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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 October 2, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92618
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(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 October 30, 1999,
is 112,323,538.
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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 September 26, 1998 and October 2, 1999 ................3
Condensed Consolidated Balance Sheets - July 3, 1999 and
October 2, 1999 .....................................................4
Condensed Consolidated Statements of Cash Flows - Three-Month
Periods Ended September 26, 1998 and October 2, 1999 ................5
Notes to Condensed Consolidated Financial Statements ................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................12
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 6. Exhibits and Reports on Form 8-K....................................28
Signatures...................................................................29
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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
--------------------------
SEPT. 26, OCT. 2,
1998 1999
--------- ---------
Revenues, net .................................... $ 650,858 $ 406,957
Costs and expenses:
Cost of revenues ........................... 733,610 472,300
Research and development ................... 51,921 50,143
Selling, general and administrative ........ 57,332 43,822
Restructuring charges ...................... -- 32,300
--------- ---------
Total costs and expenses .............. 842,863 598,565
--------- ---------
Operating loss ................................... (192,005) (191,608)
Net interest expense ............................. (2,653) (5,329)
--------- ---------
Loss before extraordinary item ................... (194,658) (196,937)
Extraordinary gain from redemption of debentures . -- 90,622
--------- ---------
Net loss ......................................... $(194,658) $(106,315)
========= =========
Basic and diluted loss per common share:
Loss per share before extraordinary item ... $ (2.20) $ (2.05)
Extraordinary gain ......................... -- .94
--------- ---------
Loss per share ............................. $ (2.20) $ (1.11)
========= =========
Common shares used in computing per share amounts:
Basic ................................. 88,545 95,918
========= =========
Diluted ............................... 88,545 95,918
========= =========
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)
(UNAUDITED)
JULY 3, OCT. 2,
1999 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 226,147 $ 185,054
Accounts receivable, less allowance for doubtful
accounts of $18,537 at July 3, 1999 and
$17,528 at October 2, 1999 ....................................... 273,435 87,255
Inventories ........................................................... 144,093 207,741
Prepaid expenses ...................................................... 44,672 45,675
----------- -----------
Total current assets ............................................. 688,347 525,725
Property and equipment at cost, net ......................................... 237,939 186,981
Intangible and other assets, net ............................................ 96,116 117,506
----------- -----------
Total assets ..................................................... $ 1,022,402 $ 830,212
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ...................................................... $ 335,907 $ 272,949
Accrued compensation .................................................. 31,136 27,524
Accrued warranty ...................................................... 78,187 66,336
Accrued expenses ...................................................... 171,388 197,259
Current portion of long-term debt ..................................... 10,000 10,000
----------- -----------
Total current liabilities ........................................ 626,618 574,068
Long-term debt .............................................................. 534,144 371,365
Deferred income taxes ....................................................... 15,430 15,476
Commitments and contingent liabilities:
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 123,209 at October 2, 1999 ................................... 1,019 1,232
Additional paid-in capital ............................................ 335,197 436,725
Accumulated deficit ................................................... (294,841) (401,156)
Accumulated other comprehensive income (loss) ......................... (2,123) 21,923
Treasury stock-common stock at cost;
11,297 shares at July 3, 1999 and 10,885
shares at October 2, 1999 ........................................ (193,042) (189,421)
----------- -----------
Total shareholders' deficiency ................................... (153,790) (130,697)
----------- -----------
Total liabilities and shareholders' deficiency ................... $ 1,022,402 $ 830,212
=========== ===========
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)
THREE-MONTH PERIOD ENDED
--------------------------
SEPT. 26, OCT. 2,
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(194,658) $(106,315)
Adjustments to reconcile net loss to net
cash used for operating activities:
Non-Cash Items:
Depreciation and amortization .......................... 33,597 24,690
Interest accrued on convertible debentures ............. 6,119 6,079
Non-cash portion of restructuring provision ............ -- 14,029
Extraordinary gain on redemption of debentures ......... -- (90,622)
Changes in assets and liabilities:
Accounts receivable .................................... (9,282) 186,180
Inventories ............................................ 19,013 (63,648)
Prepaid expenses ....................................... 1,191 (4,891)
Intangible and other assets ............................ 1,652 (1,473)
Accounts payable ....................................... 73,206 (62,958)
Accrued compensation ................................... 10,103 (3,612)
Accrued warranty ....................................... 54,366 (11,851)
Accrued expenses ....................................... (18,396) 24,571
Deferred income taxes .................................. (214) 46
--------- ---------
Net cash used for operating activities ............. (23,303) (89,775)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of land ................................................ -- 26,019
Capital expenditures, net ................................... (36,036) (7,526)
Other investment ............................................ -- (1,100)
--------- ---------
Net cash provided by (used for) investing activities (36,036) 17,393
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options ................................... 589 122
Proceeds from ESPP shares issued ............................ 3,073 1,502
Payment on term loan ........................................ -- (2,500)
Common stock issued ......................................... -- 32,165
--------- ---------
Net cash provided by financing activities .......... 3,662 31,289
--------- ---------
Net increase decrease in cash and cash equivalents .......... (55,677) (41,093)
Cash and cash equivalents, beginning of period .............. 459,830 226,147
--------- ---------
Cash and cash equivalents, end of period .................... $ 404,153 $ 185,054
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ...................... $ 1,272 $ 294
Cash paid during the period for interest .......................... 1,012 991
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
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.
2. Supplemental Financial Statement Data (in thousands)
JULY 3, OCT. 2,
1999 1999
-------- --------
Inventories
Finished goods ................................... $101,828 $179,135
Work in process .................................. 26,307 12,361
Raw materials and component parts ................ 15,958 16,245
-------- --------
$144,093 $207,741
======== ========
Supplemental disclosure of non-cash investing activities
Net mark to market increase on available for sale
investments ................................... $ -- $ 24,046
======== ========
Supplemental disclosure of non-cash financing activities
Stock issued for redemption of debentures ......... $ -- $ 71,572
======== ========
Redemption of debentures for Company stock,
net of capitalized issuance costs .... ........ $ -- $162,194
======== ========
THREE-MONTH PERIOD ENDED
------------------------
SEPT. 26, OCT. 2,
1998 1999
------- -------
Net Interest Income (Expense)
Interest income ........... $ 5,292 $ 2,480
Interest expense .......... (7,945) (7,809)
------- -------
$(2,653) $(5,329)
======= =======
3. Loss per Share
For the three-month periods ended September 26, 1998 and October 2, 1999,
13.9 and 17.9 million shares, respectively, relating to the possible
exercise of outstanding stock options were not included in the computation
of diluted loss per share. For the three-month periods ended September 26,
1998 and October 2, 1999, an additional 19.4 and 12.9 million shares,
respectively, issuable upon conversion of the convertible debentures were
excluded from the computation of diluted loss per share, respectively. The
effects of these items were not included in the computation of diluted loss
per share as their effect would have been anti-dilutive.
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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 all regular
non-direct labor employees of the Company. On October 20, 1999, the Board
of Directors approved a grant of approximately 2.4 million shares under the
Broad-Based Plan, at $3.31 per share, the fair value of the Company's
Common Stock on 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
existing shareholders rights plan will be 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 three-month period ended October 2, 1999, the Company issued
approximately 362,000 and 51,000 shares of its common stock in connection
with the Employee Stock Purchase Plan ("ESPP") and common stock option
exercises, respectively, for an aggregate of $1.6 million. During the
corresponding period of the prior year, the Company issued approximately
325,000 and 85,000 shares of its common stock in connection with the ESPP
and common stock option exercises, respectively, for an aggregate of $3.7
million.
