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ANNUAL REPORT AND FORM 10-K
Western Digital 2000
ANNUAL REPORT
AND FORM 10-K
Western Digital
2000

Table of contents

  • Page 1
    We s t e r n D i g i t a l A N N U A L R E P O R T A N D F O R M 1 0 - K We s t e r n D i g i t a l A N N U A L A N D R E P O R T 1 0 - K F O R M 2 0 0 0 2 0 0 0

  • Page 2
    ... and business data; supplies innovative solutions for storage; and provides data management, intelligence gathering and network management software. The quality and reliability of Western Digital products and services help to ensure the integrity and security of each customer's digital universe...

  • Page 3
    ... secured our excellent customer relations, but disrupted normal shipments for several quarters. Our determined and energetic workforce met these challenges with improvements in quality, innovation and market responsiveness. To earn back business, WD accelerated product development in desktop hard...

  • Page 4
    ... set top box manufacturers and gaming box companies - the segments that are expected to provide the early growth in this exciting new market for hard drives. Equipped with WD-exclusive StreamWeaverâ„¢ and WhisperDriveâ„¢ technologies for data streaming and acoustics control in high-performance audio...

  • Page 5
    ...storage, storage management software, analytical software, home entertainment, e-business ventures and data communication. We have the seasoned technological expertise that people and businesses will need as they collect, build, manage and secure the information that becomes the new digital universe...

  • Page 6
    ... number, including area code: (949) 932-5000 Registrant's Web Site: http://www.westerndigital.com Securities Registered Pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common Stock, $.01 Par Value New York Stock Exchange Rights to Purchase...

  • Page 7
    ...scal years and Ã'scal quarters. The Company's principal executive oÇces are located at 8105 Irvine Center Drive, Irvine, California 92618. The Company's telephone number is (949) 932-5000 and its web site is http://www.westerndigital.com. The information on the web site is not incorporated in this...

  • Page 8
    ... management, product lifecycle management and decision support in the manufacturing industry. For further discussion of SageTree, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' The Company will monitor the development of new markets related to data...

  • Page 9
    ... of severe price competition. See Part II, Item 7, under the heading ""Risk factors related to the hard drive industry in which we operate.'' Desktop PCs are used in a number of environments, ranging from homes to businesses and multi-user networks. Software applications are used on desktop PCs...

  • Page 10
    ...manufacturer customers to leverage their qualiÃ'cation eÃ...orts onto successive product models. The Company expects to utilize the WD Caviar platform strategy as it develops products for the emerging market for hard drives speciÃ'cally designed for audio-visual applications, such as new digital video...

  • Page 11
    ... consulting, implementation services, advanced analytics, training and postimplementation support. Technology and Product Development Hard drives are used to record, store and retrieve digital data. Their performance attributes are currently better than removable or Ã-oppy disks, optical disk drives...

  • Page 12
    ... 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, which is a measure of the amount of data that can be stored on the recording...

  • Page 13
    ... 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 drive industry in which we operate.'' The Company maintains a base stock of two to three weeks of current, Ã'nished goods inventory...

  • Page 14
    .... Western Digital also invests in direct marketing and customer satisfaction programs. The Company maintains ongoing contact with end users through primary and secondary market research, focus groups, product registrations and technical support databases. Competition In the desktop product market...

  • Page 15
    ... to process and test returned hard drives for the Company's end users. The Company refurbishes or repairs its products at a third-party service facility located in Singapore and at a third-party service facility located in Germany. Manufacturing To be competitive, Western Digital must manufacture...

  • Page 16
    ... processes support the Company's business plans. For an additional discussion of manufacturing, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Research and Development The Company devotes substantial resources to development of new products...

  • Page 17
    ...and other agreements in place in addition to its own intellectual property portfolio to compete successfully in the hard drive industry. For additional discussion of intellectual property, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Environmental...

  • Page 18
    ... research and development facility lease expires in September 2010. Western Digital owns a manufacturing facility in Kuala Lumpur, Malaysia. During 2000 the Company sold approximately 34 acres of land in Irvine, California, upon which it had previously planned to build a new corporate headquarters...

  • Page 19
    ... position, results of operation or liquidity. On June 9, 2000 a suit was brought against the Company in California State Superior Court on behalf of a class of former employees of the Company who were terminated as a result of a reduction in force in December 1999. The complaint asserts claims for...

  • Page 20
    ... was Manager, Human Resources, for Fluor Corporation where he served for 5 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...

