Western Digital 1998 Annual Report Download - page 24

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real property) of the Company. At the option of the Company, borrowings bear interest at either LIBOR plus a margin
determined by a total debt funded ratio or a base rate, with option periods of one to six months. The Senior Bank
Facility, as amended in February and June 1998, requires the Company to maintain certain financial ratios, prohibits
the payment of dividends and contains a number of other restrictive covenants. As of the date hereof, the $50 million
term loan was funded, but there were no borrowings under the revolving credit line.
On February 18, 1998, the Company received gross proceeds of $460.1 million (before the Initial Purchasers'
discount) from a private offering of 5.25% zero coupon convertible subordinated debentures due in 2018. The
principal amount at maturity of the Debentures is $1.3 billion. The Debentures are subordinated to all senior debt; are
convertible into 19.4 million shares of the Company's common stock at the rate of 14.935 shares per $1,000 principal
amount at maturity; are redeemable at the option of the Company any time after February 18, 2003 at the issue price
plus accrued original issue discount to the date of redemption; and will be repurchased by the Company, at the option
of the holder, as of February 18, 2003, February 18, 2008 or February 18, 2013, or if there is a Fundamental Change
(as defined in the Debenture documents), at the issue price plus accrued original issue discount to the date of
redemption.
On December 29, 1997, the Company purchased approximately 34 acres of land in Irvine, California for
approximately $22 million. The Company intends to negotiate lease financing for construction of a new corporate
headquarters on this site. The new headquarters facility is expected to lower the Company's occupancy costs.
However, there can be no assurance that the Company will be successful in entering into a leasing arrangement for this
property on terms that will be satisfactory to the Company and other alternatives available to the Company upon
expiration of its current headquarters lease could be more costly.
The Company believes its current cash balances, combined with cash flow from operations, will be sufficient to
meet its working capital needs at least through 1999. The Company has viewed the revolving credit line portion of its
Senior Bank Facility as a source of cash to meet its longer term working capital requirements, if needed. The
Company's recent financial results and current condition have reduced availability under the Senior Bank Facility, and
it is uncertain, based on information currently available to the Company, whether the Company will be in compliance
with certain financial covenants under the Senior Bank Facility at the end of its first quarter of 1999. Therefore, the
Company has been negotiating a new senior credit facility to replace the Senior Bank Facility and has signed a non-
binding term sheet. The new credit facility would have more flexible borrowing requirements and covenants. There
can be no assurance that the Company will successfully complete the negotiations required to obtain this new credit
facility or that the Senior Bank Facility will continue to be available, and the Company's ability to sustain its 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
Highly Competitive Industry
The desktop portion of the hard drive industry consists of many competitors of various sizes and financial
resources and is intensely competitive. The desktop hard drive industry is currently experiencing a period of sustained
oversupply and unusually severe pricing pressures that the Company expects to continue for at least the first six months
of 1999, although the current conditions in this market make it difficult to forecast the timing of any change in
competitive conditions.
During 1996 and 1997, the Company significantly increased its market share in the desktop hard drive market, but
the Company's market share eroded in 1998, primarily due to competitive conditions in the hard drive industry (with
resulting cutbacks in production), the timing of the Company's transition from thin film to magneto-resistive ("MR")
head technology and certain manufacturing and performance issues encountered as the Company pushed thin film head
technology to its limits. There can be no assurance that the Company will be able to recover recent market share losses
or avoid further erosion of market share. Seagate, Quantum, IBM, Maxtor, Fujitsu and Samsung are the Company's
major competitors in the data storage business, and Maxtor, Fujitsu and Samsung have recently gained significant
market share in the desktop market. The current intensely competitive conditions in this market make it difficult to
forecast near-term operating results. This competitive environment has adversely affected the Company's operating
results for 1998, and the Company expects these conditions to continue for at least the first half of 1999.