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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1999.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______to_______
Commission file number 1-8703
WESTERN DIGITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2647125
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92618
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (949) 932-5000
REGISTRANT'S WEB SITE: http://www.westerndigital.com
N/A Former name, former address and former fiscal year if
changed since last report.
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 ___
Number of shares outstanding of Common Stock, as of January 29, 2000,
is 129,078,880.
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WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three-Month Periods
Ended December 26, 1998 and December 31, 1999............................... 3
Condensed Consolidated Statements of Operations - Six-Month Periods
Ended December 26, 1998 and December 31, 1999............................... 4
Condensed Consolidated Balance Sheets - July 3, 1999 and
December 31, 1999........................................................... 5
Condensed Consolidated Statements of Cash Flows - Six-Month Periods
Ended December 26, 1998 and December 31, 1999............................... 6
Notes to Condensed Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 26
Item 2. Changes in Securities and Use of Proceeds................................... 27
Item 4. Submission of Matters to Vote of Security Holders........................... 28
Item 6. Exhibits and Reports on Form 8-K............................................ 29
Signatures.............................................................................. 30
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE-MONTH PERIOD ENDED
------------------------
DEC. 26, DEC. 31,
1998 1999
--------- ---------
Revenues, net ........................................... $ 738,590 $ 560,174
Costs and expenses:
Cost of revenues ................................... 719,423 539,932
Research and development ........................... 50,363 44,083
Selling, general and administrative ................ 47,819 39,070
Restructuring charges .............................. -- 25,535
--------- ---------
Total costs and expenses ....................... 817,605 648,620
--------- ---------
Operating loss .......................................... (79,015) (88,446)
Net interest expense .................................... (3,238) (3,028)
--------- ---------
Loss before extraordinary item .......................... (82,253) (91,474)
Extraordinary gain from redemption of debentures ........ -- 76,277
--------- ---------
Net loss ................................................ $ (82,253) $ (15,197)
========= =========
Basic and diluted loss per common share:
Loss per common share before extraordinary item .... $ (.93) $ (.76)
Extraordinary gain ................................. -- .63
--------- ---------
Loss per common share .............................. $ (.93) $ (.13)
========= =========
Common shares used in computing per share amounts:
Basic .......................................... 88,888 121,128
========= =========
Diluted ........................................ 88,888 121,128
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX-MONTH PERIOD ENDED
---------------------------------
DEC. 26, DEC. 31,
1998 1999
----------- -----------
Revenues, net ........................................... $ 1,389,448 $ 967,131
Costs and expenses:
Cost of revenues ................................... 1,453,033 1,012,232
Research and development ........................... 102,284 94,226
Selling, general and administrative ................ 105,151 82,892
Restructuring charges .............................. -- 57,835
----------- -----------
Total costs and expenses ....................... 1,660,468 1,247,185
----------- -----------
Operating loss .......................................... (271,020) (280,054)
Net interest expense .................................... (5,891) (8,357)
----------- -----------
Loss before extraordinary item .......................... (276,911) (288,411)
Extraordinary gain from redemption of debentures ........ -- 166,899
----------- -----------
Net loss ................................................ $ (276,911) $ (121,512)
=========== ===========
Basic and diluted loss per common share:
Loss per common share before extraordinary item .... $ (3.12) $ (2.66)
Extraordinary gain ................................. -- 1.54
----------- -----------
Loss per common share .............................. $ (3.12) $ (1.12)
=========== ===========
Common shares used in computing per share amounts:
Basic .......................................... 88,717 108,523
=========== ===========
Diluted ........................................ 88,717 108,523
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 3, DEC. 31,
1999 1999
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 226,147 $ 163,675
Accounts receivable, less allowance for doubtful
accounts of $18,537 at July 3, 1999 and
$17,352 at December 31, 1999 ........................... 273,435 198,360
Inventories ................................................ 144,093 101,728
Prepaid expenses & other current assets .................... 81,853 95,471
----------- -----------
Total current assets ................................... 725,528 559,234
Property and equipment at cost, net ............................. 237,939 156,891
Intangible and other assets, net ................................ 58,935 48,599
----------- -----------
Total assets ........................................... $ 1,022,402 $ 764,724
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ........................................... $ 335,907 $ 283,545
Accrued expenses ........................................... 252,791 291,195
Current portion of long-term debt .......................... 10,000 --
----------- -----------
Total current liabilities .............................. 598,698 574,740
Long-term debt .................................................. 534,144 236,291
Deferred income taxes and other ................................. 43,350 41,761
Shareholders' deficiency:
Preferred stock, $.01 par value;
Authorized: 5,000 shares
Outstanding: None ..................................... -- --
Common stock, $.01 par value;
Authorized: 225,000 shares
Outstanding: 101,908 shares at July 3, 1999
and 139,916 at December 31, 1999 ....................... 1,019 1,399
Additional paid-in capital ................................. 335,197 492,845
Accumulated deficit ........................................ (294,841) (416,353)
Accumulated other comprehensive income (loss) .............. (2,123) 23,461
Treasury stock-common stock at cost;
11,297 shares at July 3, 1999 and 10,884
shares at December 31, 1999 ............................ (193,042) (189,420)
----------- -----------
Total shareholders' deficiency ......................... (153,790) (88,068)
----------- -----------
Total liabilities and shareholders' deficiency ......... $ 1,022,402 $ 764,724
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX-MONTH PERIOD ENDED
DEC. 26, DEC. 31,
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $(276,911) $(121,512)
Adjustments to reconcile net loss to net
cash used for operating activities:
Non-Cash Items:
Depreciation and amortization ..................... 67,287 47,223
Interest accrued on convertible debentures ........ 12,317 9,617
Non-cash portion of restructuring charges ......... -- 28,804
Extraordinary gain on sale of debentures .......... -- (166,899)
Changes in assets and liabilities:
Accounts receivable ............................... (2,947) 75,075
Inventories ....................................... 25,542 42,365
Prepaid expenses .................................. 11,788 6,693
Accounts payable .................................. 55,874 (51,754)
Accrued expenses .................................. 56,322 25,479
Other ............................................. 2,396 3,670
--------- ---------
Net cash used for operating activities ......... (48,332) (101,239)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from or deposits relating to sales of
property and equipment ........................... -- 37,019
Capital expenditures, net ............................. (60,097) (13,843)
Other investments ..................................... (1,500) (2,200)
--------- ---------
Net cash provided by (used for)
investing activities ........................ (61,597) 20,976
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash used to repay bank debt (Note 5) ................. (50,000) (33,375)
Proceeds from issuance of bank debt (Note 5) .......... 50,000 --
Proceeds from ESPP shares issued and stock option
exercises ........................................ 6,684 1,627
Common stock issued ................................... -- 49,539
Costs relating to credit facility ..................... (2,925) --
Net cash provided by financing activities ...... 3,759 17,791
--------- ---------
Net decrease in cash and cash equivalents ............. (106,170) (62,472)
Cash and cash equivalents, beginning of period ........ 459,830 226,147
--------- ---------
Cash and cash equivalents, end of period .............. $ 353,660 $ 163,675
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ............... $ 3,317 $ 1,082
Cash paid during the period for interest ................... 2,136 937
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accounting policies followed by the Company are set forth in Note 1
of Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K as of and for the year ended July 3, 1999.
