UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 3, 1999
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
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Commission File Number 1-8703
WESTERN DIGITAL CORPORATION
(Exact name of registrant as specified in its
charter)
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Delaware |
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92-2647125 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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8105 Irvine Center Drive
Irvine, California
(Address of principal executive offices) |
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92618
(Zip Code) |
Registrant’s telephone number, including area code
(949) 932-5000
Registrant’s Web Site: http://www.westerndigital.com
Securities Registered Pursuant to Section 12(b) of the Act:
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Name of each exchange |
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on which registered: |
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Common Stock, $.01 Par Value
Rights to Purchase Series A Junior
Participating Preferred Stock |
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New York Stock Exchange
New York Stock Exchange |
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
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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. Yes [X]
As of September 17, 1999, the aggregate market value of the
voting stock of the Registrant held by non-affiliates of the
Registrant was $547.4 million.
As of September 17, 1999, the number of outstanding shares
of Common Stock, par value $.01 per share, of the Registrant was
101,301,709.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by
reference to portions of the Registrant’s Proxy Statement
for the 1999 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days
after the close of the 1999 fiscal year.
WESTERN DIGITAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended July 3, 1999
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| PART I |
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Item 1. |
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Business |
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Item 2. |
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Properties |
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Item 3. |
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Legal Proceedings |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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| PART II |
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Item 5. |
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Market for Registrant’s Common Equity and Related
Stockholder Matters |
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Item 6. |
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Selected Financial Data |
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Item 7. |
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
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Item 7A |
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Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. |
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Financial Statements and Supplementary Data |
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure |
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| PART III |
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Item 10. |
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Directors and Executive Officers of the Registrant |
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Item 11. |
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Executive Compensation |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management |
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Item 13. |
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Certain Relationships and Related Transactions |
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| PART IV |
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Item 14. |
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Exhibits, Financial Statement Schedules, and Reports on
Form 8-K |
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This report contains forward-looking statements within the
meaning of federal securities laws. The statements that are not
purely historical should be considered forward-looking
statements. Often they can be identified by the use of
forward-looking words, such as “may,” “will,”
“could,” “project,” “believe,”
“anticipate,” “expect,” “estimate,”
“continue,” “potential,” “plan,”
“forecasts,” and the like. Statements concerning
current conditions may also be forward-looking if they imply a
continuation of current conditions. These statements appear in a
number of places in this report and include statements regarding
the intentions, plans, strategies, beliefs or current
expectations of the Company with respect to, among other things:
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the financial prospects of the Company |
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the Company’s financing plans |
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litigation and other contingencies potentially affecting the
Company’s financial position or operating results |
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trends affecting the Company’s financial condition or
operating results |
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the Company’s strategies for growth, operations, product
development and commercialization |
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conditions or trends in or factors affecting the computer, data
storage, home entertainment or hard drive industry. |
Forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those
expressed in the forward-looking statements. Readers are urged
to carefully review the disclosures made by the Company
concerning risks and other factors that may affect the
Company’s business and operating results, including those
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 reports filed
with the Securities and Exchange Commission. 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.
The Company’s fiscal year is a 52 or 53-week year ending on
the Saturday nearest June 30. The 1997, 1998 and 1999 fiscal
years ended on June 28, June 27, and July 3,
respectively, and consisted of 52 weeks for the fiscal years
1997 and 1998, and 53 weeks for the fiscal year 1999.
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 (949) 932-5000 and its web site is
http://www.westerndigital.com. The information on the web site is
not incorporated in this report.
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PART I
Item 1. Business
General
Western Digital Corporation (the “Company” or
“Western Digital”) designs, develops, manufactures and
markets a broad line of hard drives featuring leading-edge
technology. A hard drive is a storage device found in most
computers that stores data on one or more rotating magnetic disks
that provide fast access to data that must be readily available
to computer users. The Company’s hard drives are designed
for the desktop PC market and the high-end hard drive market and,
recently, for the emerging market for hard drives specially
designed for audio-visual applications, such as new video
recording devices. The Company’s hard drive products
currently include 3.5-inch form factor hard drives ranging in
storage capacity from 4.3 gigabytes (“GB”) to 27.3
GB. The Company sells its products worldwide to computer
manufacturers for inclusion in their computer systems or
subsystems and to distributors, resellers and retailers. The
Company’s products are currently manufactured in Singapore
and Malaysia.
In February 1999, the Company acquired Crag Technologies, Inc.,
renamed Connex, Inc. (“Connex”) after the acquisition,
a San Jose-based startup company formed to develop storage
solutions for the Windows NT and UNIX server environments for the
rapidly changing storage market. Connex’s first product is
expected to be a network attached storage appliance targeted at
workgroups and small departments where multiple users access
shared data files over a local area network. Connex is developing
a network attached storage appliance featuring a fully
integrated controller, up to six hard drives, an integrated tape
for backup, automatic connectivity for remote management, and
plug-and-play installation capability. The system will include
Connex’s Perspective™ storage management software. For
further discussion of Connex, see Part II, Item 7, under the
heading “Risk factors relating to Western Digital
particularly.”
Industry
Desktop PC Market. According to International Data
Corporation, the desktop computer segment is the largest segment
of the worldwide personal computer market, accounting for
approximately 80% of global personal computer shipments in
calendar 1998. As a result, desktop computers were the leading
source of demand for hard drives, accounting for more than 75% of
all hard drive units shipped worldwide in calendar 1998,
according to International Data Corporation. Over 90% of Western
Digital’s hard drive unit shipments in 1999 were sold to
this market. Desktop personal computers for entry level to
experienced users are used in both commercial and consumer
environments. The demand for hard drive capacity continues to
grow in part due to:
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continued improvements in desktop computing price to performance
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the emergence of the sub-$1,000 desktop computer; |
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the rapid accumulation of data resulting from the digitization of
information previously stored in paper form; |
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larger file sizes created by multimedia-intensive applications; |
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the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative
computing; and |
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increased demand for desktop computer upgrades as a result of
Year 2000 compliance efforts. |
Future demand growth for desktop computer hard drives also may be
driven by new and emerging hard drive markets. In July 1999,
International Data Corporation forecasted that the worldwide
desktop computer hard drive market would grow from approximately
111 million units in calendar 1998 to 205 million units
in calendar 2003, reflecting a compound annual growth rate of
approximately 13.1%. However, it forecasts that revenue growth
will only be approximately 4.4% through calendar 2003, reflecting
the impact of industry
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oversupply and severe price competition. See Part II,
Item 7, under the heading “Risk factors related to the
hard drive industry in which we operate.”
Desktop PCs are used in a number of environments, ranging from
homes to businesses and multi-user networks. Software
applications are primarily word processing, spreadsheet, desktop
publishing, database management, multimedia, entertainment and
other related applications. Desktop PCs typically utilize the
Enhanced Integrated Drive Electronics (“EIDE”)
interface for their hard drives. The Company believes the minimum
storage requirements in the past year for entry-level PCs were
generally 3.2 GB to 4.3 GB of formatted capacity.
The market continues to demand increased capacity per unit as
users’ system needs increase and technological and
manufacturing advances continue to make higher capacity drives
more affordable. In the mainstream desktop PC market, the Company
believes that the rate of increase in storage capacity per unit
has recently outpaced the rate of increase in demand for such
capacity. In contrast, the emerging use of hard drives to record
and playback audio and video content in the audio-visual market
is expected to create demand for storage capacity that will
exceed the growth in demand for increased capacity in the desktop
PC market. Overall, industry sources believe that the
current rate of increase in storage capacity per unit shipped
will continue for the foreseeable future. Accordingly, the
Company believes that time-to-market, time-to-volume and
time-to-quality leadership with higher capacity drives at
attractive price levels will continue to be critical to its
future success in serving this market.
Users of PCs, especially entry-level PCs, have become
increasingly price sensitive. In 1998 the market for PC’s
priced below $1,000 grew significantly, and in 1999 the market
for PC’s priced below $800 was the fastest growing segment
of the market. These systems typically do not contain high
performance hard drives, but the growth of these segments has
placed downward price pressure on higher cost systems as well,
thereby contributing to the increasing price pressures on desktop
hard drives. The Company has development efforts underway to
specifically address the entry-level consumer PC market.
Enterprise Market. Enterprise systems include high
performance microcomputers, workstations, servers and
minicomputers. Applications operated by these systems are
characterized by compute-intensive and data-intensive solutions,
such as design and engineering software, network management,
larger database management systems, scientific applications and
small to medium-sized business applications such as materials
requirement planning, payroll, general ledger systems and related
management reports. Data integrity and rapid access to data are
paramount in this environment. Enterprise systems typically
require hard drive storage capacities of 9.0 GB and greater per
drive, average seek times of less than 8 milliseconds and
rotation speeds of 7200 revolutions per minute (“rpm”)
to 10,000 rpm. Due to the leading-edge characteristics required
by end-users of enterprise systems, manufacturers of such systems
emphasize performance as well as price as the key selling
points. Enterprise systems primarily use the Small Computer
System Interface (“SCSI”), although recently the Fibre
Channel Arbitrated Loop (“FC-AL”) interface is being
adopted by some storage subsystem providers and is expected to be
increasingly utilized.
According to International Data Corporation, the worldwide market
for enterprise hard drives experienced strong growth from
calendar 1994 through calendar 1998, with a compound annual
growth rate of approximately 20%. Revenue growth was not as
strong, with a compound annual growth rate of approximately 7.5%.
Unit growth declined in calendar 1998 as compared to prior
years, and revenue was level from calendar 1997. Industry sources
expect unit growth to stabilize at approximately 15% per year
through calendar 2001. Revenue is expected to begin growing again
in calendar 1999, accelerating to approximately 8% per year by
calendar 2001. See Part II, Item 7, under the heading
“Risk factors related to the hard drive industry in which we
operate.”
Products
The Company’s WD Caviar® and WD Expert™ brand
products are designed to serve the desktop PC portion of the
hard drive market, and its WD Enterprise™ brand products
are designed to serve the enterprise portion. Products designed
to serve the emerging audio-visual portion of the hard drive
market will be branded as WD Performer™.
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Desktop PC Products. The WD Caviar family currently
consists of 1.0” high, 3.5-inch form factor products with
capacities ranging from 4.3 GB to 20.5 GB and a rotation speed of
5400 rpm. The WD Expert family currently consists of 1.0”
high, 3.5-inch form factor products, with capacities ranging from
6.8 GB to 27.3 GB and rotation speeds of 7200 rpm. In 1998 the
Company introduced Data Lifeguard™, an exclusive data
reliability feature which is now implemented in all of the
Company’s hard drives. Data Lifeguard protects end-user data
by automatically detecting, isolating, and repairing possible
problem areas on the hard drive before data loss can occur. The
WD Caviar and WD Expert products utilize the EIDE interface,
providing high performance while retaining ease of use and
overall low cost of connection. The type of EIDE interface
currently used in all of the Company’s desktop PC hard
drives is ATA/66, which signifies an internal data transfer rate
of 66 megabytes per second, approximately twice as fast as the
previous generation of EIDE interface.
The WD Caviar product line generally leverages a common
architecture or “platform” for various products with
different capacities to serve the differing needs of the desktop
PC market. The Company expects to utilize the WD Caviar platform
strategy as it develops products for the emerging market for hard
drives specifically designed for audio-visual applications, such
as new video digital recording devices. 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. This platform
strategy also enables computer manufacturer customers to leverage
their qualification efforts onto successive product models.
The WD Expert line of hard drives is focused on the higher end of
the desktop PC market where capacity per system and performance
are most important. These drives are developed under a hard drive
technology licensing and component supply agreement between the
Company and IBM (the “IBM Agreement”). The IBM
Agreement enables the Company to incorporate IBM’s
technology, designs, and hard drive components into the
Company’s desktop PC products. The Company believes that
access to IBM’s hard drive research and development in 1999
helped the Company achieve its strategy of time-to-market
leadership in the desktop PC hard drive market. For further
discussion of the IBM relationship, see Part II, Item 7,
under the heading “Risk factors relating to Western Digital
particularly.”
Enterprise Products. The Company began shipping WD
Enterprise products in fiscal 1997. The Company’s current
enterprise products offer storage capacities ranging from 9.1 GB
to 18.3 GB, are 1.0” high, use the 3.5-inch form factor,
feature seek times of less than 8 milliseconds, and are targeted
at workstations, servers, multi-user systems and storage
subsystems. WD Enterprise™ products utilize the SCSI
interface, (both single-ended and low voltage differential)
combined with 7200 rpm and 10,000 rpm spin rates to provide the
high performance required to meet the storage needs of enterprise
systems. The Company also recently introduced a WD Enterprise
product which uses the Ultra 160 SCSI interface, allowing an
internal data transfer rate of approximately 160 megabytes per
second, twice as fast as the previous generation of SCSI
interface.
In order to grow its enterprise product revenues, the Company
must expand its product offerings to include a broader range of
enterprise products demanded by computer manufacturer customers.
These products include FC-AL and other high speed interfaces. See
“Technology and Product Development.” The IBM
Agreement is not applicable to the Company’s enterprise
business, so enterprise product development must be achieved
through the Company’s own technological developments.
Products for Emerging Audio-visual Markets. Audio-visual
applications such as digital video recording devices represent a
developing market opportunity for the Company’s hard drive
technologies. Hard drive technology makes it possible to
simultaneously record and playback content; to pause, skip
forward and backward during live broadcasts; and to rapidly
access large amounts of audio-visual content. The Company offers
customized design capabilities and unique hard drive technologies
for consumer applications; however, where practical, the Company
intends to leverage its existing product line architectures for
the various products for the audio-visual market. The Company is
currently developing hard drives for consumer electronics
products with Sony Corporation, under a strategic alliance
between the Company and Sony that was announced in December 1998.
The Company is also in discussions with other consumer
electronics
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companies concerning incorporation of hard drives into new and
existing consumer electronics products. Commercialization of the
Sony product is being targeted for calendar 2000. Because the
market for these products has not yet developed, it is too early
to project the likely size and growth of such market. For further
discussion of this product development effort, see Part II,
Item 7, under the heading “Risk factors relating to
Western Digital particularly.”
Products being Developed by Connex. Connex is developing a
network attached storage appliance featuring a fully integrated
controller, up to six hard drives, an integrated tape for backup,
automatic connectivity for remote management, and plug-and-play
installation capability. The system will include Connex’s
Perspective™ storage management software. The system will be
marketed for use by workgroups and small departments where
multiple users access shared data files over a local area
network. For further discussion of Connex, see Part II,
Item 7, under the heading “Risk factors relating to
Western Digital particularly.”
Technology and Product Development
Hard drives are used to record, store and retrieve digital data.
Their performance attributes are currently better than removable
or floppy disks, optical disk drives and tape, and they are more
cost effective than semiconductor technology. The primary
measures of hard drive performance include:
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“Storage capacity" — the amount of data that
can be stored on the hard drive — commonly expressed in
gigabytes. |
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“Average seek time" — the time needed to
position the heads over a selected track on the disk
surface — commonly expressed in milliseconds. |
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“Internal data transfer rate" — the rate at
which data is transferred to and from the disk —
commonly expressed in megabits per second. |
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“Spindle rotational speed" — the rotational
speed of the disks inside the hard drive — commonly
expressed in rpms or revolutions per minute. |
All of the Company’s hard drive products employ similar
technology. The main components of the hard drive are the head
disk assembly and the printed circuit board. The head disk
assembly includes the head, media (disks), head positioning
mechanism (actuator) and spin motor. These components are
contained in a hard base plate protective package in a
contamination-free environment. The printed circuit board
includes custom integrated circuits, an interface connector to
the host computer and a power connector.
The head disk assembly is comprised of one or more disks
positioned around a spindle hub that rotates the disks by a spin
motor. Disks are made of a smooth substrate to which a thin
coating of magnetic materials is applied. Each disk has a head
suspended directly above it, which can read data from or write
data to the spinning disk. The sensor element of the head, also
known as the slider, is getting progressively smaller, resulting
in reduced material costs.
The integrated circuits on the printed circuit board typically
include a drive interface and a controller. The drive interface
receives instructions from the computer, while the controller
directs the flow of data to or from the disks, and controls the
heads. The location of data on each disk is logically maintained
in concentric tracks which are divided into sectors. The computer
sends instructions to the controller to read data from or write
data to the disks based on track and sector locations. Guided by
instructions from the 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.
Industry standard interfaces are utilized to allow the disk drive
to communicate with the computer. Currently, the primary
interface for desktop PCs is EIDE and, for enterprise systems,
SCSI. As computer performance continues to improve, the hard
drive will need to deliver information faster than these
interfaces can handle. Accordingly, enterprise systems have begun
to incorporate the FC-AL serial interface where very high data
transfer rates are important, and the desktop PC industry plans
to transition to higher speed
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interfaces to handle the higher data transfer rates. The Company
is working to develop products that will support these higher
speed interfaces.
Storage capacity of the hard drive is determined by the number of
disks and each disk’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 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. As the areal
density increases, fewer disks and/or heads are required to
achieve a given drive capacity, thus reducing product costs
through reduced component requirements.
Head technology is one of the variables affecting areal density.
The desktop hard drive industry has completed a transition to
magnetoresistive head technology, which allows significantly
higher storage capacities than the previously utilized thin-film
head technology. Magnetoresistive heads have discrete read and
write structures which provide more signal than the older
thin-film inductive heads. This allows significantly higher areal
densities, which increases storage capacity per disk and
improves manufacturing margin and product reliability. The
Company completed the transition to magnetoresistive head
technology in 1999 and is in the process of completing a
transition to the next generation of head technology, known as
giant magnetoresistive. Certain of the Company’s competitors
in the desktop PC hard drive market moved more quickly than the
Company into magnetoresistive head technology, achieving
time-to-market leadership at higher capacity points; however, the
Company has been a leader in the transition to giant
magnetoresistive head technology. The Company began volume
shipments of its first giant magnetoresistive-based hard drive
products for the desktop PC market in the third quarter of 1999,
and currently all of the Company’s desktop product offerings
employ giant magnetoresistive head technology.
Constant innovations in research and development are essential to
the Company’s ability to compete. Hard drive providers are
evaluating or implementing a number of technological innovations
designed to further increase hard drive performance and reduce
product costs, including simplifying the electronic architecture
by combining the traditional controller, channel, microprocessor
and servo-interface management functions of traditional hard
drive microprocessors on a single integrated circuit. Moreover,
to consistently achieve timely introduction and rapid volume
production of new products, some hard drive providers are
striving to simplify their product design processes by focusing
on creating extendible core technology platforms which utilize
common firmware and mechanical designs and re-use of
manufacturing tooling and application specific integrated
circuits across various product generations and product lines.
The Company must expand its product offerings in the enterprise
market to include FC-AL interface and other emerging
technologies. The Company’s current line of enterprise
products consists of SCSI low profile 1.0” high drives with
capacity points up to 18.3 GB. While these products address
approximately 70% to 80% of the enterprise market, that
percentage is likely to decrease as demand for FC-AL interface
and 10,000 and higher rpm drive products grows. The
Company’s research and development is crucial to its success
in the enterprise market. There is continuing market pressure to
increase the spindle rotational speed and decrease the average
seek time of enterprise products. The Company must build its
enterprise infrastructure quickly enough to support this
development schedule. This will involve hiring and retaining
qualified engineers at a time when there is a worldwide shortage
of such engineers. For a discussion of our enterprise product
development, see Part II, Item 7, under the heading
“Risk factors relating to Western Digital
particularly.”
Sales and Distribution
The Company sells its products globally to computer
manufacturers, distributors, value-added resellers, dealers,
system integrators, retailers and internet-based retailers.
Manufacturers typically purchase components such as hard drives
and assemble them into the computer systems they build.
Distributors typically sell the Company’s drives to small
manufacturers, dealers, system integrators and other resellers.
Manufacturers. Sales to manufacturers accounted for 72%,
69% and 70% of consolidated revenues in 1997, 1998 and 1999,
respectively. The Company’s major computer manufacturer
customers include Apple Computer, Compaq Computer, Dell Computer,
Fujitsu, Gateway, Hewlett-Packard, IBM, Intel, Micron
Electronics and NEC. During 1997, sales to IBM accounted for 13%
of revenues. During 1998 and 1999, sales
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to Compaq accounted for 14% and 21% of revenues, respectively.
The Company believes that its success depends on its ability to
maintain and improve its strong relationships with the leading
computer manufacturers. Western Digital, Quantum, IBM and Seagate
have historically had the highest market share with these
manufacturers. Over the last two years, Maxtor Corporation and
Fujitsu Limited have introduced new hard drive products and
gained market share with leading computer manufacturers. The
increase in the number of qualified suppliers to the leading
manufacturers, combined with the growth of the sub-$1,000 PC
market, has placed continuous downward pressure on hard drive
prices. This pressure, in turn, has reduced average gross margins
for hard drive suppliers.
The leading PC computer manufacturers have been gaining market
share, which has increased their purchasing leverage over
component suppliers. In calendar years 1997 and 1998, the top ten
PC computer manufacturers accounted for more than 50% of all PC
shipments and most of the growth in the PC market. In addition,
the top four server and workstation computer manufacturers
accounted for almost 50% of server and workstation units shipped
in calendar 1998. As a result, maintaining customer satisfaction
with these leading computer manufacturers has become even more
critical.
Computer manufacturers typically seek to qualify up to three or
four providers for each generation of hard drives. Once a
computer manufacturer has chosen its qualified hard drive vendors
for a given product, it generally will purchase hard drives from
those vendors for the life of that product. To achieve
consistent success with computer manufacturers’
qualifications, a hard drive supplier must be an early provider
of next generation hard drives featuring leading technology and
high capacity per disk. Suppliers must quickly achieve volume
production of high quality and reliable hard drives. To quickly
achieve high volume production, a hard drive supplier must have
access to flexible, high-capacity, high-quality manufacturing
capabilities. Factors on which computer manufacturers evaluate
their hard drive suppliers include overall quality, storage
capacities, performance characteristics, price, ease of doing
business, and the supplier’s long-term financial stability.
