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2001
ANNUAL REPORT
AND FORM 10-K
Western Digital

Table of contents

  • Page 1
    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 1

  • Page 2

  • Page 3
    ... Milne, President, Cameo Technologies; David Fetah, Vice President, Human Resources; Jim Morris, Vice President, New Business Development; Bob Houghton, Vice President and Chief Information Officer; Arif Shakeel, Executive Vice President and Chief Operating Officer; Matt Massengill, President and...

  • Page 4
    ... hard drives that keep users' data close at hand and secure from loss. Western Digital's new ventures apply data storage core competencies to emerging markets for innovative Internet and broadband information management solutions. Keen Personal Media provides personal video recording technology...

  • Page 5
    ... as our market share climbed above 15 percent, a significant improvement from our year-earlier share. New product leadership, low cost designs and consolidation of manufacturing facilities into one world-class factory have brought Western Digital's gross margin back to industry competitive levels.

  • Page 6
    ..., video, Dollars in thousands Improvement in Desktop OPERATING RESULTS Internet downloads and other demanding applications. Western Digital led the industry in these drives throughout the past year as we brought to market 7200 RPM desktop hard drives with peak Results exclude non-recurring items...

  • Page 7
    ... integration of hard drives into PCs. Western Digital has been awarded a multi-year contract with Microsoft to supply hard drives for its Xboxâ„¢ video game system, expected to debut in the 2001 holiday season. We are also working with leaders in the cable, satellite and set-top box industries such...

  • Page 8
    ...company's system entered beta testing with two cable TV operators in July 2001, and has attracted $6.5 million in third-party investment capital. Two other new venture investments, SageTree and Cameo Technologies, apply Western Digital's capabilities in different ways. SageTree is providing packaged...

  • Page 9
    ..., cost-effective corporate headquarters we have a capable new management team. They are supported by an enthusiastic and battle-tested team of 7,800 WD employees worldwide who have rebuilt Western Digital into one of the hard drive industry's most respected companies. We have proven Western Digital...

  • Page 10

  • Page 11
    ...15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ã'scal year ended June 29, 2001 or n 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...

  • Page 12
    ... the ""Company'' and ""Western Digital'' refer to Western Digital Corporation and its predecessors and subsidiaries. The Company's principal executive oÇces are located at 20511 Lake Forest Drive, Lake Forest, California 92630. The Company's telephone number is (949) 672-7000 and its web site is...

  • Page 13
    PART I Item 1. Business General Western Digital Corporation (the ""Company'' or ""Western Digital'') operates as the parent company of Western Digital Technologies, Inc. (""WDT'') and other subsidiaries. WDT designs, develops, manufactures and markets hard drives, the Company's core business, ...

  • Page 14
    ... a compound annual growth rate of approximately 120%. 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...

  • Page 15
    ... development eÃ...ort, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Products The Company's WD Caviar» and WD ProtegeTM hard drive products are designed to serve the advanced and value portions, respectively, of the desktop PC market, entry level...

  • Page 16
    ... expressed in rpms or revolutions per minute. All of the Company's hard drive products employ similar technology. The main components of the hard drive are the head disk assembly and the printed circuit board. The head disk assembly includes the head, media (disks), head positioning mechanism...

  • Page 17
    ...design processes by focusing on creating extendible core technology platforms which utilize common Ã'rmware and mechanical designs and re-use of manufacturing tooling and application speciÃ'c integrated circuits across various product generations and product lines. Sales and Distribution The Company...

  • Page 18
    ... 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 the hard drive industry in which we operate,'' and ""Risk factors related to Western Digital particularly.'' The Company...

  • Page 19
    .... 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 hard drive market...

  • Page 20
    ...Part II, Item 7, under the heading ""Risk factors related to the hard drive industry in which we operate.'' Service and Warranty Western Digital generally warrants its newly manufactured hard drives against defects in materials and workmanship for a period of one to three years from the date of sale...

  • Page 21
    ... 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 22
    ... of custom integrated circuits for hard drives. For an additional discussion of component supplies, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Backlog At August 24, 2001, the Company's backlog, consisting of orders scheduled for delivery within...

  • Page 23
    ..., California, signing a 10-year lease agreement for the Lake Forest facility. The lease for the Irvine facility expired in January 2001. The Company's corporate headquarters houses management, research and development, administrative and sales personnel. The Company leases one facility in San Jose...

