................................................
10.32.2 Fourth Amendment to the Company's Retirement Savings and Profit Sharing
Plan(14)**.............................................................
10.33 The Company's Amended and Restated Stock Option Plan for Non-Employee
Directors, amended as of July 10, 1997* **.............................
10.34 Fiscal Year 1998 Western Digital Management Incentive Plan* **.........
10.35 Revolving Credit Agreement, dated as of April 24, 1996, among Western
Digital Corporation and Nationsbank of Texas, N.A., the First National
Bank of Boston and the other Financial Institutions listed
therein(10)............................................................
10.36 First Amendment to the Revolving Credit Agreement, dated as of June 27,
1996, among Western Digital Corporation and Nationsbank of Texas, N.A.,
the First National Bank of Boston and the other Financial Institutions
listed therein(10).....................................................
10.37 Amended and Restated Revolving Credit Agreement, dated as of May 5,
1997, among Western Digital Corporation and Nationsbank of Texas, N.A.,
BankBoston, N.A. and the other Financial Institutions listed therein*
11 Computation of Per Share Earnings......................................
21 Subsidiaries of the Company............................................
42
43
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
23 Consent of Independent Auditors........................................
27 Financial Data Schedule................................................
99.1 Press Release Regarding Judgment against Seagate Technology, Inc. in
favor of Amstrad plc by the English Court(14)..........................
- ---------------
* New exhibit filed with this Report.
** Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 28, 1992.
(2) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (No. 33-54968) as filed with the Securities and
Exchange Commission on January 26, 1993.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 33-51725) as filed with the Securities and Exchange Commission on
December 28, 1993.
(4) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on January 5, 1994.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 23, 1994.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 16, 1995.
(8) Subject to confidentiality order dated November 21, 1988.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 27, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 16, 1996.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange commission on November 11, 1996.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 10, 1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 5, 1997.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1997.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1997.
43
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERN DIGITAL CORPORATION
By: DUSTON M. WILLIAMS
------------------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Dated: September 12, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on September 12, 1997.
SIGNATURE TITLE
- ----------------------------------------------- --------------------------------------
CHARLES A. HAGGERTY Chairman of the Board, President and
- ----------------------------------------------- Chief Executive Officer (Principal
Charles A. Haggerty Executive Officer)
DUSTON M. WILLIAMS Senior Vice President and Chief
- ----------------------------------------------- Financial Officer (Principal Financial
Duston M. Williams and Accounting Officer)
JAMES A. ABRAHAMSON Director
- -----------------------------------------------
James A. Abrahamson
PETER D. BEHRENDT Director
- -----------------------------------------------
Peter D. Behrendt
I. M. BOOTH Director
- -----------------------------------------------
I. M. Booth
ANDRE R. HORN Director
- -----------------------------------------------
Andre R. Horn
ANNE O. KRUEGER Director
- -----------------------------------------------
Anne O. Krueger
THOMAS E. PARDUN Director
- -----------------------------------------------
Thomas E. Pardun
44
45
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
3.2.2 By-laws of the Company, as amended March 20, 1997(14)..................
3.3 Certificate of Agreement of Merger(2)..................................
3.4.1 Certificate of Amendment and Restatement of Certificate of
Incorporation dated March 27, 1997(14).................................
4.1 Rights Agreement between the Company and First Interstate Bank, Ltd.,
as Rights Agent, dated as of December 1, 1988 (incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 12,
1988)..................................................................
4.2 Amendment No. 1 to Rights Agreement by and between the Company and
First Interstate Bank, Ltd. dated as of August 10, 1990 (incorporated
by reference to Exhibit 1 to the Company's Current Report on Form 8-K
as filed with the Securities and Exchange Commission on August 14,
1990)..................................................................
4.2.1 Amendment No. 2 to Rights Agreement dated as of January 19, 1997, by
and between Western Digital Corporation and American Stock Transfer &
Trust Company, as Rights Agent (incorporated by reference to Exhibit 1
to the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on February 5, 1997)................
4.3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company (incorporated by reference
to Exhibit A of Exhibit 1 to the Company's Current Report on Form 8-K
as filed with the Securities and Exchange Commission on December 12,
1988)..................................................................
10.1.1 Western Digital Corporation Amended and Restated Employee Stock Option
Plan, as amended on November 14, 1996(12)**............................
10.1.2 Western Digital Corporation Amended and Restated Employee Stock Option
Plan, as amended on March 20, 1997* **.................................
10.3.1 Western Digital Corporation 1993 Employee Stock Purchase Plan, as
amended on November 14, 1996(12)**.....................................
10.4 Receivables Contribution and Sale Agreements, dated as of January 7,
1994 by and between the Company, as seller, and Western Digital Capital
Corporation, as buyer(5)...............................................
10.5 Receivables Purchase Agreement, dated as of January 7, 1994, by and
among Western Digital Capital Corporation, as seller, the Company, as
servicer, the Financial Institutions listed therein, as bank purchasers
and J.P. Morgan Delaware, as administrative agent(5)...................
10.6 First Amendment to Receivables Purchase Agreement, dated March 23,
1994, by and between Western Digital Corporation, as seller and the
Financial Institutions listed therein as bank purchasers and
administrative agents(5)...............................................
10.7 Assignment Agreement, dated as of March 23, 1994, by and between J. P.
Morgan Delaware as Bank Purchaser and Assignor and the Bank of
California, N.A.
and the Long-term Credit Bank of Japan, LTD., Los Angeles Agency, as
Assignees(5)...........................................................
10.8 Asset Purchase Agreement dated December 16, 1993 by and between
Motorola, Inc. and Western Digital regarding the sale and purchase of
Western Digital's wafer fabrication facilities and certain related
assets(4)..............................................................
46
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
10.10.1 Western Digital Corporation Deferred Compensation Plan, Amended and
Restated as of January 9, 1997 (14)**..................................
10.11 The Western Digital Corporation Executive Bonus Plan(6)**..............
10.12 The Extended Severance Plan of the Registrant(6)**.....................
10.12.1 Amendment No. 1 to the Company's Extended Severance Plan (11)**........
10.13 Manufacturing Building Lease between Wan Tien Realty Pte Ltd and
Western Digital (Singapore) Pte Ltd dated as of November 9, 1993
(incorporated by reference to Exhibit 10.17.1 to the Company's
Quarterly Report on Form 10-Q as filed with the Securities and Exchange
Commission on January 25, 1994)........................................
10.16.1 Western Digital Long-Term Retention Plan, as amended July 10,
1997* **...............................................................
10.17 Subleases between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of September 1, 1991(1)...................
10.18 Sublease between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of October 12, 1992(1)....................
10.21.1 The Company's Non-Employee Directors Stock-For-Fees Plan, Amended and
Restated as of January 9, 1997(14)**...................................
10.22 Office Building Lease between The Irvine Company and the Company dated
as of January 13, 1988 (incorporated by reference to Exhibit 10.11 to
Amendment No. 2 to the Company's Annual Report to Form 10-K as filed on
Form 8 with the Securities and Exchange Commission on November 18,
1988)(8)...............................................................
10.30 The Company's Savings and Profit Sharing Plan(9)**.....................
10.31 First Amendment to the Company's Savings and Profit Sharing
Plan(9)**..............................................................
10.32 Second Amendment to the Company's Savings and Profit Sharing
Plan(10)**.............................................................
10.32.1 Third Amendment to the Company's Retirement Savings and Profit Sharing
Plan(12)**.............................................................
10.32.2 Fourth Amendment to the Company's Retirement Savings and Profit Sharing
Plan(14)**.............................................................
10.33 The Company's Amended and Restated Stock Option Plan for Non-Employee
Directors, amended as of July 10, 1997* **.............................
10.34 Fiscal Year 1998 Western Digital Management Incentive Plan* **.........
10.35 Revolving Credit Agreement, dated as of April 24, 1996, among Western
Digital Corporation and Nationsbank of Texas, N.A., the First National
Bank of Boston and the other Financial Institutions listed
therein(10)............................................................
10.36 First Amendment to the Revolving Credit Agreement, dated as of June 27,
1996, among Western Digital Corporation and Nationsbank of Texas, N.A.,
the First National Bank of Boston and the other Financial Institutions
listed therein(10).....................................................
10.37 Amended and Restated Revolving Credit Agreement, dated as of May 5,
1997, among Western Digital Corporation and Nationsbank of Texas, N.A.,
BankBoston, N.A. and the other Financial Institutions listed therein*
11 Computation of Per Share Earnings......................................
21 Subsidiaries of the Company............................................
47
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
23 Consent of Independent Auditors........................................
27 Financial Data Schedule................................................
99.1 Press Release Regarding Judgment against Seagate Technology, Inc. in
favor of Amstrad plc by the English Court(14)..........................
- ---------------
* New exhibit filed with this Report.
** Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 28, 1992.
(2) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (No. 33-54968) as filed with the Securities and
Exchange Commission on January 26, 1993.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 33-51725) as filed with the Securities and Exchange Commission on
December 28, 1993.
(4) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on January 5, 1994.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 23, 1994.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 16, 1995.
(8) Subject to confidentiality order dated November 21, 1988.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 27, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on September 16, 1996.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange commission on November 11, 1996.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 10, 1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 5, 1997.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on May 9, 1997.
1
EXHIBIT 10.1.2
WESTERN DIGITAL CORPORATION
AMENDED AND RESTATED
EMPLOYEE STOCK OPTION PLAN
1. Purpose. The purpose of this Western Digital Corporation Employee
Stock Option Plan (the "Plan") is to further the growth and development of
Western Digital Corporation (the "Company") and its subsidiaries by providing,
through ownership of stock of the Company, an incentive to officers and other
key employees who are in a position to contribute materially to the prosperity
of the Company, to increase such persons' interest in the Company's welfare, to
encourage them to continue their services to the Company or its subsidiaries,
and to attract individuals of outstanding ability to enter the employment of the
Company or its subsidiaries.
2. Incentive and Non-Qualified Stock Options. Two types of options
(referred to herein as "options" without distinction between such two types) may
be granted under the Plan: options intended to qualify as incentive stock
options ("Incentive Stock Options") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"); and other options not specifically
authorized or qualified for favorable income tax treatment by the Code
("Non-Qualified Stock Options").
3. Administration.
3.1 Administration by Board. Subject to Section 3.2, the Plan shall be
administered by the Board of Directors of the Company (the "Board"). Subject to
the provisions of the Plan, the Board shall have authority to construe and
interpret the Plan, to promulgate, amend, and rescind rules and regulations
relating to its administration, from time to time to select from among the
eligible employees (as determined pursuant to Section 4) of the Company and its
subsidiaries those employees to whom options will be granted, to determine the
timing and manner of the grant of the options, to determine the exercise price,
the number of shares covered by and all of the terms of the options, to
determine the duration and purpose of leaves of absence which may be granted to
optionees without constituting termination of their employment for purposes of
the Plan, and to make all of the determinations necessary or advisable for
administration of the Plan. The interpretation and construction by the Board of
any provision of the Plan, or of any grant or agreement issued and executed
under the Plan, shall be final and binding upon all parties. No member of the
Board shall be liable for any action or determination undertaken or made in good
faith with respect to the Plan or any agreement executed pursuant to the Plan.
