<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 March 31, 2000.
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 April 28, 2000, is
139,340,111.
<PAGE> 2
WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three-Month
Periods Ended March 27, 1999 and March 31, 2000.............. 3
Condensed Consolidated Statements of Operations - Nine-Month
Periods Ended March 27, 1999 and March 31, 2000.............. 4
Condensed Consolidated Balance Sheets - July 3, 1999 and
March 31, 2000............................................... 5
Condensed Consolidated Statements of Cash Flows - Three-Month
Periods Ended March 27, 1999 and March 31, 2000.............. 6
Condensed Consolidated Statements of Cash Flows - Nine-Month
Periods Ended March 27, 1999 and March 31, 2000.............. 7
Notes to Condensed Consolidated Financial Statements......... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 28
Signatures.......................................................... 29
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
----------------------------
MAR. 27, MAR. 31,
1999 2000
--------- ----------
<S> <C> <C>
Revenues, net........................................ $ 668,456 $ 516,587
Costs and expenses:
Cost of revenues............................... 628,592 505,003
Research and development....................... 62,699 33,770
Selling, general and administrative............ 46,210 33,970
Restructuring charges.......................... 41,000 28,002
--------- ---------
Total costs and expenses.................. 778,501 600,745
--------- ---------
Operating loss....................................... (110,045) (84,158)
Net interest and other income (expense).............. (4,248) 13,489
--------- ---------
Net loss............................................. $(114,293) $ (70,669)
========= =========
Basic and diluted loss per common share:
Loss per common share.......................... $ (1.27) $ (.53)
========= =========
Common shares used in computing per share amounts:
Basic..................................... 89,883 133,903
========= =========
Diluted................................... 89,883 133,903
========= =========
</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>
NINE-MONTH PERIOD ENDED
-----------------------------
MAR. 27, MAR. 31,
1999 2000
----------- -----------
<S> <C> <C>
Revenues, net............................................ $ 2,057,904 $ 1,483,718
Costs and expenses:
Cost of revenues................................... 2,081,625 1,517,235
Research and development........................... 164,983 127,996
Selling, general and administrative................ 151,361 116,862
Restructuring charges.............................. 41,000 85,837
----------- -----------
Total costs and expenses...................... 2,438,969 1,847,930
----------- -----------
Operating loss........................................... (381,065) (364,212)
Net interest and other income (expense).................. (10,139) 5,132
----------- -----------
Loss before extraordinary item........................... (391,204) (359,080)
Extraordinary gain from redemption of convertible
debentures........................................ -- 166,899
----------- -----------
Net loss................................................. $ (391,204) $ (192,181)
=========== ===========
Basic and diluted loss per common share:
Loss per common share before extraordinary item.... $ (4.39) $ (3.07)
Extraordinary gain................................. -- 1.43
----------- -----------
Loss per common share.............................. $ (4.39) $ (1.64)
=========== ===========
Common shares used in computing per share amounts:
Basic......................................... 89,105 116,983
=========== ===========
Diluted....................................... 89,105 116,983
=========== ===========
</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, MAR. 31,
1999 2000
---------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 226,147 $202,087
Accounts receivable, less allowance for doubtful
accounts of $18,537 at July 3, 1999 and
$15,069 at March 31, 2000...................... 273,435 177,455
Inventories......................................... 144,093 98,208
Prepaid expenses & other current assets............. 81,853 56,068
---------- --------
Total current assets........................... 725,528 533,818
Property and equipment at cost, net....................... 237,939 108,886
Intangible and other assets, net.......................... 58,935 47,491
---------- --------
Total assets................................... $1,022,402 $690,195
========== ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.................................... $ 335,907 $ 290,330
Accrued expenses.................................... 252,791 234,713
Current portion of long-term debt................... 10,000 --
----------- ---------
Total current liabilities...................... 598,698 525,043
Long-term debt............................................ 40,000 --
Convertible debentures.................................... 494,144 222,562
Other liabilities......................................... 43,350 51,393
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 149,175 at March 31, 2000.................. 1,019 1,492
Additional paid-in capital.......................... 335,197 532,476
Accumulated deficit................................. (294,841) (487,022)
Accumulated other comprehensive income (loss)....... (2,123) 25,287
Treasury stock-common stock at cost;
11,297 shares at July 3, 1999 and 9,852
shares at March 31, 2000....................... (193,042) (181,036)
----------- ---------
Total shareholders' deficiency................. (153,790) (108,803)
----------- ---------
Total liabilities and shareholders' deficiency. $ 1,022,402 $ 690,195
=========== =========
</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>
THREE-MONTH PERIOD ENDED
----------------------------
MAR. 27, MAR. 31,
1999 2000
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(114,293) $ (70,669)
Adjustments to reconcile net loss to net cash
used for operating activities:
Non-Cash Items:
Depreciation and amortization................... 34,554 17,726
Interest on convertible debentures.............. 6,279 2,896
Non-cash portion of restructuring charges....... 25,603 27,497
In-process research and development charge...... 7,471 --
Investment gains (Note 2)....................... -- (14,767)
Changes in assets and liabilities:
Accounts receivable............................. 60,498 20,905
Inventories..................................... (2,439) 3,520
Prepaid expenses................................ (9,630) (490)
Accounts payable................................ (36,407) 32,917
Accrued expenses................................ (18,335) (42,497)
Restructuring and special charge accruals....... 7,850 (2,387)
Other........................................... (74) 5,804
--------- ---------
Net cash used for operating activities...... (38,923) (19,545)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment........... -- 29,737
Capital expenditures, net............................... (27,666) (3,258)
Other investments....................................... 1,500 --
--------- ---------
Net cash provided by (used for) investing
activities.................................. (26,166) 26,479
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank debt (Note 5)......................... -- (16,625)
Common stock issued for cash............................ 8,524 48,103
--------- ---------
Net cash provided by financing activities... 8,524 31,478
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (56,565) 38,412
Cash and cash equivalents, beginning of period........... 353,660 163,675
--------- ---------
Cash and cash equivalents, end of period................. $ 297,095 $ 202,087
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes................. $ 763 $ 3,225
Cash paid during the period for interest..................... 1,418 166
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
---------------------------
MAR. 27, MAR. 31,
1999 2000
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(391,204) $(192,181)
Adjustments to reconcile net loss to net cash
used for operating activities:
Non-Cash Items:
Depreciation and amortization.................... 101,841 64,949
Interest on convertible debentures............... 18,596 12,513
Non-cash portion of restructuring charges........ 25,603 56,301
In-process research and development charge....... 7,471 --
Extraordinary gain from redemption of
convertible debentures......................... -- (166,899)
Investment gains (Note 2)........................ -- (14,767)
Changes in assets and liabilities:
Accounts receivable.............................. 57,551 95,980
Inventories...................................... 23,103 45,885
Prepaid expenses................................. 2,158 6,203
Accounts payable................................. 19,467 (18,837)
Accrued expenses................................. 37,987 (65,947)
Restructuring and special charge accruals........ 7,850 47,542
Other............................................ 2,322 8,474
--------- ---------
Net cash used for operating activities....... (87,255) (120,784)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............ -- 66,756
Capital expenditures, net................................ (87,763) (17,101)
Other investments........................................ -- (2,200)
--------- ---------
Net cash provided by (used for) investing
activities................................... (87,763) 47,455
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank debt (Note 5).......................... -- (50,000)
Common stock issued for cash............................. 15,208 99,269
Costs relating to credit facility........................ (2,925) --
--------- ---------
Net cash provided by financing activities.... 12,283 49,269
--------- ---------
Net decrease in cash and cash equivalents................. (162,735) (24,060)
Cash and cash equivalents, beginning of period............ 459,830 226,147
--------- ---------
Cash and cash equivalents, end of period.................. $ 297,095 $ 202,087
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes.................. $ 4,080 $ 4,307
Cash paid during the period for interest...................... 3,554 2,094
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
<PAGE> 8
WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accounting policies followed by the Company are set forth in Note 1 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K as of and for the year ended July 3, 1999.
In the opinion of management, all adjustments necessary to fairly state the
condensed consolidated financial statements have been made. All such
adjustments are of a normal recurring nature. Certain information and
footnote disclosures normally included in the consolidated financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K as of and for the year ended July 3,
1999.
The Company has a 52 or 53-week fiscal year. In order to align its
manufacturing and financial calendars, effective during the three months
ended December 31, 1999, the Company changed its fiscal calendar so that
each fiscal month ends on the Friday nearest to the last day of the
calendar month. Prior to this change, the Company's fiscal month ended on
the Saturday nearest to the last day of the calendar month. The change did
not have a material impact on the Company's results of operations or
financial position. All general references to years relate to fiscal years
unless otherwise noted.
Certain prior periods' amounts have been reclassified to conform to the
current period presentation.
2. Supplemental Financial Statement Data (in thousands)
JULY 3, MAR. 31,
1999 2000
-------- --------
Inventories:
Finished goods....................... $101,828 $72,027
Work in process...................... 26,307 13,907
Raw materials and component parts.... 15,958 12,274
-------- -------
$144,093 $98,208
======== =======
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
---------------------------------------------------------
MAR. 27, MAR. 31, MAR. 27, MAR. 31,
1999 2000 1999 2000
--------- ------- --------- ---------
Net Interest and Other Income (Expense):
<S> <C> <C> <C> <C>
Interest income.................................. $ 4,187 $ 1,939 $ 14,303 $ 6,425
Investment gains................................. -- 14,767 -- 14,767
Interest expense................................. (8,435) (3,217) (24,442) (16,060)
--------- ------- --------- --------
$ (4,248) $13,489 $ (10,139) $ 5,132
========= ======= ========= ========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
----------------------------
MAR. 27, MAR. 31,
1999 2000
-------------- ------------
<S> <C> <C>
Supplemental disclosure of non-cash investing
and financing activities:
Common stock issued for redemption of convertible
debentures.............................................. $ -- $ 110,109
============== ============
Redemption of convertible debentures for Company common
stock, net of capitalized issuance costs................. $ -- $ 277,008
============== ============
Settlement of accounts payable by transfer of cost
method investments....................................... $ -- $ 26,242
============== ============
</TABLE>
3. Loss per Share
As of March 27, 1999 and March 31, 2000, 16.6 and 21.3 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 March 27, 1999 and March 31, 2000, 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.
4. Common Stock Transactions
On September 30, 1999, the Company's Board of Directors approved a
"Broad-Based" Stock Incentive 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 market
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.
During the nine-month period ended March 31, 2000, the Company issued
approximately 1,236,000 shares of its common stock in connection with
Employee Stock Purchase Plan ("ESPP") purchases and 210,000 shares of its
common stock in connection with common stock option exercises, for
aggregate cash proceeds of approximately $5.5 million. During the
corresponding period of the prior year, the Company issued approximately
1,002,000 shares of its common stock in connection with ESPP purchases and
709,000 shares of its common stock in connection with common stock option
exercises, for aggregate cash proceeds of $15.2 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 equity facility provides for up to $150.0 million in cash
proceeds of which $93.8 million had been utilized during the nine month
period ended March 31, 2000. Shares sold under the equity facility are at
the market price of the Company's common stock less a discount ranging from
2.75% to 4.25%. During the nine months ended March 31, 2000, the Company
9
<PAGE> 10
issued 20.5 million shares of common stock under the equity facility for
net cash proceeds of approximately $93.8 million.
During the nine-month period ended March 31, 2000, the Company issued 26.7
million shares of common stock to redeem a portion of its 5.25% zero coupon
convertible subordinated debentures (the "Debentures") with a book 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 nine months ended March
31, 2000. As of March 31, 2000, the book value of the remaining outstanding
Debentures was $222.6 million and the aggregate principal amount at
maturity was $561.6 million.
5. Credit Facility
The Company's credit facility matured on March 31, 2000. The remaining
balance on the term loan was repaid using the proceeds from the equity
facility during the three months ended March 31, 2000. The Company has a
commitment for a new Senior Credit Facility that will provide up to a $150
million revolving credit line (depending on a borrowing base calculation).
The new Senior Credit Facility will be secured by the Company's accounts
receivable, inventory, 65% of its stock in its foreign subsidiaries and
other assets of the Company, excluding the Company's Connex and Sagetree
subsidiaries. At the option of the Company, borrowings would bear interest
at either LIBOR (with option periods of one to three months) or a base
rate, plus a margin determined by the borrowing base. The Company
anticipates that the new Senior Credit Facility will be completed by June
30, 2000.
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.
During December 1999, the Company received an $11.0 million deposit on the
sale of its enterprise drive manufacturing facility in Tuas, Singapore. The
total sales proceeds were $11.0 million and the sale was recognized during
the three months ended March 31, 2000. The corresponding gain on the sale
of $3.1 million is included in net restructuring charges for the three
months ended March 31, 2000.
During the three months ended March 31, 2000, the Company sold its
Rochester, Minnesota enterprise research and development facility for $29.7
million. The resulting loss of $1.9 million is included in net
restructuring charges for the three months ended March 31, 2000.
7. Restructuring Activities
CONSOLIDATION OF ASIA MANUFACTURING FACILITIES
During the first half of 2000, the Company initiated a restructuring
program directed at improving operational effectiveness and efficiency and
reducing operational expenses worldwide. Charges related to these
restructuring actions were accrued in the periods in which executive
management committed to execute such actions. Committed actions for the six
months ended December 31, 1999 included reorganization of operational and
management responsibilities, transfer of hard drive production from
Singapore to the Company's manufacturing facility in Malaysia, closure of
the Company's Singapore operations, and taking property and equipment out
of service and holding it for disposal. These actions resulted in a net
reduction of worldwide headcount of approximately 1,600, of which
approximately 140 were management, professional and administrative
personnel and the remainder were manufacturing employees. In Asia,
approximately 3,800 employees were reduced from the Company's Singapore
operation and approximately 2,900 were added in Malaysia in connection with
the transfer of production. The restructuring charges originally recorded
during the six months ended December 31, 1999, as well as third-quarter
changes to the original restructuring accruals are summarized in the table
below. No additional
10
<PAGE> 11
restructuring charges for the Desktop product line were recorded during the
quarter ended March 31, 2000.