The business models of computer manufacturers are in the process
of changing, and these changes have impacted and will continue to
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
manufacturers and others in the distribution chain to the risk of
carrying excess or obsolete inventories. The historical model
limits the computer manufacturers’ flexibility to react to
rapid technology changes and component pricing fluctuations. In
response, the leading manufacturers require their hard drive
suppliers to maintain a small base stock of finished product in
locations adjacent to the customers’ manufacturing
facilities. In addition, some of the Company’s customers
have implemented a supply chain logistics model that combines
“build-to-order” (computer manufacturer does not build
until there is an order backlog) and “contract
manufacturing” (computer manufacturer contracts assembly
work to a contract manufacturer who purchases components and
assembles the computer based on the computer manufacturer’s
instructions.) The Company then ships hard drives directly to the
assembler for installation at its location. The Company has
adapted its logistics model to effectively align with these
industry shifts. These changes require greater skill in managing
finished goods inventory and more flexibility in manufacturing,
both of which in turn require even closer relationships between
the Company and its computer manufacturer and contract
manufacturer customers. To meet these challenges the Company is
expanding its use of Internet technology and web-based supply
chain planning tools. For an additional discussion of the changes
in customer models, refer to Part II, Item 7, under
the headings “Risk factors related to Western Digital
particularly,” and “Risk factors related to the hard
drive industry in which we operate.”
The Company maintains a base stock of two to three weeks of
current, finished goods inventory for certain key computer
manufacturer customers in facilities located adjacent to their
operations. Inventory at these locations usually includes minor
product customizations (such as labeling) for the related
computer manufacturer. If subsequent to its initial order the
computer manufacturer changes its requirements, inventory held at
these facilities can be sold to other computer manufacturers or
distributors as is or with minor modifications (such as a change
in labeling) at little or no additional cost. Therefore, these
arrangements, even if not fulfilled, have minimal impact on
inventory valuation.
9
Distributors. The Company uses a select group of
distributors to sell its products to small computer
manufacturers, value-added resellers, resellers and systems
integrators. The Company’s major distributor customers
include ASI, CHS, Decision Support Systems, ELD, Ingram Micro,
Merisel, Servex, Synnex and Tech Data. Distributors and retailers
combined accounted for approximately 28%, 31%, and 30% of disk
drive revenue for 1997, 1998, and 1999, respectively.
Distributors generally enter into non-exclusive agreements with
the Company for purchase and redistribution of product on a quick
turnover basis. Purchase orders are placed and revised on a
weekly basis. The Company grants certain of its distributors
price protection and limited rights to return product on a
rotation basis.
Retailers. The Company sells its retail-packaged products
directly to a select group of major retailers such as computer
superstores, warehouse clubs and computer electronics stores and
authorizes sales through distributors to smaller retailers. Major
retailers to whom the Company sells directly include Best Buy,
Carrefour, Circuit City, CompUSA, Dixons, Office Depot and Vobis.
Retailers accounted for approximately 3.1%, 4.7%, and 6.3% of
revenue for 1997, 1998, and 1999, respectively. The
Company’s current retail customer base is in the United
States and Canada. The retail channel complements the
Company’s other sales channels while helping to build brand
awareness for the Company and its products. Retailers supply the
aftermarket “upgrade” sector in which end-users
purchase and install products to upgrade their computers. The
Company grants certain of its retailers price protection and
limited rights to return product on a rotation basis.
The Company maintains sales offices throughout North America,
Eastern and Western Europe, the Middle East, Japan and Southeast
Asia. Field application engineering is provided to strategic
computer manufacturer 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
telephone support during business hours and via the
Company’s web site.
The Company’s international sales, which include sales to
foreign subsidiaries of U.S. companies, represented 47%, 43% and
45% of revenues for fiscal years 1997, 1998 and 1999,
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. See Part II,
Item 7, under the heading “Risk factors relating to
Western Digital particularly.”
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 manufacturers and resellers
are reimbursed for certain advertising expenditures. Western
Digital also invests 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.
Competition
In the desktop product market, the Company competes primarily
with Fujitsu, IBM, Maxtor, Quantum, Samsung, and Seagate. In the
enterprise market, the Company competes primarily with Fujitsu,
Hitachi, IBM, Quantum, and Seagate.
The hard drive industry is intensely competitive, with hard drive
suppliers competing for a limited number of major customers.
Hard drives manufactured by different competitors 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,
delivery capability, leadership in time-to-market, time-to-volume
and time-to-quality 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.
10
The Company believes that it cannot differentiate its hard drive
products solely on attributes such as storage capacity;
therefore, the Company also differentiates itself by designing
and incorporating into its hard drives desirable product
performance attributes and by emphasizing rapid response with its
computer manufacturer and distribution customers and brand
equity with its end users. These product performance attributes
include seek time, data transfer rates, intelligent caching,
failure prediction, remote diagnostics, acoustics and data
recovery. Rapid response requires accelerated design cycles,
customer delivery and production flexibility, which contribute to
customer satisfaction. Data storage has become strategically
critical for computer end users. Consequently, the Company
believes that trust in a manufacturer’s reputation has
become an important factor in the selection of a hard drive,
particularly within such a rapidly changing technology
environment. The Company believes it has strong brand equity with
its end users.
During 1997, the Company significantly increased its market share
in the desktop hard drive market. 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
magnetoresistive head technology and certain manufacturing and
performance issues encountered as the Company pushed thin film
head technology to its limits. The Company completed its
transition to magnetoresistive technology in 1999 and began its
transition to giant magnetoresistive technology; however, the
competitive conditions in the hard drive industry continued and
the Company’s market share eroded further due to cutbacks in
production.
The desktop market is characterized by more competitors and
shorter product life cycles than the enterprise market;
therefore, it has traditionally been subject to periods of
sustained and severe price competition, and factors such as
time-to-market can have a more pronounced effect on the success
of any particular product.
The enterprise portion of the hard drive market is more
concentrated than the desktop portion, with the two largest
competitors, Seagate and IBM, having market shares approaching
40%. During the past two years price competition in the
enterprise market has increased, and the Company expects that it
will continue to increase. Introduction of the WD
Enterprise™ drives into the enterprise market was successful
because of high product quality, competitive product performance
and the Company’s ability to leverage its customer and
supplier relations from the desktop market; however, the
Company’s future success in the enterprise storage market is
heavily dependent on the successful development, timely
introduction and market acceptance of new products.
The Company expects that the products under development by Connex
will face significant competition from established manufacturers
of network attached storage devices. For an additional
discussion of the challenges facing Connex, see Part II,
Item 7, under the heading “Risk factors related to
Western Digital particularly.”
Advances in magnetic, optical or other data storage technologies
could result in competitive products that have better performance
or lower cost per unit of capacity than the Company’s hard
drive products. Some of the Company’s competitors are
developing hybrid storage devices that combine magnetic and
optical technologies, but the Company has decided not to pursue
this technology at this time. High-speed semiconductor memory
could compete with the Company’s hard drive products in the
future. Semiconductor memory is much faster than magnetic disk
drives, but currently is volatile (i.e., subject to loss of data
in the event of power failure) and much more costly. Flash
memory, a nonvolatile semiconductor memory, is currently much
more costly and, while it has higher “read” performance
than disk drives, it has lower “write” performance.
Flash memory could become competitive in the near future for
applications requiring less storage capacity than hard drives can
provide.
For an additional discussion of competition, see Part II,
Item 7, under the heading “Risk factors related to the
hard drive industry in which we operate.”
11
Service and Warranty
Western Digital generally warrants its newly manufactured hard
drives against defects in materials and workmanship for a period
of one to five years from the date of sale, based on customer
needs. The Company’s warranty obligation is generally
limited to repair or replacement of the hard drive. The Company
recently contracted with a third party in the United States to
process and test returned hard drives for the Company’s end
users. The Company refurbishes or repairs its products at
in-house service facilities located in Singapore and at a
third-party return facility located in Germany.
Manufacturing
To be competitive, Western Digital must manufacture high quality
hard drives with industry leading time-to-volume production at
competitive 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 testing, and establishment and maintenance of key
vendor relationships in order to create “virtual vertical
integration.” By establishing partner relationships with its
strategic component suppliers, the Company believes it is able
to access “best-of-class” manufacturing quality without
the substantial capital investment associated with actual
vertical integration. In addition, the Company believes that its
virtual vertical integration model enables it to have the
business flexibility needed to select the highest quality low
cost suppliers as product designs and technologies evolve.
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’s clean room manufacturing process consists of
modular production units, each of which contains a number of work
cells. With the completed transition to magnetoresistive head
technology for desktop PC hard drives, the Company has recently
increased its factory yields on desktop PC hard drives to its
historically high levels.
The Company produces hard drives in its two plants, one in
Singapore and one in Malaysia. The Company recently announced its
intention to move substantially all of its production of desktop
hard drives to Malaysia, while retaining in Singapore production
of enterprise drives and expanding its role in design,
development and manufacturing process engineering. As a
continuation of its virtual vertical integration model, the
Company sold its media manufacturing division in 1999 to Komag,
Inc. (“Komag”). With the sale of this division, the
Company now purchases all of the standard mechanical components
and micro controllers for its hard drives from external
suppliers.
The Company continually evaluates its manufacturing processes in
an effort to increase productivity and decrease manufacturing
costs. In order to address inventory oversupply, the Company has
implemented production cutbacks in its manufacturing facilities
and has reduced excess manufacturing capacity through closure of
one of its manufacturing facilities in Singapore and the
announced relocation of the remaining Singapore desktop hard
drive production to Malaysia. 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
continually 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, see Part II,
Item 7, under the heading “Risk factors relating to
Western Digital particularly.”
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 $150.2, $203.7 and
$217.0 million in 1997, 1998 and 1999, respectively.
12
Research and development expenditures included approximately
$22.0 million, primarily related to the initiation of the
IBM relationship in 1998, and approximately $12.0 million
related to the acquisition of Connex in 1999. Recurring research
and development expenditures for hard drive products increased by
approximately $31.5 million from 1997 to 1998, and by
$23.3 million from 1998 to 1999, due to the Company’s
decision to develop a full line of enterprise hard drives, regain
time-to-market leadership in the desktop hard drive market,
develop a line of audio-visual hard drives and continue
development of Connex new products.
For a discussion of product development, see Part II,
Item 7, under the heading “Risk factors related to the
hard drive industry in which we operate.”
Materials and Supplies
The principal components currently used in the manufacture of the
Company’s hard drives are magnetic heads and related head
stack assemblies, media, controllers, spindle motors and
mechanical parts used in the head-disk assembly. In addition to
its own proprietary semiconductor devices, the Company also uses
standard semiconductor components such as logic, memory and
microprocessor devices obtained from other manufacturers and a
wide variety of other parts, including connectors, cables, and
other interconnect technology.
Unlike some of its competitors, the Company acquires all of the
components for its products from third-party suppliers. In
general, the Company tries to have at least two or three
suppliers for each of its component requirements. For example,
the Company currently buys giant magnetoresistive heads from IBM,
Read-Rite and SAE. IBM supplies all of the heads for the
Company’s desktop PC hard drives incorporating IBM
technology under the IBM Agreement. Media requirements are
purchased through several outside vendors including Komag, IBM
and HMT Technology. In connection with the sale of its media
manufacturing division to Komag in April 1999, the Company
entered into a three-year volume purchase agreement with Komag.
Under this Agreement, the Company is obligated to purchase a
substantial portion of its requirements for hard disk media from
Komag. The Agreement does not require the Company to purchase a
fixed minimum amount of media from Komag. Some custom integrated
circuits are currently sole-sourced from Cirrus Logic and
STMicroelectronics. Because of their custom nature, these
products require significant design-in periods and long lead
times.
For an additional discussion of component supplies, see
Part II, Item 7, under the heading “Risk factors
relating to Western Digital particularly.”
Backlog
At August 21, 1999, the Company’s backlog, consisting
of orders scheduled for delivery within the next twelve months,
was approximately $388 million, compared with a backlog at
August 7, 1998 of approximately $270 million. The
Company expects all this backlog to be delivered within the
current fiscal year. 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 generally
negotiates pricing, order lead times, product support
requirements and other terms and conditions prior to receiving a
computer manufacturer’s first purchase order for a product.
Manufacturers’ purchase orders typically may be canceled
with relatively short notice to the Company, with little or no
cost to the customer, or modified by customers to provide for
delivery at a later date. Also, certain of the Company’s
sales to computer manufacturers 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 information as of the end of a
particular period is not necessarily indicative of future levels
of the Company’s revenue and profit and may not be
comparable to earlier periods.
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.
13
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.
For additional discussion of intellectual property, see
Part II, Item 7, under the heading “Risk factors
relating to Western Digital particularly.”
Environmental Regulation
The Company is subject to a variety of regulations in connection
with its operations. It believes that it has obtained or is in
the process of obtaining all necessary permits for its domestic
operations.
Employees
As of July 31, 1999, the Company employed a total of 10,390
full-time employees worldwide. This represents a reduction in
headcount of approximately 20% since July 31, 1998, as the
Company responded to the industry downturn and its decrease in
sales. The Company employed 1,673 employees in the United States,
4,410 employees at its hard drive manufacturing facilities in
Malaysia, 4,165 at its hard drive manufacturing facility in
Singapore, and 142 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, house management, research and development,
administrative and sales personnel. The lease agreement for this
facility expires in December 2000 and provides the Company with
the option to extend the lease for an additional six-month
period. The Company also leases facilities in San Jose,
California, and Rochester, Minnesota, for research and
development activities. The Company operates a hard drive design
and manufacturing facility in Chai Chee, Singapore. The Chai
Chee, Singapore, facility is leased. The leases referenced above
expire at various times beginning in 2000 through July 2006. The
Company also owns a facility in Tuas, Singapore, subject to a
ground lease expiring in 2026. This Tuas, Singapore, facility is
presently being held for disposition. Western Digital also owns a
hard drive manufacturing facility in Kuala Lumpur, Malaysia. The
Company owns a facility in Rochester, Minnesota, soon to be
occupied and used for research and development activities, which
14
consists of a 215,000 square foot building on approximately 57
acres. The Company recently sold approximately 34 acres of land
in Irvine, California, on which it previously intended to
construct a new corporate headquarters.
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 following discussion contains forward-looking statements
within the meaning of the federal securities laws. These
statements relate to the Company’s legal proceedings
described below. Litigation is inherently uncertain and may
result in adverse rulings or decisions. Additionally, the Company
may enter into settlements or be subject to judgments that may,
individually or in the aggregate, have a material adverse effect
on the Company’s financial position, results of operations
or liquidity. Accordingly, actual results could differ materially
from those projected in the forward-looking statements.
The Company was sued by Amstrad PLC (“Amstrad”) in
December 1992 in Orange County Superior Court. The complaint
alleged that hard drives supplied by the Company in calendar 1988
and 1989 were defective and caused damages to Amstrad of
$186.0 million in 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 in addition to exemplary damages in an unspecified
amount. The first trial of this case ended in a mistrial, with
the jury deadlocked on the issue of liability. The case was
retried, and on June 9, 1999, the jury returned a verdict
against Amstrad and in favor of Western Digital. Amstrad has
filed a notice of appeal from the judgment. The Company does not
believe that the ultimate resolution of this matter will have a
material adverse effect on the financial position, results of
operations or liquidity of the Company. However, should the
judgment be reversed on appeal, and if in a retrial of the case
Amstrad were to prevail, the Company may be required to pay
damages and other expenses, which may have a material adverse
effect on the Company’s financial position, results of
operations or liquidity. In addition, the costs of defending a
retrial of the case may be material, regardless of the outcome.
On February 26, 1999, the Lemelson Foundation
(“Lemelson”) sued the Company and 87 other companies in
the U.S. District Court for the District of Arizona. The
complaint alleges infringement of numerous patents held by
Mr. Jerome H. Lemelson relating to, among other
matters, “machine vision,” “computer image
analysis,” and “automatic identification.” The
Company has reached preliminary agreement with Lemelson
concerning a fully paid-up license of the patents, and Lemelson
has filed a voluntary dismissal without prejudice of the
complaint against the Company. Based upon the information
presently known to management, the Company does not believe that
the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations
or liquidity of the Company. However, because of the nature and
inherent uncertainties of litigation, should the outcome of this
action be unfavorable, the Company may be required to pay damages
and other expenses, which may have a material adverse effect on
the Company’s financial position, results of operations or
liquidity. In addition, the costs of defending such litigation
may be material, regardless of the outcome.
In 1994 Papst Licensing (“Papst”) brought suit against
the Company in U.S. District Court for the Central District of
California alleging infringement by the Company of five of its
patents relating to disk drive motors that the Company purchases
from motor vendors. Later that year Papst dismissed its case
without prejudice, but it has 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 ultimate resolution of this
matter will have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
However, because of the nature and inherent uncertainties of
litigation, should the outcome of this action be
15
unfavorable, the Company may be required to pay damages and other
expenses, which may have a material adverse effect on the
Company’s financial position, results of operations or
liquidity. In addition, the costs of defending such litigation
may be material, regardless of the outcome.
On July 2, 1999, Magnetic Media Development, LLC
(“Magnetic Media”) brought suit against the Company in
the United States District Court for the Northern District of
California. The suit alleges infringement by the Company of four
patents allegedly owned by Magnetic Media. While the Company has
not yet had an opportunity to fully study the complaint, it
believes that the patents cited in the complaint are those
previously cited to the Company by Mr. Virgle Hedgcoth. In a
letter dated July 16, 1996, Mr. Hedgcoth gave notice of
his assertion that the Company’s products infringe several
of his patents. Each of the patents which Hedgcoth cited relates
to magnetic media. In the letter, Hedgcoth offered the Company a
license under all his patents, without specifying any amount of
compensation. The Company has investigated these assertions and
believes it is likely that, with respect to magnetic disks that
it purchases from others and incorporates into the Company’s
products, it may have the right to have the vendors of such
magnetic disks undertake the defense and indemnify the Company
with respect to such purchased disks. 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. However, because of the nature and inherent
uncertainties of litigation, should the outcome of this action be
unfavorable, the Company may be required to pay damages and
other expenses, which may have a material adverse effect on the
Company’s financial position, results of operations or
liquidity. In addition, the costs of defending such litigation
may be material, regardless of the outcome.
The Company and Censtor Corporation (“Censtor”) have
had discussions concerning any royalties that might be due
Censtor under a licensing agreement. Censtor has initiated
arbitration procedures under the agreement seeking payment of
royalties. In response, the Company has filed a complaint in
federal court seeking a determination that the patents at issue
are invalid. The federal court action has been stayed pending
completion of the arbitration procedures. The Company does not
believe that the outcome of this dispute will have a material
adverse effect on its financial position, results of operations
or liquidity.
In the normal course of business, the Company receives and makes
inquiry regarding possible intellectual property matters
including alleged patent infringement. Where deemed advisable,
the Company may seek or extend licenses or negotiate settlements.
Although patent holders often offer such licenses, no assurance
can be given that a license will be offered or that the terms of
any license offered will be acceptable to the Company. Several
such matters are currently pending. The Company does not believe
that the ultimate resolution of these matters will have a
material adverse effect on the financial position, results of
operations or liquidity of the Company.
From time to time the Company receives claims and is a party to
suits and other judicial and administrative proceedings
incidental to 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 Company’s financial position, results of
operations or liquidity.
16
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 1999.
Executive Officers of the Registrant
The names, ages and positions of all the executive officers of
the Company as of August 20, 1999 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 |
|
|
57 |
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
|
|
|
|
Matthew E. Massengill |
|
|
38 |
|
|
Co-Chief Operating Officer |
|
|
|
|
|
|
Russell R. Stern |
|
|
43 |
|
|
Co-Chief Operating Officer |
|
|
|
|
|
|
Steven G. Campbell |
|
|
44 |
|
|
Senior Vice President, Desktop Solutions |
|
|
|
|
|
|
Arif Shakeel |
|
|
44 |
|
|
Senior Vice President, Worldwide Operations |
|
|
|
|
|
|
Duston M. Williams |
|
|
41 |
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
|
W. Michael Williams |
|
|
40 |
|
|
Senior Vice President and General Manager, Connex, Inc. |
|
|
|
|
|
|
Michael A. Cornelius |
|
|
57 |
|
|
Vice President, Law and Administration, and Secretary |
|
|
|
|
|
|
Steven M. Slavin |
|
|
48 |
|
|
Vice President, Taxes and Treasurer |
|
|
|
|
|
|
Jack Van Berkel |
|
|
39 |
|
|
Vice President, Human Resources |
Messrs. Haggerty, Massengill, Campbell, Slavin and Duston
Williams 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. Stern joined the Company in November 1994 as Vice
President, New Product Introductions. He also served as Vice
President, Asian Operations for the Personal Storage Division and
became Senior Vice President, Engineering, Personal Storage
Division in July 1998. He was promoted to his current position in
July 1999. Immediately prior to joining the Company, he served
as Vice President, Asian Operations for MiniStor Peripherals
Corporation.
Mr. Shakeel joined the Company in 1985 as Product Manager,
Integrated Drive Electronics. Mr. Shakeel served in various
executive capacities, including Vice President,
Materials — Asia, until October 1997, when he left the
Company to become Managing Director of Mahlin Associates, a
supplier of electromechanical components in Singapore.
Mr. Shakeel rejoined the Company in April 1999 as Senior
Vice President of Operations, Drive Products Division. He was
promoted to his current position in July 1999.
Mr. Michael Williams joined the Company in September 1998 as
General Manager, Enterprise Storage Group. He assumed his
current position in February 1999. Prior to joining the Company,
he was a founder and served as Vice President, Engineering, of
Ridge Technologies, a manufacturer of enterprise-class storage
systems and subsidiary of Adaptec, from July 1997. Ridge
Technologies was the predecessor to Connex, Inc. Prior to this,
Mr. Williams served in various engineering and management
positions at Apple Computer for 10 years.
Mr. Cornelius joined the Company in his current position in
January 1995. Prior to joining the Company, he held the position
of Vice President of Corporate Affairs for Nissan North America
for two years.
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.
17
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”) under the symbol
“WDC.” The approximate number of holders of record of
common stock of the Company as of September 17, 1999 was
3,874.
The Company has not paid any cash dividends on its common stock
and does not intend to pay any cash dividends on common stock in
the foreseeable future. The Company’s line of credit
agreement prohibits the payment of such dividends.