  • Page 21
    ... 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 Ã'led with the Securities and Exchange Commission. Readers are cautioned not to place...

  • Page 22
    ... sold its Santa Clara disk media operations to Komag, recording a charge to operations of $20.0 million, in the fourth quarter of 1999. During 2000, the Company reorganized its operational and management responsibilities, transferred its hard drive production from Singapore to Malaysia and closed...

  • Page 23
    ... in-process research and development write-oÃ...s associated with the acquisition of Connex and restructuring charges of $61.0 million for the consolidation of the Company's personal storage and enterprise storage divisions and the sale of its media operation. The 2000 loss included net restructuring...

  • Page 24
    ... charges) was primarily the result of lower manufacturing costs due to the consolidation of desktop hard drive production to a single, highly utilized facility in Malaysia, oÃ...set by lower volumes and lower ASPs. Operating Expenses Research and development expense was $217.0 million in 1999, an...

  • Page 25
    ... Employee Stock Purchase Plan purchases in 1999. The Company anticipates that capital expenditures in 2001 will not be more than $50.0 million and will relate to accommodating new product lines, normal replacement of existing assets and expansion of production capabilities in Malaysia. The Company...

  • Page 26
    ... of which $111.8 million had been utilized as of June 30, 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%. Between July 1, 2000 and September 5, 2000, the Company issued 6.1 million shares for cash proceeds of $27...

  • Page 27
    ... 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...

  • Page 28
    Risk factors related to the hard drive industry in which we operate Our operating results depend on our being among the Ã'rst-to-market and Ã'rst-to-volume with our new products. To achieve consistent success with computer manufacturer customers we must be an early provider of next generation hard ...

  • Page 29
    ... 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...

  • Page 30
    ...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...

  • Page 31
    ...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...

  • Page 32
    ... prices of our products ‚ manufacturing delays or interruptions ‚ acceptance by customers of competing products in lieu of our products ‚ variations in the cost of components for our products ‚ limited access to components that we obtain from a single or a limited number of suppliers, such...

  • Page 33
    ... 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 Ã'led against us in the past, and any of these litigation matters could result in substantial costs and a diversion of resources and management...

  • Page 34
    ..., at the Company's option. Between July 1, 2000 and September 26, 2000, the Company issued 6.3 million shares of common stock in exchange for Debentures with a book value of $49.8 million and an aggregate principal amount at maturity of $122.7 million. As of September 26, 2000, the market value of...

  • Page 35
    ... 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 June 30, 2000, the quoted market value of the Company's Komag common stock holdings, without regard to discounts due to sales restrictions, was $18.9 million and the aggregate...

  • Page 36
    Item 8. Financial Statements and Supplementary Data Index to Financial Statements and Financial Statement Schedule Page Consolidated Financial Statements: Independent Auditors' Report Consolidated Statements of Operations Ì Three Years Ended June 30, 2000 Consolidated Balance Sheets Ì July 3, ...

  • Page 37
    ... respects, the Ã'nancial position of Western Digital Corporation and subsidiaries as of July 3, 1999 and June 30, 2000, and the results of their operations and their cash Ã-ows for each of the years in the three-year period ended June 30, 2000, in conformity with accounting principles generally...

  • Page 38
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) June 27, 1998 Years ended July 3, 1999 June 30, 2000 Revenues, net (Note 7 Costs and expenses: Cost of revenues (Notes 4 and 8 Research and development (Notes 4 and 8 Selling, general and ...

  • Page 39
    ...Total current assets Property and equipment at cost, net (Note 2 Other assets, net (Note 8 Total assets LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Accounts payable Accrued compensation Accrued warranty Other accrued expenses Current portion of long-term debt (Note 3 Total...

  • Page 40
    ... stock options Shares issued in connection with Connex acquisition ÏÏ Net loss Unrealized loss on investment securities Balance at July 3, 1999 ESPP shares issued ÏÏÏÏ Exercise of stock options Shares issued in debenture redemption and equity facility sales Other shares issued ÏÏÏÏ Net...

  • Page 41
    ... expenditures, net Proceeds from sales of property and equipment Other investment activity Net cash provided by (used for) investing activities ÏÏÏÏÏ Cash Ã-ows from Ã'nancing activities Proceeds from ESPP shares issued and stock option exercises ÏÏÏ Debt issuance costs Proceeds from...

