Western Digital 2002 Annual Report Download - page 27

conversions of convertible debt when the oÅer for consideration in excess of the original conversion terms was made by the
bondholder. The EITF concluded that this guidance should be followed for transactions entered into on or after
September 12, 2002. The Company's previous extinguishments of its convertible debentures involving the issuance of
stock have been accounted for under APB 26 whereby a gain on early extinguishment was recorded equal to the excess of
the net book value of the indebtedness over the fair value of the consideration paid to extinguish the indebtedness.
Following the guidance in EITF Issue No. 02-15, similar early extinguishments of the convertible debentures involving
stock initiated by the debt holder will give rise to a conversion inducement expense equal to the fair value of the shares
issued in excess of those required to be issued upon the exercise of the debenture conversion feature. The Company does
not expect EITF Issue No. 02-15 to have a signiÑcant impact on the future results of operations because the Company
does not expect to use stock to make early extinguishments of its convertible debentures.
Risk factors related to the hard drive industry in which we operate
Our operating results depend on our being among the Ñrst-to-market and Ñrst-to-volume with our new products at a low cost.
To achieve consistent success with computer manufacturer customers, we must be an early provider of next
generation hard drives featuring leading technology and high quality. If we fail to:
‚ consistently maintain or improve our time-to-market performance with our new products,
‚ produce these products in suÇcient volume within our rapid product cycle,
‚ qualify these products with key customers on a timely basis by meeting our customers' performance and quality
speciÑcations,
‚ achieve acceptable manufacturing yields and costs with these products, or
‚ consistently meet stated quality requirements on delivered products,
our operating results would be adversely aÅected.
Product life cycles require continuous technical innovation associated with higher areal densities.
New products require higher areal densities (the gigabyte of storage per disk) than previous product generations,
posing formidable technical challenges. Higher areal densities require fewer heads and disks to achieve a given drive
capacity, which means that existing head technology must be improved to accommodate more data on a single disk. Our
failure to bring these new products to market on time and at acceptable costs would put us at a competitive disadvantage
to companies that achieve these results.
Short product life cycles make it diÇcult to recover the cost of development.
Over the past few years, hard drive areal density has increased at a much more rapid pace than previously
experienced. This has signiÑcantly shortened product life cycles since each generation of drives is more cost eÅective than
the previous one. Shorter product life cycles make it more diÇcult to recover the cost of product development.
Short product life cycles and new products force us to continually qualify new products with our customers.
Due to short product life cycles and continuously changing products, we must regularly engage in new product
qualiÑcation with our customers. To be considered for qualiÑcation we must be among the leaders in time-to-market
with our new products. Once a product is accepted for qualiÑcation testing, any failure or delay in the qualiÑcation
process can result in our losing sales to that customer until the next generation of products is introduced. The eÅect of
missing a product qualiÑcation opportunity is magniÑed by the limited number of high volume computer manufacturers,
most of which continue to consolidate their share of the PC market. These risks are increased because we expect cost
improvements and competitive pressures to result in declining sales and gross margins on our current generation products.
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