The high and low sales prices of the Company’s common stock,
as reported by the NYSE, for each quarter of 1998 and 1999 are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
|
|
|
|
|
|
1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
54 |
3/4 |
|
$ |
49 |
9/16 |
|
$ |
20 |
7/16 |
|
$ |
22 |
1/16 |
|
|
|
|
|
|
Low |
|
|
30 |
5/8 |
|
|
14 |
1/2 |
|
|
14 |
3/4 |
|
|
10 |
1/4 |
|
|
|
|
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
13 |
1/2 |
|
$ |
18 |
9/16 |
|
$ |
21 |
7/16 |
|
$ |
9 |
7/8 |
|
|
|
|
|
|
Low |
|
|
8 |
|
|
|
7 |
1/8 |
|
|
8 |
1/2 |
|
|
6 |
1/4 |
On February 1, 1999, the Company’s wholly owned
subsidiary, Western Digital Rochester, Inc., merged with and into
Connex, whereby Connex was the surviving corporation and all
previously issued and outstanding shares of Connex were canceled
and exchanged for common stock of the Company. This resulted in
an aggregate of 575,662 shares of common stock of the Company
being issued to the shareholders of Connex. This transaction was
undertaken in reliance upon the exemption from the registration
requirements of the Securities Act of 1933, as amended (the
“Securities Act”), afforded by Section 4(2)
thereof, as a transaction not involving a public offering. The
recipients of the Company’s common stock received in
connection with the Connex transaction acquired them for their
own account and not with a view to any distribution thereof to
the public. The certificates evidencing this common stock bear
restrictive legends stating that the shares may not be offered,
sold or transferred other than pursuant to an effective
registration statement under the Securities Act or an exemption
from such registration requirements. The Company believes that
exemptions other than those specified above may exist with
respect to the transaction set forth above.
18
Item 6. Selected Financial Data
Financial Highlights
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
July 1, |
|
June 29, |
|
June 28, |
|
June 27, |
|
July 3, |
|
|
1995 |
|
1996 |
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share and employee data) |
|
|
|
|
|
|
Revenues, net |
|
$ |
2,130.9 |
|
|
$ |
2,865.2 |
|
|
$ |
4,177.9 |
|
|
$ |
3,541.5 |
|
|
$ |
2,767.2 |
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
394.1 |
|
|
|
382.1 |
|
|
|
650.3 |
|
|
|
100.1 |
|
|
|
(2.8 |
) |
|
|
|
|
|
|
Operating income (loss) |
|
|
133.0 |
|
|
|
77.5 |
|
|
|
301.6 |
|
|
|
(295.8 |
) |
|
|
(476.8 |
) |
|
|
|
|
|
|
Net income (loss) |
|
$ |
123.3 |
|
|
$ |
96.9 |
|
|
$ |
267.6 |
|
|
$ |
(290.2 |
) |
|
$ |
(492.7 |
) |
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.34 |
|
|
$ |
1.05 |
|
|
$ |
3.07 |
|
|
$ |
(3.32 |
) |
|
$ |
(5.51 |
) |
|
|
|
|
|
|
Diluted |
|
$ |
1.23 |
|
|
$ |
1.01 |
|
|
$ |
2.86 |
|
|
$ |
(3.32 |
) |
|
$ |
(5.51 |
) |
|
|
|
|
|
|
Working capital |
|
$ |
360.5 |
|
|
$ |
280.2 |
|
|
$ |
364.2 |
|
|
$ |
463.5 |
|
|
$ |
61.7 |
|
|
|
|
|
|
|
Total assets |
|
$ |
858.8 |
|
|
$ |
984.1 |
|
|
$ |
1,307.1 |
|
|
$ |
1,442.7 |
|
|
$ |
1,002.4 |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
519.2 |
|
|
$ |
534.1 |
|
|
|
|
|
|
|
Shareholders’ equity (deficiency) |
|
$ |
473.4 |
|
|
$ |
453.9 |
|
|
$ |
620.0 |
|
|
$ |
317.8 |
|
|
$ |
(153.8 |
) |
|
|
|
|
|
|
Number of employees |
|
|
7,647 |
|
|
|
9,628 |
|
|
|
13,384 |
|
|
|
13,286 |
|
|
|
10,503 |
|
No cash dividends were paid for the years presented.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Western Digital is a leading supplier of hard drives for desktop
and enterprise computers. The hard drive industry is intensely
competitive and has experienced a great deal of growth, entry and
exit of firms, 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 oversupply.
The Company’s operating results during 1999 deteriorated
primarily as a result of increased pricing competition,
particularly in the desktop storage market. Although the business
environment was challenging in 1999, the Company continued to
make significant investments in its existing desktop and
enterprise product lines, and acquired a start-up company which
will add new product lines to the Company in 2000. During the
year, the Company also restructured its operations and completed
the sale of its media business to Komag.
In December 1998, the Company formed a strategic partnership with
Sony Corporation to co-develop a new hard disk drive
(“HDD”) for consumer audio and video (“AV”)
applications. The collaborative agreement calls for Sony to
develop the interface, architecture, and protocol for AV
applications, while the Company will be responsible for
developing the mechanical and electronic components and firmware
of the HDD. Each company will contribute its respective expertise
to the development effort. Sony will contribute in the areas of
digital video and audio processing and Western Digital in HDD
design and manufacturing technology. Commercialization of the AV
HDD is being targeted for the first half of calendar 2000.
In February 1999, the Company acquired Connex for approximately
$12.0 million. Connex had, at the time of the acquisition,
several in-process research and development projects. The Company
is continuing development efforts and expects to ship the first
new products developed by Connex in January 2000.
Cost-saving and organizational restructuring measures were taken
in 1999 to improve the Company’s financial performance and
responsiveness to changing industry conditions. In January 1999,
the Company initiated a restructuring program that resulted in
the combination of its Personal Storage Division and Enterprise
Storage Group into a single hard drive operating unit, the Drive
Products Division (“DPD”), which combined design,
manufacturing, materials, business and product marketing
resources to address both the desktop and enterprise markets. In
connection with combining the divisions, the Company’s Tuas,
19
Singapore facility was closed and production of its enterprise
drives was moved to the Company’s nearby manufacturing
facility in Chai-Chee, Singapore. The combination resulted in a
$41.0 million charge to operations in the third quarter. The
Company has realized and expects to further realize operating
efficiencies as a result of the combination.
In April 1999, the Company completed the sale of its Santa Clara
disk media operations to Komag. Terms of the sale agreement
include a three-year volume purchase agreement under which the
Company must purchase a significant percentage of its media
requirements from Komag. The agreement does not require the
Company to purchase a fixed minimum amount of media from Komag.
As a result of the sale, the Company recorded a fourth-quarter
charge to operations of $20.0 million. Prior to the sale,
Komag was already a long-time media supplier to the Company. The
two companies plan to work closely on the design and development
of media for future hard drive products. These efforts should
further enhance the time-to-market of the Company’s drive
designs and lower its component costs through the efficiencies of
Komag’s global high-volume media manufacturing facilities.
On July 8, 1999, a further restructuring of operations and
management responsibilities was announced. The structural change
established a Worldwide Operations and Geographies structure and
a Lines of Business/ Research and Development organization
(“LOB”). The assignment of LOB’s and geographic
responsibilities is expected to help the Company focus on
narrower vertical markets, and on specific geographic territories
and customers. The restructuring is also expected to enable the
Company to be more responsive to its markets and to encourage
faster, more focused, customer-oriented decision-making. The
restructuring resulted in a reduction of worldwide employee
headcount of approximately 40 employees, approximately 25 of
whom were direct and indirect labor and the rest were
management, professional and administrative personnel. The
Company expects to record a charge to operations, primarily for
severance accruals, of approximately $2 million in the first
quarter of 2000.
On July 20, 1999, the Company’s chairman, president,
and chief executive officer, Chuck Haggerty, announced his plans
to retire by the end of June 2000, or upon the Company’s
appointment of a new president and CEO. Currently the new
operating and management structure is led by co-chief operating
officers.
On August 13, 1999, the Company announced its intention to
move substantially all of its production of desktop hard drives
to Malaysia, while retaining in Singapore production of
enterprise drives and expanding its role in design, development
and manufacturing process engineering. The Company expects to
finalize its plans relative to the restructuring by the end of
its first quarter. The Company expects that the transfer of
production of desktop hard drives to its Malaysia facility will
result in a reduction of employee headcount in Singapore by the
end of December 1999 of approximately 2,000 direct and 500
indirect workers and a charge to operations during the first half
of 2000 of approximately $30 million relating to the
write-off of fixed assets to be disposed of, lease cancellations,
and employee severance and other costs of vacating leased
properties. The Company expects that the transfer to its Malaysia
facility will result in an employee headcount increase in
Malaysia of approximately 2,000 workers by the end of
December 1999. The Company also expects that this restructuring,
along with the January 1999 consolidation of its Singapore
facilities, will result in a combined annualized cost savings of
approximately $100 million.
On September 27, 1999, the Company announced a recall of up to
400,000 of its 6.8GB per platter series of WD Caviar desktop hard
drives which are in completed computer systems, because of a
reliability problem resulting from a faulty power driver chip
manufactured by a third-party supplier. Approximately
1.2 million units were manufactured with the faulty chip,
but the Company believes the remaining drives are either in the
Company’s or its customers’ inventory. Replacement of
the chips will involve rework of the printed circuit board
assembly. The Company expects that it will be able to resume
production of the hard drives with new chips by approximately
October 11, 1999. The Company has not yet quantified the
total impact of the recall, rework, and manufacturing stoppage on
its financial position, results of operation, or liquidity,
although it believes it will be material. The special charges
associated with the cost of recalling and repairing the affected
drives are not expected to exceed $50 million. This estimate
excludes any impact on the Company’s revenues or market
share. The Company has not yet determined how much of the
potential loss might be recoverable from insurance sources and
from the supplier of the faulty chip.
20
Results of Operations
Comparison of 1997, 1998 and 1999
In 1997, the Company reported net income of $267.6 million
compared with net losses of $290.2 and $492.7 million in
1998 and 1999, respectively. The deterioration in operating
performance from 1997 to 1998 occurred because of a 15% decrease
in revenues, a 13 percentage point decline in gross profit
margin and a three percentage point increase in operating
expenses as a percentage of revenues. The increase in operating
loss from 1998 to 1999 resulted from a 22% decrease in revenues,
a three percentage point decrease in gross margin, and a six
percentage point increase in operating expenses as a percentage
of revenues. The net loss in 1998 included charges of
$148 million recorded in the second quarter, primarily to
cost of sales, and $22 million of costs recorded in the
fourth quarter to research and development (“R&D”)
principally related to the start-up of the IBM Agreement. The net
loss in 1999 included approximately $77 million of charges
for incremental thin-film warranty provisions and approximately
$7.5 million in Malaysian currency losses recorded in the
first quarter, $12.0 million of in-process research and
development write-offs associated with the acquisition of Connex
in the third quarter, and restructuring charges totaling
$61.0 million for the consolidation of the Company’s
Personal Storage Division and Enterprise Storage Group and sale
of its media operations in the third and fourth quarter,
respectively.
Sales of hard drive products, which comprise 100% of the
Company’s revenues, were $4.2, $3.5 and $2.8 billion in
1997, 1998 and 1999, respectively. A unit shipment decrease of
6% from 1997 to 1998, which, combined with reductions in the
average selling prices of hard drive products due to an intensely
competitive hard drive business environment, resulted in a 15%
decline in hard drive revenues. During 1999, a unit shipment
decrease of 5% from 1998, combined with further reductions in
average selling prices, resulted in a 22% decline in hard drive
revenues.
Gross profit margins for 1997, 1998 and 1999 were 15.6%, 2.8% and
0%, respectively. The reduction in gross profit margin in 1998
was primarily related to unusually severe competitive pricing
pressures experienced in the desktop storage market during the
last three quarters. The Company also experienced higher assembly
costs associated with extending the life of thin film head
technology in desktop storage products and the accelerated
transition to hard drives utilizing magnetoresistive heads. The
$140 million of charges recorded in the second quarter of
1998 (discussed below) also contributed to the decline in gross
profit margin. Partially offsetting these amounts were
incremental sales of the Company’s higher margin enterprise
storage products in 1998.
During the second quarter of 1998, the Company incurred
$148 million of special charges as a result of its decisions
to reduce its exposure to the sustained oversupply and unusually
competitive pricing pressures in the lower capacity portion of
the hard drive marketplace, and to sharpen its focus and
resources on its desktop and enterprise storage product lines.
This decision led the Company to accelerate its transition to
magnetoresistive head technology and to redeploy the resources
which were being used on development of its mobile disk drive
product line back to its core desktop and enterprises disk drive
products. The special charges included approximately
$49 million of vendor purchase order cancellation charges on
older, thin-film technology components due to reduced production
of thin-film products, $35 million for write-down of
inventory and service center stock, $24 million for
incremental warranty accruals on older technology products,
$10 million for write-offs of investments in companies
developing advanced thin-film and mobile disk drive technologies,
$8 million of mobile engineering development expenses
incurred during the quarter, and $22 million of other
incremental costs incurred within the quarter associated with the
accelerated transition out of older, thin-film technology into
magnetoresistive products. Of the total $148 million special
charges, approximately $8 million was recorded in research
and development expense and $140 million was recorded in
cost of sales. Since these charges were either incurred during
the second quarter of 1998, or resulted from liabilities incurred
or assets impaired upon the Company’s decision in the
second quarter to implement these actions, the entire
$148 million was recorded in the second quarter of 1998. The
inventory referred to above was scrapped or subsequently sold at
or slightly above its adjusted book value with minimal gross
margin impact. The Company substantially completed its transition
to magnetoresistive products by the fourth quarter of 1998,
largely as planned, improving its technology leadership position
relative to its competitors. Of the total
21
charges, approximately $100 million required the use of
cash. There were no significant subsequent changes to the cost
estimates associated with the special charges.
The reduction of gross profit margin in 1999 was primarily due to
continued competitive pricing pressure in the desktop storage
market, a reduction in sales of higher margin enterprise storage
products, and a first quarter special charge of $77 million
to increase warranty accruals associated with the Company’s
last generations of thin film desktop products. Excluding special
charges, gross profit margins for 1998 and 1999 were 7% and
2.7%, respectively.
The overall increase in the Company’s warranty accruals from
1998 to 1999 was primarily due to a normal increase in units
under warranty and the completion of the Company’s
transition in its desktop product line from thin-film to the
newer magnetoresistive head technology in the June 1998 quarter.
This transition and recent experience with thin film returns,
which indicated a higher return rate, higher cost of repair and
longer duration of returns within the warranty period, resulted
in an increase in warranty accruals. Prior to the first quarter
of 1999, the Company’s experience with returns of older
generation thin-film products was that a large percentage of the
products which were going to fail, failed in the first six months
after sale. However, with the advancements in thin-film
recording technology, the gaps between critical components
(principally the recording heads and disks) within the drive
became much smaller until they were almost in contact with one
another. This made the thin-film drives much more susceptible to
environmental factors which typically manifest themselves over
longer periods of time, such as gases released from the
surrounding environment that may permeate through or from other
components in the drive. During the first quarter of 1999, the
Company began to see consistent data indicating a higher
percentage of these advanced thin-film drives coming back after
the first six months. That, combined with the significant amount
of these drives that were now in the field, led to a higher
lifetime return rate being applied to a larger base of products
in the field. This resulted in a special charge to warranty
provision of $77 million in the first quarter of 1999.
Research and development expense was $150.2 million, or 3.6%
of revenues, $203.7 million, or 5.8% of revenues, and
$217.0 million, or 7.8% of revenues in 1997, 1998 and 1999,
respectively. The increase in absolute dollars spent from 1997 to
1998 was primarily associated with higher expenditures to
support the development of hard drives for the desktop and
enterprise storage markets and costs of $22.0 million
recorded in the fourth quarter of 1998 related principally to the
start-up of the IBM Agreement.
The increase in absolute dollars spent from 1998 to 1999 was
primarily due to the third quarter $12.0 million charge to
in-process research and development related to the acquisition of
Connex and higher spending due to the Company’s decisions
to develop a full line of enterprise hard drives, regain
time-to-market leadership in the desktop hard drive market,
develop a line of audio-visual products, and continue Connex
development spending. At the time of the acquisition, Connex was
a development stage operation with no commercial products yet
available for sale and several in-process research and
development projects which were approximately 40% complete. The
major projects acquired include industry standard storage systems
and storage management software solutions for both Windows NT
and UNIX server environments. The Company’s primary purpose
for the acquisition was to acquire these in-process projects and
complete the development efforts as the Company believed they had
economic value but had not yet reached technological
feasibility, and had no alternative future uses. Therefore, the
Company allocated substantially all of the purchase price to a
one-time charge for in-process research and development of
$12.0 million to the Company’s results of operations in
1999. Approximately $0.4 million of assets were acquired in
the acquisition. Due to the small size of the Connex
acquisition, the $12.0 million dollar purchase price was
determined based on an arms-length negotiation. Approximately
$8 million in development and administrative expenses
(approximately $5 million for network attached storage
systems and $3 million for network storage management
software) were incurred during fiscal 1999 after the acquisition.
The Company is continuing the Connex development efforts and
expects to begin shipping the first new products developed by
Connex in January 2000. Following the acquisition, expenditures
of approximately $27 million ($10 million for network
attached storage systems and $17 million for network storage
management software) were estimated to complete the development
of the two projects. The primary risks and uncertainties
associated with timely completion of the projects lie in the
Company’s ability to attract and
22
retain qualified software engineers in the current competitive
environment. Should the projects not be completed on a timely
basis, the Company’s first-to-market advantages would be
reduced (e.g. lower margins), or an alternative technology might
be developed by a competitor which could severely impact the
marketability of the Company’s planned products. Should the
projects prove to be unsuccessful, the impact on the fiscal year
2000 results of operations would primarily consist of the
engineering and start up efforts incurred to complete the
projects for which there would be no future value, plus the costs
of any new efforts on replacement projects and/ or costs to
unwind the infrastructure if a decision were made not to pursue
new efforts.
Selling, general and administrative expenses
(“SG&A”) were $198.5 million, or 4.8% of
revenues, $192.1 million, or 5.4% of revenues and
$196.0 million, or 7.1% of revenues, in 1997, 1998 and 1999,
respectively. The decrease in absolute dollars of SG&A
expense from 1997 to 1998 was primarily the result of lower
expenses for the Company’s pay-for-performance and profit
sharing plans, partially offset by higher expenses associated
with implementing the Company’s new computer information
systems. The increase in absolute dollars of SG&A expense
from 1998 to 1999 was primarily the result of the special charges
recorded in the first quarter for losses on terminated forward
exchange contracts on the Malaysian Ringgit, partially offset by
decreased marketing expenditures due to the Company’s
cost-cutting initiatives.
Net interest income was $13.2 and $3.8 million in 1997 and
1998, respectively. Net interest expense was $15.9 million
in 1999. The decline in net interest income from 1997 to 1998 was
primarily attributable to interest expense incurred on the
Company’s long-term debt consisting of a $50.0 million
term loan, which is part of the Company’s secured revolving
credit and term loan facility (“Senior Bank Facility”),
and accrual of original issue discount on the Company’s
5.25% zero coupon convertible subordinated debentures due 2018
(the “Debentures”) which were issued in February 1998.
No debt was outstanding during 1997. Partially offsetting this
decrease was incremental interest income earned on the cash and
cash equivalents balance in 1998, which was higher than
historical levels due to the proceeds from the term loan and sale
of the Debentures. The change in net interest income in 1998 to
net interest expense in 1999 was primarily due to a full
year’s accrual of original issue discount on the Debentures,
a full year of interest expense incurred on the
$50.0 million term loan partially offset by a reduced amount
of interest income earned on the Company’s cash and cash
equivalent balances, which were lower in 1999.
The Company’s 1997 effective tax rate of 15% resulted
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 income tax benefit recorded in 1998
represented the expected benefit of loss carrybacks, partially
offset by provisions for income taxes recorded in certain
jurisdictions where the Company had positive earnings. In 1999
there was no tax benefit recorded as no additional loss
carrybacks were available and management deemed it was more
likely than not that the deferred tax benefits generated would
not be realized.
Liquidity and Capital Resources
At July 3, 1999, the Company had $226.1 million of cash
and cash equivalents compared to $459.8 million at
June 27, 1998. Net cash used for operating activities was
$139.5 million during 1999 compared to $39.0 million in
1998. Cash flows resulting from a decrease in accounts
receivable, lower inventories and higher current liabilities were
more than offset by the higher net loss (net of non-cash
charges). Significant uses of cash during 1999 were capital
expenditures of $106.6 million. The capital expenditures
were incurred primarily to upgrade the Company’s production
capability, the normal replacement of existing assets, and
further development of the Company’s new computer
information systems. Partially offsetting these uses of cash was
$15.0 million received in connection with stock option
exercises and Employee Stock Purchase Plan purchases.
The Company anticipates that capital expenditures in 2000 will
total approximately $75 million and will relate to retooling
of the Company’s hard drive assembly lines in order to
accommodate new technologies and new product lines, normal
replacement of existing assets and expansion of production
capabilities in Malaysia. The Company’s 2000 research and
development programs include planned spending of approximately
23
$19 million in the first three quarters of 2000 to complete
development of its first products by Connex, which are scheduled
to begin shipping in January 2000. The Company also anticipates
cash expenditures of $3.0 million and $16.0 million to
be paid in 2000 for severance and outplacement costs related to
the Company’s 1999 and 2000 restructuring programs,
respectively.
The Senior Bank Facility provides the Company with up to a
$125.0 million revolving credit line (depending on borrowing
base calculation) and a $50.0 million term loan, both of
which expire in November 2001. The Senior Bank Facility is
secured by the Company’s accounts receivable, inventory, 66%
of its stock in its foreign subsidiaries and the other assets
(excluding real property) of the Company. At the option of the
Company, borrowings bear interest at either LIBOR or a base rate
plus a margin determined by the borrowing base, with option
periods of one to three months. The Senior Bank Facility requires
the Company to maintain certain amounts of net equity, prohibits
the payment of cash dividends on common stock and contains a
number of other covenants. The Company was in compliance at
July 3, 1999 with all terms of the Senior Bank Facility. As
of the date hereof, the $50.0 million term loan was funded,
but there were no borrowings under the revolving credit line. The
term loan requires quarterly payments of $2.5 million
beginning in September 1999 with the remaining balance due in
November 2001. The costs of the product recall announced on
September 27, 1999 may result in the Company not being in
compliance with certain financial covenants in the Senior Bank
Facility in future periods. The availability of this facility
will depend upon, among other things, the actual cost of the
recall and the Company’s ability to recover such costs from
third parties.
The Company has an equity draw-down facility (“Equity
Facility”) with a bank which allows the Company to issue up
to $150.0 million (in monthly increments of up to
$12.5 million) in common stock for cash at the market price
of its stock less a 2.75% discount. As of July 3, 1999, the
Equity Facility had not been used. During July through
September 29, 1999, the Company issued 6.2 million
shares of common stock under the Equity Facility for net proceeds
of $32.2 million.