3.2 Administration by Committee. The Board may, in its sole discretion,
delegate any or all of its administrative duties to a committee appointed by the
Board (the "Committee") consisting of three Board members, each of whom, during
such time as one or more persons eligible to receive options under the Plan is
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") shall be disinterested within the meaning of Rule 16b-3 under
the Exchange Act (or any successor rule, "Rule 16b-3"), provided, however, that
the Board may from time to time increase the size of the Committee, and add
additional members to, or remove members from, the Committee. The Committee
shall act pursuant to a majority vote, or the written consent of a majority of
its members, and minutes shall be kept of all of its meetings and copies thereof
shall be provided to the Board. Subject to the provisions of the Plan and the
directions of the Board, the Committee may establish and follow such rules and
regulations for the conduct of its business as it may deem advisable. No member
of the Committee shall be liable for any action or determination undertaken or
made in good faith with respect to the Plan or any agreement executed pursuant
to the Plan. The Board or the Committee, as the case may be, is sometimes
referred to herein as the "Administrator."
4. Eligibility. Any employee (including any officer who is an employee)
of the Company or any of its subsidiaries who does not own stock possessing more
than 10% of the total combined voting power of all outstanding shares of all
classes of stock of the Company or any of its parent or subsidiary corporations
shall be eligible to receive a grant or grants of such options under the Plan;
provided, however, that notwithstanding the foregoing, any employee of the
Company who owns stock possessing more than 10% of the total combined voting
power of all outstanding shares of all classes of stock of the Company or any of
its parent or subsidiary corporations shall be eligible to receive a grant or
grants of such options under the Plan if at the time such options are granted
the option exercise price therefor is at least 110% of the Fair Market Value (as
defined below) of the shares subject to the option and such option by its terms
1
2
is not exercisable after the expiration of five years from the date such option
is granted. An employee may receive more than one option under the Plan.
Notwithstanding the foregoing, no person who is a director of the Company shall
be eligible to receive an option under the Plan unless the granting of such
option shall be effected in such a manner as not to impair the Plan's
qualification under Rule 16b-3.
5. Shares Subject to Options. The stock available for issuance upon
exercise of stock options granted under the Plan shall be shares of the
Company's authorized but unissued, or reacquired, Common Stock. The aggregate
number of shares that may be issued after September 5, 1985, pursuant to
exercise of options granted under the Plan shall not exceed 15,450,000 shares of
Common Stock (subject to adjustment as provided herein). In the event that any
outstanding option under the Plan for any reason expires or is terminated, the
shares of Common Stock allocable to the unexercised portion of the option shall
not count against the share limit set forth herein and shall again be available
for issuance upon exercise of stock options granted under the Plan as if no
option had been granted with respect to such shares.
6. Terms and Conditions of Options.
6.1 Grants of Options. Subject to the express provisions of the Plan,
the Administrator shall from time to time in its discretion select those
individuals to whom options shall be granted, and shall determine the terms of
such options (which need not be identical) and the number of shares of Common
Stock for which each may be exercised. Notwithstanding anything to the contrary
herein, the number of shares of Common Stock with respect to which an option or
options may be granted to any optionee in any one taxable year of the Company
shall not exceed 400,000, subject to adjustment as provided herein (the "Maximum
Annual Employee Grant"). Each option shall be subject to the terms and
conditions of the Plan and such other terms and conditions established by the
Administrator as are not inconsistent with the purpose and provisions of the
Plan.
6.2 Agreements or Confirming Memos. Options granted under the Plan may
but need not be evidenced by agreements (which need not be identical) in such
form and containing such provisions consistent with the Plan as the
Administrator shall from time to time approve. Options not documented by written
agreement shall be memorialized by a written confirming memorandum stating the
material terms of the option and provided to the option recipient. Each
agreement or confirming memorandum shall specify whether the subject option is
an Incentive Stock Option or a Non-Qualified Stock Option.
6.3 Optionee's Employment. Each optionee shall agree to remain in the
employ of, and to render services to, the Company or its subsidiaries for a
period of one year from the date the option is granted, but neither the Company
nor any of its subsidiaries shall be obligated to continue to employ the
optionee for any period.
6.4 Option Exercise Price. The purchase price for the shares subject to
any option shall be determined by the Administrator but shall not be less than
100% of the Fair Market Value of the shares of Common Stock of the Company on
the date the option is granted. For purposes of the Plan, the "Fair Market
Value" of any share of Common Stock of the Company at any date shall be (a) if
the Common Stock is listed on an established stock exchange or exchanges, the
last reported sale price per share on such date on the principal exchange on
which it is traded, or if no sale was made on such date on such principal
exchange, at the closing reported bid price on such date on such exchange, or
(b) if the Common Stock is not then listed on an exchange, the average of the
closing bid and asked prices per share for the Common Stock in the
over-the-counter market as quoted on the Nasdaq National Market on such date, or
(c) if the Common Stock is not then listed on an exchange or quoted on the
Nasdaq National Market, an amount determined in good faith by the Administrator.
6.5 Medium and Time of Payment. The purchase price for any shares
purchased pursuant to exercise of an option granted under the Plan shall be paid
in full upon exercise of the option in cash or such other consideration as the
Administrator may deem acceptable, including without limitation securities of
the Company (delivered by or on behalf of the person exercising the option or
retained by the Company from the stock otherwise issuable upon exercise and
valued at Fair Market Value as of the exercise date), provided, however, that
the Administrator may, in the exercise of its discretion, allow exercise of an
option in a broker-assisted or similar transaction in which the exercise price
is not received by the Company until promptly after exercise. Shares of Common
Stock transferred to the Company upon exercise of an option shall not increase
the number of shares available for issuance upon exercise of options granted
2
3
under the Plan. Notwithstanding the foregoing, the Company may extend and
maintain, or arrange for the extension and maintenance of, credit to any
optionee to finance the optionee's purchase of shares pursuant to exercise of
any option, on such terms as may be approved by the Administrator, subject to
applicable regulations of the Federal Reserve Board and any other laws or
regulations in effect at the time such credit is extended.
6.6 Option Period and Vesting. Subject to Section 6.14, options granted
under the Plan shall vest and may be exercised as determined by the
Administrator, except that no option may vest and become exercisable at any time
prior to six months from the date the option is granted. Exercise of options
after termination of the optionee's employment shall be subject to Sections 6.13
and 6.14. Each option granted hereunder and all rights or obligations under such
option shall expire on such date as shall be determined by the Administrator,
but not later than ten years after the date the option is granted, or five years
after the date of grant in the case of an option recipient who at the time of
grant owns more than 10% of the total combined voting power of all outstanding
shares of all classes of stock of the Company or any of its parent or subsidiary
corporations, and shall be subject to earlier termination as herein provided.
6.7 Exercise of Options. To the extent that an optionee has the right to
exercise an option, the option may be exercised from time to time by written
notice to the Company stating the number of shares being purchased and
accompanied by payment in full of the purchase price for such shares, except
that in no event shall the Company be required to issue fractional shares upon
the exercise of an option, and the Administrator may, in its discretion, require
that any exercise of an option be for at least 100 shares or, if less, the total
number of shares for which the option is then exercisable. Any certificate(s)
for outstanding securities of the Company used to pay the purchase price shall
be accompanied by stock power(s) duly endorsed in blank by the registered holder
of the certificate(s). In the event the certificate(s) tendered by the optionee
in such payment cover more shares than are required for such payment, the
certificate(s) shall also be accompanied by instructions from the optionee to
the Company's transfer agent with respect to disposition of the balance of the
securities covered thereby. Notwithstanding any other provision of this Plan,
the Administrator may impose such conditions upon the exercise of options
(including, without limitation, conditions limiting the time of exercise to
specified periods) as may be required to satisfy applicable regulatory
requirements, including without limitation Rule 16b-3, other relevant securities
laws and rules, and any applicable section of or rule under the Code. Whenever
shares of stock are to be issued upon exercise of an option granted under the
Plan or subsequently transferred, the Administrator shall have the right to
require the optionee or transferor to remit to the Company an amount sufficient
to satisfy any federal, state and local withholding tax requirements prior to
the delivery of any certificate or certificates for such shares. The
Administrator may, in the exercise of its discretion, allow satisfaction of tax
withholding requirements by accepting delivery of securities of the Company or
by withholding a portion of the stock otherwise issuable upon exercise of an
option.
6.8 Nonassignability. No option granted under the Plan shall be
assignable or transferable except (i) by will or by the laws of descent and
distribution, or (ii) subject to the final sentence of this Section 6.8, upon
dissolution of marriage pursuant to a property settlement or domestic relations
order, or (iii) as permitted on a case-by-case basis in the discretion of, and
subject to such conditions as may be imposed by, the Administrator to permit
transfers to immediate family members, family trusts or family foundations of
the grantee under circumstances that would not adversely affect the interests of
the Company. During the lifetime of an optionee, an option granted to him or her
shall be exercisable only by the optionee (or the optionee's permitted
transferee) or his or her guardian or legal representative. Notwithstanding the
foregoing, Incentive Stock Options may not be assigned or transferred in
violation of Section 422(b)(5) of the Code (or any successor provision) or the
Treasury Regulations thereunder, and nothing herein is intended to allow such
assignment or transfer."
6.9 Limit on Incentive Stock Options. Subject to Section 12.1, the
aggregate Fair Market Value (determined as of the time the option is granted) of
the stock for which Incentive Stock Options granted to any one employee under
all stock option plans of the Company and its parent and subsidiary corporations
first become exercisable during any calendar year after December 31, 1986 shall
not exceed $100,000.
6.10 Restriction on Issuance of Shares. The issuance of options and
shares shall be subject to compliance with all of the applicable requirements of
law with respect to the issuance and sale of securities, including, without
limitation, any required qualification under the California Corporate Securities
Law of 1968, as amended.
3
4
6.11 Investment Representation. Any optionee may be required, as a
condition of issuance of shares covered by his or her option, to represent that
the shares to be acquired pursuant to exercise of the option will be acquired
for investment and without a view to distribution thereof; and in such case, the
Company may place a legend on the certificate evidencing the shares reflecting
the fact that they were acquired for investment and cannot be sold or
transferred unless registered under the Securities Act of 1933, as amended, or
unless counsel for the Company is satisfied that the circumstances of the
proposed transfer do not require such registration, and in addition, the Company
may issue stop transfer instructions to the transfer agent of the Company's
securities restricting the transfer of such shares.
6.12 Rights as a Shareholder or Employee. An optionee or transferee of
an option shall have no rights as a shareholder of the Company with respect to
any shares covered by any option until (i) the Company has received all amounts
payable in connection with the exercise of the option, including the exercise
price and any amounts required by the Company to satisfy tax withholding
requirements, and (ii) a share certificate for such shares has been issued. No
adjustment shall be made for dividends (ordinary or extraordinary, whether cash,
securities, or other property) or distributions or other rights for which the
record date is prior to the date such share certificate is issued, except as
provided in Section 6.15. Nothing in the Plan or in any grant or option
agreement shall confer upon any employee any right to continue in the employ of
the Company or any of its subsidiaries or interfere in any way with any right of
the Company or any subsidiary to terminate the optionee's employment at any
time.