In the opinion of management, all adjustments necessary to fairly state
the condensed consolidated financial statements have been made. All
such adjustments are of a normal recurring nature. Certain information
and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K as of and
for the year ended July 3, 1999.
The Company has a 52 or 53-week fiscal year. In order to align its
manufacturing and financial calendars, effective during the three
months ended December 31, 1999, the Company changed its fiscal calendar
so that each fiscal month ends on the Friday nearest to the last day of
the calendar month. Prior to this change, the Company's fiscal month
ended on the Saturday nearest to the last day of the calendar month.
The change did not have a material impact on the Company's results of
operations or financial position. All general references to years
relate to fiscal years unless otherwise noted.
Certain prior periods' amounts have been reclassified to conform to the
current period presentation.
2. Supplemental Financial Statement Data (in thousands)
JULY 3, DEC. 31,
1999 1999
-------- --------
Inventories
Finished goods .............................................. $101,828 $ 67,558
Work in process ............................................. 26,307 15,344
Raw materials and component parts ........................... 15,958 18,826
-------- --------
$144,093 $101,728
======== ========
SIX-MONTH PERIOD ENDED
----------------------
DEC. 26, DEC. 31,
1998 1999
-------- --------
Supplemental disclosure of non-cash financing activities
Common stock issued for redemption of
debentures .................................................. $ -- $110,109
======== ========
Redemption of debentures for Company common stock, net of
capitalized issuance costs ................................ $ -- $277,008
======== ========
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THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
------------------------ ----------------------
DEC. 26, DEC. 31, DEC. 26, DEC. 31,
1998 1999 1998 1999
-------- -------- -------- --------
Net Interest Income (Expense)
Interest income ......... $ 4,824 $ 2,006 $ 10,115 $ 4,487
Interest expense ........ (8,062) (5,034) (16,006) (12,844)
-------- -------- -------- --------
$ (3,238) $ (3,028) $ (5,891) $ (8,357)
======== ======== ======== ========
3. Loss per Share
As of December 26, 1998 and December 31, 1999, 17.4 and 24.0 million
shares, respectively, relating to the possible exercise of outstanding
stock options were not included in the computation of diluted loss per
share. As of December 26, 1998 and December 31, 1999, an additional
19.4 and 8.4 million shares, respectively, issuable upon conversion of
the convertible debentures were excluded from the computation of
diluted loss per share. The effects of these items were not included in
the computation of diluted loss per share as their effect would have
been anti-dilutive.
In September 1999, the Company's Board of Directors approved a
"Broad-Based" Incentive Stock Plan (the "Broad-Based Plan") under which
options to purchase shares of common stock may be granted to employees
of the Company and others. On October 20, 1999, the Board of Directors
approved a grant to its regular, non-direct labor employees of
approximately 2.4 million shares under the Broad-Based Plan and the
Company's Employee Stock Option Plan, at $3.31 per share, the fair
value of the Company's common stock on the date of the grant. The
options granted vest 100% one year from the date of grant.
On September 10, 1998, the Company's Board of Directors authorized and
declared a dividend distribution of one Right for each share of common
stock of the Company outstanding at the close of business on November
30, 1998. In addition, the Company's Board of Directors authorized the
issuance of one Right for each share of common stock of the Company
issued from the record date until certain dates as specified in the
Company's rights agreement dated as of October 15, 1998, pursuant to
which the Company's then existing shareholders rights plan was replaced
by a successor ten year plan. The Rights issued become exercisable for
common stock at a discount from market value upon certain events
related to a change in control.
4. Common Stock Transactions
During the six-month period ended December 31, 1999, the Company issued
approximately 362,000 shares of its common stock in connection with
Employee Stock Purchase Plan ("ESPP") purchases and issued 52,000
shares of its common stock in connection with common stock option
exercises, for an aggregate of $1.6 million. During the corresponding
period of the prior year, the Company issued approximately 325,000
shares of its common stock in connection with ESPP purchases and
493,000 shares of its common stock in connection with common stock
option exercises, for an aggregate of $6.7 million.
Under an existing equity facility, the Company may issue for cash,
shares of common stock to institutional investors in monthly increments
of $12.5 million. The facility provides for up to $150.0 million in
cash proceeds of which $49.5 million had been utilized as of December
31, 1999. Shares paid under the facility are at the market price of the
Company's common stock less a discount ranging from 2.75% to 4.25%.
During the six-month period ended December 31, 1999, the Company issued
26.7 million shares of common stock to redeem its 5.25% zero coupon
convertible subordinated debentures (the "Debentures") with a carrying
value of $284.1 million, and an aggregate principal amount at maturity
of $735.6 million. These redemptions were private, individually
negotiated transactions with certain institutional investors. The
redemptions resulted in extraordinary gains of $166.9 million during
the six months ended December
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31, 1999. As of December 31, 1999, the carrying value of the remaining
outstanding Debentures was $219.7 million and the aggregate principal
amount at maturity was $561.6 million.
