<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 December 31, 1999.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______to_______
Commission file number 1-8703
WESTERN DIGITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2647125
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92618
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (949) 932-5000
REGISTRANT'S WEB SITE: http://www.westerndigital.com
N/A Former name, former address and former fiscal year if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Number of shares outstanding of Common Stock, as of January 29, 2000,
is 129,078,880.
<PAGE> 2
WESTERN DIGITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three-Month Periods
<S> <C>
Ended December 26, 1998 and December 31, 1999............................... 3
Condensed Consolidated Statements of Operations - Six-Month Periods
Ended December 26, 1998 and December 31, 1999............................... 4
Condensed Consolidated Balance Sheets - July 3, 1999 and
December 31, 1999........................................................... 5
Condensed Consolidated Statements of Cash Flows - Six-Month Periods
Ended December 26, 1998 and December 31, 1999............................... 6
Notes to Condensed Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 26
Item 2. Changes in Securities and Use of Proceeds................................... 27
Item 4. Submission of Matters to Vote of Security Holders........................... 28
Item 6. Exhibits and Reports on Form 8-K............................................ 29
Signatures.............................................................................. 30
</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
------------------------
DEC. 26, DEC. 31,
1998 1999
--------- ---------
<S> <C> <C>
Revenues, net ........................................... $ 738,590 $ 560,174
Costs and expenses:
Cost of revenues ................................... 719,423 539,932
Research and development ........................... 50,363 44,083
Selling, general and administrative ................ 47,819 39,070
Restructuring charges .............................. -- 25,535
--------- ---------
Total costs and expenses ....................... 817,605 648,620
--------- ---------
Operating loss .......................................... (79,015) (88,446)
Net interest expense .................................... (3,238) (3,028)
--------- ---------
Loss before extraordinary item .......................... (82,253) (91,474)
Extraordinary gain from redemption of debentures ........ -- 76,277
--------- ---------
Net loss ................................................ $ (82,253) $ (15,197)
========= =========
Basic and diluted loss per common share:
Loss per common share before extraordinary item .... $ (.93) $ (.76)
Extraordinary gain ................................. -- .63
--------- ---------
Loss per common share .............................. $ (.93) $ (.13)
========= =========
Common shares used in computing per share amounts:
Basic .......................................... 88,888 121,128
========= =========
Diluted ........................................ 88,888 121,128
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE> 4
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
---------------------------------
DEC. 26, DEC. 31,
1998 1999
----------- -----------
<S> <C> <C>
Revenues, net ........................................... $ 1,389,448 $ 967,131
Costs and expenses:
Cost of revenues ................................... 1,453,033 1,012,232
Research and development ........................... 102,284 94,226
Selling, general and administrative ................ 105,151 82,892
Restructuring charges .............................. -- 57,835
----------- -----------
Total costs and expenses ....................... 1,660,468 1,247,185
----------- -----------
Operating loss .......................................... (271,020) (280,054)
Net interest expense .................................... (5,891) (8,357)
----------- -----------
Loss before extraordinary item .......................... (276,911) (288,411)
Extraordinary gain from redemption of debentures ........ -- 166,899
----------- -----------
Net loss ................................................ $ (276,911) $ (121,512)
=========== ===========
Basic and diluted loss per common share:
Loss per common share before extraordinary item .... $ (3.12) $ (2.66)
Extraordinary gain ................................. -- 1.54
----------- -----------
Loss per common share .............................. $ (3.12) $ (1.12)
=========== ===========
Common shares used in computing per share amounts:
Basic .......................................... 88,717 108,523
=========== ===========
Diluted ........................................ 88,717 108,523
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE> 5
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 3, DEC. 31,
1999 1999
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 226,147 $ 163,675
Accounts receivable, less allowance for doubtful
accounts of $18,537 at July 3, 1999 and
$17,352 at December 31, 1999 ........................... 273,435 198,360
Inventories ................................................ 144,093 101,728
Prepaid expenses & other current assets .................... 81,853 95,471
----------- -----------
Total current assets ................................... 725,528 559,234
Property and equipment at cost, net ............................. 237,939 156,891
Intangible and other assets, net ................................ 58,935 48,599
----------- -----------
Total assets ........................................... $ 1,022,402 $ 764,724
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ........................................... $ 335,907 $ 283,545
Accrued expenses ........................................... 252,791 291,195
Current portion of long-term debt .......................... 10,000 --
----------- -----------
Total current liabilities .............................. 598,698 574,740
Long-term debt .................................................. 534,144 236,291
Deferred income taxes and other ................................. 43,350 41,761
Shareholders' deficiency:
Preferred stock, $.01 par value;
Authorized: 5,000 shares
Outstanding: None ..................................... -- --
Common stock, $.01 par value;
Authorized: 225,000 shares
Outstanding: 101,908 shares at July 3, 1999
and 139,916 at December 31, 1999 ....................... 1,019 1,399
Additional paid-in capital ................................. 335,197 492,845
Accumulated deficit ........................................ (294,841) (416,353)
Accumulated other comprehensive income (loss) .............. (2,123) 23,461
Treasury stock-common stock at cost;
11,297 shares at July 3, 1999 and 10,884
shares at December 31, 1999 ............................ (193,042) (189,420)
----------- -----------
Total shareholders' deficiency ......................... (153,790) (88,068)
----------- -----------
Total liabilities and shareholders' deficiency ......... $ 1,022,402 $ 764,724
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
DEC. 26, DEC. 31,
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $(276,911) $(121,512)
Adjustments to reconcile net loss to net
cash used for operating activities:
Non-Cash Items:
Depreciation and amortization ..................... 67,287 47,223
Interest accrued on convertible debentures ........ 12,317 9,617
Non-cash portion of restructuring charges ......... -- 28,804
Extraordinary gain on sale of debentures .......... -- (166,899)
Changes in assets and liabilities:
Accounts receivable ............................... (2,947) 75,075
Inventories ....................................... 25,542 42,365
Prepaid expenses .................................. 11,788 6,693
Accounts payable .................................. 55,874 (51,754)
Accrued expenses .................................. 56,322 25,479
Other ............................................. 2,396 3,670
--------- ---------
Net cash used for operating activities ......... (48,332) (101,239)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from or deposits relating to sales of
property and equipment ........................... -- 37,019
Capital expenditures, net ............................. (60,097) (13,843)
Other investments ..................................... (1,500) (2,200)
--------- ---------
Net cash provided by (used for)
investing activities ........................ (61,597) 20,976
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash used to repay bank debt (Note 5) ................. (50,000) (33,375)
Proceeds from issuance of bank debt (Note 5) .......... 50,000 --
Proceeds from ESPP shares issued and stock option
exercises ........................................ 6,684 1,627
Common stock issued ................................... -- 49,539
Costs relating to credit facility ..................... (2,925) --
Net cash provided by financing activities ...... 3,759 17,791
--------- ---------
Net decrease in cash and cash equivalents ............. (106,170) (62,472)
Cash and cash equivalents, beginning of period ........ 459,830 226,147
--------- ---------
Cash and cash equivalents, end of period .............. $ 353,660 $ 163,675
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ............... $ 3,317 $ 1,082
Cash paid during the period for interest ................... 2,136 937
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accounting policies followed by the Company are set forth in Note 1
of Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K as of and for the year ended July 3, 1999.
In the opinion of management, all adjustments necessary to fairly state
the condensed consolidated financial statements have been made. All
such adjustments are of a normal recurring nature. Certain information
and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K as of and
for the year ended July 3, 1999.
The Company has a 52 or 53-week fiscal year. In order to align its
manufacturing and financial calendars, effective during the three
months ended December 31, 1999, the Company changed its fiscal calendar
so that each fiscal month ends on the Friday nearest to the last day of
the calendar month. Prior to this change, the Company's fiscal month
ended on the Saturday nearest to the last day of the calendar month.
The change did not have a material impact on the Company's results of
operations or financial position. All general references to years
relate to fiscal years unless otherwise noted.
Certain prior periods' amounts have been reclassified to conform to the
current period presentation.
2. Supplemental Financial Statement Data (in thousands)
<TABLE>
<CAPTION>
JULY 3, DEC. 31,
1999 1999
-------- --------
<S> <C> <C>
Inventories
Finished goods .............................................. $101,828 $ 67,558
Work in process ............................................. 26,307 15,344
Raw materials and component parts ........................... 15,958 18,826
-------- --------
$144,093 $101,728
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
----------------------
DEC. 26, DEC. 31,
1998 1999
-------- --------
<S> <C> <C>
Supplemental disclosure of non-cash financing activities
Common stock issued for redemption of
debentures .................................................. $ -- $110,109
======== ========
Redemption of debentures for Company common stock, net of
capitalized issuance costs ................................ $ -- $277,008
======== ========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
------------------------ ----------------------
DEC. 26, DEC. 31, DEC. 26, DEC. 31,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Interest Income (Expense)
Interest income ......... $ 4,824 $ 2,006 $ 10,115 $ 4,487
Interest expense ........ (8,062) (5,034) (16,006) (12,844)
-------- -------- -------- --------
$ (3,238) $ (3,028) $ (5,891) $ (8,357)
======== ======== ======== ========
</TABLE>
3. Loss per Share
As of December 26, 1998 and December 31, 1999, 17.4 and 24.0 million
shares, respectively, relating to the possible exercise of outstanding
stock options were not included in the computation of diluted loss per
share. As of December 26, 1998 and December 31, 1999, an additional
19.4 and 8.4 million shares, respectively, issuable upon conversion of
the convertible debentures were excluded from the computation of
diluted loss per share. The effects of these items were not included in
the computation of diluted loss per share as their effect would have
been anti-dilutive.
In September 1999, the Company's Board of Directors approved a
"Broad-Based" Incentive Stock Plan (the "Broad-Based Plan") under which
options to purchase shares of common stock may be granted to employees
of the Company and others. On October 20, 1999, the Board of Directors
approved a grant to its regular, non-direct labor employees of
approximately 2.4 million shares under the Broad-Based Plan and the
Company's Employee Stock Option Plan, at $3.31 per share, the fair
value of the Company's common stock on the date of the grant. The
options granted vest 100% one year from the date of grant.
On September 10, 1998, the Company's Board of Directors authorized and
declared a dividend distribution of one Right for each share of common
stock of the Company outstanding at the close of business on November
30, 1998. In addition, the Company's Board of Directors authorized the
issuance of one Right for each share of common stock of the Company
issued from the record date until certain dates as specified in the
Company's rights agreement dated as of October 15, 1998, pursuant to
which the Company's then existing shareholders rights plan was replaced
by a successor ten year plan. The Rights issued become exercisable for
common stock at a discount from market value upon certain events
related to a change in control.
4. Common Stock Transactions
During the six-month period ended December 31, 1999, the Company issued
approximately 362,000 shares of its common stock in connection with
Employee Stock Purchase Plan ("ESPP") purchases and issued 52,000
shares of its common stock in connection with common stock option
exercises, for an aggregate of $1.6 million. During the corresponding
period of the prior year, the Company issued approximately 325,000
shares of its common stock in connection with ESPP purchases and
493,000 shares of its common stock in connection with common stock
option exercises, for an aggregate of $6.7 million.
Under an existing equity facility, the Company may issue for cash,
shares of common stock to institutional investors in monthly increments
of $12.5 million. The facility provides for up to $150.0 million in
cash proceeds of which $49.5 million had been utilized as of December
31, 1999. Shares paid under the facility are at the market price of the
Company's common stock less a discount ranging from 2.75% to 4.25%.
During the six-month period ended December 31, 1999, the Company issued
26.7 million shares of common stock to redeem its 5.25% zero coupon
convertible subordinated debentures (the "Debentures") with a carrying
value of $284.1 million, and an aggregate principal amount at maturity
of $735.6 million. These redemptions were private, individually
negotiated transactions with certain institutional investors. The
redemptions resulted in extraordinary gains of $166.9 million during
the six months ended December
8
<PAGE> 9
31, 1999. As of December 31, 1999, the carrying value of the remaining
outstanding Debentures was $219.7 million and the aggregate principal
amount at maturity was $561.6 million.
5. Credit Facility
The Company has a secured revolving credit and term loan facility
("Senior Bank Facility") which, as amended on January 15, 2000,
provided the Company with up to a $125.0 million revolving credit line
(depending on the borrowing base calculation) and a $50.0 million term
loan (of which $16.6 million was outstanding as of December 31, 1999).
Borrowings under the Senior Bank Facility are secured by the Company's
accounts receivable, inventory, 66% of its stock in its foreign
subsidiaries and the other assets (excluding real property) of the
Company and, at the option of the Company, bear interest at either
LIBOR or a base rate plus a margin determined by the borrowing base,
with option periods of one to three months. The Senior Bank Facility
requires the Company to maintain certain amounts of net equity,
prohibits the payment of cash dividends on common stock and contains a
number of other covenants. This facility matures on March 31, 2000, and
further borrowings through such date are not allowed. As of the date
hereof, the remaining balance on the term loan has been repaid using
the proceeds from the equity facility. The Company has received a
proposal for a new credit facility, including a term loan. As of the
date hereof, the terms and conditions of this proposal have not been
finalized.
6. Sales of Real Property
On August 9, 1999, the Company sold approximately 34 acres of land in
Irvine, California, upon which it had previously planned to build a new
corporate headquarters, for $26 million (the approximate cost of the
land). The Company has extended the current lease of its worldwide
headquarters in Irvine, California, through January 2001, and has an
option to extend the lease for an additional five month period.
In December 1999, the Company agreed to sell a manufacturing facility
in Tuas, Singapore for cash proceeds of $11.0 million. In January 2000,
the Company also agreed to sell its Rochester, Minnesota facility for
cash proceeds of approximately $30.0 million. These transactions are
expected to close, subject to customary closing conditions, in the
quarter ending March 31, 2000, each with a minimal gain or loss.
7. Restructuring Activities
During the six months ended December 31, 1999, the Company initiated a
restructuring program which is intended to improve operational
effectiveness and efficiency and reduce operational expenses worldwide.
Charges related to the restructuring actions taken are accrued in the
periods in which executive management commits to execute such actions.
Committed actions for the six months ended December 31, 1999 include
reorganization of operational and management responsibilities, transfer
of hard drive production from Singapore to the Company's manufacturing
facility in Malaysia, and closure of the Company's Singapore
operations. These actions will result in a net reduction of world-wide
headcount of approximately 1,000, of which approximately 100 will be
management, professional and administrative personnel and the remainder
will be manufacturing employees. In Asia, approximately 3,800 employees
will be reduced from the Company's Singapore operation and
approximately 2,900 will be added in Malaysia in connection with the
transfer of production. Restructuring charges recorded in connection
with these actions totaled $57.8 million for the six-month period ended
December 31, 1999 and consist of severance and outplacement costs of
$18.0 million, write-offs of manufacturing equipment and information
systems assets no longer utilized as a result of the actions of $28.8
million, and lease cancellation and other costs of $11.0 million.