The Company has an equity drawdown facility ("Equity Facility") which
allows the Company to issue up to $150.0 million (in monthly increments of
up to $12.5 million) in common stock to institutional investors for cash at
the market price of its stock less a discount ranging between 2.75% and
4.25%. During the period from July 16, 1999 through September 29, 1999, the
Company issued 6.2 million shares of common stock under the Equity Facility
for net proceeds of $32.2 million.
During the period from July 27, 1999 through October 1, 1999, the Company
issued 15.1 million shares of common stock to redeem its 5.25% zero coupon
convertible subordinated debentures (the "Debentures") with a carrying
value of $166.4 million, and an aggregate principal amount at maturity of
$432.1 million, 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 quarter due to the difference between the
carrying value of the Debentures and the market value of the common stock
issued by the Company at the time of the redemptions. As of the quarter
ended October 2, 1999, the carrying value and aggregate principal amount at
maturity of the remaining outstanding Debentures was $333.9 million and
$865.1 million, respectively.
5. Line of Credit
The Senior Bank Facility 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 ($47.5 million was outstanding as of October 2,
1999), both of which expire in November 2001. The Senior Bank Facility is
secured by the Company's accounts receivable, inventory, 66% of its stock
in its foreign subsidiaries and the other assets (excluding real property)
of the Company. At the option of the Company, borrowings bear interest at
either LIBOR or a base rate plus a margin determined by the borrowing base,
with option periods of one to three months. The Senior Bank Facility
requires the Company to maintain certain amounts of net equity, prohibits
the payment of cash dividends on common stock and contains a number of
other covenants. The Company is not in default under the Senior Bank
Facility. However, as of the first quarter ended October 2, 1999, the
borrowing base was significantly reduced as a result of lower accounts
receivable balances at October 2, 1999, due to the product recall, and the
Company has agreed that it will not borrow against the borrowing base until
a review of the borrowing base is completed and agreement is reached as to
the valuation of certain assets. The availability of this facility will
depend upon, among other things, such valuation and compliance by the
Company with the covenants of the facility. The total costs of the product
recall announced on September 27, 1999 may result in the Company not being
in compliance with certain financial covenants in the Senior Bank Facility
in future periods. As of the date hereof, the $47.5 million term loan was
funded, but there were no borrowings under the revolving credit line. The
term loan requires
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quarterly payments of $2.5 million with the remaining balance due in
November 2001. During the current quarter the Company made a $2.5 million
payment on the term loan and $47.5 million was outstanding as of the
quarter ended October 2, 1999.
6. Sale of Land
On August 9, 1999, the Company sold approximately 34 acres of land in
Irvine, California, upon which it had previously planned to build a new
corporate headquarters, for $26 million (the approximate cost of the land).
The Company has extended the current lease of its worldwide headquarters in
Irvine, California, through December 2000, and has an option to extend the
lease for an additional six month period.
7. Restructuring Programs
On July 8, 1999, a restructuring of operations and management
responsibilities was executed. The structural change establishes a
Worldwide Operations and Geographies structure and a Lines of Business/
Research and Development organization (LOB). Each of the Geographies will
be responsible for their own operating results, field sales, customer and
channel business management and channel marketing in their respective
regions. The restructure resulted in a reduction of worldwide employee
headcount of approximately 42 employees (compared to the original plan of
40), approximately 25 of which were direct and indirect labor and the rest
were management, professional and administrative personnel. For the quarter
ended October 2, 1999, the Company recorded a charge to operations of
approximately $2 million consisting primarily of severance and outplacement
accruals. As of October 2, 1999, approximately $1.7 million remained
accrued for payments expected to occur substantially in the second and
third quarters of 2000.
Following is a reconciliation of the original accrual, cash charges, and
the remaining accrual (in millions):
Original restructuring accrual $ 2.0
Cash utilized (.3)
------
Balance at October 2, 1999 $ 1.7
======
There have been no significant changes to the original restructuring
charges or accrual estimates.
On August 13, 1999, the Company initiated a restructuring plan which will
move substantially all of its production of desktop hard drives to
Malaysia, while expanding Singapore's role in design, development and
manufacturing process engineering. The Company expects that the transfer of
production of desktop hard drives to its Malaysia facility will result in a
reduction of employee headcount in Singapore by the end of December 1999 of
approximately 2,000 direct and 500 indirect workers. The Company also
expects that the transfer of desktop hard drive production to its Malaysia
facility will result in an employee headcount increase in Malaysia of
approximately 2,000 workers by the end of December 1999. As of October 2,
1999, a headcount reduction in Singapore of 895 direct and 98 indirect
workers and a headcount increase in Malaysia of 861 direct and 119 indirect
workers had occurred. For the quarter ended October 2, 1999, the Company
recorded a $30.3 million charge to operations consisting of approximately
$14.1 million for the write-off of fixed assets to be disposed of, employee
severance and outplacement costs of approximately $11.0 million and lease
cancellations and other costs of approximately $5.2 million. During the
first quarter ended October 2, 1999, severance payments of approximately
$1.1 million were made. The remaining $9.9 million of severance and
outplacement charges are to be paid by the end of the second quarter ending
December 31, 1999. The $5.2 million of lease cancellation and other costs
is expected to be paid over 24 months beginning October 3, 1999, and the
remaining $14.1 million represents non-cash charges.
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As of the first quarter ended October 2, 1999, the Company estimates that
approximately 10% of the restructuring effort has been completed. Following
is a reconciliation of the original accrual, cash charges, and the
remaining accrual (in millions):
Original restructuring accrual $ 30.3
Non-cash charges (14.1)
Cash utilized (1.1)
------
Balance at October 2, 1999 $ 15.1
======
There have been no significant changes to the original restructuring
charges or accrual estimates. The value of the equipment to be disposed of
was determined to have minimal salvage value.
As of October 2, 1999, the accrued expenses for the Company's fiscal 1999
restructuring efforts were substantially utilized.
8. Product Recall
On September 27, 1999, the Company recalled approximately 400,000 of its
6.8GB per platter series of WD Caviar 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, and the Company has identified the
remaining affected drives as either in the Company's or its customers'
inventory. As of October 21, 1999, the Company had captured and begun
rework on approximately 90% of the 1.2 million units manufactured with the
faulty chip. Replacement of the chips will involve rework of the printed
circuit board assembly. For the first quarter ended October 2, 1999, the
Company recorded $37.7 million of special charges to cost of sales for the
estimated cost of recalling and repairing the affected drives. Of the $37.7
million total charges, $23.1 million was accrued for repair and retrieval
cost with expected payment in the Company's second and third quarters
ending December 31, 1999 and April 1, 2000 , $4.5 million was accrued for
freight and other costs for expected payment in the second quarter ending
December 31, 1999, and the remaining $10.1 million represents valuation
adjustments on related inventory which the Company expects will re-ship to
customers at prices lower than cost due to the time delay.
