UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
Commission file number 1-8703
WESTERN DIGITAL CORPORATION
(Exact name of Registrant as specified in its charter)
REGISTRANTS TELEPHONE NUMBER INCLUDING AREA CODE: (949) 672-7000
N/A
Former name, former address and former fiscal year if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Number of shares outstanding of Common Stock, as of October 25,
2002, is 193,535,008.
WESTERN DIGITAL CORPORATION
Western Digital Corporation (the Company or Western Digital) has a
52 or 53-week fiscal year and each fiscal month ends on the Friday nearest to
the last day of the calendar month. Unless otherwise indicated, references
herein to specific years and quarters are to the Companys fiscal years and
fiscal quarters, and references to financial information are on a
consolidated basis.
The information in the Companys website referenced herein is not
incorporated by reference in this Quarterly Report on
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PART I. FINANCIAL INFORMATION
Item 1
. FINANCIAL STATEMENTS
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts; unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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7
8
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Item 2
. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the unaudited
condensed interim consolidated financial statements and the notes thereto
included in this Quarterly Report on Form 10-Q, and the audited consolidated
financial statements and notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained in Western Digital
Corporations (the Companys or Western Digitals) Annual Report on Form
10-K as of and for the year ended June 28, 2002.
Unless otherwise indicated, references herein to specific years and
quarters are to the Companys fiscal years and fiscal quarters.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
federal securities laws. The statements that are not purely historical should
be considered forward-looking statements. Often they can be identified by the
use of forward-looking words, such as may, will, could, project,
believe, anticipate, expect, estimate, continue, potential, plan,
forecasts, and the like. Statements concerning current conditions may also be
forward-looking if they imply a continuation of current conditions. These
statements appear in a number of places in this report and include statements
regarding the intentions, plans, strategies, beliefs or current expectations of
the Company with respect to, among other things:
Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in the
forward-looking statements. Readers are urged to carefully review the
disclosures made by the Company concerning risks and other factors that may
affect the Companys business and operating results, including those made in
this report under the caption Risk Factors That May Affect Future Results, as
well as the Companys other reports filed with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Critical Accounting Policies
The Company has prepared the accompanying unaudited condensed interim
consolidated financial statements in conformity with accounting principles
generally accepted in the United States for interim financial information. The
preparation of the financial statements requires the use of estimates and
judgment that affect the reported amounts of revenues, expenses, assets and
liabilities. The Company has adopted accounting policies and practices that are
generally accepted in the industry in which it operates. The Company believes
the following are its most critical accounting policies that affect significant
areas and involve managements judgment and estimates. If these estimates
differ materially from actual results, the impact to the consolidated financial
statements may be material.
Revenue and Accounts Receivable
In accordance with standard industry practice, the Company has agreements
with resellers that provide limited price protection for inventories held by
resellers at the time of published list price reductions. In addition the
Company may have agreements with resellers that provide for stock rotation on
slow-moving items and other incentive programs. In accordance with current
accounting standards, the Company recognizes revenue upon shipment or delivery
to resellers and records a corresponding adjustment for estimated price
protection and other programs in effect until the resellers sell such inventory
to their customers. Adjustments are based on anticipated price decreases during
the reseller holding period, estimated amounts to be reimbursed to qualifying
customers as well as historical pricing information.
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The Company establishes an allowance for doubtful accounts by analyzing
specific customer accounts and assessing the risk of uncollectibility based on
insolvency, disputes or other collection issues. In addition, the Company
routinely analyzes the different receivable aging categories and establishes
reserves based on the length of time receivables are past due.
The Company records provisions against revenue and cost of revenue for
estimated sales returns in the same period that the related revenues are
recognized. The Company bases these provisions on existing product return
notifications as well as historical returns by product type (see Warranty).
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
over the warranty period which ranges from one to three years. The Company has
comprehensive processes with which to estimate accruals for warranty, which
include specific detail on hard drives in the field by product type, historical
field return rates and costs to repair.
Inventory
Inventories are valued at the lower of cost (first-in, first-out basis) or
net realizable value. Inventory write-downs are recorded for the valuation of
inventory at the lower of cost or net realizable value by analyzing market
conditions, estimates of future sales prices, inventory costs and inventory
balances.
The Company evaluates inventory balances for excess quantities and obsolescence
on a regular basis by analyzing backlog, estimated demand, inventory on hand,
sales levels and other information. The Company writes down inventory balances
for excess and obsolete inventory based on the analysis.
Litigation and Other Contingencies
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 5, Accounting for Contingencies to determine when and how much to accrue
for and disclose related to legal and other contingencies. Accordingly, the
Company accrues loss contingencies when management, in consultation with its
legal advisors, concludes that a loss is probable and is able to be reasonably
estimated.
Deferred Tax Assets
The Companys deferred tax assets, which consist primarily of net
operating loss and tax credit carryforwards, are fully reserved due to
managements determination that it is more likely than not that these assets
will not be realized. This determination is based on the weight of available
evidence, the most significant of which is the Companys loss history in the
related tax jurisdictions. Should this determination change in the future, some
amount of deferred tax assets could be recognized, resulting in a tax benefit
or a reduction of future tax expense.
Results of Operations
Summary Comparison
The following table sets forth, for the periods indicated, summary
information from the Companys statements of income expressed as a percentage
of net revenue. This table and the following discussion exclude the results of
discontinued operations.
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Net Revenue
Net revenue was $582.9 million for the three months ended September 27,
2002, an increase of 32%, or $142.0 million, from the three months ended
September 28, 2001 and an increase of 8%, or $42.2 million, from the
immediately preceding quarter. The increase in net revenue as compared to the
corresponding period of the prior year was due to a 59% increase in unit
shipments, partially offset by a 17% decrease in average selling prices
(ASPs). The increase in net revenue as compared to the immediately
preceding quarter was due to an 8% increase in unit shipments.
