ITEM 1. BUSINESS
GENERAL
Western Digital Corporation (the "Company" or "Western Digital") currently designs, manufactures and sells hard drives for the personal computer ("PC") market. The Company is one of the three largest independent manufacturers of hard drives. The Company's principal drive products are 3.5-inch form factor hard drives for the desktop PC market with storage capacities from 850 megabytes ("MBs") to 3.1 gigabytes ("GBs"), including the Caviar AC33100, a 3.1 GB drive which began initial volume shipments in August 1996. These hard drives utilize the enhanced integrated drive electronics ("EIDE") interface. With the planned introduction of product lines for the mobile and enterprise storage markets in 1997, the Company will design, manufacture and sell hard drives across the entire spectrum of the hard drive market. The mobile products will use the 3.0-inch form factor. The first generation of enterprise storage products will include 2.1 and 4.3 GB capacities and will use the 3.5-inch form factor and the small computer system interface ("SCSI"). The initial enterprise storage products have been designed to be used by workstations, LAN servers, multi-user systems and high-end PCs.
Until April 1996, the Company also designed and sold proprietary semiconductors, some of which were used in the manufacture of hard drives. These businesses (multimedia, high speed fiber-optic communication links and input/output products), which were sold at various times during 1996, were collectively referred to as the microcomputer products ("MCP") group and had combined revenues of $70.1, $191.0 and $160.0 million in 1996, 1995, and 1994, respectively. During the fourth quarter of 1996, all of the Company's revenues were generated from hard drive product sales.
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 1996 and 1995 fiscal years ended on June 29 and July 1, respectively, whereas the previous fiscal years ended on June 30.
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, and its telephone number is (714) 932-5000.
MARKETS
Personal Computer. The market for PC EIDE hard drives is segmented by type of computer (mobile or desktop), form factor (2.5-inch, 3.0-inch, 3.5-inch and 5.25-inch) and storage capacity (currently up to 3.1 GBs). The segment of the PC market currently generating the largest requirements for EIDE hard drives is the desktop segment which primarily uses 3.5-inch drives with capacities up to 3.1 GBs.
The mobile market is currently dominated by the 2.5-inch form factor. The new 3.0-inch form factor offers several advantages over the 2.5-inch form factor including larger disk surface area, permitting higher capacity per platter, and lower cost structure without any compromise in performance. The Company anticipates that these advantages will enable the 3.0-inch form factor to be successfully accepted into the mobile market.
The hard drive market has been highly cyclical and characterized by significant price erosion over the life of a product, periodic rapid price declines due to industry over-capacity or other competitive factors, technological changes and changing market requirements. In 1996, with the merger of Seagate Technology, Inc. ("Seagate Technology") and Conner Peripherals, Inc. ("Conner"), the industry dynamics were changed by reducing the number of competitors and significantly increasing the size of Seagate Technology. The Company is unable to predict the effect, if any, that the merger will have on this industry and/or on Western Digital.
The rapid increase in PC performance and storage requirements and the need for PC manufacturers to differentiate their products have increased the demand for higher capacity hard drives. At the same time, intense price competition among PC manufacturers requires that hard drive suppliers meet aggressive cost targets in order to become high-volume suppliers. The Company's strategy in response to these conditions is to increase market share by achieving volume time-to-market leadership while minimizing its fixed cost structure and maximizing the utilization of its assets. The Company attempts to implement this strategy, in part, by capitalizing on its expertise in control and communication electronics to deliver greater storage capacity per disk from components widely available in the commercial market, such as disks and heads, and to provide a high degree of commonality of component parts among its hard drive products.
Enterprise Storage. The market for SCSI hard drives is segmented by workstations, LAN servers, multi-user systems and high-end PCs. The Company's strategy to penetrate this market is to provide a competitive price and performance solution to prospective customers. The initial products offered in 1997 will leverage technology and processes that are currently used by the Company's 3.5-inch desktop product line.
PRODUCTS
Revenues from hard drive products were $2.8, $1.9, and $1.4 billion for 1996, 1995 and 1994, respectively. Revenues from microcomputer products were $70.1, $191.0 and $160.0 million for 1996, 1995 and 1994, respectively.