9. Investments in Marketable Securities
The Company owns approximately 10.8 million shares of Komag common stock,
which at the time of acquisition 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. Approximately 45% of these shares are
capable of being sold within 12 months. As 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 October 2, 1999.
Accordingly, an incremental unrealized loss of approximately $0.2 million
was recorded during the quarter ended October 2, 1999, and a total
accumulated unrealized loss of $2.3 million is included in accumulated
other comprehensive income. The aggregate carrying value of the shares is
$32.7 million as of October 2, 1999. As of October 2, 1999, the quoted
market value of the Company's Komag common stock holdings, without regard
to discounts due to sales restrictions, was $33.4 million. All of the Komag
common stock is included in other assets.
The Company owns approximately 1.3 million shares of Vixel Corporation
("Vixel") common stock. As Vixel closed an initial public offering during
the quarter ended October 2, 1999, the Company has identified the Vixel
shares as "available for sale" under the provisions of SFAS 115. The shares
have been marked to market value during the quarter ended October 2, 1999,
and accordingly, an unrealized gain of $24.2 million was recorded in
accumulated other comprehensive income. The shares are restricted as to
sale until March 28, 2000, pursuant to an agreement with Vixel's
underwriters. All of the Vixel common stock is included in other assets.
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10. Other Comprehensive Income
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. Other comprehensive income 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, SFAS 130 has no impact on the Company's net loss or total
shareholders' deficit. The Company's other comprehensive income is
comprised of unrealized gains and losses on marketable securities
categorized as available for sale. The components of total comprehensive
loss for the three-month period ended October 2, 1999 were as follows (in
millions):
Net loss $ (106.3)
Other comprehensive income:
Unrealized gain on
investments, net 24.0
--------
Total comprehensive loss $ (82.3)
========
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. The Company does not believe that the ultimate resolution of
this matter will have a material adverse effect on the financial position,
results of operations or liquidity of the Company. However, should the
judgment be reversed on appeal, and if in a retrial of the case Amstrad
were to prevail, the Company may be required to pay damages and other
expenses, which may have a material adverse effect on the Company's
financial position, results of operations or liquidity. n addition, the
costs of defending a retrial of the case may be material, regardless of the
outcome.
On February 26, 1999, the Lemelson Foundation ("Lemelson") sued the Company
and 87 other companies in the U.S. District Court for the District of
Arizona. The complaint alleges infringement of numerous patents held by Mr.
Jerome H. Lemelson relating to, among other matters, "machine vision,"
"computer image analysis," and "automatic identification." The Company has
reached preliminary agreement with Lemelson concerning a fully paid-up
license of the patents, and Lemelson has filed a voluntary dismissal
without prejudice of the complaint against the Company. The amounts to be
paid under the paid-up license had been accrued at October 2, 1999. Based
upon the information presently known to management, the Company does not
believe that the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. However, because of the nature and inherent
uncertainties of litigation, should the outcome of this action be
unfavorable, the Company may be required to pay damages and other expenses,
which may have a material adverse effect on the Company's financial
position, results of operations or liquidity. In addition, the costs of
defending such litigation may be material, regardless of the outcome.
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In 1994 Papst Licensing ("Papst") brought suit against the Company in U.S.
District Court for the Central District of California alleging infringement
by the Company of five of its patents relating to disk drive motors that
the Company purchases from motor vendors. Later that year Papst dismissed
its case without prejudice, but it has notified the Company that it intends
to reinstate the suit if the Company does not agree to enter into a license
agreement with Papst. Papst has also put the Company on notice with respect
to several additional patents. The Company does not believe that the
ultimate resolution of this matter will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
However, because of the nature and inherent uncertainties of litigation,
should the outcome of this action be unfavorable, the Company may be
required to pay damages and other expenses, which may have a material
adverse effect on the Company's financial position, results of operations
or liquidity. In addition, the costs of defending such litigation may be
material, regardless of the outcome.
On July 2, 1999, Magnetic Media Development, LLC ("Magnetic Media") brought
suit against the Company in the United States District Court for the
Northern District of California. The suit alleges infringement by the
Company of four patents allegedly owned by Magnetic Media. The Company has
reached an agreement with Magnetic Media concerning a fully paid up license
covering the patents that are the subject of the complaint. The amounts to
be paid under the paid-up license had been accrued at October 2, 1999. The
Company does not believe that the outcome of this matter will have a
material adverse effect on its financial position, results of operations or
liquidity. However, because of the nature and inherent uncertainties of
litigation, should the outcome of this action be unfavorable, the Company
may be required to pay damages and other expenses, which may have a
material adverse effect on the Company's financial position, results of
operations or liquidity. In addition, the costs of defending such
litigation may be material, regardless of the outcome.
The Company and Censtor Corporation ("Censtor") have had discussions
concerning any royalties that might be due Censtor under a licensing
agreement. Censtor has initiated arbitration procedures under the agreement
seeking payment of royalties. In response, the Company has filed a
complaint in federal court seeking a determination that the patents at
issue are invalid. The federal court action has been stayed pending
completion of the arbitration procedures. The Company does not believe that
the outcome of this dispute will have a material adverse effect on its
financial position, results of operations or liquidity.
In the normal course of business, the Company receives and makes inquiry
regarding possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend
licenses or negotiate settlements. Although patent holders often offer such
licenses, no assurance can be given that a license will be offered or that
the terms of any license offered will be acceptable to the Company. Several
such matters are currently pending. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
From time to time the Company receives claims and is a party to suits and
other judicial and administrative proceedings incidental to its business.
Although occasional adverse decisions (or settlements) may occur, the
Company believes that the final disposition of such matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
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This report contains forward-looking statements within the meaning of
federal securities laws. The statements that are not purely historical
should be considered forward-looking statements. Often they can be
identified by the use of forward-looking words, such as "may," "will,"
"could," "project," "believe," "anticipate," "expect," "estimate,"
"continue," "potential," "plan," "forecasts," and the like. Statements
concerning current conditions may also be forward-looking if they imply a
continuation of current conditions. These statements appear in a number of
places in this report and include statements regarding the intentions,
plans, strategies, beliefs or current expectations of the Company with
respect to, among other things:
- the financial prospects of the Company
- the Company's financing plans
- litigation and other contingencies potentially affecting the Company's
financial position or operating results
- 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 caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this report, as well as the Company's other reports
filed with the Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
On July 8, 1999, a restructuring of operations and management responsibilities
was executed. The structural change establishes a Worldwide Operations and
Geographies structure and a Lines of Business/Research and Development
organization (LOB). Each of the Geographies will be responsible for their own
operating results, field sales, customer and channel business management and
channel marketing in their respective regions. The restructure resulted in a
reduction of worldwide employee headcount of approximately 42 employees
(compared to the original plan of 40), 25 of which were direct and indirect
labor and the rest were management, professional and administrative personnel.
For the quarter ended October 2, 1999, the Company recorded a charge to
operations of approximately $2 million consisting primarily of severance and
outplacement accruals. As of October 2, 1999, approximately $1.7 million
remained accrued for payments expected to occur substantially in the second and
third quarters of 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). The Company
has extended the current lease of its worldwide headquarters in Irvine,
California, through December 2000, and has an option to extend the lease for an
additional six month period.