6.13 Termination of Employment, Disability, or Death. In general,
subject to Section 6.14, options shall be exercisable by an optionee (or his or
her permitted successor in interest) following such optionee's termination of
employment only to the extent that such options had become exercisable on or
prior to the date of such termination. In the event an optionee ceases to be an
employee of the Company and its subsidiaries for any reason (other than cause)
while still living, any option or unexercised portion thereof granted to the
optionee may, to the extent such option was exercisable by the optionee on or
prior to the date he or she ceased to be an employee (or is accelerated pursuant
to Section 6.14 to a date within three months of termination of employment), be
exercised by the optionee within three months of the date on which he or she
ceased to be an employee, but in any event not later than the date of expiration
of the option. In the event of the death or disability (as defined in Section
105(d)(4) of the Code) of the optionee while he or she is an employee of the
Company or any of its subsidiaries or within not more than three months of the
date on which he or she ceased to be an employee for any reason other than
cause, any option or unexercised portion thereof granted to the optionee may, to
the extent such option was exercisable by the optionee on or prior to the date
of death or disability (or is accelerated pursuant to Section 6.14 to a date
within the period during which such option may be exercised as set forth below),
be exercised by the optionee or, if the optionee is then deceased or
incapacitated, by the optionee's personal representatives, heirs, or legatees at
any time prior to the later of (i) one year from the date on which the optionee
ceased to be an employee or (ii) the latest date the option could have been
exercised by the optionee if not disabled or dead, but in any event, not later
than the date of expiration of the option. Notwithstanding the foregoing,
however, if an optionee's employment with the Company and its subsidiaries is
terminated for cause, as determined by the Administrator in its sole discretion,
all options held by such optionee shall expire on the date of termination of
employment and thereafter shall not be exercisable in whole or in part.
6.14 Modification, Extension, and Renewal of Options; Alteration of
Vesting and Exercise Periods. Subject to the terms and conditions and within the
specific limitations of the Plan, the Administrator may modify, extend, or renew
outstanding options granted under the Plan, accept the surrender of outstanding
options (to the extent not theretofore exercised), and authorize the granting of
new options in substitution therefor (to the extent not theretofore exercised)
except that no such modification, extension or renewal shall result in a
reduction in the exercise price of such option. Without limitation of the
foregoing and notwithstanding anything in this Plan to the contrary, the
Administrator may at any time and from time to time in its discretion (i)
designate shorter or longer periods than specified herein or in any particular
option grant or agreement following the termination of an optionee's employment
with the Company or any of its subsidiaries or the optionee's death or
disability during which the optionee may exercise options, provided, however,
that any shorter periods determined by the Administrator shall be effective only
if determined at the time of the grant of the affected option or if such shorter
period is agreed to in writing by the optionee, and any longer periods may not
extend beyond the original termination date of the affected option; (ii) subject
to the six-month minimum vesting period described in Section 6.6, accelerate
vesting of an option in whole or part by increasing the number of shares
purchasable at any particular time, provided that no such acceleration shall
increase the total number of shares for which the option may be exercised; and
(iii) extend the period after death or disability or
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termination of employment during which vesting of all or any portion of any
options that had not become exercisable on or prior to the date thereof may
occur. Notwithstanding the foregoing, no option shall be modified in such a
manner as to impair any rights of the optionee under the option, or to cause an
Incentive Stock Option to cease to qualify as such, without the consent of the
optionee.
6.15 Recapitalization or Reorganization of the Company. Except as
otherwise provided herein, appropriate and proportionate adjustments shall be
made in the number and class of shares subject to the Plan, the Maximum Annual
Employee Grant, the option rights granted under the Plan, and the exercise price
of such option rights, in the event of a stock dividend (but only on Common
Stock), stock split, reverse stock split, recapitalization, reorganization,
merger, consolidation, separation, or like change in the capital structure of
the Company affecting the Common Stock of the Company. In the event of a
liquidation of the Company, or a merger, reorganization, or consolidation of the
Company with any other corporation in which the Company is not the surviving
corporation or the Company becomes a wholly-owned subsidiary of another
corporation, any unexercised options theretofore granted under the Plan shall be
deemed canceled unless the surviving corporation in any such merger,
reorganization, or consolidation elects to assume the options under the Plan or
to issue substitute options in place thereof; provided, however, that,
notwithstanding the foregoing, if such options would otherwise be canceled in
accordance with the foregoing, the optionee shall have the right, exercisable
during a ten-day period ending on the fifth day prior to such liquidation,
merger, reorganization, or consolidation, to exercise the optionee's option in
whole or in part without regard to any installment exercise provisions in the
optionee's option agreement. To the extent that the foregoing adjustments relate
to stock or securities of the Company, such adjustments shall be made by the
Administrator, the determination of which in that respect shall be final,
binding, and conclusive, provided that an Incentive Stock Option shall not
without the consent of the optionee be adjusted in a manner that causes the
option to fail to continue to qualify as an Incentive Stock Option.
7. Termination or Amendment of Plan. The Board or the Committee may at
any time or from time to time suspend, terminate or amend the Plan; provided
that, without approval of the shareholders of the Company, there shall be,
except as specifically permitted by the Plan, no increase in the total number of
shares issuable upon exercise of options granted under the Plan, no change in
the class of persons eligible to receive options granted under the Plan, and no
extension of the latest date upon which options may be granted under the Plan;
and provided further that, without the consent of the optionee, no amendment may
adversely affect any then outstanding option or any unexercised portion thereof
without the consent of the holder of such option.
8. Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board or the Committee, the members of the
Board or the Committee administering the Plan shall be indemnified by the
Company against reasonable expenses, including attorney's fees, actually and
necessarily incurred in connection with the defense of any action, suit, or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any action, suit, or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit, or
proceeding that such member is liable for negligence or misconduct in the
performance of his or her duties, provided that within 60 days after institution
of any such action, suit, or proceeding, the member shall in writing offer the
Company the opportunity, at its own expense, to handle and defend the same.
9. 1978 Non-Qualified Stock Option Plan. The Plan as set forth herein
constitutes an amendment and restatement of the Company's 1978 Non-Qualified
Stock Option Plan which was adopted in 1978. The Administrator may, in its
discretion, authorize the conversion, to the fullest extent permitted by law, of
Non-Qualified Stock Options granted under the 1978 Non-Qualified Stock Option
Plan prior to such amendment to Incentive Stock Options under this Plan, as so
amended. Any such options converted to Incentive Stock Options shall be treated
as Incentive Stock Options for all purposes under the Plan; provided, however,
that none of the terms or conditions of any of such options, including, but not
limited to, the exercise price, the term of the option, and the time(s) within
which the option may be exercised, shall be altered or amended by reason of such
conversion.
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10. Options Granted Prior to Amendment and Restatement. The Plan, as
amended and restated from time to time, shall, in the discretion of the
Administrator, apply to and govern options granted under the Plan prior to the
date of any such amendment or restatement, subject to the consent of any holder
of an option who would be disadvantaged by application to such option of the
Plan as amended and restated after the grant of such option.
11. Term of Plan. Unless sooner terminated by the Board or the Committee
in its sole discretion, the Plan will expire on November 10, 2004 (the
"Termination Date"). Options may be granted under the Plan until midnight on the
Termination Date, whereupon the Plan shall terminate. No options may be granted
during any suspension of the Plan or after its termination. Notwithstanding the
foregoing, each option properly granted under the Plan shall remain in effect
until such option has been exercised or terminated in accordance with its terms
and the terms of the Plan.
12. Miscellaneous.
12.1 Plan Provisions Regarding Incentive Stock Options. Options
originally granted as Incentive Stock Options but that subsequently become
Non-Qualified Stock Options need not satisfy any requirements of the Plan
applicable to Incentive Stock Options.
12.2 Other Compensation Plans. The adoption of this Plan shall not
affect any other stock option, incentive, or compensation plans in effect for
the Company or any of its subsidiaries, and the Plan shall not preclude the
Company or any of its subsidiaries from establishing any other forms of
incentive compensation for employees, directors, or advisors of the Company or
any of its subsidiaries.
# # #
As amended (Section 5, 6.4, 6.14) and restated 11/14/96
Amended 3/20/97: (Section 6.8)
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EXHIBIT 10.16.1
AMENDED AND RESTATED
WESTERN DIGITAL CORPORATION
LONG-TERM RETENTION PLAN
This Plan was adopted by the Company in July 1995 and amended and
restated in July 1997.
1. PURPOSE.
The purpose of the Western Digital Corporation Long-Term Retention Plan
(the "PLAN") is to provide additional incentive compensation to a select group
of employees who are considered critical to the management and successful
operation of Western Digital Corporation (the "COMPANY").
2. DEFINITIONS.
As used herein, the following terms shall have the meanings ascribed
thereto below:
(a) "ACCOUNT" means a bookkeeping account maintained by the Company for
each Award to track vesting and value pursuant to Sections 5 and 6.
(b) "AWARD" means the commitment of the Company to make payments under
the Plan to an Eligible Employee selected pursuant to Section 4 in amounts
determined in accordance with Sections 5 and 6.
(c) "BASE AMOUNT" means the amount of an Award at the time of its grant,
denominated in Dollars.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CHANGE IN CONTROL" has the meaning set forth in the Deferred
Compensation Plan.
(f) "COMMITTEE" means a committee of the Board consisting solely of two
(2) or more Non-employee Directors.
(g) "COMMON STOCK" means the common stock of the Company.
(h) "DEFERRED COMPENSATION PLAN" means the Company's Deferred
Compensation Plan.
(i) "ELIGIBLE EMPLOYEE" means a select group of management or highly
compensated employees (within the meaning of Title I of the Employee Retirement
Income Security Act of 1974) regularly employed by the Company or any of its
subsidiaries.
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(j) "NON-EMPLOYEE DIRECTOR" means a director who is both a "non-employee
director" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as
amended, and an "outside director" within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
(k) "PARTICIPANT" means any Eligible Employee to whom an Award is
granted.
(l) "SHARE EQUIVALENTS" means amounts credited to a Participant's
Account pursuant to Section 5.1 to reflect an Award, and other amounts credited
to such Account pursuant to the Plan.
(m) "SHARE EQUIVALENT VALUE" has the meaning set forth in Section 6.3.
(n) "SUB-ACCOUNT" means a First Sub-Account, Second Sub-Account, or
Third Sub-Account making up a portion of an Account as described in Section 5.1.
(o) "VALUATION DATE" means each January 1 and July 1.
3. ADMINISTRATION OF THE PLAN.
3.1 Administrator. The Plan shall be administered by the Board, which
shall have complete discretion and authority to interpret and construe the Plan
and any Awards issued thereunder, decide all questions of eligibility and
benefits (including underlying factual determinations), and adjudicate all
claims and disputes.
3.2 Administrative Rules. The Board may (a) adopt, amend, and rescind
rules and regulations relating to the Plan; (b) determine the Base Amount and
any other terms and provisions of Awards not inconsistent with the Plan, (c)
construe the provisions of the Plan and Awards; and (d) make all determinations
necessary or advisable for administering the Plan. Any such actions by the Board
shall be consistent with the provisions of the Plan. The Board may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or any
Award in the manner and to the extent it shall deem expedient to carry the Plan
or Award into effect, and it shall be the sole and final judge of such
expediency. The determinations of the Board on the matters referred to in this
Section 3.2 shall be final and binding on all interested parties.
3.3 Delegation. The Board may delegate any of its responsibilities with
respect to the Plan to the Committee.
4. AWARDS.
4.1 Eligibility and Grants of Awards. Subject to the express provisions
of the Plan, Awards may be granted to Eligible Employees by the Board or the
Committee. Upon the date of any such grant, or any effective date of such grant
specified by the Board or Committee different from the date the grant decision
is made, the Award shall be effective and the recipient thereof shall be a
Participant with respect to that Award. Each Award granted pursuant to the Plan
shall
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be evidenced by a memorandum from the Company to the recipient specifying the
Base Amount of the Award and such other terms as the Board or Committee shall
deem necessary or desirable.
4.2 Continued Employment. The grant of an Award to an Eligible Employee
pursuant to the Plan shall not give the Eligible Employee any right to be
retained in the employ of the Company; and the right and power of the Company to
dismiss or discharge any Eligible Employee or Participant, with or without
cause, for any reason or no reason, is specifically reserved.