Following is a summary of the charges, the amounts paid and the ending
accrual balance (in thousands):
9
<PAGE> 10
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
DECEMBER 31, 1999
----------------------
Non-Cash
Accruals Charges Total
-------- ------- -----
<S> <C> <C> <C>
Equipment and information systems
asset write-offs $ -- $28,822 $28,822
Severance and outplacement 18,028 -- 18,028
Lease cancellation and other 10,985 -- 10,985
------- ------- -------
Total charges 29,013 $28,822 $57,835
======= =======
Cash utilized 7,456
-------
Balance at December 31, 1999 $21,557
=======
</TABLE>
The Company expects that remaining accruals for severance and
outplacement of $10.1 million will be paid in the third and fourth
quarters of 2000. Lease cancellation and other costs are expected to be
paid over the 24 months beginning October 3, 1999. The Company expects
the aforementioned restructuring actions to be completed no later than
June 30, 2000.
The equipment to be disposed of was determined to have minimal salvage
value.
On January 19, 2000, the Company announced that it will exit the
enterprise hard drive business and shift its strategic focus and
resources in the enterprise storage market to Internet-related data
content management systems and management software. In connection with
this decision, the Company closed its Rochester, Minnesota enterprise
hard drive design center, and a majority of the 420 employees in the
design center have been laid off and given legally required
notification and outplacement services. The exit from the enterprise
business will result in nonrecurring charges against operations in the
quarter ended March 31, 2000. The Company currently estimates these
charges to include $25.0 million for property and equipment write-offs,
and $11.0 million for severance ($8.0 million relating to domestic
operations). The Company is currently analyzing the effect of this
decision on inventory purchase commitments and the price levels that
may be needed to sell the Company's remaining enterprise products.
Accordingly, additional reserves and accruals may be needed for
purchase order cancellations, purchase price protection, inventory
write-downs and other costs flowing from the Company's decision to
exit. The Company estimates that the restructuring effort will be
substantially completed by June 30, 2000.
As of December 31, 1999, the accrued expenses for the Company's 1999
restructuring efforts were substantially utilized.
8. Product Recall
On September 27, 1999, the Company announced a recall of its 6.8GB per
platter series of WD Caviar(R) desktop hard drives because of a
reliability problem resulting from a faulty power driver chip
manufactured by a third-party supplier. Approximately 1.2 million units
were manufactured with the faulty chip. Replacement of the chips
involved rework of the printed circuit board assembly. Revenues of
approximately $100 million related to the products which were recalled
were reversed in the three months ended October 2, 1999. In addition,
the Caviar product line was shut down for approximately two weeks,
eliminating approximately $70 million of forecasted revenue during the
three months ended October 2, 1999. Cost of revenues for the three
months ended October 2, 1999, included charges totaling $37.7 million
for estimated costs to recall and repair the affected drives, including
$23.1 million for repair and retrieval, $4.5 million for freight and
other, and $10.1 million for write-downs of related inventory. By the
end of the three months ended December 31, 1999, the Company had
completed
10
<PAGE> 11
rework on approximately 78% of the 1.2 million units and had resolved
its claims against third parties resulting from the recall.
9. Investments in Marketable Securities
The Company owns approximately 10.8 million shares of Komag common
stock, which when acquired on April 8, 1999, had a fair market value of
$34.9 million. The stock is restricted as to the number of shares which
can be sold in a given time period. The restrictions will lapse over a
three and one-half year period. As of December 31, 1999, approximately
60% of these shares may be sold within 12 months. Because the Company
has identified these shares as "available for sale" under the
provisions of Statement of Financial Accounting Standards No. 115,
"Investments in Certain Debt and Equity Securities" ("SFAS 115"), they
have been marked to market value using published closing prices of
Komag stock as of December 31, 1999. Accordingly, an incremental
unrealized gain of approximately $1.4 million was recorded during the
six months ended December 31, 1999, and a total accumulated unrealized
loss of $0.7 million is included in accumulated other comprehensive
income (loss). The aggregate carrying value of the shares, which
approximates market value, is $34.2 million as of December 31, 1999, of
which $20.2 million relates to "available for sale" shares and is
classified as current.
The Company owns approximately 1.3 million shares of Vixel Corporation
("Vixel") common stock, all of which are restricted as to sale until
March 28, 2000, pursuant to an agreement with Vixel's underwriters. The
Company has identified these shares as "available for sale" under the
provisions of SFAS 115. During the three months ended October 2, 1999,
Vixel completed an initial public offering and the shares were marked
to market value. Accordingly, an unrealized gain of $24.2 million was
recorded in accumulated other comprehensive income (loss) during the
three months ended October 2, 1999. The investment in Vixel common
stock is classified as current. As of December 31, 1999, the quoted
market value of the Company's Vixel common stock approximated its
carrying value.
10. Other Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), beginning with the
Company's fourth quarter of 1999. Prior to the fourth quarter of 1999,
the Company did not possess any components of other comprehensive
income as defined by SFAS 130. SFAS 130 separates comprehensive income
into two components; net income and other comprehensive income (loss).
Other comprehensive income (loss) refers to revenue, expenses, gains
and losses that are recorded as an element of shareholders' equity but
are excluded from net income. While SFAS 130 establishes new rules for
the reporting and display of comprehensive income (loss), SFAS 130 has
no impact on the Company's net loss or total shareholders' deficiency.
The Company's other comprehensive income (loss) is comprised of
unrealized gains and losses on marketable securities categorized as
"available for sale" under SFAS 115. The components of total
comprehensive loss for the three and six-month periods ended December
31, 1999 were as follows (in millions):
<TABLE>
<CAPTION>
Three-Month Six-Month
Period Ended Period Ended
Dec. 31, 1999 Dec. 31, 1999
------------- -------------
<S> <C> <C>
Net loss $(15.2) $(121.5)
Other comprehensive income:
Unrealized gain on available for
sale investments, net 1.5 25.6
------ -------
Total comprehensive loss $(13.7) $ (95.9)
====== =======
</TABLE>
11
<PAGE> 12
11. Legal Proceedings
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in
Orange County Superior Court. The complaint alleged that hard drives
supplied by the Company in calendar 1988 and 1989 were defective and
caused damages to Amstrad of $186.0 million in out-of-pocket expenses,
lost profits, injury to Amstrad's reputation and loss of goodwill. The
Company filed a counterclaim for $3.0 million in actual damages in
addition to exemplary damages in an unspecified amount. The first trial
of this case ended in a mistrial, with the jury deadlocked on the issue
of liability. The case was retried, and on June 9, 1999, the jury
returned a verdict against Amstrad and in favor of Western Digital.
Amstrad has filed a notice of appeal from the judgment, and the Company
has filed motions seeking recovery of a portion of its legal and other
costs of defense. The Company does not believe that the ultimate
resolution of this matter will have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
However, should the judgment be reversed on appeal, and if in a retrial
of the case Amstrad were to prevail, the Company may be required to pay
damages and other expenses, which may have a material adverse effect on
the Company's financial position, results of operations and/or
liquidity. In addition, the costs of defending a retrial of the case
may be material, regardless of the outcome.
In 1994 Papst Licensing ("Papst") brought suit against the Company in
the U.S. District Court for the Central District of California alleging
infringement by the Company of five of its patents relating to disk
drive motors that the Company purchases from motor vendors. Later that
year Papst dismissed its case without prejudice, but it has notified
the Company that it intends to reinstate the suit if the Company does
not agree to enter into a license agreement with Papst. Papst has also
put the Company on notice with respect to several additional patents.
The Company does not believe that the ultimate resolution of this
matter will have a material adverse effect on the financial position,
results of operations or liquidity of the Company. However, because of
the nature and inherent uncertainties of litigation, should the outcome
of this action be unfavorable, the Company may be required to pay
damages and other expenses, which may have a material adverse effect on
the Company's financial position, results of operations and/or
liquidity. In addition, the costs of defending such litigation may be
material, regardless of the outcome.
The Company and Censtor Corporation ("Censtor") have had discussions
concerning royalties, if any, that might be due Censtor under a
licensing agreement. Censtor has initiated arbitration procedures under
the agreement seeking payment of royalties. In response, the Company
has filed a complaint in federal court seeking a determination that the
patents at issue are invalid. The Federal Court action has been stayed
pending completion of the arbitration procedures. The Company does not
believe that the outcome of this dispute will have a material adverse
effect on its financial position, results of operations and/or
liquidity.
In the normal course of business, the Company receives and makes
inquiry regarding possible intellectual property matters including
alleged patent infringement. Where deemed advisable, the Company may
seek or extend licenses or negotiate settlements. Although patent
holders often offer such licenses, no assurance can be given that a
license will be offered or that the terms of any license offered will
be acceptable to the Company. Several such matters are currently
pending. The Company does not believe that the ultimate resolution of
these matters will have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
From time to time the Company receives claims and is a party to suits
and other judicial and administrative proceedings incidental to its
business. Although occasional adverse decisions (or settlements) may
occur, the Company believes that the final disposition of such matters
will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of federal
securities laws. The statements that are not purely historical should be
considered forward-looking statements. Often they can be identified by the use
of forward-looking words, such as "may", "will", "could", "project", "believe",
"anticipate", "expect", "estimate", "continue", "potential", "plan", "forecasts"
and the like. Statements concerning current conditions may also be
forward-looking if they imply a continuation of current conditions. These
statements appear in a number of places in this report and include statements
regarding the intentions, plans, strategies, beliefs or current expectations of
the Company with respect to, among other things:
- the financial prospects of the Company
- the Company's financing plans
- litigation and other contingencies potentially affecting the
Company's financial position, operating results, or liquidity
- trends affecting the Company's financial condition or
operating results
- the Company's strategies for growth, operations, product
development and commercialization
- conditions or trends in or factors affecting the computer,
data storage, home entertainment or hard drive industry.
Forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those expressed in the
forward-looking statements. Readers are urged to carefully review the
disclosures made by the Company concerning risks and other factors that may
affect the Company's business and operating results, including those made under
the captions "Risk factors related to the hard drive industry in which we
operate" and "Risk Factors relating to Western Digital particularly" in this
report, as well as the Company's other reports filed with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RECENT DEVELOPMENTS
During the six months ended December 31, 1999, the Company initiated a
restructuring program which is intended to improve operational effectiveness and
efficiency and reduce operational expenses worldwide. Charges related to the
restructuring actions taken are accrued in the periods in which executive
management commits to execute such actions. Committed actions for the six months
ended December 31, 1999 include reorganization of operational and management
responsibilities, transfer of hard drive production from Singapore to the
Company's manufacturing facility in Malaysia, and closure of the Company's
Singapore operations. These actions will result in a net reduction of world wide
headcount of approximately 1,000, of which approximately 100 will be management,
professional and administrative personnel and the remainder will be
manufacturing employees. In Asia, approximately 3,800 employees will be reduced
from the Company's Singapore operation and approximately 2,900 will be added in
Malaysia in connection with the transfer of production. Restructuring charges
recorded in connection with these actions totaled $57.8 million for the
six-month period ended December 31, 1999 and consist of severance and
outplacement costs of $18.0 million, write-offs of manufacturing equipment and
information systems assets no longer utilized as a result of the actions of
$28.8 million, and lease cancellation and other costs of $11.0 million. The
Company expects that remaining accruals for severance and outplacement of $10.1
million will be paid in the third and fourth quarters of 2000. Lease
cancellation and other costs are expected to be paid over the 24 months
beginning October 3, 1999. The Company expects the aforementioned restructuring
actions to be completed no later than June 30, 2000.
On August 9, 1999, the Company sold approximately 34 acres of land in Irvine,
California, upon which it had previously planned to build a new corporate
headquarters, for $26 million (the approximate cost of the land).
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The Company has extended the current lease of its worldwide headquarters in
Irvine, California, through January 2001, and has an option to extend the lease
for an additional five month period.
On September 27, 1999, the Company announced a recall of its 6.8GB per platter
series of WD Caviar(R) desktop hard drives because of a reliability problem
resulting from a faulty power driver chip manufactured by a third-party
supplier. Approximately 1.2 million units were manufactured with the faulty
chip. Replacement of the chips involved rework of the printed circuit board
assembly. Revenues of approximately $100 million related to the products which
were recalled were reversed in the three months ended October 2, 1999. In
addition, the Caviar product line was shut down for approximately two weeks,
eliminating approximately $70 million of forecasted revenue during the three
months ended October 2, 1999. Cost of revenues for the three months ended
October 2, 1999, included charges totaling $37.7 million for estimated costs to
recall and repair the affected drives, including $23.1 million for repair and
retrieval cost, $4.5 million for freight and other, and $10.1 million for
write-downs of related inventory. By the end of the three months ended December
31, 1999, the Company had completed rework on approximately 78% of the 1.2
million units and had resolved its claims against third parties resulting from
the recall.
In December 1999, the Company agreed to sell a manufacturing facility in Tuas,
Singapore for cash proceeds of $11.0 million. In January 2000, the Company also
agreed to sell its Rochester, Minnesota facility for cash proceeds of
approximately $30.0 million. These transactions are expected to close, subject
to customary closing conditions, in the quarter ending March 31, 2000, each with
a minimal gain or loss.
On January 19, 2000, the Company announced that it will exit the enterprise hard
drive business and shift its strategic focus and resources in the enterprise
storage market to Internet-related data content management systems and
management software. In connection with this decision, the Company closed its
Rochester, Minnesota enterprise hard drive design center, and a majority of the
420 employees in the design center have been laid off and given legally required
notification and outplacement services. The exit from the enterprise business
will result in nonrecurring charges against operations in the quarter ended
March 31, 2000. The Company currently estimates these charges to include $25.0
million for property and equipment write-offs, and $11.0 million for severance
($8.0 million relating to domestic operations). The Company is currently
analyzing the effect of this decision on inventory purchase commitments and the
price levels that may be needed to sell the Company's remaining enterprise
products. Accordingly, additional reserves and accruals may be needed for
purchase order cancellations, purchase price protection, inventory write-downs
and other costs flowing from the Company's decision to exit. The Company
estimates that the restructuring effort will be substantially completed by June
30, 2000.
RESULTS OF OPERATIONS
Consolidated revenues were $560.2 million for the three months ended December
31, 1999, a decrease of 24%, or $178.4 million, from the three months ended
December 26, 1998 and an increase of 38%, or $153.2, from the immediately
preceding quarter. The lower revenues during the three months ended December 31,
1999, as compared to the corresponding period of the prior year, resulted from a
decline in unit shipments of approximately 2% combined with reductions in the
average selling prices ("ASPs") of hard drive products due to an intensely
competitive hard drive business environment. The increase in revenue for the
three months ended December 31, 1999, from the immediately preceding quarter
resulted primarily from higher volume (an increase in unit shipments of 56%)
following the product recall in the immediately preceding quarter, as discussed
above, offset by lower ASPs.
Consolidated revenues were $967.1 million for the six months ended December
31,1999, down 30% from the six months ended December 26, 1998. The lower
revenues resulted from a decline in unit shipments of approximately 13%, which
was largely due to the product recall in the three months ended October 2, 1999,
combined with lower ASPs.
The gross profit for the three months ended December 31, 1999, totaled $20.2
million, or 4% of revenue. This compares to a gross profit of $19.2 million, or
3% of revenue, for the three months ended December 26, 1998 and a negative gross
profit of $65.3 million, or negative 16% of revenue, for the immediately
preceding quarter. The negative gross profit in the immediately preceding
quarter included a $37.7 million special charge relating to the product recall.