Technology. Hard drives are used to record, store and retrieve digital data. They are faster than floppy disk, tape and optical disk drives and cost less than semiconductor memory. Commonly quoted measures of hard drive performance are storage capacity, average seek time (the average time to move the heads from one track to another), data transfer rate (the rate at which data is transferred between the drive and the host computer) and spindle rotational speed.
Product Offerings. The Company's current line of hard drive products for the personal computer market consists of the WD Caviar(R) family of low-profile drives which includes 1-inch high, 3.5-inch form factor models for desktop applications. In addition, the Company plans to begin shipping 3.0-inch form factor models for mobile computer applications in 1997. Each of these drives features CacheFlow(TM), 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 data to or receive it from the computer. An additional common feature is the Company's proprietary drive control and communication electronic circuitry called Architecture III, which spans the Company's entire 3.5-inch WD Caviar product line. Architecture III features EIDE technology, which provides the desktop marketplace the key attributes of the SCSI interface while retaining the focus on ease-of-use, compatibility and overall lower cost of connection advantages, all of which are the traditional strengths of integrated drive electronics ("IDE"). The Company believes that the commonality of control and communication electronics featured in all of the WD Caviar hard drives facilitates customer qualification of successive product models, reduces risk of inventory obsolescence, and allows the Company to place larger orders for components, resulting in reduced component cost.
In 1997, the Company plans to introduce a new line of 3.5-inch form factor, low profile, SCSI hard drives for the enterprise storage market. The initial WD Enterprise(TM) products will have formatted capacities of 2.1 GBs and 4.3 GBs, rotational speed of 7,200 RPM, media data transfer rates of 17.5 MB per second, and will support Ultra Fast and Ultra Fast Wide host transfers.
The following table summarizes certain design and performance characteristics and specifications of the Company's current hard drive products:
SALES AND DISTRIBUTION
The Company sells its products primarily to PC manufacturers and, to a lesser extent, resellers and distributors through its worldwide direct sales force. The Company's direct sales organization is structured so that each customer is served by a single sales team. Each sales team is responsible for marketing the Company's entire product line and 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 original equipment manufacturer ("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. 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 presents a business risk that loss of one or more accounts could adversely affect the Company's operating results. During 1996 and 1995, sales to Gateway 2000 accounted for 11% of revenues. During 1994, sales to Gateway 2000 and IBM accounted for 12% of revenues each.
The Company also sells its products through its direct 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, National Computer Distributors, Supercom and Synnex. Major mass merchandiser customers include Best Buy, Computer City, CompUSA, Egghead Software, Office Depot, Radio Shack and Wal-Mart. 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.
Western Digital maintains sales offices in the United States, Europe and Asia. Technical support services are provided within the United States and Europe. The Company's international sales, which include sales to foreign subsidiaries of U.S. companies, represented 51%, 44%, and 43% of revenues for 1996, 1995 and 1994, 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 sales by geographic region, see Note 7 of Notes to Consolidated Financial Statements.
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. The Company's enterprise storage products will provide similar warranties for up to five years. 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.
RESEARCH AND DEVELOPMENT
Research and development expenses totaled $150.1, $130.8 and $112.8 million in 1996, 1995 and 1994, respectively. The Company devotes substantial resources to research and development in order to develop new products and improve existing products. The Company focuses its engineering efforts to coordinate its product design and manufacturing processes in order to bring its products to market in a cost-effective and timely manner. The availability of research and development funds depends upon the Company's revenues and profitability. Reductions in such expenditures could impair the Company's ability to innovate and compete.
The Company's current product line primarily uses thin film head technology. Over the next several years, as storage capacity requirements increase, the Company expects that it will be required to replace thin film heads with magnetoresistive ("MR") heads. There can be no assurance that the Company will be successful in the transition from thin film heads to MR heads.
The market for the Company's products is subject to rapid technological change and short product life cycles. To remain competitive, the Company must anticipate the needs of the market and successfully develop and introduce new products in a timely fashion. If not carefully planned and executed, the introduction of new products may adversely affect sales of existing products and increase risk of inventory obsolescence. In addition, new products typically have lower initial manufacturing yields and higher initial component costs than more mature products.