ENTERPRISE DRIVE MARKET
On January 19, 2000, the Company announced its plans to exit the enterprise
hard drive market 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 approximately 402 employees in the design center were laid off and
given legally required notification and outplacement services. The exit
from the enterprise market resulted in a restructuring charge of $38.1
million during the three months ended March 31, 2000. The restructuring
charge consisted of $27.4 million for property and equipment write-offs
(equipment taken out of service and held for disposal) including the loss
on the sale of the Rochester facility, and $10.7 million for severance,
outplacement and other incremental costs associated with the closure.
Reducing these charges is the gain realized on the sale of the Tuas
facility of $3.1 million, the favorable settlement of lease commitments in
Singapore of $5.3 million and favorable settlement of 1999 restructuring
accruals of $1.7 million. Below is a summary of the restructuring charges,
the amounts paid and the ending accrual balance (in thousands) for the nine
months ended March 31, 2000. The Company estimates that these restructuring
efforts will be substantially completed by June 30, 2000.
<TABLE>
<CAPTION>
Nine Month Period Ended March 31, 2000
------------------------------------------
Non-Cash Total
Accruals Charges Charges
--------- -------- ---------
<S> <C> <C> <C>
Consolidation of Asian Operation:
Fixed asset write-offs $ -- $ 28,804 $ 28,804
Severance and outplacement 18,028 -- 18,028
Lease cancellation and other (net of favorable lease
settlement of $5,252 recorded in third quarter) 5,733 -- 5,733
--------- -------- ---------
23,761 28,804 52,565
Closure of enterprise drive business:
Fixed asset write-offs 27,497 27,497
Severance, outplacement and other 10,651 -- 10,651
--------- -------- ---------
10,651 27,497 38,148
--------- -------- ---------
34,412 56,301 90,713
Cash Payments: (26,364) --
--------- --------
$ 8,048 $ 56,301
========= ========
Changes to 1999 restructuring estimates:
Gain on sale of Tuas building (3,100)
Favorable settlement of 1999 restructuring accruals (1,776)
---------
$ 85,837
=========
</TABLE>
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 that 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, consisting of $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 March 31, 2000, the Company had completed rework on
approximately 83% of the 1.2 million units and had resolved its claims
against third parties resulting from the recall.
11
<PAGE> 12
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 lapse over a three and
one-half year period. As of March 31, 2000, approximately 60% of these
shares may be sold within twelve 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"), the amount sellable within twelve months
has been marked to market value using published closing prices of Komag
stock as of March 31, 2000. Accordingly, a total accumulated unrealized
gain of $3.6 million is included in accumulated other comprehensive income
(loss). The aggregate carrying value of the shares was $38.5 million
(market value of approximately $40.9 million) as of March 31, 2000, of
which $24.6 million relates to shares sellable within twelve months and is
classified as current. Due to market conditions, as of April 28, 2000 the
market value of all Komag shares held by the Company had declined to $31.7
million, of which $19.0 million relates to shares sellable within twelve
months.
The Company owns approximately 1.3 million shares of Vixel Corporation
("Vixel") common stock. 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. At March 31, 2000 a total
accumulated unrealized gain of $21.7 million is included in accumulated
other comprehensive income (loss). The investment in Vixel common stock is
classified as current. The aggregate carrying value of the shares, which
approximates market value, is $21.7 million as of March 31, 2000. As of
April 28, 2000 the market value had declined to $9.4 million, due to market
conditions.
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 (deficiency) but are excluded from net
income (loss). 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 nine-month
periods ended March 31, 2000 were as follows (in millions):
THREE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
MAR. 31, 2000 MAR. 31, 2000
-------------- -------------
Net loss $ (70.7) $ (192.2)
Other comprehensive income:
Unrealized gain on available
for sale investments, net 1.8 27.4
------- --------
Total comprehensive loss $ (68.9) $ (164.8)
======= ========
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11. Legal Proceedings
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleged that hard drives supplied by
the Company in calendar 1988 and 1989 were defective and caused damages to
Amstrad of $186.0 million in out-of-pocket expenses, lost profits, injury
to Amstrad's reputation and loss of goodwill. The Company filed a
counterclaim for $3.0 million in actual damages in addition to exemplary
damages in an unspecified amount. The first trial of this case ended in a
mistrial, with the jury deadlocked on the issue of liability. The case was
retried, and on June 9, 1999, the jury returned a verdict against Amstrad
and in favor of Western Digital. Amstrad has filed a notice of appeal from
the judgment, and the Company has filed motions seeking recovery of a
portion of its legal and other costs of defense. The Company does not
believe that the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. However, should the judgment be reversed on
appeal, and if in a retrial of the case Amstrad were to prevail, the
Company may be required to pay damages and other expenses, which may have a
material adverse effect on the Company's financial position, results of
operations and/or liquidity. In addition, the costs of defending a retrial
of the case may be material, regardless of the outcome.
In 1994 Papst Licensing ("Papst") brought suit against the Company in the
U.S. District Court for the Central District of California alleging
infringement by the Company of five of its patents relating to disk drive
motors that the Company purchases from motor vendors. Later that year Papst
dismissed its case without prejudice, but it has notified the Company that
it intends to reinstate the suit if the Company does not agree to enter
into a license agreement with Papst. Papst has also put the Company on
notice with respect to several additional patents. The Company does not
believe that the ultimate resolution of this matter will have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. However, because of the nature and inherent
uncertainties of litigation, should the outcome of this action be
unfavorable, the Company may be required to pay damages and other expenses,
which may have a material adverse effect on the Company's financial
position, results of operations and/or liquidity. In addition, the costs of
defending such litigation may be material, regardless of the outcome.
The Company and Censtor Corporation ("Censtor") have had discussions
concerning royalties, if any, that might be due Censtor under a licensing
agreement. Censtor has initiated arbitration procedures under the agreement
seeking payment of royalties. In response, the Company has filed a
complaint in federal court seeking a determination that the patents at
issue are invalid. The Federal Court action has been stayed pending
completion of the arbitration procedures. The Company does not believe that
the outcome of this dispute will have a material adverse effect on its
financial position, results of operations and/or liquidity.
In the normal course of business, the Company receives and makes inquiry
regarding possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend
licenses or negotiate settlements. Although patent holders often offer such
licenses, no assurance can be given that a license will be offered or that
the terms of any license offered will be acceptable to the Company. Several
such matters are currently pending. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
From time to time the Company receives claims and is a party to suits and
other judicial and administrative proceedings incidental to its business.
Although occasional adverse decisions (or settlements) may occur, the
Company believes that the final disposition of such matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of federal
securities laws. The statements that are not purely historical should be
considered forward-looking statements. Often they can be identified by the use
of forward-looking words, such as "may", "will", "could", "project", "believe",
"anticipate", "expect", "estimate", "continue", "potential", "plan", "forecasts"
and the like. Statements concerning current conditions may also be
forward-looking if they imply a continuation of current conditions. These
statements appear in a number of places in this report and include statements
regarding the intentions, plans, strategies, beliefs or current expectations of
the Company with respect to, among other things:
o the financial prospects of the Company
o the Company's financing plans
o litigation and other contingencies potentially affecting the Company's
financial position, operating results, or liquidity
o trends affecting the Company's financial condition or operating results
o the Company's strategies for growth, operations, product development
and commercialization
o 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 that 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 first half of 2000, the Company initiated a restructuring program
directed at improving operational effectiveness and efficiency and reducing
operational expenses worldwide. Charges related to these restructuring actions
were accrued in the periods in which executive management committed to execute
such actions. Committed actions for the six months ended December 31, 1999
included reorganization of operational and management responsibilities, transfer
of hard drive production from Singapore to the Company's manufacturing facility
in Malaysia, closure of the Company's Singapore operations, and taking property
and equipment out of service and holding it for disposal. These actions resulted
in a net reduction of worldwide headcount of approximately 1,600, of which
approximately 140 were management, professional and administrative personnel and
the remainder were manufacturing employees. In Asia, approximately 3,800
employees were reduced from the Company's Singapore operation and approximately
2,900 were 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. No additional
restructuring charges for the Desktop product line were recorded during the
third quarter ended March 31, 2000.
On August 9, 1999, the Company sold approximately 34 acres of land in Irvine,
California, upon which it had previously planned to build a new corporate
headquarters, for $26 million (the approximate cost of the land). The Company
has extended the current lease of its worldwide headquarters in Irvine,
California, through 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
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related to the products that 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, consisting of $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 March 31, 2000, the Company had
completed rework on approximately 83% 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 $29.7 million. The sales were recognized during the third quarter
and the corresponding gain of $3.1 million on the Tuas facility and the loss of
$1.9 million on the Rochester facility are included in the net restructuring
charge for the third quarter ended March 31, 2000.
On January 19, 2000, the Company announced its plans to exit the enterprise hard
drive market 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 approximately 402
employees in the design center were laid off and given legally required
notification and outplacement services. The exit from the enterprise market
resulted in a restructuring charge of $38.1 million during the three months
ended March 31, 2000. The restructuring charge consisted of $27.4 million for
equipment write-offs (equipment taken out of service and held for disposal)
including the loss on the sale of the Rochester facility, and $10.7 million for
severance, outplacement and other incremental costs associated with the closure.
Reducing these charges is the gain realized on the sale of the Tuas facility of
$3.1 million, the favorable settlement of lease commitments in Singapore of $5.3
million and favorable settlement of 1999 restructuring accruals of $1.7 million.
The Company estimates that the restructuring effort will be substantially
completed by June 30, 2000. Also, as a direct result of the exit from the
enterprise drive market, the Company had nonrecurring "special" charges of $34.8
million during the three months ended March 31, 2000. These charges are included
in costs of revenues and consist of vendor settlements, incremental warranty
accruals and inventory write-downs resulting from the immediate termination of
operations.
RESULTS OF OPERATIONS
Consolidated revenues were $516.6 million for the three months ended March 31,
2000, a decrease of 23%, or $151.9 million, from the three months ended March
27, 1999 and a decrease of 8%, or $43.6 million, from the immediately preceding
quarter. The lower revenues during the three months ended March 31, 2000 as
compared to the corresponding period of the prior year and the immediately
preceding quarter, resulted from the Company's decision in the third quarter of
2000 to exit the high end enterprise hard drive market and a decline in the
average selling prices (ASP's) of hard drive products due to an intensely
competitive hard drive market, partially offset by slight increases in desktop
unit shipments.
Consolidated revenues were $1.5 billion for the nine months ended March 31,
2000, down 28% from the nine months ended March 27, 1999. The lower revenues
resulted from the exit from the enterprise hard drive market combined with lower
ASPs and a decline in unit shipments of approximately 8%, which was largely due
to the product recall in the three months ended October 2, 1999.
The gross profit for the three months ended March 31, 2000, totaled $11.6
million, or 2% of revenue. This compares to a gross profit of $39.9 million, or
6% of revenue, for the three months ended March 27, 1999, and $20.2 million, or
4% of revenue, for the immediately preceding quarter. The gross profit for the
current quarter included $34.8 million of special charges directly relating to
the exit from the enterprise hard drive market, as discussed above. Excluding
the special charges, consolidated gross profit for the current quarter was $46.4
million, or 9% of revenue. The increase in gross profit (excluding special
charges) over the three months ended March 27, 1999 and the immediately
preceding quarter was primarily the result of lower manufacturing costs due to
recent restructurings and the transfer of all desktop production to a single,
highly utilized facility in Malaysia. The consolidated gross profit for the nine
months ended March 31, 2000 totaled $39.0 million, or 3% of revenue (excluding
special charges of $72.5 million). This compares to a gross profit for the nine
months ended March 27, 1999 of $53.3 million, or 3% of revenue (excluding
special charges of $77 million). The decline in gross
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profit for the current nine-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 March 31,
2000 was $33.8 million, a decrease of $28.9 million from the three months ended
March 27, 1999 and a decrease of $10.3 million from the immediately preceding
quarter. R&D expense for the nine months ended March 31, 2000 was $128.0
million, a decrease of $37.0 million from the nine months ended March 27, 1999.
The decrease in R&D expenses was primarily due to the Company's exit from the
enterprise hard drive market and its expense reduction efforts, particularly
expenses associated with hard disk drive development, partially offset by
increased spending at Connex and Sagetree, the Company's subsidiaries, and other
new venture development efforts. Also included in R&D spending for the three and
nine-months ended March 27, 1999 was $12 million of special charges associated
with the acquisition of in process R&D.
Selling, general and administrative ("SG&A") expense in the three months ended
March 31, 2000, was $34.0 million, a decrease of $12.2 million from the three
months ended March 27, 1999 and a decrease of $5.1 million from the immediately
preceding quarter. The decrease in SG&A expense for the three months ended March
31, 2000 compared to the three months ended March 27, 1999 and the immediately
preceding quarter was primarily due to the Company's exit from the enterprise
hard drive market and its expense reduction efforts, particularly SG&A expenses
associated with the Company's hard disk drive business. The decrease was
partially offset by increased spending at Connex, Sagetree and other of the
Company's developing ventures. SG&A expense was $116.9 million for the nine
months ended March 31, 2000, a decrease of $34.5 million from the nine months
ended March 27, 1999. The decrease was the result of the exit from the
enterprise hard drive market, expense reduction efforts, and the nonrecurrence
of a $7.5 million special charge on terminated hedging contracts recorded in
SG&A expense during the nine months ended March 27, 1999.