On August 13, 1999, the Company initiated a restructuring plan which will move
substantially all of its production of desktop hard drives to Malaysia, while
expanding Singapore's role in design, development and manufacturing process
engineering. The Company continues to evaluate its manufacturing capacity
requirements and the efficiencies of its manufacturing operations in light of
its reduced volumes. The Company expects that the transfer of production of
desktop hard drives to its Malaysia facility will result in a reduction of
employee headcount in Singapore by the end of December 1999 of approximately
2,000 direct and 500 indirect workers. The Company also expects that the
transfer of desktop hard drive production to its Malaysia facility will result
in an employee headcount increase in Malaysia of approximately 2,000 workers by
the end of December 1999. As of October 2, 1999, a headcount reduction in
Singapore of 895 direct and 98 indirect
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workers and a headcount increase in Malaysia of 861 direct and 119 indirect
workers had occurred. For the quarter ended October 2, 1999, the Company
recorded a $30.3 million charge to operations consisting of approximately $14.1
million for the write-off of fixed assets to be disposed of, employee severance
and outplacement costs of approximately $11.0 million and lease cancellations
and other costs of approximately $5.2 million. During the quarter ended October
2, 1999, severance payments of approximately $1.1 million were made. The
remaining $9.9 million of severance and outplacement charges are to be paid by
the end of the second quarter ending December 31, 1999. The $5.2 million of
lease cancellation and other costs is expected to be paid over 24 months
beginning October 3, 1999, and the remaining $14.1 million represents non-cash
charges.
On September 27, 1999, the Company recalled approximately 400,000 of its 6.8GB
per platter series of WD Caviar 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, and the Company has identified the remaining affected drives as either in
the Company's or its customers' inventory. As of October 21, 1999, the Company
had captured and begun rework on approximately 90% of the 1.2 million units
manufactured with the faulty chip. Replacement of the chips will involve rework
of the printed circuit board assembly. For the first quarter ended October 2,
1999, the Company recorded $37.7 million of special charges to cost of sales for
the estimated cost of recalling and repairing the affected drives. Of the $37.7
million total charges, $23.1 million was accrued for repair and retrieval cost
with expected payment in the Company's second and third quarters ending December
31, 1999 and April 1, 2000, $4.5 million was accrued for freight and other costs
for expected payment in the second quarter ending December 31, 1999, and the
remaining $10.1 million represents valuation adjustments on related inventory
which the Company expects will re-ship to customers at prices lower than cost
due to the time delay. Revenues of approximately $100 million related to the
products which were recalled were reversed in the first quarter ending October
2, 1999. In addition to the revenue reversal, the Caviar product line was shut
down for approximately 2 weeks, eliminating approximately $70 million of
forecasted revenue during the first quarter. The Company has not yet determined
how much of the potential loss might be recoverable from insurance sources and
from the supplier of the faulty chip. As of the quarter ended October 2, 1999,
the Company did not have the ability to reasonably estimate the impact of the
product recall on the Company's sales and operations for the second quarter
ending December 31, 1999 or the remaining quarters of fiscal year 2000.
RESULTS OF OPERATIONS
Consolidated revenues were $407 million in the first quarter, a decrease of 37%,
or $243.9 million, from the first quarter of the prior year and a decrease of
43%, or $302.3 million, from the immediately preceding quarter. Approximately
$170 million of this decrease was due to the impact of the product recall as
discussed above. Lower revenues in the current quarter as compared to the
corresponding quarter of the prior year resulted from a 27% decline in hard
drive unit shipments combined with reductions in the average selling prices
("ASPs") of hard drive products due to an intensely competitive hard drive
business environment. Lower revenues in the current quarter as compared to the
immediately preceding quarter resulted from a 41% decline in hard drive unit
shipments combined with further reductions in ASPs.
The consolidated negative gross profit in the current quarter totaled $65.3
million, or 16% of revenue. This compares to a consolidated negative gross
profit of $82.8 million, or 13% of revenue, for the corresponding period of the
prior year and a positive gross profit of $20.9 million, or 3% of revenue, for
the immediately preceding quarter. The gross loss in the current quarter
includes a $37.7 million special charge relating to the product recall. The
gross loss in the corresponding period of the prior year includes a $77 special
charge to increase warranty accruals associated with the Company's last
generations of thin-film desktop products. Excluding the aforementioned special
charges, consolidated gross margin percentages in the current quarter were
negative 7% as compared to negative 1% in the corresponding period of the prior
year and a positive gross profit of 3% in the immediately preceding quarter.
Excluding the aforementioned special charges, the decline in gross margin
percentage points was primarily due to a decrease in hard drive unit shipments
and lower ASPs for the Company's products.
The accrual for warranty decreased $11.9 million or 15% from the immediately
preceding quarter. The decrease in warranty accruals compared to the
corresponding period of the prior year and immediately preceding quarter was
primarily due to the continued utilization of the $77 million special charge
described
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above for repair or replacement of the Company's last generations of thin-film
desktop products returned during the quarter and general utilization.
Research and development ("R&D") expense for the current quarter was $50.1
million, a decrease of $1.8 million from the corresponding quarter of the prior
year and an decrease of $1.9 million from the immediately preceding quarter. R&D
in the first quarter includes approximately $3.7 million for Connex, Inc., a
wholly owned subsidiary of the Company ("Connex"). The decrease in other R&D
expenses is primarily due to the Company's cost cutting efforts.
The Company is continuing the Connex development efforts and expects to begin
shipping the first new products developed by Connex in January 2000. Connex R&D
spending in the first quarter was approximately $3.7 million. The primary risks
and uncertainties associated with timely completion of the projects lie in the
Company's ability to attract and retain qualified software engineers in the
current competitive environment. Should the projects not be completed on a
timely basis, the Company's first-to-market advantages would be reduced (e.g.
lower margins), or an alternative technology might be developed by a competitor
which could severely impact the marketability of the Company's planned products.
Should the projects prove to be unsuccessful, the impact on the fiscal year 2000
results of operations would primarily consist of the engineering and start up
efforts incurred to complete the projects for which there would be no future
value, plus the costs of any new efforts on replacement projects and/or costs to
unwind the infrastructure if a decision were made not to pursue new efforts.
Selling, general and administrative ("SG&A") expense in the current quarter were
$43.8 million, a decrease of $13.5 million from the corresponding quarter of the
prior year and a decrease of $0.8 million from the immediately preceding
quarter. The first quarter SG&A expense includes approximately $1.6 million
Connex G&A infrastructure spending. The decrease in SG&A expense in the current
quarter compared to the corresponding period of the prior year was primarily due
to a $7.5 million foreign currency-related special charge in the first quarter
of 1999 and lower selling and marketing expenses in the current quarter due to a
lower revenue base. The sequential decrease in SG&A expense was primarily due to
reduced selling expenses in the current quarter due to a lower revenue base and
cost-cutting efforts.
Net interest expense for the current quarter was $5.3 million, compared to net
interest expense of $2.7 million in the corresponding quarter of the prior year
and net interest expense of $5.8 million in the immediately preceding quarter.
The increase in net interest expense compared to the corresponding period of the
prior year was attributable to a decrease in interest income earned on lower
average cash and cash equivalent balances on hand during the current quarter.
The decrease in net interest compared to the immediately preceding quarter was
due to lower interest expense recorded 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).
The Company did not record an income tax benefit in any periods presented as no
additional loss carrybacks were available and management deemed it was more
likely than not that the deferred tax benefits generated would not be realized.