Excluding the special charge, the consolidated gross margin percentage in the
immediately preceding quarter was negative 7%. The increase in gross profit over
the three months ended
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December 26, 1998 and the immediately preceding quarter (excluding special
charges) was primarily the result of lower manufacturing costs, due to the
restructuring and transfer of all desktop production to a single, highly
utilized facility in Malaysia. The consolidated negative gross profit for the
six months ended December 31, 1999, totaled $7.4 million, or negative 1% of
revenue (excluding the aforementioned special charges of $37.7 million). This
compares to a gross profit for the six months ended December 26, 1998 of $13.4
million, or 1% of revenue (excluding special charges of $77 million). The
decline in the gross profit for the six-month period was the result of lower
volumes due to the product recall and lower ASPs, offset by the Company's
restructuring and cost-cutting efforts.
Research and development ("R&D") expense for the three months ended December 31,
1999 was $44.1 million, a decrease of $6.3 million from the three months ended
December 26, 1998 and a decrease of $6.1 million from the immediately preceding
quarter. R&D expense for the six months ended December 31, 1999 was $94.2
million, a decrease of $8.1 million from the six months ended December 26, 1998.
The decrease in R&D expenses was primarily due to the Company's cost-cutting
efforts, particularly costs associated with HDD development, offset partially by
increased spending at Connex, the Company's subsidiary, and other product line
development efforts.
Selling, general and administrative ("SG&A") expense in the three months ended
December 31, 1999 was $39.1 million, a decrease of $8.7 million from the three
months ended December 26, 1998 and a decrease of $4.8 million from the
immediately preceding quarter. The decrease in SG&A expense for the three months
ended December 31, 1999 compared to the three months ended December 26, 1998 and
the immediately preceding quarter was primarily due to a lower revenue base and
cost-cutting efforts, particularly costs associated with the Company's HDD
business, offset partially by increased spending at Connex and other of the
Company's developing ventures. SG&A expense was $82.9 million for the six months
ended December 31, 1999, a decrease of $22.3 million from the six months ended
December 26, 1998. The decrease was the result of cost-cutting efforts and the
nonrecurrence of a $7.5 million special charge on terminated hedging contracts
recorded in SG&A expense during the six months ended December 26, 1998.
Net interest expense for the three months ended December 31, 1999 was $3.0
million, compared to net interest expense of $3.2 million for the three months
ended December 26, 1998 and net interest expense of $5.3 million in the
immediately preceding quarter. The decrease in net interest expense for the
three months ended December 31, 1999, was attributable to lower interest expense
on the Company's Debentures (the average carrying value of the Company's
Debentures was lower due to the Debenture redemptions which occurred during the
current quarter). Net interest expense was $8.4 million for the six months ended
December 31, 1999 as compared to net interest expense of $5.9 million for the
six months ended December 26, 1998. The increase in net interest expense was the
result of a decrease in interest expense on the Company's Debentures offset by a
greater decrease in interest income earned on lower average cash and cash
equivalents balances.
The Company initiated significant restructuring efforts during the six months
ended December 31, 1999. The Company recorded restructuring charges of
approximately $32.3 million and $25.5 million during the three months ended
October 2, 1999 and the three months ended December 31, 1999, respectively. The
charges related to severance and outplacement, the write-off of fixed assets,
lease cancellation and other charges, as discussed above.
During the six months ended December 31, 1999, the Company issued common stock
in exchange for Debentures which were retired in non-cash transactions. These
redemptions were private, individually negotiated transactions with certain
institutional investors. The redemptions resulted in an extraordinary gain of
$90.6 million during the three months ended October 2, 1999 and an extraordinary
gain of $76.3 million during the three months ended December 31, 1999.
The Company did not record an income tax benefit in any periods presented as no
additional loss carrybacks were available and management deemed it "more likely
than not" that the deferred tax benefits generated would not be realized.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of $163.7
million as compared to $226.1 million at July 3, 1999 and $185.1 million at
October 2, 1999. Net cash used in operations was $10.2 million and $101.2
million for the three and six months ended December 31, 1999, respectively, as
compared to $25.0 million and $48.3 million for the comparable periods of the
prior year. Net cash used in operations for the three months ended December 31,
1999 decreased by $79.6 million as compared to the immediately preceding quarter
as a result of significantly lower operating losses offset in part by lower
depreciation and non-cash debenture interest and by a return to more normal
inventory and accounts receivable positions following the Company's product
recall.
Net cash used in operations for the six months ended December 31, 1999 increased
by $52.9 million as compared to the six months ended December 26, 1998 due to
slightly higher operating losses offset by depreciation and non-cash debenture
interest and by the utilization of warranty accruals established for thin-film
products in the prior year.
Operating cash flows provided by changes in working capital amounted to $39.1
million and $101.6 million for the three and six months ended December 31, 1999
and reflect the Company's management of operating assets and liabilities during
the period. For the three months ended December 31, 1999, the Company's days of
sales outstanding ("DSO") was 32 days, inventory turned 21 times and days of
payables outstanding was 48 days. Comparable measures for the three months ended
October 2, 1999 are not meaningful due to the impact of the product recall on
the Company's working capital balances at October 2, 1999. For the three months
ended July 3, 1999, the Company's DSO was 38 days, inventory turned 19 times and
days of payables outstanding was 48 days. The Company expects that the third
quarter DSO will increase to a more normal level of between 36 and 40.
Other uses of cash during the six months ended December 31, 1999 included $33.4
million to repay bank debt and net capital expenditures of $13.8 million
primarily to upgrade the Company's desktop production capabilities and for
normal replacement of existing assets. Partially offsetting the use of cash
during the period were proceeds of $49.5 million received upon issuance of 11.2
million shares of the Company's stock under the Company's Equity Facility, and
$37 million received as proceeds and deposits relating to the sale of real
property during the period.
The Company anticipates that capital expenditures for the remainder of 2000 will
not be more than $25 million and will relate to accommodating new technologies
and new product lines, normal replacement of existing assets and expansion of
production capabilities in Malaysia. The Company also anticipates cash
expenditures of approximately $24.2 million to be paid in the remaining six
months of 2000 for severance and outplacement costs and lease cancellation and
other costs of vacating leased properties related to the Company's restructuring
programs. These amounts exclude any settlements with vendors on existing
purchase orders related to the Company's exit of its enterprise business.
The Senior Bank Facility, as amended on January 15, 2000, provides the Company
with up to a $125.0 million revolving credit line (depending on the borrowing
base calculation) and a $50.0 million term loan (of which $16.6 million was
outstanding as of December 31, 1999). Borrowings under the Senior Bank Facility
are secured by the Company's accounts receivable, inventory, 66% of its stock in
its foreign subsidiaries and the other assets (excluding real property) of the
Company and, at the option of the Company, bear interest at either LIBOR or a
base rate plus a margin determined by the borrowing base, with option periods of
one to three months. The Senior Bank Facility requires the Company to maintain
certain amounts of net equity, prohibits the payment of cash dividends on common
stock and contains a number of other covenants. This facility matures on March
31, 2000, and further borrowings through such date are not allowed. As of the
date hereof, the remaining balance on the term loan has been repaid. The Company
has received a proposal for a new credit facility, including a term loan. As of
the date hereof, the terms and conditions of this proposal have not been
finalized.
Under an existing equity facility, the Company may issue for cash shares of
common stock to institutional investors in monthly increments of $12.5 million.
The facility provides for up to $150.0 million in cash proceeds of which $49.5
million had been utilized as of December 31, 1999. Shares paid under the
facility are at the market price of the Company's common stock less a discount
ranging from 2.75% to 4.25%. During the six months ended December 31, 1999, the
Company issued 11.2 million shares of common stock under the Equity Facility for
net proceeds of $49.5 million.
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During the six months ended December 31, 1999, the Company issued 26.7 million
shares of common stock in exchange for Debentures with a carrying value of
$284.1 million, and an aggregate principal amount at maturity of $735.6 million.
These redemptions were private, individually negotiated transactions with
certain institutional investors. The redemptions resulted in extraordinary gains
of $166.9 million during the six months ended December 31, 1999. As of December
31, 1999, the carrying value of the remaining outstanding Debentures was $219.7
million and the aggregate principal amount at maturity was $561.6 million.
The Company expects to continue to incur operating losses in 2000. The Company
also had a working capital deficiency of $15.5 million and a shareholders'
deficiency of $88.1 million as of December 31, 1999. However, the Company had
cash balances of $163.7 million as of December 31, 1999. In addition, the
Company has restructured portions and continues to restructure other elements
of its operations. In addition, the Company has other sources of liquidity
available. In light of these conditions, the Company has the following plans and
other options:
- The Company plans to reduce expenses and capital expenditures
substantially as compared to historical levels due to:
-- Recent restructurings;
-- Reduced general and administrative spending; and
-- Reduced infrastructure resulting from the closure of
its Santa Clara, California disk media operations,
its disk drive manufacturing facilities in Tuas and
Chai Chee, Singapore, and its enterprise hard drive
design center in Rochester, Minnesota.
- The Company has the following additional sources of liquidity
available to it:
-- $150.0 million Equity Facility ($49.5 million of
which had been utilized as of December 31, 1999);
-- $30.0 million resulting from the sale of the
Rochester, Minnesota facility, subject to customary
closing conditions; and
-- Other equity investments that may be disposed of
during 2000, including 6.5 million shares of Komag
common stock and 1.3 million shares of Vixel common
stock with a combined market value of approximately
$44.4 million as of December 31, 1999.
-- The Company is also pursuing other possible external
sources of equity financing in its developing
subsidiaries.
Based on the above factors, the Company believes its current cash balances, its
existing equity facility, and other liquidity vehicles currently available to
it, will be sufficient to meet its working capital needs through the next twelve
months. There can be no assurance that a new bank facility or the equity
facility will continue to be available to the Company. Also, the Company's
ability to sustain its working capital position is dependent upon a number of
factors that are discussed below under the heading "Risk factors relating to
Western Digital particularly."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. In August 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133, An Amendment of FASB Statement No. 133" ("SFAS
137"), which defers the effective date of SFAS 133 to all fiscal quarters for
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. Application of SFAS 133 is not expected to have a
material impact on the Company's consolidated financial position, results of
operations or liquidity.
YEAR 2000
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On January 1, 2000, the Company incurred nominal impact on its products,
equipment, computer systems and applications as a result of the Year 2000 issue.
The Company attributes this to its Year 2000 readiness efforts. As of December
31, 1999, systems remediation and integration testing and development of the
Company's contingency plans had been completed. Supplier management is an
ongoing process, and no material impact was felt from lack of supplier readiness
at January 1, 2000. Although the Company did not experience any material
problems related to the Year 2000 issue, there can be no assurances that
problems relating to the Year 2000 issue will not manifest themselves in the
future. Expenditures related to the Year 2000 project, excluding normal
replacement of existing capital assets, totaled approximately $12.2 million .
RISK FACTORS RELATED TO THE HARD DRIVE INDUSTRY IN WHICH WE OPERATE
Our operating results depend on our being among the first-to-market and
first-to-volume with our new products.
To achieve consistent success with computer manufacturer customers we
must be an early provider of next generation hard drives featuring leading
technology and high quality. If we fail to:
- consistently maintain and improve our time-to-market
performance with our new products
- produce these products in sufficient volume within our rapid
product cycle
- qualify these products with key customers on a timely basis by
meeting our customer's performance and quality specifications,
or
- achieve acceptable manufacturing yields and costs with these
products
then our market share would be adversely affected, which would harm our
operating results.
Short product life cycles make it difficult to recover the cost of development.
Over the past two years hard drive areal density (the gigabytes of
storage per disk) has increased at a much more rapid pace than previously, and
we expect this trend to continue. Higher areal densities mean that fewer heads
and disks are required to achieve a given drive capacity. This has significantly
shortened product life cycles, since each generation of drives is more cost
effective than the previous one. Shorter product cycles make it more difficult
to recover the cost of product development
Short product life cycles force us to continually qualify new products with our
customers.
Due to short product life cycles, we must regularly engage in new product
qualification with our customers. To be considered for qualification we must be
among the leaders in time-to-market with our new products. Once a product is
accepted for qualification testing, any failure or delay in the qualification
process can result in our losing sales to that customer until the next
generation of products is introduced. The effect of missing a product
qualification opportunity is magnified by the limited number of high volume
computer manufacturers most of which continue to consolidate their share of the
PC market. These risks are magnified because we expect cost improvements and
competitive pressures to result in declining sales and gross margins on our
current generation products.
Our average selling prices and our revenue are declining.
We expect that our average selling prices for hard disk drives will
continue to decline. Rapid increases in areal density mean that the average
drive we sell has fewer heads and disks, and is therefore lower cost. Because of
the competitiveness of the hard drive industry, lower costs generally mean lower
prices. This is true even for those products that are competitive and introduced
into the market in a timely manner. Our average selling prices decline even
further when competitors lower prices to absorb excess capacity, liquidate
excess inventories, restructure or attempt to gain market share.
Unexpected technology advances in the hard drive industry could harm our
competitive position.
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If one of our competitors were able to implement a significant advance in
head or disk drive technology that enables a step-change increase in areal
density allowing greater storage of data on a disk, it would harm our operating
results.
Advances in magnetic, optical, semiconductor or other data storage
technologies could result in competitive products that have better performance
or lower cost per unit of capacity than our products. Some of our competitors
are developing hybrid storage devices that combine magnetic and optical
technologies, but we have decided not to pursue this technology at this time. If
these products prove to be superior in performance or cost per unit of capacity,
we could be at a competitive disadvantage to the companies offering those
products.
The hard drive industry is highly competitive and characterized by rapid shifts
in market share among the major competitors.
The price of hard drives has fallen over time due to increases in supply,
cost reductions, technological advances and price reductions by competitors
seeking to liquidate excess inventories or gain market share. In addition, rapid
technological changes often reduce the volume and profitability of sales of
existing products and increase the risk of inventory obsolescence. These
factors, taken together, result in significant and rapid shifts in market share
among the industry's major participants. For example, during 1997, we
significantly increased our share of the desktop market, but these gains were
lost during 1998 and 1999. If our market share erodes further, it would likely
harm our operating results.
Our prices and margins are subject to declines due to unpredictable end-user
demand and oversupply of hard disk drives.
Demand for our hard drives depends on the demand for computer systems
manufactured by our customers and on storage upgrades to existing systems. The
demand for computer systems has been volatile in the past and often has had an
exaggerated effect on the demand for hard drives in any given period. As a
result, the hard drive market tends to experience periods of excess capacity
which typically lead to intense price competition. If intense price competition
occurs, we may be forced to lower prices sooner and more than expected and
transition to new products sooner than expected. For example, in the second half
of 1998 and throughout 1999, as a result of excess inventory in the desktop hard
drive market, aggressive pricing and corresponding margin reductions materially
adversely affected our operating results. We experienced similar conditions in
the high-end hard drive market during most of 1998 and 1999.