MANUFACTURING
The Company produces hard drives in its plants in Singapore and Malaysia. Western Digital is currently expanding its printed circuit board assembly and hard drive manufacturing capabilities in Malaysia and has a new building in Singapore which will be used to produce hard drives for the enterprise storage market beginning in 1997. These plants have complete responsibility for all hard drives in volume production, including manufacturing, purchasing, inventory management, assembly, test, 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 which supplies a portion of its media requirements.
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.
Because the Company has manufacturing facilities located in Singapore and Malaysia, the Company is subject to certain foreign manufacturing risks such as changes in government policies, high employee turnover, political risk, transportation delays, tariffs, fluctuations in foreign exchange rates and import, export, exchange and tax controls and reallocations. To date, exposure to such risks has not had a material effect on the Company's business, consolidated financial position or results of operations.
MATERIALS AND SUPPLIES
The principal components used in the manufacture of the Company's hard drives are magnetic heads (both thin film and metal-in-gap ("MIG")) and related head stack assemblies, media, micro 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 circuits manufactured for the Company and a wide variety of other parts, including connectors, cables and switches.
Substantially all of the Company's thin film head requirements are purchased from Read-Rite, SAE and AMC Corporation. The Company also uses MIG heads, which are supplied by several vendors. The Company has a media manufacturing facility which supplies a portion of its media requirements. Other media requirements are purchased through several outside vendors including Komag Inc., Trace Storage, Akashic and Showa Denko. The Company has established an agreement with SGS Thompson to purchase finished integrated circuits ("IC") which were previously manufactured internally.
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 adverse effect on Western Digital's revenue and earnings as compared to its competition. The Company must allow for significant lead times when procuring certain materials and supplies. The Company has more than one available source of supply for most of its required materials. Where there is only one source of supply, the Company has entered into close technical and manufacturing relationships, has access to more than one manufacturing location in most instances, and believes that a second source could be obtained over a period of time. However, no assurance can be given that the Company's results of operations would not be adversely affected until a new source could be secured.
COMPETITION
The computing industry is intensely competitive and has been characterized by significant price erosion over the life of a product, periodic rapid price declines due to industry over-capacity or other competitive factors, technological changes, changing market requirements, occasional shortages of materials, dependence upon a limited number of vendors for certain components, dependence upon highly skilled engineering and other personnel, and significant expenditures for product development. The hard drive market in particular has been subject to recurring periods of severe price competition. The Company's principal competitors are Quantum Corporation ("Quantum") and Seagate Technology, and large computer manufacturers such as IBM that manufacture drives for use in their own products and for sale to others. In February 1996, Seagate Technology merged with Conner, formerly one of the Company's principal competitors. This merger changed the industry dynamics by reducing the number of competitors and by significantly increasing the size of Seagate Technology. The Company is unable to predict the effect, if any, that the merger will have on Western Digital.
In general, the unit price for a given product in all of the Company's markets decreases over time as increases in industry supply and cost reductions occur and as technological advancements are achieved. Cost reductions are primarily achieved as volume efficiencies are realized, component cost reductions are achieved, experience is gained in manufacturing the product and design enhancements are made. Competitive pressures and customer expectations result in these cost improvements being passed along as reductions in selling prices. At times, the rate of general price decline is accelerated when some competitors lower prices to absorb excess capacity, to liquidate excess inventories and/or to gain market share.
The Company also competes with companies offering products based on alternative data storage and retrieval technologies. Technological advances in magnetic, optical, flash or other technologies could result in the introduction of competitive products with performance superior to and prices lower than the Company's products, which could adversely affect the Company's results of operations.
The Company believes that proprietary hard drive, semiconductor, and board-level design technology, close technical relationships with key OEM customers and vendors, diverse product lines, competitive pricing, adequate capital resources and worldwide low cost/high volume manufacturing capabilities are key factors for successfully competing in its market areas.
BACKLOG
At June 29, 1996, the Company's backlog, consisting of orders scheduled for delivery within the next twelve months, aggregated approximately $479 million, compared with a backlog at July 1, 1995 which aggregated approximately $426 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. Therefore, backlog information as of the end of a particular period is not necessarily indicative of future levels of the Company's revenue and profit.
PATENTS AND LICENSES
The Company owns numerous patents and has many patent applications in process. The Company believes that, although its patents and applications have significant value, the successful manufacturing and marketing of its products depends primarily upon the technical competence and creative ability of its personnel rather than on patent protection. See also "Legal Proceedings."
