<PAGE> 1
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
------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92618
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (949) 932-5000
REGISTRANT'S WEB SITE: HTTP://WWW.WESTERNDIGITAL.COM
N/A
------------------------------------------------------------------------
Former name, former address and former fiscal year if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of Common Stock, as of October 30, 1999,
is 112,323,538.
<PAGE> 2
WESTERN DIGITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
--------------------------
SEPT. 26, OCT. 2,
1998 1999
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE> 4
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 3, OCT. 2,
1999 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
--------------------------
SEPT. 26, OCT. 2,
1998 1999
--------- ---------
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
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)
<TABLE>
<CAPTION>
JULY 3, OCT. 2,
1999 1999
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
------------------------
SEPT. 26, OCT. 2,
1998 1999
------- -------
<S> <C> <C>
Net Interest Income (Expense)
Interest income ........... $ 5,292 $ 2,480
Interest expense .......... (7,945) (7,809)
------- -------
$(2,653) $(5,329)
======= =======
</TABLE>
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.
6
<PAGE> 7
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
7
<PAGE> 8
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):
<TABLE>
<S> <C>
Original restructuring accrual $ 2.0
Cash utilized (.3)
------
Balance at October 2, 1999 $ 1.7
======
</TABLE>
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.
8
<PAGE> 9
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):
<TABLE>
<S> <C>
Original restructuring accrual $ 30.3
Non-cash charges (14.1)
Cash utilized (1.1)
------
Balance at October 2, 1999 $ 15.1
======
</TABLE>
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.
9
<PAGE> 10
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):
<TABLE>
<S> <C>
Net loss $ (106.3)
Other comprehensive income:
Unrealized gain on
investments, net 24.0
--------
Total comprehensive loss $ (82.3)
========
</TABLE>
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.
10
<PAGE> 11
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
20
<PAGE> 21
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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<PAGE> 22
- 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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<PAGE> 23
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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<PAGE> 24
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):
<TABLE>
<CAPTION>
OCTOBER 2, 1999
--------------------------------------
WEIGHTED
CONTRACT AVERAGE UNREALIZED
AMOUNT CONTRACT RATE GAIN*
-------- ------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
<S> <C> <C> <C>
Foreign currency forward contracts:
Singapore Dollar.................... $ 35.7 1.68 $ .2
British Pound Sterling.............. 3.2 1.61 .1
------ ----
$ 38.9 $ .3
====== ====
</TABLE>
- ------------
* 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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<PAGE> 25
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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<PAGE> 26
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
26
<PAGE> 27
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.
27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<S> <C>
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
</TABLE>
- ------------
* 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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<PAGE> 29
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
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
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
</TABLE>
- ------------
* 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.
<PAGE> 1
EXHIBIT 3.2
WESTERN DIGITAL CORPORATION
(A DELAWARE CORPORATION)
BY-LAWS
ARTICLE I
OFFICES
1.01 REGISTERED OFFICE. The registered office of Western Digital
Corporation (hereinafter the "Corporation") in the State of Delaware shall be at
9 East Loockerman Street, Dover, and the name the registered agent in charge
thereof shall be National Registered Agents, Inc.
1.02 PRINCIPAL OFFICE. The principal office for the transaction of the
business of the Corporation shall be 8105 Irvine Center Drive, in the City of
Irvine, County of Orange, State of California. The Board of Directors
(hereinafter called the Board) is hereby granted full power and authority to
change said principal office from one location to another.
1.03 OTHER OFFICES. The Corporation may also have such other offices at
such other places, either within or without the State of Delaware, as the Board
may from time to time determine or as the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of the
Corporation for the purpose of electing directors and for the transaction of
such proper business as may come before such meetings may be held at such time,
date and place as the Board shall determine by resolution.
2.02 SPECIAL MEETINGS. Special meetings of the stockholders may be
called at any time by the Board, the Chairman of the Board, the President, or by
stockholders entitled to cast not less than ten percent of the votes at such
meeting.
2.03 PLACE OF MEETINGS. All meetings of the stockholders shall be held
at such places, within or without the State of Delaware, as may from time to
time be designated by the person or persons calling the respective meeting and
specified in the respective notices or waivers of notice thereof.
2.04 NOTICE OF MEETINGS. Except as otherwise required by law, notice of
each meeting of the stockholders, whether annual or special, shall be given not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder of record entitled to vote at such meeting by delivering a
typewritten or printed notice thereof to the stockholder personally, or by
depositing such notice in the United States mail, in a postage-prepaid envelope,
directed to the stockholder at the post office address furnished by the
stockholder to the Secretary of the Corporation for such purpose or, if the
stockholder shall not have furnished to the Secretary the stockholder's address
for such purpose, then at the stockholder's post office address last known to
the Secretary, or by transmitting a notice thereof to the stockholder at such
address by telecopy, telegraph, cable, wireless or such other means as are
reasonably designed to result in actual notice. Except as otherwise expressly
required by law, no publication of any notice of a meeting of the stockholder
shall be required. Every notice of a meeting of the stockholders shall state the
place, date and hour of the meeting, and in the case of a special meeting, shall
also state the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
to whom notice may be omitted pursuant to applicable Delaware law or who shall
have waived such notice and such notice shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy except a
stockholder who shall attend such meeting for the express purpose of objecting
at the beginning of the meeting to the transaction of business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of the stockholder need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
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2.05 QUORUM. Except as otherwise required by law, the holders of record
of a majority in voting interest of the shares of stock of the Corporation
entitled to be voted at any meeting of stockholders of the Corporation, present
in person or by proxy, shall constitute a quorum at any meeting or any
adjournment thereof, a majority in voting interest of the stockholder present in
person or by proxy and entitled to vote thereat or, in the absence therefrom of
all stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time. At any such adjourned
meeting at which a quorum is present any business may be transacted which might
have been transacted at the meeting as originally called.
2.06 VOTING.
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by and registered in the name of the stockholder on
the books of the Corporation:
(i) on the date fixed pursuant to Section 2.09 of these
By-laws as the record for the determination of stockholder entitled to notice of
and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (a)
at the close of business on the day next preceding the day on which notice of
the meeting shall be given or (b) if notice of the meeting shall be waived, at
the close of business on the day next preceding the day on which the meeting
shall be held.
(b) Shares of its own stock belonging to the Corporation or- to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
the pledgor shall have expressly empowered the pledge to vote thereon. Stock
having voting power standing of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants in common, tenants
by entirety or otherwise, or with respect to which two or more persons have the
same fiduciary relationship, shall be voted in accordance with the provisions of
the General Corporation Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder entitled
thereto in person or by the stockholder's proxy, provided, however, that no
proxy shall be voted or acted upon after eleven months from its date unless said
proxy shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the effect of
revoking the same unless the stockholder shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of the
stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these By-laws or by law, shall be decided by the vote of a
majority in voting interest of the stockholders present in person or by proxy
and entitled to vote thereat and thereon, a quorum being present. The vote at
any meeting of the stockholders on any question need not be by ballot, unless so
directed by the chairman of the meeting. On a vote by ballot each ballot shall
be signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and it shall state the number of shares voted.
2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.08 JUDGES. If at any meeting of the stockholder a vote by written
ballot shall be taken on any questions, the chairman of such meeting may appoint
a judge or judges to act with respect to such vote. Each judge so appointed
shall first subscribe an oath faithfully to execute the duties of a judge at
such meeting with strict impartiality and according to the best of his ability.
Such judges shall decide upon the qualification of the voters and
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shall repor the number of shares represented at the meeting and entitled to vote
on such question, shall conduct and accept the votes, and, when the voting is
completed, shall ascertain and report the number of share voted respectively for
and against the question. Reports of judges shall be in writing and subscribed
and delivered by them to the Secretary of the Corporation. The judges need not
be stockholders of the Corporation, and any officer of the Corporation may be a
judge on any question other than a vote for or against a proposal in which he
shall have a material interest.
2.09 FIXING DATE FOR DETERMINATION OF STOCKHOLDER OF RECORD. In order
that the Corporation may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any other change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action. If in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders the Board shall not fix such a record date, the record date for
determining stockholders for such purpose shall be the close of business on the
day on which the Board shall adopt the resolution relating thereto. A
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of such meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
2.10 STOCKHOLDER PROPOSALS AND NOMINATIONS.
(a) At an annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
brought before the annual meeting by or at the direction of a majority of the
directors or by any stockholder of the Corporation who complies with the notice
procedures set forth in this Section 2.10(a). For a proposal to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the corporation not less than 60 days nor
more than 120 days prior to the scheduled annual meeting, regardless of any
postponements, deferrals or adjournments of that meeting to a later date;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the scheduled annual meeting is given or made, notice by the
stockholder, to be timely, must be so delivered or received not later than the
close of business on the tenth day following the earlier of the day on which
such notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the proposal desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business and any other stockholders
known by such stockholder to be supporting such proposal, (iii) the class and
number of shares of the Corporation's stock which are beneficially owned by the
stockholder on the date of such stockholder notice and by any other stockholders
known by such stockholder to be supporting such proposal on the date of such
stockholder notice, and (iv) any financial interest of the stockholder in such
proposal. The presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the stockholder proposal was made in
accordance with the terms of this Section 2.10(a). If the presiding officer
determines that a stockholder proposal was not made in accordance with the terms
of this Section 2.10(a), he or she shall so declare at the annual meeting and
any such proposal shall not be acted upon at the annual meeting. This provision
shall not prevent the consideration and approval or disapproval at the annual
meeting of reports of officers, directors and committees or the Board of
Directors, but, in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated, filed and received as herein
provided.
(b) Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors, by any nominating committee or person appointed by the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.10(b). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the
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Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Corporation not less than 60 days nor more than 120 days prior to the scheduled
annual meeting, regardless of any postponements, deferrals or adjournments of
that meeting to a later date; provided, however, that if less than 70 days'
notice or prior public disclosure of the date of the scheduled annual meeting is
given or made, notice by the stockholder, to be timely, must be so delivered or
received not later than the close of business on the tenth day following the
earlier of the day on which such notice of the date of the scheduled annual
meeting was mailed or the day on which such public disclosure was made. A
stockholder's notice to the Secretary shall set forth (i) as to each person whom
the stockholder proposes to nominate for election or re-election as a director,
(A) the name, age, business address and residence address of the person, (B) the
principal occupation or employment of the person, (C) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
person and (D) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
applicable rules and regulations of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934, as amended; and (ii) as
to the stockholder giving the notice (A) the name and address, as they appear on
the Corporation's books, of the stockholder and (B) the class and number of
shares of the Corporation's stock which are beneficially owned by the
stockholder on the date of such stockholder notice. The corporation may require
any proposed nominee to furnish such other information as may reasonably be
required by the Corporation to determine the eligibility of such proposed
nominee to serve as director of the Corporation. The presiding officer of the
annual meeting shall determine and declare at the annual meeting whether the
nomination was made in accordance with the terms of this Section 2.10(b). If the
presiding officer determines that a nomination was not made in accordance with
the terms of this Section 2.10(b), he or she shall so declare at the annual
meeting and any such defective nomination shall be disregarded.
ARTICLE III
BOARD OF DIRECTORS
3.01 GENERAL POWERS. The property, business and affairs of the
Corporation shall be managed by the Board.
3.02 NUMBER AND TERM OF OFFICE. The number of directors shall be not
less than five nor more than twelve until this Section 3.02 is amended by a
resolution duly adopted by the Board or by the shareholders, in either case, in
accordance with the provisions of the Certificate of Incorporation of the
Corporation. The specific number of directors at any time shall be that number
between five and twelve as may be determined from time to time by the Board by
resolution. Directors need not be stockholders. Each of the directors of the
Corporation shall hold office until his successor shall have been duly elected
and shall qualify or until he shall resign or shall have been removed in the
manner hereinafter provided.