  • Page 24
    ... County of Orange 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 asserted claims for unpaid wages, fraud, breach of Ã'duciary duty, breach of contract, and unfair business practices. The Company removed...

  • Page 25
    ... became Executive Vice President and General Manager of Hard Drive Solutions. He was promoted to his current position in April 2001. Ms. Hopp joined the Company in 1998 as Vice President, Finance. Prior to joining the Company, she was an audit partner at Ernst & Young, her employer for 17 years. She...

  • Page 26
    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 of common stock of the Company as of August 24, 2001 was 3,...

  • Page 27
    ...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 undue reliance on these forward-looking statements...

  • Page 28
    ... facility in Malaysia, closed its Singapore manufacturing facilities, discontinued its SCSI drive product line, closed its Rochester, Minnesota design facility, and made signiÃ'cant changes to its worldwide management structure and sales organization. These actions resulted in net restructuring and...

  • Page 29
    ... the Company announced a recall of its 6.8GB per platter series of WD Caviar» EIDE hard drives because of a reliability problem resulting from a faulty power driver chip manufactured by a third-party supplier. As a result, revenues of approximately $100 million were reversed and production was shut...

  • Page 30
    ... from SCSI hard drive production in 2000 and the expense reduction eÃ...orts in its remaining hard drive operations, partially oÃ...set by increased spending in the Company's developing new business ventures. Interest and Other Income/Expense, Tax BeneÃ't and Extraordinary Item Net interest and other...

  • Page 31
    ... drive business, as a result of higher sales volume and improved cost management, the discontinuance in 2000 of the Company's SCSI drive product line and the inclusion in 2000 of signiÃ'cant charges relating to the product recall. The improved operating results of the hard drive business were oÃ...set...

  • Page 32
    ... factors related to the hard drive industry in which we operate'' and ""Risk factors relating to Western Digital particularly.'' New Accounting Pronouncements During July 2001, the Financial Accounting Standards Board (""FASB'') issued Statement of Financial Accounting Standards No. 141, ""Business...

  • Page 33
    ...Company's Ã'nancial position or results of operations. 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...

  • Page 34
    ... product recall; however, we recovered some market share during the remainder of 2000 and during the Ã'rst half of 2001, but our share is still signiÃ'cantly below its 1997 level. Our prices and margins are subject to declines due to unpredictable end-user demand and oversupply of hard drives...

  • Page 35
    ... to continue its operations during the Chapter 11 process. To develop new products we must maintain eÃ...ective 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...

  • Page 36
    ...for digital storage devices for television and other audio-visual content will materialize or support all of these competitors. We have entered the data warehouse software and services market through our SageTree subsidiary and are considering other initiatives related to data and content management...

  • Page 37
    ... obtain from a single or a limited number of suppliers, such as Komag ‚ competition and consolidation in the data storage industry ‚ seasonal and other Ã-uctuations in demand for computers often due to technological advances. Rapidly changing market conditions in the hard drive industry make it...

  • Page 38
    ...aÃ...ected the stock price of many high technology companies. These Ã-uctuations 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...

  • Page 39
    ... oÃ...set by gains and losses on the hedges. The contracts have maturity dates that do not exceed twelve months. 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...

  • Page 40
    ... shares as of the previous quarter end and the fair market value of the shares on the measurement date. As of June 29, 2001, a $3.1 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...

  • Page 41
    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 29, 2001 Consolidated Balance Sheets Ì June 30, ...

  • Page 42
    ... Ã'nancial position of Western Digital Corporation and subsidiaries as of June 30, 2000 and June 29, 2001, and the results of their operations and their cash Ã-ows for each of the years in the three-year period ended June 29, 2001, in conformity with accounting principles generally accepted in the...

  • Page 43
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) July 3, 1999 Years ended June 30, 2000 June 29, 2001 Revenues, net (Notes 1 and 9 Costs and expenses: Cost of revenues (Note 8 Research and development Selling, general and administrative ...

  • Page 44
    ... Additional paid-in capital Accumulated deÃ'cit Accumulated other comprehensive income (Note 1 Deferred compensation (Note 6 Treasury stock ÃŒ common shares at cost; 9,773 shares in 2000 and 6,420 shares in 2001 Total shareholders' equity (deÃ'ciency Total liabilities and shareholders' equity...

