Western Digital 1999 Annual Report Download

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ANNUAL REPORT
AND FORM 10-K
Western Digital
99

Table of contents

  • Page 1
    W est er n D igit a l A N N U A L A N D R E P O R T 1 0 - K F O R M 99

  • Page 2
    ...N Y Western Digital Corporation is a leading manufacturer of hard drives used for information storage in desktop computers, servers, workstations and home entertainment electronic products. T hrough its Connex subsidiary, the company serves users of network-attached storage systems and enterprise...

  • Page 3
    ... data storage company that cares about and protects end users' data. • We accelerated development efforts on higher-margin enterprise products, including 10,000 RPM hard drives for highdemand servers and workstations. We developed WD Enterprise™ SCSI drives employing Western Digital innovations...

  • Page 4
    ... desktop hard drive production in Malaysia to improve manufacturing efficiencies and costs. In addition to its engineering, technical and manufacturing-support roles, the Chai Chee facility continues to build our high-end WD Enterprise hard drives. T hese moves take advantage of the best features...

  • Page 5
    ... Co-Chief Operating Officers: Matt Massengill in Worldwide Operations and Geographies and Russell Stern in Lines of Business/ Research and Development. Along with the assignment of these responsibilities, I indicated to Western Digital's Board of Directors my intention to retire by the end of fiscal...

  • Page 6
    ...) 92-2647125 (I.R.S. Employer Identification No.) 8105 Irvine Center Drive Irvine, California (Address of principal executive offices) 92618 (Zip Code) Registrant's telephone number, including area code (949) 932-5000 Registrant's Web Site: http://www.westerndigital.com Securities Registered...

  • Page 7
    ...in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] As of September 17, 1999, the aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant was $547.4 million. As of September 17, 1999, the number of outstanding shares of Common Stock...

  • Page 8
    ... Item 10. Item 11. Item 12. Item 13. Directors and Executive Officers of the Registrant...Executive Compensation...Security Ownership of Certain Beneficial Owners and Management ...Certain Relationships and Related Transactions ...PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports...

  • Page 9
    ...to specific years and quarters are to the Company's fiscal years and fiscal quarters. The Company's principal executive offices are located at 8105 Irvine Center Drive, Irvine, California 92618; its telephone number is (949) 932-5000 and its web site is http://www.westerndigital.com. The information...

  • Page 10
    PART I Item 1. Business General Western Digital Corporation (the "Company" or "Western Digital") designs, develops, manufactures and markets a broad line of hard drives featuring leading-edge technology. A hard drive is a storage device found in most computers that stores data on one or more ...

  • Page 11
    ...Data Lifeguard protects end-user data by automatically detecting, isolating, and repairing possible problem areas on the hard drive before data loss can occur. The WD Caviar and WD Expert products utilize the EIDE interface, providing high performance while retaining ease of use and overall low cost...

  • Page 12
    ... management and allows the Company to achieve lower costs through economies of scale purchasing. This platform strategy also enables computer manufacturer customers to leverage their qualification efforts onto successive product models. The WD Expert line of hard drives is focused on the higher end...

  • Page 13
    ... PC industry plans to transition to higher speed interfaces to handle the higher data transfer rates. The Company is working to develop products that will support these higher speed interfaces. Storage capacity of the hard drive is determined by the number of disks and each disk's areal density...

  • Page 14
    ... product development, see Part II, Item 7, under the heading "Risk factors relating to Western Digital particularly." Sales and Distribution The Company sells its products globally to computer manufacturers, distributors, value-added resellers, dealers, system integrators, retailers and internet...

  • Page 15
    ... Company is expanding its use of Internet technology and web-based supply chain planning tools. For an additional discussion of the changes in customer models, refer to Part II, Item 7, under the headings "Risk factors related to Western Digital particularly," and "Risk factors related to the hard...

  • Page 16
    ... see Part II, Item 7, under the heading "Risk factors related to Western Digital particularly." Advances in magnetic, optical or other data storage technologies could result in competitive products that have better performance or lower cost per unit of capacity than the Company's hard drive products...

  • Page 17
    ... to process and test returned hard drives for the Company's end users. The Company refurbishes or repairs its products at in-house service facilities located in Singapore and at a third-party return facility located in Germany. Manufacturing To be competitive, Western Digital must manufacture high...