  • Page 42
    ...process and Ã'nished goods. The Company maintains a base stock of two to three weeks of current Ã'nished goods inventory for certain key original equipment manufacturer (""OEM'') customers in facilities located adjacent to their operations. Inventory at these locations usually includes minor product...

  • Page 43
    ... such agreements were not material in 1998, 1999 and 2000. Warranty The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty covers cost of repair or replacement of the hard drive and the warranty periods range from 1 to 3 years for all hard drives, except...

  • Page 44
    ...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 interpretations (""APB...

  • Page 45
    ...Ã'cation method. The Company owned approximately 10.8 million shares of Komag common stock at June 30, 2000, 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...

  • Page 46
    ... results of operations in the period in which the hedged transaction eÃ...ects the results of operations. Costs associated with entering into such contracts are typically amortized over the life of the instrument. The Company does not purchase short-term forward exchange contracts for trading purposes...

  • Page 47
    ... of various modiÃ'cations to the terms of a previously Ã'xed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is eÃ...ective July 1, 2000, but certain conclusions in this Interpretation cover speciÃ'c events that...

  • Page 48
    ... and amortization Net property and equipment Supplemental disclosure of non-cash investing and Ã'nancing activities: Proceeds from sale of Santa Clara disk media operations Common stock issued and liabilities assumed in connection with acquisition of Connex Common stock issued for redemption...

  • Page 49
    ... Total future minimum rental payments IBM License Agreement In June of 1998, the Company entered into a broad based technology licensing and component supply agreement with IBM (the ""Agreement'') involving the design and manufacture of desktop hard disk drives $11,532 6,663 6,065 5,343 5,582 20...

  • Page 50
    ... product was sold. The Agreement also included a supply arrangement for the purchase of GMR heads at negotiated market prices. Legal Proceedings In 1992 Amstrad plc (""Amstrad'') brought suit against the Company in California State Superior Court, County of Orange, alleging that disk drives supplied...

  • Page 51
    ...incentive stock options, and disqualifying dispositions of stock acquired under the employee stock purchase plan reduced taxes currently payable in 1998 by $2.3 million. Such beneÃ'ts were credited to additional paid-in capital. No amounts were recorded to additional paid-in capital in 1999 and 2000...

  • Page 52
    ... not to be realized. Reconciliation of the United States Federal statutory rate to the Company's eÃ...ective tax rate is as follows: 1998 1999 2000 U.S. Federal statutory rate State income taxes, net Tax rate diÃ...erential on international income EÃ...ect of valuation allowance Other EÃ...ective tax...

  • Page 53
    ...111.8 million had been utilized during 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 2000, the Company issued 24.6 million shares of common stock under the equity facility for net cash proceeds of...

  • Page 54
    ... Company's Board of Directors approved the 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. This plan is intended to qualify as ""broadly-based'' under the New York Stock Exchange...

  • Page 55
    ... and 2000 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Stock Option Plans 1998 1999 2000 1998 ESPP Plan 1999 2000 Option life (in years Risk-free interest rate Stock price volatility Dividend...

  • Page 56
    ... purchase common stock of Western Digital or of the acquiring company at a substantially discounted price ten days after a person or group publicly announces it has acquired or has tendered an oÃ...er for 15% or more of the Company's outstanding common stock. On September 10, 1998 the Company's Board...

  • Page 57
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) HDS All Other (in thousands) Total Year ended June 30, 2000 Revenues Restructuring charges Operating loss Total assets Depreciation and amortization Additions to property and equipment International ...

  • Page 58
    ... Actions In January 1999, the Company initiated a restructuring program which resulted in the combination of its personal storage and enterprise storage divisions into a single hard drive operating unit. Accordingly, design, manufacturing, materials, business and product marketing resources...

  • Page 59
    ... completed the sale of its Santa Clara disk media operations to Komag. The components of the sale are summarized below (in millions): Proceeds: Common stock of Komag, Inc Note receivable Trade receivable for certain inventory sold Costs: Equipment sold Inventory sold Prepaids and other related...

  • Page 60
    ... Consolidation of hard drive divisions: Write-down of building and equipment to fair value Write-oÃ... of duplicate warranty repair and engineering supplies Severance and other Tuas facility renovation and related costs Sale of media assets to Komag: Assets sold or written oÃ..., net of proceeds...

  • Page 61
    ... products yet available for sale. Connex had, at the time of acquisition, 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...

  • Page 62
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) of the purchase price as a one-time charge for in-process research and development of $12.0 million to the Company's results of operations in 1999. Approximately $0.4 million of assets were acquired in the ...