LIQUIDITY AND CAPITAL RESOURCES
At October 2, 1999, the Company had $185.1 million of cash and cash equivalents
as compared with $226.1 million at July 3, 1999. Net cash used for operating
activities was $89.8 million during the current quarter as compared to net cash
used for operating activities of $23.3 million in the corresponding period of
the prior year. Cash flows resulting from lower accounts receivable and higher
accrued expenses were more than offset by higher inventory balances, lower
payables, lower accrued warranty and the net loss (net of non-cash charges).
Other uses of cash during the quarter include net capital expenditures of $7.5
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 quarter were proceeds of $32.2 million received for 6.2 million
shares of the Company's stock which were issued under the Company's Equity
Facility, and $26 million received for the sale of land during the quarter.
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The Company anticipates that capital expenditures for the remaining quarters of
2000 will total approximately $70 million and will relate to retooling of the
Company's hard drive assembly lines in order to accommodate new technologies and
new product lines, normal replacement of existing assets and expansion of
production capabilities in Malaysia. The Company's 2000 research and development
and administrative infrastructure development programs include total planned
spending of approximately $13 million during the second and third quarters
ending December 31, 1999 and April 1, 2000, to complete development and support
of its first products by Connex, which are scheduled to begin shipping in
January 2000. The Company also anticipates cash expenditures of approximately
$13.6 million to be paid in the remaining quarters of 2000 for severance and
outplacement costs and lease cancellations and other costs of vacating leased
properties related to the Company's 1999 and 2000 restructuring programs.
The Senior Bank Facility 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 ($47.5 million was outstanding as of October 2, 1999), both of
which expire in November 2001. The Senior Bank Facility is secured by the
Company's accounts receivable, inventory, 66% of its stock in its foreign
subsidiaries and the other assets (excluding real property) of the Company. At
the option of the Company, borrowings bear interest at either LIBOR or a base
rate plus a margin determined by the borrowing base, with option periods of one
to three months. The Senior Bank Facility requires the Company to maintain
certain amounts of net equity, prohibits the payment of cash dividends on common
stock and contains a number of other covenants. The Company is not in default
under the Senior Bank Facility. However, as of the first quarter ended October
2, 1999, the borrowing base was significantly reduced as a result of lower
accounts receivable balances at October 2, 1999, due to the product recall, and
the Company has agreed that it will not borrow against the borrowing base until
a review of the borrowing base is completed and agreement is reached as to the
valuation of certain assets. The availability of this facility will depend upon,
among other things, such valuation and compliance by the Company with the
covenants of the facility. The total costs of the product recall announced on
September 27, 1999 may result in the Company not being in compliance with
certain financial covenants in the Senior Bank Facility in future periods. As of
the date hereof, the $47.5 million term loan was funded, but there were no
borrowings under the revolving credit line. The term loan requires quarterly
payments of $2.5 million with the remaining balance due in November 2001. During
the current quarter the Company made a $2.5 million payment on the term loan and
$47.5 million was outstanding as of the quarter ended October 2, 1999.
The Company has an Equity Facility which allows the Company to issue up to
$150.0 million (in monthly increments of up to $12.5 million) in common stock to
institutional investors for cash at the market price of its stock less a
discount ranging between 2.75% and 4.25%. During the period from July 16, 1999
through September 29, 1999, the Company issued 6.2 million shares of common
stock under the Equity Facility for net proceeds of $32.2 million.
During the period from July 27, 1999 through October 1, 1999, the Company issued
15.1 million shares of common stock in exchange for Debentures with a carrying
value of $166.4 million, and an aggregate principal amount at maturity of $432.1
million, 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 quarter due to the difference between the carrying value of the
Debentures and the market value of the common stock issued by the Company at the
time of the redemptions.
The Company expects to continue to incur operating losses in 2000. The Company
also had negative shareholders' equity as of October 2, 1999. However, the
Company had cash balances of $185.1 million as of October 2, 1999. In addition,
the Company has restructured or is in the process of restructuring its
operations and has other sources of liquidity available. In light of these
conditions, the Company has the following plans and other options:
- 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
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-- Reduced infrastructure resulting from the April 8, 1999 sale of its
Santa Clara disk media operations.
- The Company has the following additional sources of liquidity
available to it:
-- $150.0 million Equity Facility ($32.2 million of which had been
utilized as of September 29, 1999);
-- Other unencumbered real estate which can be sold or financed; and
-- Other equity investments that may be disposed of during 2000.
Based on the above factors, the Company believes its current cash balances, its
Equity Facility, and other liquidity vehicles currently available to it, will be
sufficient to meet its working capital needs through fiscal 2000. There can be
no assurance that the Senior 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 or
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. Application of this Statement's requirements is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or liquidity.
YEAR 2000
The Company has considered the impact of Year 2000 issues on its products,
computer systems and applications and is working aggressively to achieve Year
2000 readiness. Overall Company readiness includes systems remediation,
integration testing and supplier management. As of the end of the current
quarter, systems remediation and integration testing and development of the
Company's contingency plans have been completed. Supplier management is an
ongoing process and will continue up to and including a period of time after
January 1, 2000. Expenditures related to the Year 2000 project, which excludes
normal replacement of existing capital assets, total approximately $12 million
through October 2, 1999, and are expected to amount to approximately $13 million
in total. For an additional discussion of Year 2000 issues, see "Risk factors
relating to Western Digital particularly."
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
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then our market share would be adversely affected, which would harm our
operating results.
Short product life cycles force us to continually qualify new products with our
customers.
Due to short product life cycles, we must regularly engage in new product
qualification with our customers. To be considered for qualification we must be
among the leaders in time-to-market with our new products. Once a product is
accepted for qualification testing, any failure or delay in the qualification
process can result in our losing sales to that customer until the next
generation of products is introduced. The effect of missing a product
qualification opportunity is magnified by the limited number of high volume
computer manufacturers, most of which continue to consolidate their share of the
PC and enterprise markets. This issue is particularly acute in the enterprise
portion of the market because the product life cycles for enterprise hard drives
are longer than those for desktop drives. These risks are magnified because we
expect technological changes, short product life cycles and intense competitive
pressures to result in declining sales and gross margins on our current
generation products.
We must complete our transition to giant magnetoresistive head technology.
We began the transition to giant magnetoresistive head technology in 1999,
and all of our new products in 2000 will incorporate this technology. Unlike our
transition to magnetoresistive technology in 1998, when we lagged behind the
industry leaders, we believe that we are among the industry leaders in making
this latest technology transition. However, if we are unable to complete this
technology transition while remaining among the first in time-to-market and
time-to-volume with these new products, our operating results could be harmed.
Unexpected technology advances in the hard drive industry could harm our
competitive position.
If one of our competitors were able to implement a significant advance in
head or disk drive technology that enables a step-change increase in areal
density allowing greater storage of data on a disk, it would harm our operating
results.
Advances in magnetic, optical, semiconductor or other data storage
technologies could result in competitive products that have better performance
or lower cost per unit of capacity than our products. Some of our competitors
are developing hybrid storage devices that combine magnetic and optical
technologies, but we have decided not to pursue this technology at this time. If
these products prove to be superior in performance or cost per unit of capacity,
we could be at a competitive disadvantage to the companies offering those
products.