  • Page 18
    ...a line of audio-visual hard drives and continue development of Connex new products. For a discussion of product development, see Part II, Item 7, under the heading "Risk factors related to the hard drive industry in which we operate." Materials and Supplies The principal components currently used in...

  • Page 19
    ..., and the Company considers its employee relations to be good. Item 2. Properties The Company's headquarters, located on leased property in Irvine, California, house management, research and development, administrative and sales personnel. The lease agreement for this facility expires in December...

  • Page 20
    ...of operations or liquidity. In addition, the costs of defending such litigation may be material, regardless of the outcome. On July 2, 1999, Magnetic Media Development, LLC ("Magnetic Media") brought suit against the Company in the United States District Court for the Northern District of California...

  • Page 21
    ... The names, ages and positions of all the executive officers of the Company as of August 20, 1999 are listed below, followed by a brief account of their business experience during the past five years. Executive officers are normally appointed annually by the Board of Directors at a meeting of the...

  • Page 22
    ...of Human Resources for Walker Interactive Systems for five years. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Western Digital's common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "WDC." The approximate number of holders of record...

  • Page 23
    ... restructured its operations and completed the sale of its media business to Komag. In December 1998, the Company formed a strategic partnership with Sony Corporation to co-develop a new hard disk drive ("HDD") for consumer audio and video ("AV") applications. The collaborative agreement calls for...

  • Page 24
    ... 27, 1999, the Company announced a recall of up to 400,000 of its 6.8GB per platter series of WD Caviar desktop hard drives which are in completed computer systems, because of a reliability problem resulting from a faulty power driver chip manufactured by a third-party supplier. Approximately...

  • Page 25
    ... severe competitive pricing pressures experienced in the desktop storage market during the last three quarters. The Company also experienced higher assembly costs associated with extending the life of thin film head technology in desktop storage products and the accelerated transition to hard drives...

  • Page 26
    ... stage operation with no commercial products yet available for sale and several in-process research and development projects which were approximately 40% complete. The major projects acquired include industry standard storage systems and storage management software solutions for both Windows NT...

  • Page 27
    ... of the Company's hard drive assembly lines in order to accommodate new technologies and new product lines, normal replacement of existing assets and expansion of production capabilities in Malaysia. The Company's 2000 research and development programs include planned spending of approximately...

  • Page 28
    ..., integration testing and supplier management. Systems remediation and integration testing is expected to be completed by the end of September 1999. The Company also expects to complete development of its contingency plans by the end of September 1999. Supplier management is an ongoing process and...

  • Page 29
    ... desktop drives. These risks are magnified because we expect technological changes, short product life cycles and intense competitive pressures to result in declining sales and gross margins on our current generation products. We must complete our transition to giant magnetoresistive head technology...

  • Page 30
    ... 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...

  • Page 31
    ... 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...

  • Page 32
    ... designs and manufacturing processes so that the hard drives with IBM technology can be manufactured by us at a low enough cost to compete in the high-volume and price sensitive desktop market. We entered into the agreement expecting that IBM will continue to lead the hard drive industry in storage...

  • Page 33
    ... cost of components for our products limited access to components that we obtain from a single or a limited number of suppliers, such as IBM or Komag competition and consolidation in the data storage industry seasonal and other fluctuations in demand for computers often due to technological advances...

  • Page 34
    ... functionality are unaffected by processing of dates prior to, during and after the Year 2000, and all elements used with the product (for example, hardware, software and firmware) properly exchange accurate date data with it. Our Products. We believe our hard drive products are Year 2000 compliant...

  • Page 35
    ... do not expect the production halt to affect our commitments to our customers. We expect to complete the development of our contingency plans by the end of September 1999. To date, detailed contingency plans have been developed to support each business process which enables us to execute our primary...

  • Page 36
    ... Rate Risk At July 3, 1999, the market value of the Company's 5.25% zero coupon convertible subordinated debentures due in 2018 was approximately $225.4 million, compared to the related carrying value of $494.1 million. The convertible debentures will be repurchased by the Company, at the option...