3.03 ELECTION OF DIRECTORS. The directors shall be elected annually by
the stockholders of the Corporation and the persons receiving the greatest
number of votes, up to the number of directors to be elected, shall be the
directors.
3.04 RESIGNATIONS. Any director of the Corporation may resign at any
time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.05 VACANCIES. Except as otherwise provided in the Certificate of
Incorporation, any vacancy in the Board, whether because of death, resignation,
disqualification, an increase in the number of directors, or any other cause,
may be filed by vote of the majority of the remaining directors, although less
than a quorum. Each director so chosen to fill a vacancy shall hold office until
his successor shall have been elected and shall qualify or until he shall resign
or shall have been removed in the manner hereinafter provided.
3.06 PLACE OF MEETING, ETC. The Board may hold any of its meetings at
such place or places within or without the State of Delaware as the Board may
from time to time by resolution designate or as shall be designated by the
person or persons calling the meeting or in the notice or a waiver of notice of
any such meeting. Directors
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may participate in any regular or special meeting of the Board by means of
conference telephone or similar communications equipment pursuant to which all
persons participating in the meeting of the Board can hear each other, and such
participation shall constitute presence in person at such meeting.
3.07 FIRST MEETING. The Board shall meet as soon as practicable after
each annual election of directors and notice of such first meeting shall not be
required.
3.08 REGULAR MEETINGS. Regular meetings of the Board shall be held at
such times as the Board shall from time to time by resolutions determine. If any
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting shall be held at the same hour and place
on the next succeeding business day not a legal holiday. Except as provided by
law, notice of regular meetings need not be given.
3.09 SPECIAL MEETINGS. Special meetings of the Board for any purpose or
purposes may be called at any time by the Chairman of the Board, the President,
any Vice President, the Secretary or any two directors. Special meetings of the
Board shall not be held upon not less than four days' written notice or not less
than 48 hours' given personally or by telephone, telegraph, telecopy, telex or
other similar means of communication. Any such notice shall be addressed or
delivered to each director at such director's address as it is shown upon the
records of the Corporation or as may have been given to the Corporation by the
director for the purpose in which the meetings of the directors are regularly
held. Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mails, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the time it is communicated, in
person or by telephone or wireless, to the recipient or to a person at the
office of the recipient who the person giving the notice has reason to believe
will promptly communicate it to the recipient.
3.10 QUORUM AND MANNER OF ACTING. Except as otherwise provided in these
By-laws, the Certificate of Incorporation, or by law, the presence of a majority
of the authorized number of directors shall be required to constitute a quorum
for the transaction of business at any meeting of the Board, and all matters
shall be decided at any such meeting, a quorum being present, by the affirmative
votes of a majority of the directors present. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, provided any action taken is approved by at lease a
majority of the required quorum for such meeting. In the absence of a quorum, a
majority of directors present at any meetings may adjourn the same from time to
time until a quorum shall be present. Notice of any adjourned meeting need not
be given. The directors shall act only as a Board, and the individual directors
shall have no power as such.
3.11 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board or of any committee thereof may be taken without a
meeting if a written consent thereto is signed by all members of the Board or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.
3.12 REMOVAL OF DIRECTORS. Subject to the provisions of the Certificate
of Incorporation, any director may be removed at any time, either with or
without cause, by the affirmative vote of the stockholders having a majority of
the voting power of the Corporation given at a special meeting of the
stockholders called for the purpose.
3.13 COMPENSATION. The directors shall receive only such compensation
for their services as directors as may be allowed by resolution of the Board.
The Board may also provide that the Corporation shall reimburse each such
director for any expense incurred by him on account of his attendance at any
meetings of the Board of Committees of the Board. Neither the payment of such
compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Corporation or its subsidiaries in any
other capacity and receiving compensation therefor.
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3.14 COMMITTEES. The Board may appoint one or more committees, each
consisting of one or more directors, and delegate to such committees any of the
authority of the Board permitted by law except with respect to:
(a) The approval of any action for which the General Corporation Law
also requires shareholders approval or approval of the outstanding shares;
(b) The filing of vacancies on the Board or on any committee;
(c) The fixing of compensation of the directors for serving on the
Board or on any committee;
(d) The amendment or repeal of By-laws or the adoption of new By-laws;
(e) The amendment or repeal of any resolution of the Board which by its
express terms in not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by the Board;
(g) The appointment of other committees of the Board or the members
thereof.
Any such committee must be appointed by resolution adopted by a
majority of the authorized number of directors and may be designated an
Executive Committee or by such other name as the Board shall specify. The Board
may designate one or more directors as alternate members of any committee, who
may replace any absent member at any meeting of the committee. The appointment
of members or alternate members of a committee requires the vote of a majority
of the authorized number of directors. The Board shall have the power to
prescribe the manner in which proceedings of any such committee shall be
conducted. In the absence of any such prescription, such committee shall have
the power to prescribe the manner in which its proceedings shall be conducted.
Unless the Board or such committee shall provide, the regular and special
meetings of any such committee shall be governed by the provisions of this
Article applicable to meetings and actions of the Board. Minutes shall be kept
of each meeting of such committee.
3.15 EXECUTIVE COMMITTEE. The passage of any resolution of the
committee designated by the Board as the Executive Committee shall, in addition
to any other limitations prescribed by the Board in accordance with the
provisions of Section 3.14, require the affirmative vote of a majority of
directors present and voting on such resolution who are not employees of the
Corporation.
3.16 RIGHTS OF INSPECTION. Every director shall have the right to any
reasonable time to inspect and copy all books, records, and documents of every
kind and to inspect the physical properties of the corporation and also of its
subsidiary corporations, domestic or foreign. Such inspection by a director may
be made in person or by agent or attorney and includes the right to copy and
obtain extracts.
ARTICLE IV
OFFICERS
4.01 CORPORATE OFFICERS. The officers of the Corporation shall be a
President, a Secretary, and a Chief Financial Officer. The Corporation may also
have, at the discretion of the Board, a Chairman of the Board (who shall not be
considered an officer of the Corporation), one or more Vice Presidents, a
Treasurer, one or more Assistant Treasurers, one or more Assistant Secretaries,
and such other officers as may be elected or appointed in accordance with the
provisions of Section 4.03 or Section 4.06 of this Article.
4.02 ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers of the
Corporation, except such officers as may be appointed in accordance with
Sections 4.01aor 4.05, shall be appointed annually by the Board at the first
meeting thereof held after the election of the Board. Each officer shall hold
office until such officers shall resign or shall be removed or otherwise
disqualified to serve, or the officer's successor shall be appointed and
qualified.
4.03 SUBORDINATE OFFICERS. The Board may elect, and may empower the
President to appoint, such other officers as the business of the Corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these By-laws or as the Board may
from time to time determine.
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4.04 REMOVAL. Any officer of the Corporation may be removed, with or
without cause, at any time at any regular or special meeting of the Board by a
majority of the directors of the Board at the time in office or, except in the
case of an officer appointed by the Board, by any officer of the Corporation or
committee of the Board upon whom or which such power of removal may be conferred
by the Board.
4.05 RESIGNATIONS. Any officer may resign at any time by giving written
notice of such officer's resignation to the Board, the President, or Secretary
of the Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, upon receipt thereof by the Board,
President, or Secretary. Unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
4.06 VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification, or other event, may be filled for the unexpired
portion of the term thereof in the manner prescribed in the By-laws for regular
appointments to such office.
4.07 PRESIDENT. The President of the Corporation shall be the Chief
Executive Officer and general manager of the Corporation and shall have, subject
to the control of the Board, general supervision, direction and control of the
business and officers of the Corporation. The President shall preside at all
meetings of the stockholders and, in the absence of the Chairman of the Board,
or if there be none, at all meetings of the Board. The President shall have the
general powers and duties of management usually vested in the office of
president and general manager of a corporation and such other powers and duties
as may be prescribed by the Board.
4.08 VICE PRESIDENTS. In the absence or disability of the President,
the Vice Presidents in order of their rank as fixed by the Board or, if not
ranked, the Vice President designated by the Board, shall perform all the duties
of the President, and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the President. The Vice Presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board.
4.09 SECRETARY. The Secretary shall keep or cause to be kept, at the
principal executive office and such other place as the Board may order, a book
of minutes of all meetings of the stockholders, the Board, and its committees,
with the time and place of holding, whether regular or special, and, if special,
how authorized, the notice thereof given, the names of those present at Board
and committee meetings, the number of shares present or represented at
stockholder's meetings, and the proceedings thereof. The Secretary shall keep,
or cause to be kept, at the principal executive office or at the office of the
Corporation's transfer or registrar, if one be appointed, a share register, or a
duplicate share register, showing the names of stockholders and their addresses,
the number and classes of share of stock held by each, the number and date of
certificates issued for the same, and the number and date of cancellation if
every certificate surrendered for cancellation. The Secretary shall give, or
cause to be given, notice of all the meetings of the stockholders and of the
Board of any committees thereof required by these By-laws or by law to be given,
shall keep the seal of the Corporation in safe custody, and shall have such
other powers and perform such other duties as may be prescribed by the Board.
4.10 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct amounts
of the properties and business transactions of the Corporation, and shall send
or cause to be sent to the stockholders of the Corporation such financial
statements and reports as are by law or these By-laws required to be sent to
them. The books of account shall at all times be open to inspection by any
directors. The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board. The Chief Financial Officer
shall disburse the funds of the Corporation as may be ordered by the Board,
shall render to the President and directors, whenever they request it, an
account of all transactions as Chief Financial Officer and of the financial
condition of the corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board.
4.11 COMPENSATION. The compensation of the officers of the Corporation
shall be fixed from time to time by the Board. No officer shall be prevented
from receiving such compensation by reason of the fact that the officer is also
a director of the Corporation. Nothing contained herein shall preclude any
officer from serving the Corporation, or any subsidiary corporation, in any
other capacity and receiving compensation therefor.
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ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
5.01 EXECUTION OF CONTRACTS. The Board, except as in these By-laws
otherwise provided, may authorize any officer or officers, agent or agents, to
enter into any contract or execute any instrument in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances. Unless so authorized by the Board or by these By-laws, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or in any amount.
5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidence of indebtedness, issued in the name of
or payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each authorized person shall give such bond, if any, as
the Board may require.
5.03 DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies and other depositories as the Board may select, or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the purpose
of collection for the account of the Corporation, the President and Vice
President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to time
authorize the opening and keeping of general and special bank accounts with such
banks, trust companies or other depositories as the Board may select or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these By-laws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
6.01 CERTIFICATES FOR STOCK.
(a) The Shares of the Corporation shall be represented by certificates,
provided that the Board may provide by resolution or resolutions that some or
all of any or all classes or series of its stock shall be uncertificated shares.
Any such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the Corporation. Notwithstanding the adoption
of such a resolution by the Board every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate, in such form as the Board shall prescribe,
signed by, or in the name of the Corporation by the Chairman or Vice Chairman of
the Board, or the President or Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation representing the number of shares registered in certificate form.
Any of or all of the signatures on the certificates may be by facsimile. In case
any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the Corporation with the same
effect as though the person who signed such certificate, or whose facsimile
signature shall have been place thereupon, were such officer, transfer agent or
registrar at the date of issue.
