Western Digital 1998 Annual Report Download - page 23

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Several Asian countries recently have had large economic downturns and significant declines in the value of their
currencies relative to the U.S. Dollar. The "Asian crisis" has reduced the market for the Company's products and may
have helped some Asian hard drive companies become more competitive since they can pay some of their costs in
devalued currency while receiving their revenues in U.S. Dollars. The Company is unable to predict what effect, if
any, the factors associated with the Asian crisis will have on foreign economic conditions, the Company's customers
or vendors or the Company's ability to compete in Asian markets.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos.
130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), respectively (collectively, the "Statements"). The Statements are effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its components in annual and interim financial statements. SFAS 131 establishes standards for reporting
financial and descriptive information about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or restatement of comparative financial
statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to have a material impact on the Company's
consolidated financial position, results of operations or earnings (loss) per share data as currently reported.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards
for derivative instruments embedded in other contracts and for hedging activities. Application of this accounting
standard is not expected to have a material impact on the Company's consolidated financial position, results of
operations or liquidity.
Year 2000
The Company has considered the impact of Year 2000 issues on its products, computer systems and applications
and has developed a remediation process. Remediation activities are underway, and the Company expects compliance
and testing to be completed by June 1999. Expenditures related to the Year 2000 project, which include normal
replacement of existing capital assets were approximately $5.0 million in 1998 and are expected to amount to
approximately $35.0 million in total. For an additional discussion of Year 2000 issues, see Part II, Item 7, Risk
Factors Affecting the Company and/or the Hard Drive Industry — Year 2000 Issue.
Liquidity and Capital Resources
At June 27, 1998, the Company had $459.8 million of cash and cash equivalents as compared with $208.3 million
at June 28, 1997. Net cash used for operating activities was $39.0 million during 1998. Cash flows resulting from a
decrease in accounts receivable and lower inventories were more than offset by cash used to fund a decrease in
current liabilities and the net loss (net of non-cash charges). Other significant uses of cash during 1998 were capital
expenditures of $198.6 million and payments of $35.8 million to settle certain put option arrangements entered into in
connection with the Company's open market stock repurchase program. The capital expenditures were incurred
primarily in connection with the transition to desktop and enterprise hard drives featuring MR head technology, normal
replacement of existing assets, acquisition and development of the Company's new computer information systems and
acquisition of land for the Company's new headquarters. Partially offsetting these uses of cash was $491.4 million
received in connection with the issuance of the Debentures and borrowings under the Senior Bank Facility. In addition,
$23.8 million was received in connection with stock option exercises and Employee Stock Purchase Plan ("ESPP")
purchases. The Company anticipates that capital expenditures in 1999 will total approximately $135 million and will
relate to retooling of the Company's hard drive assembly lines in order to accommodate new technologies and normal
replacement of existing assets.
The Senior Bank Facility pursuant to which BankBoston, N.A. and other lending institutions are providing a $200
million revolving credit line and a $50 million term loan, both of which expire in January 2001, is secured by the
Company's accounts receivable, inventory, 66% of its stock in its foreign subsidiaries and the other assets (excluding