4.3 No Property Rights. The grant of an Award to an Eligible Employee
pursuant to the Plan shall not be deemed the grant of a property interest in any
assets of the Company. Each Award evidences only a general obligation of the
Company to comply with the terms and conditions of the Plan and make payments in
accordance with the Plan from the assets of the Company that are available for
the satisfaction of obligations to creditors. The Company shall not segregate
any assets in respect of any Awards or Participant Accounts. The rights of a
Participant to benefits under this Plan shall be solely those of a general,
unsecured creditor of the Company.
4.4 No Rights as a Shareholder. A Participant shall have no dividend,
voting, or any other rights as a shareholder with respect to any Award or
Account or Share Equivalents.
5. CREDITS TO ACCOUNTS.
5.1 Credits - General. The Company shall establish an Account for each
Participant for each Award granted to that Participant. At the time of grant of
each Award, the Share Equivalent of that Award shall be determined by dividing
the Base Amount of the Award by the Share Equivalent Value determined as of the
Valuation Date most recently preceding the date of the Award (or the Valuation
Date as of which the Award is made, if applicable), and the resulting number of
Share Equivalents shall be credited to the Account maintained for that
Participant for that Award. The Share Equivalents originally credited to an
Account shall be allocated into three sub-accounts, the first consisting of 10%
of the total number of such Share Equivalents (the "FIRST SUB-ACCOUNT"), the
second consisting of 25% of the total number of such Share Equivalents (the
"SECOND SUB-ACCOUNT"), and the third consisting of 65% of the total number of
such Share Equivalents (the "THIRD SUB-ACCOUNT"). Each Sub-Account may be
credited with additional Share Equivalents pursuant to Section 5.2.
5.2 Additional Credits.
(a) Whenever the Company shall pay any dividends (other than in
Common Stock) upon issued and outstanding Common Stock, or make any distribution
(other than in Common Stock) with respect thereto, there shall be credited to
each Sub-Account of each Participant a number of Share Equivalents determined by
multiplying the "fair value" of any dividend (or other distribution) made by the
Company with respect to one share of its Common Stock by the number of Share
Equivalents in that Sub-Account and then dividing that product by the Share
Equivalent Value determined as of the Valuation Date most recently preceding the
date
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of the dividend or distribution (or the Valuation Date upon which the dividend
or distribution is made, if applicable). In the case of a cash dividend or
distribution, the "fair value" thereof shall be the amount of such cash, and, in
the case of any other dividend or distribution, the "fair value" thereof shall
be such amount as shall be determined in good faith by the Board or Committee.
(b) If the Company pays any dividend or distribution upon its
issued and outstanding Common Stock payable in additional shares of such Common
Stock, there shall be credited to each Sub-Account of each Participant a number
of Share Equivalents equal to the product obtained by multiplying (i) the number
of Share Equivalents in that Sub-Account at the time of payment by (ii) the
number of shares of Common Stock issued as a stock dividend or distribution by
the Company with respect to one share of its Common Stock.
(c) In the event of any change in the number of outstanding
shares of the Common Stock effected without receipt of consideration therefor by
the Company and not addressed by Section 5.2(a) or (b), whether by reason of a
stock dividend or split, combination, exchange of shares or other
recapitalization, merger in which the Company is the surviving corporation or
other similar corporate change, then if the Board or Committee shall determine
that such change equitably requires an adjustment in the number or kind of Share
Equivalents then held in Participants' Sub-Accounts, or other computations under
the Plan based upon Common Stock or its value, such adjustment shall be made by
the Board or Committee and shall be conclusive and binding for all purposes of
the Plan.
5.3 Cessation of Credits. There shall be no further credits to a
Sub-Account after it vests, or to any account or accounts of a Participant after
termination of his or her employment with the Company or a Change in Control.
6. VESTING AND PAYMENT.
6.1 Vesting. Except as provided below, Participants will have no vested
interest in any Award prior to vesting thereof or in excess of the amount
thereof vested. Each Award shall vest in three installments: the First
Sub-Account for an Award shall vest on the second anniversary of the Valuation
Date most recently preceding the date of the Award (or upon which the Award is
made, if applicable); the Second Sub-Account for that Award shall vest on the
third anniversary of the Valuation Date most recently preceding the date of the
Award (or upon which the Award is made, if applicable); and the Third
Sub-Account for that Award shall vest on the fourth anniversary of the Valuation
Date most recently preceding the date of the Award (or upon which the Award is
made, if applicable). Notwithstanding the foregoing, however, vesting shall
immediately cease upon termination of the Participant's employment with the
Company for any reason, and no vesting credit shall be given for partial years,
regardless of the reason for termination of the Participant's employment with
the Company. If a Participant's employment with the Company terminates for any
reason, he or she shall immediately forfeit all nonvested Awards and account
balances.
6.2 Change in Control. Notwithstanding the foregoing, all Awards shall
vest in their entirety immediately prior to any Change in Control.
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6.3 Payments. Within sixty (60) days of vesting of a Sub-Account, the
Company shall pay to the Participant for whom that Sub-Account is maintained an
amount equal to the product of the number of Share Equivalents in that
Sub-Account on the date of vesting and the Share Equivalent Value then
applicable. For these purposes, the Company shall determine the "SHARE
EQUIVALENT VALUE" as of each Valuation Date as the arithmetic mean of the
closing prices of the Common Stock on the New York Stock Exchange (or other
exchange or market system upon which the Common Stock principally trades) for
each trading day during the 12-month period ending on the day before that
Valuation Date. The Share Equivalent Value determined as of each Valuation Date
shall apply to the calculation of all credits and payments in respect of any
vesting occurring on or after that Valuation Date and before the next succeeding
Valuation Date.
6.4 Payments only to Participant. Payments pursuant to any Award shall
be made only to the Participant recipient of that Award or his or her survivors.
6.5 Tax Limits. Notwithstanding anything herein to the contrary, if the
Company's tax deduction for any payment under the Plan would be disallowed under
Section 162(m) or 280G of the Internal Revenue Code of 1986, as amended, or for
any other reason, the Company may, in its discretion, defer payment of the
excess amount, but only to the extent that, and for so long as, the Company's
tax deduction for the payment would be disallowed. Amounts that are deferred for
this reason will accrue interest at a rate in accordance with the Deferred
Compensation Plan.
6.6 Deferral. A Participant may elect at any time prior to the first
anniversary of the date of grant of an Award to defer receipt of any or all
payments due under the Plan in respect of that Award. Such election shall be
made, and any such deferral shall be effected and administered, in accordance
with the Deferred Compensation Plan.
7. TAXES.
7.1 Withholding. The amounts payable to a Participant under the Plan
shall be reduced by any amount that the Company is required to withhold with
respect to such payments under applicable law.
7.2 Participant Taxes. The Company is not responsible for, and makes no
representation or warranty whatsoever in connection with, the tax treatment
hereunder, and each Participant should consult his or her own tax advisor.
8. AMENDMENT OR TERMINATION.
The Board may, from time to time, amend, modify, change, suspend, or
terminate, in whole or in part, any or all provisions of the Plan, except that
no amendment, modification, change, suspension, or termination may affect any
right of any Participant, without his or her consent, with respect to any Award
granted prior to the effective date of such amendment, modification, change,
suspension, or termination.
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9. ASSIGNMENT.
No right or interest to or in any Award, payment or benefit to a
Participant shall be assignable by such Participant except by will or the laws
of descent and distribution. No right, benefit or interest of a Participant
hereunder shall be subject to anticipation, alienation, sale, assignment,
encumbrance, charge, pledge, hypothecation or set off in respect of any claim,
debt or obligation, or to execution, attachment, levy or similar process or
assignment by operation of law. Any attempt, voluntarily or involuntarily, to
effect any action specified in the immediately preceding sentences shall, to the
full extent permitted by law, be null, void and of no effect; provided, however,
that this provision shall not preclude a Participant from designating one or
more beneficiaries to receive any amount that may be payable to such Participant
under the Plan after his or her death and shall not preclude the legal
representatives of the Participant's estate from assigning any right hereunder
to the person or persons entitled thereto under his or her will, or, in the case
of intestacy, to the person or persons entitled thereto under the laws of
intestacy applicable to his or her estate.
10. GENERAL.
10.1 Laws Governing. The substantive laws of the State of California
shall govern the validity, construction, enforcement and interpretation of the
Plan and all Awards, unless otherwise specified therein.
10.2 Good Faith Determinations. No member of the Committee or the Board
shall be liable, with respect to the Plan or any Award, for any act, whether of
commission or omission, taken by any other member or by any officer, agent, or
employee of the Company, nor, excepting circumstances involving his or her own
bad faith, for anything done or omitted to be done by himself or herself. The
Company shall indemnify and hold harmless each member of the Committee and Board
from and against any liability or expense hereunder, except in the case of such
member's own bad faith.
10.3 Effect of Headings. Section headings contained in the Plan are for
convenience only and shall not affect the construction or interpretation of the
Plan.
10.4 Invalid Provisions. If any provision of the Plan or any Award
granted hereunder is held to be illegal, invalid or unenforceable under present
or future laws effective during the term of the Plan, such provision shall be
fully severable; the Plan or such Award shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never been a part of the
Plan or such Award; and the remaining provisions of the Plan or such Award shall
remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or severance from the Plan or such Award.
Furthermore, in lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as part of the Plan or such Award a provision as
similar in terms to such illegal, invalid or unenforceable provision as is
possible and still be legal, valid and enforceable.
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10.5 Set-Off. The Company shall be entitled, at its option and not in
lieu of any other remedies to which it may be entitled, to set off any amounts
due the Company or any affiliate of the Company against any amount due and
payable by the Company or any affiliate of the Company to a Participant pursuant
to this Plan or otherwise.
10.6 Waivers. No waiver of any term or condition hereof shall be binding
unless it is in writing and signed by the Company and the affected Participant.
The waiver by any party of a breach of any provision of this Plan shall not
operate or be construed as a waiver of any subsequent breach by any party.
10.7 Inurement. The rights and obligations under the Plan and any
related agreements shall inure to the benefit of, and shall be binding upon the
Company, its successors and assigns, and the Participants and their
beneficiaries and legal representatives.
10.8 Entire Agreement. This Plan constitutes the entire agreement
between the Company and the Participants concerning the subject matter hereof,
and supersedes all other agreements, whether written or oral, with respect to
such subject matter.
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EXHIBIT 10.33
WESTERN DIGITAL CORPORATION
AMENDED AND RESTATED
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
ARTICLE I
GENERAL
1.01 Adoption and Amendment. This Western Digital Corporation Amended
and Restated Stock Option Plan for Non-Employee Directors (the "PLAN") was
initially adopted by the Board of Directors (the "BOARD") of Western Digital
Corporation (the "COMPANY") as of May 15, 1985 (the initial effective date of
the Plan) subject to approval of the Company's shareholders, which was obtained
at the Annual Meeting of Shareholders held on November 15, 1985. Amendment No. 1
to the Plan was adopted by the Board as of December 6, 1985, subject to
shareholder approval, which was obtained at the Annual Meeting of Shareholders
held on November 13, 1986. Amendment No. 2 to the Plan was adopted by the Board
as of September 22, 1987, subject to shareholder approval, which was obtained at
the Annual Meeting of Shareholders held on November 19, 1987. Amendment No. 3 to
the Plan was approved by the Board without shareholder approval on November 19,
1987. Amendment No. 4 to the Plan was adopted by the Board as of September 22,
1988, subject to shareholder approval, which was obtained at the Annual Meeting
of Shareholders held on November 17, 1988. Amendment No. 5 to the Plan was
adopted by the Board as of July 27, 1989, subject to shareholder approval, which
was obtained at the Annual Meeting of Shareholders held on November 16, 1989.