  • Page 37
    ... (of 15% or more) could occur, and this decline could adversely impact the Company's consolidated financial statements. As of July 3, 1999, the quoted market value of the Company's Komag stock holdings, without regard to discounts due to sales restrictions, was $33.7 million. Bowne Conversion 32

  • Page 38
    Item 8. Financial Statements and Supplementary Data Index to Financial Statements and Financial Statement Schedule Pag e Consolidated Financial Statements: Independent Auditors' Report...Consolidated Statements of Operations - Three Years Ended July 3, 1999...Consolidated Balance Sheets - June 27, ...

  • Page 39
    ...Western Digital Corporation and subsidiaries as of June 27, 1998 and July 3, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended July 3, 1999, in conformity with generally...LLP Orange County, California July 21, 1999, except as to Note...

  • Page 40
    ... and expenses: Cost of revenues...Research and development (Note 8) ...Selling, general and administrative...Restructuring charges (Note 8) ...Total costs and expenses ...Operating income (loss) ...Net interest income (expense) (Note 2) ...Income (loss) before income taxes ...Provision (benefit) for...

  • Page 41
    ...1999 $ 226,147 273,435 144,093 44,672 688,347 237,939 96,116 $ 1,022,402 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable ...Accrued compensation ...Accrued warranty...Treasury stock-common shares at cost; 13,039 shares in 1998 and 11,297 shares in 1999...Total ...

  • Page 42
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (in thousands) Total Comprehensive Income (Loss) Retained Additional Common Stock Balance at June 29, 1996 ...Common stock repurchase program ...Exercise of stock options...ESPP shares issued...Income tax ...

  • Page 43
    ... ...Sales and maturities of short-term investments ...Decrease (increase) in other assets ...Net cash used for investing activities...Cash flows from financing activities Proceeds from ESPP shares issued...Exercise of stock options and other, including tax benefit ...Debt issuance costs...Proceeds...

  • Page 44
    ...) for work in process and finished goods. The Company maintains a base stock of two to three weeks of current, finished goods inventory for certain key original equipment manufacturer ("OEM") customers in facilities located adjacent to their operations. Inventory at these locations usually includes...

  • Page 45
    ..., which include specific detail on hard drives in the field by product type, historical field return rates and costs to repair. Although the Company believes that it has the continued ability to reasonably estimate warranty reserves, unforeseeable changes in factors used to estimate the accrual for...

  • Page 46
    ... the financial accounting and reporting standards for stock-based compensation plans. The Company elected to continue accounting for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related...

  • Page 47
    ... balance sheet approximate fair values. As of July 3, 1999, the quoted market value of the Company's Komag stock holdings, without regard to discounts due to sales restrictions, was $33.7 million. Investments The Company's investments in marketable equity securities are included in other assets, and...

  • Page 48
    ... buildings...Machinery and equipment...Furniture and fixtures...Leasehold improvements...Accumulated depreciation and amortization...Net property and equipment ...Supplemental disclosure of non-cash investing activities Proceeds from sale of Santa Clara disk media operations ...Common stock issued...

  • Page 49
    ...), at the issue price plus accrued original issue discount to the date of redemption. As of July 3, 1999, the carrying value of the Debenture was $494.1 million. Included in other assets is the amount of unamortized debenture issuance costs. The Debenture issuance costs totaled approximately...

  • Page 50
    ... operations and liquidity. In addition, the costs of defending such litigation may be material, regardless of the outcome. On July 2, 1999, Magnetic Media Development, LLC ("Magnetic Media") brought suit against the Company in the United States District Court for the Northern District of California...

  • Page 51
    ... stock options, and the disqualifying disposition of stock acquired under the employee stock purchase plan reduce taxes currently payable as shown above by $20.2 and $2.3 million for 1997 and 1998, respectively. Such benefits are credited to additional paid-in capital. No amounts were recorded...

  • Page 52
    ... grant...Employee stock purchase plan ...19,374 25,718 1,371 46,463 Stock Option Plans Western Digital's Employee Stock Option Plan ("Employee Plan") is administered by the Compensation Committee of the Board of Directors, which determines the vesting provisions, the form of payment for the shares...

  • Page 53
    ... Company. Under the plan, each share of the Company's outstanding common stock carries one Right to Purchase Series A Junior Participating Preferred Stock (the "Right"). The Right enables the holder, under certain circumstances, to purchase common stock of Western Digital or of the acquiring company...