Changes in the markets for hard drives require us to develop new products.
Over the past few years the consumer market for desktop computers has
shifted significantly towards lower priced systems, especially those systems
priced below $1,000. If we do not develop lower cost hard drives that can
successfully compete in this market, our market share will likely fall, which
could harm our operating results.
Furthermore, the PC market is fragmenting into a variety of computing
devices and products. Some of these products, such as internet appliances, may
not contain a hard drive. On the other hand, many industry analysts expect, as
do we, that as broadcasting and communications are increasingly converted to
digital technology from the older, analog technology, the technology of
computers and consumer electronics and communication devices will converge, and
hard drives will be found in many consumer products other than computers. While
we are investing development resources in designing hard drive products for new
audio-visual applications, it is too early to assess the impact of these new
applications on future demand for hard drive products.
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We depend on our key personnel.
Our success depends upon the continued contributions of our key employees,
many of whom would be extremely difficult to replace. Worldwide competition for
skilled employees in the hard drive industry is intense. We have lost a number
of experienced hard drive engineers over the past year as a result of the loss
of retention value of our employee stock options (because of the decrease in
price of our common stock) and aggressive recruiting of our employees. If we are
unable to retain our existing employees or to hire and integrate new employees,
our operating results would likely be harmed.
RISK FACTORS RELATING TO WESTERN DIGITAL PARTICULARLY
Loss of market share with a key customer could harm our operating results.
A majority of our revenue comes from a few customers. For example, for the
six month period ended December 31, 1999, sales to our top 10 customers
accounted for approximately 62% of revenues. These customers have a wide variety
of suppliers to choose from and therefore can make substantial demands on us.
Even if we successfully qualify a product with a customer, the customer
generally is not obligated to purchase any minimum volume of products from us
and is able to terminate its relationship with us at any time. Our ability to
maintain strong relationships with our principal customers is essential to our
future performance. If we lose a key customer or if any of our key customers
reduce their orders of our products or require us to reduce our prices before we
are able to reduce costs, our operating results would likely be harmed. For
example, this occurred early in the third quarter of 2000 in our enterprise hard
drive business and is one of the factors which led to the Company's decision to
exit the enterprise hard drive business and close its Rochester, Minnesota
facility.
Dependence on a limited number of qualified suppliers of components could lead
to delays or increased costs.
Because we do not manufacture any of the components in our hard drives, an
extended shortage of required components or the failure of key suppliers to
remain in business, adjust to market conditions, or to meet our quality, yield
or production requirements could harm us more severely than our competitors,
some of whom manufacture certain of the components for their hard drives. A
number of the components used by us are available from only a single or limited
number of qualified outside suppliers. If a component is in short supply, or a
supplier fails to qualify or has a quality issue with a component, we may
experience delays or increased costs in obtaining that component. This occurred
in September 1999 when we had to shut down our Caviar product line production
for approximately two weeks as a result of a faulty power driver chip which was
sole-sourced from a third-party supplier.
To reduce the risk of component shortages, we attempt to provide significant
lead times when buying these components. As a result, we may have to pay
significant cancellation charges to suppliers if we cancel orders, as we did in
1998 when we accelerated our transition to magnetoresistive recording head
technology, and as we are doing as a result of our decision to exit the
enterprise hard drive business.
In April 1999, we entered into a three year volume purchase agreement with
Komag under which we will buy a substantial portion of our media components from
Komag. We intend that this strategic relationship will reduce our media
component costs; however, it increases our dependence on Komag as a supplier.
Our future operating results will depend substantially on Komag's ability to
timely qualify its media components in our new development programs and to
supply us with these components in sufficient volume to meet our production
requirements. Any disruption in Komag's ability to manufacture and supply us
with media would likely harm our operating results.
To develop new products we must maintain effective partner relationships with
our strategic component suppliers.
Under our "virtual vertical integration" business model, we do not
manufacture any of the parts used in our hard drives. As a result, the success
of our products depends on our ability to gain access to and integrate parts
that are "best in class" from reliable component suppliers. To do so we must
effectively manage our relationships with our strategic component suppliers. We
must also effectively integrate different products from a variety of suppliers
and manage difficult scheduling and delivery problems.
20
<PAGE> 21
We have only one manufacturing facility, which subjects us to the risk of damage
or loss of the facility.
Our volume manufacturing operations currently are based in one facility. A
fire, flood, earthquake or other disaster or condition affecting our facility
would almost certainly result in a loss of substantial sales and revenue and
harm our operating results.
Manufacturing our products abroad subjects us to numerous risks.
We are subject to risks associated with our foreign manufacturing
operations, including:
- obtaining requisite United States and foreign governmental permits and
approvals
- currency exchange rate fluctuations or restrictions
- political instability and civil unrest
- transportation delays or higher freight rates
- labor problems
- trade restrictions or higher tariffs
- exchange, currency and tax controls and reallocations
- loss or non-renewal of favorable tax treatment under agreements or
treaties with foreign tax authorities.
We attempt to manage the impact of foreign currency exchange rate changes
by, among other things, entering into short-term, forward exchange contracts.
However, those contracts do not cover our full exposure and can be canceled by
the issuer if currency controls are put in place, as occurred in Malaysia during
the first quarter of 1999.
Our plan to broaden our business in data and content management, storage and
communication takes us into new markets.
We have recently entered the storage subsystem market through our Connex
subsidiary. In this market we will be facing the challenges of building volume
and market share in a market which is new to us but which has several
established and well-funded competitors. There is already significant
competition for skilled engineers, both in the hardware and software areas, in
this market. Our success will depend on Connex's ability to develop, introduce
and achieve market acceptance of new products, applications and product
enhancements, and to attract and retain skilled engineers. Additionally, our
competitors in this market have established intellectual property portfolios.
Our success will also depend on our ability to license existing intellectual
property or create new innovations. Moreover, our competitors' established
intellectual property portfolios increase our risk of intellectual property
litigation.
We are also developing hard drives for the emerging audio-visual market. We
will be facing the challenge of developing products for a market that is still
evolving and subject to rapid changes and shifting consumer preferences. There
are several competitors which have also entered this emerging market, and there
is no assurance that the market for digital storage devices for audio-visual
content will materialize or support all of these competitors.
We also expect to enter the data warehouse software and services market
through our SageTree subsidiary and are considering other initiatives related to
data and content management, storage and communication. In any of these
initiatives we will be facing the challenge of developing products and services
for markets that are still evolving and which have many current and potential
competitors.
Our reliance on intellectual property and other proprietary information subjects
us to the risk of significant litigation.
21
<PAGE> 22
The hard drive industry has been characterized by significant litigation.
This includes litigation relating to patent and other intellectual property
rights, product liability claims and other types of litigation. We are currently
evaluating several notices of alleged patent infringement or notices of patents
from patent holders. We also are a party to several judicial and other
proceedings relating to patent and other intellectual property rights. If we
conclude that a claim of infringement is valid, we may be required to obtain a
license or cross-license or modify our existing technology or design a new
non-infringing technology. Such licenses or design modifications can be
extremely costly. We may also be liable for any past infringement. If there is
an adverse ruling against us in an infringement lawsuit, an injunction could be
issued barring production or sale of any infringing product. It could also
result in a damage award equal to a reasonable royalty or lost profits or, if
there is a finding of willful infringement, treble damages. Any of these results
would likely increase our costs and harm our operating results.
Our reliance on intellectual property and other proprietary information subjects
us to the risk that these key ingredients of our business could be copied by
competitors.
Our success depends, in significant part, on the proprietary nature of our
technology, including our non-patentable intellectual property such as our
process technology. Despite safeguards, to the extent that a competitor is able
to reproduce or otherwise capitalize on our technology, it may be difficult,
expensive or impossible for us to obtain necessary legal protection. Also, the
laws of some foreign countries may not protect our intellectual property to the
same extent as do the laws of the United States. In addition to patent
protection of intellectual property rights, we consider elements of our product
designs and processes to be proprietary and confidential. We rely upon employee,
consultant and vendor non-disclosure agreements and a system of internal
safeguards to protect our proprietary information. However, we cannot insure
that our registered and unregistered intellectual property rights will not be
challenged or exploited by others in the industry.
Inaccurate projections of demand for our product can cause large fluctuations in
our quarterly results.
If we do not forecast total quarterly demand accurately, it can have a
material adverse effect on our quarterly results. We typically book and ship a
high percentage of our total quarterly sales in the third month of the quarter,
which makes it is difficult for us to match our production plans to customer
demands. In addition, our quarterly projections and results may in the future be
subject to significant fluctuations as a result of a number of other factors
including:
- the timing of orders from and shipment of products to major customers
- our product mix
- changes in the prices of our products
- manufacturing delays or interruptions
- acceptance by customers of competing products in lieu of our products
- variations in the cost of components for our products
- limited access to components that we obtain from a single or a limited
number of suppliers, such as Komag
- competition and consolidation in the data storage industry
- seasonal and other fluctuations in demand for computers often due to
technological advances.
22
<PAGE> 23
Rapidly changing market conditions in the hard drive industry make it difficult
to estimate actual results.
We have made and continue to make a number of estimates and assumptions
relating to our consolidated financial reporting. The rapidly changing market
conditions with which we deal means that actual results may differ significantly
from our estimates and assumptions. Key estimates and assumptions for us
include:
- accruals for warranty against product defects
- price protection adjustments on products sold to resellers and
distributors
- inventory adjustments for write-down of inventories to fair value
- reserves for doubtful accounts
- accruals for product returns.
The market price of our common stock is volatile.
The market price of our common stock has been, and may continue to be,
extremely volatile. Factors such as the following may significantly affect the
market price of our common stock:
- actual or anticipated fluctuations in our operating results
- announcements of technological innovations by us or our competitors
which may decrease the volume and profitability of sales of our existing
products and increase the risk of inventory obsolescence
- new products introduced by us or our competitors
- periods of severe pricing pressures due to oversupply or price erosion
resulting from competitive pressures
- developments with respect to patents or proprietary rights
- conditions and trends in the hard drive industry
- changes in financial estimates by securities analysts relating
specifically to us or the hard drive industry in general.
In addition, the stock market in recent months has experienced extreme price
and volume fluctuations that have particularly affected the stock price of many
high technology companies. These fluctuations are often unrelated to the
operating performance of the companies.
Securities class action lawsuits are often brought against companies after
periods of volatility in the market price of their securities. A number of such
suits have been filed against us in the past, and any of these litigation
matters could result in substantial costs and a diversion of resources and
management's attention.
We may be unable to raise future capital through debt or equity financing.
Due to our recent financial performance and the risks described in this
Report, in the future we may be unable to maintain adequate financial resources
for capital expenditures, working capital and research and development. Our
current borrowing agreement with our banks terminates no later than March 31,
2000, and we have agreed that we will not borrow under the agreement. If we
decide to increase or accelerate our capital expenditures or research and
development efforts, or if results of operations do not meet our expectations,
we could require additional debt or equity financing. However, we cannot insure
that additional financing will be available to us or available on favorable
terms. An equity financing could also be dilutive to our existing stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23
<PAGE> 24
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars, some
transactions are based in various foreign currencies. From time to time, the
Company purchases short-term, forward exchange contracts to hedge the impact of
foreign currency fluctuations on certain underlying assets, liabilities and
commitments for operating expenses denominated in foreign currencies. The
purpose of entering into these hedge transactions is to minimize the impact of
foreign currency fluctuations on the results of operations. A majority of the
increases or decreases in the Company's local currency operating expenses are
offset by gains and losses on the hedges. The contracts have maturity dates that
do not exceed twelve months. The unrealized gains and losses on these contracts
are deferred and recognized in the results of operations in the period in which
the hedged transaction is consummated. The Company does not purchase short-term
forward exchange contracts for trading purposes.
Historically, the Company has focused on hedging its foreign currency risk
related to the Singapore Dollar, the British Pound and the Malaysian Ringgit.
With the establishment of currency controls and the prohibition of purchases or
sales of the Malaysian Ringgit by offshore companies, the Company has
discontinued hedging its Malaysian Ringgit currency risk. Future hedging of this
currency will depend on currency conditions in Malaysia. The imposition of
exchange controls by the Malaysian government resulted in a $7.5 million
realized loss on terminated hedging contracts in the first quarter of 1999.
As of December 31, 1999, the Company had outstanding the following purchased
foreign currency forward exchange contracts (in millions, except average
contract rate):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
WEIGHTED
CONTRACT AVERAGE UNREALIZED
AMOUNT CONTRACT RATE GAIN*
-------- ------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
<S> <C> <C> <C>
Foreign currency forward contracts:
Singapore Dollar .................... $ 9.0 1.67 $ .2
British Pound Sterling .............. 3.2 1.63 --
------ ------
$ 12.2 $ .2
====== ======
</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.
During the three and six months ended December 31, 1999 and 1998 total realized
transaction and forward exchange contract currency gains and losses (excluding
the $7.5 million realized loss on the Malaysian Ringgit realized in the first
quarter of 1999), were immaterial to the consolidated financial statements.
Based on historical experience, the Company does not expect that a significant
change in foreign exchange rates (up to approximately 25%) would materially
affect the Company's consolidated financial statements.
DISCLOSURE ABOUT OTHER MARKET RISKS
Fixed Interest Rate Risk
At December 31, 1999, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $81.4 million,
compared to the related carrying value of $219.7 million. The convertible
debentures will be repurchased by the Company, at the option of the holder, as
of February 18, 2003, February 18, 2008, or February 18, 2013, or if there is a
Fundamental Change (as defined in the Debenture documents), at the issue price
plus accrued original issue discount to the date of redemption. The payment on
those dates, with the exception of a Fundamental Change, can be in cash, stock
or any combination, at the Company's option.
24
<PAGE> 25
The Company has various note receivables from other companies. All of the notes
carry a fixed rate of interest. Therefore a significant change in interest rates
would not impact the Company's consolidated financial statements.
Variable Interest Rate Risk
The Company maintains a term loan bearing interest at LIBOR or a base rate plus
margin determined by the borrowing base with an approximate current interest
rate of 7.9%, as part of its Senior Bank Facility. This facility will terminate
no later than March 31, 2000, and the balance has been repaid. As a result, the
Company currently has no variable interest rate risk, and no further borrowings
will be allowed during the remaining term of its Senior Bank Facility loan.
Fair Value Risk
The Company owns approximately 10.8 million shares of Komag, Inc. common stock.
The stock is restricted as to the percentage of total shares which can be sold
in a given time period. The unrestricted portion of the total Komag shares
acquired represents the shares which can be sold within one year. The Company
determines, on a quarterly basis, the fair market value of the unrestricted
Komag shares and records an unrealized gain or loss resulting from the
difference in the fair market value of the unrestricted shares as of the
previous quarter end and the fair market value of the unrestricted shares on the
measurement date. As of December 31, 1999, a $0.7 million total accumulated
unrealized loss has been recorded in accumulated other comprehensive income
(loss). If the Company sells all or a portion of this stock, any unrealized gain
or loss on the date of sale will be recorded as a realized gain or loss in the
Company's results of operations. Due to market fluctuations, a significant
decline in the stock's fair market value (of approximately 30% or more) could
occur, and this decline could adversely impact the Company's consolidated
financial statements. As of December 31, 1999, the quoted market value of the
Company's Komag common stock holdings, without regard to discounts due to sales
restrictions, was $33.7 million.