Net interest and other income for the three months ended March 27, 2000 was
$13.5 million, compared to net interest expense of $4.2 million for the three
months ended March 27, 1999 and net interest expense of $3.0 million in the
immediately preceding quarter. The increase in net interest and other income for
the three months ended March 31, 2000 was due to a $14.7 million gain on
disposition of certain investment securities and lower interest expense on the
Company's convertible debentures (the average carrying value of the Company's
convertible debentures was lower due to the debenture redemptions which occurred
during the immediately preceding quarter). Net interest and other income was
$5.1 million for the nine months ended March 31, 2000 as compared to net
interest expense of $10.1 million for the nine months ended March 27, 1999. The
increase in net interest and other income was due to the $14.7 million gain and
a decrease in interest expense on the Company's convertible debentures.
The Company initiated significant restructuring efforts during the nine months
ended March 31, 2000. As a result, net restructuring charges of approximately
$28.0 million and $85.8 million were recorded during the three and nine months
ended March 31, 2000, respectively. The charges related to severance and
outplacement, the write-off of fixed assets taken out of service and to be
disposed of, lease cancellation and other charges, as discussed above.
During the nine months ended March 31, 2000, the Company issued common stock in
exchange for its convertible debentures which were retired in non-cash
transactions. 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. There were no redemptions during the three months ended March 31, 2000.
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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash and cash equivalents of $202.1 million
as compared to $226.1 million at July 3, 1999 and $163.7 million at December 31,
1999. Net cash used in operations was $19.5 million and $120.8 million for the
three and nine months ended March 31, 2000 respectively, as compared to $38.9
million and $87.3 million for the comparable periods of the prior year. Net cash
used in operations for
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the nine months ended March 31, 2000 increased by $33.5 million as compared to
the nine months ended March 27,1999, due to higher expenditures for
restructuring activities and the product recall.
Operating cash flows provided by changes in working capital amounted to $6.2
million and $119.3 million for the three and nine months ended March 31, 2000,
respectively and reflect the Company's management of operating assets and
liabilities during the periods. For the three months ended March 31, 2000, the
Company's days of sales outstanding ("DSO") was 31 days, inventory turned 21
times and days of payables outstanding was 52 days.
Excluding charges and cash used for restructuring and other nonrecurring
activities, operations provided net cash of $18.2 million for the three months
ended March 31, 2000 as compared to usage of $8.0 million for the three months
ended December 31, 1999. Cash used for restructuring and other nonrecurring
activities was $37.7 million for the three months ended March 31, 2000 and
consisted of expenditures for severance and outplacement, lease cancellations
and product recall costs.
Other uses of cash during the nine months ended March 31, 2000 included the
repayment of bank debt of $50.0 million and net capital expenditures of $17.1
million, primarily to upgrade the Company's desktop hard drive production
capabilities and for normal replacement of existing assets. Other sources of
cash during the period included proceeds of $93.8 million received upon issuance
of 20.5 million shares of the Company's stock under the Company's equity
facility, and $66.8 million received on sales of real property during the
period.
The Company anticipates that capital expenditures for the remainder of 2000 will
not be more than $15 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 $10.0 million to be paid in the remaining three
months of 2000 related to the Company's restructuring programs, primarily for
severance and outplacement costs, lease cancellation and other costs of vacating
leased properties, and settlements with vendors on existing purchase orders
related to the Company's exit from its enterprise hard drive market.
The Company's credit facility matured on March 31, 2000. The remaining balance
on the term loan was repaid using the proceeds from the equity facility during
the three months ended March 31, 2000. The Company has a commitment for a new
Senior Credit Facility that will provide up to a $150 million revolving credit
line (depending on a borrowing base calculation). The new Senior Credit Facility
will be secured by the Company's accounts receivable, inventory, 65% of its
stock in its foreign subsidiaries and other assets of the Company, excluding the
Company's Connex and Sagetree subsidiaries. At the option of the Company,
borrowings would bear interest at either LIBOR (with option periods of one to
three months) or a base rate, plus a margin determined by the borrowing base.
The Company anticipates that the new Senior Credit Facility will be completed by
June 30, 2000.
Under an existing equity facility, the Company may issue shares of common stock
to institutional investors for cash, in monthly increments of $12.5 million. The
facility provides for up to $150.0 million in cash proceeds of which $93.8
million had been utilized as of March 31, 2000. Shares sold 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 26.7 million
shares of common stock in exchange for Debentures with a book 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. There were no
redemptions during the three months ended March 31, 2000. As of March 31, 2000,
the book value of the remaining outstanding Debentures was $222.6 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
had a shareholders' deficiency of $108.8 million as of March 31, 2000. However,
the Company had cash balances of $202.1 million and working capital of $8.8
million as of March 31, 2000. In addition, the Company has significantly
restructured its operations and has other sources of liquidity available. In
light of these conditions, the company has the following plans and other
options:
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o The Company's ongoing operating expenses and capital expenditures have
been reduced substantially as compared to historical levels due to:
-- Recent restructurings;
-- Reduced general and administrative spending; and
-- Lower fixed spending 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.
o The Company has the following additional sources of liquidity available
to it:
-- $56.2 million remaining available under the Equity Facility;
-- Other equity investments that may be disposed of during the next
twelve months, 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 $28.4 million as of April 28, 2000.
-- The Company has a commitment for a new Senior Credit Facility that
will provide up to a $150 million revolving credit line (depending
on a borrowing base calculation). The Company anticipates that the
new Senior Credit Facility will be completed by June 30, 2000.
-- The Company is also pursuing other sources of private equity
financing for its developing subsidiaries.
Based on the above factors, the Company believes its current cash balances, its
existing equity facility, and other liquidity sources 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 will be obtained 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 for 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB101") "Revenue Recognition in Financial Statements". This
Staff Accounting Bulletin summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company does not expect the adoption of SAB101 to have a
material impact on the Company's consolidated results of operations.
YEAR 2000
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
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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:
o consistently maintain or improve our time-to-market performance with
our new products
o produce these products in sufficient volume within our rapid product
cycle
o qualify these products with key customers on a timely basis by meeting
our customers' performance and quality specifications, or
o 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 few 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.
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
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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.
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.
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 two years as a result of the
loss of retention value of their 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 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
nine-month period ended March 31, 2000, sales to our top 10 customers accounted
for approximately 58% of revenues. These customers have a wide variety of
suppliers to choose from and therefore can make substantial demands on
20
<PAGE> 21
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 market and is one of the factors which led to the Company's decision to
exit the enterprise hard drive market 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 market.
In April 1999, we entered into a three year volume purchase agreement with
Komag under which we buy a substantial portion of our media components from
Komag. This strategic relationship has reduced our media component costs;
however, it has increased our dependence on Komag as a supplier. Our future
operating results will depend substantially on Komag's ability to timely qualify
its media components in our new development programs and to supply us with these
components in sufficient volume to meet our production requirements. Any
disruption in Komag's ability to manufacture and supply us with media would
likely harm our operating results.
To develop new products we must maintain effective partner relationships with
our strategic component suppliers.
Under our "virtual vertical integration" business model, we do not
manufacture any of the parts used in our hard drives. As a result, the success
of our products depends on our ability to gain access to and integrate parts
that are "best in class" from reliable component suppliers. To do so we must
effectively manage our relationships with our strategic component suppliers. We
must also effectively integrate different products from a variety of suppliers
and manage difficult scheduling and delivery problems.
We have only 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 in
Malaysia. 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:
o obtaining requisite United States and foreign governmental permits and
approvals
o currency exchange rate fluctuations or restrictions
o political instability and civil unrest
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<PAGE> 22
o transportation delays or higher freight rates
o labor problems
o trade restrictions or higher tariffs
o exchange, currency and tax controls and reallocations
o loss or non-renewal of favorable tax treatment under agreements or
treaties with foreign tax authorities.
We have attempted 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. As a result of the Malaysian currency
controls, we are no longer hedging the Malaysian currency risk.
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 are 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 and storage devices 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 have recently entered 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.
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.
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<PAGE> 23
Our success depends, in significant part, on the proprietary nature of our
technology, including 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, any of our
registered or unregistered intellectual property rights may not be challenged or
exploited by others in the industry, which might harm our operating results.
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 be subject to
significant fluctuations as a result of a number of other factors including:
o the timing of orders from and shipment of products to major customers
o our product mix
o changes in the prices of our products
o manufacturing delays or interruptions
o acceptance by customers of competing products in lieu of our products
o variations in the cost of components for our products
o limited access to components that we obtain from a single or a limited
number of suppliers, such as Komag
o competition and consolidation in the data storage industry
o seasonal and other fluctuations in demand for computers often due to
technological advances.
Rapidly changing market conditions in the hard drive industry make it difficult
to estimate actual results.
We have made and continue to make a number of estimates and assumptions
relating to our consolidated financial reporting. The rapidly changing market
conditions with which we deal means that actual results may differ significantly
from our estimates and assumptions. Key estimates and assumptions for us
include:
o accruals for warranty against product defects
o price protection adjustments on products sold to resellers and
distributors
o inventory adjustments for write-down of inventories to fair value
o reserves for doubtful accounts
o 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:
23
<PAGE> 24
o actual or anticipated fluctuations in our operating results
o 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
o new products introduced by us or our competitors
o periods of severe pricing pressures due to oversupply or price erosion
resulting from competitive pressures
o developments with respect to patents or proprietary rights
o conditions and trends in the hard drive, data and content management,
storage and communication industries
o 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
prior borrowing agreement with our banks matured on March 31, 2000, and we have
received a commitment letter for a new credit facility. As of the date hereof,
the definitive agreement for the new credit facility has not been finalized. 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
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 a
result of the closure of the
24
<PAGE> 25
Company's Singapore operations in 2000, the Company has also discontinued its
hedging program related to the Singapore Dollar.
As of March 31, 2000, the Company had outstanding the following purchased
foreign currency forward exchange contract (in millions, except average contract
rate):
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------------
WEIGHTED
CONTRACT AVERAGE UNREALIZED
AMOUNT CONTRACT RATE GAIN*
------------- ------------- ----------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
<S> <C> <C> <C>
Foreign currency forward contracts:
British Pound Sterling.............. $ 3.1 1.60 --
</TABLE>
- ------------
* Unrealized gains on contracts are deferred and 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 nine months ended March 31, 2000 and March 27, 1999 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 March 31, 2000, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $85.6 million,
compared to the related book value of $222.6 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.
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's credit facility matured on March 31, 2000 and the Company has a
commitment for a new Senior Credit Facility. The Company anticipates that the
new Senior Credit Facility will be completed by June 30, 2000. The Company will
not be able to borrow under the new credit facility until its completion. The
Company currently has no variable interest rate risk.
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 March 31, 2000, a $3.6 million total accumulated
unrealized gain has been recorded in accumulated other
25
<PAGE> 26
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. As of March 31,
2000, the quoted market value of the Company's Komag common stock holdings,
without regard to discounts due to sales restrictions, was $40.9 million. As a
result of market conditions, the market value had declined to $31.7 million as
of April 28, 2000. Due to market fluctuations, an additional decline in the
stock's fair market value could occur. A significant decline (50% or more) could
materially adversely impact the Company's consolidated financial statements.
The Company owns approximately 1.3 million shares of Vixel common stock. The
shares were 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 March 31, 2000, a $21.7 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. As a result of market conditions, the market value of the
shares had declined from $21.7 million as of March 31, 2000 to $9.4 million as
of April 28, 2000. Due to market fluctuations, an additional decline in the
stock's fair market value could occur.
26
<PAGE> 27
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.
27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.19 Retention Agreement effective September 21, 1998 between
registrant and Teresa A. Hopp
10.32.4 Sixth Amendment to the Company's Retirement Savings and
Profit Sharing Plan
10.32.5 Seventh Amendment to the Company's Retirement Savings and
Profit Sharing Plan
10.34 Western Digital Broad-Based Stock Incentive Plan
10.44 Amended and Restated Purchase Agreement dated February 23,
2000, by and between Western Digital Corporation and Mayo
Foundation
27 Financial Data Schedule
- -------------------------------
(b) REPORTS ON FORM 8-K:
On January 19, 2000, the Company filed a current report on Form 8-K to
file its press release dated January 13, 2000, announcing the appointment
of Matthew E. Massengill as President and Chief Executive Officer and to
file its press release dated January 19, 2000, announcing its decision to
exit the enterprise hard drive market.
On January 21, 2000, the Company filed a current report on Form 8-K to
file its press release dated January 20, 2000, announcing the expected
range of the net loss and loss per share for its second quarter.
On January 31, 2000, the Company filed a current report on Form 8-K to
file its press release dated January 25, 2000, announcing its second
quarter results.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION
Registrant
/s/ Teresa Hopp
---------------------------------------------
Teresa Hopp
Senior Vice President
and Chief Financial Officer
Date: May 15, 2000
29
<PAGE> 30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.19 Retention Agreement effective September 21, 1998 between
registrant and Teresa A. Hopp
10.32.4 Sixth Amendment to the Company's Retirement Savings and
Profit Sharing Plan
10.32.5 Seventh Amendment to the Company's Retirement Savings and
Profit Sharing Plan
10.34 Western Digital Broad-Based Stock Incentive Plan
10.44 Amended and Restated Purchase Agreement dated February 23,
2000, by and between Western Digital Corporation and Mayo
Foundation
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.19
September 15, 1998
Teresa A. Hopp
26711 Corsica Road
Mission Viejo, CA 92692
Dear Teresa,
It is with great pleasure that we at Western Digital Corporation extend this
offer of employment to you. Your position will be Vice President, Finance,
Personal Storage Division, reporting to Duston Williams, Senior Vice President
and Chief Financial Officer. This is an exempt position and will pay an
annualized base salary of $200,000.00, paid bi-weekly.