The Company has cross-licensing agreements with IBM and Seagate Technology, which grant the Company licenses for its products under patents owned by these companies, and which grant each of these companies a license for its products under patents owned by the Company. The Company pays periodic royalties under the IBM cross-license agreement. Several patent holders have made assertions that the Company needs a license under certain patents. The Company conducts ongoing investigations into such assertions and presently believes that any licenses ultimately determined to be required could be obtained 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. See also "Legal Proceedings."
EMPLOYEES
As of June 29, 1996, the Company employed a total of 9,628 full-time employees worldwide. The Company employed 1,776 employees in the United States, of whom 725, 487 and 564 were engaged in engineering, sales and administration, and manufacturing, respectively. The Company employed 2,892 employees at its hard drive manufacturing facility in Malaysia, 4,837 at its hard drive manufacturing facilities in Singapore, and 123 at its international sales offices.
Many of the Company's employees are highly skilled, and the Company's continued success depends in part upon the 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.
ITEM 2. PROPERTIES
The Company's headquarters are located in a 358,000 square foot building in Irvine, California. This building houses management, research and development, administrative and sales personnel and is leased to the Company. The Company has two hard drive manufacturing facilities located in Singapore. The first Singapore facility, which is used to produce hard drives for the personal computer market, is leased to the Company and consists of several buildings totaling approximately 297,000 square feet. The second Singapore facility is approximately 90,000 square feet and will be used to produce hard drives for the enterprise storage products market beginning in 1997. This facility is currently leased, but the Company has entered into an agreement to purchase the facility. Western Digital also owns an 88,000 square foot hard drive manufacturing facility located in Malaysia. The Company recently acquired an adjacent parcel of land in Malaysia and is in
the process of constructing a building totaling approximately 250,000 square feet to expand its printed circuit board assembly and hard drive manufacturing facility. The Company's media processing facilities total approximately 100,000 square feet and are located on leased property in Santa Clara, California. In addition, the Company leases facilities in San Jose, California and in Rochester, Minnesota for research and development activities. The leases referenced above expire at various times 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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The following discussion contains forward-looking statements relating to the Company's legal proceedings described below. Litigation is inherently uncertain and, accordingly, actual results could differ materially from those expressed in the forward-looking statements.
The Company was sued in March 1993 in the United States District Court for the Northern District of California by Conner. The suit alleged that the Company infringed five Conner patents and sought damages in an unspecified amount and injunctive relief. The Company also filed a suit alleging that Conner infringed two of the Company's patents. On February 20, 1996, the lawsuits were dismissed with prejudice by mutual agreement of the parties.
The Company was sued in December 1994 by Rodime plc ("Rodime") in the United States District Court for the Central District of California. The suit alleged that the Company infringed one of Rodime's patents which relates to 3.5-inch hard drives and sought damages in an unspecified amount. In April 1994, in an action for declaratory judgment involving this patent which was brought by Quantum against Rodime, the United States District Court for the District of Minnesota entered a summary judgment in Quantum's favor, ruling that claims of the Rodime patent were invalid because of impermissible broadening in reexamination proceedings. This summary judgment was affirmed on September 22, 1995, by the United States Court of Appeals for the Federal Circuit. On April 29, 1996, The United States Supreme Court declined to review this decision. This ruling, now final, concluded Quantum's action against Rodime. Subsequently, on May 3, 1996, Rodime dismissed its claim against the Company without prejudice.
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. Trial in the matter is currently scheduled for February 1997. 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 or results of operations, if Amstrad were to prevail on its liability 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 the financial position or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all the executive officers of the Company as of August 1996 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. None of these officers has been involved in any court or administrative proceeding within the past five years adversely reflecting on his or her ability or integrity.
Messrs. 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. Haggerty joined the Company as President in June 1992 and has been a director since January 1993. He assumed the additional positions of Chairman and Chief Executive Officer on June 30, 1993. Prior to joining the Company, he spent his 28-year business career in various positions at IBM. In 1987, he became IBM's Vice President of worldwide operations for the AS/400. He then served as Vice President/General Manager, low-end mass-storage products responsible for operations in the United States, Japan and the United Kingdom. Immediately prior to joining the Company, he held the position of Vice President of IBM's worldwide OEM storage marketing.