The Company owns approximately 1.3 million shares of Vixel common stock. The
shares are restricted as to sale until March 28, 2000 pursuant to an agreement
with Vixel's underwriters. The Company determines, on a quarterly basis, the
fair market value of the Vixel shares and records an unrealized gain or loss
resulting from the difference in the fair market value of the shares as of the
previous quarter end and the fair market value of the shares on the measurement
date. As of December 31, 1999, a $24.2 million total accumulated unrealized gain
has been recorded in accumulated other comprehensive income (loss). If the
Company sells all or a portion of this common stock, any unrealized gain or loss
on the date of sale will be recorded as a realized gain or loss in the Company's
results of operations. Due to market fluctuations, a significant decline in the
stock's fair market value as of December 31, 1999 (of approximately 40% or more)
could occur, and this decline could adversely impact the Company's consolidated
financial statements.
25
<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 and/or liquidity.
Accordingly, actual results could differ materially from those projected in
the forward-looking statements.
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleged that hard drives supplied by
the Company in calendar 1988 and 1989 were defective and caused damages to
Amstrad of $186.0 million in out-of-pocket expenses, lost profits, injury
to Amstrad's reputation and loss of goodwill. The Company filed a
counterclaim for $3.0 million in actual damages in addition to exemplary
damages in an unspecified amount. The first trial of this case ended in a
mistrial, with the jury deadlocked on the issue of liability. The case was
retried, and on June 9, 1999, the jury returned a verdict against Amstrad
and in favor of Western Digital. Amstrad has filed a notice of appeal from
the judgment, and the Company has filed motions seeking recovery of a
portion of its legal and other costs of defense. The Company does not
believe that the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. However, should the judgment be reversed on
appeal, and if in a retrial of the case Amstrad were to prevail, the
Company may be required to pay damages and other expenses, which may have a
material adverse effect on the Company's financial position, results of
operations and/or liquidity. In addition, the costs of defending a retrial
of the case may be material, regardless of the outcome.
In 1994 Papst Licensing ("Papst") brought suit against the Company in the
U.S. District Court for the Central District of California alleging
infringement by the Company of five of its patents relating to disk drive
motors that the Company purchases from motor vendors. Later that year Papst
dismissed its case without prejudice, but it has notified the Company that
it intends to reinstate the suit if the Company does not agree to enter
into a license agreement with Papst. Papst has also put the Company on
notice with respect to several additional patents. The Company does not
believe that the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. However, because of the nature and inherent
uncertainties of litigation, should the outcome of this action be
unfavorable, the Company may be required to pay damages and other expenses,
which may have a material adverse effect on the Company's financial
position, results of operations and/or liquidity. In addition, the costs of
defending such litigation may be material, regardless of the outcome.
The Company and Censtor Corporation ("Censtor") have had discussions
concerning royalties, if any, that might be due Censtor under a licensing
agreement. Censtor has initiated arbitration procedures under the agreement
seeking payment of royalties. In response, the Company has filed a complaint
in federal court seeking a determination that the patents at issue are
invalid. The Federal Court action has been stayed pending completion of the
arbitration procedures. The Company does not believe that the outcome of
this dispute will have a material adverse effect on its financial position,
results of operations and/or liquidity.
In the normal course of business, the Company receives and makes inquiry
regarding possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend
licenses or negotiate settlements. Although patent holders often offer such
licenses, no assurance can be given that a license will be offered or that
the terms of any license offered will be acceptable to the Company. Several
such matters are currently pending. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on
the consolidated financial position, results of operations and/or liquidity
of the Company.
From time to time the Company receives claims and is a party to suits and
other judicial and administrative proceedings incidental to its business.
Although occasional adverse decisions (or settlements) may occur, the
Company believes that the final disposition of such matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations and/or liquidity.
26
<PAGE> 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended December 31, 1999, the Company engaged in
transactions pursuant to which it exchanged an aggregate principal amount at
maturity of $303.5 million of the Company's Zero Coupon Convertible
Subordinated Debentures due 2018, for an aggregate of 11.7 million shares of
the Company's common stock. These transactions were undertaken, in reliance
upon the exemption from the registration requirements of the Securities Act
afforded by Section 3(a)(9) thereof, as exchanges of securities by the
Company with its existing security holders. No commission or other
remuneration was paid or given directly or indirectly for such exchanges.
These exchanges were consummated in private, individually negotiated
transactions with institutional investors.
27
<PAGE> 28
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 18, 1999. The
shareholders elected the following seven directors to hold office until the next
annual meeting and until their successors are elected and qualified:
<TABLE>
<CAPTION>
Number of Votes
---------------
For Withheld
--- --------
<S> <C> <C>
James A. Abrahamson 96,975,134 3,115,298
Peter D. Behrendt 96,981,406 3,103,412
I. M. Booth 96,954,381 3,155,935
Charles A. Haggerty 96,910,097 3,239,812
Andre R. Horn 96,972,074 3,120,075
Anne O. Krueger 96,985,045 3,096,268
Thomas E. Pardun 96,984,379 3,097,092
</TABLE>
In addition, the shareholders approved the following proposals:
<TABLE>
<CAPTION>
Number of Votes
---------------
For Against Abstentions
--- ------- -----------
<S> <C> <C> <C>
1. To approve the amendment to the Company's Employee
Stock Purchase Plan authorizing an additional
4,000,000 shares. 94,857,139 4,770,455 589,654
2. To ratify the selection of KPMG LLP as independent
accountants for the Company for the fiscal year
ended June 30, 2000. 98,740,089 1,058,010 419,150
</TABLE>
28
<PAGE> 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.3 Western Digital Corporation 1993 Employee Stock
Purchase Plan, as amended on November 18, 1999. *
10.22.1 Second Amendment to Lease, dated January 6, 1999,
by and between The Irvine Company and Western
Digital Corporation.
10.22.2 Letter Agreement dated December 21, 1999, by and
between The Irvine Company and Western Digital
Corporation.
10.35 Fiscal Year 2000 Western Digital Management
Incentive Plan.
10.38.5 Fifth Amendment to Revolving Credit and Term Loan
Agreement, dated as of January 14, 2000, among
Western Digital Corporation, BankBoston N.A., and
other lending institutions named therein.
10.44 Agreement dated October 7, 1999, by and between
the Company and Russell R. Stern.
10.45 Western Digital Corporation 1999 Employee
Severance Plan for U.S. Employees.
27 Financial Data Schedule
- -------------------------------
* Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (No. 333-95499) as filed with the
Securities and Exchange Commission on January 27, 2000.
(b) REPORTS ON FORM 8-K:
On October 4, 1999, the Company filed a current report on Form 8-K to
announce the close of a transaction to retire in the aggregate $100
million principal amount of convertible debentures in exchange for shares
of its common stock.
On October 7, 1999, the Company filed a current report on Form 8-K to
announce the close of a transaction to retire in the aggregate $125
million principal amount of convertible debentures in exchange for shares
of its common stock.
On October 21, 1999, the Company filed a current report on Form 8-K to
file its press release dated October 20, 1999, announcing its first
quarter results.
On November 18, 1999, the Company filed a current report on Form 8-K to
announce its retirement, in aggregate, of $303.5 million principal amount
of its convertible debentures in exchange for shares of its common stock.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION
---------------------------
Registrant
/s/Teresa Hopp
--------------
Teresa Hopp
Senior Vice President
and Chief Financial Officer
Date: February 14, 2000
30
<PAGE> 31
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.3 Western Digital Corporation 1993 Employee Stock
Purchase Plan, as amended on November 18, 1999. *
10.22.1 Second Amendment to Lease, dated January 6, 1999,
by and between The Irvine Company and Western
Digital Corporation.
10.22.2 Letter Agreement dated December 21, 1999, by and
between The Irvine Company and Western Digital
Corporation.
10.35 Fiscal Year 2000 Western Digital Management
Incentive Plan.
10.38.5 Fifth Amendment to Revolving Credit and Term Loan
Agreement, dated as of January 14, 2000, among
Western Digital Corporation, BankBoston N.A., and
other lending institutions named therein.
10.44 Agreement dated October 7, 1999, by and between
the Company and Russell R. Stern.
10.45 Western Digital Corporation 1999 Employee
Severance Plan for U.S. Employees.
27 Financial Data Schedule
</TABLE>
- -------------------------------
* Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (No. 333-95499) as filed with the
Securities and Exchange Commission on January 27, 2000.
<PAGE> 1
EXHIBIT 10.22.1
SECOND AMENDMENT TO LEASE
I. PARTIES AND DATE.
This Second Amendment to Lease dated January 6, 1999, is by and between
THE IRVINE COMPANY ("Landlord"), and WESTERN DIGITAL CORPORATION, a Delaware
corporation ("Tenant").
II. RECITALS.
On January 13, 1988, Landlord and Tenant entered into an office space
lease for the office building located at 8105 Irvine Center Drive, Irvine,
California, and related parking and landscape areas more particularly described
therein, which lease was subsequently amended by a First Amendment to Lease
dated May 18, 1990 (as amended, the "Lease").
Landlord and Tenant each desire to modify the Lease to extend the Lease
Term, adjust the Basic Rent, and make such other modifications as are set forth
in "III. MODIFICATIONS" next below.
III. MODIFICATIONS.
A. Lease Term. Notwithstanding any contrary provision in the Lease,
unless sooner terminated for default or breach of the terms, covenants or
conditions of the Lease, Landlord and Tenant hereby agree to extend the Term of
the Lease to expire at midnight on December 31, 2000.
B. Basic Rent. Notwithstanding any contrary provision in the Lease,
Landlord and Tenant hereby agree that the Basic Rent payable by Tenant during
the six (6) month period commencing July 1, 2000 shall be Six Hundred
Eighty-Seven Thousand Two Hundred Twelve Dollars ($687,212.00) per month, based
on $1.92 per rentable square foot.
C. Right to Extend the Lease Term. Section 3.1 of the Lease is hereby
amended by deleting Subparagraphs (b), (c), (d), (e), and (f) therefrom. In
lieu thereof, Landlord hereby agrees that provided Tenant is not in default
under any provision of the Lease at the time of exercise of the extension right
granted herein, and provided further that Tenant has not assigned or sublet any
of its interest in the Lease, Tenant may extend the Term of the Lease for one
(1) additional period of six (6) months (the "Extension Period"). Tenant shall
exercise its right to extend the Term by and only by (i) delivering to Landlord
prior to December 31, 1999, Tenant's written notice of its commitment to extend
(the "Commitment Notice"); and (ii) returning to Landlord, within fifteen (15)
days after receipt, an executed amendment to this Lease (to be prepared by
Landlord upon receipt of the Commitment Notice). The Basic Rent payable under
the Lease during the Extension Period shall be at the same rate set forth in
Paragraph III.B above. If Tenant fails to timely comply with any of the
provisions of this paragraph, Tenant's right to extend the Term shall be
extinguished and the Lease shall automatically terminate as of midnight on
December 31, 2000, without any extension and without any liability to Landlord.
Any attempt to assign or transfer any right or interest created by this
paragraph shall be void from its inception. Tenant shall have no other right to
extend the Term beyond the Extension Period described in this paragraph. Unless
agreed to in a writing signed by Landlord and Tenant, any extension of the
Term, whether created by an amendment to the Lease or by a holdover of the
Premises by Tenant, or otherwise, shall be deemed a part of, and not in
addition to, any duly exercised extension period permitted by this paragraph.
D. Parking. Landlord hereby agrees that Tenant's current parking
privileges shall remain unchanged during the six (6) month period commencing
July 1, 2000,and if applicable, during the Extension Period. Landlord further
agrees that Tenant's allotted parking spaces shall
1
<PAGE> 2
be provided to Tenant free of charge during the aforementioned twelve (12)
month period. Thereafter, the stall charge payable by Tenant shall be at
Landlord's scheduled parking rates from time to time.
E. Parking Rights Agreement. Landlord and Tenant hereby agree that the
separate "Parking Rights" agreement between the parties dated July 6, 1998
shall remain in full force and effect during the six (6) month period
commencing July 1, 2000, and if applicable, during the Extension Period.
IV. GENERAL.
A. Effect of Amendments. The Lease shall remain in full force and effect
except to the extent that it is modified by this Amendment.
B. Entire Agreement. This Amendment embodies the entire understanding
between Landlord and Tenant with respect to the modifications set forth in
"III. MODIFICATIONS" above and can be changed only by a writing signed by
Landlord and Tenant.
C. Counterparts. If this Amendment is executed in counterparts, each is
hereby declared to be an original; all, however, shall constitute but one and
the same amendment. In any action or proceeding, any photographic, photostatic,
or other copy of this Amendment may be introduced into evidence without
foundation.
D. Defined Terms. All words commencing with initial capital letters in
this Amendment and defined in the Lease shall have the same meaning in this
Amendment as in the Lease, unless they are otherwise defined in this Amendment.
E. Corporate and Partnership Authority. If Tenant is a corporation or
partnership, or is comprised of either or both of them, each individual
executing this Amendment for the corporation or partnership represents that he
or she is duly authorized to execute and deliver this Amendment on behalf of
the corporation or partnership and that this Amendment is binding upon the
corporation or partnership in accordance with its terms.
F. Attorneys' Fees. The provisions of the Lease respecting payment of
attorneys' fees shall also apply to this Amendment.
V. EXECUTION.
Landlord and Tenant executed this Amendment on the date as set forth in
"I. PARTIES AND DATE," above.
LANDLORD: TENANT:
THE IRVINE COMPANY WESTERN DIGITAL CORPORATION
By: /s/ WILLIAM R. HALFORD By /s/ [SIGNATURE ILLEGIBLE] 1/4/00
------------------------------ --------------------------------
William R. Halford, President
Irvine Office Company Title CFO
a division of the Irvine Company ----------------------------
By /s/ RICHARD G. SIM By /s/ [SIGNATURE ILLEGIBLE]
------------------------------ --------------------------------
Richard G. Sim,
Executive Vice President Title V.P. Law & Secretary
----------------------------
2
<PAGE> 1
EXHIBIT 10.22.2
[THE IRVINE COMPANY LOGO/LETTERHEAD]
December 21, 1999
Mr. Charles A. Haggerty
Chairman of the Board
President & Chief Executive Officer
Western Digital Corporation
8105 Irvine Center Drive
Irvine, CA 92618
Dear Chuck:
I am in receipt of your letter dated December 20, 1999 wherein you ask that we
defer the date by which Western Digital must notify The Irvine Company of your
desire to extend the lease term. This letter shall serve to modify our existing
agreement (Second Amendment to Lease) dated January 6, 1999 as follows: (i) in
that the "Commitment Notice" must be received by Landlord no later than January
28, 2000 and (ii) the Term of the lease shall be extended to expire on midnight
January 31, 2001.