  • Page 54
    ... using a BlackScholes option pricing model with the following weighted average assumptions: Stock Option Plans 1997 1998 1999 4.0 4.5 5.0 6.0% 5.5% 5.75% .58 .76 .82 - - - ESPP Plan 1998 1999 2.0 2.0 5.5% 5.75% .76 .82 - - Option life (in years) ...Risk-free interest rate...Stock price volatility...

  • Page 55
    ... recorded to cost of sales as the product is sold. The Agreement also includes a supply arrangement for the purchase of GMR heads at negotiated market prices. Acquisition of Connex On February 1, 1999, the Company acquired Connex, a San Jose-based startup company formed to develop storage solutions...

  • Page 56
    ... drives was moved to the Company's nearby manufacturing facility in Chai-Chee, Singapore. This restructuring program, which was substantially completed by the end of the third quarter of 1999, resulted in a reduction of worldwide employee headcount of 934 employees (compared to the original plan...

  • Page 57
    ...12 months, they are marked-to-market using published closing prices of Komag stock as of the end of the reporting period. Subsequent to the transaction, the market value of Komag's common stock declined. As the Company has identified the shares as "available for sale" under the provisions of SFAS No...

  • Page 58
    ... $12.5 million) in common stock for cash at the market price of its stock less a 2.75% discount. As of July 3, 1999, the Equity Facility had not been used. During July through September 29, 1999, the Company issued 6.2 million shares of common stock under the Equity Facility for net proceeds of $32...

  • Page 59
    ... 27, 1999, the Company announced a recall of up to 400,000 of its 6.8GB per platter series of WD Caviar desktop hard drives which are in completed computer systems, because of a reliability problem resulting from a faulty power driver chip manufactured by a third-party supplier. Approximately...

  • Page 60
    ... of inventory and service center stock, $24 million for incremental warranty accruals on older technology products, $10 million for write-offs of investments in companies developing advanced thin-film and mobile disk drive technologies, $8 million of mobile engineering development expenses incurred...

  • Page 61
    WESTERN DIGITAL CORPORATION SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended July 3, 1999 (in thousands) Allowance for Doubtful Accounts $ 9,376 7,116 (4,786) 11,706 4,674 (454) 15,926 2,632 (21) $ 18,537 Accrued Warranty $ 13,414 67,900 (52,416) 28,898 104,600 (86,363)...

  • Page 62
    ... Commission no later than 120 days after the close of the fiscal year ended July 3, 1999. Item 11. Executive Compensation There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders under the...

  • Page 63
    ... between Wan Tien Realty Pte Ltd and Western Digital (Singapore) Pte Ltd dated as of October 12, 1992(3) The Company's Non-Employee Directors Stock-For-Fees Plan, Amended and Restated as of January 9, 1997(11)** Office Building Lease between The Irvine Company and the Company dated as of January...

  • Page 64
    ... Komag, Incorporated*** Volume Purchase Agreement, dated April 8, 1999, by and between Western Digital Corporation and Komag, Incorporated*** Subsidiaries of the Company* Consent of Independent Auditors* Financial Data Schedule* * New exhibit filed with this Report. ** Compensation plan, contract...

  • Page 65
    ...(15) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with ...Company's Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on February 8, 1999. (19) Subject to confidentiality order dated October 2, 1998. (b) Reports on Form 8-K: No reports...

  • Page 66
    ...the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN DIGITAL CORPORATION By: DUSTON M. W ILLIAMS Duston M. Williams Senior Vice President and Chief Financial Officer Dated: October 1, 1999 Pursuant to the requirements of the...

  • Page 67
    ... Chief Executive Officer Polaroid Corporation Photographic Equipment Irwin Federman General Partner U.S. Venture Partners Venture Capital Investments André R. Horn Retired. Chairman Emeritus, Needham & Co. Investment Banking Former Chairman of the Board Joy Manufacturing Company Capital Equipment...

  • Page 68
    ... Connex San Jose, California Manufacturing Facilities Malaysia Singapore Domestic Sales Offices Western Digital (U.K.) Limited Leatherhead, Surrey, England Glasgow, Scotland Prague, Czech Republic Dubai, UAE Transfer Agent and Registrar American Stock Transfer & Trust Company 40 Wall Street New...