5. Credit Facility
The Company has a secured revolving credit and term loan facility
("Senior Bank Facility") which, as amended on January 15, 2000,
provided the Company with up to a $125.0 million revolving credit line
(depending on the borrowing base calculation) and a $50.0 million term
loan (of which $16.6 million was outstanding as of December 31, 1999).
Borrowings under the Senior Bank Facility are 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 and, at the option of the Company, 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. This facility matures on March 31, 2000, and
further borrowings through such date are not allowed. As of the date
hereof, the remaining balance on the term loan has been repaid using
the proceeds from the equity facility. The Company has received a
proposal for a new credit facility, including a term loan. As of the
date hereof, the terms and conditions of this proposal have not been
finalized.
6. Sales of Real Property
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 January 2001, and has an
option to extend the lease for an additional five month period.
In December 1999, the Company agreed to sell a manufacturing facility
in Tuas, Singapore for cash proceeds of $11.0 million. In January 2000,
the Company also agreed to sell its Rochester, Minnesota facility for
cash proceeds of approximately $30.0 million. These transactions are
expected to close, subject to customary closing conditions, in the
quarter ending March 31, 2000, each with a minimal gain or loss.
7. Restructuring Activities
During the six months ended December 31, 1999, the Company initiated a
restructuring program which is intended to improve operational
effectiveness and efficiency and reduce operational expenses worldwide.
Charges related to the restructuring actions taken are accrued in the
periods in which executive management commits to execute such actions.
Committed actions for the six months ended December 31, 1999 include
reorganization of operational and management responsibilities, transfer
of hard drive production from Singapore to the Company's manufacturing
facility in Malaysia, and closure of the Company's Singapore
operations. These actions will result in a net reduction of world-wide
headcount of approximately 1,000, of which approximately 100 will be
management, professional and administrative personnel and the remainder
will be manufacturing employees. In Asia, approximately 3,800 employees
will be reduced from the Company's Singapore operation and
approximately 2,900 will be added in Malaysia in connection with the
transfer of production. Restructuring charges recorded in connection
with these actions totaled $57.8 million for the six-month period ended
December 31, 1999 and consist of severance and outplacement costs of
$18.0 million, write-offs of manufacturing equipment and information
systems assets no longer utilized as a result of the actions of $28.8
million, and lease cancellation and other costs of $11.0 million.
Following is a summary of the charges, the amounts paid and the ending
accrual balance (in thousands):
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SIX-MONTH PERIOD ENDED
DECEMBER 31, 1999
----------------------
Non-Cash
Accruals Charges Total
-------- ------- -----
Equipment and information systems
asset write-offs $ -- $28,822 $28,822
Severance and outplacement 18,028 -- 18,028
Lease cancellation and other 10,985 -- 10,985
------- ------- -------
Total charges 29,013 $28,822 $57,835
======= =======
Cash utilized 7,456
-------
Balance at December 31, 1999 $21,557
=======
The Company expects that remaining accruals for severance and
outplacement of $10.1 million will be paid in the third and fourth
quarters of 2000. Lease cancellation and other costs are expected to be
paid over the 24 months beginning October 3, 1999. The Company expects
the aforementioned restructuring actions to be completed no later than
June 30, 2000.
The equipment to be disposed of was determined to have minimal salvage
value.
On January 19, 2000, the Company announced that it will exit the
enterprise hard drive business and shift its strategic focus and
resources in the enterprise storage market to Internet-related data
content management systems and management software. In connection with
this decision, the Company closed its Rochester, Minnesota enterprise
hard drive design center, and a majority of the 420 employees in the
design center have been laid off and given legally required
notification and outplacement services. The exit from the enterprise
business will result in nonrecurring charges against operations in the
quarter ended March 31, 2000. The Company currently estimates these
charges to include $25.0 million for property and equipment write-offs,
and $11.0 million for severance ($8.0 million relating to domestic
operations). The Company is currently analyzing the effect of this
decision on inventory purchase commitments and the price levels that
may be needed to sell the Company's remaining enterprise products.
Accordingly, additional reserves and accruals may be needed for
purchase order cancellations, purchase price protection, inventory
write-downs and other costs flowing from the Company's decision to
exit. The Company estimates that the restructuring effort will be
substantially completed by June 30, 2000.
As of December 31, 1999, the accrued expenses for the Company's 1999
restructuring efforts were substantially utilized.
8. Product Recall
On September 27, 1999, the Company announced a recall of its 6.8GB per
platter series of WD Caviar(R) desktop hard drives 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. Replacement of the chips
involved rework of the printed circuit board assembly. Revenues of
approximately $100 million related to the products which were recalled
were reversed in the three months ended October 2, 1999. In addition,
the Caviar product line was shut down for approximately two weeks,
eliminating approximately $70 million of forecasted revenue during the
three months ended October 2, 1999. Cost of revenues for the three
months ended October 2, 1999, included charges totaling $37.7 million
for estimated costs to recall and repair the affected drives, including
$23.1 million for repair and retrieval, $4.5 million for freight and
other, and $10.1 million for write-downs of related inventory. By the
end of the three months ended December 31, 1999, the Company had
completed
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rework on approximately 78% of the 1.2 million units and had resolved
its claims against third parties resulting from the recall.
9. Investments in Marketable Securities
The Company owns approximately 10.8 million shares of Komag common
stock, which when acquired on April 8, 1999, 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 restrictions will lapse over a
three and one-half year period. As of December 31, 1999, approximately
60% of these shares may be sold within 12 months. Because the Company
has identified these shares as "available for sale" under the
provisions of Statement of Financial Accounting Standards No. 115,
"Investments in Certain Debt and Equity Securities" ("SFAS 115"), they
have been marked to market value using published closing prices of
Komag stock as of December 31, 1999. Accordingly, an incremental
unrealized gain of approximately $1.4 million was recorded during the
six months ended December 31, 1999, and a total accumulated unrealized
loss of $0.7 million is included in accumulated other comprehensive
income (loss). The aggregate carrying value of the shares, which
approximates market value, is $34.2 million as of December 31, 1999, of
which $20.2 million relates to "available for sale" shares and is
classified as current.