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. Hughes joined the Company in July 1993 as Vice President, Human Resources before becoming an elected officer of the Company in July 1994. He served as Director of Human Resources of Quantum from 1992 to 1993. From 1990 to 1992, he served in various capacities with Western Digital, including acting Vice President, Human Resources.
PART II
ITEM 5.
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 1, 1996 was 3,400.
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 high and low sales prices of the Company's common stock, as reported by the NYSE, for each quarter of 1996 and 1995 are as follows:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Western Digital operates in an extremely competitive industry which has experienced a great deal of consolidation and change over the past several years. The industry is characterized by short product life cycles, dependence upon a limited number of suppliers for certain component parts, dependence upon highly skilled engineering and other personnel, significant expenditures for product development and recurring periods of severe price competition.
The Company's product strategy for the PC market is to be the first to market in volume with the highest capacity per platter 3.5-inch EIDE hard drives at competitive prices. The successful implementation of this strategy during the last three fiscal years has resulted in significant increases in unit shipments of hard drives, with attendant improvements in factory utilization and manufacturing efficiencies, lower component costs and overall reductions in per unit manufacturing costs.
During the first quarter of 1996, the Company sold its multimedia business to Philips Semiconductors, Inc. Later in 1996, Western Digital sold its high speed fiber-optic communication links and input/output products businesses to Vixel Corporation and Adaptec, Inc. ("Adaptec"), respectively. These businesses represented the final elements of the Company's MCP group. Concurrent with the sale of these final two businesses, the Company restructured its business to focus on its primary objectives and strengths: the design, manufacture and sale of hard drives. Beginning with the fourth quarter of 1996, the Company's operations were related entirely to hard drive products.
The Company invested a significant amount during the year in the development of two new hard drive product lines, enterprise storage products and mobile PC products. The Company expects to begin shipping these new products in 1997 and anticipates that these products will positively impact its consolidated gross margin and operating income in 1997.
Unless otherwise indicated, references herein to specific years and quarters are to the Company's fiscal years and fiscal quarters.
RESULTS OF OPERATIONS
Comparison of 1996, 1995 and 1994
In 1996, the Company reported net income of $96.9 million, including a one-time, pre-tax gain of $17.3 million on the sale of its multimedia products business, compared with net income of $123.3 million for 1995 and $73.1 million for 1994. 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 1995 over 1994 resulted from a 38% increase in revenues and higher net interest and other income. A two percentage point decline in gross profit margin partially offset these improvements.
Sales of hard drive products were $2.8, $1.9 and $1.4 billion in 1996, 1995 and 1994, respectively. During 1996, unit shipments increased 50% which, combined with a modest decline in average selling prices ("ASPs"), resulted in hard drive revenues increasing 44% from 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 considerable factor. During 1995, unit shipments increased 49% from 1994, but declining ASPs reduced the 1994 to 1995 hard drive revenue growth rate to 41%. The revenue increase in 1995 primarily resulted from increased business with OEMs.
Gross profit margins were as follows:
The decrease in gross profit margin from 1995 to 1996 was primarily due to three factors. First, 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 fiscal year 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 have higher average gross margin percentages) were sold due to the sale of the MCP businesses during 1996.
During 1995, the Company increased its shipments of hard drive products to OEMs, which typically require lower prices and a broader product mix (including lower capacity hard drives) in exchange for high volumes. Overall hard drive industry conditions also became more competitive during 1995 as the industry's manufacturing capacity more closely matched demand and competitors continued to shorten product development cycles. These were the primary factors which contributed to the decline in hard drive product gross margins during 1995.
The decline in microcomputer product gross margin 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.
Research and development expense ("R&D") in 1996 was approximately $150.1 million, or 5.2% of revenues, as compared to approximately $130.8 million, or 6.1% of revenues, and $112.8 million, or 7.3% of revenues, during 1995 and 1994, respectively. Higher expenditures to support the development of enterprise storage and mobile products, partially offset by lower expenditures for microcomputer products, were the primary factors contributing to the $19.3 million, or 15%, increase in total R&D expenses in 1996. R&D expenses declined as a percentage of revenues primarily as a result of the higher revenue base in 1996 as compared to 1995 and 1994.