Contingent upon approval by the Shareholders and Board of Directors, we will
recommend a stock option grant amount of 50,000 shares, subject to the provision
of Western Digital's Stock Option Agreement. In the event of a corporate change
of control, all remaining unvested options, specific to this grant, would
immediately vest.
You will be eligible to participate in the FY'99 Management Incentive Plan.
Funding will be based on both corporate and group results. Your participation
will be based on your individual accomplishments and contingent upon approval
by the Western Digital Compensation Committee.
You will receive a sign-on bonus of $50,000.00, payable within three weeks of
your start date and considered taxable income to you. If you voluntarily
terminate prior to the completion of two full years of employment at Western
Digital, this bonus shall be repaid to the Company.
This offer is contingent upon successful completion of all pre-employment
criteria as outlined on Western Digital's Application for Employment which is
attached. Please see the attached information regarding drug screening.
As a condition of employment, immediately upon date of hire, you will be
required to sign an Employee Agreement governing inventions, proprietary
information and such other subject matter which the company considers vital to
protect its operation.
You will be eligible on your first day of employment for our Executive Benefits
Program. You will be eligible to join the Western Digital Savings (401(k)) Plan
immediately. You will receive a complete benefits summary during your
orientation on your first day of employment.
<PAGE> 2
Teresa A. Hopp
Page 2
In the event of a) a change of corporate control, b) substantial change in job
content, or c) should your position be eliminated due to downsizing, you will
receive a twelve (12) month severance package. The severance package is defined
as your base salary plus benefit continuation.
Please return the signed and dated original of this letter indicating your
acceptance by either dropping it by the office, faxing it to 932-7837 or
bringing it with you first thing Monday morning. We will provide you with a
signed copy for your records. If you should have any questions, please do not
hesitate to call.
Sincerely,
Jack Van Berkel
Vice President, Human Resources
ACCEPTANCE:
---------------------------------------------------------------------
Signature Date
DATE YOU PLAN TO START WORK:
----------------------------------------------------
<PAGE> 1
EXHIBIT 10.32.4
SIXTH AMENDMENT
TO THE WESTERN DIGITAL CORPORATION
SAVINGS AND PROFIT SHARING PLAN
WHEREAS, Western Digital Corporation (the "Company") previously adopted
the Western Digital Corporation Savings and Profit Sharing Plan (the "Plan");
and
WHEREAS, the terms of the Plan are set forth in an amended and restated
Plan document, dated June 23, 1995, as thereafter amended by the First Amendment
dated June 30, 1995; the Second Amendment dated March 27, 1996; the Third
Amendment dated January 9, 1997; the Fourth Amendment dated March 20, 1997; and
the Fifth Amendment dated November 13, 1997; and
WHEREAS, Section 17.1 of the Plan authorizes the Company to amend the
Plan by action of its Board of Directors; and
WHEREAS, the Company desires to amend the Plan in certain respects.
NOW, THEREFORE, the Plan is amended as follows:
1. Effective January 1, 2000, Section 5.3.1. shall be amended in its
entirety as follows:
5.3.1. As of the last day of a contribution cycle (as such term is
defined in 5.3.4. below), the Employer shall make a Basic Matching
Contribution on behalf of each "Eligible Participant," as defined in
Subsection 5.3.3. below, who is an Eligible Employee of such Employer.
A Basic Matching Contribution on behalf of an Eligible Participant
under this Section 5.3. shall be in an amount equal to fifty percent
(50%) of the Eligible Participant's Pre-Tax Contributions for the
contribution cycle which do not exceed five percent (5%) of the
Eligible Participant's Compensation for the contribution cycle, not to
exceed a maximum aggregate Basic Matching Contribution of $2,000 for
any calendar year.
2. Except as expressly provided herein above, the provisions of the Plan
shall continue in full force and effect as set forth herein.
IN WITNESS WHEREOF, the Company has caused this Sixth Amendment to the
Plan to be executed by its duly authorized officer on this 27th day of January,
2000.
WESTERN DIGITAL CORPORATION
By: /s/ MICHAEL A. CORNELIUS
------------------------------------
Name: Michael A. Cornelius
Title: Vice President
1
<PAGE> 1
EXHIBIT 10.32.5
SEVENTH AMENDMENT TO THE
WESTERN DIGITAL CORPORATION
SAVINGS AND PROFIT SHARING PLAN
WHEREAS, Western Digital Corporation (the "Company") previously adopted
the Western Digital Corporation Savings and Profit Sharing Plan (the "Plan");
and
WHEREAS, the terms of the Plan are set forth in an amended and restated
Plan document, dated June 23, 1995, as thereafter amended by the First Amendment
dated June 30, 1995; the Second Amendment dated March 27, 1996; the Third
Amendment dated January 9, 1997; the Fourth Amendment dated March 20, 1997; the
Fifth Amendment dated November 13, 1997; and the Sixth Amendment dated January
27, 2000; and
WHEREAS, Section 17.1 of the Plan authorizes the Company to amend the
Plan by action of its Board of Directors; and
WHEREAS, the Company desires to amend the Plan in certain respects.
NOW, THEREFORE, the Plan is amended as follows:
1. Effective January 1, 2000, Section 2.14.2.5 shall be amended in its
entirety to read as follows:
2.14.2.5. any person who is recorded on the books and records of an
Employer or Affiliated Company as an independent contractor, summer
intern, consultant, or temporary employee; a worker provided by a
third-party temporary staffing agency; or any person with respect to
whom a written agreement governing the relationship between such person
and an Employer or Affiliated Company provides in substance that such
person shall not be an Eligible Employee hereunder; and
2. Effective January 1, 2000, a new Section 2.14.2.6 shall be added
which reads as follows:
2.14.2.6 any person who is not treated by an Employer or an
Affiliated Company as a common law employee without regard to the
characterization or recharacterization of such individual's status by
any court or governmental agency.
3. Except as expressly provided herein above, the provisions of the Plan
shall continue in full force and effect as set forth herein.
IN WITNESS WHEREOF, the Company has caused this Seventh Amendment to the
Plan to be executed by its duly authorized officer on this ____ day of March,
2000.
WESTERN DIGITAL CORPORATION
By: /s/ MICHAEL A. CORNELIUS
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Name: Michael A. Cornelius
Title: Vice President
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EXHIBIT 10.34
WESTERN DIGITAL CORPORATION
BROAD-BASED STOCK INCENTIVE PLAN
SECTION 1. PURPOSE OF PLAN
The purpose of this Broad-Based Stock Incentive Plan ("Plan") of Western
Digital Corporation, a Delaware corporation, is to enable the Company, as
defined in Section 2.2(a)(ii) hereof, to attract, retain and motivate its key
employees and other personnel, and to further align the interests of such
persons with those of the shareholders of the Company, by providing for or
increasing their proprietary interest in the Company. This plan is intended to
qualify as "broadly-based" under the New York Stock Exchange Shareholder
Approval Policy.
SECTION 2. ADMINISTRATION OF THE PLAN
2.1 Composition of Committee. The Plan shall be administered by the
Compensation Committee of the Board of Directors, and/or by the Board of
Directors or another committee of the Board of Directors of the Company, as
appointed from time to time by the Board of Directors (any such administrative
body, the "Committee"). The Board of Directors shall fill vacancies on, and from
time to time may remove or add members to, the Committee. The Committee shall
act pursuant to a majority vote or unanimous written consent. Notwithstanding
the foregoing, with respect to any Award that is not intended to satisfy the
conditions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or Section 162(m)(4)(C) of the Internal Revenue Code of
1986, as amended (the "Code"), the Committee may appoint one or more separate
committees (any such committee, a "Subcommittee") composed of one or more
directors of the Company (who may but need not be members of the Committee) and
may delegate to any such Subcommittee(s) the authority to grant Awards, as
defined in Section 5.1 hereof, under the Plan to Eligible Employees, as defined
in Section 4 hereof, to determine all terms of such Awards, and/or to administer
the Plan or any aspect of it. Any action by any such Subcommittee within the
scope of such delegation shall be deemed for all purposes to have been taken by
the Committee. The Committee may designate or delegate authority to the
Secretary of the Company or other Company employees to assist the Committee in
the administration of the Plan, and may grant authority to such persons to
execute agreements evidencing Awards made under this Plan or other documents
entered into under this Plan on behalf of the Committee or the Company.
2.2 Powers of the Committee. Subject to the express provisions of this
Plan, the Committee shall be authorized and empowered to do all things necessary
or desirable in connection with the administration of this Plan with respect to
the Awards over which such Committee has authority, including, without
limitation, the following:
(a) to prescribe, amend and rescind rules and regulations relating
to this Plan and to define terms not otherwise defined herein; provided that,
unless the Committee shall specify otherwise, for purposes of this Plan, and the
term "Company" shall mean Western Digital Corporation and its subsidiaries and
affiliates, unless the context otherwise requires;
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(b) to determine which persons are Eligible Employees (as defined in
Section 4 hereof), to which of such Eligible Employees, if any, Awards shall be
granted hereunder, to make Awards under the Plan and to determine the terms of
such Awards and the timing of any such Awards;
(c) to determine the number of Shares subject to Awards and the
exercise or purchase price of such Shares;
(d) to establish and verify the extent of satisfaction of any
performance goals applicable to Awards;
(e) to prescribe and amend the terms of the agreements or other
documents evidencing Awards made under this Plan (which need not be identical);
(f) to determine whether, and the extent to which, adjustments are
required pursuant to Section 11 hereof;
(g) to interpret and construe this Plan, any rules and regulations
under the Plan and the terms and conditions of any Award granted hereunder, and
to make exceptions to any such provisions in good faith and for the benefit of
the Company; and
(h) to make all other determinations deemed necessary or advisable
for the administration of the Plan.
2.3 Determinations of the Committee. All decisions, determinations and
interpretations by the Committee or the Board regarding the Plan shall be final
and binding on all Eligible Employees and Participants, as defined in Section 4
hereof. The Committee or the Board, as applicable, shall consider such factors
as it deems relevant, in its sole and absolute discretion, to making such
decisions, determinations and interpretations including, without limitation, the
recommendations or advice of any officer of the Company or Eligible Employee and
such attorneys, consultants and accountants as it may select.
SECTION 3. STOCK SUBJECT TO PLAN
3.1 Aggregate Limits. Subject to adjustment as provided in Section 10,
at any time, the aggregate number of shares of the Company's common stock, $0.01
par value ("Shares"), issued pursuant to all Awards granted under this Plan
shall not exceed 20,000,000. The Shares subject to the Plan may be either Shares
reacquired by the Company, including Shares purchased in the open market, or
authorized but unissued Shares.
3.2 Issuance of Shares. For purposes of Section 3.1, the aggregate
number of Shares issued under this Plan at any time shall equal only the number
of Shares actually issued upon exercise or settlement of an Award and not
returned to the Company upon cancellation, expiration or forfeiture of an Award
or delivered (either actually or by attestation) in payment or satisfaction of
the purchase price, exercise price or tax obligation of an Award.
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SECTION 4. PERSONS ELIGIBLE UNDER PLAN
Any person who is an (i) employee, (ii) prospective employee, (iii)
consultant, or (iv) advisor of the Company (an "Eligible Employee") shall be
eligible to be considered for the grant of Awards hereunder. For purposes of
this Plan, the Chairman of the Board's status as an Employee shall be determined
by the Board. For purposes of the administration of Awards, the term "Eligible
Employee" shall also include a former Eligible Employee or any person (including
any estate) who is a beneficiary of a former Eligible Employee. A "Participant"
is any Eligible Employee to whom an Award has been made and any person
(including any estate) to whom an Award has been assigned or transferred
pursuant to Section 9.1.
SECTION 5. PLAN AWARDS
5.1 Award Types. The Committee, on behalf of the Company, is authorized
under this Plan to enter into certain types of arrangements with Eligible
Employees and to confer certain benefits on them. The following such
arrangements or benefits are authorized under the Plan if their terms and
conditions are not inconsistent with the provisions of the Plan: Stock Options,
Restricted Stock and Stock Units. Such arrangements and benefits are sometimes
referred to herein as "Awards." The authorized types of arrangements and
benefits for which Awards may be granted are defined as follows:
Stock Option Awards: A Stock Option is a right granted under
Section 6 to purchase a number of Shares at such exercise price, at such
times, and on such other terms and conditions as are specified in or
determined pursuant to the document(s) evidencing the Award (the "Option
Agreement"). Options intended to qualify as Incentive Stock Options
("ISOs") pursuant to Code Section 422 may not be granted under this
Plan.
Restricted Stock Awards: Restricted Stock is an award of Shares
made under Section 7, the grant, issuance, retention and/or vesting of
which is subject to such conditions as are expressed in the document(s)
evidencing the Award (the "Restricted Stock Agreement").
Stock Unit Awards: A Stock Unit Award is an award of a right to
receive the fair market value of one share of Common Stock made under
Section 8, the grant, issuance, retention and/or vesting of which is
subject to such conditions as are expressed in the document(s)
evidencing the Award (the "Stock Unit Agreement").