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(b) A record shall be kept of the respective names of the persons,
firms or corporations owning the stock represented by such certificates, the
number and class of shares represented by such certificates, respectively, and
the respective dates thereof, and in case of cancellation, the respective dates
of cancellation. Every certificate surrendered to the Corporation for exchange
or transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 6.04
6.02 TRANSFERS OF STOCK. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such holder's attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.03, and upon surrender of
the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer agents and one or more registrars, and may require
all certificates for stock to bear the signature or signatures of any of them.
6.03 REGULATIONS. This Board may make such rules and regulations as it
may deem expedient, not inconsistent with these By-laws, concerning the issue,
transfer and registration of certificates for shares of the stock of the
Corporation. It may appoint, or authorize any officer or officers to appoint,
one or more transfer clerks or one or more transfer agents and one or more
registrars, and may require all certificates for stock to bear the signature or
signatures of any of them.
6.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In any case
of loss, theft, destruction, or mutilation of any certificate of stock, another
may be issued in its place upon proof of such loss, theft, destruction, or
mutilation and upon the giving of a bond of indemnity to the Corporation in such
form and in such sum as the Board may direct; provided, however, that a new
certificate may be issued without requiring any bonds when, in the judgment of
the Board, it is proper to do so.
ARTICLE VII
INDEMNIFICATION
7.01 SCOPE OF INDEMNIFICATION. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the fullest extent permitted
by Delaware law and the Certificate of Incorporation.
7.02 ADVANCE OF EXPENSES. Costs and expenses (including attorneys'
fees) incurred by or on behalf of a director, officer, employer or agent in
defending or investigating any action, suit proceeding or investigation shall be
paid by the Corporation in advance of the final disposition of such matter, if
such director, officer, employee or agent shall undertake in writing to repay
any such advances in the event that it is ultimately determined that he is not
entitled to indemnification. Notwithstanding the foregoing, no advance shall be
made by the Corporation if a determination is reasonably and promptly made by
the Board by a majority vote of a quorum of disinterested directors, or (if such
a quorum is not obtained or, even if obtainable, a quorum of disinterested
directors so directs) by independent legal counsel, that, based upon the facts
known to the Board or counsel at the time such determination is made, (a) the
director, officer, employee or agent acted in bad faith or deliberately breached
his duty to the Corporation or its stockholders, and (b) as a result of such
actions by the director, officer, employee or agent, it is more likely than not
that it will ultimately be determined that such director, officer, employee or
agent is not entitled to indemnification.
7.03 OTHER RIGHTS AND REMEDIES. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other subsections of the
Article shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any By-laws,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office.
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7.04 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of their heirs, executors and
administrators of such a person.
7.05 INSURANCE. Upon resolution passed by the Board, the Corporation
may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of the Article.
ARTICLE VIII
MISCELLANEOUS
8.01 SEAL. The Board shall provide a corporate seal, which shall be in
the form of a circle and shall bear the name of the Corporation and words and
figures showing that the Corporation was incorporated in the State of Delaware
and the year of incorporation.
8.02 WAIVER OF NOTICES. Whenever notice is required to be given by
these By-laws or the Certificate of Incorporation or by law, the person entitled
to said notice may waive such notice in writing, either before or after the time
stated therein, and such waiver shall be deemed equivalent to notice. Attendance
of a person at a meeting (whether in person or by proxy in the case of a meeting
of stockholders) shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice.
8.03 AMENDMENTS. These By-laws, or any of them, may be altered, amended
or repealed, and new By-laws may be made, (i) by the Board, by vote of a
majority of the number of directors then in office as directors, acting at any
meeting of the Board, or (ii) by the stockholders, provided that notice of such
proposed amendment, modification, repeal or adoption is given in the notice of
special meeting. Any By-laws made or altered by the stockholders may be altered
or repealed by either the Board or the stockholders.
8.04 REPRESENTATION OF OTHER CORPORATIONS. The President, any Vice
President, or Secretary of this Corporation are authorized to vote, represent
and exercise on behalf of this Corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of this
Corporation. The authority herein granted to said officers to vote or represent
on behalf of this Corporation any and all shares held by this Corporation in any
other corporation or corporations may be exercised either by such officers in
person or by any person authorized so to do by proxy or power of attorney duly
executed by said officers.
# # #
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EXHIBIT 10.34
WESTERN DIGITAL CORPORATION
BROAD-BASED STOCK INCENTIVE PLAN
SECTION 1. PURPOSE OF PLAN
The purpose of this Broad-Based Stock Incentive Plan ("Plan") of
Western Digital Corporation, a Delaware corporation, is to enable the Company,
as defined in Section 2.2(a)(ii) hereof, to attract, retain and motivate its key
employees and other personnel, and to further align the interests of such
persons with those of the shareholders of the Company, by providing for or
increasing their proprietary interest in the Company. This plan is intended to
qualify as "broadly-based" under the New York Stock Exchange Shareholder
Approval Policy.
SECTION 2. ADMINISTRATION OF THE PLAN
2.1 Composition of Committee. The Plan shall be administered by the
Compensation Committee of the Board of Directors, and/or by the Board of
Directors or another committee of the Board of Directors of the Company, as
appointed from time to time by the Board of Directors (any such administrative
body, the "Committee"). The Board of Directors shall fill vacancies on, and from
time to time may remove or add members to, the Committee. The Committee shall
act pursuant to a majority vote or unanimous written consent. Notwithstanding
the foregoing, with respect to any Award that is not intended to satisfy the
conditions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or Section 162(m)(4)(C) of the Internal Revenue Code of
1986, as amended (the "Code"), the Committee may appoint one or more separate
committees (any such committee, a "Subcommittee") composed of one or more
directors of the Company (who may but need not be members of the Committee) and
may delegate to any such Subcommittee(s) the authority to grant Awards, as
defined in Section 5.1 hereof, under the Plan to Eligible Employees, as defined
in Section 4 hereof, to determine all terms of such Awards, and/or to administer
the Plan or any aspect of it. Any action by any such Subcommittee within the
scope of such delegation shall be deemed for all purposes to have been taken by
the Committee. The Committee may designate or delegate authority to the
Secretary of the Company or other Company employees to assist the Committee in
the administration of the Plan, and may grant authority to such persons to
execute agreements evidencing Awards made under this Plan or other documents
entered into under this Plan on behalf of the Committee or the Company.
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2.2 Powers of the Committee. Subject to the express provisions of this
Plan, the Committee shall be authorized and empowered to do all things necessary
or desirable in connection with the administration of this Plan with respect to
the Awards over which such Committee has authority, including, without
limitation, the following:
(a) to prescribe, amend and rescind rules and regulations relating
to this Plan and to define terms not otherwise defined herein; provided that,
unless the Committee shall specify otherwise, for purposes of this Plan, and the
term "Company" shall mean Western Digital Corporation and its subsidiaries and
affiliates, unless the context otherwise requires.
(b) to determine which persons are Eligible Employees (as defined
in Section 4 hereof), to which of such Eligible Employees, if any, Awards shall
be granted hereunder, to make Awards under the Plan and to determine the terms
of such Awards and the timing of any such Awards;
(c) to determine the number of Shares subject to Awards and the
exercise or purchase price of such Shares;
(d) to establish and verify the extent of satisfaction of any
performance goals applicable to Awards;
(e) to prescribe and amend the terms of the agreements or other
documents evidencing Awards made under this Plan (which need not be identical);
(f) to determine whether, and the extent to which, adjustments are
required pursuant to Section 11 hereof;
(g) to interpret and construe this Plan, any rules and regulations
under the Plan and the terms and conditions of any Award granted hereunder, and
to make exceptions to any such provisions in good faith and for the benefit of
the Company; and
(h) to make all other determinations deemed necessary or advisable
for the administration of the Plan.
2.3 Determinations of the Committee. All decisions, determinations and
interpretations by the Committee or the Board regarding the Plan shall be final
and binding on all Eligible Employees and Participants, as defined in Section 4
hereof. The Committee or the Board, as applicable, shall consider such factors
as it deems relevant, in its sole and absolute discretion, to making such
decisions, determinations and interpretations including, without limitation, the
recommendations or advice of any officer of the Company or Eligible Employee and
such attorneys, consultants and accountants as it may select.
SECTION 3. STOCK SUBJECT TO PLAN
3.1 Aggregate Limits. Subject to adjustment as provided in Section 10,
at any time, the aggregate number of shares of the Company's common stock, $0.01
par value ("Shares"), issued pursuant to all Awards granted under this Plan
shall not exceed 20,000,000. The Shares subject to the Plan may be either Shares
reacquired by the Company, including Shares purchased in the open market, or
authorized but unissued Shares.
3.2 Issuance of Shares. For purposes of Section 3.1, the aggregate
number of Shares issued under this Plan at any time shall equal only the number
of Shares actually issued upon exercise or settlement of an Award and not
returned to the Company upon cancellation,
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expiration or forfeiture of an Award or delivered (either actually or by
attestation) in payment or satisfaction of the purchase price, exercise price or
tax obligation of an Award.
SECTION 4. PERSONS ELIGIBLE UNDER PLAN
Any person who is an (i) employee, (ii) prospective employee, (iii)
consultant, or (iv) advisor of the Company (an "Eligible Employee") shall be
eligible to be considered for the grant of Awards hereunder. For purposes of
this Plan, the Chairman of the Board's status as an Employee shall be determined
by the Board. For purposes of the administration of Awards, the term "Eligible
Employee" shall also include a former Eligible Employee or any person (including
any estate) who is a beneficiary of a former Eligible Employee. A "Participant"
is any Eligible Employee to whom an Award has been made and any person
(including any estate) to whom an Award has been assigned or transferred
pursuant to Section 9.1.
SECTION 5. PLAN AWARDS
5.1 Award Types. The Committee, on behalf of the Company, is authorized
under this Plan to enter into certain types of arrangements with Eligible
Employees and to confer certain benefits on them. The following such
arrangements or benefits are authorized under the Plan if their terms and
conditions are not inconsistent with the provisions of the Plan: Stock Options,
Restricted Stock and Stock Units. Such arrangements and benefits are sometimes
referred to herein as "Awards." The authorized types of arrangements and
benefits for which Awards may be granted are defined as follows:
Stock Option Awards: A Stock Option is a right granted under Section 6
to purchase a number of Shares at such exercise price, at such times, and on
such other terms and conditions as are specified in or determined pursuant to
the document(s) evidencing the Award (the "Option Agreement"). Options intended
to qualify as Incentive Stock Options ("ISOs") pursuant to Code Section 422 may
not be granted under this Plan.
Restricted Stock Awards: Restricted Stock is an award of Shares made
under Section 7, the grant, issuance, retention and/or vesting of which is
subject to such conditions as are expressed in the document(s) evidencing the
Award (the "Restricted Stock Agreement").
Stock Unit Awards: A Stock Unit Award is an award of a right to receive
the fair market value of one share of Common Stock made under Section 8, the
grant, issuance, retention and/or vesting of which is subject to such conditions
as are expressed in the document(s) evidencing the Award (the "Stock Unit
Agreement").
5.2 Grants of Awards. An Award may consist of one such arrangement or
benefit or two or more of them in tandem or in the alternative.
SECTION 6. STOCK OPTION AWARDS
The Committee may grant an Option or provide for the grant of an
Option, either from time-to-time in the discretion of the Committee or
automatically upon the occurrence of specified events, including, without
limitation, the achievement of performance goals, the satisfaction of an event
or condition within the control of the recipient of the Award, within the
control of others or not within any person's control.
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6.1 Option Agreement. Each Option Agreement shall contain provisions
regarding (a) the number of Shares which may be issued upon exercise of the
Option, (b) the purchase price of the Shares and the means of payment for the
Shares, (c) the term of the Option, (d) such terms and conditions of
exercisability as may be determined from time to time by the Committee, (e)
restrictions on the transfer of the Option and forfeiture provisions, and (f)
such further terms and conditions, in each case not inconsistent with the Plan
as may be determined from time to time by the Committee.