Selling, general and administrative expenses ("SG&A") were $154.5 million, or 5.4% of revenues, in 1996 versus $130.3 million, or 6.1% of revenues, and $113.2 million, or 7.4% of revenues, in 1995 and 1994, respectively. The increases in total SG&A expenses were primarily the result of higher selling, marketing and other related expenses in support of higher revenue levels and higher royalty expenses. The higher revenue base was the primary factor contributing to the decline in SG&A expenses as a percentage of revenues in 1996 as compared to 1995 and 1994.
Interest and other income was $13.1 million in 1996. Interest and other income was $12.0 million in 1995 versus an expense of $5.8 million in 1994. 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 improvement from 1994 to 1995 was the result of significantly lower levels of outstanding debt and higher average cash and short-term investment balances.
The provision for income taxes in 1996 and 1995 consists primarily of taxes associated with certain of the Company's foreign subsidiaries which had taxable income. The Company's effective tax rate of 10% recorded in 1996 and 15% in 1995 and 1994 results primarily from the earnings of certain subsidiaries which are taxed at substantially lower tax rates as compared with United States statutory rates (see Note 5 of Notes to Consolidated Financial Statements).
In October 1995, The Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 provides an alternative to APB Opinion 25, "Accounting for Stock Issued to Employees" (APBO 25) and requires additional disclosures. SFAS 123 is effective for the Company's fiscal year beginning June 30, 1996. The Company plans to continue to account for its employee stock plans in accordance with the provisions of APBO 25 and provide the additional disclosures required by SFAS 123 in 1997. Accordingly, SFAS 123 is not expected to have a material impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 1996, the Company had $219.2 million in cash and short-term investments as compared with $307.7 million at July 1, 1995. During 1996, the Company generated $58.3 million in cash flow from operations. Cash flow from earnings (net of the gain on sale of the multimedia business), depreciation and amortization, and an increase in current liabilities were partially offset by cash used to fund increased accounts receivable, inventories, prepaid expenses and other assets. Other significant uses of cash during 1996 were $108.7 million for capital expenditures, which were incurred primarily to support increased production of hard drives and related components, and the acquisition of 7.7 million shares of the Company's common stock in the open market for $132.1 million. Partially offsetting these uses of cash was $85.5 million received in connection with the sale of the multimedia, high speed fiber-optics communication links and input/output products businesses. The Company anticipates that capital expenditures in 1997 will total approximately $150 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 2.6 million shares of its common stock under the current Board of Directors' authorization, which expires in July 1997.
The Company has an $150 million revolving credit agreement with certain financial institutions extending through April 1999. This facility is intended to meet short-term working capital requirements which may arise from time to time. The Company believes that its current cash and short-term investments combined with cash flow from operations and its revolving credit agreement will be sufficient to meet its working capital needs
for the foreseeable future. However, the Company's ability to sustain its favorable working capital position is dependent upon a number of factors that are discussed below under the heading "Certain Factors Affecting Future Operating Results."
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The hard drive industry in which the Company competes is subject to a number of risks which have affected the Company's operating results in the past and could affect its future operating results. Demand for the Company's hard drive products depends on the demand for the computer systems manufactured by its customers and storage upgrades to computer systems, which in turn are affected by computer system product cycles, end user demand for increased storage capacity, and prevailing economic conditions. Growth in demand for computer systems, especially in the desktop segment where the Company derives a significant amount of its revenue, has historically been subject to significant fluctuations. Such fluctuations have in the past and may in the future result in deferral or cancellation of orders for the Company's products.
Even during periods of consistent demand, the hard drive industry has been characterized by intense competition and ongoing price erosion over the life of a given drive product, and the Company expects that price erosion in the data storage industry will continue for the foreseeable future. This competition and continuing price erosion could adversely affect the Company's result of operations in any given quarter, and such adverse effect often cannot be anticipated until late in any given quarter.
The demand of hard drive customers for greater storage capacity and higher performance has led to short product life cycles that require the Company to constantly develop and introduce new drive products on a cost effective and timely basis. Failure of the Company to execute its strategy of achieving time-to-market in volume leadership with these new products, or any delay in introduction of more advanced and more cost effective products, could result in significantly lower gross margins. The Company's future is therefore dependent upon its ability to develop new products, to qualify these new products with its customers, to successfully introduce these products to the market on a timely basis, and to commence volume production to meet customer demands. In this regard, the Company's new enterprise storage products, currently under development, are expected to achieve volume production and contribute to sales beginning in the second quarter of 1997. The Company's inability to successfully achieve its sales goals for its enterprise storage products would significantly impact the Company's future operating results. The Company's future operating results may also be adversely affected if it is unsuccessful in marketing the 3.0-inch form factor hard drive to the mobile PC market.