In February 1998, the Company received gross proceeds of
$460.1 million (before the Initial Purchasers’
discount) from a private offering of the Debentures. The
principal amount at maturity of the Debentures when issued was
$1.3 billion. The Debentures are subordinated to all senior
debt; are convertible into 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 repurchase.
During the period from July 27, through September 17,
1999, the Company issued 6.1 million shares of common stock
in exchange for Debentures with a carrying value of
$79.6 million, and an aggregate principal amount at maturity
of $207.1 million, in non-cash transactions. These
Debentures were subsequently retired by the Company. These
exchanges were private, individually negotiated transactions with
certain institutional investors. The Company expects to record
an extraordinary gain of approximately $45 million during
the quarter ending October 2, 1999 for the difference
between the carrying value of the retired Debentures and the
market value of the common stock given by the Company at the time
of the exchange.
On August 9, 1999, the Company sold approximately
34 acres of land in Irvine, California, upon which it had
previously planned to build a new corporate headquarters, for
$26 million (the approximate cost of the land). The Company
has extended the current lease of its worldwide headquarters in
Irvine, California, through December 2000, and has an option to
extend the lease for an additional six-month period.
24
The Company expects to continue to incur operating losses in
2000. The Company also had negative shareholders’ equity as
of July 3, 1999. However, the Company had cash balances of
$226.1 million as of July 3, 1999. In addition, the
Company has restructured or is in the process of restructuring
its operations and has other sources of liquidity available. In
light of these conditions, the Company has the following plans
and other options:
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The Company plans to reduce expenses and capital expenditures
substantially as compared to historical levels due to: |
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— Recent restructurings; |
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— Reduced general and administrative spending; and |
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— Reduced infrastructure resulting from the sale of its
Santa Clara disk media operations. |
• The Company has the following additional sources of
liquidity available to it:
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— $150.0 million Equity Facility (partially
utilized as of September 1999); |
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— Sale of land in Irvine, California (sold on
August 9, 1999 for approximately $26 million); |
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— Other unencumbered real estate which can be sold or
financed; and |
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— Other equity investments that may be disposed of
during 2000. |
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The recent exchange of Debentures for common stock reduces the
shareholders’ deficiency of the Company. |
Based on the above factors, the Company believes its current cash
balances, its Equity Facility, and other liquidity vehicles
currently available to it, will be sufficient to meet its working
capital needs through 2000. There can be no assurance that the
Senior Bank Facility will continue to be available to the
Company. Also, 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 pertaining
to Western Digital particularly.”
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”
(“SFAS 133”). SFAS 133 was effective for all
fiscal quarters or fiscal years beginning after June 15,
1999. In August 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, “Accounting for
Derivative Instruments and Hedging Activities —
Deferral of the Effective Date of FASB Statement No. 133, An
Amendment of FASB Statement No. 133”
(“SFAS 137”), which defers the effective date of
SFAS 133 to all fiscal quarters or fiscal years beginning
after June 15, 2000. SFAS 133 establishes accounting
and reporting standards for derivative instruments embedded in
other contracts and for hedging activities. Application of this
Statement’s requirements 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 is working
aggressively to achieve Year 2000 readiness. Overall Company
readiness includes systems remediation, integration testing and
supplier management. Systems remediation and integration testing
is expected to be completed by the end of September 1999. The
Company also expects to complete development of its contingency
plans by the end of September 1999. Supplier management is an
ongoing process and will continue up to and including a period of
time after January 1, 2000. Expenditures related to the
Year 2000 project, which excludes normal replacement of existing
capital assets, were approximately $5 million and
$6 million in 1998 and 1999, respectively, and are expected
to amount to approximately $13 million in total. For an
additional discussion of Year 2000 issues, see “Risk factors
relating to Western Digital particularly.”
25
Risk factors related to the hard drive industry in which we
operate.
Our operating results depend on our being among the
first-to-market and first-to-volume with our new products.
To achieve consistent success with computer manufacturer
customers we must be an early provider of next generation hard
drives featuring leading technology and high quality. If we fail
to:
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consistently maintain and improve our time-to-market performance
with our new products |
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produce these products in sufficient volume within our rapid
product cycle |
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qualify these products with key customers on a timely basis by
meeting our customer’s performance and quality
specifications, or |
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achieve acceptable manufacturing yields and costs with these
products |
then our market share would be adversely affected, which would
harm our operating results.
Short product life cycles force us to continually
qualify new products with our customers.
Due to short product life cycles, we must regularly engage in new
product qualification with our customers. To be considered for
qualification we must be among the leaders in time-to-market with
our new products. Once a product is accepted for qualification
testing, any failure or delay in the qualification process can
result in our losing sales to that customer until the next
generation of products is introduced. The effect of missing a
product qualification opportunity is magnified by the limited
number of high volume computer manufacturers, most of which
continue to consolidate their share of the PC and enterprise
markets. This issue is particularly acute in the enterprise
portion of the market because the product life cycles for
enterprise hard drives are longer than those for desktop drives.
These risks are magnified because we expect technological
changes, short product life cycles and intense competitive
pressures to result in declining sales and gross margins on our
current generation products.
We must complete our transition to giant
magnetoresistive head technology.
We began the transition to giant magnetoresistive head technology
in 1999, and all of our new products in 2000 will incorporate
this technology. Unlike our transition to magnetoresistive
technology in 1998, when we lagged behind the industry leaders,
we believe that we are among the industry leaders in making this
latest technology transition. However, if we are unable to
complete this technology transition while remaining among the
first in time-to-market and time-to-volume with these new
products, our operating results could be harmed.
Unexpected technology advances in the hard drive
industry could harm our competitive position.
If one of our competitors were able to implement a significant
advance in head or disk drive technology that enables a
step-change increase in areal density allowing greater storage of
data on a disk, it would harm our operating results.
Advances in magnetic, optical, semiconductor or other data
storage technologies could result in competitive products that
have better performance or lower cost per unit of capacity than
our products. Some of our competitors are developing hybrid
storage devices that combine magnetic and optical technologies,
but we have decided not to pursue this technology at this time.
If these products prove to be superior in performance or cost per
unit of capacity, we could be at a competitive disadvantage to
the companies offering those products.
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The hard drive industry is highly competitive and
characterized by rapid shifts in market share among the major
competitors. |
The price of hard drives has fallen over time due to increases in
supply, cost reductions, technological advances and price
reductions by competitors seeking to liquidate excess inventories
or gain market share. In
26
addition, rapid technological changes often reduce the volume and
profitability of sales of existing products and increase the
risk of inventory obsolescence. These factors, taken together,
result in significant and rapid shifts in market share among the
industry’s major participants. For example, during 1997, we
significantly increased our share of the desktop market, but
these gains were lost during 1998 and 1999. If our market share
erodes further, it would likely harm our operating results.
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Our prices and margins are subject to declines due to
unpredictable end-user demand and oversupply of hard disk drives.
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Demand for our hard drives depends on the demand for computer
systems manufactured by our customers and on storage upgrades to
existing systems. The demand for computer systems has been
volatile in the past and often has had an exaggerated effect on
the demand for hard drives in any given period. As a result, the
hard drive market tends to experience periods of excess capacity
which typically lead to intense price competition. If intense
price competition occurs, we may be forced to lower prices sooner
and more than expected and transition to new products sooner
than expected. For example, in 1999 and the second half of 1998,
as a result of excess inventory in the desktop hard drive market,
aggressive pricing and corresponding margin reductions
materially adversely impacted our operating results. We
experienced similar conditions in the high-end hard drive market
during most of 1998 and 1999.
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Changes in the markets for hard drives require us to develop
new products. |
Over the past two years the consumer market for desktop computers
has shifted significantly towards lower priced systems,
especially those systems priced below $1,000. If the market for
those lower price systems continues to grow and we do not develop
lower cost hard drives that can successfully compete in this
market, our market share would likely fall, which could harm our
operating results.
Furthermore, the PC market is fragmenting into a variety of
computing devices and products. Some of these products, such as
internet appliances, may not contain a hard drive. On the other
hand, many industry analysts expect, as do we, that as
broadcasting and communications are increasingly converted to
digital technology from the older, analog technology, the
technology of computers and consumer electronics and
communication devices will converge, and hard drives will be
found in many consumer products other than computers. While we
are investing development resources in designing hard drive
products for new audio-visual applications, it is too early to
assess the impact of these new applications on future demand for
hard drive products.
We depend on our key personnel.
Our success depends upon the continued contributions of our key
employees, many of whom would be extremely difficult to replace.
Worldwide competition for skilled employees in the hard drive
industry is intense. We have lost a number of experienced hard
drive engineers over the past year as a result of the loss of
retention value of our employee stock options (because of the
decrease in price of our common stock) and aggressive recruiting
by some of our competitors. If we are unable to retain our
existing employees or to hire and integrate new employees, our
operating results would likely be harmed.
Risk factors relating to Western Digital particularly
Loss of market share with a key customer could
harm our operating results.
A majority of our revenue comes from a few customers. For
example, during 1999 sales to our top 10 customers accounted for
approximately 58% of revenues. These customers have a wide
variety of suppliers to choose from and therefore can make
substantial demands on us. Even if we successfully qualify a
product with a customer, the customer generally is not obligated
to purchase any minimum volume of products from us and is able to
terminate its relationship with us at any time. Our ability to
maintain strong relationships with our principal customers is
essential to our future performance. If we lose a key customer or
if any of our key customers reduce their orders of our products
or require us to reduce our prices before we are able to reduce
costs, our operating results would likely be harmed.
27
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If we are to succeed in the enterprise hard drive portion of
the market, we must increase our volume and market share. |
To succeed in the enterprise hard drive portion of the market, we
must develop and timely introduce new products, and we must
increase the number of customers for our products. A risk we face
in expanding our product line is that there is currently a
world-wide shortage of qualified hard drive engineers. As a
result, competition for skilled hard drive development engineers
is intense. We also may encounter development delays or quality
issues, which may retard the introduction of new products or make
the introduction of new products more expensive. If we
experience any of these setbacks, we may miss crucial delivery
time windows on these new enterprise products, which would likely
harm our operating results.
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Dependence on a limited number of qualified suppliers of
components could lead to delays or increased costs. |
Because we do not manufacture any of the components in our hard
drives, an extended shortage of required components or the
failure of key suppliers to remain in business, adjust to market
conditions, or to meet our quality, yield or production
requirements could harm us more severely than our competitors,
some of whom manufacture certain of the components for their hard
drives. A number of the components used by us are available from
a single or limited number of qualified outside suppliers. If a
component is in short supply, or a supplier fails to qualify, or
has a quality issue with, a component, we may experience delays
or increased costs in obtaining that component. To reduce this
risk, we attempt to provide significant lead times when buying
these components. As a result, we may have to pay significant
cancellation charges to suppliers if we cancel orders, either
because of market oversupply or transition to new products or
technologies. This occurred in 1998 when we accelerated our
transition to magnetoresistive recording head technology.
In April 1999, we entered into a three year volume purchase
agreement with Komag under which we will buy a substantial
portion of our media components from Komag. We intend that this
strategic relationship will reduce our media component costs;
however, it increases our dependence on Komag as a supplier. Our
future operating results will depend substantially on
Komag’s ability to timely qualify its media components in
our new development programs and to supply us with these
components in sufficient volume to meet our production
requirements. Any disruption in Komag’s ability to
manufacture and supply us with media would likely harm our
operating results.
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To develop new products we must maintain effective partner
relationships with our strategic component suppliers. |
Under our “virtual vertical integration” business
model, we do not manufacture any of the parts used in our hard
drives. As a result, the success of our products depends on our
ability to gain access to and integrate parts that are “best
in class” from reliable component suppliers. To do so we
must effectively manage our relationships with our strategic
component suppliers. We must also effectively integrate different
products from a variety of suppliers and manage difficult
scheduling and delivery problems.
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We have only two manufacturing facilities, which subjects us
to the risk of damage or loss of either facility. |
Our volume manufacturing operations currently are based in two
facilities, one in Singapore and one in Malaysia. We have
recently announced that we will consolidate substantially all of
our desktop drive manufacturing operations in our Malaysian
plant. A fire, flood, earthquake or other disaster or condition
affecting either or both of our facilities would almost certainly
result in a loss of substantial sales and revenue and harm our
operating results.
Manufacturing our products abroad subjects us to
numerous risks.
We are subject to risks associated with our foreign manufacturing
operations, including:
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obtaining requisite United States and foreign governmental
permits and approvals |
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• |
currency exchange rate fluctuations or restrictions |
28
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political instability and civil unrest |
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transportation delays or higher freight rates |
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labor problems |
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trade restrictions or higher tariffs |
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exchange, currency and tax controls and reallocations |
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loss or non-renewal of favorable tax treatment under agreements
or treaties with foreign tax authorities. |
We attempt to manage the impact of foreign currency exchange rate
changes by, among other things, entering into short-term,
forward exchange contracts. However, those contracts do not cover
our full exposure and can be canceled by the issuer if currency
controls are put in place, as occurred in Malaysia during the
first quarter of 1999.
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Agreement with IBM requires us to adapt IBM’s product
designs and integrate IBM technology. |
In 1998 we entered into a broad-based hard drive component supply
and technology licensing agreement with IBM. Under the IBM
Agreement, IBM is our sole supplier of the head and certain other
components for desktop hard drives that we manufacture with IBM
technology. Our business and operating results would be harmed if
these components fail to satisfy our quality requirements or if
IBM is unable to meet our volume or delivery requirements. Our
business and operating results could also be harmed if we are
unable to adapt IBM’s product designs and manufacturing
processes so that the hard drives with IBM technology can be
manufactured by us at a low enough cost to compete in the
high-volume and price sensitive desktop market.
We entered into the agreement expecting that IBM will continue to
lead the hard drive industry in storage capacity and
performance. We also believed that we could leverage that
leadership to give us a competitive advantage in the desktop
portion of the market through being faster to market with new
products and faster in reaching levels of volume at which our
costs would decrease. If IBM does not maintain that leadership,
we may not realize the benefits we had anticipated.
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Our plan to broaden our product offerings in storage solutions
and audio-visual products takes us into new businesses. |
We are preparing to enter the storage subsystem business through
our subsidiary, Connex, Inc. This area of storage solutions is a
new business venture for us. We will be facing the challenges of
building volume and market share in a market which is new to us,
but which has several established and well-funded competitors.
There is already significant competition for skilled engineers,
both in the hardware and software areas, in this market. Our
success in this storage subsystems market will depend on
Connex’s ability to successfully develop, introduce and
achieve market acceptance of new products, applications and
product enhancements, and to successfully attract and retain
skilled engineers, as the storage solutions business evolves.
Additionally, our competitors in this market have established
intellectual property portfolios. Our success will depend on our
ability to license existing intellectual property or create new
innovations. Moreover, our competitors’ established
intellectual property portfolios increase our risk of
intellectual property litigation.
We are also developing hard drives for the emerging audio-visual
market. We will be facing the challenge of developing products
for a market that is still evolving, and subject to rapid changes
and shifting consumer preferences. There are several competitors
which have also entered this emerging market, and there is no
assurance that the market for digital storage devices for
audio-visual content will materialize or support all of these
competitors.
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Our reliance on intellectual property and other proprietary
information subjects us to the risk of significant litigation.
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The hard drive industry has been characterized by significant
litigation. This includes litigation relating to patent and other
intellectual property rights, product liability claims and other
types of litigation. We are
29
currently evaluating several notices of alleged patent
infringement or notices of patents from patent holders. We also
are a party to several judicial and other proceedings relating to
patent and other intellectual property rights. If we conclude
that a claim of infringement is valid, we may be required to
obtain a license or cross-license or modify our existing
technology or design a new non-infringing technology. Such
licenses or design modifications can be extremely costly. We may
also be liable for any past infringement. If there is an adverse
ruling against us in an infringement lawsuit, an injunction could
be issued barring production or sale of any infringing product.
It could also result in a damage award equal to a reasonable
royalty or lost profits or, if there is a finding of willful
infringement, treble damages. Any of these results would likely
increase our costs and harm our operating results.
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Our reliance on intellectual property and other proprietary
information subjects us to the risk that these key ingredients of
our business could be copied by competitors. |
Our success depends, in significant part, on the proprietary
nature of our technology, including our non-patentable
intellectual property such as our process technology. Despite
safeguards, to the extent that a competitor is able to reproduce
or otherwise capitalize on our technology, it may be difficult,
expensive or impossible for us to obtain necessary legal
protection. Also, the laws of some foreign countries may not
protect our intellectual property to the same extent as do the
laws of the United States. In addition to patent protection of
intellectual property rights, we consider elements of our product
designs and processes to be proprietary and confidential. We
rely upon employee, consultant and vendor non-disclosure
agreements and a system of internal safeguards to protect our
proprietary information. However, we cannot insure that our
registered and unregistered intellectual property rights will not
be challenged or exploited by others in the industry.
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Inaccurate projections of demand for our product can cause
large fluctuations in our quarterly results. |
If we do not forecast total quarterly demand accurately, it can
have a material adverse effect on our quarterly results. We
typically book and ship a high percentage of our total quarterly
sales in the third month of the quarter, which makes it is
difficult for us to match our production plans to customer
demands. In addition, our quarterly projections and results may
in the future be subject to significant fluctuations as a result
of a number of other factors including:
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the timing of orders from and shipment of products to major
customers |
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our product mix |
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changes in the prices of our products |
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manufacturing delays or interruptions |
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acceptance by customers of competing products in lieu of our
products |
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variations in the cost of components for our products |
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limited access to components that we obtain from a single or a
limited number of suppliers, such as IBM or Komag |
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competition and consolidation in the data storage industry |
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seasonal and other fluctuations in demand for computers often due
to technological advances. |
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Rapidly changing market conditions in the hard drive industry
make it difficult to estimate actual results. |
We have made and continue to make a number of estimates and
assumptions relating to our consolidated financial reporting. The
rapidly changing market conditions with which we deal means that
actual results may differ significantly from our estimates and
assumptions. Key estimates and assumptions for us include:
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accruals for warranty against product defects |
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price protection adjustments on products sold to resellers and
distributors |
30
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inventory adjustments for write-down of inventories to fair value |
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reserves for doubtful accounts |
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accruals for product returns. |
The market price of our common stock is volatile.
The market price of our common stock has been, and may continue
to be, extremely volatile. Factors such as the following may
significantly affect the market price of our common stock:
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actual or anticipated fluctuations in our operating results |
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announcements of technological innovations by us or our
competitors which may decrease the volume and profitability of
sales of our existing products and increase the risk of inventory
obsolescence |
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new products introduced by us or our competitors |
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periods of severe pricing pressures due to oversupply or price
erosion resulting from competitive pressures |
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developments with respect to patents or proprietary rights |
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conditions and trends in the hard drive industry |
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changes in financial estimates by securities analysts relating
specifically to us or the hard drive industry in general. |
In addition, the stock market in recent months has experienced
extreme price and volume fluctuations that have particularly
affected the stock price of many high technology companies. These
fluctuations are often unrelated to the operating performance of
the companies.
Securities class action lawsuits are often brought against
companies after periods of volatility in the market price of
their securities. A number of such suits have been filed against
us in the past, and any of these litigation matters could result
in substantial costs and a diversion of resources and
management’s attention.
We may be unable to raise future capital through
debt or equity financing.
Due to our recent financial performance and the risks described
in this Report, in the future we may be unable to maintain
adequate financial resources for capital expenditures, working
capital and research and development. If we decide to increase or
accelerate our capital expenditures or research and development
efforts, or if results of operations do not meet our
expectations, we could require additional debt or equity
financing. However, we cannot insure that additional financing
will be available to us or available on favorable terms. An
equity financing could also be dilutive to our existing
stockholders.
We may experience Year 2000 computer problems that
harm our business.
The Year 2000 issue is the result of computer programs,
microprocessors, and embedded date reliant systems using two
digits rather than four to define the applicable year. This could
result in a program, microprocessor or embedded system
recognizing a date using “00” as the year 1900 rather
than the year 2000. We consider a product to be Year 2000
compliant if:
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the product’s performance and functionality are unaffected
by processing of dates prior to, during and after the Year 2000,
and |
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all elements used with the product (for example, hardware,
software and firmware) properly exchange accurate date data with
it. |
Our Products. We believe our hard drive products are Year
2000 compliant, although some older, non-hard drive products
previously sold by us may not be Year 2000 compliant. Even if our
products are Year 2000 compliant, we may be named as a defendant
in litigation against makers of components of systems that are
31
unable to properly manage data related to the Year 2000. Our
agreements with customers typically contain provisions designed
to limit our liability for such claims. These provisions may not
provide protection from liability, however, because of existing
or future federal, state or local laws or ordinances or
unfavorable judicial decisions. Any such claims, with or without
merit, could materially harm our business.
Our Systems. We have established a comprehensive program
with a dedicated program management office to deal with Year 2000
readiness in our internal systems and with our customers and
suppliers. We addressed our most critical internal systems first.
We have categorized as “mission critical” or
“priority” those systems the failure of which would
have a high likelihood of causing an extended shutdown of all or
a critical portion of a factory or personal injury, or have a
significant and lengthy detrimental financial impact. As
appropriate, we have tested customer and supplier electronic data
interfaces with our internal systems. We have prioritized
functions and systems on a worldwide basis, and all of our
facilities are coordinated in working toward our company-wide
timeline, which includes continuing quality assurance audits of
the remediation and testing work which has been completed to
date.
We have committed people and resources to resolve potential Year
2000 issues, both internally and with respect to our suppliers
and customers, for both information technology assets and
non-information technology assets. We identified Year 2000
dependencies in our systems, equipment and processes and we have
implemented changes to such systems, updating or replacing such
equipment, and modifying such processes to make all such
mission-critical systems and substantially all other systems Year
2000 compliant. Each of our business sites has identified
mission critical systems for which contingency plans have been
developed in the event of any disruption caused by Year 2000
problems. Testing of our business applications has been
completed, and test results are being reviewed. Follow-up
remediation on non-mission critical systems resulting from the
testing is expected to be completed by the end of September 1999.
We are vulnerable to the failure of any of our key suppliers to
remedy their Year 2000 issues. Such a failure could delay
shipment of essential components and disrupt or even halt our
manufacturing operations. While all our suppliers are being
notified of our Year 2000 compliance requirements, we have
established specific reviews with our critical suppliers, and
they are requested to report their progress to us on a quarterly
basis. We regularly monitor this progress and are actively
involved with a few suppliers that are behind schedule.