6.2 Option Price. The purchase price per Share of the Shares subject to
each Option granted under the Plan shall equal or exceed 100% of the fair market
value of such Stock on the date the Option is granted, unless the Committee
determines otherwise.
6.3 Option Term. The "Term" of each Option granted under the Plan shall
not exceed ten (10) years from the date of its grant.
6.4 Option Vesting. Options granted under the Plan shall be exercisable
at such time and in such installments during the period prior to the expiration
of the Option's Term as determined by the Committee in its sole discretion. The
Committee shall have the right to make the timing of the ability to exercise any
Option granted under the Plan subject to such performance requirements as deemed
appropriate by the Committee. At any time after the grant of an Option the
Committee may, in its sole discretion, reduce or eliminate any restrictions
surrounding any Participant's right to exercise all or part of the Option
6.5 Option Exercise.
(a) Partial Exercise. An exercisable Option may be exercised in
whole or in part. However, an Option shall not be exercisable with respect to
fractional Shares and the Committee may require, by the terms of the Option
Agreement, a partial exercise to include a minimum number of Shares.
(b) Manner of Exercise. All or a portion of an exercisable Option
shall be deemed exercised upon delivery to the representative of the Company
designated for such purpose by the Committee all of the following: (i) notice of
exercise in such form as the Committee authorizes specifying the number of
Shares to be purchased by the Participant, (ii) payment or provision for payment
of the exercise price for such number of Shares, (iii) such representations and
documents as the Committee, in its sole discretion, deems necessary or advisable
to effect compliance with all applicable provisions of the Securities Act of
1933, as amended, and any other federal, state or foreign securities laws or
regulations, (iv) in the event that the Option shall be exercised pursuant to
Section 9.1 by any person or persons other than the Eligible Employee,
appropriate proof of the right of such person or persons to exercise the Option,
and (v) such representations and documents as the Committee, in its sole
discretion, deems necessary or advisable to provide for the tax withholding
pursuant to Section 12. Unless provided otherwise by the Committee, no
Participant shall have any right as a shareholder with respect to any Shares
purchased pursuant to any Option until the registration of Shares in the name of
such person, and no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such Shares are
so registered.
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(c) Payment of Exercise Price. The exercise price of an Option may
be paid in such form as authorized by the Committee, including, without limiting
the generality of the foregoing, in the form of one of more of the following,
either through the terms of the Option Agreement or at the time of exercise of
an Option: (i) cash or certified or cashiers' check, (ii) shares of capital
stock of the Company that have been held by the Participant for such period of
time as the Committee may specify, (iii) other property deemed acceptable by the
Committee, (iv) a reduction in the number of Shares or other property otherwise
issuable pursuant to such Option, or (v) any combination of (i) through (iv).
SECTION 7. RESTRICTED STOCK AWARDS
Restricted Stock consists of an award of Shares, the grant, issuance,
retention and/or vesting of which shall be subject to such terms and conditions
as the Committee deems appropriate.
7.1 Restricted Stock Award. Each Restricted Stock Award shall reflect,
to the extent applicable (a) the number of Shares subject to such Award or a
formula for determining such, (b) the time or times at which Shares shall be
granted or issued and/or become retainable or vested, and the conditions or
restrictions on such Shares, (c) the performance criteria, if any, and level of
achievement versus these criteria which shall determine the number of Shares
granted, issued, retainable and/or vested, (d) the period, if any, as to which
performance shall be measured for determining achievement of performance, (e)
forfeiture provisions, and (f) such further terms and conditions, in each case
not inconsistent with the Plan as may be determined from time to time by the
Committee.
7.2 Restrictions and Performance Criteria. The grant, issuance,
retention and/or vesting of each Restricted Stock Award may but need not be
subject to such performance criteria and level of achievement versus these
criteria as the Committee shall determine, which criteria may be based on
financial performance, personal performance evaluations and/or completion of
service by the Participant.
7.3 Timing and Form of Award. The Committee shall determine the timing
of award of any Restricted Stock Award. The Committee may provide for or,
subject to such terms and conditions as the Committee may specify, may permit a
Participant to elect for the award or vesting of any Restricted Stock to be
deferred to a specified date or event. The Committee may provide for a
Participant to have the choice for his or her Restricted Stock, or such portion
thereof as the Committee may specify, to be granted in whole or in part in Stock
Units.
7.4 Discretionary Adjustments. Notwithstanding satisfaction of any
completion of service or performance goals, the number of Shares granted,
issued, retainable and/or vested under a Restricted Stock Award on account of
either financial performance or personal performance evaluations may be reduced
by the Committee on the basis of such further considerations as the Committee in
its sole discretion shall determine.
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SECTION 8. STOCK UNITS
8.1 Stock Units. A "Stock Unit" is a bookkeeping entry representing an
amount equivalent to the fair market value of one share of Common Stock, also
sometimes referred to as a "restricted unit" or "shadow stock". Stock Units
represent an unfunded and unsecured obligation of the Company, except as
otherwise provided for by the Committee.
8.2 Stock Unit Awards. Each Stock Unit Award shall reflect, to the
extent applicable (a) the number of Stock Units subject to such Award or a
formula for determining such, (b) the time or times at which Stock Units shall
be granted or issued and/or become retainable or vested, and the conditions or
restrictions on such Stock Units , (c) the performance criteria, if any, and
level of achievement versus these criteria which shall determine the number of
Stock Units granted, issued, retainable and/or vested, (d) the period, if any,
as to which performance shall be measured for determining achievement of
performance, (e) forfeiture provisions, and (f) such further terms and
conditions, in each case not inconsistent with the Plan as may be determined
from time to time by the Committee. Stock Units may also be issued upon exercise
of Options, and may be issued in lieu of Restricted Stock or any other Award
that the Committee elects to be paid in the form of Stock Units.
8.3 Restrictions and Performance Criteria. The grant, issuance,
retention and or vesting of each Stock Unit may but need not be subject to such
performance criteria and level of achievement versus these criteria as the
Committee shall determine, which criteria may be based on financial performance,
personal performance evaluations and/or completion of service by the
Participant.
8.4 Timing and Form of Award. The Committee shall determine the timing
of award of any Stock Unit. The Committee may provide for or, subject to such
terms and conditions as the Committee may specify, may permit a Participant to
elect for the award or vesting of any Stock Unit to be deferred to a specified
date or event. The Committee may provide for a Participant to have the choice
for his or her Stock Unit, or such portion thereof as the Committee may specify,
to be granted in whole or in part in Shares.
8.5 Settlement of Stock Units. The Committee may provide for Stock
Units to be settled in cash or Shares (at the election of the Company or the
Participant, as specified by the Committee) and to be made at such other times
as it determines appropriate or as it permits a Participant to choose. The
amount of cash or Shares, or other settlement medium, to be so distributed may
be increased by an interest factor or by dividend equivalents, as the case may
be, which may be valued as if reinvested in Shares. Until a Stock Unit is
settled, the number of Shares represented by a Stock Unit shall be subject to
adjustment pursuant to Section 10.
8.6 Discretionary Adjustments. Notwithstanding satisfaction of any
completion of service or performance goals, the number of Stock Units granted,
issued, retainable and/or vested under a Stock Unit Award on account of either
financial performance or personal performance evaluations may be reduced by the
Committee on the basis of such further considerations as the Committee in its
sole discretion shall determine.
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SECTION 9. OTHER PROVISIONS APPLICABLE TO AWARDS
9.1 Transferability. Unless the agreement evidencing an Award (or an
amendment thereto authorized by the Committee) expressly states that it is
transferable as provided hereunder, no Award granted under the Plan, nor any
interest in such Award, may be sold, assigned, conveyed, gifted, pledged,
hypothecated or otherwise transferred in any manner, other than by will or the
laws of descent and distribution, prior to the vesting or lapse of any and all
restrictions applicable to any Shares issued under an Award. The Committee may
in its sole discretion grant an Award or amend an outstanding Award to provide
that the Award is transferable or assignable to a Permitted Transferee (as
defined below), provided that following any such transfer or assignment the
Award will remain subject to substantially the same terms applicable to the
Award while held by the Eligible Employee, as modified as the Committee in its
sole discretion shall determine appropriate, and the Participant shall execute
an agreement agreeing to be bound by such terms. As used herein, the term
"Permitted Transferee" shall mean (i) in the case of a transfer without the
payment of any consideration, any "family member" as such term is defined in
Section 1(a)(5) of the General Instructions to Form S-8 under the 1933 Act as in
effect on the date this Plan is adopted, (ii) any transfer described in clause
(ii) of Section 1(a)(5) of the General Instructions to Form S-8 under the 1933
Act as in effect on the date this Plan is adopted, and (iii) upon the Eligible
Employee's death, the Eligible Employee's executors, administrators,
testamentary trustees, legatees and beneficiaries.
9.2 Dividends. Unless otherwise provided by the Committee, no
adjustment shall be made in Shares issuable under Awards on account of cash
dividends which may be paid or other rights which may be issued to the holders
of Shares prior to their issuance under any Award. The Committee shall specify
whether dividends or dividend equivalent amounts shall be paid to any
Participant with respect to the Shares subject to any Award that have not vested
or been issued or that are subject to any restrictions or conditions on the
record date for dividends.
9.3 Agreements Evidencing Awards. The Committee shall, subject to
applicable law, determine the date an Award is deemed to be granted, which for
purposes of this Plan shall not be affected by the fact that an Award is
contingent on subsequent stockholder approval of the Plan. The Committee or,
except to the extent prohibited under applicable law, its delegate(s) may
establish the terms of agreements evidencing Awards under this Plan and may, but
need not, require as a condition to any such agreement's effectiveness that such
agreement be executed by the Participant and that such Participant agree to such
further terms and conditions as specified in such agreement. The grant of an
Award under this Plan shall not confer any rights upon the Participant holding
such Award other than such terms, and subject to such conditions, as are
specified in this Plan as being applicable to such type of Award (or to all
Awards) or as are expressly set forth in the Agreement evidencing such Award.
9.4 Tandem Stock or Cash Rights. Either at the time an Award is granted
or by subsequent action, the Committee may, but need not, provide that an Award
shall contain as a term thereof, a right, either in tandem with the other rights
under the Award or as an alternative thereto, of the Participant to receive,
without payment to the Company, a number of Shares, cash or a combination
thereof, the amount of which is determined by reference to the value of the
Award; provided, however, that the number of such rights granted under any Award
shall not exceed the per Eligible Employee share limitation for such Award as
set forth in Section 3.2.
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9.5 Financing. The Committee may in its discretion provide financing to
a Participant in a principal amount sufficient to pay the purchase price of any
Award and/or to pay the amount of taxes required by law to be withheld with
respect to any Award. Any such loan shall be subject to all applicable legal
requirements and restrictions pertinent thereto, including Regulation U
promulgated by the Federal Reserve Board. The grant of an Award shall in no way
obligate the Company or the Committee to provide any financing whatsoever in
connection therewith.
SECTION 10. CHANGES IN CAPITAL STRUCTURE
If the outstanding securities of the class then subject to this Plan
are increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or shares
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee may make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Awards theretofore granted under
this Plan and the exercise or settlement price of such Awards, and (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to such Awards thereafter granted under this Plan.