The Company owns approximately 1.3 million shares of Vixel Corporation
("Vixel") common stock, all of which are restricted as to sale until
March 28, 2000, pursuant to an agreement with Vixel's underwriters. The
Company has identified these shares as "available for sale" under the
provisions of SFAS 115. During the three months ended October 2, 1999,
Vixel completed an initial public offering and the shares were marked
to market value. Accordingly, an unrealized gain of $24.2 million was
recorded in accumulated other comprehensive income (loss) during the
three months ended October 2, 1999. The investment in Vixel common
stock is classified as current. As of December 31, 1999, the quoted
market value of the Company's Vixel common stock approximated its
carrying value.
10. Other Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), beginning with the
Company's fourth quarter of 1999. Prior to the fourth quarter of 1999,
the Company did not possess any components of other comprehensive
income as defined by SFAS 130. SFAS 130 separates comprehensive income
into two components; net income and other comprehensive income (loss).
Other comprehensive income (loss) refers to revenue, expenses, gains
and losses that are recorded as an element of shareholders' equity but
are excluded from net income. While SFAS 130 establishes new rules for
the reporting and display of comprehensive income (loss), SFAS 130 has
no impact on the Company's net loss or total shareholders' deficiency.
The Company's other comprehensive income (loss) is comprised of
unrealized gains and losses on marketable securities categorized as
"available for sale" under SFAS 115. The components of total
comprehensive loss for the three and six-month periods ended December
31, 1999 were as follows (in millions):
Three-Month Six-Month
Period Ended Period Ended
Dec. 31, 1999 Dec. 31, 1999
------------- -------------
Net loss $(15.2) $(121.5)
Other comprehensive income:
Unrealized gain on available for
sale investments, net 1.5 25.6
------ -------
Total comprehensive loss $(13.7) $ (95.9)
====== =======
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11. 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, and the Company
has filed motions seeking recovery of a portion of its legal and other
costs of defense. 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 and/or
liquidity. In addition, the costs of defending a retrial of the case
may be material, regardless of the outcome.
In 1994 Papst Licensing ("Papst") brought suit against the Company in
the 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/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 royalties, if any, 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 and/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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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:
- the financial prospects of the Company
- the Company's financing plans
- litigation and other contingencies potentially affecting the
Company's financial position, operating results, or liquidity
- trends affecting the Company's financial condition or
operating results
- the Company's strategies for growth, operations, product
development and commercialization
- 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 captions "Risk factors related to the hard drive industry in which we
operate" and "Risk Factors relating to Western Digital particularly" 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.
RECENT DEVELOPMENTS
During the six months ended December 31, 1999, the Company initiated a
restructuring program which is intended to improve operational effectiveness and
efficiency and reduce operational expenses worldwide. Charges related to the
restructuring actions taken are accrued in the periods in which executive
management commits to execute such actions. Committed actions for the six months
ended December 31, 1999 include reorganization of operational and management
responsibilities, transfer of hard drive production from Singapore to the
Company's manufacturing facility in Malaysia, and closure of the Company's
Singapore operations. These actions will result in a net reduction of world wide
headcount of approximately 1,000, of which approximately 100 will be management,
professional and administrative personnel and the remainder will be
manufacturing employees. In Asia, approximately 3,800 employees will be reduced
from the Company's Singapore operation and approximately 2,900 will be added in
Malaysia in connection with the transfer of production. Restructuring charges
recorded in connection with these actions totaled $57.8 million for the
six-month period ended December 31, 1999 and consist of severance and
outplacement costs of $18.0 million, write-offs of manufacturing equipment and
information systems assets no longer utilized as a result of the actions of
$28.8 million, and lease cancellation and other costs of $11.0 million. The
Company expects that remaining accruals for severance and outplacement of $10.1
million will be paid in the third and fourth quarters of 2000. Lease
cancellation and other costs are expected to be paid over the 24 months
beginning October 3, 1999. The Company expects the aforementioned restructuring
actions to be completed no later than June 30, 2000.
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).
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The Company has extended the current lease of its worldwide headquarters in
Irvine, California, through January 2001, and has an option to extend the lease
for an additional five month period.
On September 27, 1999, the Company announced a recall of its 6.8GB per platter
series of WD Caviar(R) desktop hard drives 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. Replacement of the chips involved rework of the printed circuit board
assembly. Revenues of approximately $100 million related to the products which
were recalled were reversed in the three months ended October 2, 1999. In
addition, the Caviar product line was shut down for approximately two weeks,
eliminating approximately $70 million of forecasted revenue during the three
months ended October 2, 1999. Cost of revenues for the three months ended
October 2, 1999, included charges totaling $37.7 million for estimated costs to
recall and repair the affected drives, including $23.1 million for repair and
retrieval cost, $4.5 million for freight and other, and $10.1 million for
write-downs of related inventory. By the end of the three months ended December
31, 1999, the Company had completed rework on approximately 78% of the 1.2
million units and had resolved its claims against third parties resulting from
the recall.
In December 1999, the Company agreed to sell a manufacturing facility in Tuas,
Singapore for cash proceeds of $11.0 million. In January 2000, the Company also
agreed to sell its Rochester, Minnesota facility for cash proceeds of
approximately $30.0 million. These transactions are expected to close, subject
to customary closing conditions, in the quarter ending March 31, 2000, each with
a minimal gain or loss.
On January 19, 2000, the Company announced that it will exit the enterprise hard
drive business and shift its strategic focus and resources in the enterprise
storage market to Internet-related data content management systems and
management software. In connection with this decision, the Company closed its
Rochester, Minnesota enterprise hard drive design center, and a majority of the
420 employees in the design center have been laid off and given legally required
notification and outplacement services. The exit from the enterprise business
will result in nonrecurring charges against operations in the quarter ended
March 31, 2000. The Company currently estimates these charges to include $25.0
million for property and equipment write-offs, and $11.0 million for severance
($8.0 million relating to domestic operations). The Company is currently
analyzing the effect of this decision on inventory purchase commitments and the
price levels that may be needed to sell the Company's remaining enterprise
products. Accordingly, additional reserves and accruals may be needed for
purchase order cancellations, purchase price protection, inventory write-downs
and other costs flowing from the Company's decision to exit. The Company
estimates that the restructuring effort will be substantially completed by June
30, 2000.