Chuck, to the extent that your lease status can be resolved in January, we may
well be able to backfill floors 8-15 given the current level of tenant demand
for space and the lack of mid-rise office space in Irvine Spectrum. For example,
the former AT&T building adjacent to your headquarters is now 98% leased with
prospects to go to 100% in the next sixty days. It would be our desire to stage
your downsizing to occur from the lowest floor (8) first, and move up in a
contiguous fashion. We believe this would enable us to lease this space faster
than if we have to lease from 15 down.
To be effective, we need to receive a signed copy of this letter agreement prior
to December 31, 1999.
<PAGE> 2
Mr. Charles A. Haggerty
December 21, 1999
Page Two
Best wishes for a Happy Holiday Season
Sincerely,
/s/ Richard G. Sim The above Terms are agreed to by:
--------------
RGS:cf
cc: William R. Halford Western Digital Corporation
James Stiepan
By: /s/ Charles A. Haggerty 12-22-99
------------------------
It's Authorized officer
<PAGE> 1
EXHIBIT 10.35
FISCAL YEAR 2000
WESTERN DIGITAL MANAGEMENT INCENTIVE PROGRAM (MIP)
PURPOSE
----------------------------------------------------
The purpose of this program is to focus participants
on achieving key financial and strategic objectives
at the corporate and business group levels that will
lead to the creation of value for the Company's
shareholders and provide participants the
opportunity to earn significant awards, commensurate
with performance.
ELIGIBILITY
----------------------------------------------------
Program eligibility is extended to all employees of
Western Digital and selected employees of its
domestic subsidiaries (Employees of Connex and
Sagetree are not eligible for this plan) who are in,
or who are hired into, salary grades 68 and above
(or equivalent) on or before January 31, 2000.
Eligibility may also be granted to employees who
have an authorized written agreement that grants
them eligibility.
Employees of Western Digital and its domestic
subsidiaries who are in salary grades 67 or below
(or equivalent) are eligible for awards generated by
a secondary bonus pool.
DESCRIPTION OF THE PROGRAM
----------------------------------------------------
The 2000 Management Incentive Program will pay as
cash awards to participants for the achievement of
predetermined performance goals. Each participant
will be assigned a pool or target bonus percentage,
which when multiplied by the participant's annual
base salary as of June 30, 2000, will determine the
pool or target bonus payout.
Predetermined performance goals will be established
and approved by the Compensation Committee of the
Board of Directors.
The actual performance achieved will determine the
percentage used to calculate the award at the end of
the program year. The size of the actual award can
vary between 0% and 200% of the pool or target
award.
In addition, individual and pool awards may be
adjusted upward or downward by the Chief Executive
Officer from the amount generated by the formula.
The Chief Executive Officer's award may be adjusted
upward or downward by the Compensation Committee.
1
<PAGE> 2
OPERATION OF THE PROGRAM
----------------------------------------------------
Program Year: July 1, 1999 to June 30, 2000
Award Opportunities: The award for participants will be expressed as a
percentage of salary, and determined according to
salary grade.
PerformanceMeasures: Performance will be measured at the corporate and
business group levels. Performance measures that will
be used in the 2000 Program
are as follows:
- Cash Flow
- Time to Market
- Inventory Management
2000 Goals and Every employee of Western Digital covered by this
Weighting: program will be measured on the same goals and
objectives
The percentage of target bonus opportunity earned
(before discretionary adjustments) will vary from the
target bonus opportunity based on actual performance
achieved..
ADDITIONAL PROVISIONS
-----------------------------------------------------
Award Thresholds: Corporate operating profit/loss must be at a minimum
level for incentives to be paid under any aspect of
the Program.
Total Award Cap: Total awards paid under this Program may
not exceed a preset amount as determined by the
Compensation Committee. Any award reductions
attributable to the preset cap will be made by the
Chief Executive Officer.
Award Adjustment: Group award levels may be adjusted upward or downward
by up to 25% by the Chief Executive Officer provided
that total awards do not exceed the amounts generated
by formula.
After application of the group performance,
individual awards may be adjusted upward or downward
based on the adjustment table below. Approval from
the Chief Executive Officer is required for
adjustments outside of these limits. The Chief
Executive Officer's award may be adjusted upward or
downward by the Compensation Committee. The
adjustments by salary grade level (or equivalent) are
as follows:
2
<PAGE> 3
Salary Grade Upward Downward
(or equivalent) Adjustment Adjustment
--------------- ---------- ----------
All Participants +100% -100%
All awards under this program are discretionary. The
amount of the award including adjustments is
determined by Western Digital in its sole discretion.
No employee has any contractual right to receive an
award pursuant to this program due to his/her
employment at Western Digital.
Extraordinary Events: The Compensation Committee, in its
discretion, may adjust the basis upon which
performance is measured to reflect the effect of
significant changes that include, but are not limited
to, unbudgeted acquisitions/divestitures, unusual or
extraordinary accounting items, or significant,
unplanned changes in the economic or regulatory
environment.
Termination: Participants must be employed by the Company at the
end of the program year to receive an award. If a
participant terminates for reason of retirement,
total and permanent disability, or death, the
Compensation Committee has the discretion to pay
prorated awards based upon the percentage of the year
worked.
Partial Year The Compensation Committee, in its discretion, may
Participation: pay prorated awards to people hired or promoted into
eligible positions after July 1, 1999. In general,
awards will be prorated for participants who begin
before January 31, 2000 while those hired after
January 31, 2000 will not be eligible to participate
in the program.
Deferred Payout: Before the end of the calendar year, the
participant may elect to defer payout of all or part
of the award in accordance with Western Digital's
Deferred Compensation Plan. The deferred amount will
be credited with a rate as specified in the Western
Digital's Deferred Compensation Plan.
Payout of Award: Awards will be paid in cash as soon as possible
following the end of the program year or according to
the participant's deferral election.
Secondary Pool: The intent of this pool is to allow for the top 10%
of the remaining population to receive 5% of their
salary as a bonus at target levels of performance.
3
<PAGE> 1
EXHIBIT 10.38.5
FIFTH AMENDMENT
TO
REVOLVING CREDIT AND TERM LOAN AGREEMENT
Fifth Amendment dated as of January 14, 2000 to Revolving Credit and
Term Loan Agreement (the "Fifth Amendment"), by and among WESTERN DIGITAL
CORPORATION, a Delaware corporation (the "Borrower") and BANKBOSTON, N.A. and
the other lending institutions listed on Schedule 1 to the Credit Agreement (as
hereinafter defined) (the "Banks"), amending certain provisions of the Revolving
Credit and Term Loan Agreement dated as of November 4, 1998 (as amended and in
effect from time to time, the "Credit Agreement") by and among the Borrower, the
Banks, BankBoston, N.A. as agent for the Banks (in such capacity, the "Agent")
and The CIT Group/Business Credit, Inc. as co-agent for the Banks. Terms not
otherwise defined herein which are defined in the Credit Agreement shall have
the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms
and conditions of the Credit Agreement as specifically set forth in this Fifth
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. LIMITATION ON NEW REVOLVING CREDIT LOANS AND LETTERS OF
CREDIT.
(a) Notwithstanding anything to the contrary contained in the Credit
Agreement and the other Loan Documents, the Borrower hereby agrees that from the
Effective Date (as defined in Section 8 hereof) through and including the
Revolving Credit Loan Maturity Date (the "Limitation Period"), it will not
request to borrow any Revolving Credit Loans, request any Letters of Credit be
issued, extended or renewed or borrow any Revolving Credit Loans or request the
issuance, renewal or extension of any Letters of Credit (with the parties hereto
hereby agreeing that the only Letters of Credit to be outstanding during the
Limitation Period shall be the Letters of Credit which have been issued prior to
the date hereof). The parties hereto hereby acknowledge and agree that during
the Limitation Period the Banks and the Agent shall have no obligation to make
Revolving Credit Loans or issue, extend or renew Letters of Credit.
(b) The parties hereto hereby acknowledge and agree that after the
termination of the Limitation Period, the Banks shall have no obligation to make
Revolving Credit Loans and the Agent shall have no obligation to issue, extend
or renew Letters of Credit.
SECTION 2. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1.1
of the Credit Agreement is hereby amended as follows:
(a) the definition of "Revolving Credit Loan Maturity Date" is hereby
amended by deleting the date "November 2, 2001" which appears in such definition
and substituting in place thereof the date "March 31, 2000";
(b) the definition of "Term Loan Maturity Date" is hereby amended by
deleting the date "November 2, 2001" which appears in such definition and
substituting in place thereof the
<PAGE> 2
-2-
words "The earlier to occur of (a) January 31, 2000 and (b) the date on which
the Borrower incurs the Vendor Indebtedness";
(c) Section 1.1 of the Credit Agreement is further amended by inserting
the following definitions in the appropriate alphabetical order:
Vendor. That certain vendor of the Borrower which has been
previously identified as the "Vendor" to the Banks and the Agent by the
Borrower.
Vendor Indebtedness. Indebtedness of the Borrower to the Vendor
incurred pursuant to the Vendor Loan Agreement in the original principal
amount of not less than $16,625,000 in the aggregate.
Vendor Loan Agreement. That certain Loan Agreement dated or to be
dated on or after January 13, 2000 between the Vendor and the Borrower
and in form and substance satisfactory to the Agent.
Vixel. Vixel Corporation, a Delaware corporation.
SECTION 3. AMENDMENT TO SECTION 2.3 OF THE CREDIT AGREEMENT. Section 2.3
of the Credit Agreement is hereby amended by deleting Section 2.3 in its
entirety and restating it as follows:
2.3. REDUCTION OF TOTAL COMMITMENT. The Borrower shall
have the right at any time and from time to time upon five (5)
Business Days prior written notice to the Agent to reduce by
$5,000,000 or a whole multiple of $500,000 in excess thereof or
terminate entirely the Total Commitment, whereupon the
Commitments of the Banks shall be reduced pro rata in accordance
with their respective Commitment Percentages of the amount
specified in such notice or, as the case may be, terminated,
provided, however, notwithstanding the foregoing, from January 1,
2000 through and including the Revolving Credit Loan Maturity
Date, the Borrower shall only have the right to terminate the
Total Commitment in its entirety and shall not have the right to
reduce the Total Commitment by any smaller amount. Promptly after
receiving any notice of the Borrower delivered pursuant to this
Section 2.3, the Agent will notify the Banks of the substance
thereof. Upon the effective date of any such reduction or
termination, the Borrower shall pay to the Agent for the
respective accounts of the Banks the full amount of any
commitment fee then accrued on the amount of such reduction. No
reduction or termination of the Commitments may be reinstated.
SECTION 4. AMENDMENT TO SECTION 4 OF THE CREDIT AGREEMENT. Section 4.4.
of the Credit Agreement is hereby amended by deleting Section 4.4 in its
entirety and restating it as follows:
4.4. OPTIONAL REPAYMENT OF TERM LOAN. The Borrower shall have the
right at any time to prepay the Term Notes on or before the Term Loan
Maturity Date, as a whole, or in part, upon not less than five (5)
Business Days prior written notice to the Agent, without premium or
penalty (but subject to Section 6.9 hereof), provided, that (a) each
partial prepayment shall be in the principal amount of $5,000,000 or an
integral multiple of $1,000,000 in excess thereof, and (b) each partial
prepayment shall be allocated among the Banks, in proportion, as nearly
as practicable, to the respective outstanding amount of each
<PAGE> 3
-3-
Bank's Term Note, with adjustments to the extent practicable to equalize
any prior prepayments not exactly in proportion. Any prepayment of
principal on the Term Loan shall include all interest accrued to the
date of prepayment and shall be applied against the scheduled
installments of principal due on the Term Loan in the inverse order of
maturity. No amount repaid with respect to the Term Loan may be
reborrowed.
SECTION 5. AMENDMENT TO SECTION 10 OF THE CREDIT AGREEMENT. Section 10
of the Credit Agreement is hereby amended as follows:
(a) Section 10.1(i) of the Credit Agreement is hereby amended by
deleting the text of Section 10.1(f) in its entirety and restating it as
follows:
(i) the (i) Indebtedness evidenced by the Subordinated Debt
Documents; and (ii) Vendor Indebtedness, provided, that as to the Vendor
Indebtedness, (1) the net proceeds received by the Borrower from such
Vendor Indebtedness is in the original principal amount of not less than
the aggregate amount of the Term Loans outstanding on such date,
together with any and all interest accrued thereon; and (2) the Borrower
will use the proceeds received from the Vendor Indebtedness to prepay in
full the outstanding amount of the Term Loans, together with any and all
interest accured thereon.
(b) Section 10.2(xii) of the Credit Agreement is hereby amended by
deleting the text of Section 10.2(xii) in its entirety and restating it as
follows:
(xii) the (i) liens in favor of the Indenture Trustee to the
extent expressly provided in Section 7.07 of the Subordinated Indenture;
and (ii) lien solely on the Vixel Stock in favor of the Vendor to secure
the Vendor Indebtedness permitted by Section 10.1(i)(ii), provided, that
as to lien on the Vixel Stock to secure the Vendor Indebtedness, (1)
such lien shall only be permitted to be granted after the aggregate
amount of the Term Loans of all the Banks have been repaid in full in
cash; and (2) such security interest covers only the Vixel Stock and no
other asset of the Borrower or any Subsidiary.
(c) Section 10.5.2(a)(i) of the Credit Agreement is hereby amended by
deleting the words "enter into a sale and leaseback arrangement in respect of
the real property located in Rochester, Minnesota in an arms-length transaction
for fair and reasonable value" and substituting in place thereof the words
"enter into a sale of the real property (together with the fixtures located
thereon) located in Rochester, Minnesota in an arms-length transaction for fair
and reasonable value so long as immediately prior to the consummation of such
sale (1) the aggregate outstanding amount of the Term Loans, including all
accrued interest thereon, has been repaid in full in cash and (2) the Borrower
has provided to the Agent cash collateral in an amount sufficient to cash
collateralize the Maximum Drawing Amount (together with any Reimbursement
Obligations and any Unpaid Reimbursement Obligations) of all issued and
outstanding Letters of Credit, and the Borrower has executed and delivered to
the Agent a cash collateral agreement in respect of such cash collateral in form
and substance satisfactory to the Agent with appropriate instructions
prohibiting the Borrower's withdrawal of such funds so long as they remain cash
collateral".
SECTION 6. AMENDMENT TO SECTION 11 OF THE CREDIT AGREEMENT. Section 11.1
of the Credit Agreement is hereby amended by deleting the table contained in
Section 11.1 of the Credit Agreement in its entirety and restating it as
follows:
<PAGE> 4
-4-
<TABLE>
<CAPTION>
PERIOD AMOUNT
------------------------------------------- ------------------------------
<S> <C>
Closing Date - last day of Second Fiscal $416,000,000
Quarter, 1999
First Day of Third Fiscal Quarter, 1999 - $423,000,000 last day of Third
Fiscal Quarter, 1999
First Day of Fourth Fiscal Quarter, 1999 - $410,000,000 last day of
Fourth Fiscal Quarter, 1999
First Day of First Fiscal Quarter, 2000 - $238,000,000 last day of First
Fiscal Quarter, 2000
First Day of Second Fiscal Quarter, 2000 - $176,000,000 last day of
Second Fiscal Quarter, 2000
At any time thereafter $155,000,000
</TABLE>
SECTION 7. LIMITED WAIVER. The Borrower has requested that the Banks
waive compliance with Section 11.1 of the Credit Agreement for the fiscal
quarter ended October 2, 1999. Subject always to compliance by the Borrower with
the terms and provisions of the Credit Agreement and the other Loan Documents
and the terms and conditions contained herein, from and after the effectiveness
of this Fifth Amendment the Banks hereby waive the provisions of Section 11.1 of
the Credit Agreement for the fiscal quarter ended October 2, 1999 and solely
with respect to the determination of compliance for such fiscal quarter ended
October 2, 1999.