SECTION 11. CHANGE OF CONTROL
11.1 Effect of Change of Control. The Committee may through the terms
of the Award or otherwise provide that any or all of the following shall occur,
either immediately upon the Change of Control or a Change of Control
Transaction, or upon termination of the Eligible Employee's employment within
twenty-four (24) months following a Change of Control or a Change of Control
Transaction: (a) in the case of an Option, the Participant's ability to exercise
any portion of the Option not previously exercisable, and (b) in the case
Restricted Stock or Stock Units, the lapse and expiration of any conditions to
the grant, issuance, retention, vesting or transferability of, or any other
restrictions applicable to, such Award. The Committee also may, through the
terms of the Award or otherwise, provide for an absolute or conditional
exercise, payment or lapse of conditions or restrictions on an Award which shall
only be effective if, upon the announcement of a Change of Control Transaction,
no provision is made in such Change of Control Transaction for the exercise,
payment or lapse of conditions or restrictions on the Award, or other procedure
whereby the Participant may realize the full benefit of the Award.
11.2 Definitions. Unless the Committee or the Board shall provide
otherwise, "Change of Control" shall mean an occurrence of any of the following
events (a) any Person (other than an Exempt Person), alone or together with its
Affiliates and Associates, including any group of Persons which is deemed a
"person" under Section 13(d)(3) of the Exchange Act, becomes the Beneficial
Owner, directly or indirectly, of thirty-three and one-third percent or more of
(i) the then-outstanding shares of the Company's common stock or (ii) securities
representing thirty-three and one-third percent or more of the combined voting
power of the Company's
8
<PAGE> 9
then-outstanding voting securities; (b) a change, during any period of two
consecutive years, of a majority of the Board of the Company as constituted as
of the beginning of such period, unless the election, or nomination for election
by the Company's stockholders, of each director who was not a director at the
beginning of such period was approved by vote of at least two-thirds of the
Incumbent Directors then in office (for purposes hereof, "Incumbent Directors"
shall consist of the directors holding office as of the effective date of this
Plan and any person becoming a director subsequent to such date whose election,
or nomination for election by the Company's stockholders, is approved by a vote
of at least a majority of the Incumbent Directors then in office); (c)
consummation of any merger, consolidation, reorganization or other extraordinary
transactions (or series of related transactions) involving the Company which
results in the stockholders of the Company having power to vote in the ordinary
election of directors immediately prior to such transaction (or series of
related transactions) failing to beneficially own at least a majority of the
securities of the Company having the power to note in the ordinary election of
directors which are outstanding after giving effect to such transaction (or
series of related transactions); or (d) the stockholders of the Company approve
a plan of complete liquidation of the Company or the sale of substantially all
of the assets of the Company. "Change of Control Transaction" shall include any
tender offer, offer, exchange offer, solicitation, merger, consolidation,
reorganization or other transaction which is intended to or reasonably expected
to result in a Change of Control. "Affiliate" and "Associate", when used with
reference to any Person, have the meaning given to such terms in Rule 12b-2
under the Exchange Act. A Person's "Beneficial Ownership" of securities shall be
determined in accordance with, and a Person shall be deemed the "Beneficial
Owner" in accordance with, the rules and regulations, including Rule 13d-3,
promulgated by the Securities and Exchange Commission in connection with Section
13(d) of the Exchange Act; provided that no Person engaged in business as an
underwriter of securities shall be deemed for purposes of this Plan as the
Beneficial Owner of any securities acquired through such Person's participation
in good faith in a firm commitment underwriting until the expiration of forty
days after the date of such acquisition. "Exempt Person" means the Company, any
Subsidiary, any employee benefit plan or employee stock plan of the Company or
any Subsidiary (or any Person organized, appointed or established by the Company
or any Subsidiary for or pursuant to the terms of any such plan). "Person" means
an individual, a corporation, a partnership, an association, a trust, an
unincorporated organization or any other entity. "Subsidiary" means any
corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient to elect a majority of the directors of
such corporation (or other persons performing similar functions) are directly or
indirectly Beneficially Owned by the Company.
SECTION 12. TAXES
12.1 Withholding Requirements. The Committee may make such provisions
or impose such conditions as it may deem appropriate for the withholding or
payment by the Employee or Participant, as appropriate, of any taxes which it
determines are required in connection with any Awards granted under this Plan,
and a Participant's rights in any Award are subject to satisfaction of such
conditions.
12.2 Payment of Withholding Taxes. Notwithstanding the terms of Section
12.1 hereof, the Committee may provide in the agreement evidencing an Award or
otherwise that all or any portion of the taxes required to be withheld by the
Company or, if permitted by the
9
<PAGE> 10
Committee, desired to be paid by the Participant, in connection with the
exercise of an Option or the exercise, vesting, settlement or transfer of any
other Award shall be paid or, at the election of the Participant, may be paid by
the Company withholding shares of the Company's capital stock otherwise issuable
or subject to such Award, or by the Participant delivering previously owned
shares of the Company's capital stock, in each case having a fair market value
equal to the amount required or elected to be withheld or paid. Any such
elections are subject to such conditions or procedures as may be established by
the Committee and may be subject to disapproval by the Committee.
SECTION 13. AMENDMENTS OR TERMINATION
The Board may amend, alter or discontinue the Plan or any agreement
evidencing an Award made under the Plan, in its sole discretion, and the
Committee may amend, alter or discontinue any agreement evidencing an Award
under the Plan, and may, without limiting the generality of the foregoing;
(a) increase the maximum number of shares of Common Stock for which
Awards may be granted under the Plan;
(b) reduce the exercise price of outstanding Options;
(c) after the date of a Change of Control, impair the rights of any
Award holder, without such holder's consent, under any Award granted prior to
the date of any Change of Control; or
(d) extend the term of the Plan;
provided, however, that the Board shall not materially reduce the class of
persons eligible to be Participants unless it no longer intends for the Plan to
qualify as "broadly-based" under the New York Stock Exchange Shareholder
Approval Policy and takes appropriate actions to obtain shareholder approval of
the Plan if required under such policy.
SECTION 14. COMPLIANCE WITH OTHER LAWS AND REGULATIONS.
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell, issue or deliver Shares under such Awards,
shall be subject to all applicable federal, state and foreign laws, rules and
regulations and to such approvals by any governmental or regulatory agency as
may be required. The Company shall not be required to register in a
Participant's name or deliver any Shares prior to the completion of any
registration or qualification of such Shares under any federal, state or foreign
law or any ruling or regulation of any government body which the Committee
shall, in its sole discretion, determine to be necessary or advisable. This Plan
is intended to constitute an unfunded arrangement for key employees.
No Option shall be exercisable unless a registration statement with
respect to the Option is effective or the Company has determined that such
registration is unnecessary. Unless the Awards and Shares covered by this Plan
have been registered under the Securities Act of 1933,
10
<PAGE> 11
as amended, or the Company has determined that such registration is unnecessary,
each person receiving an Award and/or Shares pursuant to any Award may be
required by the Company to give a representation in writing that such person is
acquiring such Shares for his or her own account for investment and not with a
view to, or for sale in connection with, the distribution of any part thereof.
SECTION 15. OPTION GRANTS BY SUBSIDIARIES
In the case of a grant of an Option to any Eligible Employee employed
by a subsidiary or affiliate, such grant may, if the Committee so directs, be
implemented by the Company issuing any subject Shares to the subsidiary or
affiliate, for such lawful consideration as the Committee may determine, upon
the condition or understanding that the subsidiary or affiliate will transfer
the Shares to the optionholder in accordance with the terms of the Option
specified by the Committee pursuant to the provisions of the Plan.
Notwithstanding any other provision hereof, such Option may be issued by and in
the name of the subsidiary or affiliate and shall be deemed granted on such date
as the Committee shall determine.
SECTION 16. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ of
the Company or interfere in any way with the right of the Company to terminate
an individual's employment at any time. The Award agreements may contain such
provisions as the Committee may approve with reference to the effect of approved
leaves of absence.
SECTION 17. EFFECTIVENESS AND EXPIRATION OF PLAN
The Plan shall be effective on the date the Board adopts the Plan. No
Stock Option Award, Restricted Stock Award or Stock Unit shall be granted
pursuant to the Plan more than ten (10) years after the effective date of the
Plan.
SECTION 18. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Board or the Committee to adopt
such other incentive arrangements as it or they may deem desirable, including
without limitation, the granting of restricted stock or stock options otherwise
than under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
SECTION 19. GOVERNING LAW
This Plan and any agreements hereunder shall be interpreted and
construed in accordance with the laws of the State of Delaware and applicable
federal law. The Committee may provide that any dispute as to any Award shall be
presented and determined in such forum as the Committee may specify, including
through binding arbitration. Any reference in this Plan or in the agreement
evidencing any Award to a provision of law or to a rule or regulation shall be
deemed to include any successor law, rule or regulation of similar effect or
applicability.
11
<PAGE> 1
EXHIBIT 10.36
[WESTERN DIGITAL CORPORATION LETTERHEAD]
October 1, 1999
Mr. Charles A. Haggerty
27 Le Conte
Laguna Niguel, 92677
Dear Chuck:
This letter, when signed by you, constitutes the agreement between you and
Western Digital, Inc. (the "Company") relative to your resignation from the
Company.
You are employed by the Company as its President, Chief Executive Officer and
Chairman of the Board and are a member of the Board of Directors of the Company
and an officer and/or director of certain of the Company's subsidiaries. The
Company and you wish to document (i) the severance and other benefits the
Company has agreed to pay you in connection with your resignation as President,
Chief Executive Office and Chairman of the Board and as a member of the
Company's Board of Directors and as a director and/or officer of certain of its
subsidiaries and other related companies upon which you serve as a director
and/or officer, and (ii) the consulting arrangement and restrictions that will
be in effect following such termination.
in consideration of the mutual promises and covenants contained herein, it is
hereby agreed by and between us as follows:
1. RESIGNATION DATE. Your resignation as President, Chief Executive
Officer, Chairman of the Board, and a member of the Company's Board of
Directors, and from your positions as director and/or officer of each of the
Company's subsidiaries where you so serve (except as otherwise provided in
paragraph 8(b) herein), shall be effective June 30, 2000, or on such earlier
date as the Board of Directors of the Company (the "Board") may determine. Your
resignation as an employee of the Company shall be effective June 30, 2000 (the
"Termination Date").
2. PAYMENT OF COMPENSATION AND BENEFITS.
(a) You will receive your normal salary through the Termination
Date, and all regular and mandatory payroll deductions will be taken
from your final paycheck. Your participation in the Company's employee
benefit programs shall cease as of the Termination Date, except to the
extent provided in Paragraph 6 below.
(b) You will be eligible for a bonus for the full fiscal year
2000, based upon your bonus target and the determination by the Board
with respect to payment of bonuses, if any, to senior
<PAGE> 2
Mr. Charles A. Haggerty
October 1, 1999
Page 2
management of the Company under the Company's fiscal year 2000
Management Incentive Plan.
3. CONSULTING PAYMENTS. As consideration for the consulting services you
agree to provide pursuant to Paragraph 8 and the other covenants contained in
this Agreement, the Company agrees to pay you compensation in the amounts and
payable as follows: $750,000 on the Effective Date (as defined in Paragraph 23
hereof); and $750,000 on the Termination Date. You understand and agree that
this compensation is front-loaded and is payment in full for your services
throughout the Consultancy Period and the other covenants contained in this
Agreement. All payments will be subject to the Company's deduction of applicable
withholding taxes and other regular and mandatory deductions. However, in the
event of a material breach by you of any of your covenants under this Agreement,
the Company's obligation to make such payments shall immediately cease, and you
shall be required to promptly reimburse the Company in full for any such
payments made by the Company to you.