Amendment No. 6 to the Plan was adopted by the Board as of July 26, 1990,
subject to shareholder approval, which was obtained at the Annual Meeting of
Shareholders held on November 15, 1990. Amendment No. 7 to the Plan was approved
by the Board without shareholder approval on May 23, 1991. Amendment No. 8 to
the Plan was approved by the Board as of July 21, 1994, subject to shareholder
approval, which was obtained at the Annual Meeting of Shareholders held on
November 10, 1994. This Amendment and Restatement of the Plan was approved by
the Board on September 7, 1995, subject to shareholder approval, which was
obtained at the Annual Meeting of Shareholders held on November 1, 1995, and is
effective as of that date, provided that holders of options shall receive
Additional Options pursuant to Section 6(a) of the Plan as amended through
Amendment No. 8 thereto in respect of exercises or terminations of Initial
Options or Additional Options until December 31, 1995. This Amendment and
Restatement of the Plan shall govern all options granted under the Plan after
the date of approval hereof by the Company's shareholders (including Additional
Options granted pursuant to the preceding sentence) and all options granted
under the Plan prior to that date, subject to any required consents of the
holders of such options; prior to or in the absence of any such consent, options
granted under the Plan as amended through Amendment No. 8 thereto will be
governed by that version of the Plan.
1.02 Administration. The Plan shall be administered by the Company,
which, subject to the express provisions of the Plan, shall have the power to
construe the Plan and any agreements or memoranda defining the rights and
obligations of the Company and option recipients, to determine all questions
arising thereunder, to adopt and amend such rules and regulations for the
administration thereof as it may deem desirable, and otherwise to carry out the
terms of the Plan and such agreements or memoranda. The interpretation and
construction by the administrator of any provisions of the Plan or of any option
granted under the Plan shall be final. Notwithstanding the foregoing, the
administrator shall have no authority or discretion as to the selection of
persons eligible to receive options granted under the Plan, the number of shares
covered by options granted under the Plan, the timing of such grants, or the
exercise price of options granted under the Plan, which matters are specifically
governed by the provisions of the Plan.
1.03 Eligible Directors. A person shall be eligible to receive grants of
options under the Plan (an "ELIGIBLE DIRECTOR") if, at the time of the option's
grant, he or she is a duly elected or appointed member of the Board, but is not
and has not since the beginning of the Company's most recently completed fiscal
year been (a) granted or awarded any equity securities of the Company
(including, without limitation, stock options and stock appreciation rights)
except pursuant to the Plan or a similar plan for directors of the Company, or
(b) an employee of the Company or any of its affiliates or otherwise eligible
for selection as a person to whom equity securities of the Company (including,
without limitation, stock options and stock appreciation rights) may be
allocated or
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granted pursuant to any plan of the Company or any of its affiliates (other than
the Plan or a similar plan for directors of the Company) entitling participants
therein to acquire stock, stock options, or stock appreciation rights of the
Company or any of its affiliates.
1.04 Shares of Common Stock Subject to the Plan and Grant Limit. The
shares that may be issued upon exercise of options granted under the Plan shall
be authorized and unissued shares of the Company's Common Stock or previously
issued shares of the Company's Common Stock reacquired by the Company and unused
option shares pursuant to Section 2.06. The aggregate number of shares that may
be issued upon exercise of options granted under the Plan shall not exceed
800,000 shares of Common Stock, subject to adjustment in accordance with Article
III.
1.05 Amendment of the Plan. The Board may, insofar as permitted by law,
from time to time suspend or discontinue the Plan or revise or amend it in any
respect whatsoever, except that no such amendment shall alter or impair or
diminish any rights or obligations under any option theretofore granted under
the Plan without the consent of the person to whom such option was granted. In
addition, if an amendment to the Plan would increase the number of shares
subject to the Plan (as adjusted under Article III), increase the number of
shares for which an option or options may be granted to any optionee (as
adjusted under Article III), change the class of persons eligible to receive
options under the Plan, provide for the grant of options having an exercise
price per option share less than the exercise price specified in the Plan,
extend the final date upon which options may be granted under the Plan, or
otherwise materially increase the benefits accruing to participants in a manner
not specifically contemplated herein or affect the Plan's compliance with Rule
16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), the amendment shall be approved by the Company's
shareholders to the extent required to comply with Rule 16b-3 under the Exchange
Act ("RULE 16B-3"). Under no circumstances may the provisions of the Plan that
provide for the amounts, price, and timing of option grants be amended more than
once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the rules thereunder. The Plan is intended to qualify as a formula
plan under Rule 16b-3, but not to impose restrictions included in the Plan for
purposes of compliance with Rule 16b-3 if those restrictions become unnecessary
to compliance with Rule 16b-3. Accordingly, notwithstanding the foregoing, the
administrator may administer and amend the Plan to comply with or take advantage
of changes in the rules (or interpretations thereof) promulgated by the
Securities and Exchange Commission or its staff under Section 16 of the Exchange
Act, subject to the shareholder approval requirement described above.
1.06 Term of Plan. Options may be granted under the Plan until the
earlier to occur of May 15, 2005 or the date of a Change in Control, as defined
in Section 3.02. In addition, no options may be granted during any suspension of
the Plan or after its termination for any reason. Notwithstanding the foregoing,
each option properly granted under the Plan shall remain in effect until such
option has been exercised or terminated in accordance with its terms and the
terms of the Plan.
1.07 Restrictions. All options granted under the Plan shall be subject
to the requirement that, if at any time the Company shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to options granted under the Plan upon any securities exchange or under
any state or federal law, or the consent or approval of any government or
regulatory body or authority, is necessary or desirable as a condition of, or in
connection with, the granting of such an option or the issuance, if any, or
purchase of shares in connection therewith, such option may not be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. Unless the shares of stock to be issued upon exercise
of an option granted under the Plan have been effectively registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT") as now in force or
hereafter amended, the Company shall be under no obligation to issue any shares
of stock covered by any option unless the person who exercises such option, in
whole or in part, shall give a written representation and undertaking to the
Company satisfactory in form and scope to counsel to the Company and upon which,
in the opinion of such counsel, the Company may reasonably rely, that he or she
is acquiring the shares of stock issued to him or her pursuant to such exercise
of the option for his or her own account as an investment and not with a view
to, or for sale in connection with, the distribution of any such shares of
stock, and that he or she will make no transfer of the same except in compliance
with any rules and regulations in force at the time of such transfer under the
Securities Act, or
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any other applicable law or regulation, and that if shares of stock are issued
without such registration, a legend to this effect may be endorsed upon the
securities so issued and the Company may order its transfer agent to stop
transfer of such shares.
1.08 Assignability. No option granted under the Plan shall be assignable
or transferable by the grantee except by will or the laws of descent and
distribution or upon dissolution of marriage pursuant to a property settlement
or domestic relations order, or as permitted on a case-by-case basis in the
discretion of, and subject to such conditions as may be imposed by, the
Administrator to permit transfers to immediate family members, family trusts or
family foundations of the grantee under circumstances that would not adversely
affect the interests of the Company.
1.09 Withholding Taxes. Whenever shares of stock are to be issued upon
exercise of an option granted under the Plan, the administrator shall have the
right to require the optionee to remit to the Company an amount sufficient to
satisfy any federal, state and local withholding tax requirements prior to such
issuance. The administrator may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company or by withholding a portion of the stock otherwise issuable upon
exercise of an option.
1.10 Definition of "Fair Market Value". For purposes of the Plan, the
"fair market value" of a share of stock as of a particular date shall be: (a) if
the stock is listed on an established stock exchange or exchanges (including,
for this purpose, The Nasdaq Stock Market), the last reported sale price per
share of the stock on such date on the principal exchange on which it is traded
or, if no sale was made on such date on such principal exchange, then as of the
next preceding date on which such a sale was made; or (b) if the stock is not
then listed on an exchange, the average of the closing bid and asked prices per
share for the stock in the over-the-counter market as quoted on the NASDAQ
system on such date (in the case of (a) or (b), subject to adjustment as and if
necessary and appropriate to set an exercise price not less than 100% of the
fair market value of the stock on the date an option is granted); or (c) if the
stock is not then listed on an exchange or quoted in the over-the-counter
market, an amount determined in good faith by the administrator. The fair market
value of rights or property other than stock shall be determined by the
administrator on the basis of such factors as it may deem appropriate.
1.11 Rights as a Shareholder. An optionee or a permitted transferee of
an option shall have no rights as a shareholder with respect to any shares
issuable or issued upon exercise of the option until the date of the receipt by
the Company of all amounts payable in connection with exercise of the option,
including the exercise price and any amounts required pursuant to Section 1.09.
ARTICLE II
STOCK OPTIONS
2.01 Grants of Initial Options. Each Eligible Director shall, upon first
becoming an Eligible Director, receive a one-time grant of an option to purchase
up to 30,000 shares of the Company's Common Stock, subject to adjustment as set
forth in Article III. Options granted under this Section 2.01 are "INITIAL
OPTIONS" for the purposes hereof. The exercise price per share for Initial
Options shall be equal to the fair market value of the Company's Common Stock on
the date of grant, subject to (a) vesting as set forth in Section 2.03, and (b)
adjustment as set forth in Article III. An Eligible Director who has received an
initial grant of stock options under the Plan or pursuant to a prior option plan
for the Company's directors shall not be eligible to receive an Initial Option.
2.02 Grants of Additional Options. Immediately following the annual
meeting of shareholders of the Company next following an Eligible Director's
becoming an Eligible Director and immediately following each subsequent annual
meeting of shareholders of the Company, in each case if the Eligible Director
has served as a director since his or her election or appointment and has been
re-elected as a director at such annual meeting, such Eligible Director shall
automatically receive an option to purchase up to 7,500 shares of the Company's
Common Stock (an "ADDITIONAL OPTION"), subject to adjustment as set forth in
Article III. In addition to the Additional Options described above, an
individual who was previously an Eligible Director and received an initial grant
of
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stock options under the Plan or pursuant to a prior option plan for the
Company's directors, who then ceased to be a director for any reason, and who
then again becomes an Eligible Director, shall upon again becoming an Eligible
Director automatically receive an Additional Option. The exercise price per
share for all Additional Options shall be equal to the fair market value of the
Company's Common Stock on the date of grant, subject to (a) vesting as set forth
in Section 2.03, and (b) adjustment as set forth in Article III.
2.03 Vesting. Initial Options shall vest and become exercisable in
installments of 5,000 shares on the first anniversary of the date of grant and
1,250 shares at the end of each of the next 12 three-month periods thereafter.
Additional Options shall vest and become exercisable in installments of 1,250
shares on the first anniversary of the date of grant and 312.5 shares at the end
of each of the next 12 three-month periods thereafter. Notwithstanding the
foregoing, however, but subject to Section 3.02, (i) Initial Options and
Additional Options will vest and become exercisable as set forth herein only if
the optionee has remained a director for the entire period from the date of
grant to the date specified herein for vesting, and (ii) Initial Options and
Additional Options that have not vested and become exercisable at the time the
optionee ceases to be a director shall terminate.