RESULTS OF OPERATIONS
Consolidated revenues were $560.2 million for the three months ended December
31, 1999, a decrease of 24%, or $178.4 million, from the three months ended
December 26, 1998 and an increase of 38%, or $153.2, from the immediately
preceding quarter. The lower revenues during the three months ended December 31,
1999, as compared to the corresponding period of the prior year, resulted from a
decline in unit shipments of approximately 2% combined with reductions in the
average selling prices ("ASPs") of hard drive products due to an intensely
competitive hard drive business environment. The increase in revenue for the
three months ended December 31, 1999, from the immediately preceding quarter
resulted primarily from higher volume (an increase in unit shipments of 56%)
following the product recall in the immediately preceding quarter, as discussed
above, offset by lower ASPs.
Consolidated revenues were $967.1 million for the six months ended December
31,1999, down 30% from the six months ended December 26, 1998. The lower
revenues resulted from a decline in unit shipments of approximately 13%, which
was largely due to the product recall in the three months ended October 2, 1999,
combined with lower ASPs.
The gross profit for the three months ended December 31, 1999, totaled $20.2
million, or 4% of revenue. This compares to a gross profit of $19.2 million, or
3% of revenue, for the three months ended December 26, 1998 and a negative gross
profit of $65.3 million, or negative 16% of revenue, for the immediately
preceding quarter. The negative gross profit in the immediately preceding
quarter included a $37.7 million special charge relating to the product recall.
Excluding the special charge, the consolidated gross margin percentage in the
immediately preceding quarter was negative 7%. The increase in gross profit over
the three months ended
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December 26, 1998 and the immediately preceding quarter (excluding special
charges) was primarily the result of lower manufacturing costs, due to the
restructuring and transfer of all desktop production to a single, highly
utilized facility in Malaysia. The consolidated negative gross profit for the
six months ended December 31, 1999, totaled $7.4 million, or negative 1% of
revenue (excluding the aforementioned special charges of $37.7 million). This
compares to a gross profit for the six months ended December 26, 1998 of $13.4
million, or 1% of revenue (excluding special charges of $77 million). The
decline in the gross profit for the six-month period was the result of lower
volumes due to the product recall and lower ASPs, offset by the Company's
restructuring and cost-cutting efforts.
Research and development ("R&D") expense for the three months ended December 31,
1999 was $44.1 million, a decrease of $6.3 million from the three months ended
December 26, 1998 and a decrease of $6.1 million from the immediately preceding
quarter. R&D expense for the six months ended December 31, 1999 was $94.2
million, a decrease of $8.1 million from the six months ended December 26, 1998.
The decrease in R&D expenses was primarily due to the Company's cost-cutting
efforts, particularly costs associated with HDD development, offset partially by
increased spending at Connex, the Company's subsidiary, and other product line
development efforts.
Selling, general and administrative ("SG&A") expense in the three months ended
December 31, 1999 was $39.1 million, a decrease of $8.7 million from the three
months ended December 26, 1998 and a decrease of $4.8 million from the
immediately preceding quarter. The decrease in SG&A expense for the three months
ended December 31, 1999 compared to the three months ended December 26, 1998 and
the immediately preceding quarter was primarily due to a lower revenue base and
cost-cutting efforts, particularly costs associated with the Company's HDD
business, offset partially by increased spending at Connex and other of the
Company's developing ventures. SG&A expense was $82.9 million for the six months
ended December 31, 1999, a decrease of $22.3 million from the six months ended
December 26, 1998. The decrease was the result of cost-cutting efforts and the
nonrecurrence of a $7.5 million special charge on terminated hedging contracts
recorded in SG&A expense during the six months ended December 26, 1998.
Net interest expense for the three months ended December 31, 1999 was $3.0
million, compared to net interest expense of $3.2 million for the three months
ended December 26, 1998 and net interest expense of $5.3 million in the
immediately preceding quarter. The decrease in net interest expense for the
three months ended December 31, 1999, was attributable to lower interest expense
on the Company's Debentures (the average carrying value of the Company's
Debentures was lower due to the Debenture redemptions which occurred during the
current quarter). Net interest expense was $8.4 million for the six months ended
December 31, 1999 as compared to net interest expense of $5.9 million for the
six months ended December 26, 1998. The increase in net interest expense was the
result of a decrease in interest expense on the Company's Debentures offset by a
greater decrease in interest income earned on lower average cash and cash
equivalents balances.
The Company initiated significant restructuring efforts during the six months
ended December 31, 1999. The Company recorded restructuring charges of
approximately $32.3 million and $25.5 million during the three months ended
October 2, 1999 and the three months ended December 31, 1999, respectively. The
charges related to severance and outplacement, the write-off of fixed assets,
lease cancellation and other charges, as discussed above.
During the six months ended December 31, 1999, the Company issued common stock
in exchange for Debentures which were retired in non-cash transactions. These
redemptions were private, individually negotiated transactions with certain
institutional investors. The redemptions resulted in an extraordinary gain of
$90.6 million during the three months ended October 2, 1999 and an extraordinary
gain of $76.3 million during the three months ended December 31, 1999.
The Company did not record an income tax benefit in any periods presented as no
additional loss carrybacks were available and management deemed it "more likely
than not" that the deferred tax benefits generated would not be realized.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of $163.7
million as compared to $226.1 million at July 3, 1999 and $185.1 million at
October 2, 1999. Net cash used in operations was $10.2 million and $101.2
million for the three and six months ended December 31, 1999, respectively, as
compared to $25.0 million and $48.3 million for the comparable periods of the
prior year. Net cash used in operations for the three months ended December 31,
1999 decreased by $79.6 million as compared to the immediately preceding quarter
as a result of significantly lower operating losses offset in part by lower
depreciation and non-cash debenture interest and by a return to more normal
inventory and accounts receivable positions following the Company's product
recall.
Net cash used in operations for the six months ended December 31, 1999 increased
by $52.9 million as compared to the six months ended December 26, 1998 due to
slightly higher operating losses offset by depreciation and non-cash debenture
interest and by the utilization of warranty accruals established for thin-film
products in the prior year.