SECTION 8. CONDITIONS TO EFFECTIVENESS. This Fifth Amendment shall not
become effective until the date (the "Effective Date") on which Agent receives
the following:
(a) a counterpart of this Fifth Amendment, executed by the Borrower, the
Guarantors and the Banks; and
(c) payment by the Borrower to the Agent for the pro rata accounts of
the Banks an amendment fee of $200,000.
SECTION 9. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats,
on and as of the date hereof, each of the representations and warranties made by
it in Section 8 of the Credit Agreement, and such representations and warranties
remain true as of the date hereof (except to the extent of changes resulting
from transactions contemplated or permitted by the Credit Agreement and the
other Loan Documents and changes occurring in the ordinary course of business
that singly or in the aggregate are not materially adverse, and to the extent
that such representations and warranties relate expressly to an earlier date),
provided, that all references therein to the Credit Agreement shall refer to
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower and its
Subsidiaries of this Fifth Amendment and the performance by the Borrower and its
Subsidiaries of all of its agreements and obligations under the Credit Agreement
as amended hereby and the other Loan Documents are within the corporate
authority of each the Borrower and its Subsidiaries and has been duly authorized
by all necessary corporate action on the part of the Borrower and its
Subsidiaries.
SECTION 10. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement, the Security Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. The Credit Agreement and this Fifth
Amendment shall be read and construed as a single agreement. All references in
the Credit Agreement or any related agreement or instrument to the Credit
Agreement shall hereafter refer to the Credit Agreement as amended hereby.
<PAGE> 5
-5-
SECTION 11. NO WAIVER. Except as expressly set forth in Section 7
hereof, nothing contained herein shall constitute a waiver of, impair or
otherwise affect any Obligations, any other obligation of the Borrower or any
rights of the Bank Agents or the Banks consequent thereon.
SECTION 12. COUNTERPARTS. This Fifth Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
SECTION 13. GOVERNING LAW. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE> 6
-6-
IN WITNESS WHEREOF, the parties hereto have executed this Fifth
Amendment as a document under seal as of the date first above written.
WESTERN DIGITAL CORPORATION
By:
------------------------------------
Title:
---------------------------------
BANKBOSTON, N.A.
By:
------------------------------------
Title:
---------------------------------
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
------------------------------------
Title:
---------------------------------
HELLER FINANCIAL, INC.
By:
------------------------------------
Title:
---------------------------------
FLEET CAPITAL CORPORATION
By:
------------------------------------
Title:
---------------------------------
FINOVA CAPITAL CORPORATION
By:
------------------------------------
Title:
---------------------------------
<PAGE> 7
-7-
LASALLE BUSINESS CREDIT, INC.
By:
------------------------------------
Title:
---------------------------------
FINOVA CAPITAL CORPORATION,
SUCCESSOR BY MERGER TO:
FREMONT FINANCIAL CORPORATION
By:
------------------------------------
Title:
---------------------------------
FLEET BUSINESS CREDIT CORPORATION
(F/K/A SANWA BUSINESS CREDIT CORP.)
By:
------------------------------------
Title:
---------------------------------
<PAGE> 8
-8-
RATIFICATION OF GUARANTY
The undersigned guarantors hereby acknowledges and consents to the
foregoing Fifth Amendment as of January 14, 2000, and agrees that the Guarantee
dated as of November 4, 1998 from WD UK, the Guaranty dated as of February 12,
1999 from Connex, Inc. and the Guaranty dated as of September 22, 1999 from
SageTree, Inc. in favor of the Agent and each of the Banks remains in full force
and effect, and each Guarantor confirms and ratifies all of its obligations
thereunder.
CONNEX, INC.
By:
------------------------------------
Title:
---------------------------------
WESTERN DIGITAL (U.K.) LIMITED
By:
------------------------------------
Title:
---------------------------------
SAGETREE, INC.
By:
------------------------------------
Title:
---------------------------------
<PAGE> 1
EXHIBIT 10.44
October 7, 1999
Mr. Russell R. Stern
25502 Nellie Gail Road
Laguna Hills, CA 92653
Dear Russell,
This letter, when signed by you, constitutes the agreement (the "Agreement")
relative to your resignation from Western Digital Corporation (the "Company").
The terms of this Agreement are as follows:
1. RESIGNATION DATE. You will resign your position as Co-Chief Operating
Officer effective Friday, October 8, 1999.
2. EMPLOYMENT PERIOD. You will continue to be treated as an employee,
including stock option vesting, until the earlier of September 29, 2000
or your death (the "Employment Period"). 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 7, 1999 through September 29, 2000 would result in the vesting
of 89,000 to 96,066 additional exerciseable shares. A schedule setting
forth these options, their grant dates, exercise prices, and vesting
schedules is attached as Attachment "A" and incorporated herein by
reference.
3. PAYMENT OF COMPENSATION. You will be paid $400,000.00 in wage
continuation based on your current base salary and not including any
executive retention program amounts. Vesting on your awards under the
Company's executive retention programs will cease as of October 7, 1999,
and no further amounts will be credited or paid thereunder. Twenty-six
(26) bi-weekly payments of $15,384.62 will begin on October 15, 1999,
and conclude with a final payment on September 29, 2000. This total
exceeds the standard formula of 6 months pay (130 days - $200,000.00),
which is normally available to executives at your level and length of
service.
4. STOCK OPTIONS. 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
<PAGE> 2
Mr. Russell R. Stern
October 7, 1999
Page 2
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 September 29, 2000 to exercise your vested
options; 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 11 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..
5. BENEFITS. The status of your current benefits is set forth on Attachment
"B" hereto and hereby made a part hereof. During the Employment Period
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 $306.50 per pay period.
b) Employee Stock Purchase Plan (ESPP) will continue and deductions
will be made from your wage continuation checks through the next
two purchase dates.
c) 401(k) participation and Western Digital employer match will
continue with deductions coming from your wage continuation
checks.
d) Tax preparation assistance of up to $5,000 per fiscal year.
e) Supplemental executive medical coverage of up to $5,000 per
fiscal year.
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 Employment Period. No
actions will be taken with respect to the moneys payable or the benefits
accorded to you that are intended to affect adversely only
<PAGE> 3
Mr. Russell R. Stern
October 7, 1999
Page 3
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
wage 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. Your Western
Digital benefits will cease sixty days after the September 29, 2000
month-end. See the attachment for details. 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. CONFIDENTIALITY. 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.
7. VACATION. By October 15, 1999 you will be paid all accrued, unused
vacation. Although you will continue on the Company payroll through
September 29, 2000, you will accrue no more vacation subsequent to
October 8, 1999.
8. SAVINGS AND PROFIT SHARING PLAN. 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
September 29, 2000.
9. OUTPLACEMENT SERVICES. The Company will provide executive outplacement
assistance through Lee Hecht Harrison; Challenger, Gray and Christmas;
or another firm of your choosing to assist you in finding another
position. These services may begin anytime prior to September 29, 2000.
Contact the Vice President of Human Resources or Pam Burdi, Director
Employee Relations (949) 932-5516 for assistance with these
arrangements.
10. INDEMNIFICATION AND ASSISTANCE.
<PAGE> 4
Mr. Russell R. Stern
October 7, 1999
Page 4
(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.
11. 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 Employment 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 Executive 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
<PAGE> 5
Mr. Russell R. Stern
October 7, 1999
Page 5
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
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 Employment Period the Company's
Board of Directors and its officers shall refrain from any
disparagement, defamation or slander of you.
12. CONFIDENTIAL INFORMATION. When you joined the Company you signed an
agreement setting forth your obligations to the Company during and after
your employment. A copy of your agreement is attached hereto as
Attachment "C" 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.
<PAGE> 6
Mr. Russell R. Stern
October 7, 1999
Page 6
13. RELEASE OF CLAIMS. 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 its 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,
(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
<PAGE> 7
Mr. Russell R. Stern
October 7, 1999
Page 7
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.
You and the Company agree 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.
14. 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 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 21 hereof by close of business
on the seventh day from the date that you sign this Agreement.
15. 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
<PAGE> 8
Mr. Russell R. Stern
October 7, 1999
Page 8
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.
16. 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 you and the
Company 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, you and the
Company 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
you and the Company shall mutually agree upon. If the dispute is
not resolved through mediation, you and the Company 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, you and the Company shall select a mutually
acceptable neutral arbitrator from among the JAMS/Endispute panel
of arbitrators. If you and the Company cannot agree on an
arbitrator, the Administrator of JAMS/Endispute shall appoint an
arbitrator. None of you, the Company or the arbitrator shall
disclose the existence, content, or results of any arbitration
hereunder without the prior written consent of both of you and
the Company, 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
<PAGE> 9
Mr. Russell R. Stern
October 7, 1999
Page 9
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 you or the
Company and shall apply the standards governing such motions
under the 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. You and the Company intend this
arbitration provision to be valid, enforceable, irrevocable and
construed as broadly as possible. Pending the resolution of any
dispute between you and the Company, the Company may make any
remaining unpaid payments due to you pursuant to paragraphs 3 and
5 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 paragraphs 3 and 5 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 this
Agreement, then the arbitrator shall be authorized to direct
payment of the money (including any accrued interest) from the
escrow account to the Company, order that the Company is not
required to make any further payments to you under paragraphs 3
and 5, and award the Company any other appropriate remedies,
including but not limited to reimbursement by you to the Company
of the amounts paid to you pursuant to Paragraphs 3 and 5 of this
Agreement.
(b) In the event that a dispute arises concerning compliance with
this Agreement, either you or the Company will be entitled to
obtain from a court with jurisdiction over you and the Company
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.
<PAGE> 10
Mr. Russell R. Stern
October 7, 1999
Page 10
(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.
17. 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.
18. WAIVER. A waiver by either you or the Company 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 you or the
Company.
19. 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.
20. COSTS. Except as provided in Paragraph 16 hereof, you and the Company
shall each bear your own costs, expert fees, attorneys' fees and other
fees incurred in connection with this Agreement.
21. 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
<PAGE> 11
Mr. Russell R. Stern
October 7, 1999
Page 11
Irvine, CA 92618
Attention: Vice President, Human Resources
<PAGE> 12
Mr. Russell R. Stern
October 7, 1999
Page 12
To Mr. Stern: 25502 Nellie Gail Road
Laguna Hills, CA 92653
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.
22. ENTIRE AGREEMENT. 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.
23. NO ORAL MODIFICATION. This Agreement may only be amended by a writing
signed by you and the Chief Executive Officer of the Company or the
Chief Legal Officer of the Company.
24. GOVERNING LAW. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of the State of
California.
25. EFFECTIVE DATE. This Agreement is effective eight days after it has been
signed by both you and the Company (the "Effective Date").
26. 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 you and
the Company.
27. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed by you
voluntarily and without any duress or undue influence on the part or
behalf of the Company, with the full intent of releasing all claims. You
acknowledge that:
(a) you have read this Agreement;
(b) you have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of your own choice
or that you have voluntarily declined to seek such counsel;
(c) you understand the terms and consequences of this Agreement and
of the releases it contains; and
<PAGE> 13
Mr. Russell R. Stern
October 7, 1999
Page 13
(d) you are fully aware of the legal and binding effect of this
Agreement.
Please indicate your agreement to the above by signing below.
Very truly yours,
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.
- ------------------------------------------------------------------------
Russell R. Stern Date
<PAGE> 14
ATTACHMENT "B"
SEPTEMBER 2000 - STATUS OF BENEFITS UPON
TERMINATION OF EMPLOYMENT - RUSSELL R. STERN
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 November 30, 2000
DENTAL INSURANCE
Dental coverage continues until November 30, 2000
VISION INSURANCE
Vision coverage continues until November 30, 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 November 30, 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 November
30, 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 November 30, 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.
<PAGE> 15
BUSINESS TRAVEL ACCIDENT COVERAGE
Business travel accident coverage will end on your last day actively at work for
Western Digital. Under the terms of the contract, no conversion privileges are
available.
LONG-TERM DISABILITY
Long-term disability coverage will end on your last day actively at work for
Western Digital. 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. 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 January, 2001) 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 November 30,
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 September 29, 2000. The company match is effective until September 29,
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. 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.
<PAGE> 16
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 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 the next purchase dates in
January and August, 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.
<PAGE> 17
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
September 29, 2000.
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
<PAGE> 1
EXHIBIT 10.45
WESTERN DIGITAL CORPORATION
1999 EMPLOYEE SEVERANCE PLAN FOR U.S. EMPLOYEES
1. PURPOSE
The purpose of this Plan is to provide severance benefits to certain
Eligible Employees (as defined herein) of Western Digital Corporation (the
"Company") whose employment with the Company is terminated by reason of Job
Discontinuance as described more fully herein. This instrument shall serve as
both a plan document and summary plan description for purposes of Title I of
ERISA.
2. EFFECTIVE DATE
All of the Company's policies and practices regarding severance benefits
or similar payments upon employment termination with respect to Eligible
Employees in the U.S., other than written employment or separation agreements
with the Company that provide severance benefits, are hereby superseded by this
Plan which shall be known as the Western Digital Corporation 1999 Employee
Severance Plan For U.S. Employees, effective as of December 1, 1999.
3. AMOUNT AND PAYMENT OF SEVERANCE BENEFITS
3.1 Severance Benefits. An Eligible Employee who meets the departure
conditions described in Section 3.2 shall become a Participant and the following
shall apply:
(a) The Participant shall receive a severance payment based on
Service Date and the Participant's Base Pay as follows:
Less than 5 years of service = 2 weeks Base Pay
5 years to less than 10 years = 3 weeks Base Pay
Over 10 years of service = 4 weeks Base Pay
(i) The severance payment shall be paid in one lump-sum
cash payment within fifteen (15) days of the Participant's
compliance with all provisions of Section 3.2.
(ii) A Participant may not be employed by Western
Digital Corporation, its parent or subsidiaries, or any of its
affiliates in any capacity including, but not limited to,
consultant or temporary worker, during the period of time
represented by the severance payment.
(b) The Participant shall be eligible for outplacement services
provided by a vendor and in an amount (with no cash value) to be chosen
by the Company, at the Company's sole discretion, as follows:
<PAGE> 2
(i) Manager II, Grades 26, 35-36, 44-45, 69-72, and
85-86 shall receive up to a maximum of $5,000 in outplacement
services;
(ii) Manager I, Grades 34, 68, and 84 shall receive up
to a maximum of $3,000 in outplacement services;
(iii) Professional II, Exempt and Non-Exempt, Grades
20-24, 31-33, 41-43, 50-67, and 81-83 shall receive up to a
maximum of $2,000 in outplacement services;
(iv) Professional I, Hourly Non-Exempt shall receive up
to a maximum of $1,500 in outplacement services; and
(v) To the extent that a Participant is a Grade 73 or
higher, the Committee shall determine, in its sole and exclusive
judgment and discretion, the level of outplacement services, if
any, to which such Participant shall be entitled.