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 1999 and the
second half of
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1998, as a result of excess inventory in the desktop hard drive market,
aggressive pricing and corresponding margin reductions materially adversely
impacted our operating results. We experienced similar conditions in the
high-end hard drive market during most of 1998 and 1999.
Changes in the markets for hard drives require us to develop new products.
Over the past two years the consumer market for desktop computers has
shifted significantly towards lower priced systems, especially those systems
priced below $1,000. If the market for those lower price systems continues to
grow and we do not develop lower cost hard drives that can successfully compete
in this market, our market share 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.
We depend on our key personnel.
Our success depends upon the continued contributions of our key employees,
many of whom would be extremely difficult to replace. Worldwide competition for
skilled employees in the hard drive industry is intense. We have lost a number
of experienced hard drive engineers over the past year as a result of the loss
of retention value of our employee stock options (because of the decrease in
price of our common stock) and aggressive recruiting by some of our competitors.
If we are unable to retain our existing employees or to hire and integrate new
employees, our operating results would likely be harmed.
RISK FACTORS RELATING TO WESTERN DIGITAL PARTICULARLY
Loss of market share with a key customer could harm our operating results.
A majority of our revenue comes from a few customers. For example, during
1999 sales to our top 10 customers accounted for approximately 58% of revenues.
These customers have a wide variety of suppliers to choose from and therefore
can make substantial demands on us. Even if we successfully qualify a product
with a customer, the customer generally is not obligated to purchase any minimum
volume of products from us and is able to terminate its relationship with us at
any time. Our ability to maintain strong relationships with our principal
customers is essential to our future performance. If we lose a key customer or
if any of our key customers reduce their orders of our products or require us to
reduce our prices before we are able to reduce costs, our operating results
would likely be harmed.
If we are to succeed in the enterprise hard drive portion of the market, we must
increase our volume and market share.
To succeed in the enterprise hard drive portion of the market, we must
develop and timely introduce new products, and we must increase the number of
customers for our products. We are not currently selling enterprise hard drives
at volumes which allow us to be successful in this market. A risk we face in
expanding our product line is that there is currently a world-wide shortage of
qualified hard drive engineers. As a result, competition for skilled hard drive
development engineers is intense. We also may encounter development delays or
quality issues, which may retard the introduction of new products or make the
introduction of new products more expensive. If we experience any of these
setbacks, we may miss crucial delivery time windows on these new enterprise
products, which would likely harm our operating results.
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Dependence on a limited number of qualified suppliers of components could lead
to delays or increased costs.
Because we do not manufacture any of the components in our hard drives, an
extended shortage of required components or the failure of key suppliers to
remain in business, adjust to market conditions, or to meet our quality, yield
or production requirements could harm us more severely than our competitors,
some of whom manufacture certain of the components for their hard drives. A
number of the components used by us are available from a single or limited
number of qualified outside suppliers. If a component is in short supply, or a
supplier fails to qualify or has a quality issue with a component, we may
experience delays or increased costs in obtaining that component. This occurred
in September 1999 when we had to shut down our Caviar product line production
for approximately 2 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, either
because of market oversupply or transition to new products or technologies. This
occurred in 1998 when we accelerated our transition to magnetoresistive
recording head technology.
In April 1999, we entered into a three year volume purchase agreement with
Komag under which we will buy a substantial portion of our media components from
Komag. We intend that this strategic relationship will reduce our media
component costs; however, it increases our dependence on Komag as a supplier.
Our future operating results will depend substantially on Komag's ability to
timely qualify its media components in our new development programs and to
supply us with these components in sufficient volume to meet our production
requirements. Any disruption in Komag's ability to manufacture and supply us
with media would likely harm our operating results.
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.
We have only two manufacturing facilities, which subjects us to the risk of
damage or loss of either facility.
Our volume manufacturing operations currently are based in two facilities,
one in Singapore and one in Malaysia. We have recently announced that we will
consolidate substantially all of our desktop drive manufacturing operations in
our Malaysian plant, and the Company continues to evaluate its manufacturing
capacity requirements and the efficiency of its manufacturing operations in
light of its reduced volumes. A fire, flood, earthquake or other disaster or
condition affecting either or both of our facilities would almost certainly
result in a loss of substantial sales and revenue and harm our operating
results.
Manufacturing our products abroad subjects us to numerous risks.
We are subject to risks associated with our foreign manufacturing
operations, including:
- 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
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- 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 product offerings in storage solutions and audio-visual
products takes us into new businesses.
We are preparing to enter the storage subsystem business through our
subsidiary, Connex, Inc. This area of storage solutions is a new business
venture for us. We will be facing the challenges of building volume and market
share in a market which is new to us, but which has several established and
well-funded competitors. There is already significant competition for skilled
engineers, both in the hardware and software areas, in this market. Our success
in this storage subsystems market will depend on Connex's ability to
successfully develop, introduce and achieve market acceptance of new products,
applications and product enhancements, and to successfully attract and retain
skilled engineers, as the storage solutions business evolves. Additionally, our
competitors in this market have established intellectual property portfolios.
Our success will depend on our ability to license existing intellectual property
or create new innovations. Moreover, our competitors' established intellectual
property portfolios increase our risk of intellectual property litigation.
We are also developing hard drives for the emerging audio-visual market. We
will be facing the challenge of developing products for a market that is still
evolving, and subject to rapid changes and shifting consumer preferences. There
are several competitors which have also entered this emerging market, and there
is no assurance that the market for digital storage devices for audio-visual
content will materialize or support all of these competitors.
Our reliance on intellectual property and other proprietary information subjects
us to the risk of significant litigation.
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
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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 IBM or Komag
- competition and consolidation in the data storage industry
- seasonal and other fluctuations in demand for computers often due to
technological advances.
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
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- 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. If we
decide to increase or accelerate our capital expenditures or research and
development efforts, or if results of operations do not meet our expectations,
we could require additional debt or equity financing. However, we cannot insure
that additional financing will be available to us or available on favorable
terms. An equity financing could also be dilutive to our existing stockholders.
We may experience Year 2000 computer problems that harm our business.
The Year 2000 issue is the result of computer programs, microprocessors, and
embedded date reliant systems using two digits rather than four to define the
applicable year. This could result in a program, microprocessor or embedded
system recognizing a date using "00" as the year 1900 rather than the year 2000.
We consider a product to be Year 2000 compliant if:
- the product's performance and functionality are unaffected by processing
of dates prior to, during and after the Year 2000, and
- all elements used with the product (for example, hardware, software and
firmware) properly exchange accurate date data with it.
Our Products. We believe our hard drive products are Year 2000 compliant,
although some older, non-hard drive products previously sold by us may not be
Year 2000 compliant. Even if our products are Year 2000 compliant, we may be
named as a defendant in litigation against makers of components of systems that
are unable to properly manage data related to the Year 2000. Our agreements with
customers typically contain provisions designed to limit our liability for such
claims. These provisions may not provide protection from liability, however,
because of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. Any such claims, with or without merit, could
materially harm our business.