We are also communicating with our large customers to determine
the extent to which we are vulnerable to their failure to remedy
their own Year 2000 issues. We also rely, both domestically and
internationally, particularly in Singapore and Malaysia where we
have our manufacturing facilities, upon governmental agencies,
utility companies, telecommunication service companies,
transportation service providers and other service providers
outside of our control. We have less control over assessing and
remediating Year 2000 issues of third parties. As a result, we
cannot insure that these third parties will not suffer business
disruption caused by a Year 2000 issue, which, in turn, could
materially harm our business.
Contingency Planning. Because we believe that our core and
mission-critical systems, equipment and processes are
substantially Year 2000 compliant, we do not consider failure of
these systems to be within a reasonable Year 2000 worst case
scenario. We believe we are primarily at risk due to failures
within external infrastructures such as utilities and
transportation systems. However, if we have failed to identify
all Year 2000 dependencies in our systems, equipment or processes
or those of our suppliers, customers or other organizations on
which we rely, it could result in delays in the manufacture or
delivery of our products, which in turn would likely harm our
business.
We are currently examining these risk areas to develop responses
and action plans. These include a production halt at our Asian
manufacturing facilities on December 31 and system access
shutdown at all locations on December 31, 1999, and systems
test and controlled startup prior to business resumption on
January 1, 2000. We do not expect the production halt to
affect our commitments to our customers. We expect to complete
the development of our contingency plans by the end of September
1999. To date, detailed contingency plans have been developed to
support each business process which enables us to execute our
primary operations, including administration and fiduciary
obligations. The plans provide detailed work instructions and
roles and responsibility matrices in order to transition rapidly
to manual back-up systems in
32
the event of electronic systems failures. These plans are being
reviewed with customers and logistics providers to ensure
compatibility with our external business partners. Managers and
employees will be participating in scenario planning drills
during the month of October 1999 to optimize readiness.
Other. Our Year 2000 program has been reviewed
periodically by a third party. The results of the review have
been reviewed by the Audit Committee of our Board of Directors. A
final program review is scheduled during October 1999.
Expenditures related to our Year 2000 project, which excludes
normal replacement of existing capital assets, were approximately
$11 million through July 3, 1999, and are expected to
amount to approximately $13 million in total. Based on work
to date, we believe that the Year 2000 issue will not pose
significant operational problems for us.
Many of our disclosures and announcements regarding our products
and Year 2000 programs are intended to constitute “Year 2000
Readiness Disclosure” as defined in the Year 2000
Information and Readiness Disclosure Act. The Act provides added
protection from liability for certain public and private
statements concerning an entity’s Year 2000 readiness and
the Year 2000 readiness of its products and services. The Act
also potentially provides added protection from liability for
certain types of Year 2000 disclosures made after January 1,
1996, and before the date of enactment of the Act.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
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 purchases short-term, forward exchange
contracts to hedge the impact of foreign currency fluctuations on
certain underlying assets, liabilities and commitments 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. The Company does not purchase
short-term forward exchange contracts for trading purposes.
Historically, the Company has focused on hedging its foreign
currency risk related to the Singapore Dollar and the Malaysian
Ringgit. With the establishment of currency controls and the
prohibition of purchases or sales of the Malaysian Ringgit by
offshore companies, the Company has discontinued hedging its
Malaysian Ringgit currency risk. Future hedging of this currency
will depend on currency conditions in Malaysia. The imposition of
exchange controls by the Malaysian government resulted in a
$7.5 million realized loss on terminated hedging contracts
in the first quarter of 1999.
As of July 3, 1999, the Company had outstanding the
following purchased foreign currency forward exchange contracts
(in millions, except average contract rate):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 1999 |
|
|
|
|
|
Contract |
|
Weighted Average |
|
Unrealized |
|
|
Amount |
|
Contract Rate |
|
Loss* |
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollar equivalent amounts) |
|
|
|
|
|
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singapore Dollar |
|
$ |
63.2 |
|
|
|
1.66 |
|
|
$ |
.8 |
|
|
|
|
|
|
|
British Pound Sterling |
|
|
3.2 |
|
|
|
1.61 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66.4 |
|
|
|
|
|
|
$ |
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
The unrealized losses on these contracts are deferred and will be
recognized in the results of operations in the period in which
the hedged transactions are consummated, at which time the loss
is offset by the reduced U.S. Dollar value of the local currency
operating expense. |
33
In 1997, 1998, and 1999 total realized transaction and forward
exchange contract currency gains and losses (excluding the
$7.5 million realized loss on the Malaysian Ringgits), were
immaterial to the financial statements. Based on historical
experience, the Company does not expect that a significant change
in foreign exchange rates (up to 25%) would materially impact
the Company’s consolidated financial statements.
Disclosure About Other Market Risks
Fixed Interest Rate Risk
At July 3, 1999, the market value of the Company’s
5.25% zero coupon convertible subordinated debentures due in 2018
was approximately $225.4 million, compared to the related
carrying value of $494.1 million. The convertible debentures
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.
The Company has various note receivables from other companies.
All of the notes carry a fixed rate of interest. Therefore a
significant change in interest rates would not impact the
Company’s consolidated financial statements.
Variable Interest Rate Risk
The Company maintains a $50.0 million term loan bearing
interest at LIBOR or a base rate plus margin determined by the
borrowing base with an approximate current interest rate of
7.75%, as part of its Senior Bank Facility. This is the only debt
which does not have a fixed-rate of interest. A significant
change in interest rates (up to 12%) would not materially impact
the Company’s consolidated financial statements. The Senior
Bank Facility expires in November 2001.
Fair Value Risk
The Company owns approximately 10.8 million shares of Komag,
Inc. stock. (See Note 8 of Notes to Consolidated Financial
Statements). The estimated fair market value of the Komag stock
on the date of acquisition was $34.9 million. The stock is
restricted as to the percentage of total shares which can be sold
in a given time period (see Note 8 of Notes to Consolidated
Financial Statements.) The unrestricted portion of the total
Komag shares acquired represents the shares which can be sold
within one year. The Company reviews, on a quarterly basis, the
fair market value of the unrestricted Komag shares and records an
unrealized gain or loss resulting from the difference in the
fair market value of the unrestricted shares as of the previous
quarter end and the fair market value of the unrestricted shares
on the measurement date. As of July 3, 1999, a
$2.1 million unrealized loss has been recorded and is shown
as a component of stockholders’ deficit. If the Company
sells all or a portion of this stock, any unrealized gain or loss
on the date of sale will be recorded as a realized gain or loss
in the Company’s results of operations. Due to market
fluctuations, a significant decline in the stock’s fair
market value (of 15% or more) could occur, and this decline could
adversely impact the Company’s consolidated financial
statements. As of July 3, 1999, the quoted market value of
the Company’s Komag stock holdings, without regard to
discounts due to sales restrictions, was $33.7 million.
34
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Financial Statement Schedule
| |
|
|
|
|
|
|
|
Page |
|
|
|
|
Consolidated Financial Statements: |
|
|
|
|
| |
|
|
|
|
|
|
Independent Auditors’ Report |
|
|
36 |
|
|
|
|
|
|
|
Consolidated Statements of Operations — Three Years
Ended July 3, 1999 |
|
|
37 |
|
|
|
|
|
|
|
Consolidated Balance Sheets — June 27, 1998 and
July 3, 1999 |
|
|
38 |
|
|
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity
(Deficiency) — Three Years Ended July 3, 1999 |
|
|
39 |
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows — Three Years
Ended July 3, 1999 |
|
|
40 |
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
41 |
|
| |
|
|
|
|
|
|
Financial Statement Schedule: |
|
|
|
|
| |
|
|
|
|
|
|
Schedule II — Consolidated Valuation and
Qualifying Accounts — Three Years Ended
July 3, 1999. |
|
|
63 |
|
35
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 27, 1998 and July 3, 1999, and the results of
their operations and their cash flows for each of the years in
the three-year period ended July 3, 1999, 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.
Orange County, California
July 21, 1999, except as to Note 11,
|
|
| |
which is as of September 29, 1999. |
36
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended |
|
|
|
|
|
June 28, |
|
June 27, |
|
July 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Revenues, net (Note 7) |
|
$ |
4,177,857 |
|
|
$ |
3,541,525 |
|
|
$ |
2,767,206 |
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
3,527,574 |
|
|
|
3,441,475 |
|
|
|
2,770,054 |
|
|
|
|
|
|
|
Research and development (Note 8) |
|
|
150,157 |
|
|
|
203,733 |
|
|
|
216,986 |
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
198,530 |
|
|
|
192,142 |
|
|
|
195,958 |
|
|
|
|
|
|
|
Restructuring charges (Note 8) |
|
|
— |
|
|
|
— |
|
|
|
61,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
3,876,261 |
|
|
|
3,837,350 |
|
|
|
3,243,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
301,596 |
|
|
|
(295,825 |
) |
|
|
(476,792 |
) |
|
|
|
|
|
|
Net interest income (expense) (Note 2) |
|
|
13,223 |
|
|
|
3,817 |
|
|
|
(15,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
314,819 |
|
|
|
(292,008 |
) |
|
|
(492,690 |
) |
|
|
|
|
|
|
Provision (benefit) for income taxes (Note 5) |
|
|
47,223 |
|
|
|
(1,791 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
267,596 |
|
|
$ |
(290,217 |
) |
|
$ |
(492,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share (Note 9): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.07 |
|
|
$ |
(3.32 |
) |
|
$ |
(5.51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.86 |
|
|
$ |
(3.32 |
) |
|
$ |
(5.51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in computing per share amounts
(Note 9): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
87,261 |
|
|
|
87,525 |
|
|
|
89,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
93,522 |
|
|
|
87,525 |
|
|
|
89,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
37
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, |
|
July 3, |
|
|
1998 |
|
1999 |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
459,830 |
|
|
$ |
226,147 |
|
|
|
|
|
|
|
Accounts receivable, less allowance for doubtful accounts of
$15,926 in 1998 and $18,537 in 1999. |
|
|
369,013 |
|
|
|
273,435 |
|
|
|
|
|
|
|
Inventories (Note 2) |
|
|
186,516 |
|
|
|
144,093 |
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
36,763 |
|
|
|
44,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,052,122 |
|
|
|
688,347 |
|
|
|
|
|
|
|
Property and equipment at cost, net (Note 2) |
|
|
346,987 |
|
|
|
237,939 |
|
|
|
|
|
|
|
Intangible and other assets, net (Note 8) |
|
|
43,579 |
|
|
|
96,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,442,688 |
|
|
$ |
1,022,402 |
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) |
| |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
330,130 |
|
|
$ |
335,907 |
|
|
|
|
|
|
|
Accrued compensation |
|
|
23,697 |
|
|
|
31,136 |
|
|
|
|
|
|
|
Accrued warranty |
|
|
47,135 |
|
|
|
78,187 |
|
|
|
|
|
|
|
Accrued expenses |
|
|
187,617 |
|
|
|
171,388 |
|
|
|
|
|
|
|
Current portion of long-term debt (Note 3) |
|
|
— |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
588,579 |
|
|
|
626,618 |
|
|
|
|
|
|
|
Long-term debt (Note 3) |
|
|
519,188 |
|
|
|
534,144 |
|
|
|
|
|
|
|
Deferred income taxes (Note 5) |
|
|
17,163 |
|
|
|
15,430 |
|
|
Commitments and contingent liabilities (Note 4) |
|
|
|
|
|
|
|
|
|
Subsequent events (Notes 3 and 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity (deficiency) (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 1998 and
101,908 shares in 1999 |
|
|
1,013 |
|
|
|
1,019 |
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
326,244 |
|
|
|
335,197 |
|
|
|
|
|
|
|
Retained earnings (accumulated deficit) |
|
|
197,849 |
|
|
|
(294,841 |
) |
|
|
|
|
|
|
Accumulated other comprehensive loss (Note 8) |
|
|
— |
|
|
|
(2,123 |
) |
|
Treasury stock-common shares at cost; 13,039 shares in 1998 and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,297 shares in 1999. |
|
|
(207,348 |
) |
|
|
(193,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity (deficiency) |
|
|
317,758 |
|
|
|
(153,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity (deficiency) |
|
$ |
1,442,688 |
|
|
$ |
1,022,402 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
38
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(DEFICIENCY)
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional |
|
|
|
|
|
|
Paid-in |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 1996 |
|
|
101,332 |
|
|
$ |
1,013 |
|
|
|
(14,190 |
) |
|
$ |
(121,417 |
) |
|
$ |
353,826 |
|
|
|
|
|
|
|
Common stock repurchase program |
|
|
— |
|
|
|
— |
|
|
|
(5,172 |
) |
|
|
(135,506 |
) |
|
|
(9,068 |
) |
|
|
|
|
|
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
2,790 |
|
|
|
22,087 |
|
|
|
(8,350 |
) |
|
|
|
|
|
|
ESPP shares issued |
|
|
— |
|
|
|
— |
|
|
|
1,136 |
|
|
|
9,090 |
|
|
|
37 |
|
|
|
|
|
|
|
Income tax benefit from stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,209 |
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 28, 1997 |
|
|
101,332 |
|
|
|
1,013 |
|
|
|
(15,436 |
) |
|
|
(225,746 |
) |
|
|
356,654 |
|
|
|
|
|
|
|
Common stock repurchase program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35,828 |
) |
|
|
|
|
|
|
ESPP shares issued |
|
|
— |
|
|
|
— |
|
|
|
1,231 |
|
|
|
9,506 |
|
|
|
3,178 |
|
|
|
|
|
|
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
1,166 |
|
|
|
8,892 |
|
|
|
(99 |
) |
|
|
|
|
|
|
Income tax benefit from stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,339 |
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 1998 |
|
|
101,332 |
|
|
|
1,013 |
|
|
|
(13,039 |
) |
|
|
(207,348 |
) |
|
|
326,244 |
|
|
|
|
|
|
|
ESPP shares issued |
|
|
— |
|
|
|
— |
|
|
|
1,002 |
|
|
|
8,222 |
|
|
|
1,632 |
|
|
|
|
|
|
|
Exercise of stock options and other |
|
|
— |
|
|
|
— |
|
|
|
740 |
|
|
|
6,084 |
|
|
|
(590 |
) |
|
|
|
|
|
|
Shares issued in connection with Crag Acquisition |
|
|
576 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
7,911 |
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Unrealized loss on investment securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 3, 1999 |
|
|
101,908 |
|
|
$ |
1,019 |
|
|
|
(11,297 |
) |
|
$ |
(193,042 |
) |
|
$ |
335,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Retained |
|
Accumulated |
|
Total |
|
Compre- |
|
|
Earnings |
|
Compre- |
|
Shareholders’ |
|
hensive |
|
|
(Accumulated |
|
hensive |
|
Equity |
|
Income |
|
|
Deficit) |
|
Loss |
|
(Deficiency) |
|
(Loss) |
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 1996 |
|
$ |
220,470 |
|
|
$ |
— |
|
|
$ |
453,892 |
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchase program |
|
|
— |
|
|
|
— |
|
|
|
(144,574 |
) |
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
13,737 |
|
|
|
|
|
|
|
|
|
|
|
ESPP shares issued |
|
|
— |
|
|
|
— |
|
|
|
9,127 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
20,209 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
267,596 |
|
|
|
|
|
|
|
267,596 |
|
|
$ |
267,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 28, 1997 |
|
|
488,066 |
|
|
|
— |
|
|
|
619,987 |
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchase program |
|
|
— |
|
|
|
— |
|
|
|
(35,828 |
) |
|
|
|
|
|
|
|
|
|
|
ESPP shares issued |
|
|
— |
|
|
|
— |
|
|
|
12,684 |
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
8,793 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
2,339 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(290,217 |
) |
|
|
|
|
|
|
(290,217 |
) |
|
$ |
(290,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 1998 |
|
|
197,849 |
|
|
|
— |
|
|
|
317,758 |
|
|
|
|
|
|
|
|
|
|
|
ESPP shares issued |
|
|
— |
|
|
|
— |
|
|
|
9,854 |
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and other |
|
|
— |
|
|
|
— |
|
|
|
5,494 |
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with Crag Acquisition |
|
|
— |
|
|
|
— |
|
|
|
7,917 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(492,690 |
) |
|
|
— |
|
|
|
(492,690 |
) |
|
|
(492,690 |
) |
|
|
|
|
|
|
Unrealized loss on investment securities |
|
|
— |
|
|
|
(2,123 |
) |
|
|
(2,123 |
) |
|
|
(2,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 3, 1999 |
|
$ |
(294,841 |
) |
|
$ |
(2,123 |
) |
|
$ |
(153,790 |
) |
|
$ |
(494,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
39
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended |
|
|
|
|
|
June 28, |
|
June 27, |
|
July 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
267,596 |
|
|
$ |
(290,217 |
) |
|
$ |
(492,690 |
) |
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
63,485 |
|
|
|
106,550 |
|
|
|
131,066 |
|
|
|
|
|
|
|
Interest accrued on convertible debentures |
|
|
— |
|
|
|
9,059 |
|
|
|
24,956 |
|
|
|
|
|
|
|
Non-cash portion of restructuring charges (Note 8) |
|
|
— |
|
|
|
— |
|
|
|
41,236 |
|
|
|
|
|
|
|
Non-cash portion of in process research and development
(Note 8) |
|
|
— |
|
|
|
— |
|
|
|
7,471 |
|
|
|
|
|
|
|
Changes in assets and liabilities (Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(136,079 |
) |
|
|
176,539 |
|
|
|
107,693 |
|
|
|
|
|
|
|
|
Inventories |
|
|
(81,852 |
) |
|
|
37,958 |
|
|
|
22,069 |
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
2,184 |
|
|
|
2,830 |
|
|
|
(10,101 |
) |
|
|
|
|
|
|
|
Accrued warranty |
|
|
15,610 |
|
|
|
18,110 |
|
|
|
31,052 |
|
|
|
|
|
|
|
|
Accounts payable, accrued compensation and accrued expenses |
|
|
124,073 |
|
|
|
(83,236 |
) |
|
|
(3,013 |
) |
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(1,570 |
) |
|
|
(16,267 |
) |
|
|
(1,733 |
) |
|
|
|
|
|
|
|
Other assets |
|
|
712 |
|
|
|
(299 |
) |
|
|
2,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
|
254,159 |
|
|
|
(38,973 |
) |
|
|
(139,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net |
|
|
(155,958 |
) |
|
|
(198,641 |
) |
|
|
(106,559 |
) |
|
|
|
|
|
|
Sales and maturities of short-term investments |
|
|
36,598 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Decrease (increase) in other assets |
|
|
(7,587 |
) |
|
|
9,758 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(126,947 |
) |
|
|
(188,883 |
) |
|
|
(106,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from ESPP shares issued |
|
|
9,127 |
|
|
|
12,684 |
|
|
|
9,854 |
|
|
|
|
|
|
|
Exercise of stock options and other, including tax benefit |
|
|
33,946 |
|
|
|
11,132 |
|
|
|
5,494 |
|
|
|
|
|
|
|
Debt issuance costs |
|
|
— |
|
|
|
(18,707 |
) |
|
|
(2,925 |
) |
|
|
|
|
|
|
Proceeds from issuance of bank debt (Note 3) |
|
|
— |
|
|
|
50,000 |
|
|
|
— |
|
|
|
|
|
|
|
Proceeds from issuance of convertible debentures (Note 3) |
|
|
— |
|
|
|
460,129 |
|
|
|
— |
|
|
|
|
|
|
|
Common stock repurchase program (Note 6) |
|
|
(144,574 |
) |
|
|
(35,828 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities |
|
|
(101,501 |
) |
|
|
479,410 |
|
|
|
12,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
25,711 |
|
|
|
251,554 |
|
|
|
(233,683 |
) |
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
182,565 |
|
|
|
208,276 |
|
|
|
459,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
208,276 |
|
|
$ |
459,830 |
|
|
$ |
226,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
40
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Western Digital Corporation (“Western Digital” or the
“Company”) has prepared its consolidated 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
The Company’s fiscal year end is a 52 or 53-week year ending
on the Saturday nearest June 30. Accordingly, the 1997,
1998 and 1999 fiscal years ended on June 27, June 28,
and July 3, respectively, and included 52 weeks for
fiscal years 1997 and 1998, and 53 weeks in fiscal year
1999. 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
The Company’s cash equivalents represent highly liquid
investments, primarily money market funds and commercial paper,
with original maturities of three months or less.
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 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.
The Company maintains a base stock of two to three weeks of
current, finished goods inventory for certain key original
equipment manufacturer (“OEM”) customers in facilities
located adjacent to their operations. Inventory at these
locations usually includes minor product customizations (such as
labeling) for the related OEM. If subsequent to its initial order
the OEM changes its requirements, inventory held at these
facilities can be sold to other OEM’s or distributors as is
or with minor modifications (such as a change in labeling) at
little or no additional cost.
41
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Other
intangible assets are amortized over their expected useful lives
or the lives of the related products, including intangibles
acquired from IBM pursuant to a joint technology development
agreement (See Note 8 of Notes to Consolidated Financial
Statements).
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 net of pricing
adjustments and estimated sales returns. In accordance with
standard industry practice, the Company’s agreements with
certain 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 recognizes revenue at the time of shipment
on sales to resellers who have inventory repurchase agreements
due to the Company’s ability to reasonably estimate future
returns as well as the historically low levels of actual
repurchases. Revenue recognized on sales to resellers with
inventory repurchase agreements was $1,179, $1,083 and
$841 million for fiscal years 1997, 1998 and 1999,
respectively. Repurchases of inventory under such agreements were
not material in 1997, 1998 and 1999.
The Company also records an accrual for estimated warranty costs
when revenue is recognized. Warranty periods range from 3 to
5 years and cover cost of repair or replacement of the hard
drive. The Company has comprehensive processes with which to
estimate accruals for warranty, which include specific detail on
hard drives in the field by product type, historical field return
rates and costs to repair. Although the Company believes that it
has the continued ability to reasonably estimate warranty
reserves, unforeseeable changes in factors used to estimate the
accrual for warranty could occur. These unforeseeable changes
could cause a material change in the Company’s warranty
accrual estimate. Such a change would be recorded in the period
in which the change was identified.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and
administrative expenses of the Company include advertising costs
of $16.3 million, $17.4 million and $14.3 million in
1997, 1998 and 1999, respectively.