  • Page 45
    ... 5,494 7,917 (492,690) (2,123) $(153,790) Total Comprehensive Income (Loss) $(290,217) Balance at June 27, 1998 101,332 ESPP shares issued Exercise of stock options Shares issued in connection with Connex acquisition Net loss Unrealized loss on investment securities (492,690) (2,123) $(494...

  • Page 46
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) July 3, 1999 Years ended June 30, 2000 June 29, 2001 Cash Ã-ows from operating activities Net loss Adjustments to reconcile net loss to net cash used for operating activities of continuing operations: Extraordinary ...

  • Page 47
    ... All general references to years relate to Ã'scal years unless otherwise noted. On April 6, 2001, the Company established a holding company organizational structure, under which Western Digital Corporation operates as the parent company to its hard drive business, Western Digital Technologies (""WDT...

  • Page 48
    ...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 49
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 ...

  • Page 50
    ...million shares of Komag common stock during April 1999, upon the sale of its disk media operations to Komag (See Note 8). The common stock had a fair market value of $34.9 million at the time of the transaction. During the three months ended September 29, 2000, the Company sold 4.9 million shares of...

  • Page 51
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Standards No. 115, ""Investments in Certain Debt and Equity Securities'' (""SFAS 115''). These shares were marked to market using published closing prices of Komag stock on a monthly basis and a related accumulated...

  • Page 52
    ..., the Company elected not to designate these forward exchange contracts as accounting hedges and any changes in fair value have been recorded through the results of operations for the year ended June 29, 2001. Such changes in fair value were minor for the year ended June 29, 2001. Unrealized gains...

  • Page 53
    ... with acquisition of Connex Common stock issued for redemption of convertible debenturesÏÏÏ Redemption of convertible debentures for Company common stock, net of capitalized issuance costs Settlement of accounts payable by transfer of cost method investments Transfer of Service Center assets...

  • Page 54
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Note 3. Long-Term Debt Line of Credit During 2001, the Company's hard drive business, Western Digital Technologies (""WDT''), entered into a three-year Senior Credit Facility which provides up to $125 million in ...

  • Page 55
    ... County of Orange 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 asserted claims for unpaid wages, fraud, breach of Ã'duciary duty, breach of contract, and unfair business practices. The Company removed...

  • Page 56
    ...Inc. (""Cirrus'') in California Superior Court for the County of Orange for breach of contract and other claims resulting from Cirrus' role as a strategic supplier of read channel chips for the Company's hard drives. The Company also stopped making payments to Cirrus for past deliveries of chips and...

  • Page 57
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Note 5. Income Taxes The domestic and international components of net income (loss) before income taxes are as follows (in thousands): 1999 2000 2001 United States International Net loss excluding income taxes...

  • Page 58
    ...statutory rates. The lower rates reduced income taxes and reduced the net loss by $25.2 million ($.28 per share, diluted), $19 million ($.15 per share, diluted), and $30.0 million ($.18 per share, diluted) in 1999, 2000 and 2001, respectively. These lower rates are in eÃ...ect through Ã'scal year 2004...

  • Page 59
    ...,000, 1,236,000 and 1,199,000 shares were issued under this plan during 1999, 2000 and 2001, respectively. Stock Option Plans Western Digital's Employee Stock Option Plan (""Employee Plan'') is administered by the Compensation Committee of the Board of Directors (""Compensation Committee''), which...

  • Page 60
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) increments thereafter and have a ten-year term. As of June 29, 2001 options to purchase 7,532,746 and 13,423,861 shares of common stock were exercisable and available for grant, respectively, under this plan. ...

  • Page 61
    ... and 2001 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 1999 2000 2001 1999 ESPP Plan 2000 2001 Option life (in years Risk-free interest rate Stock price volatility Dividend...

  • Page 62
    ... a single hard drive operating unit. Accordingly, design, manufacturing, materials, business and product marketing resources to address both the personal storage and enterprise markets were combined. In connection with the combination, the Company's Tuas, Singapore facility was closed and production...

  • Page 63
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) independent party, $14.3 million for severance and other incremental costs related to the closure of the facility, $5.7 million for the write-oÃ... of duplicate warranty repair and engineering supplies and $1.4 ...