5.2 Grants of Awards. An Award may consist of one such arrangement or
benefit or two or more of them in tandem or in the alternative.
SECTION 6. STOCK OPTION AWARDS
The Committee may grant an Option or provide for the grant of an Option,
either from time-to-time in the discretion of the Committee or automatically
upon the occurrence of specified events, including, without limitation, the
achievement of performance goals, the satisfaction of an event or condition
within the control of the recipient of the Award, within the control of others
or not within any person's control.
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6.1 Option Agreement. Each Option Agreement shall contain provisions
regarding (a) the number of Shares which may be issued upon exercise of the
Option, (b) the purchase price of the Shares and the means of payment for the
Shares, (c) the term of the Option, (d) such terms and conditions of
exercisability as may be determined from time to time by the Committee, (e)
restrictions on the transfer of the Option and forfeiture provisions, and (f)
such further terms and conditions, in each case not inconsistent with the Plan
as may be determined from time to time by the Committee.
6.2 Option Price. The purchase price per Share of the Shares subject to
each Option granted under the Plan shall equal or exceed 100% of the fair market
value of such Stock on the date the Option is granted, unless the Committee
determines otherwise.
6.3 Option Term. The "Term" of each Option granted under the Plan shall
not exceed ten (10) years from the date of its grant.
6.4 Option Vesting. Options granted under the Plan shall be exercisable
at such time and in such installments during the period prior to the expiration
of the Option's Term as determined by the Committee in its sole discretion. The
Committee shall have the right to make the timing of the ability to exercise any
Option granted under the Plan subject to such performance requirements as deemed
appropriate by the Committee. At any time after the grant of an Option the
Committee may, in its sole discretion, reduce or eliminate any restrictions
surrounding any Participant's right to exercise all or part of the Option.
6.5 Option Exercise.
(a) Partial Exercise. An exercisable Option may be exercised in
whole or in part. However, an Option shall not be exercisable with respect to
fractional Shares and the Committee may require, by the terms of the Option
Agreement, a partial exercise to include a minimum number of Shares.
(b) Manner of Exercise. All or a portion of an exercisable Option
shall be deemed exercised upon delivery to the representative of the Company
designated for such purpose by the Committee all of the following: (i) notice of
exercise in such form as the Committee authorizes specifying the number of
Shares to be purchased by the Participant, (ii) payment or provision for payment
of the exercise price for such number of Shares, (iii) such representations and
documents as the Committee, in its sole discretion, deems necessary or advisable
to effect compliance with all applicable provisions of the Securities Act of
1933, as amended, and any other federal, state or foreign securities laws or
regulations, (iv) in the event that the Option shall be exercised pursuant to
Section 9.1 by any person or persons other than the Eligible Employee,
appropriate proof of the right of such person or persons to exercise the Option,
and (v) such representations and documents as the Committee, in its sole
discretion, deems necessary or advisable to provide for the tax withholding
pursuant to Section 12. Unless provided otherwise by the Committee, no
Participant shall have any right as a shareholder with respect to any Shares
purchased pursuant to any Option until the registration of Shares in the name of
such person, and no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such Shares are
so registered.
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(c) Payment of Exercise Price. The exercise price of an Option may
be paid in such form as authorized by the Committee, including, without limiting
the generality of the foregoing, in the form of one of more of the following,
either through the terms of the Option Agreement or at the time of exercise of
an Option: (i) cash or certified or cashiers' check, (ii) shares of capital
stock of the Company that have been held by the Participant for such period of
time as the Committee may specify, (iii) other property deemed acceptable by the
Committee, (iv) a reduction in the number of Shares or other property otherwise
issuable pursuant to such Option, or (v) any combination of (i) through (iv).
SECTION 7. RESTRICTED STOCK AWARDS
Restricted Stock consists of an award of Shares, the grant, issuance,
retention and/or vesting of which shall be subject to such terms and conditions
as the Committee deems appropriate.
7.1 Restricted Stock Award. Each Restricted Stock Award shall reflect,
to the extent applicable (a) the number of Shares subject to such Award or a
formula for determining such, (b) the time or times at which Shares shall be
granted or issued and/or become retainable or vested, and the conditions or
restrictions on such Shares, (c) the performance criteria, if any, and level of
achievement versus these criteria which shall determine the number of Shares
granted, issued, retainable and/or vested, (d) the period, if any, as to which
performance shall be measured for determining achievement of performance, (e)
forfeiture provisions, and (f) such further terms and conditions, in each case
not inconsistent with the Plan as may be determined from time to time by the
Committee.
7.2 Restrictions and Performance Criteria. The grant, issuance,
retention and/or vesting of each Restricted Stock Award may but need not be
subject to such performance criteria and level of achievement versus these
criteria as the Committee shall determine, which criteria may be based on
financial performance, personal performance evaluations and/or completion of
service by the Participant.
7.3 Timing and Form of Award. The Committee shall determine the timing
of award of any Restricted Stock Award. The Committee may provide for or,
subject to such terms and conditions as the Committee may specify, may permit a
Participant to elect for the award or vesting of any Restricted Stock to be
deferred to a specified date or event. The Committee may provide for a
Participant to have the choice for his or her Restricted Stock, or such portion
thereof as the Committee may specify, to be granted in whole or in part in Stock
Units.
7.4 Discretionary Adjustments. Notwithstanding satisfaction of any
completion of service or performance goals, the number of Shares granted,
issued, retainable and/or vested under a Restricted Stock Award on account of
either financial performance or personal performance evaluations may be reduced
by the Committee on the basis of such further considerations as the Committee in
its sole discretion shall determine.
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SECTION 8. STOCK UNITS
8.1 Stock Units. A "Stock Unit" is a bookkeeping entry representing an
amount equivalent to the fair market value of one share of Common Stock, also
sometimes referred to as a "restricted unit" or "shadow stock". Stock Units
represent an unfunded and unsecured obligation of the Company, except as
otherwise provided for by the Committee.
8.2 Stock Unit Awards. Each Stock Unit Award shall reflect, to the
extent applicable (a) the number of Stock Units subject to such Award or a
formula for determining such, (b) the time or times at which Stock Units shall
be granted or issued and/or become retainable or vested, and the conditions or
restrictions on such Stock Units , (c) the performance criteria, if any, and
level of achievement versus these criteria which shall determine the number of
Stock Units granted, issued, retainable and/or vested, (d) the period, if any,
as to which performance shall be measured for determining achievement of
performance, (e) forfeiture provisions, and (f) such further terms and
conditions, in each case not inconsistent with the Plan as may be determined
from time to time by the Committee. Stock Units may also be issued upon exercise
of Options, and may be issued in lieu of Restricted Stock or any other Award
that the Committee elects to be paid in the form of Stock Units.
8.3 Restrictions and Performance Criteria. The grant, issuance,
retention and or vesting of each Stock Unit may but need not be subject to such
performance criteria and level of achievement versus these criteria as the
Committee shall determine, which criteria may be based on financial performance,
personal performance evaluations and/or completion of service by the
Participant.
8.4 Timing and Form of Award. The Committee shall determine the timing
of award of any Stock Unit. The Committee may provide for or, subject to such
terms and conditions as the Committee may specify, may permit a Participant to
elect for the award or vesting of any Stock Unit to be deferred to a specified
date or event. The Committee may provide for a Participant to have the choice
for his or her Stock Unit, or such portion thereof as the Committee may specify,
to be granted in whole or in part in Shares.
8.5 Settlement of Stock Units. The Committee may provide for Stock Units
to be settled in cash or Shares (at the election of the Company or the
Participant, as specified by the Committee) and to be made at such other times
as it determines appropriate or as it permits a Participant to choose. The
amount of cash or Shares, or other settlement medium, to be so distributed may
be increased by an interest factor or by dividend equivalents, as the case may
be, which may be valued as if reinvested in Shares. Until a Stock Unit is
settled, the number of Shares represented by a Stock Unit shall be subject to
adjustment pursuant to Section 10.
8.6 Discretionary Adjustments. Notwithstanding satisfaction of any
completion of service or performance goals, the number of Stock Units granted,
issued, retainable and/or vested under a Stock Unit Award on account of either
financial performance or personal performance evaluations may be reduced by the
Committee on the basis of such further considerations as the Committee in its
sole discretion shall determine.
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SECTION 9. OTHER PROVISIONS APPLICABLE TO AWARDS
9.1 Transferability. Unless the agreement evidencing an Award (or an
amendment thereto authorized by the Committee) expressly states that it is
transferable as provided hereunder, no Award granted under the Plan, nor any
interest in such Award, may be sold, assigned, conveyed, gifted, pledged,
hypothecated or otherwise transferred in any manner, other than by will or the
laws of descent and distribution, prior to the vesting or lapse of any and all
restrictions applicable to any Shares issued under an Award. The Committee may
in its sole discretion grant an Award or amend an outstanding Award to provide
that the Award is transferable or assignable to a Permitted Transferee (as
defined below), provided that following any such transfer or assignment the
Award will remain subject to substantially the same terms applicable to the
Award while held by the Eligible Employee, as modified as the Committee in its
sole discretion shall determine appropriate, and the Participant shall execute
an agreement agreeing to be bound by such terms. As used herein, the term
"Permitted Transferee" shall mean (i) in the case of a transfer without the
payment of any consideration, any "family member" as such term is defined in
Section 1(a)(5) of the General Instructions to Form S-8 under the 1933 Act as in
effect on the date this Plan is adopted, (ii) any transfer described in clause
(ii) of Section 1(a)(5) of the General Instructions to Form S-8 under the 1933
Act as in effect on the date this Plan is adopted, and (iii) upon the Eligible
Employee's death, the Eligible Employee's executors, administrators,
testamentary trustees, legatees and beneficiaries.
9.2 Dividends. Unless otherwise provided by the Committee, no adjustment
shall be made in Shares issuable under Awards on account of cash dividends which
may be paid or other rights which may be issued to the holders of Shares prior
to their issuance under any Award. The Committee shall specify whether dividends
or dividend equivalent amounts shall be paid to any Participant with respect to
the Shares subject to any Award that have not vested or been issued or that are
subject to any restrictions or conditions on the record date for dividends.
9.3 Agreements Evidencing Awards. The Committee shall, subject to
applicable law, determine the date an Award is deemed to be granted, which for
purposes of this Plan shall not be affected by the fact that an Award is
contingent on subsequent stockholder approval of the Plan. The Committee or,
except to the extent prohibited under applicable law, its delegate(s) may
establish the terms of agreements evidencing Awards under this Plan and may, but
need not, require as a condition to any such agreement's effectiveness that such
agreement be executed by the Participant and that such Participant agree to such
further terms and conditions as specified in such agreement. The grant of an
Award under this Plan shall not confer any rights upon the Participant holding
such Award other than such terms, and subject to such conditions, as are
specified in this Plan as being applicable to such type of Award (or to all
Awards) or as are expressly set forth in the Agreement evidencing such Award.
9.4 Tandem Stock or Cash Rights. Either at the time an Award is granted
or by subsequent action, the Committee may, but need not, provide that an Award
shall contain as a term thereof, a right, either in tandem with the other rights
under the Award or as an alternative thereto, of the Participant to receive,
without payment to the Company, a number of Shares, cash or a combination
thereof, the amount of which is determined by reference to the value of the
Award; provided, however, that the number of such rights granted under any Award
shall not exceed the per Eligible Employee share limitation for such Award as
set forth in Section 3.2.
9.5 Financing. The Committee may in its discretion provide financing to
a Participant in a principal amount sufficient to pay the purchase price of any
Award and/or to pay the amount of taxes required by law to be withheld with
respect to any Award. Any such loan shall be subject to all applicable legal
requirements and restrictions pertinent thereto, including Regulation U
promulgated by the Federal Reserve Board. The grant of an Award shall in no way
obligate the Company or the Committee to provide any financing whatsoever in
connection therewith.
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SECTION 10. CHANGES IN CAPITAL STRUCTURE
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or shares
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee may make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Awards theretofore granted under
this Plan and the exercise or settlement price of such Awards, and (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to such Awards thereafter granted under this Plan.
SECTION 11. CHANGE OF CONTROL
11.1 Effect of Change of Control. The Committee may through the terms of
the Award or otherwise provide that any or all of the following shall occur,
either immediately upon the Change of Control or a Change of Control
Transaction, or upon termination of the Eligible Employee's employment within
twenty-four (24) months following a Change of Control or a Change of Control
Transaction: (a) in the case of an Option, the Participant's ability to exercise
any portion of the Option not previously exercisable, and (b) in the case
Restricted Stock or Stock Units, the lapse and expiration of any conditions to
the grant, issuance, retention, vesting or transferability of, or any other
restrictions applicable to, such Award. The Committee also may, through the
terms of the Award or otherwise, provide for an absolute or conditional
exercise, payment or lapse of conditions or restrictions on an Award which shall
only be effective if, upon the announcement of a Change of Control Transaction,
no provision is made in such Change of Control Transaction for the exercise,
payment or lapse of conditions or restrictions on the Award, or other procedure
whereby the Participant may realize the full benefit of the Award.