Operating cash flows provided by changes in working capital amounted to $39.1
million and $101.6 million for the three and six months ended December 31, 1999
and reflect the Company's management of operating assets and liabilities during
the period. For the three months ended December 31, 1999, the Company's days of
sales outstanding ("DSO") was 32 days, inventory turned 21 times and days of
payables outstanding was 48 days. Comparable measures for the three months ended
October 2, 1999 are not meaningful due to the impact of the product recall on
the Company's working capital balances at October 2, 1999. For the three months
ended July 3, 1999, the Company's DSO was 38 days, inventory turned 19 times and
days of payables outstanding was 48 days. The Company expects that the third
quarter DSO will increase to a more normal level of between 36 and 40.
Other uses of cash during the six months ended December 31, 1999 included $33.4
million to repay bank debt and net capital expenditures of $13.8 million
primarily to upgrade the Company's desktop production capabilities and for
normal replacement of existing assets. Partially offsetting the use of cash
during the period were proceeds of $49.5 million received upon issuance of 11.2
million shares of the Company's stock under the Company's Equity Facility, and
$37 million received as proceeds and deposits relating to the sale of real
property during the period.
The Company anticipates that capital expenditures for the remainder of 2000 will
not be more than $25 million and will relate to accommodating new technologies
and new product lines, normal replacement of existing assets and expansion of
production capabilities in Malaysia. The Company also anticipates cash
expenditures of approximately $24.2 million to be paid in the remaining six
months of 2000 for severance and outplacement costs and lease cancellation and
other costs of vacating leased properties related to the Company's restructuring
programs. These amounts exclude any settlements with vendors on existing
purchase orders related to the Company's exit of its enterprise business.
The Senior Bank Facility, as amended on January 15, 2000, provides the Company
with up to a $125.0 million revolving credit line (depending on the borrowing
base calculation) and a $50.0 million term loan (of which $16.6 million was
outstanding as of December 31, 1999). Borrowings under the Senior Bank Facility
are 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 and, at the option of the Company, 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. This facility matures on March
31, 2000, and further borrowings through such date are not allowed. As of the
date hereof, the remaining balance on the term loan has been repaid. The Company
has received a proposal for a new credit facility, including a term loan. As of
the date hereof, the terms and conditions of this proposal have not been
finalized.
Under an existing equity facility, the Company may issue for cash shares of
common stock to institutional investors in monthly increments of $12.5 million.
The facility provides for up to $150.0 million in cash proceeds of which $49.5
million had been utilized as of December 31, 1999. Shares paid under the
facility are at the market price of the Company's common stock less a discount
ranging from 2.75% to 4.25%. During the six months ended December 31, 1999, the
Company issued 11.2 million shares of common stock under the Equity Facility for
net proceeds of $49.5 million.
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During the six months ended December 31, 1999, the Company issued 26.7 million
shares of common stock in exchange for Debentures with a carrying value of
$284.1 million, and an aggregate principal amount at maturity of $735.6 million.
These redemptions were private, individually negotiated transactions with
certain institutional investors. The redemptions resulted in extraordinary gains
of $166.9 million during the six months ended December 31, 1999. As of December
31, 1999, the carrying value of the remaining outstanding Debentures was $219.7
million and the aggregate principal amount at maturity was $561.6 million.
The Company expects to continue to incur operating losses in 2000. The Company
also had a working capital deficiency of $15.5 million and a shareholders'
deficiency of $88.1 million as of December 31, 1999. However, the Company had
cash balances of $163.7 million as of December 31, 1999. In addition, the
Company has restructured portions and continues to restructure other elements
of its operations. In addition, the Company has other sources of liquidity
available. In light of these conditions, the Company has the following plans and
other options:
- The Company plans to reduce expenses and capital expenditures
substantially as compared to historical levels due to:
-- Recent restructurings;
-- Reduced general and administrative spending; and
-- Reduced infrastructure resulting from the closure of
its Santa Clara, California disk media operations,
its disk drive manufacturing facilities in Tuas and
Chai Chee, Singapore, and its enterprise hard drive
design center in Rochester, Minnesota.
- The Company has the following additional sources of liquidity
available to it:
-- $150.0 million Equity Facility ($49.5 million of
which had been utilized as of December 31, 1999);
-- $30.0 million resulting from the sale of the
Rochester, Minnesota facility, subject to customary
closing conditions; and
-- Other equity investments that may be disposed of
during 2000, including 6.5 million shares of Komag
common stock and 1.3 million shares of Vixel common
stock with a combined market value of approximately
$44.4 million as of December 31, 1999.
-- The Company is also pursuing other possible external
sources of equity financing in its developing
subsidiaries.
Based on the above factors, the Company believes its current cash balances, its
existing equity facility, and other liquidity vehicles currently available to
it, will be sufficient to meet its working capital needs through the next twelve
months. There can be no assurance that a new bank facility or the equity
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 relating 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 for
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 SFAS 133 is not expected to have a
material impact on the Company's consolidated financial position, results of
operations or liquidity.
YEAR 2000
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On January 1, 2000, the Company incurred nominal impact on its products,
equipment, computer systems and applications as a result of the Year 2000 issue.
The Company attributes this to its Year 2000 readiness efforts. As of December
31, 1999, systems remediation and integration testing and development of the
Company's contingency plans had been completed. Supplier management is an
ongoing process, and no material impact was felt from lack of supplier readiness
at January 1, 2000. Although the Company did not experience any material
problems related to the Year 2000 issue, there can be no assurances that
problems relating to the Year 2000 issue will not manifest themselves in the
future. Expenditures related to the Year 2000 project, excluding normal
replacement of existing capital assets, totaled approximately $12.2 million .
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:
- consistently maintain and improve our time-to-market
performance with our new products
- produce these products in sufficient volume within our rapid
product cycle
- qualify these products with key customers on a timely basis by
meeting our customer's performance and quality specifications,
or
- 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 make it difficult to recover the cost of development.
Over the past two years hard drive areal density (the gigabytes of
storage per disk) has increased at a much more rapid pace than previously, and
we expect this trend to continue. Higher areal densities mean that fewer heads
and disks are required to achieve a given drive capacity. This has significantly
shortened product life cycles, since each generation of drives is more cost
effective than the previous one. Shorter product cycles make it more difficult
to recover the cost of product development
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 market. These risks are magnified because we expect cost improvements and
competitive pressures to result in declining sales and gross margins on our
current generation products.