  • Page 64
    ... and management responsibilities, transfer of hard drive production from Singapore to the Company's manufacturing facility in Malaysia, removal of property and equipment from service, closure of the Company's Singapore operations and closure of its Rochester, Minnesota design center. These actions...

  • Page 65
    ...(""SAN'') management software. SageTree was formed in 2000 to design and market packaged analytical software and related services for supply chain and product lifecycle applications. Keen PM was formed in 2000 to develop and sell interactive personal video recorder and set-top box software, services...

  • Page 66
    ... in Malaysia as well as sales oÇces throughout Europe and Asia. During 1999 and the Ã'rst half of 2000, the Company also had manufacturing facilities in Singapore. The following table summarizes operations by geographic areas for the past three years. United States revenues to unaÇliated customers...

  • Page 67
    .... Note 10. Discontinued Operations The Company acquired Connex, a San Jose-based startup company formed to develop storage systems and solutions, on February 1, 1999 for approximately $12.0 million. The purchase price included 575,662 shares of Western Digital common stock valued at $7.9 million...

  • Page 68
    ... product in October 2000. On July 1, 2001, the Company decided to discontinue Connex and SANavigator. Connex and SANavigator are separate major lines of business and legal entities with separate facilities, operations, management teams, and classes of end-user customers from the Company's hard drive...

  • Page 69
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) (1) 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 ...

  • Page 70
    WESTERN DIGITAL CORPORATION SCHEDULE II Ì CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended June 29, 2001 (in thousands) Allowance for Doubtful Accounts Accrued Warranty(1) Balance at June 27, 1998 Charges to operations Deductions Balance at July 3, 1999 Charges to operations ...

  • Page 71
    ...Company's Proxy Statement for the 2001 Annual Meeting of Shareholders under the caption ""Security Ownership by Principal Shareholders and Management,'' which 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 29, 2001. PART...

  • Page 72
    ... Western Digital Corporation Employee Stock Option Plan, dated April 6, 2001*‰ Western Digital Corporation 1993 Employee Stock Purchase Plan, as amended on November 18, 1999(22)* First Amendment to the Western Digital Corporation 1993 Employee Stock Purchase Plan, dated April 6, 2001‰* Western...

  • Page 73
    ...Sharing Plan, dated April 6, 2001‰* The Company's Amended and Restated Stock Option Plan for Non-Employee Directors, amended as of May 25, 2000‰* First Amendment to the Company's Amended and Restated Stock Option Plan for NonEmployee Directors, dated April 6, 2001‰* Western Digital Corporation...

  • Page 74
    ... Company and General Electric Capital Corporation, dated as of April 7, 2001‰ Agreement between the Company and Teresa Hopp, dated July 5, 2001‰* Connex, Inc. 1999 Stock Incentive Plan‰* Cameo Technologies, Inc. 2000 Stock Incentive Plan‰* Keen Personal Media, Inc. 2000 Stock Incentive Plan...

  • Page 75
    ...On April 30, 2001, the Company Ã'led a current report on Form 8-K to Ã'le its press release dated April 26, 2001, announcing its third quarter results. On June 14, 2001, the Company Ã'led a current report on Form 8-K to announce the sale of shares of its common stock in a private sale to an existing...

  • Page 76
    ..., thereunto duly authorized. WESTERN DIGITAL CORPORATION By: /s/ MATTHEW E. MASSENGILL Matthew E. Massengill President and Chief Executive OÇcer Dated: September 27, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 77
    ... Corporation 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 78
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  • Page 79
    ...' equity (deÃ'ciency) and cash Ã-ows for each of the years in the three-year period ended June 29, 2001, and the related Ã'nancial statement schedule, which report appears in the June 29, 2001 annual report on Form 10-K of Western Digital Corporation. KPMG LLP Orange County, California September 27...

  • Page 80
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  • Page 81
    ... company focusing on Asian markets Matthew E. Massengill President and Chief Executive Officer Western Digital Corporation Peter D. Behrendt Former Chairman and Chief Executive Officer Exabyte Corporation Computer tape storage products I. M. Booth Former Chairman, President and Chief Executive...

  • Page 82
    ... market; and other factors listed in the Company's Form 10-K for the fiscal year ended 2001 and in its other recent SEC filings. The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof. Stock Exchange Listing Western Digital...