4. OTHER PLANS AND AGREEMENTS. You are a participant in the Company's
Extended Severance Plan ("Severance Plan"). If, prior to the Termination Date,
you become eligible for severance payments under the Severance Plan, and the
amount of such severance payments exceeds the amount payable to you under
Paragraph 3 above, then, in lieu of your receiving severance payments under the
Severance Plan, the payments in Paragraph 3 shall be increased to an amount
equal to such severance payments, and all other provisions of this Agreement
shall remain the same.
5. STOCK OPTIONS. You currently hold outstanding stock options for
shares of the Company's common stock. A schedule setting forth these options,
their grant dates, exercise prices, vesting schedules and expiration dates, is
attached as Attachment "A" and incorporated herein by reference. At the
Termination Date all such options outstanding at that time shall be immediately
and fully vested and exercisable. Thereafter all such options shall be fully
exercisable until the dates of their expiration; provided, however, that the
Company may cancel any unexpired option at any time if you are in violation of
any of your covenants under Paragraph 9 hereof, without regard to the time
limitation provided for therein. To the extent the options are non-qualified
options under the federal income tax laws, you shall recognize compensation
income in connection with your exercise of those options, and you agree to
satisfy all applicable withholding taxes associated with each such exercise.
6. BENEFITS.
(a) The Company shall continue to provide you, from the
Termination Date through June 30, 2005, such medical and group insurance
benefits as are at least as favorable as the most favorable medical and
group insurance benefits provided from time to time to senior executives
of the Company. Notwithstanding the foregoing, if you are covered under
any medical or group insurance plans provided by a subsequent employer,
such coverages will be primary to those provided by the Company.
<PAGE> 3
Mr. Charles A. Haggerty
October 1, 1999
Page 3
(b) At the Termination Date the Company shall assign its rights
and interests to you, or your designee, in the Collaterally Assigned
Split Dollar Universal Life insurance policies in your name that you
have previously collaterally assigned to the Company.
(c) You are a participant in the Company's Deferred Compensation
Plan. For purposes of the plan you have advised the Company that your
severance from employment at the Termination Date shall be deemed a
Termination of Employment as that term is defined in the plan.
Distribution to you of your account balance shall be made in accordance
with the provisions of the plan.
7. INDEMNIFICATION AND ASSISTANCE.
(a) If you are subjected to any claim or demand involving any
action or inaction allegedly taken by you during the course of your
employment or directorship with the Company, you will be entitled to all
rights of indemnification which may then be available to other executive
officers or directors of the Company, including, without limitation,
insurance protection under any director and/or officer liability
insurance coverage maintained by the Company or any subsidiary and any
rights to indemnification provided by applicable law or the By-laws of
the Company or any subsidiary, and the Company will, and shall cause any
subsidiary to, cooperate fully with you in responding to or defending
against any such claim or demand.
(b) You agree to make yourself available to respond to inquiries
by the Company regarding management, regulatory, and legal activities of
which you acquired knowledge while employed by the Company. You agree to
make yourself available, without the requirement of being subpoenaed, to
confer with counsel at reasonable times and locations and upon
reasonable notice concerning any knowledge you have or may have with
respect to actual and/or potential disputes arising out of the
activities of the company during your period of employment. You further
agree to submit to deposition and/or testimony in accordance with the
laws of the forum involved concerning any knowledge you have or may have
with respect to actual and/or potential disputes arising out of the
activities of the company during your period of employment.
8. CONSULTING AND BOARD SERVICE.
(a) As a condition to, and in consideration for, the severance
benefits you are to receive herein, you agree to make yourself available
to perform consulting services reasonably requested of you during the
period beginning from the Termination Date and ending on June 30, 2005
(the "Consultancy Period"). You agree to make yourself reasonably
available to render up to 75 hours of consulting services per each of
the Company's fiscal quarters during the Consultancy Period, provided
that such consulting services do not materially conflict with your then-
existing activities or commitments. All assignments will come from the
Chief Executive officer of the Company, and you will
<PAGE> 4
Mr. Charles A. Haggerty
October 1, 1999
Page 4
report directly to such person with respect to each assignment. Should
you be requested to render more than the required 75 hours of consulting
services per fiscal quarter, then you will be compensated for those
additional hours at an hourly rate to be agreed upon by you and the
Chief Executive Officer of the Company at the time such consulting
services are to be rendered. You will be reimbursed for all reasonable
out-of-pocket expenses incurred in rendering such consulting services
upon your submission of appropriate documentation for those expenses.
During the Consultancy Period, you will not make any representations to
any third party that you are an officer or employee of the Company or a
member of the Company's Board of Directors. Any proprietary information
or other confidential information of the Company to which you may have
access in the performance of your consulting services will be held in
confidence and will not be disclosed to any third party or otherwise
directly or indirectly used by you, except to the extent necessary to
perform your consulting services.
(b) The Company shall cause you to be elected as Chairman of the
Board of the following subsidiaries of the Company: Connex, Inc. and
SageTree, Inc. During your service as Chairman and a director of each
company you shall be entitled to receive such compensation and other
benefits, if any, as are afforded to outside directors of such company.
The foregoing notwithstanding, the Company may at any time or from time
to time change the organization, structure or operation of each such
company, or the composition of its Board of Directors, and it is
understood by you that any such changes may include the removal of you
as Chairman and/or a director of each such company.
9. YOUR COVENANTS.
As a condition to, and as consideration for, the severance and other
benefits you are to receive herein, you agree that you will not, at any time
during the Consultancy Period:
(a) directly or indirectly, whether for your own account or as an
employee, director, consultant or advisor, provide services to any
business or engage in any business which at the time of commencement of
such services is competitive with the Company's or any of its
subsidiaries' product lines or business activities, unless you obtain
the prior written consent of the Company's Chief Legal Officer;
(b) directly or indirectly solicit any individuals to leave the
Company's (or any of its subsidiaries') employ for any reason or
interfere in any other manner with the employment relationships at the
time existing between the Company (or any of its subsidiaries) and its
current or prospective employees;
(c) induce or attempt to induce any customer, supplier,
distributor, licensor, licensee or other business relation of the
Company (or any of its subsidiaries) to cease doing business with the
Company (or any of its subsidiaries) or in any way interfere with the
existing business relationship between any such
<PAGE> 5
Mr. Charles A. Haggerty
October 1, 1999
Page 5
customer, supplier, distributor, licensor, licensee or other business
relation and the Company (or any of its subsidiaries); or
(d) disparage, defame or slander the Company (or any of its
subsidiaries) or any of their officers or directors or any of its
products or services, to any one, including but not limited to any past,
present or prospective customers. The foregoing sentence is not
applicable to comments you may make to your immediate family. During the
Consultancy Period the Company's Board of Directors and its officers
shall refrain from any disparagement, defamation or slander of you.
10. CONFIDENTIAL INFORMATION. When you joined the Company you signed an
agreement setting forth your obligations to us during and after your employment.
A copy of your agreement is attached hereto as Attachment "B" and incorporated
herein by reference. You understand and agree that in the course of your
employment with the Company, you have acquired confidential information and
trade secrets concerning the Company's operations, its future plans and its
methods of doing business. You understand and agree it would be extremely
damaging to the Company if you disclosed such information to a competitor or
made it available to any other person or company. You understand and agree that
such information has been divulged to you in confidence, and you understand and
agree that you will keep such information secret and confidential unless
disclosure is required by court order or otherwise by compulsion of law. In view
of the nature of your employment and the information and trade secrets which you
have received during the course of your employment, you also agree that the
Company would be irreparably harmed by any violation, or threatened violation of
the agreements in this Paragraph and that, therefore, the Company shall be
entitled to an injunction prohibiting you from any violation or threatened
violation of such agreements.
11. RELEASE OF CLAIMS. Neither the Board of Directors nor any of the
elected officers of the Company presently has any knowledge of any claims or
causes of action that the Company might have or assert against you arising from
any omissions, acts or facts that have occurred up until and including the
Effective Date of this Agreement (as defined in Paragraph 23 hereof). You agree
that the consideration provided for in this Agreement represents payment in full
of all outstanding obligations owed to you by the Company or any subsidiary of
the Company. You, on behalf of yourself and your heirs, agents, representatives,
immediate family members, executors, successors, and assigns, hereby fully and
forever release the Company and our agents, directors, employees, attorneys,
investors, shareholders, administrators, affiliates, divisions, subsidiaries,
parents, predecessor and successor corporations, and assigns from, and agree not
to sue or otherwise institute or cause to be instituted any legal or
administrative proceedings concerning, any claim, duty, obligation or cause of
action relating to any matters of any kind, whether presently known or unknown,
suspected or unsuspected, that you may possess against the Company arising from
any omissions, acts or facts that have occurred up until and including the
Effective Date including, without limitation,
<PAGE> 6
Mr. Charles A. Haggerty
October 1, 1999
Page 6
(a) any and all claims relating to or arising from your
relationship with the Company or any subsidiary of the Company and the
termination of that relationship;
(b) any and all claims relating to, or arising from, your right
to purchase, or actual purchase of shares of stock of the Company or any
subsidiary of the Company, including, without limitation, any claims for
fraud, misrepresentation, breach of fiduciary duty, breach of duty under
applicable state corporate law, and securities fraud under any state or
federal law;
(c) any and all claims for wrongful discharge of employment;
termination in violation of public policy; discrimination; breach of
contract, both express and implied; breach of a covenant of good faith
and fair dealing, both express and implied; promissory estoppel;
negligent or intentional infliction of emotional distress; negligent or
intentional misrepresentation; negligent or intentional interference
with contract or prospective economic advantage; unfair business
practices; defamation; libel; slander; negligence; personal injury;
invasion of privacy; false imprisonment; and conversion;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil
Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination
in Employment Act of 1967, the Americans with Disabilities Act of 1990,
the Fair Labor Standards Act, the Employee Retirement Income Security
Act of 1974, The Worker Adjustment and Retraining Notification Act, the
Older Workers Benefit Protection Act; the California Fair Employment and
Housing Act, and the California Labor Code;
(e) any and all claims for violation of the federal or any state
constitution;
(f) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
(g) any and all claims for attorneys' fees and costs.
Each of us agrees that the release set forth in this Paragraph shall be
and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred under
this Agreement.
12. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. You acknowledge that
you are waiving and releasing any rights you may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. You and the Company agree that this waiver and
release does not apply to any rights or claims that may arise under the ADEA
after the Effective Date of this Agreement. You acknowledge that the
consideration given for this waiver and release Agreement is in addition to
anything of value to which you were already entitled. You further acknowledge
that you have been advised by this writing that (a) you should consult with an
<PAGE> 7
Mr. Charles A. Haggerty
October 1, 1999
Page 7
attorney prior to executing this Agreement; (b) you have at least twenty-one
(21) days within which to consider this Agreement; (c) you have seven (7) days
following the execution of this Agreement by you to revoke the Agreement, and
(d) this Agreement shall not be effective until the revocation period has
expired. Any revocation should be in writing and delivered in accordance with
the notice provisions of Paragraph 19 hereof by close of business on the seventh
day from the date that you sign this Agreement.
13. CIVIL CODE SECTION 1542. You represent that you are not aware of any
claim other than the claims that are released by this Agreement. You acknowledge
that you have been advised by legal counsel and are familiar with the provisions
of California Civil Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
You, being aware of said code section, agree to expressly waive any
rights you may have thereunder, as well as under any other federal or state
statute or common law principles of similar effect.
14. REMEDIES IN EVENT OF FUTURE DISPUTE.
(a) Except as provided in subparagraph (b) below, in the event of any
future dispute, controversy or claim between us arising from or relating
to this Agreement, its breach, any matter addressed by this Agreement,
and/or your employment with the Company through the Termination Date, we
will first attempt to resolve the dispute through confidential
non-binding mediation to be conducted in Orange County, California by
JAMS-Endispute or such other mediator as we shall mutually agree upon.