11.2 Definitions. Unless the Committee or the Board shall provide
otherwise, "Change of Control" shall mean an occurrence of any of the following
events (a) any Person (other than an Exempt Person), alone or together with its
Affiliates and Associates, including any group of Persons which is deemed a
"person" under Section 13(d)(3) of the Exchange Act, becomes the Beneficial
Owner, directly or indirectly, of thirty-three and one-third percent or more of
(i) the then-outstanding shares of the Company's common stock or (ii) securities
representing thirty-three and one-third percent or more of the combined voting
power of the Company's then-outstanding voting securities; (b) a change, during
any period of two consecutive years, of a majority of the Board of the Company
as constituted as of the beginning of such period, unless the election, or
nomination for election by the Company's stockholders, of each director who was
not a director at the beginning of such period was approved by vote of at least
two-thirds of the
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Incumbent Directors then in office (for purposes hereof, "Incumbent Directors"
shall consist of the directors holding office as of the effective date of this
Plan and any person becoming a director subsequent to such date whose election,
or nomination for election by the Company's stockholders, is approved by a vote
of at least a majority of the Incumbent Directors then in office); (c)
consummation of any merger, consolidation, reorganization or other extraordinary
transactions (or series of related transactions) involving the Company which
results in the stockholders of the Company having power to vote in the ordinary
election of directors immediately prior to such transaction (or series of
related transactions) failing to beneficially own at least a majority of the
securities of the Company having the power to note in the ordinary election of
directors which are outstanding after giving effect to such transaction (or
series of related transactions); or (d) the stockholders of the Company approve
a plan of complete liquidation of the Company or the sale of substantially all
of the assets of the Company. "Change of Control Transaction" shall include any
tender offer, offer, exchange offer, solicitation, merger, consolidation,
reorganization or other transaction which is intended to or reasonably expected
to result in a Change of Control. "Affiliate" and "Associate", when used with
reference to any Person, have the meaning given to such terms in Rule 12b-2
under the Exchange Act. A Person's "Beneficial Ownership" of securities shall be
determined in accordance with, and a Person shall be deemed the "Beneficial
Owner" in accordance with, the rules and regulations, including Rule 13d-3,
promulgated by the Securities and Exchange Commission in connection with Section
13(d) of the Exchange Act; provided that no Person engaged in business as an
underwriter of securities shall be deemed for purposes of this Plan as the
Beneficial Owner of any securities acquired through such Person's participation
in good faith in a firm commitment underwriting until the expiration of forty
days after the date of such acquisition. "Exempt Person" means the Company, any
Subsidiary, any employee benefit plan or employee stock plan of the Company or
any Subsidiary (or any Person organized, appointed or established by the Company
or any Subsidiary for or pursuant to the terms of any such plan). "Person" means
an individual, a corporation, a partnership, an association, a trust, an
unincorporated organization or any other entity. "Subsidiary" means any
corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient to elect a majority of the directors of
such corporation (or other persons performing similar functions) are directly or
indirectly Beneficially Owned by the Company.
SECTION 12. TAXES
12.1 Withholding Requirements. The Committee may make such provisions or
impose such conditions as it may deem appropriate for the withholding or payment
by the Employee or Participant, as appropriate, of any taxes which it determines
are required in connection with any Awards granted under this Plan, and a
Participant's rights in any Award are subject to satisfaction of such
conditions.
12.2 Payment of Withholding Taxes. Notwithstanding the terms of Section
12.1 hereof, the Committee may provide in the agreement evidencing an Award or
otherwise that all or any portion of the taxes required to be withheld by the
Company or, if permitted by the Committee, desired to be paid by the
Participant, in connection with the exercise of an Option or the exercise,
vesting, settlement or transfer of any other Award shall be paid or, at the
election of the Participant, may be paid by the Company withholding shares of
the Company's capital stock otherwise issuable or subject to such Award, or by
the Participant delivering previously owned
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shares of the Company's capital stock, in each case having a fair market value
equal to the amount required or elected to be withheld or paid. Any such
elections are subject to such conditions or procedures as may be established by
the Committee and may be subject to disapproval by the Committee.
SECTION 13. AMENDMENTS OR TERMINATION
The Board may amend, alter or discontinue the Plan or any agreement
evidencing an Award made under the Plan, in its sole discretion, and the
Committee may amend, alter or discontinue any agreement evidencing an Award
under the Plan, and may, without limiting the generality of the foregoing:
(a) increase the maximum number of shares of Common Stock for which
Awards may be granted under the Plan;
(b) reduce the exercise price of outstanding Options;
(c) after the date of a Change of Control, impair the rights of any
Award holder, without such holder's consent, under any Award granted prior to
the date of any Change of Control; or
(d) extend the term of the Plan;
provided, however, that the Board shall not materially reduce the class of
persons eligible to be Participants unless it no longer intends for the Plan to
qualify as "broadly-based" under the New York Stock Exchange Shareholder
Approval Policy and takes appropriate actions to obtain shareholder approval of
the Plan if required under such policy.
SECTION 14. COMPLIANCE WITH OTHER LAWS AND REGULATIONS.
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell, issue or deliver Shares under such Awards,
shall be subject to all applicable federal, state and foreign laws, rules and
regulations and to such approvals by any governmental or regulatory agency as
may be required. The Company shall not be required to register in a
Participant's name or deliver any Shares prior to the completion of any
registration or qualification of such Shares under any federal, state or foreign
law or any ruling or regulation of any government body which the Committee
shall, in its sole discretion, determine to be necessary or advisable. This Plan
is intended to constitute an unfunded arrangement for key employees.
No Option shall be exercisable unless a registration statement with
respect to the Option is effective or the Company has determined that such
registration is unnecessary. Unless the Awards and Shares covered by this Plan
have been registered under the Securities Act of 1933, as amended, or the
Company has determined that such registration is unnecessary, each person
receiving an Award and/or Shares pursuant to any Award may be required by the
Company to give a representation in writing that such person is acquiring such
Shares for his or her own account for investment and not with a view to, or for
sale in connection with, the distribution of any part thereof.
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SECTION 15. OPTION GRANTS BY SUBSIDIARIES
In the case of a grant of an Option to any Eligible Employee employed by
a subsidiary or affiliate, such grant may, if the Committee so directs, be
implemented by the Company issuing any subject Shares to the subsidiary or
affiliate, for such lawful consideration as the Committee may determine, upon
the condition or understanding that the subsidiary or affiliate will transfer
the Shares to the optionholder in accordance with the terms of the Option
specified by the Committee pursuant to the provisions of the Plan.
Notwithstanding any other provision hereof, such Option may be issued by and in
the name of the subsidiary or affiliate and shall be deemed granted on such date
as the Committee shall determine.
SECTION 16. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ of
the Company or interfere in any way with the right of the Company to terminate
an individual's employment at any time. The Award agreements may contain such
provisions as the Committee may approve with reference to the effect of approved
leaves of absence.
SECTION 17. EFFECTIVENESS AND EXPIRATION OF PLAN
The Plan shall be effective on the date the Board adopts the Plan. No
Stock Option Award, Restricted Stock Award or Stock Unit shall be granted
pursuant to the Plan more than ten (10) years after the effective date of the
Plan.
SECTION 18. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as creating
any limitations on the power of the Board or the Committee to adopt such other
incentive arrangements as it or they may deem desirable, including without
limitation, the granting of restricted stock or stock options otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
SECTION 19. GOVERNING LAW
This Plan and any agreements hereunder shall be interpreted and
construed in accordance with the laws of the State of Delaware and applicable
federal law. The Committee may provide that any dispute as to any Award shall be
presented and determined in such forum as the Committee may specify, including
through binding arbitration. Any reference in this Plan or in the agreement
evidencing any Award to a provision of law or to a rule or regulation shall be
deemed to include any successor law, rule or regulation of similar effect or
applicability.
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EXHIBIT 10.44
AMENDED AND RESTATED PURCHASE AGREEMENT
THIS AMENDED AND RESTATED PURCHASE AGREEMENT ("AGREEMENT") is made as of
February 23, 2000, between WESTERN DIGITAL CORPORATION, a Delaware corporation
("SELLER"), and MAYO FOUNDATION, a Minnesota nonprofit Corporation ("BUYER").
RECITALS:
FIRST: Seller is the owner of real property located in the City of Rochester,
Olmsted County, Minnesota legally described on the attached Exhibit A ("LAND",
and the respective Lots described therein "LOT 1", "LOT 2" and "LOT 3"),
together with (1) all buildings and improvements constructed or located on the
Land ("BUILDING") and (2) all easements and rights benefiting or appurtenant to
the Land (collectively the "REAL PROPERTY"); and
SECOND: Seller is the owner of other items of property situated in or pertaining
to the Real Property as described in Section 1 hereafter (collectively the
"PERSONAL PROPERTY"); and
THIRD: Seller and Buyer entered into a Purchase Agreement (the "OLD PURCHASE
AGREEMENT") dated as of January 18, 2000 with respect to a portion of the Real
Property, but have now agreed to make certain changes to the terms of such
Purchase Agreement.
In consideration of the mutual promises of the parties set forth in this
Agreement, Seller and Buyer agree that the Old Purchase Agreement is hereby
amended and restated to read as follows:
1. SALE OF PROPERTY. Seller agrees to sell to Buyer, and Buyer agrees to buy
from Seller, the following property (collectively, "PROPERTY"):
1.1 REAL PROPERTY. The Real Property, subject to the "Permitted
Encumbrances" described on Exhibit B.
1.2 PERSONAL PROPERTY. All of the personal property situated in or
about the Real Property owned by Seller including any attached
property or systems, such as the generator, or any components
thereof which might be technically labeled as personal property
except the items described in Exhibit ("PERSONAL PROPERTY").
1.3 LEASES. Seller's interest as lessor in any lease affecting the Real
Property ("LEASES").
1.4 CONTRACTS, PERMITS, WARRANTIES, RECORDS, MISCELLANEOUS. Seller's
interests in the following items all of which relate to the
Property, to the extent transferable without the consent of any
other party thereto (or to the extent that the necessary consents
are obtained), and to the extent such items survive the Closing:
all
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service and maintenance contracts, equipment leases, parking area
leases, design, construction and other contracts, land surveys
related to the Property ("CONTRACTS"); all permits and licenses
related to the Property ("PERMITS"); all warranties and guaranties
relating to the Property ("WARRANTIES"); and the right to inspect
and receive copies, from time to time, both before and after
Closing, of all records, including management, leasing, real estate
taxes, assessments, insurance, rents, construction, maintenance,
repairs, blue prints, surveys, soil test results, and capital
improvements and services related to the Property ("RECORDS").
Seller agrees to use commercially reasonable efforts to obtain any
consents required to allow transfer of these interests.
2. PURCHASE PRICE AND MANNER OF PAYMENT. The total purchase price ("PURCHASE
PRICE") to be paid for the Property shall be Thirty Million Four Hundred
Eight Thousand Nine Hundred Seventeen and 67/100 Dollars ($30,408,917.67).
The Purchase Price shall be payable as follows:
2.1 Seven Hundred Fifty Thousand Dollars ($750,000.00) as earnest money
("EARNEST MONEY") which Earnest Money shall be held by Rochester
Title and Escrow Company ("ESCROW AGENT
2.2 The balance of the Purchase Price in cash or by wire transfer of
funds on the Closing Date.
3. CONTINGENCIES.
3.1 BUYER'S CONTINGENCIES. The obligations of Buyer under this
Agreement are contingent upon each of the following:
3.1.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller contained in this Agreement must be true
now and on the Closing Date as if made on the Closing Date.
3.1.2 TITLE. Title shall have been found acceptable, or been made
acceptable, in accordance with the requirements and terms of
Section 6 below.
3.1.3 ACCESS AND INSPECTION. Seller shall have allowed Buyer, and
Buyer's agents, access to the Real Property without charge
and at all reasonable times for the purpose of Buyer's
investigation, surveying, and testing the same. Seller shall
make available to Buyer and Buyer's Agents without charge all
Records related to the Property. Buyer shall have the right
to interview employees of Seller who may have knowledge of
such matters. Buyer shall pay all costs and expenses of such
investigation and testing, shall restore the Real Property,
and shall hold Seller and the Real Property harmless from all
costs and liabilities relating to the Buyer's activities
pursuant to Section 3.3. Buyer shall have been satisfied with
the results of all tests and investigations of Lot 3
performed by it or on its behalf as of the Contingency Date.
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3.1.4 ESTOPPEL CERTIFICATES. On or before the Contingency Date,
Buyer shall have received from all tenants under Leases or
from Seller, estoppel certificates (the "ESTOPPELS"), which
are reasonably acceptable to Buyer or a certificate from
Seller certifying to the status of each Lease.
3.1.5 DOCUMENT REVIEW. Buyer shall have determined, on or before
the Contingency Date, that it is satisfied with its review
and analysis of the Leases, Contracts, Permits, Warranties
and Records.
3.1.6 SELLER'S GOVERNMENTAL APPROVALS. Seller shall demonstrate to
Buyer's satisfaction that Seller has obtained, at its sole
cost and expense on or before the Contingency Date, all final
governmental approvals or reimbursement of any governmental
assistance that may be due as a result of this sale of the
Property to Buyer, including, but not limited to, any
approval or payment resulting from any tax increment
financing agreements that affect the Property (collectively,
the "Governmental Approvals").
3.2 SELLER'S CONTINGENCIES. The obligations of Seller under this
Agreement are contingent upon each of the following:
3.2.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer contained in this Agreement must be true
now and on the Closing Date as if made on the Closing Date.
3.2.2 SELLER'S GOVERNMENTAL APPROVALS. Seller shall have obtained
the Governmental Approvals upon terms and conditions
acceptable to Seller. Seller agrees to use commercially
reasonable efforts to obtain the Governmental Approvals.