Our Systems. We have established a comprehensive program with a dedicated
program management office to deal with Year 2000 readiness in our internal
systems and with our customers and suppliers. We addressed our most critical
internal systems first. We have categorized as "mission critical" or "priority"
those systems the failure of which would have a high likelihood of causing an
extended shutdown of all or a critical portion of a factory or personal injury,
or have a significant and lengthy detrimental financial impact. As appropriate,
we have tested customer and supplier electronic data interfaces with our
internal systems. We have prioritized functions and systems on a worldwide
basis, and all of our facilities are coordinated in working toward our
company-wide timeline, which includes continuing quality assurance audits of the
remediation and testing work which has been completed to date.
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We have committed people and resources to resolve potential Year 2000
issues, both internally and with respect to our suppliers and customers, for
both information technology assets and non-information technology assets. We
identified Year 2000 dependencies in our systems, equipment and processes and we
have implemented changes to such systems, updating or replacing such equipment,
and modifying such processes to make all such mission-critical systems and
substantially all other systems Year 2000 compliant. Each of our business sites
has identified mission critical systems for which contingency plans have been
developed in the event of any disruption caused by Year 2000 problems. Testing
of our business applications has been completed, and test results have been
reviewed. Follow-up remediation on non-mission critical systems resulting from
the testing has been completed.
We are vulnerable to the failure of any of our key suppliers to remedy their
Year 2000 issues. Such a failure could delay shipment of essential components
and disrupt or even halt our manufacturing operations. While all our suppliers
are being notified of our Year 2000 compliance requirements, we have established
specific reviews with our critical suppliers, and they are requested to report
their progress to us on a quarterly basis. We regularly monitor this progress
and are actively involved with a few suppliers that are behind schedule.
We are also communicating with our large customers to determine the extent
to which we are vulnerable to their failure to remedy their own Year 2000
issues. We also rely, both domestically and internationally, particularly in
Singapore and Malaysia where we have our manufacturing facilities, upon
governmental agencies, utility companies, telecommunication service companies,
transportation service providers and other service providers outside of our
control. We have less control over assessing and remediating Year 2000 issues of
third parties. As a result, we cannot insure that these third parties will not
suffer business disruption caused by a Year 2000 issue, which, in turn, could
materially harm our business.
Contingency Planning. Because we believe that our core and mission-critical
systems, equipment and processes are substantially Year 2000 compliant, we do
not consider failure of these systems to be within a reasonable Year 2000 worst
case scenario. We believe we are primarily at risk due to failures within
external infrastructures such as utilities and transportation systems. However,
if we have failed to identify all Year 2000 dependencies in our systems,
equipment or processes or those of our suppliers, customers or other
organizations on which we rely, it could result in delays in the manufacture or
delivery of our products, which in turn would likely harm our business.
We are currently examining these risk areas to develop responses and action
plans. These include a production halt at our Asian manufacturing facilities on
December 31, 1999, and system access shutdown at all locations on December 31,
1999, and systems test and controlled startup prior to business resumption on
January 1, 2000. We do not expect the production halt to affect our commitments
to our customers. To date, detailed contingency plans have been developed and
completed to support each business process which enables us to execute our
primary operations, including administration and fiduciary obligations. The
plans provide detailed work instructions and roles and responsibility matrices
in order to transition rapidly to manual back-up systems in the event of
electronic systems failures. These plans are being reviewed with customers and
logistics providers to ensure compatibility with our external business partners.
Managers and employees have participated in scenario planning drills to optimize
readiness.
Other. Our Year 2000 program has been reviewed periodically by a third
party. The results of the review have been reviewed by the Audit Committee of
our Board of Directors. A final program review was completed during October
1999.
Expenditures related to our Year 2000 project, which excludes normal
replacement of existing capital assets, were approximately $12 million through
October 2, 1999, and are expected to amount to approximately $13 million in
total. Based on work to date, we believe that the Year 2000 issue will not pose
significant operational problems for us.
Many of our disclosures and announcements regarding our products and Year
2000 programs are intended to constitute "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act. The Act
provides added protection from liability for certain public and private
statements concerning an entity's Year 2000 readiness and the Year 2000
readiness of its products and services. The Act
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also potentially provides added protection from liability for certain types of
Year 2000 disclosures made after January 1, 1996, and before the date of
enactment of the Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars, some
transactions are based in various foreign currencies. 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 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 October 2, 1999, the Company had outstanding the following purchased
foreign currency forward exchange contracts (in millions, except average
contract rate):
OCTOBER 2, 1999
--------------------------------------
WEIGHTED
CONTRACT AVERAGE UNREALIZED
AMOUNT CONTRACT RATE GAIN*
-------- ------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
Foreign currency forward contracts:
Singapore Dollar.................... $ 35.7 1.68 $ .2
British Pound Sterling.............. 3.2 1.61 .1
------ ----
$ 38.9 $ .3
====== ====
- ------------
* 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.
In the current quarter, the corresponding period of the prior year, and the
immediately preceding quarter, total realized transaction and forward exchange
contract currency gains and losses (excluding the $7.5 million realized loss on
the Malaysian Ringgits realized in the first quarter of 1999), were immaterial
to the financial statements. Based on historical experience, the Company does
not expect that a significant change in foreign exchange rates (up to
approximately 25%) would materially impact the Company's consolidated financial
statements.
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DISCLOSURE ABOUT OTHER MARKET RISKS
Fixed Interest Rate Risk
At October 2, 1999, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $132 million,
compared to the related carrying value of $333.9 million. The convertible
debentures will be repurchased by the Company, at the option of the holder, as
of February 18, 2003, February 18, 2008, or February 18, 2013, or if there is a
Fundamental Change (as defined in the Debenture documents), at the issue price
plus accrued original issue discount to the date of redemption.
The Company has various note receivables from other companies. All of the notes
carry a fixed rate of interest. Therefore a significant change in interest rates
would not impact the Company's consolidated financial statements.
Variable Interest Rate Risk
The Company maintains a $47.5 million term loan bearing interest at LIBOR or a
base rate plus margin determined by the borrowing base with an approximate
current interest rate of 7.91%, as part of its Senior Bank Facility. This is the
only debt which does not have a fixed-rate of interest. A significant change in
interest rates would not materially impact the Company's consolidated financial
statements. The Senior Bank Facility expires in November 2001.
Fair Value Risk
The Company owns approximately 10.8 million shares of Komag, Inc. 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 October 2, 1999, a $2.3 million total accumulated
unrealized loss has been recorded in accumulated other comprehensive income. 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 October 2, 1999, the quoted market value of the Company's Komag common
stock holdings, without regard to discounts due to sales restrictions, was $33.4
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 October 2, 1999, a $24.2 million total accumulated unrealized gain
has been recorded in accumulated other comprehensive income. 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 October 2, 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 or liquidity.
Accordingly, actual results could differ materially from those projected in
the forward-looking statements.
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleged that hard drives supplied by
the Company in calendar 1988 and 1989 were defective and caused damages to
Amstrad of $186.0 million in out-of-pocket expenses, lost profits, injury to
Amstrad's reputation and loss of goodwill. The Company filed a counterclaim
for $3.0 million in actual damages in addition to exemplary damages in an
unspecified amount. The first trial of this case ended in a mistrial, with
the jury deadlocked on the issue of liability. The case was retried, and on
June 9, 1999, the jury returned a verdict against Amstrad and in favor of
Western Digital. Amstrad has filed a notice of appeal from the judgment. The
Company does not believe that the ultimate resolution of this matter will
have a material adverse effect on the financial position, results of
operations or liquidity of the Company. However, should the judgment be
reversed on appeal, and if in a retrial of the case Amstrad were to prevail,
the Company may be required to pay damages and other expenses, which may
have a material adverse effect on the Company's financial position, results
of operations or liquidity. In addition, the costs of defending a retrial of
the case may be material, regardless of the outcome.