Our average selling prices and our revenue are declining.
We expect that our average selling prices for hard disk drives will
continue to decline. Rapid increases in areal density mean that the average
drive we sell has fewer heads and disks, and is therefore lower cost. Because of
the competitiveness of the hard drive industry, lower costs generally mean lower
prices. This is true even for those products that are competitive and introduced
into the market in a timely manner. Our average selling prices decline even
further when competitors lower prices to absorb excess capacity, liquidate
excess inventories, restructure or attempt to gain market share.
Unexpected technology advances in the hard drive industry could harm our
competitive position.
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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.
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 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.
Our prices and margins are subject to declines due to unpredictable end-user
demand and oversupply of hard disk drives.
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 the second half
of 1998 and throughout 1999, as a result of excess inventory in the desktop hard
drive market, aggressive pricing and corresponding margin reductions materially
adversely affected our operating results. We experienced similar conditions in
the high-end hard drive market during most of 1998 and 1999.
Changes in the markets for hard drives require us to develop new products.
Over the past few years the consumer market for desktop computers has
shifted significantly towards lower priced systems, especially those systems
priced below $1,000. If we do not develop lower cost hard drives that can
successfully compete in this market, our market share will 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.
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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 of our employees. 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, for the
six month period ended December 31, 1999, sales to our top 10 customers
accounted for approximately 62% 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. For
example, this occurred early in the third quarter of 2000 in our enterprise hard
drive business and is one of the factors which led to the Company's decision to
exit the enterprise hard drive business and close its Rochester, Minnesota
facility.
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 only 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. This occurred
in September 1999 when we had to shut down our Caviar product line production
for approximately two weeks as a result of a faulty power driver chip which was
sole-sourced from a third-party supplier.
To reduce the risk of component shortages, 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, as we did in
1998 when we accelerated our transition to magnetoresistive recording head
technology, and as we are doing as a result of our decision to exit the
enterprise hard drive business.
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.
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 one manufacturing facility, which subjects us to the risk of damage
or loss of the facility.
Our volume manufacturing operations currently are based in one facility. A
fire, flood, earthquake or other disaster or condition affecting our facility
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:
- obtaining requisite United States and foreign governmental permits and
approvals
- currency exchange rate fluctuations or restrictions
- political instability and civil unrest
- transportation delays or higher freight rates
- labor problems
- trade restrictions or higher tariffs
- exchange, currency and tax controls and reallocations
- 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.
Our plan to broaden our business in data and content management, storage and
communication takes us into new markets.
We have recently entered the storage subsystem market through our Connex
subsidiary. In this market 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 will depend on Connex's ability to develop, introduce
and achieve market acceptance of new products, applications and product
enhancements, and to attract and retain skilled engineers. Additionally, our
competitors in this market have established intellectual property portfolios.
Our success will also 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.
We also expect to enter the data warehouse software and services market
through our SageTree subsidiary and are considering other initiatives related to
data and content management, storage and communication. In any of these
initiatives we will be facing the challenge of developing products and services
for markets that are still evolving and which have many current and potential
competitors.
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 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.
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.
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:
- the timing of orders from and shipment of products to major customers
- our product mix
- changes in the prices of our products
- manufacturing delays or interruptions
- acceptance by customers of competing products in lieu of our products
- variations in the cost of components for our products
- limited access to components that we obtain from a single or a limited
number of suppliers, such as Komag
- competition and consolidation in the data storage industry
- 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:
- accruals for warranty against product defects
- price protection adjustments on products sold to resellers and
distributors
- inventory adjustments for write-down of inventories to fair value
- reserves for doubtful accounts
- 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:
- actual or anticipated fluctuations in our operating results
- 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
- new products introduced by us or our competitors
- periods of severe pricing pressures due to oversupply or price erosion
resulting from competitive pressures
- developments with respect to patents or proprietary rights
- conditions and trends in the hard drive industry
- 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. Our
current borrowing agreement with our banks terminates no later than March 31,
2000, and we have agreed that we will not borrow under the agreement. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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. From time to time, 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, the British Pound 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 December 31, 1999, the Company had outstanding the following purchased
foreign currency forward exchange contracts (in millions, except average
contract rate):
DECEMBER 31, 1999
-----------------------------------------------
WEIGHTED
CONTRACT AVERAGE UNREALIZED
AMOUNT CONTRACT RATE GAIN*
-------- ------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
Foreign currency forward contracts:
Singapore Dollar .................... $ 9.0 1.67 $ .2
British Pound Sterling .............. 3.2 1.63 --
------ ------
$ 12.2 $ .2
====== ======
- ------------
* The unrealized gains 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 gain is offset by the increased U.S.
Dollar value of the local currency operating expense.
During the three and six months ended December 31, 1999 and 1998 total realized
transaction and forward exchange contract currency gains and losses (excluding
the $7.5 million realized loss on the Malaysian Ringgit realized in the first
quarter of 1999), were immaterial to the consolidated financial statements.
Based on historical experience, the Company does not expect that a significant
change in foreign exchange rates (up to approximately 25%) would materially
affect the Company's consolidated financial statements.
DISCLOSURE ABOUT OTHER MARKET RISKS
Fixed Interest Rate Risk
At December 31, 1999, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $81.4 million,
compared to the related carrying value of $219.7 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 payment on
those dates, with the exception of a Fundamental Change, can be in cash, stock
or any combination, at the Company's option.
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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 term loan bearing interest at LIBOR or a base rate plus
margin determined by the borrowing base with an approximate current interest
rate of 7.9%, as part of its Senior Bank Facility. This facility will terminate
no later than March 31, 2000, and the balance has been repaid. As a result, the
Company currently has no variable interest rate risk, and no further borrowings
will be allowed during the remaining term of its Senior Bank Facility loan.
Fair Value Risk
The Company owns approximately 10.8 million shares of Komag, Inc. common stock.