If our dispute is not resolved through mediation, we will submit it to
final and binding confidential arbitration to be conducted in Orange
County, California by JAMS/Endispute in accordance with the then
existing JAMS/Endispute Arbitration Rules and Procedures for Employment
Disputes. In the event of such an arbitration proceeding, we shall
select a mutually acceptable neutral arbitrator from among the
JAMS/Endispute panel of arbitrators. If we cannot agree on an
arbitrator, the Administrator of JAMS/Endispute shall appoint an
arbitrator. Neither one of us nor the arbitrator shall disclose the
existence, content, or results of any arbitration hereunder without the
prior written consent of both of us, except as may be compelled by court
order. Except as provided herein, the Federal Arbitration Act shall
govern the interpretation and enforcement of such arbitration and all
proceedings. The arbitrator shall apply the substantive law (and the law
of remedies, if applicable) of the State of California, or Federal law,
or both, as applicable and the arbitrator is without jurisdiction to
apply any different substantive law. The arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary
judgment by either of us and shall apply the standards governing such
motions under the
<PAGE> 8
Mr. Charles A. Haggerty
October 1, 1999
Page 8
Federal Rules of Civil Procedure. The arbitrator shall render an award
and a written, reasoned opinion in support thereof. Judgment upon the
award may be entered in any court having jurisdiction thereof. Each of
us intends this arbitration provision to be valid, enforceable,
irrevocable and construed as broadly as possible. Pending the resolution
of any dispute between us, the Company shall continue prompt payment of
all amounts due you under this Agreement and prompt provision of all
benefits to which you are otherwise entitled.
(b) In the event that a dispute arises concerning compliance with
this Agreement, either of us will be entitled to obtain from a court
with jurisdiction over us preliminary and permanent injunctive relief to
enjoin or restrict the other party from such breach or to enjoin or
restrict a third party from inducing any such breach, and other
appropriate relief, including money damages. In seeking any such relief,
however, the moving party will retain the right to have any remaining
portion of the controversy resolved by binding confidential arbitration
in accordance with subparagraph (a) above.
(c) The prevailing party in any such arbitration or court
proceeding shall be entitled to recover from the losing party his or its
reasonable costs and expenses incurred in connection with the
arbitration or court proceeding.
15. ASSIGNMENT. The rights and obligations of the company under this
Agreement shall inure to the benefit of and shall be binding upon the present
and future subsidiaries of the Company, any and all subsidiaries of a
subsidiary, all affiliated corporations, and successors and assigns of the
Company. No assignment of this Agreement by the Company will relieve the Company
of its obligations. You shall not assign any of your rights and/or obligations
under this Agreement and any such attempted assignment will be void. This
Agreement shall be binding upon and inure to the benefit of your heirs,
executors, administrators, or other legal representatives and their legal
assigns.
16. WAIVER. A waiver by either us of any of the terms or conditions of
this Agreement in any instance shall not be deemed or construed to be a waiver
of such term or condition for the future, or of any subsequent breach thereof.
All remedies, rights, undertakings, obligations, and agreements contained in
this Agreement shall be cumulative, and none of them shall be in limitation of
any other remedy, right, undertaking, obligation or agreement of either of us.
17. TAX CONSEQUENCES. The Company makes no representations or warranties
with respect to the tax consequences of the payment of any sums to you under the
terms of this Agreement. You agree and understand that you are responsible for
payment, if any, of local, state and/or federal taxes on the sums paid hereunder
by the Company and any penalties or assessments thereon.
18. COSTS. Except as provided in Paragraph 14 hereof, each of us shall
each bear our own costs, expert fees, attorneys' fees and other fees incurred in
connection with this Agreement.
<PAGE> 9
Mr. Charles A. Haggerty
October 1, 1999
Page 9
19. NOTICES. All notices required by this Agreement shall by given in
writing either by personal delivery or by first class mail, return receipt
requested. Notices shall be addressed as follows:
To Western Digital: Western Digital Corporation
8105 Irvine Center Drive
Irvine, CA 92618
Attention: General Counsel
To Mr. Haggerty: 27 Le Conte
Laguna Niguel, CA 92677
or in each case to such other address as you or the Company shall notify the
other. Notice given by mail shall be deemed given five (5) days following the
date of mailing.
20. ENTIRE AGREEMENT. Except as provided in Paragraph 4 hereof, this
Agreement, including its Attachments, represents the entire agreement and
understanding between you and the Company concerning the subject matter herein,
and supersedes and replaces any and all prior agreements and understandings.
21. NO ORAL MODIFICATION. This Agreement may only be amended by a
writing signed by you and the then Chief Executive Officer of the Company or the
Chief Legal Officer of the Company.
22. GOVERNING LAW. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of the State of California.
23. EFFECTIVE DATE. This Agreement is effective eight days after it has
been signed by both of us (the "Effective Date").
24. COUNTERPARTS. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of us.
25. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
each of us, with the full intent of releasing all claims. Each of us
acknowledges that:
(a) we have read this Agreement;
(b) we have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of our own choice or that
we have voluntarily declined to seek such counsel;
(c) we understand the terms and consequences of this Agreement
and of the releases it contains; and
(d) we are fully aware of the legal and binding effect of this
Agreement.
<PAGE> 10
Mr. Charles A. Haggerty
October 1, 1999
Page 10
Please indicate your agreement to the above by signing below.
Very truly yours,
Western Digital Corporation
/s/ MICHAEL A. CORNELIUS
Michael A. Cornelius
Agreed to by
/s/ CHARLES A. HAGGERTY
- ------------------------------
Charles A. Haggerty
Sept. 30, 1999
Irvine, California
<PAGE> 1
EXHIBIT 10.37
July 6, 1999
Mr. David W. Schafer
21 Emerald
Irvine, CA 92714
Dear Dave:
This letter, when signed by you, constitutes the agreement ("Agreement")
relative to your resignation from Western Digital Corporation (the "Company").
The terms of this Agreement are as follows:
1. You will continue to work on site in your position as Senior Vice
President, Strategic Customer Relations until October 1, 1999.
1a. You have agreed to serve as Master of Ceremonies at Service Recognition
Dinners in Irvine and San Jose during September, 1999.
2. You will continue to be treated as an employee, including stock option
vesting, until the earlier of March 31, 2000 or your death. During such
time you will be available for occasional consulting of up to two days
per month as reasonably agreed by the Company and you. Stock options
previously granted to you under the Employee Stock Option Plan will
continue to vest in accordance with their terms, which during the period
from October 1, 1999 through March 31, 2000 would result in the vesting
of 20,188 to 27,960 additional exerciseable shares.
3. You will be paid $137,500.00 in salary continuation. Thirteen (13)
bi-weekly payments of $10,576.92 will begin on October 15, 1999, and
conclude on March 31, 2000. Your Deferred Compensation Plan balance will
be paid to you within 90 days of March 31, 2000.
4. Any exercise of stock options by you must be in accord with the
provisions of your stock option agreements and with the procedures
relating to exercise as may be established by the Compensation Committee
of the Board of Directors from time to time. All such procedures, unless
they are to your benefit, shall be of general application and will not
apply specifically to you. The Company will act expeditiously and in a
supportive manner in assisting you to exercise your options. You will
have up to 3 months following March 31, 2000 to exercise your vested
options.
<PAGE> 2
5. Until March 31, 2000, you will continue to receive benefits accorded to
employees generally, other than vacation accruals, and benefits accorded
to you and other executives in comparable pay grades ("special
benefits"), provided that such special benefits continue to be furnished
to executives generally in comparable pay grades. These include:
a) your flex benefit allowance of $339.03 per pay period
b) Employee Stock Purchase Plan (ESPP) will continue and
deductions will be made from your salary continuation
checks until the next purchase date.
c) 401(k) participation and Western Digital employer match
will continue with deductions coming from your salary
continuation checks.
d) Financial planning assistance of up to $5,000 per fiscal
year for executive tax consultation will continue.
e) Supplemental executive medical coverage up to $3,000 per
fiscal year will continue.
f) Auto allowance of $323.08 per pay period.
If any benefits (including special benefits) are discontinued and
adjustments are made to compensation or benefits of employees generally,
or of executives in comparable pay grades, in lieu of the discontinued
benefits, and if such discontinuances apply to you under this agreement,
then in such instances like adjustments will be made to payments or
benefits accorded to you with respect to the period through March 31,
2000. No actions will be taken with respect to the monies payable or the
benefits accorded to you that are intended to affect adversely only you
or other terminating employees, unless such actions are taken as a
result of a material breach by you of any of your obligations under this
agreement. Should you take another position, prior to the expiration of
your salary continuation, as an employee of a company with health
insurance coverages, Western Digital's health coverages stop at the end
of the month in which you start to work for the other company. On May
31, 2000 (sixty days after your termination date), all Western Digital
benefits will cease. You may be entitled to continued basic health
insurance coverage under the Company's COBRA plan. If you so elect, this
continuation will be on terms consistent with applicable federal laws
and regulations. If you elect and are eligible to continue this
coverage, you will be charged a monthly premium to cover the cost of
providing this insurance including a small administrative fee, Our
benefits administration staff will give you complete details in this
regard.
6. You and the Company agree that the terms of this arrangement will be
held in confidence except to the extent that disclosures may be required
by government regulations or judicial process or to receive tax, legal
or financial advice. References which may request information about your
employment will be referred to the Vice President of Human Resources.
<PAGE> 3
7. By October 15, 1999 you will be paid all accrued, unused vacation.
Although you will continue on the Company payroll through March 31, 2000
you will accrue no more vacation subsequent to October 1, 1999.
8. Any distributions to which you are entitled from the Savings and Profit
Sharing Plan will be made to you in accordance with the terms of that
plan after your termination date of March 31, 2000.
9. The Company will provide executive outplacement assistance through Lee
Hecht Harrison or another firm of your choosing if you wish. Contact Pam
Burdi at (949) 932-5516 for assistance with these arrangements.
10. You agree that, for the period beginning October 1, 1999 and ending
March 31, 1999 you will not provide services to a "direct competitor" of
the Company. You and the Company agree that, for purposes of the
Agreement, the terms "direct competitor" shall mean a division of a
business (a) which is a significant direct competitor of the Company as
of the date of this Agreement, and (b) which is currently in the
business of manufacturing and selling Winchester type magnetic hard
drives. Provided, however, that nothing in this Agreement shall prevent
you from accepting employment with another business which is not a
direct competitor with the Company and/or competing with the Company in
a manner consistent with the terms of this Agreement.
11. You agree that, until March 31, 2000, you will observe and be bound by
all fiduciary duties and duties of loyalty which were applicable to you
as an employee of the Company. Additionally, you agree that at any time
prior to March 31, 2000, you will not induce any active employee of the
Company or of any of its subsidiaries, to terminate his or her
employment with the Company or any subsidiary of the Company, unless you
first obtain written permission from the Chief Executive Officer or the
Vice President of Human Resources of the Company, provided however, that
you shall not be considered to have induced an employee to terminate his
or her employment with the Company if you respond to good faith
inquiries by said persons initiated other than by you.