(c) If the Participant elects COBRA continuation coverage within
the applicable election period, the Company shall make the applicable
COBRA premium payments for a period of two months beyond the expiration
of the Participant's Company-provided medical, dental, and/or vision
coverage existing as of the Participant's termination date.
Notwithstanding anything in this Plan to the contrary, there shall be no
obligation to make such COBRA premium payments on behalf of any
Participant if the Participant otherwise becomes eligible for equivalent
coverage under another employer's plan.
3.2 Departure and Entitlement Procedure. As a condition to becoming a
Participant and receiving the severance benefits described in Section 3.1, the
Eligible Employee must return and deliver to the Director of Human Resources or
his or her designee all Company property within seven (7) days of the Eligible
Employee's termination date.
3.3 Voluntary Resignation/Termination For Cause. Notwithstanding the
foregoing, in no event shall an employee receive any payment hereunder if he or
she quits voluntarily or is terminated for Cause.
3.4 Offsets. All severance payments under this Plan shall be subject to
legal deductions, and the Company reserves the right to offset the benefits
payable under this Plan by any advanced monies the Participant owes the Company.
The benefits and amounts payable under this Plan shall be reduced (but not below
zero) by any severance pay or benefits to which a Participant is or becomes
entitled under any other severance pay plan, policy, agreement or arrangement.
Notwithstanding any provision of this Plan to the contrary, to the extent that
any Participant is entitled to any period of paid notice under Federal or state
law including, but not limited to, the Worker Adjustment Retraining Notification
Act, 29 U.S.C. Sections 2101 et seq., the benefits and amounts payable under
this Plan shall be reduced (but not below zero) by the Base Pay received by the
Participant during the period of such paid notice.
3.5 Loss and Reduction of Benefits. If an Eligible Employee resigns
prior to his/her scheduled termination date, then he/she shall not be entitled
to any severance payments or any
2
<PAGE> 3
other severance benefits provided herein. If, during the period represented by
the severance payment, an Eligible Employee accepts a position with Western
Digital Corporation, its parent or subsidiaries, or any of its affiliates, he or
she will not receive any further severance payments or benefits, and must repay
the portion of any lump sum representing the unexpired severance benefit. If,
prior to the payment of the lump-sum severance payment referenced in Section
3.1(a) herein, it is discovered that an otherwise Eligible Employee has
improperly used the funds and assets of the Company, or has violated Company
policies, practices or procedures at any time during his or her employment with
the Company, then such employee shall not be entitled to any severance payment
or any other severance benefits provided herein and all applicable benefits
shall cease immediately.
3.6 Limitation On Employee Rights. This Plan shall not give any employee
the right to be retained in the service of the Company or to interfere with or
restrict the right of the Company to discharge any employee at any time, with or
without cause.
4. ADMINISTRATION
4.1 The Company shall be the administrator of the Plan for purposes of
Section 3(16) of ERISA and shall have responsibility for complying with any
reporting and disclosure rules applicable to the Plan under ERISA. In all other
respects, except as provided herein, the Plan shall be administered and operated
by the Committee. The Committee is empowered to construe and interpret the
provisions of the Plan and to decide all questions of eligibility for benefits
under this Plan and shall make such determinations in its sole and absolute
discretion. The Committee may at any time delegate to any other named person or
body, or reassume therefrom, any of its fiduciary responsibilities or
administrative duties with respect to this Plan.
4.2 The members of the Committee shall be the named fiduciaries with
respect to this Plan for purposes of Section 402 of ERISA.
4.3 The Committee may contract with one or more persons to render advice
with regard to any responsibility it has under this Plan.
4.4 Subject to the limitations of this Plan, the Committee shall from
time to time establish such rules for the administration of this Plan as it may
deem desirable.
4.5 The Company shall, to the extent permitted by law, by the purchase
of insurance or otherwise, indemnify and hold harmless the members of the
Committee and each other fiduciary with respect to this Plan for liabilities or
expenses they and each of them incur in carrying out their respective duties
under the Plan, other than for any liabilities or expenses arising out of such
fiduciary's gross negligence or willful misconduct. A fiduciary shall not be
responsible for any breach of responsibility of any other fiduciary except to
the extent provided in Section 405 of ERISA.
4.6 If a Participant or any other individual (collectively "Claimant")
believes that benefits under this Plan are being wrongfully denied, that the
Plan is not being operated properly, that fiduciaries of the Plan have breached
their duties, or that the Claimant's legal rights are being violated with
respect to the Plan, the Claimant must file a formal claim with the Committee.
3
<PAGE> 4
Any such claim for benefits must be filed in writing within 90 days of the date
upon which the Participant first knew or should have known the facts upon which
the claim is based.
4.7 If any claim for benefits under this Plan is denied, in whole or in
part, the claimant shall be so notified by the Committee, or its delegate,
within thirty (30) calendar days of the date such person's claim is delivered to
the Committee (or such person designated in writing by it). At the same time,
the Committee shall notify the claimant of his or her right to a review by the
Committee and shall set forth, in a manner calculated to be understood by the
claimant, specific reasons for such decision, specific references to pertinent
Plan provisions on which the decision is based, a description of any additional
material or information necessary for the claimant to perfect his or her request
for review, an explanation of why such material or information is necessary, and
an explanation of the Plan's review procedure.
4.8 Any claimant or duly authorized representative may appeal from such
decision by submitting to the Committee within sixty (60) calendar days after
the date of such notice of its decision a written statement:
(a) Requesting a review of the claim for benefits by the
Committee;
(b) Setting forth all of the grounds upon which the request for
review is based and any facts in support thereof; and
(c) Setting forth any issues or comments which the claimant
deems relevant to the claim. The Committee shall act upon such appeal
within sixty (60) calendar days after the latter of receipt of the
claimant's request for review by it or receipt of all additional
materials reasonably requested by it from such claimant.
4.9 The Committee shall make a full and fair review of an appeal and all
written materials submitted by the claimant in connection therewith and may
require the claimant to submit, within ten (10) calendar days of written notice
by the Committee, such additional facts, documents or other evidence as the
Committee, in its sole discretion, deem necessary or advisable in making such a
review. On the basis of its review, the Committee shall make an independent
determination of the claimant's eligibility for an allowance and the amount of
such allowance, if any, under this Plan. The decision of the Committee on any
appeal shall be final and conclusive upon all persons if supported by
substantial evidence in the record.
4.10 If the Committee denies a claim in whole or in part, it shall give
written notice of its decision to the claimant setting forth, in a manner
calculated to be understood by the claimant, the specific reasons for such
denial and specific references to the pertinent Plan provisions on which its
decision was based.
4.11 If any Claimant believes that the Committee's determination on
appeal is incorrect, the Claimant or duly authorized representative may file
suit related to such determination but must do so within one year from the date
of the notification of the Committee's determination on appeal or the date which
marks the end of the otherwise applicable limitations period under ERISA,
whichever occurs first.
4
<PAGE> 5
5. GENERAL
5.1 Payments to and benefits under this Plan are not assignable since
they are primarily for the support and maintenance of the Participants.
5.2 The benefits and costs of this Plan shall be paid by the Company out
of its general assets. The status of a claim against the Company with respect to
the benefits provided hereunder shall be same as the status of a claim against
the Company by any general or unsecured creditor.
5.3 This Plan is intended to be an employee welfare benefit plan, as
defined in Section 3(1), Subtitle A of Title 1 of ERISA. The Plan will be
interpreted to effectuate this intent.
5.4 The masculine pronoun shall include the feminine pronoun and the
feminine pronoun shall include the masculine pronoun and the singular pronoun
shall include the plural pronoun and the plural pronoun shall include the
singular pronoun, unless the context clearly indicates otherwise.
5.5 The Plan shall be construed according to the laws of the State of
California, except to the extent such laws are preempted by federal law.
5.6 ERISA Rights. An employee of the Company eligible to participate in
the Plan has certain rights and protections under ERISA which entitle him or her
to:
(a) examine, without charge, at the Plan administrator's office,
all Plan documents and copies of all documents filed by the Plan with
the U.S. Department of Labor, such as detailed annual reports and Plan
descriptions.
(b) Obtain copies of all Plan documents and other Plan
information upon written request to the Plan administrator. The Plan
administrator may make a reasonable charge for copies.
(c) Receive a summary of the Plan's annual financial report. The
Plan administrator is required by law to furnish each Participant with a
copy of this summary financial report.
In addition to creating rights for Plan participants, ERISA imposes
duties upon the people who are responsible for the operation of the Plan. The
people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do
so prudently and in the interest of Eligible Employees and beneficiaries.
No one, including the Company, or any other person, may fire any person
or otherwise discriminate against him or her in any way to prevent him or her
from obtaining a benefit or exercising rights under ERISA.
If a claim for a benefit is denied in whole or in part, the claimant
must receive a written explanation of the reason for denial. A claimant has the
right to have the claim reviewed as
5
<PAGE> 6
outlined above. Under ERISA, there are steps an employee can take to enforce the
above rights. For instance, if an employee requests materials from the Plan and
does not receive them within thirty (30) days, he or she may file suit in a
federal court. In such a case, the court may require the Plan administrator to
provide the materials and pay up to $100 a day until he or she receives the
materials, unless the materials were not sent because of reasons beyond the
control of the Plan administrator.
If any employee has a claim for benefits which is denied or ignored, in
whole or in part, he or she may file suit in a state or federal court. If it
should happen that Plan fiduciaries misuse the Plan's money, or if an employee
is discriminated against for asserting ERISA rights, he or she may seek
assistance from the U.S. Department of Labor, or file suit in a federal court.
The court will decide who should pay court costs and legal fees. If he or she is
successful, the court may order the person sued to pay these costs and fees. If
he or she loses, the court may order such person to pay these costs and fees. If
such person loses, the court may order him or her to pay these costs and fees,
for example, if it finds the claim is frivolous.
If an employee has any questions about the Plan, he or she should
contact the Committee at the address shown below in Section 5.7. An employee
with any questions about this statement or about rights under ERISA should
contact the nearest Area Office of the U.S. Labor-Management Service
Administration, Department of Labor.
5.7 The Plan sponsor, Plan administrator, and agent for the service of
legal process is:
Plan Sponsor and Administrator:
Western Digital Corporation
8105 Irvine Center Drive
Irvine, California 92718
Agent for Service of Process:
Director of Human Resources
Western Digital Corporation
8105 Irvine Center Drive
Irvine, California 92718
The Company's Employer Identification Number is 95-2647125. The Plan
Number is 504.
6 AMENDMENT AND TERMINATION
The Company reserves the right to amend and/or terminate this Plan at
any time in its sole discretion. No amendment or termination shall diminish
benefits to which a participant is currently entitled under this Plan. Any
termination, modification, or other amendment of the Plan shall be in writing,
signed by the Chief Executive Officer or the Vice President of Human Resources.
6
<PAGE> 7
7. DEFINITIONS
7.1 "Base Pay" means the employee's wages earned on a weekly basis
determined as of the employment termination date, excluding bonuses and
commissions, and, if paid hourly, is based on the number of regularly scheduled
hours worked per week.
7.2 "Cause" means:
(a) fraud, misappropriation, embezzlement or other act of
misconduct against the Company;
(b) conviction of a felony;
(c) violation of any rules or regulations of any governmental or
regulatory body which has an adverse effect on the Company;
(d) a material breach of the terms of the employee's employment,
or a breach of the employee's duty not to engage in any transaction that
represents, directly or indirectly, self-dealing with the Company or any
of the Company's affiliates, which has not been approved by the Company;
(e) unsatisfactory performance;
(f) violation of company policy;
(g) violation of state or federal law in connection with the
employee's performance of his/her job;
(h) a leave of absence exceeding the period allowed by contract,
policy or applicable law; or
(i) circumstances beyond the Company's control including, but
not limited to, fire, flood, explosion, bombing, earthquake, and civil
unrest.
Review of any determination that a termination is for Cause
shall be by the Committee, in their sole and exclusive judgment and
discretion, in accordance with the provisions of Section 4 herein.
7.3 "Committee" means the Severance Committee the members of which shall
consist of the members of the Company's Retirement Plan Committee, unless
otherwise determined by the Board of Directors of the Company.
7.4 "Eligible Employee" means any non-temporary, full-time or part-time,
salaried or hourly employee (specifically excluding any individual who is not
treated by the Company as a common law employee, such as an independent
contractor or an individual working through a third-party provider, such as
Kelly Services, without regard to the characterization or recharacterization of
such individual's status by any court or governmental agency), who is paid from
the Company's United States payroll, who is not a party to a written employment
or separation agreement with the Company that provides severance benefits, and
who is notified by
7
<PAGE> 8
the Company that he or she has been selected for Job Discontinuance for reasons
other than Cause.
7.5 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
7.6 "Job Discontinuance" means the termination of the employment of an
Eligible Employee for reasons other than for Cause. Job Discontinuance does not
apply, however, in circumstances including, but not limited to, voluntary
resignation and/or voluntary retirement.
7.7 "Participant" means an Eligible Employee who is entitled, based on
the provisions of Section 3.2 hereof, to the severance payment.
7.8 "Plan" means the Western Digital, Corporation 1999 Employee
Severance Plan For U.S. Employees, as set forth in this instrument as it may be
amended from time to time.
7.9 "Service Date" means the first date of employment or adjusted date
of employment if rehired with the Company.
IN WITNESS WHEREOF, this instrument, evidencing the terms of the Western
Digital Corporation 1999 Employee Severance Plan for U.S. Employees, is executed
as of December 5, 1999.
WESTERN DIGITAL CORPORATION
By: /s/ Raymond M. Bukaty
_________________________________
Raymond M. Bukaty
Vice President, Corporate Law
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND BALANCE SHEET OF WESTERN
DIGITAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
QUARTERLY REPORT ON FORM 10Q FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> DEC-31-1999
<CASH> 163,675
<SECURITIES> 0
<RECEIVABLES> 215,712
<ALLOWANCES> 17,352
<INVENTORY> 101,728
<CURRENT-ASSETS> 559,234
<PP&E> 504,435
<DEPRECIATION> 347,544
<TOTAL-ASSETS> 764,724
<CURRENT-LIABILITIES> 574,740
<BONDS> 236,291
0
0
<COMMON> 1,290
<OTHER-SE> (89,358)
<TOTAL-LIABILITY-AND-EQUITY> 764,724
<SALES> 967,131
<TOTAL-REVENUES> 967,131
<CGS> 1,012,232
<TOTAL-COSTS> 1,012,232
<OTHER-EXPENSES> 234,953
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 8,357
<INCOME-PRETAX> (288,411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 166,899
<CHANGES> 0
<NET-INCOME> (121,512)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
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