2.04 Exercise. No option shall be exercisable except in respect of whole
shares, and fractional share interests shall be disregarded. Not less than 100
shares of stock (or such other amount as is set forth in the applicable option
agreement or confirming memorandum) may be purchased at one time unless the
number purchased is the total number at the time available for purchase under
the terms of the option. An option shall be deemed to be exercised when the
Secretary or other designated official of the Company receives written notice of
such exercise from or on behalf of the optionee, together with payment of the
exercise price and any amounts required under Section 1.09. The option exercise
price shall be payable upon the exercise of an option in legal tender of the
United States or capital stock of the Company delivered in transfer to the
Company by or on behalf of the person exercising the option (duly endorsed in
blank or accompanied by stock powers duly endorsed in blank, with signatures
guaranteed in accordance with the Exchange Act if required by the administrator)
or retained by the Company from the stock otherwise issuable upon exercise or
surrender of vested and exercisable options granted to the recipient and being
exercised (in either case valued at fair market value as of the exercise date),
or such other consideration as the administrator may from time to time in the
exercise of its discretion deem acceptable in any particular instance, provided,
however, that the administrator may, in the exercise of its discretion, (a)
allow exercise of an option in a broker-assisted or similar transaction in which
the exercise price is not received by the Company until promptly after exercise,
and/or (b) allow the Company to loan the exercise price to the person entitled
to exercise the option, if the exercise will be followed by a prompt sale of
some or all of the underlying shares and a portion of the sales proceeds is
dedicated to full payment of the exercise price and amounts required pursuant to
Section 1.09.
2.05 Option Agreements or Memoranda. Each option granted under the Plan
shall be evidenced by an option agreement duly executed on behalf of the Company
and by the Eligible Director to whom such option is granted or, in the
administrator's discretion, a confirming memorandum issued by the Company to the
recipient, stating the number of shares of stock issuable upon exercise of the
option and the exercise price, and setting forth explicitly or by reference to
the Plan the time during which the option is exercisable and the times at which
the options vest and become exercisable. Such option agreements or confirming
memoranda may but need not be identical and shall comply with and be subject to
the terms and conditions of the Plan, a copy of which shall be provided to each
option recipient and incorporated by reference into each option agreement or
confirming memorandum. Any option agreement or confirming memorandum may contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the administrator.
2.06 Term of Options and Effect of Termination. Notwithstanding any
other provision of the Plan, no option granted under the Plan shall be
exercisable after the expiration of ten years from the effective date of its
grant. In the event that any outstanding option under the Plan expires by reason
of lapse of time or is otherwise terminated without exercise for any reason,
then the shares of Common Stock subject to such option that have not been issued
upon exercise of the option shall again become available in the pool of shares
of Common Stock for which options may be granted under the Plan. In the event
that the recipient of any options granted under the Plan shall cease to be a
director of the Company for any reason, and subject to Section 3.02, all Initial
Options and Additional Options granted under the plan to such recipient shall be
exercisable, to the extent they are already
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exercisable at the date such recipient ceases to be a director, for a period of
365 days after that date (or, if sooner, until the expiration of the option
according to its terms), and shall then terminate. In the event of the death of
an optionee while such optionee is a director of the Company or within the
period after termination of such status during which he or she is permitted to
exercise an option, such option may be exercised by any person or persons
designated by the optionee on a beneficiary designation form adopted by the
administrator for such purpose or, if there is no effective beneficiary
designation form on file with the Company, by the executors or administrators of
the optionee's estate or by any person or persons who shall have acquired the
option directly from the optionee by his or her will or the applicable laws of
descent and distribution.
ARTICLE III
CORPORATE TRANSACTIONS
3.01 Anti-dilution Adjustments. The number of shares of Common Stock
available for issuance upon exercise of options granted under the Plan, the
number of shares for which each outstanding option can be exercised, the number
of shares underlying an Initial Option, the number of shares underlying an
Additional Option, and the exercise price per share of options shall be
appropriately and proportionately adjusted for any increase or decrease in the
number of issued and outstanding shares of Common Stock resulting from a
subdivision or consolidation of shares or the payment of a stock dividend or any
other increase or decrease in the number of issued and outstanding shares of
capital stock of the Company effected without receipt of consideration by the
Company. No fractional interests will be issued under the Plan resulting from
any such adjustments.
3.02 Reorganizations; Mergers; Changes in Control. Subject to the other
provisions of this Section 3.02, if the Company shall consummate any
reorganization or merger or consolidation in which holders of shares of the
Company's Common Stock are entitled to receive in respect of such shares any
other consideration (including, without limitation, a different number of such
shares), each option outstanding under the Plan shall thereafter be exercisable,
in accordance with the Plan, only for the kind and amount of securities, cash
and/or other property receivable upon such reorganization or merger or
consolidation by a holder of the same number of shares of Common Stock as are
subject to that option immediately prior to such reorganization or merger or
consolidation, and any appropriate adjustments will be made to the exercise
price thereof. In addition, if a Change in Control occurs and in connection with
such Change in Control any recipient of an option granted under the Plan ceases
to be a director of the Company, then such recipient shall have the right to
exercise his or her options granted under the Plan in whole or in part during
the applicable time period provided in Section 2.06 without regard to any
vesting requirements. For purposes hereof, but without limitation, a director
will be deemed to have ceased to be a director of the Company in connection with
a Change in Control if such director (i) is removed by or resigns upon request
of a Person (as defined in paragraph (a) below) exercising practical voting
control over the Company following the Change in Control or a person acting upon
authority or at the instruction of such Person, or (ii) is willing and able to
continue as a director of the Company but is not re-elected to or retained on
the Board by the Company's shareholders through the shareholder vote or consent
action for election of directors that precedes and is taken in connection with,
or next follows, the Change in Control. For purposes hereof, a "CHANGE IN
CONTROL" means the following and shall be deemed to occur if any of the
following events occurs:
(a) Any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Exchange Act, but excluding the Company and its
subsidiaries and any employee benefit or stock ownership plan of the Company or
its subsidiaries and also excluding an underwriter or underwriting syndicate
that has acquired the Company's securities solely in connection with a public
offering thereof (such person, entity or group being referred to herein as a
"PERSON"), becomes the beneficial owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or more of either the then
outstanding shares of Common Stock or the combined voting power of the Company's
then outstanding securities entitled to vote generally in the election of
directors; or
(b) Individuals who, as of the effective date hereof, constitute
the Board cease for any reason to constitute at least a majority of the Board,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise,
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through beneficial ownership, voting agreement and/or proxy, 20% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding voting securities entitled to vote generally
in the election of directors, in which case that individual shall not be
considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition
by the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity, more than 50% of
the combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected
to implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
3.03 Determination by the Company. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the administrator, whose determination in that respect shall be
final, binding and conclusive. The grant of an option pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve, or liquidate or to sell or
transfer all or any part of its business or assets.
# # #
Amended 03/20/97: Section 1.08
Amended 07/10/97: Section 2.01, 2.02, 3.01
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EXHIBIT 10.34
FISCAL YEAR 1998
WESTERN DIGITAL MANAGEMENT INCENTIVE PLAN (MIP)
PURPOSE
The purpose of this Plan is to focus participants on achieving key financial and
strategic objectives at the corporate and business group levels that will lead
to the creation of value for the Company's shareholders and provide participants
the opportunity to earn significant awards, commensurate with performance.
ELIGIBILITY
Plan eligibility is extended to all employees of Western Digital and selected
employees of its domestic subsidiaries who are in, or who are hired into, salary
grades 68 and above (or equivalent) on or before January 5, 1998.
Eligibility may be granted to employees who have an authorized written agreement
that grants them eligibility.
Employees of Western Digital and its domestic subsidiaries who are in salary
grades 67 or below (or equivalent) are eligible for awards generated by a
secondary bonus pool.
DESCRIPTION OF THE PLAN
The 1998 Management Incentive Plan will pay a combination of cash and deferred
awards to participants for the achievement of predetermined performance goals.
Each participant will be assigned a pool or target bonus percentage, which when
multiplied by the participant's annual base salary as of June 30, 1998, will
determine the pool or target bonus payout.
Predetermined performance goals will be established and approved by the
Compensation Committee of the Board of Directors before the end of the first
quarter of the fiscal year.
The actual performance achieved will determine the percentage used to calculate
the award at the end of the plan year. The size of the actual award can vary
between 0% and 200% of the pool or target award.
In addition, individual awards may be adjusted upward or downward by the Chief
Executive Officer from the amount generated by the formula. The Chief Executive
Officer's award may be adjusted upward or downward by the Compensation
Committee.
OPERATION OF THE PLAN
Plan Year: July 1, 1997 to June 30, 1998
Award Opportunities: The award for participants will be expressed as a
percentage of salary and determined according to
salary grade.
1998 Goals and Weighting: Each business group will have goals at the
corporate and/or business group level, and each
goal will have an assigned weighting.
The percentage of target bonus opportunity earned
(before discretionary adjustments) will vary from
the target bonus opportunity based on actual
performance achieved relative to the performance
goals.
Page 1 of 3
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ADDITIONAL PROVISIONS
Award Thresholds: Corporate operating profit must be at least 50% of
the Annual Operating Plan for incentives to be paid
under any aspect of the Plan.
In addition, each business group will have a
predetermined operating profit threshold. If the
threshold is not met, no incentive payments can
occur for that business group.
Total Award Cap: Total awards paid under this Plan may not exceed a
preset percentage of corporate operating profit as
determined by the Compensation Committee. Any award
reductions attributable to the preset percentage
cap will be made by the Chief Executive Officer.
Award Adjustment: Group award levels may be adjusted upward or
downward by up to 25% by the Chief Executive
Officer.
After application of the group performance,
individual awards may be adjusted upward or
downward based on the adjustment table below.
Approval from the Chief Executive Officer is
required for adjustments outside of these limits.
The Chief Executive Officer's award may be adjusted
upward or downward by the Compensation Committee.
The adjustments by salary grade level (or
equivalent) are as follows:
Salary Grade Upward Downward
(or equivalent) Adjustment Adjustment
--------------- ---------- ----------
68, 69 & 84 +100% (1) -100% (1)
All others +40% -40%
(1) The adjustment factors are higher for those
in salary grades 68, 69 and 84 since these
individuals also participate in Western
Digital's Profit Sharing Plan.
All awards under this Plan are discretionary. The
amount of the award including adjustments is
determined by Western Digital in its sole
discretion. No employee has any contractual right
to receive an award pursuant to this Plan due to
his/her employment at Western Digital.
Extraordinary Events: The Compensation Committee, in its
discretion, may adjust the basis upon which
performance is measured to reflect the effect of
significant changes that include, but are not
limited to, unbudgeted acquisitions/divestitures,
unusual or extraordinary accounting items, or
significant, unplanned changes in the economic or
regulatory environment.
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Termination: Participants must be employed by the Company at the
end of the plan year to receive an award. If a
participant terminates for reason of retirement,
total and permanent disability, or death, the
Compensation Committee has the discretion to pay
prorated awards based upon the percentage of the
year worked.
Partial Year The Compensation Committee, in its discretion, may
Participation: pay prorated awards to people hired or promoted
into eligible positions after July 1, 1997.
Deferred Payout: At the beginning of the plan year, the participant
may elect to defer payout of all or part of the
award in accordance with Western Digital's Deferred
Compensation Plan.
Payout of Award: Awards will be paid in cash as soon as possible
following the end of the plan year or according to
the participant's deferral election. In addition,
an amount will be deducted from the award and
contributed to Western Digital's Savings and Profit
Plan. This amount will be based upon a percentage
of salary. This percentage will be the same as that
used by all participants in the Western Digital
Profit Sharing Plan.
Secondary Pool: Secondary award pools will be created for employees
in salary grades 67 and below (or equivalent) for
all corporate and business groups.
Management has the discretion to award any one
individual up to a maximum of 10% of salary.
Approval of the Chief Executive Officer is required
for discretion outside this limit.
The intent of this pool is to allow for the top 10%
of the remaining population to receive 5% of their
salary as a bonus.