Income Taxes
The Company accounts for income taxes using the asset and
liability method under Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes”
(“SFAS 109”). 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 more likely than
not that it will not receive future tax benefits. The
42
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 consolidated
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
The Company has adopted Statement of Financial Accounting
Standards No. 128, “Earnings per Share”
(“SFAS 128”). This statement replaced the
previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per
share. All earnings (loss) per share amounts for all periods
have been presented and restated to conform to the SFAS 128
requirements (See Note 9 of Notes to Consolidated Financial
Statements).
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.
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). SFAS 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 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 123. See
Note 6 of Notes to Consolidated Financial Statements.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”
(“SFAS 133”). SFAS 133 was effective for all
fiscal quarters or fiscal years beginning after June 15,
1999. In August 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137,
“Accounting for Derivative Instruments and Hedging
Activities — Deferral of the Effective Date of FASB
Statement No. 133, An Amendment of FASB Statement
No. 133” (“SFAS 137”), which defers the
effective date of SFAS 133 to all fiscal quarters or fiscal
years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging
activities. Application of this Statement’s requirements is
not expected to have a material impact on the Company’s
consolidated financial position, results of operations or
liquidity.
43
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Comprehensive Loss
The Company has adopted Statement of Financial Accounting
Standards No. 130, “Reporting Comprehensive
Income” (“SFAS 130”). SFAS 130
establishes standards for reporting of comprehensive income and
its components in annual and interim financial statements.
Reclassification or restatement of comparative financial
statements or financial information for earlier periods is
required upon adoption of SFAS 130. For 1999, the Company
possessed one of the components of other comprehensive income as
defined in SFAS 130. (See Note 8 of Notes to
Consolidated Financial Statements for further discussion of the
other comprehensive loss of $2.1 million recorded in 1999.)
Other than the $2.1 million comprehensive loss discussed in
Note 8, the Company does not have any other components of
comprehensive income (loss) for the year ended July 3,
1999 or prior periods.
Segment Information
The Company has adopted Statement of Financial Accounting
Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information”
(“SFAS 131”). 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 SFAS 131. In 1999, the Company
operated in one industry segment, the hard drive industry, and in
accordance with SFAS 131, only enterprise-wide disclosures
have been provided. (See Note 7 of Notes to Consolidated
Financial Statements.) During 1999, the Company acquired Connex,
which is a separate operating segment as defined under
SFAS 131. Connex is an early-stage business which did not
generate revenue in 1999, and does not meet the disclosure
requirements under SFAS 131. The Company will be reviewing
its disclosure requirements under SFAS 131 as it relates to
its July 8, 1999 reorganization (see Note 11 of Notes
to Consolidated Financial Statements) and will make any
applicable disclosures during 2000.
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 fair value of the
Company’s convertible debentures is estimated by reference
to quoted information from market sources. At July 3, 1999,
the market value of the Company’s convertible debentures was
approximately $225.4 million, compared to the related
carrying value of $494.1 million. The Company owns
approximately 10.8 million shares of Komag stock, which at
the time of acquisition, had a fair market value of
$34.9 million. The stock is restricted as to the number of
shares which can be sold in a given time period. The Company
reviews, on a quarterly basis, the fair market value of the
unrestricted stock and records an unrealized gain or loss
resulting from the difference between the fair market value of
the unrestricted stock at the time of acquisition and the fair
market value of the unrestricted stock on the measurement date.
As of July 3, 1999, a $2.1 million unrealized loss has
been recorded and is shown as a component of stockholders’
deficit. (See Note 8 of Notes to Consolidated Financial
Statements for further discussion on the Company’s valuation
of Komag stock and related restrictions.) The carrying amounts
of all other financial instruments in the consolidated balance
sheet approximate fair values. As of July 3, 1999, the
quoted market value of the Company’s Komag stock holdings,
without regard to discounts due to sales restrictions, was
$33.7 million.
Investments
The Company’s investments in marketable equity securities
are included in other assets, and have been classified as
“available for sale” and are carried at fair value. The
classification of a security is determined at the acquisition
date and reviewed periodically. The unrealized gains or losses
resulting from the difference in
44
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the fair value and the cost of marketable equity securities
classified as available for sale are shown as a component of
stockholders’ equity. Securities which are not classified as
available for sale are carried at cost. The Company periodically
reviews its investments for which fair value is less than cost
to determine if the decline in value is other than temporary. If
the decline in value is judged to be other than temporary, the
cost basis of the security is written down to fair value. The
amount of any write-down would be included in the results of
operations as a realized loss. Realized gains and losses
resulting from the sale of securities are determined using the
specific identification method.
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 commitments 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 transactions are consummated. Realized
gains and losses are primarily recorded in cost of revenues in
the accompanying consolidated statements of operations. Costs
associated with entering into such contracts are typically
amortized over the life of the instrument.
The Company had outstanding forward exchange contracts with
commercial banks with nominal values of $241.9 and
$66.4 million, at June 27, 1998 and July 3, 1999,
respectively. The total unrealized gains and losses on
outstanding forward exchange contracts and foreign currency
transactions were not material for the years ended June 28,
1997 and June 27, 1998. For the year ended July 3,
1999, the total net loss on foreign currency transactions and
forward exchange contracts was $10.3 million. Of this
amount, a realized loss of $7.5 million was recorded due to
the imposition of exchange controls by the Malaysian government.
With the establishment of currency controls and the prohibition
of purchases or sales of the Malaysian Ringgit by offshore
companies, the Company has discontinued hedging its Malaysian
Ringgit currency risk. Future hedging of this currency will
depend on currency conditions in Malaysia.
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 estimates and assumptions relating to
the reporting of certain 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.
45
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Supplemental Financial Statement Data (in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
13,223 |
|
|
$ |
15,952 |
|
|
$ |
16,906 |
|
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
|
12,135 |
|
|
|
32,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
$ |
13,223 |
|
|
$ |
3,817 |
|
|
$ |
(15,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
— |
|
|
$ |
2,073 |
|
|
$ |
4,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
$ |
126,363 |
|
|
$ |
101,828 |
|
|
|
|
|
|
|
Work in process |
|
|
|
|
|
|
28,287 |
|
|
|
26,307 |
|
|
|
|
|
|
|
Raw materials and component parts |
|
|
|
|
|
|
31,866 |
|
|
|
15,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
186,516 |
|
|
$ |
144,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and buildings |
|
|
|
|
|
$ |
92,234 |
|
|
$ |
94,788 |
|
|
|
|
|
|
|
Machinery and equipment |
|
|
|
|
|
|
415,469 |
|
|
|
383,095 |
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
14,060 |
|
|
|
13,407 |
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
79,490 |
|
|
|
42,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601,253 |
|
|
|
534,262 |
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
|
|
|
|
(254,266 |
) |
|
|
(296,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
|
|
|
$ |
346,987 |
|
|
$ |
237,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Santa Clara disk media operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
77,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued and liabilities assumed in connection with
acquisition of Connex |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Long-Term Debt
Line of Credit
The Company has a secured revolving credit and term loan facility
(“Senior Bank Facility”). The Senior Bank Facility
provides the Company with up to $125.0 million in a
revolving credit line (depending on borrowing base calculation)
and a $50.0 million term loan, both of which expire in
November 2001. The Senior Bank Facility is secured by the
Company’s accounts receivable, inventory, 66% of its stock
in its foreign subsidiaries and the other assets (excluding real
property) of the Company. At the option of the Company,
borrowings bear interest at either LIBOR or a base rate plus a
margin determined by the borrowing base, with option periods of
one to three months. The Senior Bank Facility requires the
Company to maintain certain amounts of net equity, prohibits the
payment of cash dividends on common stock and contains a number
of other covenants. The Company was in compliance at July 3,
1999, with all terms of the Senior Bank Facility. As of the date
hereof, the $50.0 million term loan was funded, but there
were no borrowings under the revolving credit line. The term loan
requires quarterly payments of $2.5 million beginning in
September 1999 with the remaining balance due in November 2001.
The costs of the product recall discussed in note 11 may
result in the Company not being in compliance with certain
financial covenants in the Senior Bank Facility in future
periods. The availability of this facility will depend upon,
among other things, the actual cost of the recall and the
Company’s ability to recover such costs from third parties.
46
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Convertible Debentures
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
“Debentures”). The principal amount at maturity of the
Debentures is $1.3 billion. The Debentures are subordinated
to all senior debt; are convertible into 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. As of July 3, 1999, the carrying value of the
Debenture was $494.1 million. Included in other assets is
the amount of unamortized debenture issuance costs. The Debenture
issuance costs totaled approximately $14.5 million and are
being amortized over 10 years. As of July 3, 1999, the
balance of unamortized Debenture issuance costs was approximately
$12.6 million.
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, and also owns a facility in Tuas,
Singapore (currently held for sale) which is subject to a ground
lease expiring in 2026. Rental expense under these leases,
including month-to-month rentals, was $32.2, $39.3, and
$36.2 million in 1997, 1998, and 1999, respectively. Leases
for which the Company is contingently liable, totaling
$69.4 million, are not included in the table below. See Note
8 of Notes to Consolidated Financial Statements for further
discussion.
Future minimum rental payments under non-cancelable operating
leases as of July 3, 1999 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
$ |
19,077 |
|
|
|
|
|
|
|
2001 |
|
|
10,642 |
|
|
|
|
|
|
|
2002 |
|
|
4,867 |
|
|
|
|
|
|
|
2003 |
|
|
2,114 |
|
|
|
|
|
|
|
2004 |
|
|
1,880 |
|
|
|
|
|
|
|
Thereafter |
|
|
7,754 |
|
|
|
|
|
|
|
Total future minimum rental payments |
|
$ |
46,334 |
|
|
|
|
|
|
Legal Proceedings
The Company was sued by Amstrad PLC (“Amstrad”) in
December 1992 in Orange County Superior Court. The complaint
alleged that hard drives supplied by the Company in calendar 1988
and 1989 were defective and caused damages to Amstrad of
$186.0 million in 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 in addition to exemplary damages in an unspecified
amount. The first trial of this case ended in a mistrial, with
the jury deadlocked on the issue of liability. The case was
retried, and on June 9, 1999, the jury returned a verdict
against Amstrad and in favor of Western Digital. Amstrad has
filed a notice of appeal from the judgment. The Company does not
believe that the ultimate resolution of this matter will have a
material adverse effect on the financial position, results of
operations or liquidity of the Company. However, should the
judgment be reversed on appeal, and if in a retrial of the case
Amstrad were to prevail, the Company may be required to pay
damages and other expenses, which may have a material adverse
effect on the Company’s
47
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial position, results of operations and liquidity. In
addition, the costs of defending a retrial of the case may be
material, regardless of the outcome.
On February 26, 1999, the Lemelson Foundation
(“Lemelson”) sued the Company and 87 other
companies in the U.S. District Court for the District of Arizona.
The complaint alleges infringement of numerous patents held by
Mr. Jerome H. Lemelson relating to, among other
matters, “machine vision”, “computer image
analysis”, and “automatic identification”. The
Company has reached preliminary agreement with Lemelson
concerning a fully paid-up license of the patents, and Lemelson
has filed a voluntary dismissal without prejudice of the
complaint against the Company. Based upon the information
presently known to management, the Company does not believe that
the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations
or liquidity of the Company. However, because of the nature and
inherent uncertainties of litigation, should the outcome of this
action be unfavorable, the Company may be required to pay damages
and other expenses, which may have a material adverse effect on
the Company’s financial position, results of operations and
liquidity. In addition, the costs of defending such litigation
may be material, regardless of the outcome.
In 1994 Papst Licensing (“Papst”) brought suit against
the Company in U.S. District Court for the Central District of
California alleging infringement by the Company of five of its
patents relating to disk drive motors that the Company purchases
from motor vendors. Later that year Papst dismissed its case
without prejudice, but it has 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 ultimate resolution of this
matter will have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
However, because of the nature and inherent uncertainties of
litigation, should the outcome of this action be unfavorable, the
Company may be required to pay damages and other expenses, which
may have a material adverse effect on the Company’s
financial position, results of operations and liquidity. In
addition, the costs of defending such litigation may be material,
regardless of the outcome.
On July 2, 1999, Magnetic Media Development, LLC
(“Magnetic Media”) brought suit against the Company in
the United States District Court for the Northern District of
California. The suit alleges infringement by the Company of four
patents allegedly owned by Magnetic Media. While the Company has
not yet had an opportunity to fully study the complaint, it
believes that the patents cited in the complaint are those
previously cited to the Company by Mr. Virgle Hedgcoth. In a
letter dated July 16, 1996, Mr. Hedgcoth gave notice
of his assertion that the Company’s products infringe
several of his patents. Each of the patents which Hedgcoth cited
relates to magnetic media. In the letter, Hedgcoth offered the
Company a license under all his patents, without specifying any
amount of compensation. The Company has investigated these
assertions and believes it is likely that, with respect to
magnetic disks that it purchases from others and incorporates
into the Company’s products, it may have the right to have
the vendors of such magnetic disks undertake the defense and
indemnify the Company with respect to such purchased disks. 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. However, because of the nature and
inherent uncertainties of litigation, should the outcome of this
action be unfavorable, the Company may be required to pay damages
and other expenses, which may have a material adverse effect on
the Company’s financial position, results of operations or
liquidity. In addition, the costs of defending such litigation
may be material, regardless of the outcome.
The Company and Censtor Corporation (“Censtor”) have
had discussions concerning any royalties that might be due
Censtor under a licensing agreement. Censtor has initiated
arbitration procedures under the agreement seeking payment of
royalties. In response, the Company has filed a complaint in
federal court seeking a determination that the patents at issue
are invalid. The federal court action has been stayed pending
completion of the arbitration procedures. The Company does not
believe that the outcome of this dispute will have a material
adverse effect on its financial position, results of operations
or liquidity.
48
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the normal course of business, the Company receives and makes
inquiry regarding possible intellectual property matters
including alleged patent infringement. Where deemed advisable,
the Company may seek or extend licenses or negotiate settlements.
Although patent holders often offer such licenses, no assurance
can be given that a license will be offered or that the terms of
any license offered will be acceptable to the Company. Several
such matters are currently pending. The Company does not believe
that the ultimate resolution of these matters will have a
material adverse effect on the financial position, results of
operations or liquidity of the Company.
From time to time the Company receives claims and is a party to
suits and other judicial and administrative proceedings
incidental to 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 Company’s financial position, results of
operations or liquidity.
Note 5. Income Taxes
The domestic and international components of income
(loss) before income taxes are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
United States |
|
$ |
105,884 |
|
|
$ |
(348,397 |
) |
|
$ |
(399,006 |
) |
|
|
|
|
|
|
International |
|
|
208,935 |
|
|
|
56,389 |
|
|
|
(93,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
314,819 |
|
|
$ |
(292,008 |
) |
|
$ |
(492,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision (benefit) for income taxes
are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
29,153 |
|
|
$ |
(6,195 |
) |
|
$ |
(3,519 |
) |
|
|
|
|
|
|
International |
|
|
9,964 |
|
|
|
4,905 |
|
|
|
3,352 |
|
|
|
|
|
|
|
State |
|
|
8,106 |
|
|
|
(501 |
) |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,223 |
|
|
|
(1,791 |
) |
|
|
— |
|
|
|
|
|
|
|
Deferred, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
$ |
47,223 |
|
|
$ |
(1,791 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 reduce
taxes currently payable as shown above by $20.2 and
$2.3 million for 1997 and 1998, respectively. Such benefits
are credited to additional paid-in capital. No amounts were
recorded to additional paid-in capital in 1999 because no tax
benefits related to these plans were realized.
The total cash paid for income taxes was $19.2 million,
$16.9 million and $5.5 million in 1997, 1998 and 1999,
respectively.
49
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities at
June 27, 1998, and July 3, 1999 are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
1998 |
|
1999 |
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOL carryforward |
|
$ |
83,649 |
|
|
$ |
251,009 |
|
|
|
|
|
|
|
Business credit carryforward |
|
|
29,323 |
|
|
|
34,242 |
|
|
|
|
|
|
|
Reserves and accrued expenses not currently deductible |
|
|
122,454 |
|
|
|
120,117 |
|
|
|
|
|
|
|
All other |
|
|
18,920 |
|
|
|
16,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
254,346 |
|
|
|
421,627 |
|
|
|
|
|
|
|
Valuation allowance |
|
|
(254,297 |
) |
|
|
(421,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
49 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unremitted income of foreign subsidiaries |
|
$ |
17,163 |
|
|
$ |
15,430 |
|
|
|
|
|
|
|
All other |
|
|
3,148 |
|
|
|
3,640 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
20,311 |
|
|
$ |
19,070 |
|
|
|
|
|
|
|
|
|
|
Reserves and accrued expenses not currently deductible include
the following:
| |
|
|
|
|
|
|
|
|
|
|
|
1998 |
|
1999 |
|
|
|
|
|
|
Sales related reserves and adjustments |
|
$ |
51,900 |
|
|
$ |
50,889 |
|
|
|
|
|
|
|
Accrued compensation and benefits |
|
|
20,100 |
|
|
|
17,897 |
|
|
|
|
|
|
|
Inventory reserves and adjustments |
|
|
7,753 |
|
|
|
4,498 |
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
42,701 |
|
|
|
46,833 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
122,454 |
|
|
$ |
120,117 |
|
|
|
|
|
|
|
|
|
|
SFAS 109 requires deferred taxes to be determined for each tax
paying component of an enterprise within each tax jurisdiction.
The deferred tax assets indicated above are attributable
primarily to a tax jurisdiction where a history of earnings has
not been established. The taxable earnings in this tax
jurisdiction is also subject to volatility. Therefore, the
Company believes a valuation allowance is needed to reduce the
deferred tax asset to an amount that is more likely than not to
be realized.
Reconciliation of the United States Federal statutory rate to the
Company’s effective tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
U.S. Federal statutory rate |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
|
|
|
|
|
State income taxes, net |
|
|
1.7 |
|
|
|
(0.2 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
Tax rate differential on international income |
|
|
(12.7 |
) |
|
|
(15.5 |
) |
|
|
.9 |
|
|
|
|
|
|
|
Effect of valuation allowance |
|
|
(10.0 |
) |
|
|
46.5 |
|
|
|
34.1 |
|
|
|
|
|
|
|
Other |
|
|
1.0 |
|
|
|
3.6 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
15.0 |
% |
|
|
(0.6 |
)% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain income of selected subsidiaries is taxed at substantially
lower income tax rates as compared to local statutory rates. The
lower rates reduced income taxes and increased net earnings or
reduced the net loss by $58.5 million ($.63 per share, diluted),
$17.1 million ($.20 per share, diluted) and by
$25.2 million ($.28 per share, diluted) in 1997, 1998 and
1999, respectively. These lower rates are in effect through
fiscal year 2004.
50
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At July 3, 1999, the Company had federal net operating loss
carryforwards of $658.5 million and federal and state tax
credits of $34.2 million. The loss carryforwards expire in
fiscal years 2008 through 2019 and the credit carryforwards
expire in fiscal years 2000 through 2012.
Net undistributed earnings from international subsidiaries at
July 3, 1999, on which no U.S. tax has been provided,
amounted to $434.7 million. The net undistributed earnings
are intended to finance local operating requirements.
Accordingly, an additional United States tax provision has not
been made on these earnings.
Note 6. Shareholders’ Equity
The following table summarizes all shares of common stock
reserved for issuance at July 3, 1999 (in thousands):
| |
|
|
|
|
|
|
|
Number |
|
|
of Shares |
|
|
|
|
Issuable in connection with: |
|
|
|
|
|
|
|
|
|
|
Convertible debentures |
|
|
19,374 |
|
|
|
|
|
|
|
Exercise of stock options, including options available for grant |
|
|
25,718 |
|
|
|
|
|
|
|
Employee stock purchase plan |
|
|
1,371 |
|
|
|
|
|
|
|
|
|
46,463 |
|
|
|
|
|
|
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. In 1999, the
Employee Plan was amended to authorize the issuance of an
additional 10.0 million shares of common stock upon exercise
of stock options granted under the plan. As of July 3,
1999, 6,674,895 options were exercisable and
7,263,194 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.
The Company has a Stock Option Plan for Non-Employee Directors
(“Director Plan”) and has reserved 1.6 million
shares for issuance thereunder. 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. 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 July 3, 1999, 201,566 options
were exercisable and 698,464 options were available for
grant.
51
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 |
|
|
|
|
|
|
|
Granted |
|
|
4,433 |
|
|
|
27.17 |
|
|
|
|
|
|
|
Exercised, net of value of redeemed shares |
|
|
(1,166 |
) |
|
|
7.54 |
|
|
|
|
|
|
|
Canceled or expired |
|
|
(502 |
) |
|
|
20.00 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 27, 1998 |
|
|
12,351 |
|
|
|
16.92 |
|
|
|
|
|
|
|
Granted |
|
|
9,119 |
|
|
|
11.10 |
|
|
|
|
|
|
|
Exercised, net of value of redeemed shares |
|
|
(710 |
) |
|
|
7.30 |
|
|
|
|
|
|
|
Canceled or expired |
|
|
(3,004 |
) |
|
|
23.63 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at July 3, 1999 |
|
|
17,756 |
|
|
$ |
13.19 |
|
|
|
|
|
|
|
|
|
|
The following tables summarize information about options
outstanding and exercisable under the Employee and Director Plans
combined at July 3, 1999 (in thousand, except per share
amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
Options Exercisable |
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Number |
|
Contractual Life |
|
Weighted |
|
Number |
|
Weighted Average |
| Range of Exercise Prices |
|
of Shares |
|
(in years) |
|
Exercise Price |
|
of Shares |
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.44 – $ 6.94 |
|
|
|
2,505 |
|
|
|
7.19 |
|
|
$ |
5.84 |
|
|
|
1,189 |
|
|
$ |
5.10 |
|
|
7.00 – 8.31 |
|
|
|
1,907 |
|
|
|
7.51 |
|
|
|
7.72 |
|
|
|
995 |
|
|
|
7.72 |
|
|
8.50 – 10.25 |
|
|
|
2,344 |
|
|
|
7.26 |
|
|
|
9.25 |
|
|
|
1,346 |
|
|
|
8.83 |
|
|
10.38 – 11.88 |
|
|
|
2,866 |
|
|
|
7.77 |
|
|
|
11.71 |
|
|
|
1,651 |
|
|
|
11.77 |
|
|
12.25 – 12.25 |
|
|
|
682 |
|
|
|
9.09 |
|
|
|
12.25 |
|
|
|
— |
|
|
|
— |
|
|
12.50 – 12.88 |
|
|
|
2,666 |
|
|
|
9.34 |
|
|
|
12.87 |
|
|
|
30 |
|
|
|
12.69 |
|
|
13.06 – 18.63 |
|
|
|
2,827 |
|
|
|
8.73 |
|
|
|
16.53 |
|
|
|
751 |
|
|
|
17.54 |
|
|
18.88 – 34.19 |
|
|
|
1,826 |
|
|
|
8.00 |
|
|
|
30.28 |
|
|
|
847 |
|
|
|
30.49 |
|
|
34.50 – 48.25 |
|
|
|
128 |
|
|
|
7.88 |
|
|
|
37.56 |
|
|
|
65 |
|
|
|
37.39 |
|
|
48.50 – 48.50 |
|
|
|
5 |
|
|
|
8.23 |
|
|
|
48.50 |
|
|
|
2 |
|
|
|
48.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
17,756 |
|
|
|
8.05 |
|
|
$ |
13.19 |
|
|
|
6,876 |
|
|
$ |
12.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. On September 10, 1998 the
Company’s Board of Directors approved the adoption of a new
Rights plan to replace the previous plan, which expired in
September of 1998. The Rights under the new plan are similar to
the rights under the 1989 plan except they are redeemable by the
Company at $.01 per Right and expire in 2008.