All of the Company's hard drive products currently utilize conventional thin film inductive head technology. The Company believes that MR heads, which enable higher capacity per disk than conventional thin film inductive heads, will eventually replace thin film inductive heads as the leading recording head technology. Several of the Company's major competitors incorporate MR head technology into some of their current products. Failure of the Company to successfully manufacture and market products incorporating MR head technology in a timely manner could have a material adverse effect on the Company's business and results of operations.
The Company's operating results have been and may in the future be subject to significant quarterly fluctuations as a result of a number of other factors. These factors have included the timing of orders from and shipments of products to major customers, product mix, pricing, delays in product development, introduction in production, competing technologies, variations in product cost, component availability due to single or limited sources of supply, foreign exchange fluctuations, increased competition and general economic and industry fluctuations. The Company's future operating results may also be 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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 July 1, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended June 29, 1996, 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 24, 1996
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED JUNE 29, 1996
(IN THOUSANDS)
See notes to consolidated financial statements.
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See notes to consolidated financial statements.
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 1996 and 1995 fiscal years ended on June 29 and July 1, respectively, whereas the previous fiscal year ended on June 30. 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 translated 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 translated at the exchange rate in effect at each year end and at historical rates, respectively. Operating statement accounts have been translated at 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, manufactures and sells hard drives to personal computer manufacturers and resellers 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,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are capitalized at cost and amortized on a straight-line basis over their estimated lives which are fifteen and five to fifteen years, respectively.
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," which was adopted by the Company in 1996, the Company reviews identifiable intangibles and goodwill 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. The effect of adopting SFAS 121 was not material to the financial statements.
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.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 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.
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 and 1994, 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.
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
NOTE 3 -- DEBT
Line of Credit
During 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 in April 1999, 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 the payment of dividends. No borrowings were made on this agreement during 1996.
Subordinated Debt
During 1995, $58.1 million of the Company's 9% convertible subordinated debentures, due 2014, were converted into 4,026,623 shares of the Company's common stock. In connection with this conversion, the Company charged $.7 million of unamortized issue costs to shareholders' equity. The remaining $.5 million of the Company's debentures were redeemed for cash.
NOTE 4 -- COMMITMENTS AND CONTINGENT LIABILITIES
Patents and Licenses
The Company owns numerous patents and has many patent applications in process. The Company believes that, although its patents and applications have significant value, the successful manufacturing and marketing of its products depends primarily upon the technical competence and creative ability of its personnel rather than on patent protection.
The Company has cross-licensing agreements with IBM and Seagate Technology, which grant the Company licenses for its products under patents owned by these companies, and which grant each of these
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies a license for its products under patents owned by the Company. The Company pays periodic royalties under the IBM cross-license agreement. Several patent holders have made assertions that the Company needs a license under certain patents. The Company conducts ongoing investigations into such assertions and presently believes that any licenses ultimately determined to be required could be obtained 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.
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 future commitments denominated in foreign currencies. At June 29, 1996 and July 1, 1995, the Company had outstanding $177.6 and $110.0 million, respectively, of forward exchange contracts with commercial banks. These contracts have maturity dates that do not exceed twelve months. The realized and unrealized gains and losses on these contracts are deferred and recognized in the results of operations in the period in which the underlying transaction is consummated and are not material for all periods presented. Costs associated with entering into such contracts are amortized over the life of the instrument.
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 $27.2, $25.5, and $26.5 million in 1996, 1995, and 1994, respectively.
Future minimum rental payments under non-cancelable operating leases as of June 29, 1996 are (in thousands):
Legal Claims
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. Trial in the matter is currently scheduled for February 1997. 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 or results of operations, if Amstrad were to prevail on its liability 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 the financial position or results of operations of the Company.
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):
The components of the provision for income taxes are as follows (in thousands):
The total cash paid for income taxes was $4.5, $4.9 and $1.1 million for the years ended June 29, 1996, July 1, 1995 and June 30, 1994, respectively.