All the Buyer's contingencies are specifically for the benefit of the Buyer
and all Seller's contingencies are specifically for the benefit of the
Seller. Each party shall have the right to waive any contingency for its
benefit. The "Contingency Date" shall be February 28, 2000. If any
contingency has not been satisfied or waived on or before the Contingency
Date, then this Agreement may be terminated by notice from the party
benefited by the contingency to the other party, which notice shall be given
on or before the Contingency Date. In the event a party fails to so terminate
this Agreement on or before the Contingency Date, all contingencies shall be
deemed to be satisfied or waived by such party. Upon termination, the Earnest
Money, and any interest accrued thereon, shall be released to Buyer and upon
return, neither party will have any further rights or obligations regarding
this Agreement or the Property. Notwithstanding other provisions of this
Section, the contingencies in Section 3.1.1 and 3.2.1 shall continue until
the Closing Date.
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4. CLOSING. The closing of the purchase and sale contemplated by this Agreement
(the "CLOSING") shall occur February 28, 2000 (the "CLOSING DATE"). The
Closing shall take place at 11:00 a.m. local time at the office of Dorsey &
Whitney LLP in Rochester, Minnesota. Seller agrees to deliver possession of
the Property to Buyer on the Closing Date.
4.1 SELLER'S CLOSING DOCUMENTS. On the Closing Date, Seller shall
execute and deliver to Buyer the following (collectively, "SELLER'S
CLOSING DOCUMENTS"), all in form and content reasonably
satisfactory to Buyer:
4.1.1 DEED. A Warranty Deed in recordable form conveying good and
marketable title to the Real Property to Buyer, free and
clear of all encumbrances, except as permitted in Section 6
below.
4.1.2 SELLER'S AFFIDAVIT. A standard Seller's Affidavit acceptable
in form to Escrow Agent and to Buyer.
4.1.3 BILL OF SALE. A Warranty Bill of Sale in the form attached to
the Old Purchase Agreement as Attachment A conveying any
Personal Property to Buyer, free and clear of all
encumbrances.
4.1.4 ASSIGNMENT OF LEASES. An Assignment of Leases in the form
attached to the Old Purchase Agreement as Attachment B
assigning the Leases and any security deposits, prepaid rents
or collections and guarantees regarding the Leases to Buyer,
free and clear of all encumbrances.
4.1.5 ASSIGNMENT OF CONTRACTS, PERMITS, AND WARRANTIES. An
Assignment of Contracts, Permits, Warranties and
Miscellaneous Documents in the form attached to the Old
Purchase Agreement as Attachment C conveying Seller's
interest to Buyer together with the consent of all parties
having a right to consent to such Assignment.
4.1.6 SECURITY DEPOSITS AND PREPAID RENTS. Any security deposits
and prepaid rents under the Leases, including valid transfers
of any noncash securities or documents held for such
purposes, together with notices to tenants and third parties
of such transfers.
4.1.7 ORIGINAL DOCUMENTS. Copies (original copies, if available) of
the Leases, Contracts, Permits, and Warranties, plus, to the
extent available, all plans and specifications for the
Property in Seller's possession and to the extent requested
copies of those Records requested by Buyer. Copies of all
records required to be kept concerning the presence, location
and quantity of asbestos containing materials and presumed
asbestos containing materials in the Property.
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4.1.8 FIRPTA AFFIDAVIT. A non-foreign affidavit in the form
attached to the Old Purchase Agreement as Attachment D,
properly executed, containing such information as is required
by Internal Revenue Code Section 1445(b)(2) and its
regulations.
4.1.9 IRS FORM. A Designation Agreement designating the "reporting
person" for purposes of completing Internal Revenue Form 1099
and, if applicable, Internal Revenue Form 8594.
4.1.10 WELL CERTIFICATE. A Certificate signed by Seller warranting
that there are no "Wells" on the Property within the meaning
of Minn. Stat. Section 103I or if there are "Wells", a Well
Certificate in the form required by law.
4.1.11 STORAGE TANKS. If the Property contains or contained a
storage tank, an affidavit with respect thereto, if required
by Minn. Stat. Section 116.48.
4.1.12 OTHER DOCUMENTS. All other documents reasonably determined
by Buyer or Title to be necessary to transfer the Property to
Buyer free and clear of all encumbrances other than the
Permitted Encumbrances.
4.2 BUYER'S CLOSING DOCUMENTS. On the Closing Date, Buyer will execute
and deliver to Seller the following (collectively, "BUYER'S CLOSING
DOCUMENTS"):
4.2.1 PURCHASE PRICE. Funds representing the Purchase Price by wire
transfer of U.S. Federal funds.
4.2.2 IRS FORM. A Designation Agreement designating the "reporting
person" for purposes of completing Internal Revenue Form 1099
and, if applicable, Internal Revenue Form 8594.
4.2.3 ASSIGNMENT OF LEASES. An Assignment of Leases in the form
attached to the Old Purchase Agreement as Attachment B by
which Buyer accepts assignment of the Leases and assumes
Seller's obligations thereunder.
4.2.4 ASSIGNMENT OF CONTRACTS, PERMITS, AND WARRANTIES. An
Assignment of Contracts, Permits, Warranties and
Miscellaneous Documents in the form attached to the Old
Purchase Agreement as Attachment C by which Buyer accepts
assignment of the Contracts, Permits, Warranties and
Miscellaneous Documents and assumes Seller's obligations
under those items which have been identified and provided to
Buyer pursuant to Section 8.3.
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5. PRORATIONS. Seller and Buyer agree to the following pro-rations (made as of
the Closing Date unless otherwise stated) and allocation of costs regarding
this Agreement:
5.1 TITLE INSURANCE AND CLOSING FEE. Seller will pay all costs of the
Title Evidence (as defined below) and one-half of any closing fee
or charge imposed by Title. Buyer will pay the Title Policy
premiums and one-half of any closing fee or charge imposed by
Title.
5.2 DEED TAX. Seller shall pay all State Deed Tax payable in connection
with this transaction.
5.3 REAL ESTATE TAXES AND SPECIAL ASSESSMENTS. . Real estate taxes
payable in 2000 shall be prorated as of the Closing Date. Seller
shall pay all Real Estate Taxes payable in 1999 and all prior
years. Buyer will assume all Real Estate Taxes due and payable in
2001 and thereafter. Seller shall pay all special assessments
levied, pending or certified as of the Closing, including all
future special assessments proposed with respect to public
improvements which have been constructed or are being constructed
as of the Closing Date and any portions of such assessments which
have been certified to the 2000 payable taxes.
5.4 RENTS. All rents and other charges under the Leases will be
pro-rated as of the Closing Date. If at -------------- the Closing
Date a tenant under any of the Leases is delinquent, then if Buyer
received from such tenant amounts in excess of the payments due
Buyer, Buyer will remit such excess amounts to Seller. Buyer will
have no obligation to collect any payments and will only be
obligated to make payment to Seller after Buyer is fully paid for
all amounts due it. Seller shall deliver to Buyer all records
regarding operating expenses and cash in the amount of any prepaid
deposits. At the request of either Seller or Buyer within thirty
(30) days after the amount of operating expenses and reimbursement
from tenants is determined and verified the parties shall
re-prorate those items based upon the facts as finally determined.
5.5 OTHER COSTS. All other operating costs of the Property shall be
allocated between Seller and Buyer as of 12:01 a.m. on the Closing
Date.
6. TITLE EXAMINATION. Title Examination will be conducted as follows:
6.1 SELLER'S TITLE EVIDENCE. Seller has furnished the following
(collectively, "TITLE EVIDENCE") to Buyer: (a) an Abstract of Title
to the Real Property certified to a current date to include all
appropriate judgment and bankruptcy searches; (b) a commitment
("TITLE COMMITMENT") for an ALTA Owner's Policy of Title Insurance
insuring title to the Real Property, in the amount of the Purchase
Price, issued by Chicago Title Insurance Company ("TITLE"); (c)
legible copies of all documents affecting the Real Property which
are referred to in the Title Commitment; (d) a copy of all existing
land surveys in Seller's possession related to the Property; (e)
the Estoppels, and (f) a UCC search showing no UCC filings
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regarding any of the Property. Buyer may also obtain such title
endorsements and other evidence of title as it may elect, such as a
survey, reports of liens for unpaid sales or withholding taxes on
file against Seller or its predecessors in title (or against any
trade name or business name used by Seller or its predecessors in
title) which are on file in the office of the Minnesota Secretary
of State or any applicable County Recorder, all of which shall be
part of the Title Evidence. Buyer understands and agrees that
Seller may elect to keep certain retainages under its construction
contract and Buyer consent thereto so long as Title will insure
Buyer against mechanics liens.
6.2 OBJECTIONS TO TITLE. Buyer has accepted the Title Evidence.
7. OPERATION PRIOR TO CLOSING. During the period from the date of this Agreement
to the Closing Date (the "EXECUTORY PERIOD"), Seller shall operate and
maintain the Property in the ordinary course of business in accordance with
prudent, reasonable business standards, including the maintenance of adequate
liability insurance and insurance against loss by fire, windstorm and other
hazards, casualties and contingencies, including vandalism and malicious
mischief. Seller shall execute no contracts, leases or other agreements
regarding the Property during the Executory Period that are not terminable on
or before the Closing Date, without the prior written consent to Buyer, which
consent may be withheld by Buyer at its sole discretion.
8. REPRESENTATIONS AND WARRANTIES BY SELLER. Seller represents and warrants to
Buyer as follows:
8.1 LEASES. Seller has delivered to Buyer a correct and complete copy
of each Lease and all its amendments. The Leases are in full force
and neither Seller, nor any tenant, is in default under the Leases.
There are no other leases or possessory rights of others regarding
the Real Property except for the Permitted Encumbrances.
8.2 TITLE TO REAL PROPERTY. Seller owns the Real Property, free and
clear of all encumbrances except the Permitted Encumbrances
identified on Exhibit B attached hereto (the "Permitted
Encumbrances").
8.3 CONTRACTS. Seller has delivered to Buyer a correct and complete
copy of each Contract, Lease, Permit, Warranty and any amendments
which will survive the closing of the transaction contemplated in
this Agreement.
8.4 OPERATIONS. Seller has received no notice of actual or threatened
cancellation or suspension of any utility services or certificate
of occupancy for any portion of the Real Property. Seller has
received no written notice of actual or threatened special
assessments or reassessments of the Real Property. To Seller's best
knowledge, during the period of Seller's ownership of the Property,
Seller has used the Property in compliance with all governmental
permits, statutes, and ordinances. All necessary permits have been
obtained and are in full force and effect and no default exists
thereunder.
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8.5 ENVIRONMENTAL LAWS. To the best of Seller's knowledge, and except
as identified in that certain Phase I Environmental Report
("Seller's Phase I") dated December 10, 1997, by Braun/Intertec,
Project Number CMXX-97-0912, no toxic or hazardous substances or
wastes, pollutants or contaminants (including, without limitation,
asbestos, urea formaldehyde, the group of organic compounds known
as polychlorinated biphenyls, petroleum products including
gasoline, fuel oil, crude oil and various constituents of such
products), and any hazardous substance as defined in any
Environmental Law (as that term is defined below) (collectively,
"Hazardous Substances") have been generated, treated, stored,
transferred from, released or disposed of, or otherwise placed,
deposited in or located on the Property in violation of any such
Environmental Law, nor has any activity been undertaken on the
Property that would cause or contribute to the Property becoming a
treatment, storage or disposal facility within the meaning of any
Environmental Law. The term "Environmental Law" shall mean any and
all federal, state and local laws, statutes, codes, ordinances,
regulations, rules, policies, consent decrees, judicial orders,
administrative orders or other requirements relating to the
environment or to human health or safety associated with the
environment, all as amended or modified from time to time. To the
best of Seller's knowledge, and except as identified in the
Seller's Phase I, there has been no discharge, release or
threatened release of Hazardous Substances or conditions in or on
the Property that may support a claim or cause of action under any
Environmental Law. The Property is not now, and to the best of the
Seller's knowledge never has been, listed on any list of sites
contaminated with Hazardous Substances, nor used as landfill, dump,
disposal or storage site for Hazardous Substances. The phrase "to
the best of Seller's knowledge" shall mean to the knowledge of
Michael Zell and John Porcelli, Jr., the officers and employees of
Seller primarily responsible for the acquisition and development of
the Property
8.6 SELLER'S DEFAULTS. Seller is not in default concerning any of its
obligations or liabilities which are binding upon the Property or
which would have a material adverse effect on the Buyer's use,
occupancy or enjoyment of the Property after Closing.
8.7 FIRPTA. Seller is not a "foreign person", "foreign partnership",
"foreign trust" or "foreign estate", as those terms are defined in
Section 1445 of the Internal Revenue Code.
8.8 PROCEEDINGS. There is no action, litigation, investigation,
condemnation or proceeding of any kind pending or to the best
knowledge of Seller threatened against any portion of the Property
or against Seller with respect to the Property.
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8.9 CONDITION. The buildings, structures and improvements included
within the Property are entirely within the boundary line of the
Property. All heating and air conditioning, wiring and plumbing
shall be in proper working order as of the Closing Date. Attached
to the Old Purchase Agreement as Exhibit E is a copy of the "punch
list" of uncompleted work on the Building. Seller will diligently
pursue completion of those items not so excluded through the
Closing Date. To the extent there remain any such items that are
not completed on the Closing Date, Seller's representatives will
work with Buyer's representatives in good faith to keep Buyer's
representatives updated on the status of any such items, so that
Buyer's representatives are in a position to follow-up with the
contractors and to enforce contracts/warranties to cause completion
after closing without additional expense to Buyer. Seller will keep
and not assign to Buyer any and all retainages under its
construction contract and shall hold Buyer harmless against any
mechanics liens which may arise out of work on the Property ordered
by Seller.