Page 3 of 3
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EXHIBIT 10.37
AMENDED AND RESTATED REVOLVING CREDIT
AGREEMENT
Dated as of May 5, 1997
among
WESTERN DIGITAL CORPORATION,
NATIONSBANK OF TEXAS, N.A.,
BANKBOSTON, N.A.
(f/k/a The First National Bank of Boston)
and the other lending institutions listed on Schedule 1 hereto
and
NATIONSBANK OF TEXAS, N.A.
as Syndication Agent
and
BANKBOSTON, N.A.
(f/k/a The First National Bank of Boston)
as
Administrative Agent
with
BANCBOSTON SECURITIES INC.
and
NATIONSBANC CAPITAL MARKETS, INC.
having acted as arrangers for this transaction
2
AMENDED AND RESTATED REVOLVING CREDIT
AGREEMENT
This AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made as of May 5,
1997, by and among (a) WESTERN DIGITAL CORPORATION (the "Borrower"), a Delaware
corporation having its principal place of business at 8105 Irvine Center Drive,
Irvine, California 92718, (b) NATIONSBANK OF TEXAS, N.A., BANKBOSTON, N.A.
(f/k/a The First National Bank of Boston), and the other lending institutions
listed on Schedule 1 hereto, (c) NATIONSBANK OF TEXAS, N.A., as syndication
agent for the Banks (as hereinafter defined)(the "Syndication Agent") and (d)
BANKBOSTON, N.A. (f/k/a The First National Bank of Boston) as administrative
agent for the Banks (the "Agent" and, collectively with the Syndication Agent,
the "Bank Agents").
WHEREAS, pursuant to a Revolving Credit Agreement dated as of April 24,
1996 (as amended and in effect from time to time, the "Original Credit
Agreement"), by and among the Borrower, certain of the Banks (as hereinafter
defined) and the Bank Agents, the Banks party thereto made revolving credit
loans and other extensions of credit to the Borrower for general corporate and
working capital purposes; and
WHEREAS, the Borrower has requested, among other things, to amend and
restate the Original Credit Agreement on the terms and conditions set forth
herein and the Banks are willing to amend and restate the Original Credit
Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, the Borrower, the Banks and the Bank Agents agree that on
the Closing Date the Original Credit Agreement is hereby amended and restated
and shall remain in full force and effect only as set forth herein.
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.1. DEFINITIONS. The terms set forth in Section 1.1 of the Original
Credit Agreement shall be incorporated by reference herein and shall have the
same effect in this Credit Agreement as if each such term was set forth verbatim
herein, and shall survive the termination, amended and restatement of the
Original Credit Agreement, provided, that the definitions of "Applicable Margin"
and "Revolving Credit Loan Maturity Date" contained therein shall each be
deleted in its entirety and restated as follows:
Applicable Margin. For each period commencing on an Adjustment Date
through the date immediately preceding the next Adjustment Date (each a "Rate
Adjustment Period"), the Applicable Margin shall be the applicable margin set
forth below with respect to the Borrower's Fixed Charge Coverage Ratio as
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determined for the fiscal period of the Borrower ending on the fiscal quarter
ended immediately preceding the applicable Rate Adjustment Period.
BASE RATE EURODOLLAR COMMITMENT LETTER OF
FIXED CHARGE COVERAGE LOANS RATE LOANS FEE RATE CREDIT FEES
RATIO (BASIS POINTS) (BASIS POINTS) (BASIS POINTS) (BASIS POINTS)
- ------------------------ -------------- -------------- -------------- --------------
Less than 3.00:1.00 0 87.5 25 87.5
Greater than or equal to
3.00:1.00, but less than 0 65 22.5 65
4.00:1.00
Greater than or equal to 0 47.5 17.5 47.5
4.00:1.00, but less than
5.50:1.00
Greater than or equal to 0 40 15 40
5.50:1.00
Notwithstanding the foregoing, (a) for Revolving Credit Loans outstanding
and Letter of Credit Fees and the Commitment Fee Rate payable during the period
commencing on the Closing Date through the date immediately preceding the first
Adjustment Date to occur after March 31, 1997, the Applicable Margin shall be
the lowest Applicable Margin set forth above, and (b) if the Borrower fails to
deliver any Compliance Certificate when required by Section 8.4(c) hereof then,
for the period commencing on the next Adjustment Date to occur subsequent to
such failure through the date immediately following the date on which such
Compliance Certificate is delivered, the Applicable Margin shall be the highest
Applicable Margin set forth above.
Revolving Credit Loan Maturity Date. April 24, 2000, unless extended in
accordance with Section 2.1.2, and then such date as set forth in such extension
notice.
1.2. RULES OF INTERPRETATION. The rules of interpretation set forth in
Section 1.2 of the Original Credit Agreement shall be incorporated by reference
herein.
2. THE REVOLVING CREDIT FACILITY.
The provisions set forth in Section 2 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
3. REPAYMENT OF THE REVOLVING CREDIT LOANS.
The provisions set forth in Section 3 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
4
-3-
4. LETTERS OF CREDIT.
The provisions set forth in Section 4 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
5. CERTAIN GENERAL PROVISIONS.
The provisions set forth in Section 5 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
6. GUARANTIES.
The provisions set forth in Section 6 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
7. REPRESENTATIONS AND WARRANTIES.
The provisions set forth in Section 7 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
8. AFFIRMATIVE COVENANTS OF THE BORROWER.
The provisions set forth in Section 8 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
9. CERTAIN NEGATIVE COVENANTS OF THE BORROWER.
The provisions set forth in Section 9 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
5
-4-
10. FINANCIAL COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Revolving Credit
Loan, Unpaid Reimbursement Obligation, Letter of Credit or Revolving Credit Note
is outstanding or any Bank has any obligation to make any Revolving Credit Loans
or the Agent has any obligation to issue, extend or renew any Letters of Credit:
10.1. PROFITABLE OPERATIONS. The Borrower will not permit Consolidated Net
Income or Consolidated Net Operating Income for any two consecutive fiscal
quarters to be less than $1.00.
10.2. FIXED CHARGE COVERAGE RATIO. The Borrower will not as at the end of
any fiscal quarter, permit the ratio of (a) the sum of (i) EBITDA for the period
of four (4) consecutive fiscal quarters ending on such date plus (ii) Rental
Obligations for the period of four (4) consecutive fiscal quarters ending on
such date to (b) the sum of (i) Consolidated Total Interest Expense for the
period of four (4) consecutive fiscal quarters ending on such date plus (ii)
Rental Obligations for the period of four (4) consecutive fiscal quarters ending
on such date, to be less than 2.50:1.00.
10.3. MINIMUM LIQUIDITY. The Borrower will not permit the ratio of (a)
the sum of (i) cash of the Borrower plus (ii) Current Accounts Receivable of the
Borrower to (b) the sum of (i) accounts payable of the Borrower plus (ii) Senior
Funded Indebtedness to be less than 1.25 to 1.00 at any time.
10.4. CONSOLIDATED NET WORTH. The Borrower will not permit Consolidated
Net Worth at any time to be less than the greater of (a) $450,000,000 or (b) the
sum of (i) $450,000,00 plus, on a cumulative basis, (ii) 75% of positive
Consolidated Net Income for each fiscal quarter beginning with the fiscal
quarter ended June 30, 1997, minus (iii) 100% of the purchase price paid by the
Borrower to repurchase the capital stock of the Borrower in such fiscal
quarters.
11. CLOSING CONDITIONS.
The obligations of the Banks to make the initial Revolving Credit Loans
and of the Agent to issue any initial Letters of Credit shall be subject to the
satisfaction of the following conditions precedent.
11.1. LOAN DOCUMENTS. The Credit Agreement shall have been duly executed
and delivered by the respective parties thereto, shall be in full force and
effect and shall be in form and substance satisfactory to each of the Banks.
Each Bank shall have received a fully executed copy of such document.
11.2. CERTIFIED COPIES OF CHARTER DOCUMENTS. Each of the Banks shall have
received from the Borrower and each of its Subsidiaries a secretary's
certificate from each such Person certifying that no changes have been made to
6
-5-
each of (a) its charter or other incorporation documents from the date
previously delivered to the Agent under the Original Credit Agreement, and (b)
its by-laws as in effect on such date, other than the changes to the Borrower's
charter documents which have been disclosed in writing to the Agent. In
addition, the Borrower shall provide the Agent with evidence of the liquidation
of each of Selanar Corporation, Western Digital Capital Corporation, Western
Digital Europe and Western Digital Pacific Corporation.
11.3. CORPORATE, ACTION. All corporate action necessary for the valid
execution, delivery and performance by the Borrower and each of its Subsidiaries
of this Credit Agreement and the other Loan Documents to which it is or is to
become a party shall have been duly and effectively taken, and evidence thereof
satisfactory to the Banks shall have been provided to each of the Banks.
11.4. OPINION OF COUNSEL. Each of the Banks and the Agent shall have
received a favorable legal opinion addressed to the Banks and the Agent, dated
as of the Closing Date, in form and substance satisfactory to the Banks and the
Agent, from Michael A. Cornelius, Esq., counsel to the Borrower and its
Domestic Subsidiaries.
12. CONDITIONS TO ALL BORROWINGS.
The provisions set forth in Section 12 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
13. EVENTS OF DEFAULT; ACCELERATION; ETC.
The provisions set forth in Section 13 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
14. SETOFF.
The provisions set forth in Section 14 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
7
-6-
15. THE BANK AGENTS.
The provisions set forth in Section 15 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
16. EXPENSES.
The provisions set forth in Section 16 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
17. INDEMNIFICATION.
The provisions set forth in Section 17 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
18. SURVIVAL OF COVENANTS, ETC.
The provisions set forth in Section 18 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
19. ASSIGNMENT AND PARTICIPATION; ACCESSION.
The provisions set forth in Section 19 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
20. NOTICES, ETC.
The provisions set forth in Section 29 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
8
-7-
21. GOVERNING LAW.
The provisions set forth in Section 21 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
22. HEADINGS.
The provisions set forth in Section 22 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in
this Credit Agreement as if each such provision was set forth verbatim herein,
and shall survive the termination, amended and restatement of the Original
Credit Agreement.
23. COUNTERPARTS.
The provisions set forth in Section 23 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
24. ENTIRE AGREEMENT, ETC.
The Loan Documents and any other documents executed in connection herewith
or therewith express the entire understanding of the parties with respect to the
transactions contemplated hereby. Neither this Credit Agreement nor any term
hereof may be changed, waived, discharged or terminated, except as provided in
Section 26.
25. WAIVER OF JURY TRIAL.
Each of the Borrower and the Banks hereby waives its right to a jury trial
with respect to any action or claim arising out of any dispute in connection
with this Credit Agreement, the Revolving Credit Notes or any of the other Loan
Documents, any rights or obligations hereunder or thereunder or the performance
of which rights and obligations. Except as prohibited by law, the Borrower
hereby waives any right it may have to claim or recover in any litigation
referred to in the preceding sentence any special, exemplary, punitive or
consequential damages or any damages other than, or in addition to, actual
damages. The Borrower (a) certifies that no representative, agent or attorney of
any Bank or either of the Bank Agents has represented, expressly or otherwise,
that such Bank or such Bank Agent would not, in the event of litigation, seek to
enforce the foregoing waivers and (b) acknowledges that each of the Bank Agents
and the Banks have been induced to enter into this Credit Agreement,
9
-8-
the other Loan Documents to which it is a party by, among other things, the
waivers and certifications contained herein.
26. CONSENTS, AMENDMENTS, WAIVERS, ETC.
The provisions set forth in Section 26 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
27. SEVERABILITY.
The provisions set forth in Section 27 of the Original Credit Agreement
shall be incorporated by reference herein and shall have the same effect in this
Credit Agreement as if each such provision was set forth verbatim herein, and
shall survive the termination, amended and restatement of the Original Credit
Agreement.