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at June 29, 1996 and July 1, 1995 are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of the United States Federal statutory rate to the Company's effective tax rate is as follows:
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 $30.1 million ($.62 per share, fully diluted), $33.2 million ($.65 per share, fully diluted) and $27.4 million ($.60 per share, fully diluted) in 1996, 1995 and 1994, respectively. These lower rates are in effect through 2004.
At June 29, 1996, the Company had federal net operating loss carryforwards and tax credit carryforwards of $119.7 million and $23.1 million, respectively. The losses expire in fiscal years 2007 and 2008, and the credits expire in fiscal years 1997 through 2010.
Net undistributed earnings from international subsidiaries at June 29, 1996 were $261.6 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 29, 1996 (in thousands):
Common Stock Offering
In February 1994, the Company issued 7,618,711 shares of its common stock in a public common stock offering. Proceeds from the offering, net of commissions, and other related expenses totaling $4.2 million, were $73.3 million.
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 at the date of grant. Options granted vest 25% one year from the date of grant and in twelve quarterly increments thereafter. As of June 29, 1996, 1,548,099 options were exercisable and 1,015,117 options were available for grant. Participants in the Employee Plan are permitted to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilize stock purchased previously as consideration to exercise options. The following table summarizes activity under the Employee Plan (in thousands, except per share amounts):
In 1985, the Company adopted the Stock Option Plan for Non-Employee Directors ("Director Plan") and reserved 800,000 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 20,000 shares per director and additional grants of 5,000 options per director each year upon their reelection as a director at the annual shareholders' meeting. Terms of the Director Plan require that the exercise price of options be not less than the fair market value at the date of grant. As of June 29, 1996, 64,500 options were exercisable and 435,732 options were available for grant. The following table summarizes activity under the Director Plan (in thousands, except per share amounts):
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 1.8 million shares of common stock have been reserved for issuance under this plan. Approximately 646,000 and 484,000 shares were issued under this plan during 1996 and 1995, respectively. No shares were issued during 1994.
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 6.5%, 8% and 8% of defined pre-tax profits to be allocated to the participants in 1996, 1995 and 1994, respectively. Payments to participants of the Savings and Profit Sharing Plan were $7.1, $11.3, and $7.4 million in 1996, 1995 and 1994, respectively.
NOTE 7 -- BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
Western Digital currently operates in one industry segment--the design, manufacture and marketing of hard drives for the personal computer market. During 1996 and 1995, one customer accounted for 11% of the Company's revenues. During 1994, two customers accounted for a total of 24% 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, principally to Asia, of $674.1, $399.2, and $300.0 million in 1996, 1995, and 1994, respectively.
Transfers between geographic areas are accounted for at prices comparable to normal sales through outside distributors. General and corporate expenses of $61.5, $49.6, and $43.6 million in 1996, 1995, and 1994, respectively, have been excluded in determining operating income by geographic region.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- SALE OF FACILITY AND 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 MCP 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 personnel reductions 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):
As of June 29, 1996, approximately $8.7 million of the accruals for severance, facilities, contractual commitments and other miscellaneous items remained. The majority of these amounts are scheduled to be paid during 1997.
SALE OF WAFER FABRICATION FACILITY
In December 1993, the Company sold its silicon wafer fabrication facility and certain tangible assets to Motorola, Inc. ("Motorola") for $111.0 million plus certain other considerations, including the assumption by Motorola of equipment leases and certain other liabilities associated with the facility. The gain on the sale of the facility was not material to the financial position or results of operations of the Company. Concurrent with the sale, the Company entered into a supply contract with Motorola under which Motorola supplied silicon wafers to Western Digital through December 1995.
NOTE 9 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
WESTERN DIGITAL CORPORATION
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 1996 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 29, 1996.
ITEM 11.
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 1996 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 29, 1996.
ITEM 12.
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 1996 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 29, 1996.
ITEM 13.
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 1996 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 29, 1996.
PART IV
ITEM 14.
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.
(3) Exhibits
- ---------------
* 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-l (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) Confidential treatment requested.
(10) 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.
(b) Reports on Form 8-K: None.
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 16, 1996
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 16, 1996.
EXHIBIT INDEX
- ---------------
* 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-l (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) Confidential treatment requested.
(10) 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.