8.10 WELLS. Except as disclosed on Exhibit D, the Seller certifies and
warrants that the Seller does not know of any "Wells" on the
described Property within the meaning of Minn. Stat. Section 103I.
This representation is intended to satisfy the requirements of that
statute.
8.11 STORAGE TANKS. Except as disclosed on Exhibit D, to the best of
Seller's knowledge, no above ground or underground tanks are
located in or about the Property, or have been located under, in or
about the Property and have subsequently been removed or filled. To
the extent storage tanks exist on or under the Real Property, such
storage tanks have been duly registered with all appropriate
regulatory and governmental bodies, and otherwise are in compliance
with applicable federal, state and local statutes, regulations,
ordinances and other regulatory requirements.
8.12 REPORTS. Seller has delivered to Buyer copies of all environmental
reports, surveys, and studies relating to the Property which are in
the possession of or are reasonably available to Seller.
8.13 INDIVIDUAL SEWAGE TREATMENT SYSTEMS. Solely for purposes of
satisfying the requirements on Minn. Stat. Section 115.55 Seller
represents that except as disclosed on Exhibit D there is no
"individual sewage treatment system" (within the meaning of that
statute) on or serving the Property.
8.14 AUTHORITY. The individual or individuals executing this Agreement
have authority to do so and to legally bind Seller to perform this
Agreement. Upon request, seller shall promptly deliver to Buyer a
Certificate of Secretary evidencing such authority.
8.15 RIGHTS OF OTHERS IN PROPERTY. Seller has not entered into any other
contracts for the sale of the Property nor are there any rights of
first refusal or options to purchase the Property or any other
rights of others that will prevent the consummation of this
Agreement.
8.16 LEAD PAINT. The RIDER TO PURCHASE AGREEMENT (LEAD PAINT) attached
to the Old Purchase Agreement is hereby incorporated into this
purchase agreement.
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The maximum obligation of Seller to Buyer for breach of any representations
or warranties shall be limited to the Purchase Price of the Property and
Seller shall be liable for such breach only if (a) such breach is discovered
within 24 months from the Closing Date and (b) any legal action on such
breach shall have been commenced within 36 months from the Closing Date.
Consummation of this Agreement by Buyer with knowledge of any such breach by
Seller will not constitute a waiver or release by Buyer, its successors and
assigns, of any claims due to such breach. Seller will indemnify Buyer, its
successors and assigns, against and will hold Buyer, its successors and
assigns, harmless from, any expenses or damages, including reasonable
attorneys' fees, that Buyer, its successors and assigns, incurs because of
the breach of any of the above representations and warranties, whether such
breach is discovered before or after Closing, but only if (a) such breach is
discovered within 24 months from the Closing Date and (b) any legal action
on such breach shall have been commenced within 36 months from the Closing
Date.
9. CASUALTY; CONDEMNATION. If any of the Real Property or other improvements
are partially damaged by fire or other casualty or if there is a notice of
condemnation with respect to any such portion of the Real Property, Seller
shall give immediate written notice thereof to Buyer. Buyer may terminate
this Agreement upon delivery of written notice to Seller within ten (10)
days following the receipt of such notice, in which case, Seller and Buyer
shall have no further obligation or liabilities under this Agreement and the
Earnest Money (and any interest thereon) shall be immediately returned to
Buyer. In the event Buyer does not elect to so terminate this Agreement, the
Purchase Price shall not be reduced, but the Buyer shall be entitled to all
insurance proceeds and/or condemnation proceeds that the Seller is entitled
to receive as a result of such destruction or condemnation and Seller shall
not be obligated to restore the Real Property.
10. BROKER'S COMMISSION. Seller and Buyer represent to each other that they have
dealt with no brokers, finders or the like in connection with this
transaction, and agree to indemnify and hold each other harmless from all
claims, damages, costs or expenses of or for any other such fees or
commissions resulting from their respective actions or agreements regarding
the execution or performance of this Agreement.
11. ASSIGNMENT. Either party may assign its rights under this Agreement with the
prior written consent of the other party, before or after the Closing. Any
such assignment will not relieve such assigning party of its obligations
under this Agreement.
12. SURVIVAL; FURTHER ASSURANCES. All of the terms of this Agreement and
warranties and representations herein contained shall survive and be
enforceable after the Closing. Seller and Buyer each agree that they will,
upon the request of the other party, take all reasonable actions in a prompt
manner to provide reasonably necessary documents or assurances required by
the requesting party to implement this Agreement or for assisting Buyer in
the collection and reducing to possession of any or all of the assets or
property which is the subject of this Agreement, at the sole cost of the
requesting party.
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13. NOTICES. All notices and demands hereunder shall be in writing, and shall be
deemed to have been properly given or served as of (a) the date of personal
delivery with acknowledgment of receipt; (b) three (3) days after the same
is deposited in the United States mail, prepaid, for delivery by registered
or certified mail, return receipt requested; (c) the first business day
after the date delivered to a reputable overnight courier service providing
proof of delivery; or (d) on the day of facsimile transmission, if the
sending machine prints out evidence of successful transmission and such
transmission is made so that the recipient receives the facsimile prior to
5:00 p.m. local time of the recipient on a business day (and if not prior to
5:00 p.m. local time of the recipient on a business day, then service shall
be deemed given on the next business day), with a copy mailed by regular
mail no later than the next business day. The initial addresses of Landlord
and Tenant are set forth below:
If to Buyer: Mayo Foundation
201 First Street SW
Rochester, MN 55905
Attn: John Herrell--Vice President
Fax: (507) 284-5760
With Copy to: Mayo Foundation
201 First Street SW
Rochester, MN 55905
Attn: Legal Department--Jonathan J. Oviatt
Fax: (507) 284-0929
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If to Seller: Western Digital Corporation
8105 Irvine Center
Irvine, CA 92618
Attn: Matt Massengill, President
Fax: (949) 932-7837
With Copy to: Western Digital Corporation
8105 Irvine Center
Irvine, CA 92618
Attn: Raymond Bukaty, VP Corporate Law
Fax: (949) 932-5633
Such addresses may be changed at any time or from time to time or additional
notice parties added, by notice as above provided.
14. MISCELLANEOUS. The Section and paragraph headings or captions appearing in
this Agreement are for convenience only, are not a part of this Agreement,
and are not to be considered in interpreting this Agreement. This written
Agreement constitutes the complete agreement between the parties and
supersedes any prior or contemporaneous oral or written agreements between
the parties regarding the Property. There are no verbal agreements that
change this Agreement, and no waiver of any of its terms will be effective
unless in writing executed by the parties. This Agreement binds and benefits
the parties and their successors and assigns. This Agreement has been made
under the laws of the State of Minnesota, and such laws will control its
interpretation. This Agreement may be signed in one or more counterparts,
all of which, taken together, shall be deemed one original.
15. REMEDIES FOR NON-PERFORMANCE.
15.1 SELLER'S REMEDIES. If the Buyer defaults in performing any of the
Buyer's Closing obligations under the terms of this Agreement on
the Closing Date for any reason other than Seller's default,
Seller's sole remedy shall be to terminate this Agreement and to
receive the Earnest Money (and any interest thereon) as liquidated
damages or to enforce specific performance of this Agreement as
Seller's exclusive remedies
15.2 BUYER'S REMEDIES. If the Seller defaults in performing any of the
Seller's Closing obligations under the terms of this Agreement on
the Closing Date for any reason other than Buyer's default, Buyer
shall be entitled to terminate this Agreement and to receive the
Earnest Money (and any interest thereon) or to enforce specific
performance of this Agreement as Buyer's exclusive remedies.
12
<PAGE> 13
Seller and Buyer have executed this Agreement as of the date first
written above.
SELLER: WESTERN DIGITAL CORPORATION
a Delaware corporation
Date of Signature By
February ___, 2000 ------------------------------------
Its
-----------------------------------
By
------------------------------------
Its
-----------------------------------
Tax I.D. Number: 95-2647125
BUYER: MAYO FOUNDATION,
a Minnesota nonprofit corporation
Date of Signature By
February ___, 2000 ------------------------------------
Its President
And
---------------------------------------
Its Assistant Secretary
Tax I.D. Number: 41-1937751
13
<PAGE> 14
EXHIBIT A
LEGAL DESCRIPTION OF REAL PROPERTY
LOTS 1, 2, AND 3, BLOCK 1; WESTERN DIGITAL TECHNOLOGY PARK, ACCORDING TO THE
RECORDED PLAT THEREOF, OLMSTED COUNTY, MINNESOTA.
14
<PAGE> 15
EXHIBIT B
PERMITTED ENCUMBRANCES
(1) Building and zoning laws, ordinances, and State and Federal regulations.
(2) Reservation of any mineral or mineral rights to the State of Minnesota.
(3) Real estate taxes as provided in Section 5.2(c).
(4) Special assessments levied or pending or certified after the Closing Date.
(5) Easements covenants, conditions, restrictions, reservation, and all other
matters of record or which is disclosed by the ALTA survey of Lots 1 and 2
which was provided to Buyer or which would be disclosed by an ALTA survey of
Lot 3.
(6) Interests of Alton and Louise Shefelbine in Lot 1, Block 1, Western Digital
Technology Park under Lease dated May 1, 1998 referenced in that certain
Memorandum of Lease dated May 1, 1998 and recorded on May 6, 1998 as
Document No. 778665 in the Olmsted County Minnesota Recorder's office.
(7) Possible interest of tenant under any farming lease affecting Lot 3.
15
<PAGE> 16
EXHIBIT C
EXCESS AND OBSOLETE EQUIPMENT
AT
WESTERN DIGITAL CORPORATION
4001 41ST STREET, NW
ROCHESTER, MN 55901
CLEANROOM-ASSOCIATED
Gowning racks
Gowning hooks
Ulpa Filters
Latex Gloves and wipes
Misc. Cleanroom garb and cleanroom supplies
Hangers
REMAINING GENERAL
Sensible Cooling Units (six)
Items of Equipment from Seller's other buildings
that were relocated to the Property
DATA CENTER (DC211)
2 Cisco 6500's with Modules
- - 2 Cisco MSM
- - 2 Supervisor Engines with Gigabyte Ports
- - 4 8 Port Gigabyte cards
- - 2 48 Port 10/100 cards
4 PC's w/ monitors
1 Sun Station w/monitors
1 Compaq Prolaint 6500 w/monitors
1 Compaq Prolaint 800 w/monitors
1 Cisco Probe
1 Phone
1 Laptop
TELECOMMUNICATIONS CLOSET TC 124
2 Cisco 5513 with 2 power supplies
2 Supervisor modules with Gigabyte ports
20 10/100 24 port fast Ethernet cards
MAIN CROSS-CONNECT CLOSET MC 125
2 Cisco 5513 with 2 power supplies
2 Supervisor modules with Gigabyte ports
21 10/100 24 port fast Ethernet cards
1 Cisco 4500 Router
4 T-1 CSU/DSU's
1 Lucent EPN
1 Lucent PPN
TELECOMMUNICATIONS CLOSET TC 136
3 Cisco 5513 with 2 power supplies
3 Supervisor modules with Gigabyte ports
32 10/100 24 port fast Ethernet cards
TELECOMMUNICATIONS CLOSET TC 137
3 Cisco 5513 with 2 power supplies
3 Supervisor modules with Gigabyte ports
32 10/100 24 port fast Ethernet cards
16
<PAGE> 17
EXHIBIT D
WELL DISCLOSURE
To the best of Seller's knowledge there is one domestic well located on
Lot 1, Block 1, Western Digital Technology which is in use. Attached hereto is a
map showing the approximate location of the well.
This Disclosure is not a warranty of any kind by the Seller and is not a
substitute for any inspections or warranties Buyer may wish to obtain.
This Disclosure is given pursuant to Minn. Stat. Section 103I.235.
STORAGE TANK DISCLOSURE
To the best of Seller's knowledge there is a 10,000 gallon diesel fuel
underground storage tank located on Lot 2, Block 1, Western Digital Technology
Park.
INDIVIDUAL WASTE TREATMENT SYSTEM DISCLOSURE
To the best of Seller's knowledge there is private sewer system
consisting of a septic tank with drain field located on Lot 1, Block 1, Western
Digital Technology. The sewer system which is currently in use was installed in
1993. Attached hereto is a map showing the approximate location of the septic
tank.
This Disclosure is not a warranty of any kind by the Seller and is not a
substitute for any inspections or warranties Buyer may wish to obtain.
This Disclosure is given pursuant to Minn. Stat. Section 115.55.
17
<PAGE> 18
EXHIBIT E
18
<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 10-Q FOR THE NINE MONTH PERIOD ENDED MARCH 31, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> MAR-31-2000
<CASH> 202,087
<SECURITIES> 0
<RECEIVABLES> 192,524
<ALLOWANCES> 15,069
<INVENTORY> 98,208
<CURRENT-ASSETS> 533,818
<PP&E> 435,226
<DEPRECIATION> 326,340
<TOTAL-ASSETS> 690,195
<CURRENT-LIABILITIES> 525,043
<BONDS> 222,562
0
0
<COMMON> 1,393
<OTHER-SE> (107,410)
<TOTAL-LIABILITY-AND-EQUITY> 690,195
<SALES> 1,483,718
<TOTAL-REVENUES> 1,483,718
<CGS> 1,517,235
<TOTAL-COSTS> 1,517,235
<OTHER-EXPENSES> 330,695
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> (5,132)
<INCOME-PRETAX> (359,080)
<INCOME-TAX> 0
<INCOME-CONTINUING> (359,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 166,899
<CHANGES> 0
<NET-INCOME> (192,181)
<EPS-BASIC> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