  • Page 63
    ... the period July 1, 2000 through September 15, 2000, the Company sold 4.9 million shares of its Komag common stock holdings for $15.0 million. Line of Credit On September 20, 2000, the Company's hard drive solutions division (""HDS'') entered into a new threeyear Senior Credit Facility replacing...

  • Page 64
    ...thin-Ã'lm desktop products. During the Ã'rst quarter of 2000, the Company announced a recall of its 6.8GB per platter series of WD Caviar» desktop hard drives because of a reliability problem resulting from a faulty power driver chip manufactured by a third-party supplier. Approximately 1.2 million...

  • Page 65
    ... for in-process research and development related to the acquisition of Connex. The third quarter of 2000 includes a $28.0 million net restructuring charge and a special charge to cost of revenues of $34.8, directly resulting from the Company's exit from the enterprise hard drive market. The third...

  • Page 66
    WESTERN DIGITAL CORPORATION SCHEDULE II Ì CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended June 30, 2000 (in thousands) Allowance for Doubtful Accounts Accrued Warranty(1) Balance at June 28, 1997 Charges to operations Deductions Balance at June 27, 1998 Charges to operations ...

  • Page 67
    ... will be Ã'led with the Securities and Exchange Commission no later than 120 days after the close of the Ã'scal year ended June 30, 2000. 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...

  • Page 68
    ... the Company's Extended Severance Plan(9)* Manufacturing Building Lease between Wan Tien Realty Pte Ltd and Western Digital (Singapore) Pte Ltd dated as of November 9, 1993(5) Western Digital Long-Term Retention Plan, as amended July 10, 1997(12)* Western Digital Corporation Executive Retention Plan...

  • Page 69
    ... and ProÃ't Sharing Plan(23)* The Company's Amended and Restated Stock Option Plan for Non-Employee Directors, amended as of May 25, 2000(12)‰* Broad-Based Stock Incentive Plan(23)* Fiscal Year 1999-2000 Western Digital Bridge Incentive Plan(20)* Separation and Consulting Agreement dated October...

  • Page 70
    ... and Restated Purchase Agreement dated February 23, 2000, by and between Western Digital Corporation and Mayo Foundation(23) Subsidiaries of the Company‰ Consent of Independent Auditors‰ Financial Data Schedule‰ New exhibit Ã'led with this Report. Compensation plan, contract or arrangement...

  • Page 71
    ... Registration Statement on Form S-8 (No. 333-95499) as Ã'led with the Securities and Exchange Commission on January 27, 2000. (b) Reports on Form 8-K: On May 4, 2000, The Company Ã'led a current report on Form 8-K to Ã'le its press release dated April 27, 2000, announcing third quarter earnings. 66

  • Page 72
    ...WESTERN DIGITAL CORPORATION By: /s/ TERESA HOPP Teresa Hopp Senior Vice President and Chief Financial OÇcer Dated: September 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed... of the Board /s/ President and Chief Executive OÇcer /s/...

  • Page 73
    INTENTIONALLY LEFT BLANK

  • Page 74
    ..., Inc Western Digital Canada Corporation Western Digital (Deutschland) GmbH Western Digital (France) SARL Western Digital Hong Kong Limited Western Digital Ireland, Ltd Western Digital (I.S.) Limited Western Digital Japan Ltd Western Digital (Malaysia) Sdn. Bhd Western Digital Netherlands...

  • Page 75
    INTENTIONALLY LEFT BLANK

  • Page 76
    ...' equity (deÃ'ciency) and cash Ã-ows for each of the years in the three-year period ended June 30, 2000, and the related Ã'nancial statement schedule, which report appears in the June 30, 2000, Annual Report on Form 10-K of Western Digital Corporation. KPMG LLP Orange County, California September 27...

  • Page 77
    ... Chairman, President and Chief Executive Officer Homespace, Inc. Internet real estate and home services André R. Horn Chairman Emeritus, Needham & Co. Investment Banking Former Chairman of the Board Joy Manufacturing Company Capital equipment for the energy industry Dr. Anne O. Krueger Professor...

  • Page 78
    Research and Development Centers Irvine, California San Jose, California Connex San Jose, California Manufacturing Facility Malaysia Domestic Sales Offices Irvine, California San Jose, California Boca Raton, Florida Burlington, Massachusetts Waterford, Michigan Princeton, New Jersey Durham, North ...