The stock is restricted as to the percentage of total shares which can be sold
in a given time period. The unrestricted portion of the total Komag shares
acquired represents the shares which can be sold within one year. The Company
determines, 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 December 31, 1999, a $0.7 million total accumulated
unrealized loss has been recorded in accumulated other comprehensive income
(loss). 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 approximately 30% or more) could
occur, and this decline could adversely impact the Company's consolidated
financial statements. As of December 31, 1999, the quoted market value of the
Company's Komag common stock holdings, without regard to discounts due to sales
restrictions, was $33.7 million.
The Company owns approximately 1.3 million shares of Vixel common stock. The
shares are restricted as to sale until March 28, 2000 pursuant to an agreement
with Vixel's underwriters. The Company determines, on a quarterly basis, the
fair market value of the Vixel shares and records an unrealized gain or loss
resulting from the difference in the fair market value of the shares as of the
previous quarter end and the fair market value of the shares on the measurement
date. As of December 31, 1999, a $24.2 million total accumulated unrealized gain
has been recorded in accumulated other comprehensive income (loss). If the
Company sells all or a portion of this common 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 as of December 31, 1999 (of approximately 40% or more)
could occur, and this decline could adversely impact the Company's consolidated
financial statements.
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PART II. OTHER INFORMATION
ITEM 1. 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 and/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, and the Company has filed motions seeking recovery of a
portion of its legal and other costs of defense. 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 and/or liquidity. In addition, the costs of defending a retrial
of the case may be material, regardless of the outcome.
In 1994 Papst Licensing ("Papst") brought suit against the Company in the
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/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 royalties, if any, 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 and/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 consolidated financial position, results of operations and/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 consolidated financial position,
results of operations and/or liquidity.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended December 31, 1999, the Company engaged in
transactions pursuant to which it exchanged an aggregate principal amount at
maturity of $303.5 million of the Company's Zero Coupon Convertible
Subordinated Debentures due 2018, for an aggregate of 11.7 million shares of
the Company's common stock. These transactions were undertaken, in reliance
upon the exemption from the registration requirements of the Securities Act
afforded by Section 3(a)(9) thereof, as exchanges of securities by the
Company with its existing security holders. No commission or other
remuneration was paid or given directly or indirectly for such exchanges.
These exchanges were consummated in private, individually negotiated
transactions with institutional investors.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 18, 1999. The
shareholders elected the following seven directors to hold office until the next
annual meeting and until their successors are elected and qualified:
Number of Votes
---------------
For Withheld
--- --------
James A. Abrahamson 96,975,134 3,115,298
Peter D. Behrendt 96,981,406 3,103,412
I. M. Booth 96,954,381 3,155,935
Charles A. Haggerty 96,910,097 3,239,812
Andre R. Horn 96,972,074 3,120,075
Anne O. Krueger 96,985,045 3,096,268
Thomas E. Pardun 96,984,379 3,097,092
In addition, the shareholders approved the following proposals:
Number of Votes
---------------
For Against Abstentions
--- ------- -----------
1. To approve the amendment to the Company's Employee
Stock Purchase Plan authorizing an additional
4,000,000 shares. 94,857,139 4,770,455 589,654
2. To ratify the selection of KPMG LLP as independent
accountants for the Company for the fiscal year
ended June 30, 2000. 98,740,089 1,058,010 419,150
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.3 Western Digital Corporation 1993 Employee Stock
Purchase Plan, as amended on November 18, 1999. *
10.22.1 Second Amendment to Lease, dated January 6, 1999,
by and between The Irvine Company and Western
Digital Corporation.
10.22.2 Letter Agreement dated December 21, 1999, by and
between The Irvine Company and Western Digital
Corporation.
10.35 Fiscal Year 2000 Western Digital Management
Incentive Plan.
10.38.5 Fifth Amendment to Revolving Credit and Term Loan
Agreement, dated as of January 14, 2000, among
Western Digital Corporation, BankBoston N.A., and
other lending institutions named therein.
10.44 Agreement dated October 7, 1999, by and between
the Company and Russell R. Stern.
10.45 Western Digital Corporation 1999 Employee
Severance Plan for U.S. Employees.
27 Financial Data Schedule
- -------------------------------
* Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (No. 333-95499) as filed with the
Securities and Exchange Commission on January 27, 2000.
(b) REPORTS ON FORM 8-K:
On October 4, 1999, the Company filed a current report on Form 8-K to
announce the close of a transaction to retire in the aggregate $100
million principal amount of convertible debentures in exchange for shares
of its common stock.
On October 7, 1999, the Company filed a current report on Form 8-K to
announce the close of a transaction to retire in the aggregate $125
million principal amount of convertible debentures in exchange for shares
of its common stock.
On October 21, 1999, the Company filed a current report on Form 8-K to
file its press release dated October 20, 1999, announcing its first
quarter results.
On November 18, 1999, the Company filed a current report on Form 8-K to
announce its retirement, in aggregate, of $303.5 million principal amount
of its convertible debentures in exchange for shares of its common stock.
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SIGNATURES
Pursuant to the requirements 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
---------------------------
Registrant
/s/Teresa Hopp
--------------
Teresa Hopp
Senior Vice President
and Chief Financial Officer
Date: February 14, 2000
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Exhibit Index
Exhibit No. Description
----------- -----------
10.3 Western Digital Corporation 1993 Employee Stock
Purchase Plan, as amended on November 18, 1999. *
10.22.1 Second Amendment to Lease, dated January 6, 1999,
by and between The Irvine Company and Western
Digital Corporation.
10.22.2 Letter Agreement dated December 21, 1999, by and
between The Irvine Company and Western Digital
Corporation.
10.35 Fiscal Year 2000 Western Digital Management
Incentive Plan.
10.38.5 Fifth Amendment to Revolving Credit and Term Loan
Agreement, dated as of January 14, 2000, among
Western Digital Corporation, BankBoston N.A., and
other lending institutions named therein.
10.44 Agreement dated October 7, 1999, by and between
the Company and Russell R. Stern.
10.45 Western Digital Corporation 1999 Employee
Severance Plan for U.S. Employees.
27 Financial Data Schedule
- -------------------------------
* Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (No. 333-95499) as filed with the
Securities and Exchange Commission on January 27, 2000.