Western Digital 2006 Annual Report Download - page 67

The Senior Credit Facility prohibits the payment of cash dividends on common stock and contains specific financial
covenants. The Company is required to maintain an available liquidity level of $300 million at the end of each quarter.
Available liquidity is defined as cash plus eligible trade receivables. Should the Company’s available liquidity be less than
$300 million, the Company would then be subject to minimum EBITDA (earnings before interest, taxes, depreciation
and amortization) requirements and capital expenditure limitations. As of June 30, 2006, the Company was in
compliance with all covenants.
The terms of the Senior Credit Facility require that the Company deliver to the lenders audited financial statements
within 90 days of the end of each fiscal year. As a result of the independent investigation into the Company’s stock option
accounting that was conducted under the direction of the Special Committee, the Company was delayed in completing its
fiscal year 2006 audited financial statements, this Annual Report on Form 10-K, and its Quarterly Report on Form 10-Q
as of and for the period ending September 29, 2006. At the Company’s request, the lenders under the Senior Credit
Facility agreed that the Company would not be in default under the Senior Credit Facility as a result of its failure to
timely deliver its 2006 audited financial statements, or the management discussion and analysis for its Quarterly Report
on Form 10-Q as of and for the period ending September 29, 2006, provided that the lenders receive the 2006 audited
financial statements, the management discussion and analysis for its Quarterly Report on Form 10-Q as of and for the
period ending September 29, 2006, and all other documents reasonably requested by the lenders before the earlier of:
(a) 30 days following the filing of this Annual Report on Form 10-K or (b) January 12, 2007. The Company intends to
deliver its audited financial statements to the lenders on or around the date of filing this Annual Report on Form 10-K.
Note 6. Commitments and Contingencies
Lease Commitments
The Company leases certain facilities and equipment under long-term, non-cancelable operating and capital leases.
The Company’s operating leases consist of leased property and equipment that expire at various dates through 2012.
Rental expense under these operating leases, including month-to-month rentals, was $16.1 million, $16.2 million and
$14.9 million in 2006, 2005 and 2004, respectively. The Company’s capital leases consist of leased equipment. These
leases have maturity dates through December 1, 2008 and interest rates averaging approximately 5.2%. Future
minimum lease payments under operating and capital leases that have initial or remaining non-cancelable lease terms in
excess of one year at June 30, 2006 are as follows (in millions):
Operating Capital
2007 ................................... $11.2 $12.8
2008 ................................... 9.5 5.6
2009 ................................... 9.3 1.7
2010 ................................... 8.7 —
2011 ................................... 5.4 —
Thereafter ................................ 7.1 —
Total future minimum payments .............. $51.2 $20.1
Less: interest on capital leases ................ (1.1)
Total principal payable on capital leases ......... $19.0
Product Warranty Liability
The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty covers costs of
repair or replacement of the hard drive over the warranty period, which generally ranges from one to five years. This
accrual is based on estimated future returns within the warranty period and costs to repair, using factory test data,
historical field returns and current average repair costs by product type. Return rate and repair cost estimates are reviewed
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)