52
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 7.0 million
shares of common stock have been reserved for issuance under this
plan. Approximately 1,136,000, 1,231,000 and
1,002,000 shares were issued under this plan during 1997,
1998 and 1999, respectively.
Common Stock Repurchase Program
In February 1995, the Company established an open market stock
repurchase program. Under this program, the Company has spent
$323.4 million in connection with the repurchase of
22.2 million shares of its common stock at an average price
of $14.55 per share. The $323.4 million includes the
acquisition price of Western Digital common stock and amounts
totaling $35.8 million paid in 1998 to settle certain put
option arrangements entered into in connection with the open
market stock repurchase program. There was no stock repurchase
program activity during 1999.
Pro Forma Information
Pro forma information regarding net income (loss) and
earnings (loss) per share is required by SFAS 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 1997, 1998 and 1999 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 |
|
|
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option life (in years) |
|
|
4.0 |
|
|
|
4.5 |
|
|
|
5.0 |
|
|
|
2.0 |
|
|
|
2.0 |
|
|
|
2.0 |
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
6.0 |
% |
|
|
5.5 |
% |
|
|
5.75 |
% |
|
|
6.0 |
% |
|
|
5.5 |
% |
|
|
5.75 |
% |
|
|
|
|
|
|
Stock price volatility |
|
|
.58 |
|
|
|
.76 |
|
|
|
.82 |
|
|
|
.58 |
|
|
|
.76 |
|
|
|
.82 |
|
|
|
|
|
|
|
Dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
The following is a summary of the per share weighted average fair
value of stock options granted in the years listed below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Options granted under the Stock Option Plans |
|
$ |
9.10 |
|
|
$ |
17.10 |
|
|
$ |
7.74 |
|
|
|
|
|
|
|
Shares granted under the ESPP Plan |
|
$ |
6.75 |
|
|
$ |
7.39 |
|
|
$ |
9.92 |
|
53
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 123, the Company’s net income
(loss) and net earnings (loss) per share would have
been reduced to the amounts indicated below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
June 28, |
|
June 27, |
|
July 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
Pro forma net income (loss) (in thousands) |
|
$ |
254,831 |
|
|
$ |
(324,178 |
) |
|
$ |
(538,637 |
) |
|
|
|
|
|
|
Pro forma net earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.92 |
|
|
$ |
(3.70 |
) |
|
$ |
(6.02 |
) |
|
|
|
|
|
|
Diluted |
|
$ |
2.72 |
|
|
$ |
(3.70 |
) |
|
$ |
(6.02 |
) |
Pro forma net income (loss) and net earnings (loss) per
share reflects only options granted in 1996, 1997, 1998 and
1999. Therefore, the full impact of calculating compensation
expense for options under SFAS 123 is not reflected in the
pro forma net income (loss) amounts presented above because
compensation expense is reflected over the options’ vesting
period and compensation expense for options granted before 1996
is not considered.
Note 7. Business Segment and International Operations
Western Digital currently operates in one operating
segment — the design, development, manufacture and
marketing of hard drives for the computer marketplace. During
1997, sales to IBM accounted for 13% of the Company’s
revenues. During 1998 and 1999, sales to Compaq accounted for 14%
and 21% of the Company’s revenues, respectively.
The Company’s operations outside the United States include
manufacturing facilities in Singapore and Malaysia as well as
sales offices throughout the world.
54
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Europe and Asia of $763.5, $606.7,
and $482.5 million in 1997, 1998, and 1999, respectively.
Transfers between geographic areas are accounted for at prices
comparable to normal sales through outside distributors. General
and corporate expenses of $62.8, $77.6, and $82.7 million in
1997, 1998, and 1999, respectively, have been excluded in
determining operating income (loss) by geographic region.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
|
States |
|
Europe |
|
Asia |
|
Eliminations |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 27, 1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
$ |
2,630 |
|
|
$ |
886 |
|
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
3,542 |
|
|
|
|
|
|
|
Transfers between geographic areas |
|
|
998 |
|
|
|
166 |
|
|
|
3,324 |
|
|
|
(4,488 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
3,628 |
|
|
$ |
1,052 |
|
|
$ |
3,350 |
|
|
$ |
(4,488 |
) |
|
$ |
3,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(271 |
) |
|
$ |
7 |
|
|
$ |
66 |
|
|
$ |
(20 |
) |
|
$ |
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
907 |
|
|
$ |
116 |
|
|
$ |
455 |
|
|
$ |
(35 |
) |
|
$ |
1,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 3, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
$ |
2,001 |
|
|
$ |
751 |
|
|
$ |
15 |
|
|
$ |
— |
|
|
$ |
2,767 |
|
|
|
|
|
|
|
Transfers between geographic areas |
|
|
746 |
|
|
|
1 |
|
|
|
2,607 |
|
|
|
(3,354 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
2,747 |
|
|
$ |
752 |
|
|
$ |
2,622 |
|
|
$ |
(3,354 |
) |
|
$ |
2,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(295 |
) |
|
$ |
7 |
|
|
$ |
(114 |
) |
|
$ |
8 |
|
|
$ |
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
550 |
|
|
$ |
97 |
|
|
$ |
390 |
|
|
$ |
(15 |
) |
|
$ |
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Acquisitions and Restructurings
IBM License Agreement
In June of 1998, the Company entered into a broad based
technology licensing and component supply agreement with IBM (the
“Agreement”) involving the design and manufacture of
desktop hard disk drives using IBM’s giant magnetoresistive
heads and other components. The terms of the Agreement included a
$20.0 million non-refundable initial payment in June 1998,
which was fully expensed in 1998 as in-process research and
development. Additional payments of $40.0 million are
dependent upon the achievement of certain product development
milestones. These additional payments are being capitalized and
amortized to cost of sales as the related product is sold
(generally within one year). During 1999, $30.0 million of
these additional payments were made, $6.4 million of which
was unamortized as of July 3, 1999 and is included in
prepaid expenses. Another $10.0 million is expected to be
paid in 2000. The Agreement also calls for the Company to make
supplemental per unit payments as the related product is sold.
These amounts are recorded to cost of sales as the product is
sold. The Agreement also includes a supply arrangement for the
purchase of GMR heads at negotiated market prices.
55
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of Connex
On February 1, 1999, the Company acquired Connex, a San
Jose-based startup company formed to develop storage solutions
for the Windows NT and Unix server environments, at a cost of
approximately $12.0 million. The purchase price included 575,662
shares of Western Digital common stock valued at
$7.9 million, forgiveness of amounts advanced to Connex
prior to the acquisition totaling $2.0 million and the
assumption of certain liabilities of approximately
$2.1 million. Due to the small size of the Connex
acquisition, the $12.0 million purchase price was determined
based on an arms-length negotiation. The acquisition was
accounted for as a purchase.
At the time of the acquisition, Connex was a development stage
operation with no commercial products yet available for sale.
Connex had, at the time of acquisition, several in-process
research and development projects which were approximately 40%
complete. The major projects acquired include: industry standard
storage systems and storage management software solutions for
both Windows NT and UNIX server environments. The Company’s
primary purpose for the acquisition was to acquire these
in-process projects and complete the development efforts as the
Company believed they had economic value but had not yet reached
technological feasibility and had no alternative future uses.
Therefore, the Company allocated substantially all of the
purchase price as a one-time charge for in-process research and
development of $12.0 million to the Company’s results
of operations in 1999. Approximately $0.4 million of assets
were acquired in the acquisition. Approximately $8 million
in development and administrative expenses (approximately
$5 million for network attached storage systems and
$3 million for network storage management software) were
incurred during 1999 after the acquisition. The Company is
continuing development efforts and expects to ship the first new
products developed by Connex in January 2000. The primary risks
and uncertainties associated with timely completion of the
projects lies in the Company’s ability to attract and retain
qualified software engineers in the current competitive
environment. Should the projects not be completed on a timely
basis, the Company’s first-to-market advantages would be
reduced (e.g. lower margins), or an alternative technology might
be developed by a competitor which could severely impact the
marketability of the Company’s planned products. Should the
projects prove to be unsuccessful, the impact on the 2000 results
of operations will primarily consist of the engineering and
start up efforts incurred to complete the projects for which
there would be no future value, plus the costs of any new efforts
on replacement projects and/or costs to unwind the
infrastructure if a decision was made not to pursue new efforts.
Restructuring Programs
In January 1999, the Company initiated a restructuring program
which resulted in the combination of its Personal Storage
Division and Enterprise Storage Group into a single hard drive
operating unit. The new Drive Products Division (“DPD”)
has combined design, manufacturing, materials, business and
product marketing resources to address both the desktop and
enterprise markets. In connection with the combination of the
divisions, the Company’s Tuas, Singapore facility was closed
and production of Enterprise drives was moved to the
Company’s nearby manufacturing facility in Chai-Chee,
Singapore. This restructuring program, which was substantially
completed by the end of the third quarter of 1999, resulted in a
reduction of worldwide employee headcount of 934 employees
(compared to the original plan of 900), approximately 250 of
which were direct and indirect labor and the rest were
management, professional and administrative personnel. A
$41.0 million restructuring charge was recorded in the third
quarter of 1999, the components of which are summarized below
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
Write-down of building and equipment to fair value |
|
$ |
22.7 |
|
|
|
|
|
|
|
Severance and related costs |
|
|
11.2 |
|
|
|
|
|
|
|
Write-off of duplicate warranty repair and engineering supplies |
|
|
4.1 |
|
|
|
|
|
|
|
Tuas facility renovation and related costs |
|
|
1.3 |
|
|
|
|
|
|
|
Miscellaneous |
|
|
1.7 |
|
|
|
|
|
|
|
Total |
|
$ |
41.0 |
|
|
|
|
|
|
56
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The write-down of building and equipment includes the reduction
of the Tuas building to its estimated fair market value of
$7.8 million, which was based on a valuation done by an
independent party. As of July 3, 1999, the Tuas building is
held for sale. The Company expects the building to sell within
6 months to 1 year. Of the severance and related charge
of $11.2 million, approximately $9.3 million was paid in
1999, leaving a liability of approximately $1.9 expected to be
paid in the first and second quarters of fiscal 2000. The
write-off of duplicate warranty repair and engineering supplies,
including base replacement stock for warranty repairs and
engineering materials, was necessary due to the reduced
requirements of a single combined repair facility. Tuas facility
renovation and related costs consist of costs incurred to ready
the facility for sale. The miscellaneous category includes
various other incremental costs incurred during the quarter for
closure of the facility and wind-down of its operations. All
other non-severance related costs were substantially paid by
July 3, 1999.
Following is a reconciliation of the original accrual, the cash
and non-cash charges, and the remaining accrual (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
Original restructuring accrual |
|
$ |
41.0 |
|
|
|
|
|
|
|
Non-cash charges. |
|
|
(26.0 |
) |
|
|
|
|
|
|
Cash utilized |
|
|
(13.1 |
) |
|
|
|
|
|
|
Changes in original estimates: |
|
|
|
|
|
|
|
|
|
|
Reduced building and equipment impairment |
|
|
(3.0 |
) |
|
|
|
|
|
|
Increased severance and outplacement costs |
|
|
1.0 |
|
|
|
|
|
|
|
Increased duplicate warranty repair and engineering supplies |
|
|
2.0 |
|
|
|
|
|
|
|
Balance at July 3, 1999 |
|
$ |
1.9 |
|
|
|
|
|
|
In April 1999, the Company completed the sale of its Santa Clara
disk media operations to Komag. The components of the sale are
summarized below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
Proceeds: |
|
|
|
|
|
|
|
|
|
|
Common stock of Komag, Inc. |
|
$ |
34.9 |
|
|
|
|
|
|
|
Note receivable |
|
|
30.1 |
|
|
|
|
|
|
|
Trade receivable for certain inventory sold |
|
|
12.1 |
|
|
|
|
|
|
|
|
|
77.1 |
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
Equipment sold |
|
|
68.3 |
|
|
|
|
|
|
|
Inventory sold |
|
|
18.1 |
|
|
|
|
|
|
|
Prepaids and other related assets sold or written off |
|
|
7.7 |
|
|
|
|
|
|
|
Severance and outplacement |
|
|
3.0 |
|
|
|
|
|
|
|
|
|
97.1 |
|
|
|
|
|
|
| |
|
Restructuring/loss on sale |
|
$ |
20.0 |
|
|
|
|
|
|
The Komag common stock received as consideration includes
restrictions upon when the stock may be sold. The restrictions
will be lifted over a three and one-half year period. As of
July 3, 1999, approximately 30% of these shares are not
restricted. As shares become capable of being sold within 12
months, they are marked-to-market using published closing prices
of Komag stock as of the end of the reporting period. Subsequent
to the transaction, the market value of Komag’s common stock
declined. As the Company has identified the shares as
“available for sale” under the provisions of SFAS
No. 115, “Investments in Certain Debt and Equity
Securities”, the unrestricted shares have been marked to
market value at July 3, 1999, and accordingly, the
unrealized loss of $2.1 million is recorded as a component
of other comprehensive loss in the
57
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accompanying balance sheet and statement of shareholders’
deficit. All of the Komag stock is included in other assets.
The Company also received, as consideration, a $30.1 million
unsecured note (the “Note”), which is included in
other assets. The Note matures in April 2002 and has an annual
interest rate of 4.9%, compounded quarterly. The outstanding
principal balance on this Note, plus accrued interest, is due and
payable in full upon maturity. The Note contains a principle and
accrued interest reduction provision which is based on the
increase, if any, in performance of Komag’s stock price
subsequent to the date of the sale.
In conjunction with the sale of Company assets, Komag assumed
certain liabilities, mainly leases related to production
equipment and facilities. The Company is contingently liable for
these leases. If Komag were unable to meet its payment
obligations on the remaining leases, totaling approximately
$69.4 million as of July 3, 1999, the Company would be
ultimately liable to make the payments.
The transaction also included a three-year volume purchase
agreement under which the Company must purchase a significant
percentage of its media requirements from Komag. The agreement
does not require the Company to purchase a fixed minimum amount
of media from Komag. The Company also entered into a License
Agreement and Joint Development Agreement. The License Agreement
grants Komag a fully paid-up license to utilize certain of the
Company’s technology in the development of future media
products for the Company. The Joint Development Agreement
provides the basis for determining the ownership of any media
manufacturing related technology developed by Komag and/or the
Company in the future. There is no additional consideration
related to the sale inherent in these other agreements.
Therefore, no portion of the sales proceeds was allocated to
them.
The April 1999 sale of the media business resulted in a reduction
of worldwide employee headcount of 1,106 employees (compared to
the original plan of 1,100), approximately 650 of which were
direct labor and the rest were technicians, management and other
professionals. Of the severance and outplacement charge of
$3.0 million, approximately $1.9 million was paid in
1999, leaving approximately $1.1 million, as of July 3,
1999, which is to be paid in the first half of 2000.
The sale of Company’s media assets to Komag and the related
transition and restructuring program were substantially completed
by the end of the fourth quarter. Following is a reconciliation
of the original accrual, the cash and non-cash charges, and the
remaining accrual (in millions):
| |
|
|
|
|
|
|
|
|
|
|
Original restructuring charge |
|
$ |
20.0 |
|
|
|
|
|
|
|
Non-cash charges |
|
|
(17.0 |
) |
|
|
|
|
|
|
Cash utilized |
|
|
(1.9 |
) |
|
|
|
|
|
|
Balance at July 3, 1999 |
|
$ |
1.1 |
|
|
|
|
|
|
There have been no significant changes to the original
restructuring charges or accrual estimates. The value of the
equipment sold was determined based on the Company’s book
value.
58
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Earnings (Loss) Per Share
As discussed in Note 1, the Company adopted SFAS 128
effective December 27, 1997. The following table illustrates
the computation of basic and diluted earnings (loss) per
share under the provisions of SFAS 128.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
June 28, |
|
June 27, |
|
July 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings (loss) per
share — net income (loss) |
|
$ |
267,596 |
|
|
$ |
(290,217 |
) |
|
$ |
(492,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share —
weighted average number of common shares outstanding during the
period |
|
|
87,261 |
|
|
|
87,525 |
|
|
|
89,478 |
|
|
|
|
|
|
|
Incremental common shares attributable to exercise of outstanding
options, put options and ESPP contributions |
|
|
6,261 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share |
|
|
93,522 |
|
|
|
87,525 |
|
|
|
89,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
3.07 |
|
|
$ |
(3.32 |
) |
|
$ |
(5.51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
2.86 |
|
|
$ |
(3.32 |
) |
|
$ |
(5.51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all options were included in the computation of
diluted earnings per share for 1997. In 1998 and 1999,
12.4 million and 17.8 million shares, respectively,
relating to the possible exercise of outstanding stock options
and 19.4 million shares issuable upon conversion of the
convertible debentures were not included in the computation of
diluted loss per share as their effect would have been
anti-dilutive.
Note 10. Savings and Profit Sharing Plan
Effective July 1, 1991, the Company adopted a Savings and
Profit Sharing Plan, the Western Digital Corporation Retirement
Savings and Profit Sharing Plan (“the Plan”). The Plan
includes an employee 401(k) plan. The Plan covers
substantially all domestic employees, subject to certain
eligibility requirements. In 1997, the Company authorized
$12.6 million (4.1% of defined pre-tax profits) to be
allocated to participants under the profit sharing plan. In 1998
and 1999, no amounts were allocated by the Company to the profit
sharing plan. The Company may also make annual contributions to
the 401(k) plan at the discretion of the Board of Directors.
For 1997, 1998, and 1999 the Company made contributions to the
401(k) plan of $2.7, $2.9, $3.3 million, respectively.
Note 11. Subsequent Events
Equity Facility
The Company has an equity draw-down facility (“Equity
Facility”) with a bank which allows the Company to issue up
to $150.0 million (in monthly increments of up to
$12.5 million) in common stock for cash at the market price
of its stock less a 2.75% discount. As of July 3, 1999, the
Equity Facility had not been used. During July through
September 29, 1999, the Company issued 6.2 million
shares of common stock under the Equity Facility for net proceeds
of $32.2 million.
Debenture Retirements
During the period from July 27, through September 17,
1999, the Company issued 6.1 million shares of common stock
in exchange for Debentures with a carrying value of
$79.6 million, and an aggregate principal
59
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount at maturity of $207.1 million, which were retired in
non-cash transactions. These exchanges were private, individually
negotiated transactions with certain institutional investors.
The Company expects to record an extraordinary gain of
approximately $45 million during the quarter ending
October 2, 1999 for the difference between the carrying
value of the Debentures and the market value of the common stock
given by the Company at the time of the exchange.
Sale of Land
On August 9, 1999, the Company sold approximately
34 acres of land in Irvine, California, upon which it had
previously planned to build a new corporate headquarters, for
$26 million (the approximate cost of the land). The Company
has extended the current lease of its worldwide headquarters in
Irvine, California, through December 2000, and has an option to
extend the lease for an additional six month period.
Restructurings
On July 8, 1999, a further restructuring of operations and
management responsibilities was executed. The structural change
establishes a Worldwide Operations and Geographies structure and
a Lines of Business/ Research and Development organization (LOB).
Each of the Geographies will be responsible for their own
operating results, field sales, customer and channel business
management and channel marketing in its respective region. The
restructure resulted in a reduction of worldwide employee
headcount of approximately 40 employees, approximately 25 of
which were direct and indirect labor and the rest were
management, professional and administrative personnel. The
Company expects to record a charge to operations of approximately
$2.0 million in the first quarter ending October 2,
1999, consisting primarily of severance accruals to be fully paid
by the end of the second quarter ending December 31, 1999.
On August 13, 1999, the Company announced its intention to
move substantially all of its production of desktop hard drives
to Malaysia, while retaining in Singapore production of
enterprise drives and expanding its role in design, development
and manufacturing process engineering. The Company expects to
finalize its plans relative to the restructuring by the end of
its first quarter. The Company expects that the transfer of
production of desktop hard drives to its Malaysia facility will
result in a reduction of employee headcount in Singapore by the
end of December 1999 of approximately 2,000 direct and 500
indirect workers and a charge to operations during the first half
of 2000 of approximately $30 million (unaudited) relating
to the write-off of fixed assets to be disposed of, lease
cancellations, and employee severance and other costs of vacating
leased properties. The Company expects that the transfer to its
Malaysia facility will result in an employee headcount increase
in Malaysia of approximately 2,000 workers by the end of
December 1999.
Product Recall (unaudited)
On September 27, 1999, the Company announced a recall of up to
400,000 of its 6.8GB per platter series of WD Caviar desktop hard
drives which are in completed computer systems, because of a
reliability problem resulting from a faulty power driver chip
manufactured by a third-party supplier. Approximately
1.2 million units were manufactured with the faulty chip,
but the Company believes the remaining drives are either in the
Company’s or its customers’ inventory. Replacement of
the chips will involve rework of the printed circuit board
assembly. The Company expects that it will be able to resume
production of the hard drives with new chips by approximately
October 11, 1999. The Company has not yet quantified the
total impact of the recall, rework, and manufacturing stoppage on
its financial position, results of operation, or liquidity,
although it believes it will be material. The special charges
associated with the cost of recalling and repairing the affected
drives are not expected to exceed $50 million. This estimate
excludes any impact on the Company’s revenues or market
share. The Company has not yet determined how much of the
potential loss might be recoverable from insurance sources and
from the supplier of the faulty chip.