12. In the course of your employment, and because of the nature of your
responsibilities, you have acquired and may continue to acquire
confidential information and trade secrets with regard to the Company's
business operations, including, but not limited to, the names and
addresses of its clients and their respective contact points, marketing
materials, financial data and analysis, technical know-how, business
plans and strategies, forecasts, and other similar information
(collectively the "Confidential Information"). You agree that the
Confidential Information has been developed at considerable expense and
effort by the Company, is not generally known to the public at large, is
not readily ascertainable by
<PAGE> 4
proper means, has been the subject of reasonable efforts to maintain its
secrecy, and has at all times remained in the exclusive property of the
Company. You agree that you shall not, at any time during or after your
employment with the Company, directly or indirectly disclose, divulge,
reveal, report, publish, transfer, or use, for any purpose, any
Confidential Information which has been obtained by or disclosed to you
as a result of your employment by the Company, including any
Confidential Information, except as may be required by law. You further
agree that any and all of the Confidential Information, including all
intellectual property rights therein, shall be and shall remain the sole
and exclusive property of Western Digital.
13. You and the Company agree that in the event the Company determines in
good faith that you have violated the terms of paragraphs 10, 11, or 12,
the Company may make any remaining unpaid payments due to you pursuant
to paragraph 3 hereof into a third party escrow account pending further
agreement of the parties or the award of an arbitrator pursuant to the
arbitration provisions of this paragraph. The arbitrator shall be
authorized to determine whether the remaining payment obligations under
paragraph 3 of this Agreement shall continue notwithstanding any alleged
breach of this Agreement or are terminated as a result of the alleged
breach. In the event an arbitrator determines that you have violated the
terms of paragraphs 10, 11, or 12, then the arbitrator shall be
authorized to direct payment of the money (including any accrued
interest) from the escrow account to the Company and order that the
Company is not required to make any further payments to you under
paragraph 3, and award the Company any other appropriate remedies.
Additionally, in no event shall you be required to pay to the Company
any payments received prior to the date that the Company notifies you of
the alleged breach of the paragraphs 10, 11, or 12. In the event an
arbitrator determines that you have not violated the terms of paragraphs
10, 11, or 12, then the arbitrator shall be authorized to direct payment
of any money (including accrued interest, if any) held in the escrow
account to you and award you any other appropriate remedies.
14. None of the officers of the Company (i.e. officers elected by the Board
of Directors) have knowledge of any claims which the Company might
assert against you, and for the period that you are and have been
employed by the Company you will be afforded the protections provided
for under the Company's Bylaws, indemnification agreements and the
various insurance policies carried by the Company that would apply to
you.
15. In consideration for the payments and benefits provided to you pursuant
to this Agreement, you hereby irrevocably and unconditionally release,
acquit and forever discharge Western Digital Corporation, all of its
current and former subsidiaries, affiliates, divisions, successors,
predecessors, related corporate entities, assigns, owners,
<PAGE> 5
stockholders, directors, officers, current and former employees, agents,
representatives, attorneys, insurers and all persons acting by, through,
under or in concert with any of them (collectively "Releasees"), from
any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, damages, actions, causes of action, suits, rights,
demands, costs, losses, debts and expenses (including attorneys' fees
and costs) actually incurred of any nature whatsoever, known or unknown,
suspected or unsuspected ("Claim" or "Claims") which you now have, own
or hold, or claim to have, own or hold, or which you at any time
heretofore had, owned or held, or claimed to have had, owned or held
against any of the Releasees relating to any event, act or omission that
has occurred as of the date of the Agreement, including, but by no means
limited to, any events arising out of your employment with Western
Digital Corporation. The Claims which you are releasing include, but are
not limited to, claims for discrimination, harassment and retaliation
under the California Fair Employment and Housing Act, Title VII of the
Civil Rights Act, the Age Discrimination in Employment Act and public
policy, claims for disability and medical condition discrimination under
the Americans with Disabilities Act and the California Fair Employment
and Housing Act, claims for wrongful termination, breach of implied or
express contract, and breach of the covenant of good faith and fair
dealing, claims for wages, penalties and interest under the California
Wage Orders, the Fair Labor Standards Act and the California Labor Code,
claims for injuries purportedly occurring in the course and scope of
employment, claims under the California Workers' Compensation Act, tort
claims for intentional infliction of emotional distress, defamation, and
all claims like or related to any of the foregoing.
16. You also expressly waive and relinquish all rights and benefits afforded
by Section 1542 of the Civil Code of the State of California, and do so
understanding, and acknowledging the significance and consequence of
such specific waiver of Section 1542. Section 1542 of the Civil Code of
the State of California states as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in their favor at the time of
executing the release, which if known by him must have materially
affected their settlement with the debtor.
Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of the
Releasees, you expressly acknowledge that this Agreement is intended to
include in its effect, without limitation, all Claims which you do not
know or suspect to exist in your favor at the time of execution thereof,
and that this Agreement contemplates the extinguishment of any such
Claim or Claims.
<PAGE> 6
17. You should consult with an attorney concerning this Agreement. By
signing this Agreement, you acknowledge that you have carefully read
this Agreement, understand it and are voluntarily entering into it.
18. The undersigned persons represent and warrant that they have been duly
authorized to execute this agreement on behalf of the person, or
corporations as described below.
19. This agreement shall be construed in accordance with, and all disputes
arising thereunder shall be governed by, the laws of the State of
California.
20. You have up to twenty-one days from the date of your receipt of this
Agreement to consider this Agreement. You also have seven days after
execution of this Agreement to revoke it in writing. This Agreement
shall not be effective or enforceable until the revocation period has
expired.
WESTERN DIGITAL CORPORATION
Jack Van Berkel
Vice President
Human Resources
JVB: kl
I have read and agree to all terms and conditions as outlined above.
- ----------------------------------- -----------------------------------
David W. Schafer Date
<PAGE> 7
MARCH, 2000 STATUS OF BENEFITS UPON
TERMINATION OF EMPLOYMENT - DAVE SCHAFER
The following information is to help you understand the status of your benefits
if you are affected by a reduction in work force.
MEDICAL INSURANCE
Medical coverage continues until May 31, 2000.
DENTAL INSURANCE
Dental coverage continues until May 31, 2000.
VISION INSURANCE
Vision coverage continues until May 31, 2000.
COBRA CONTINUATION COVERAGE
Continuation privileges may be available through COBRA for the medical, dental,
vision, and health care reimbursement plans you are enrolled in at the time of
termination. COBRA information and election forms will be mailed to you by the
COBRA administrator for Western Digital (COBRAPRO) within two weeks from your
last date of coverage.
LIFE INSURANCE
Life insurance coverage continues until May 31, 2000. Conversion privileges to
an individual policy are available after your coverage terminates. You must
apply with the insurance carrier within 31 days. Conversion forms are available
at the Benefits Department.
ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE (AD&D)
Accidental death and dismemberment insurance coverage continues until May 31,
2000. Conversion privileges to an individual policy are available after your
coverage terminates. You must apply with the insurance carrier within 31 days.
Conversion forms are available at the Benefits Department.
DEPENDENT LIFE INSURANCE
Dependent life insurance coverage continues until May 31, 2000. Conversion
privileges to an individual policy are available after your coverage terminates.
You must apply with the insurance carrier within 31 days. Conversion forms are
available at the Benefits Department.
BUSINESS TRAVEL ACCIDENT COVERAGE
Business travel accident coverage will end on your last active day at work for
Western Digital which is October 1, 1999. Under the terms of the contract, no
conversion privileges are available.
<PAGE> 8
LONG-TERM DISABILITY
Long-term disability coverage will end on your last active day at work for
Western Digital, October 1, 1999. Conversion privileges to an individual policy
are available by completing an application and submitting the first quarterly
premium within 31 days of our termination of group coverage. To qualify for
conversion, you must have been covered under the current group plan for 12
consecutive months. Conversion forms are available at the Benefits Department.
SHORT-TERM DISABILITY
Short-term disability coverage will end on your last day actively at work for
Western Digital, October 1, 1999, Under the terms of the contract, no conversion
privileges are available.
REIMBURSEMENT ACCOUNTS
If contributions continue to be deducted from scheduled payments, Health Care
and Dependent Care Account claims may be reimbursed for ELIGIBLE EXPENSES
INCURRED UP TO THE LAST DAY OF YOUR BENEFITS COVERAGE. Money left over in the
account(s) at the end of the plan year (June 30) is forfeited. You will have a
90 day grace period (through August 30, 2000) to file a claim for reimbursement.
Send the claims to FlexPro, P. O. Box 5545, Orange, CA 92613. Telephone (949)
835-6752, Fax (949) 953-9404.
MANAGED HEALTH NETWORK (MHN)
The MHN program will continue for you and your dependents until May 31, 2000.
The toll free number is 800-327-8399. However, if you elect COBRA continuation,
you may still be eligible to continue MHN benefits.
RETIREMENT SAVINGS (401(k)) & PROFIT SHARING PLAN
As a participant in this plan, you will continue to participate in the plan
until March 31, 2000. The company match is effective until March 31, 2000. After
that date, you will receive 100% of your employee account, plus 100% of the
profit sharing account, and the vested portion of the employer match account.
For information regarding rollover or distribution of your account, call T. Rowe
Price at 800-922-9945. If you wish to withdraw your account from the plan,
simply return the termination package that will be sent to you from T. Rowe
Price. If your account is over $3,500.00, you may defer the withdrawal of your
account until a future point in time,
CONTRIBUTIONS CONTINUE: Contributions will continue to be deducted from wage
continuation payments unless you call T. Rowe Price at 800-922-9945 to suspend
your contributions.
SAVINGS 401(K) PLAN LOANS: Bi-weekly loan payments will continue to be deducted
from wage continuation payments. You will choose one of the following options to
be effective after your last
<PAGE> 9
wage continuation payment: 1) continue making loan payments, 2) repay the entire
outstanding loan balance, or 3) elect final distribution upon which any
outstanding loan balance will be treated as a taxable distribution. You must
complete a Loan Repayment form indicating your selection that will be provided
in the T. Rowe Price termination package.
EMPLOYEE STOCK PURCHASE PLAN
You will continue to participate in ESPP through March 31, 2000. Deductions for
ESPP will be made from your wage continuation checks. If you have previously
purchased shares, then you can keep or sell them as you wish.
STOCK OPTIONS
If you have received stock options, they will vest through your date of
termination from Western Digital in accordance with the plan provisions. Contact
Stasia Shirley at 949-932-5645 for more information.
VACATION
All earned but unused vacation will be paid by the first wage continuation
payment following your last day of active employment with Western Digital.
Vacation Buy: The cost of the extra hours you have taken but not paid
for will be subtracted from your final paycheck.
Vacation Sell: The remaining amount and any accrued vacation that you
haven't taken is paid to you. Exception: If you term with a negative
vacation balance, the value of those hours will be subtracted from your
final paycheck.
SICK LEAVE
All unused sick leave will be forfeited in accordance with the policy of Western
Digital.
EDUCATIONAL REIMBURSEMENT
If you have received prior educational approval for classes that have started,
but which you will not complete before your termination date, you are eligible
for reimbursement for the classes you are currently attending. Reimbursement
will be made following the company's receipt of proof that the class was
successfully completed based on the policy guidelines.
CREDIT UNION
Membership is lifetime and is not based on continuing employment with Western
Digital
CALIFORNIA STATE UNEMPLOYMENT BENEFITS
You can file an application for unemployment benefits immediately, however your
eligibility for benefits (as determined by the EDD-Employment Development
Department) will be delayed until after your last Wage Continuation payment on
March 31, 2000.
<PAGE> 10
If you have any questions, need to request forms, or need life conversion forms,
contact:
WESTERN DIGITAL
BENEFITS DEPARTMENT
8105 IRVINE CENTER DRIVE
IRVINE, CA 92618
949-932-5700
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DIGITAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
QUARTERLY REPORT ON FORM 10-Q FOR THE 3-MONTH PERIOD ENDED OCTOBER 3, 1999.
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