On February 26, 1999, the Lemelson Foundation ("Lemelson") sued the Company
and 87 other companies in the U.S. District Court for the District of
Arizona. The complaint alleges infringement of numerous patents held by Mr.
Jerome H. Lemelson relating to, among other matters, "machine vision,"
"computer image analysis," and "automatic identification." The Company has
reached preliminary agreement with Lemelson concerning a fully paid-up
license of the patents, and Lemelson has filed a voluntary dismissal without
prejudice of the complaint against the Company. The amounts to be paid under
the paid-up license had been accrued at October 2, 1999. Based upon the
information presently known to management, the Company does not believe that
the ultimate resolution of this matter will have a material adverse effect
on the financial position, results of operations or liquidity of the
Company. However, because of the nature and inherent uncertainties of
litigation, should the outcome of this action be unfavorable, the Company
may be required to pay damages and other expenses, which may have a material
adverse effect on the Company's financial position, results of operations or
liquidity. In addition, the costs of defending such litigation may be
material, regardless of the outcome.
In 1994 Papst Licensing ("Papst") brought suit against the Company in U.S.
District Court for the Central District of California alleging infringement
by the Company of five of its patents relating to disk drive motors that the
Company purchases from motor vendors. Later that year Papst dismissed its
case without prejudice, but it has notified the Company that it intends to
reinstate the suit if the Company does not agree to enter into a license
agreement with Papst. Papst has also put the Company on notice with respect
to several additional patents. The Company does not believe that the
ultimate resolution of this matter will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
However, because of the nature and inherent uncertainties of litigation,
should the outcome of this action be unfavorable, the Company may be
required to pay damages and other expenses, which may have a material
adverse effect on the Company's financial position, results of operations or
liquidity. In addition, the costs of defending such litigation may be
material, regardless of the outcome.
On July 2, 1999, Magnetic Media Development, LLC ("Magnetic Media") brought
suit against the Company in the United States District Court for the
Northern District of California. The suit alleges infringement by the
Company of four patents allegedly owned by Magnetic Media. The Company has
reached an agreement with Magnetic Media concerning a fully paid up license
covering the patents that are the subject of the complaint. The amounts to
be paid under the paid-up license had been accrued at October 2, 1999. The
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Company does not believe that the outcome of this matter will have a
material adverse effect on its financial position, results of operations or
liquidity. However, because of the nature and inherent uncertainties of
litigation, should the outcome of this action be unfavorable, the Company
may be required to pay damages and other expenses, which may have a material
adverse effect on the Company's financial position, results of operations or
liquidity. In addition, the costs of defending such litigation may be
material, regardless of the outcome.
The Company and Censtor Corporation ("Censtor") have had discussions
concerning any royalties that might be due Censtor under a licensing
agreement. Censtor has initiated arbitration procedures under the agreement
seeking payment of royalties. In response, the Company has filed a complaint
in federal court seeking a determination that the patents at issue are
invalid. The federal court action has been stayed pending completion of the
arbitration procedures. The Company does not believe that the outcome of
this dispute will have a material adverse effect on its financial position,
results of operations or liquidity.
In the normal course of business, the Company receives and makes inquiry
regarding possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend
licenses or negotiate settlements. Although patent holders often offer such
licenses, no assurance can be given that a license will be offered or that
the terms of any license offered will be acceptable to the Company. Several
such matters are currently pending. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
From time to time the Company receives claims and is a party to suits and
other judicial and administrative proceedings incidental to its business.
Although occasional adverse decisions (or settlements) may occur, the
Company believes that the final disposition of such matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period from July 27, 1999 to October 2, 1999, the Company engaged
in transactions pursuant to which it exchanged an aggregate principal amount
at maturity of $432.1 million of the Company's Zero Coupon Convertible
Subordinated Debentures due 2018, for an aggregate of 15,058,855 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 soliciting such
exchanges. These exchanges were consummated in private, individually
negotiated transactions with institutional investors.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.2 By-laws of the Company, as amended October 15, 1999
10.34 Western Digital Corporation Broad-Based Stock Incentive
Plan
10.36 Separation and Consulting Agreement dated October 1,
1999, by and between the Company and Charles A. Haggerty
10.37 Agreement dated July 6, 1999, by and between the Company
and David W. Schafer
10.38.3 Third Amendment to Revolving Credit and Term Loan
Agreement, dated as of July 30, 1999, among Western
Digital Corporation, BankBoston, N.A. and other lending
institutions named therein*
10.38.4 Fourth Amendment to Revolving Credit and Term Loan
Agreement, dated as of August 27, 1999, among Western
Digital Corporation, BankBoston N.A. and other lending
institutions named therein*
27. Financial Data Schedule
- ------------
* Incorporated by reference to the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on October 1, 1999.
(b) REPORTS ON FORM 8-K:
On July 14, 1999, the Company filed a current report on Form 8-K to file its
press release dated June 14, 1999, announcing that its financial results for the
fourth quarter ending July 3, 1999, were to be weaker than expected.
On August 19, 1999, the Company filed a current report on Form 8-K to file its
press release dated July 21, 1999, announcing its fourth quarter and year-end
results, and its press release dated August 13, 1999, announcing it was
accelerating the consolidation of its high-volume desktop hard drive
manufacturing in Malaysia and a reduction in its Singapore customer repair
center and production-related work force.
On September 9, 1999, the Company filed a current report on Form 8-K to announce
it had closed certain transactions pursuant to Section 3(a)(9) of the Securities
Act of 1933, as amended, retiring in the aggregate $182.1 million principal
amount at maturity of its Zero Coupon Convertible Subordinated Debentures due
2018 in exchange for shares of its common stock.
On September 27, 1999, the Company filed a current report on Form 8-K to file
its press release dated September 21, 1999, announcing that its financial
results for the first quarter ending October 2, 1999, would be below Wall Street
analyst estimates.
On September 28, 1999, the Company filed a current report on Form 8-K to file
its press release dated September 27, 1999, regarding Western Digital
Corporation's announcement of a limited voluntary recall concerning one desktop
hard drive series.
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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/Duston Williams
------------------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Date: November 15, 1999
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EXHIBIT INDEX
Exhibit
Number Description
- -------- -----------
3.2 By-laws of the Company, as amended October 15, 1999
10.34 Western Digital Corporation Broad-Based Stock Incentive
Plan
10.36 Separation and Consulting Agreement dated October 1,
1999, by and between the Company and Charles A. Haggerty
10.37 Agreement dated July 6, 1999, by and between the Company
and David W. Schafer
10.38.3 Third Amendment to Revolving Credit and Term Loan
Agreement, dated as of July 30, 1999, among Western
Digital Corporation, BankBoston, N.A. and other lending
institutions named therein*
10.38.4 Fourth Amendment to Revolving Credit and Term Loan
Agreement, dated as of August 27, 1999, among Western
Digital Corporation, BankBoston N.A. and other lending
institutions named therein*
27. Financial Data Schedule
- ------------
* Incorporated by reference to the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on October 1, 1999.