60
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Quarterly Results of Operations (unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First (1) |
|
Second(2) |
|
Third (3) |
|
Fourth(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
1,090,164 |
|
|
$ |
969,564 |
|
|
$ |
831,294 |
|
|
$ |
650,503 |
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
161,059 |
|
|
|
(55,548 |
) |
|
|
36,279 |
|
|
|
(41,740 |
) |
|
|
|
|
|
|
Operating income (loss) |
|
|
72,063 |
|
|
|
(147,198 |
) |
|
|
(58,221 |
) |
|
|
(162,469 |
) |
|
|
|
|
|
|
Net income (loss) |
|
|
62,707 |
|
|
|
(145,183 |
) |
|
|
(45,022 |
) |
|
|
(162,719 |
) |
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
.72 |
|
|
|
(1.66 |
) |
|
|
(.51 |
) |
|
|
(1.84 |
) |
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
.67 |
|
|
$ |
(1.66 |
) |
|
$ |
(.51 |
) |
|
$ |
(1.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
650,858 |
|
|
$ |
738,590 |
|
|
$ |
668,456 |
|
|
$ |
709,302 |
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(82,752 |
) |
|
|
19,167 |
|
|
|
39,864 |
|
|
|
20,873 |
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(192,005 |
) |
|
|
(79,015 |
) |
|
|
(110,045 |
) |
|
|
(95,727 |
) |
|
|
|
|
|
|
Net income (loss) |
|
|
(194,658 |
) |
|
|
(82,253 |
) |
|
|
(114,293 |
) |
|
|
(101,486 |
) |
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
(2.20 |
) |
|
|
(.93 |
) |
|
|
(1.27 |
) |
|
|
(1.12 |
) |
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
(2.20 |
) |
|
$ |
(.93 |
) |
|
$ |
(1.27 |
) |
|
$ |
(1.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
First quarter 1999 includes a $77.0 million special charge
to increase warranty accruals associated with the Company’s
last generations of thin-film desktop products. The increase was
primarily due to a normal increase in units under warranty and
the completion of the Company’s transition in its desktop
business from thin-film to the newer magnetoresistive
(“MR”) head technology in the June 1998 quarter. This
transition and recent experience with thin film returns, which
indicated a slightly higher return rate, higher cost of repair
and longer duration of returns within the warranty period,
resulted in an increase in warranty accruals. Prior to the first
quarter of 1999, the Company’s experience with returns of
older generation thin-film products was that a large percentage
of the products which were going to fail, failed in the first six
months after sale. However, with the advancements in thin-film
recording technology, the gaps between critical components
(principally the recording heads and disks) within the drive
became much smaller until they were almost in contact with one
another. This made the thin-film drives much more susceptible to
environmental factors which typically manifest themselves over
long periods of time, such as gases released from the surrounding
environment that may permeate through or from other components
in the drive. During the first quarter of 1999, the Company began
to see consistent data indicating a higher percentage of these
advanced thin-film drives coming back after the first six months.
That, combined with the significant amount of these drives that
were now in the field, led to a higher life-time return rate
being applied to a larger base of products in the field. This
resulted in a special charge to warranty provision of
$77 million in the first quarter of 1999. |
| |
| (2) |
During the second quarter of 1998, the Company incurred
$148 million of special charges as a result of its decisions
to reduce its exposure to the sustained oversupply and unusually
competitive pricing pressures in the lower capacity portion of
the hard drive marketplace, and to sharpen its focus and
resources on its desktop and enterprise storage product lines.
This decision led the Company to accelerate its transition to
magnetoresistive head technology and to redeploy the resources
which were used on development of its mobile disk drive product
line back to its core desktop and enterprises disk drive
products. The special charges included approximately
$49 million of vendor purchase order cancellation charges on
older, thin-film technology components due to reduced production
of thin-film products, $35 million for write-down of
inventory and service center stock, $24 million for
incremental warranty accruals on older technology products,
$10 million for write-offs of investments in companies
developing advanced thin-film and mobile disk drive technologies,
$8 million of mobile engineering development expenses
incurred during |
61
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
the quarter, and $22 million of other incremental costs
incurred within the quarter associated with the accelerated
transition out of older, thin-film technology into MR products.
Of the total $148 million special charges, approximately
$8 million was recorded in research and development expense
and $140 million was recorded in cost of sales. Since these
charges were either incurred during the second quarter of 1998,
or resulted from liabilities incurred or assets impaired upon the
Company’s decision in the second quarter to implement these
actions, the entire $148 million was recorded in the second
quarter of 1998. The inventory referred to above was scrapped or
subsequently sold at or slightly above its adjusted book value
with minimal gross margin impact. The Company substantially
completed its transition to magnetoresistive products by the
fourth quarter of 1998, largely as planned, improving its
technology leadership position relative to its competitors. Of
the total charges, approximately $100 million required the
use of cash. There were no significant subsequent changes to the
cost estimates associated with the special charges. |
| |
| (3) |
Third quarter 1999 includes a $41.0 restructuring charge for the
combination of the Company’s Personal Storage Division and
Enterprise Storage Group and the resulting consolidation of its
Singapore facilities (see Note 8 of Notes to Consolidated
Financial Statements), and a $12.0 million charge to
in-process research and development expenses for the acquisition
of Connex. |
| |
| (4) |
Fourth quarter 1998 results include $22 million of costs
recorded to research and development principally related to the
start-up of the IBM Agreement. |
62
WESTERN DIGITAL CORPORATION
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS
Three years ended July 3, 1999
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
|
Doubtful |
|
Accrued |
|
|
Accounts |
|
Warranty |
|
|
|
|
|
|
Balance at June 29, 1996 |
|
$ |
9,376 |
|
|
$ |
13,414 |
|
|
|
|
|
|
|
Charges to operations |
|
|
7,116 |
|
|
|
67,900 |
|
|
|
|
|
|
|
Deductions |
|
|
(4,786 |
) |
|
|
(52,416 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 28, 1997 |
|
|
11,706 |
|
|
|
28,898 |
|
|
|
|
|
|
|
Charges to operations |
|
|
4,674 |
|
|
|
104,600 |
|
|
|
|
|
|
|
Deductions |
|
|
(454 |
) |
|
|
(86,363 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 1998 |
|
|
15,926 |
|
|
|
47,135 |
|
|
|
|
|
|
|
Charges to operations |
|
|
2,632 |
|
|
|
153,000 |
|
|
|
|
|
|
|
Deductions |
|
|
(21 |
) |
|
|
(121,948 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at July 3, 1999 |
|
$ |
18,537 |
|
|
$ |
78,187 |
|
|
|
|
|
|
|
|
|
|
63
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 1999 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 July 3, 1999.
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 1999 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 July 3, 1999.
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 1999 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
July 3, 1999.
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 1999 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 July 3, 1999.
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 consolidated 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
64
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
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
|
3.2.2 |
|
By-laws of the Company, as amended March 20, 1997(11) |
|
3.3 |
|
Certificate of Agreement of Merger(4) |
|
3.4.1 |
|
Certificate of Amendment and Restatement of Certificate of
Incorporation dated March 27, 1997(11) |
|
4.1.1 |
|
Rights Agreement between the Company and American Stock Transfer
and Trust Company, as Rights Agent, dated as of October 15,
1998, which includes as Exhibit B thereto the Form of Rights
Certificate to be distributed to holders of Rights after the
Distribution Date (as that term is defined in the Rights
Agreement)(17) |
|
4.2 |
|
Form of Common Stock Certificate(1) |
|
4.3 |
|
Amended Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock of the
Company* |
|
4.4 |
|
Purchase Agreement dated February 12, 1998, by and between
the Company and the Initial Purchasers named therein(14) |
|
4.5 |
|
Indenture, dated as of February 18, 1998, between the
Company and State Street Bank and Trust Company of California,
N.A.(14) |
|
4.6 |
|
Registration Rights Agreement, dated as of February 18,
1998, by and between the Company and the Initial Purchasers named
therein(14) |
|
4.7 |
|
The Company’s Zero Coupon Convertible Subordinated Debenture
due 2018 and the Global Form of the Company’s Zero Coupon
Convertible Subordinated Debenture due 2018 (which is identical
to the Company’s Zero Coupon Convertible Subordinated
Debenture due 2018, except for certain provisions as marked)(14) |
|
10.1.4 |
|
Western Digital Corporation Amended and Restated Employee Stock
Option Plan, as amended on November 5, 1998(18)** |
|
10.3.2 |
|
Western Digital Corporation 1993 Employee Stock Purchase Plan, as
amended on November 13, 1997(15)** |
|
10.10.1 |
|
Western Digital Corporation Deferred Compensation Plan, as
amended and restated effective January 1, 1998(13)** |
|
10.11 |
|
The Western Digital Corporation Executive Bonus Plan(6)** |
|
10.11.1 |
|
Amendment No. 1 to the Western Digital Corporation Executive
Bonus Plan(15)** |
|
10.12 |
|
The Extended Severance Plan of the Registrant(6)** |
|
10.12.1 |
|
Amendment No. 1 to the Company’s Extended Severance
Plan(9)** |
|
10.13 |
|
Manufacturing Building Lease between Wan Tien Realty Pte Ltd and
Western Digital (Singapore) Pte Ltd dated as of November 9,
1993(5) |
|
10.16.1 |
|
Western Digital Long-Term Retention Plan, as amended July
10, 1997(12)** |
|
10.16.2 |
|
Western Digital Corporation Executive Retention Plan(16)** |
|
10.17 |
|
Subleases between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of September 1, 1991(3) |
|
10.18 |
|
Sublease between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of October 12, 1992(3) |
|
10.21.1 |
|
The Company’s Non-Employee Directors Stock-For-Fees Plan,
Amended and Restated as of January 9, 1997(11)** |
65
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
|
10.22 |
|
Office Building Lease between The Irvine Company and the Company
dated as of January 13, 1988(2) |
|
10.30 |
|
The Company’s Savings and Profit Sharing Plan(7)** |
|
10.31 |
|
First Amendment to the Company’s Savings and Profit Sharing
Plan(7)** |
|
10.32 |
|
Second Amendment to the Company’s Savings and Profit Sharing
Plan(8)** |
|
10.32.1 |
|
Third Amendment to the Company’s Retirement Savings and
Profit Sharing Plan(10)** |
|
10.32.2 |
|
Fourth Amendment to the Company’s Retirement Savings and
Profit Sharing Plan(11)** |
|
10.32.3 |
|
Fifth Amendment to the Company’s Retirement Savings and
Profit Sharing Plan(15) ** |
|
10.33 |
|
The Company’s Amended and Restated Stock Option Plan for
Non-Employee Directors, amended as of July 10, 1997(12)** |
|
10.34 |
|
Fiscal Year 1999 Western Digital Management Incentive Plan(16)** |
|
10.35 |
|
Fiscal Year 1999-2000 Western Digital Bridge Incentive Plan*** |
|
10.38 |
|
Revolving Credit and Term Loan Agreement, dated as of
November 4, 1998, among Western Digital Corporation,
BankBoston, N.A. and other lending institutions listed
therein(18) |
|
10.38.1 |
|
First Amendment to Revolving Credit and Term Loan Agreement,
dated as of April 8, 1999, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein* |
|
10.38.2 |
|
Second Amendment to Revolving Credit and Term Loan Agreement,
dated as of May 7, 1999, among Western Digital Corporation,
BankBoston, N.A. and other lending institutions named therein* |
|
10.38.3 |
|
Third Amendment to Revolving Credit and Term Loan Agreement,
dated as of July 30, 1999, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein* |
|
10.38.4 |
|
Fourth Amendment to Revolving Credit and Term Loan Agreement,
dated as of August 27, 1999, among Western Digital
Corporation, BankBoston N.A. and other lending institutions named
therein* |
|
10.40 |
|
OEM Component Supply and Technology License Agreement, dated
June 7, 1998, between Western Digital Corporation and IBM
Corporation(15)(19) |
|
10.41 |
|
OEM Sales and Purchase Agreement, dated June 7, 1998,
between Western Digital Corporation and IBM Corporation(15)(19) |
|
10.42 |
|
Asset Purchase Agreement, dated April 8, 1999, by and
between Western Digital Corporation and Komag, Incorporated*** |
|
10.43 |
|
Volume Purchase Agreement, dated April 8, 1999, by and
between Western Digital Corporation and Komag, Incorporated*** |
|
21 |
|
Subsidiaries of the Company* |
|
23 |
|
Consent of Independent Auditors* |
|
27 |
|
Financial Data Schedule* |
|
|
| * |
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. |
|
|
| *** |
New exhibit filed with this Report, with confidential treatment
requested. |
| |
| (1) |
Incorporated by reference to the Company’s Registration
Statement on Form 8-B, filed April 13, 1987. |
66
|
|
| (2) |
Incorporated by reference to Amendment No. 2 to the
Company’s Annual Report on Form 10-K as filed on
Form 8 with the Securities and Exchange Commission on
November 18, 1988, and subject to confidentiality order
dated November 21, 1988. |
| |
| (3) |
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. |
| |
| (4) |
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. |
| |
| (5) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q as filed with the Securities and Exchange
Commission on January 25, 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 Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission on September 27, 1995. |
| |
| (8) |
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. |
| |
| (9) |
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. |
|
|
| (10) |
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. |
| |
| (11) |
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. |
| |
| (12) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission on September 12, 1997. |
| |
| (13) |
Incorporated by reference to the Company’s Registration
Statement on Form S-8 (No. 333-41423) as filed with the
Securities and Exchange Commission on December 3, 1997. |
| |
| (14) |
Incorporated by reference to the Company’s Registration
Statement on Form S-3 (No. 333-52463) as filed with the
Securities and Exchange Commission on May 12, 1998. |
| |
| (15) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission on September 1, 1998. |
| |
| (16) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q as filed with the Securities and Exchange
Commission on November 10, 1998. |
| |
| (17) |
Incorporated by reference to the Company’s Form 8A
(No. 001-08703) as filed with the Securities and Exchange
Commission on November 19, 1998. |
| |
| (18) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q as filed with the Securities and Exchange
Commission on February 8, 1999. |
| |
| (19) |
Subject to confidentiality order dated October 2, 1998. |
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter
of 1999.
67
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: October 1, 1999
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
October 1, 1999.
| |
|
|
| Signature |
|
Title |
|
|
|
CHARLES A. HAGGERTY
Charles A. Haggerty |
|
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer) |
| |
DUSTON M. WILLIAMS
Duston M. Williams |
|
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer) |
| |
JAMES A. ABRAHAMSON
James A. Abrahamson |
|
Director |
| |
PETER D. BEHRENDT
Peter D. Behrendt |
|
Director |
| |
I. M. BOOTH
I. M. Booth |
|
Director |
| |
IRWIN FEDERMAN
Irwin Federman |
|
Director |
| |
ANDRé R. HORN
André R. Horn |
|
Director |
| |
ANNE O. KRUEGER
Anne O. Krueger |
|
Director |
| |
THOMAS E. PARDUN
Thomas E. Pardun |
|
Director |
68
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
|
3.2.2 |
|
By-laws of the Company, as amended March 20, 1997(11) |
|
3.3 |
|
Certificate of Agreement of Merger(4) |
|
3.4.1 |
|
Certificate of Amendment and Restatement of Certificate of
Incorporation dated March 27, 1997(11) |
|
4.1.1 |
|
Rights Agreement between the Company and American Stock Transfer
and Trust Company, as Rights Agent, dated as of October 15,
1998, which includes as Exhibit B thereto the Form of Rights
Certificate to be distributed to holders of Rights after the
Distribution Date (as that term is defined in the Rights
Agreement)(17) |
|
4.2 |
|
Form of Common Stock Certificate(1) |
|
4.3 |
|
Amended Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock of the
Company* |
|
4.4 |
|
Purchase Agreement dated February 12, 1998, by and between
the Company and the Initial Purchasers named therein(14) |
|
4.5 |
|
Indenture, dated as of February 18, 1998, between the
Company and State Street Bank and Trust Company of California,
N.A.(14) |
|
4.6 |
|
Registration Rights Agreement, dated as of February 18,
1998, by and between the Company and the Initial Purchasers named
therein(14) |
|
4.7 |
|
The Company’s Zero Coupon Convertible Subordinated Debenture
due 2018 and the Global Form of the Company’s Zero Coupon
Convertible Subordinated Debenture due 2018 (which is identical
to the Company’s Zero Coupon Convertible Subordinated
Debenture due 2018, except for certain provisions as marked)(14) |
|
10.1.4 |
|
Western Digital Corporation Amended and Restated Employee Stock
Option Plan, as amended on November 5, 1998(18)** |
|
10.3.2 |
|
Western Digital Corporation 1993 Employee Stock Purchase Plan, as
amended on November 13, 1997(15)** |
|
10.10.1 |
|
Western Digital Corporation Deferred Compensation Plan, as
amended and restated effective January 1, 1998(13)** |
|
10.11 |
|
The Western Digital Corporation Executive Bonus Plan(6)** |
|
10.11.1 |
|
Amendment No. 1 to the Western Digital Corporation Executive
Bonus Plan(15)** |
|
10.12 |
|
The Extended Severance Plan of the Registrant(6)** |
|
10.12.1 |
|
Amendment No. 1 to the Company’s Extended Severance
Plan(9)** |
|
10.13 |
|
Manufacturing Building Lease between Wan Tien Realty Pte Ltd and
Western Digital (Singapore) Pte Ltd dated as of November 9,
1993(5) |
|
10.16.1 |
|
Western Digital Long-Term Retention Plan, as amended July
10, 1997(12)** |
|
10.16.2 |
|
Western Digital Corporation Executive Retention Plan(16)** |
|
10.17 |
|
Subleases between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of September 1, 1991(3) |
|
10.18 |
|
Sublease between Wan Tien Realty Pte Ltd and Western Digital
(Singapore) Pte Ltd dated as of October 12, 1992(3) |
|
10.21.1 |
|
The Company’s Non-Employee Directors Stock-For-Fees Plan,
Amended and Restated as of January 9, 1997(11)** |
|
10.22 |
|
Office Building Lease between The Irvine Company and the Company
dated as of January 13, 1988(2) |
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
|
10.30 |
|
The Company’s Savings and Profit Sharing Plan(7)** |
|
10.31 |
|
First Amendment to the Company’s Savings and Profit Sharing
Plan(7)** |
|
10.32 |
|
Second Amendment to the Company’s Savings and Profit Sharing
Plan(8)** |
|
10.32.1 |
|
Third Amendment to the Company’s Retirement Savings and
Profit Sharing Plan(10)** |
|
10.32.2 |
|
Fourth Amendment to the Company’s Retirement Savings and
Profit Sharing Plan(11)** |
|
10.32.3 |
|
Fifth Amendment to the Company’s Retirement Savings and
Profit Sharing Plan(15) ** |
|
10.33 |
|
The Company’s Amended and Restated Stock Option Plan for
Non-Employee Directors, amended as of July 10, 1997(12)** |
|
10.34 |
|
Fiscal Year 1999 Western Digital Management Incentive Plan(16)** |
|
10.35 |
|
Fiscal Year 1999-2000 Western Digital Bridge Incentive Plan*** |
|
10.38 |
|
Revolving Credit and Term Loan Agreement, dated as of
November 4, 1998, among Western Digital Corporation,
BankBoston, N.A. and other lending institutions listed
therein(18) |
|
10.38.1 |
|
First Amendment to Revolving Credit and Term Loan Agreement,
dated as of April 8, 1999, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein* |
|
10.38.2 |
|
Second Amendment to Revolving Credit and Term Loan Agreement,
dated as of May 7, 1999, among Western Digital Corporation,
BankBoston, N.A. and other lending institutions named therein* |
|
10.38.3 |
|
Third Amendment to Revolving Credit and Term Loan Agreement,
dated as of July 30, 1999, among Western Digital
Corporation, BankBoston, N.A. and other lending institutions
named therein* |
|
10.38.4 |
|
Fourth Amendment to Revolving Credit and Term Loan Agreement,
dated as of August 27, 1999, among Western Digital
Corporation, BankBoston N.A. and other lending institutions named
therein* |
|
10.40 |
|
OEM Component Supply and Technology License Agreement, dated
June 7, 1998, between Western Digital Corporation and IBM
Corporation(15)(19) |
|
10.41 |
|
OEM Sales and Purchase Agreement, dated June 7, 1998,
between Western Digital Corporation and IBM Corporation(15)(19) |
|
10.42 |
|
Asset Purchase Agreement, dated April 8, 1999, by and
between Western Digital Corporation and Komag, Incorporated*** |
|
10.43 |
|
Volume Purchase Agreement, dated April 8, 1999, by and
between Western Digital Corporation and Komag, Incorporated*** |
|
21 |
|
Subsidiaries of the Company* |
|
23 |
|
Consent of Independent Auditors* |
|
27 |
|
Financial Data Schedule* |
|
|
| * |
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. |
|
|
| *** |
New exhibit filed with this Report, with confidential treatment
requested. |
| |
| (1) |
Incorporated by reference to the Company’s Registration
Statement on Form 8-B, filed April 13, 1987. |
| |
| (2) |
Incorporated by reference to Amendment No. 2 to the
Company’s Annual Report on Form 10-K as filed on
Form 8 with the Securities and Exchange Commission on
November 18, 1988, and subject to confidentiality order
dated November 21, 1988. |
|
|
| (3) |
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. |
| |
| (4) |
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. |
| |
| (5) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q as filed with the Securities and Exchange
Commission on January 25, 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 Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission on September 27, 1995. |
| |
| (8) |
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. |
| |
| (9) |
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. |
|
|
| (10) |
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. |
| |
| (11) |
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. |
| |
| (12) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission on September 12, 1997. |
| |
| (13) |
Incorporated by reference to the Company’s Registration
Statement on Form S-8 (No. 333-41423) as filed with the
Securities and Exchange Commission on December 3, 1997. |
| |
| (14) |
Incorporated by reference to the Company’s Registration
Statement on Form S-3 (No. 333-52463) as filed with the
Securities and Exchange Commission on May 12, 1998. |
| |
| (15) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission on September 1, 1998. |
| |
| (16) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q as filed with the Securities and Exchange
Commission on November 10, 1998. |
| |
| (17) |
Incorporated by reference to the Company’s Form 8A
(No. 001-08703) as filed with the Securities and Exchange
Commission on November 19, 1998. |
| |
| (18) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q as filed with the Securities and Exchange
Commission on February 8, 1999. |
| |
| (19) |
Subject to confidentiality order dated October 2, 1998. |
