Western Digital 1998 Annual Report Download - page 45

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of the United States Federal statutory rate to the Company's effective tax rate is as follows:
1996 1997 1998
U.S. Federal statutory rate............................................................................... 35.0% 35.0% (35.0)%
State income taxes, net.................................................................................... 0.2 1.7 (0.2)
Tax rate differential on international income .................................................. (30.7) (12.7) (15.5)
Effect of valuation allowance ......................................................................... 3.8 (10.0) 46.5
Other............................................................................................................... 1.9 1.0 3.6
Effective tax rate............................................................................................. 10.2% 15.0% (0.6)%
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 or reduced the net loss by $30.1
million ($.31 per share, diluted), $58.5 million ($.63 per share, diluted) and by $17.1 million ($.20 per share, diluted)
in 1996, 1997 and 1998, respectively. These lower rates are in effect through fiscal year 2004.
At June 27, 1998, the Company had federal net operating loss carryforwards and tax credits of $218.1 million and
$29.3 million, respectively. The loss carryforwards expire in fiscal years 2008 through 2013 and the credit
carryforwards expire in fiscal years 1999 through 2012.
Net undistributed earnings from international subsidiaries at June 27, 1998 were $523.7 million. The net
undistributed earnings are intended to finance local operating requirements.
Note 6. Shareholders' Equity
The following table summarizes all shares of common stock reserved for issuance at June 27, 1998 (in thousands):
Number
of Shares
Issuable in connection with:
Convertible debentures............................................................................................ 19,374
Exercise of stock options, including options available for grant............................. 16,430
Employee stock purchase plan................................................................................. 2,373
38,177
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 of the common stock 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 27, 1998, 4,659,113
options were exercisable and 3,327,523 options were available for grant. Participants in the 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 27, 1998, 153,750 options were exercisable and 750,964 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