28. TRANSITIONAL ARRANGEMENTS.
This Credit Agreement shall on the Closing Date supersede the Original
Credit Agreement, except as provided in this Section 28. On the Closing Date,
the rights and obligations of the parties evidenced by the Original Credit
Agreement shall be evidenced by this Credit Agreement and other Loan Documents,
the "Revolving Credit Loans" as defined in the Original Credit Agreement shall
be converted to Revolving Credit Loans as defined herein, and all outstanding
letters of credit issued by the Agent for the account of the Borrower prior to
the Closing Date shall, for the purposes of this Credit Agreement, be Letters of
Credit. All interest and fees and expenses, if any, owing or accruing under or
in respect of the Original Credit Agreement through the Closing Date shall be
calculated as of the Closing Date (prorated in the case of any fractional
periods) and shall be paid in accordance with the method, and on the dates,
specified in the Original Credit Agreement, as if the Original Credit Agreement
were still in effect. Commencing on the Closing Date, the commitment fees shall
be payable by the Borrower to the Agent for the account of the Banks in
accordance with Section 2.2.
10
-9-
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
WESTERN DIGITAL CORPORATION
By: /s/ STEVEN M. SLAVIN
----------------------------------------
Name: Steven M. Slavin
Title: Vice President, Taxes & Treasurer
NATIONSBANK OF TEXAS, N.A.,
individually and as Syndication Agent
By:
----------------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
----------------------------------------
Name:
Vice President
UNION BANK OF CALIFORNIA, N.A.
By:
----------------------------------------
Name:
Title:
11
-9-
IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement as
a sealed instrument as of the date first set forth above.
WESTERN DIGITAL CORPORATION
By:
----------------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.,
individually and as Syndication Agent
By: /s/ STAN W. REYNOLDS
----------------------------------------
Name: STAN W. REYNOLDS
Title: VICE PRESIDENT
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By:
----------------------------------------
Name:
Vice President
UNION BANK OF CALIFORNIA, N.A.
By:
----------------------------------------
Name:
Title:
12
-9-
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
WESTERN DIGITAL CORPORATION
By:
----------------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.,
individually and as Syndication Agent
By:
----------------------------------------
Name:
Title:
BANKBOSTON, N,A. (f/k/a The First National
Bank of Boston),individually and as Agent
By: /s/ BANKBOSTON
----------------------------------------
Name: BankBoston
Vice President
UNION BANK OF CALIFORNIA, N.A.
By:
----------------------------------------
Name:
Title:
13
-9-
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
WESTERN DIGITAL CORPORATION
By:
----------------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.,
individually and as Syndication Agent
By:
-----------------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF BOSTON,
individually and as Agent
By:
-----------------------------------------
Name:
Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ SCOTT LANE
----------------------------------------
Name: Scott Lane
Title: Vice President
14
-10-
BANQUE NATIONALE de PARIS
By: /s/ CLIVE BETTLES
-----------------------------------------
Name: Clive Bettles
Title: Senior Vice President and Manager
By: /s/ TJALLING TERPSTRA
-----------------------------------------
Name: Tjalling Terpstra
Title: Vice President
THE BANK OF NOVA SCOTIA
By:
-----------------------------------------
Name:
Title:
FLEET NATIONAL BANK
By:
-----------------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
By:
-----------------------------------------
Name:
Title:
MITSUBISHI TRUST & BANKING CORPORATION
By:
-----------------------------------------
Name:
Title:
15
-10-
BANQUE NATIONALE de PARIS
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By: /s/ W.H. TILLINGER
-----------------------------------------
Name: W.H. TILLINGER
Title: Relationship Manager
FLEET NATIONAL BANK
By:
-----------------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
By:
-----------------------------------------
Name:
Title:
MITSUBISHI TRUST & BANKING CORPORATION
By:
-----------------------------------------
Name:
Title:
16
-10-
BANQUE NATIONALE de PARIS
BY:
-----------------------------------------
Name
Title
BY:
-----------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
-----------------------------------------
Name:
Title:
FLEET NATIONAL BANK
By: FLEET NATIONAL BANK
-----------------------------------------
Name: Fleet National Bank
Title: VP
THE SUMITOMO BANK, LIMITED
By:
-----------------------------------------
Name:
Title:
MITSUBISHI TRUST & BANKING CORPORATION
By:
-----------------------------------------
Name:
Title:
17
-10-
BANQUE NATIONALE de PARIS
BY:
-----------------------------------------
Name
Title
BY:
-----------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
-----------------------------------------
Name:
Title:
FLEET NATIONAL BANK
By:
-----------------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
By: /s/ GORO HIRAI
-----------------------------------------
Name: GORO HIRAI
Title: JOINT GENERAL MANAGER
MITSUBISHI TRUST & BANKING CORPORATION
By:
-----------------------------------------
Name:
Title:
18
-10-
BANQUE NATIONALE de PARIS
BY:
-----------------------------------------
Name
Title
BY:
-----------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
-----------------------------------------
Name:
Title:
FLEET NATIONAL BANK
By:
-----------------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
By:
-----------------------------------------
Name:
Title:
MITSUBISHI TRUST & BANKING CORPORATION (USA)
By: /s/ GARY T. MACIAK
-----------------------------------------
Name: Gary T.Maciak
Title: First Vice President
19
RATIFICATION OF GUARANTY
Each of the undersigned guarantors hereby acknowledges and consents to the
foregoing Amended and Restated Revolving Credit Agreement as of May 5, 1997, and
agrees that the Guaranty dated as of April 24, 1996 from Western Digital
Rochester Inc. (the "Guarantor") in favor of the Agent, the Syndication Agent
and each of the Banks, and all other Loan Documents to which the Guarantor is a
party remain in full force and effect, and the Guarantor confirms and ratifies
all of its obligations thereunder.
WESTERN DIGITAL ROCHESTER, INC.
By: /s/ STEVEN M. SLAVIN
--------------------------------------
Title: Steven M. Slavin, President
20
SCHEDULE 1
Commitments; Commitment Percentages
Commitment
Bank Commitment Percentage
NationsBank of Texas, N.A. $ 25,750,000 17.1667%
Domestic Lending Office:
901 Main Street, 67th Floor
Dallas, TX 75283-1000
Attn: Stan Reynolds
Vice President
Eurodollar Lending Office:
Same as Above
BankBoston, N.A. (f/k/a The $ 25,750,000 17.1667%
First National Bank of Boston)
Domestic Lending Office
100 Federal Street
Boston, MA 02110
Attn: High Technology Division
Eurodollar Lending Office:
Same as Above
Fleet National Bank $ 20,000,000 13.3333%
Domestic Lending Office
One Federal Street - MAOFO323
Boston, MA 02211
Attn: Frank Benesh
Managing Director
Eurodollar Lending Office:
Same as Above
The Sumitomo Bank, Limited $ 20,000,000 13.3333%
Domestic Lending Office
777 S. Figueroa Street, Suite 2600
Los Angeles, CA 90017
Attn: Mr. Mike Jackson
Eurodollar Lending Office:
Same as Above
Union Bank of California, N.A. $ 18,500,000 12.3333%
Domestic Lending Office:
550 South Hope Street, 5th Floor
Los Angeles, CA 90071
Attn: Scott Lane, Vice President
Eurodollar Lending Office:
Same as Above
21
-2-
Banque Nationale de Paris $ 15,000,000 10.0000%
Domestic Lending Office
725 Figueroa Street
Los Angeles, CA 90017
Attn: Mr. Tjalling Terpstra
Eurodollar Lending Office:
Same as Above
The Bank of Nova Scotia $ 15,000,000 10.0000%
Domestic Lending Office:
580 California Street, Suite 2100
San Francisco, CA 94104
Attn: Werner Tillinger,
Relationship Manager
Eurodollar Lending Office:
Same as Above
Mitsubishi Trust & Banking $ 10,000,000 6.6667%
Corporation
Domestic Lending Office
520 Madison Avenue
New York, NY 10022
Attn: Mr. Gary Maciak
Eurodollar Lending Office:
Same as Above
Totals $150,000,000 100%
1
EXHIBIT 11
WESTERN DIGITAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
----------------------------------
JULY 1, JUNE 29, JUNE 30,
1995 1996 1997
-------- -------- --------
PRIMARY
Net income.................................................. $123,302 $ 96,894 $267,596
======== ======= ========
Weighted average number of common shares outstanding during
the period................................................ 92,164 92,558 87,261
Incremental common shares attributable to exercise of
outstanding options, warrants and ESPP contributions...... 4,232 3,690 6,260
-------- ------- --------
Total shares...................................... 96,396 96,248 93,521
======== ======= ========
Net earnings per share............................ $ 1.28 $ 1.01 $ 2.86
======== ======= ========
FULLY DILUTED
Net income.................................................. $123,302 $ 96,894 $267,596
Add back: interest expense, net of income tax effect
applicable to convertible subordinated debentures......... 3,594 -- --
-------- ------- --------
$126,896 $ 96,894 $267,596
======== ======= ========
Weighted average number of common shares outstanding during
the period................................................ 92,164 92,558 87,261
Incremental common shares attributable to exercise of
outstanding options, warrants and ESPP contributions...... 4,250 4,002 6,619
Incremental common shares attributable to conversion of
convertible subordinated debentures....................... 6,426 -- --
-------- ------- --------
Total shares...................................... 102,840 96,560 93,880
======== ======= ========
Net earnings per share............................ $ 1.23 $ 1.00 $ 2.85
======== ======= ========
1
EXHIBIT 21
WESTERN DIGITAL CORPORATION
SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION
- --------------------------------------------- ---------------------------------------------
Western Digital Ireland, Ltd. Cayman Islands
Western Digital (Malaysia) SDN BHD Malaysia
Western Digital (Deutschland) GmbH Federal Republic of Germany
Western Digital (France) S.a.r.1. France
Western Digital Japan Ltd. Japan
Western Digital (U.K.) Limited United Kingdom
Western Digital Canada Corporation Canada
Western Digital (Singapore) Pte Ltd Singapore
Western Digital Taiwan Co., Ltd. Taiwan, Republic of China
Western Digital Hong Kong Limited Hong Kong
Western Digital Netherlands B.V. The Netherlands
Western Digital (S.E. Asia) Pte Ltd Singapore
Western Digital (I.S.) Limited Ireland
Western Digital (Tuas-Singapore) Pte Ltd Singapore
Pacifica Insurance Corporation Hawaii
1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Western Digital Corporation:
We consent to the incorporation by reference in the Registration Statements
(Nos. 2-76179, 2-97365, 33-57953, 33-9853, 33-15771, 33-60166, 33-60168,
33-51725, 333-20359 and 333-31487) on Form S-8 of Western Digital Corporation of
our report dated July 16, 1997, relating to the consolidated balance sheets of
Western Digital Corporation as of June 29, 1996 and June 28, 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended June 28, 1997, and the
related schedule, which report appears in the June 28, 1997 Annual Report on
Form 10-K of Western Digital Corporation.
KPMG PEAT MARWICK LLP
Orange County, California
September 12, 1997
5
1,000
YEAR
JUN-28-1997
JUN-30-1996
JUN-28-1997
208,276
0
557,258
11,706
224,474
1,017,895
415,661
167,766
1,307,122
653,705
0
0
0
859
619,128
1,307,122
4,177,857
4,177,857
3,527,574
3,527,574
348,687
7,116
13,223
314,819
47,223
267,596
0
0
0
267,596
2.86
2.85