Gross Margin
Gross margin totaled $83.6 million, or 14.3% of net revenue for the three
months ended September 27, 2002. This compares to a gross margin of $56.0
million, or 12.7% of net revenue, for the three months ended September 28, 2001
and gross margin of $74.0 million, or 13.7% of net revenue, for the immediately
preceding quarter. The increase in gross margin over the corresponding period
of the prior year was primarily the result of higher unit shipments,
manufacturing efficiencies and cost reduction efforts, partially offset by
lower ASPs. The increase over the immediately preceding quarter was primarily
the result of higher unit shipments, stable ASPs and manufacturing
efficiencies.
Operating Expenses
Research and development (R&D) expense was $31.9 million for the three
months ended September 27, 2002, an increase of 10.6%, or $3.1 million, from
the three months ended September 28, 2001 and an increase of 4.2%, or $1.3
million, from the immediately preceding quarter. The increase in R&D expense
from the corresponding period of the prior year was primarily due to higher
employee incentive payments resulting from improved operating results. The
increase from the immediately preceding quarter was due to increases in new
development programs and higher employee incentive payments.
Selling, general and administrative (SG&A) expense was $26.4 million for
the three months ended September 27, 2002, a decrease of 3.4%, or $0.9 million,
from the three months ended September 28, 2001 and an increase of 1.1% or $0.3
million, from the immediately preceding quarter. The decrease in SG&A expense
from the corresponding period of the prior year was due to expense reduction
efforts, which was partially offset by higher employee incentive payments.
Income Tax Provision
Income tax provision was $1.8 million for the three months ended September
27, 2002 compared to $0.5 million for the immediately preceding quarter. The
Company did not record an income tax benefit in the three months ended
September 28, 2001 as no additional loss carrybacks were available at that time
and management deemed it more likely than not that the deferred tax benefits
generated would not be realized.
Discontinued Operations
During the three months ended September 28, 2001, the Company decided to
terminate the operations of Connex, Inc. (Connex) and SANavigator, Inc.
(SANavigator) and sold substantially all of the assets of these two
businesses for a net gain of $24.5 million. In addition, during the three
months ended June 28, 2002, the Company terminated its Keen Personal Media,
Inc. (Keen) operations. Accordingly, the operating results of Connex,
SANavigator and Keen for the periods reported, and the net gain recognized on
the sale of substantially all of the assets of Connex and SANavigator during
the three months ended September 28, 2001, have been segregated from continuing
operations and reported separately on the unaudited condensed consolidated
statements of income as discontinued operations.
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Liquidity and Capital Resources
The Company had cash and cash equivalents of $244.4 million at September
27, 2002 and $223.7 million at June 28, 2002. Net cash provided by continuing
operations was $45.0 million during the three months ended September 27, 2002
as compared to net cash provided by continuing operations of $11.4 million
during the three months ended September 28, 2001. This $33.6 million
improvement in cash provided by continuing operations consists of a $20.8
million improvement in the Companys net income, net of non-cash items, and a
$12.8 million decrease in cash used to fund working capital requirements. These
improvements are due to significantly better operating performance by the
Company, including increased revenue and gross margin, improved cost management
and improved asset management.
The Companys working capital requirements depend upon the effective
management of its cash conversion cycle. The cash conversion cycle, which
represents the sum of the number of days sales outstanding (DSO) and days
inventory outstanding (DIO) less days payable outstanding (DPO), was
negative 10 days for the three months ended September 27, 2002, a 4 day
deterioration over the corresponding period of the prior year. The increase in
the cash conversion cycle was due primarily to a decrease in DPO, which was
significantly higher in the three months ended September 28, 2001 as a result
of the Companys temporary extension of its payment terms with certain key
vendors in order to better manage cash resources during the period. This
decrease in DPO was partially offset by a reduction in both DIO and DSO for the
three months ended September 27, 2002 over the corresponding period of the
prior year.
Uses of cash during the three months ended September 27, 2002 included net
capital expenditures of $12.4 million, primarily to upgrade the Companys
desktop hard drive production capabilities and for the normal replacement of
existing assets, $14.3 million for the extinguishment of a portion of the 5.25%
zero coupon convertible subordinated debentures due February 18, 2018 (the
Debentures) and $1.0 million for discontinued operations. Other sources of
cash during the period included $3.4 million received in connection with stock
option exercises and employee stock purchase plan purchases.
The Debentures are subordinated to all senior debt; are redeemable at the
option of the Company any time after February 18, 2003 at the issue price plus
accrued original issue discount to the date of redemption; and at the holders
option, will be redeemed by the Company, as of February 18, 2003, February 18,
2008 or February 18, 2013, or if there is a Fundamental Change (as defined in
the Debenture documents), at the issue price plus accrued original issue
discount to the date of redemption. The payment on those dates, with the
exception of a Fundamental Change, can be in cash, stock or any combination, at
the Companys option. The Debentures are convertible into shares of the
Companys common stock at the rate of 14.935 shares per $1,000 principal amount
at maturity. As of September 27, 2002, the remaining book value of the
Debentures was $72.6 million, the aggregate principal amount at maturity was
$160.9 million and the market value was $72.4 million. Based on current
forecasts that show the Company continuing to generate positive cash flow from
operations, the Company intends to satisfy the majority, if not all, of its put
obligations in cash instead of common stock. Accordingly, the Debentures have
been classified as a current liability. Debentures not put to the Company by
February 2003, if any, will be reclassified as long-term debt.
The Company has a three-year senior credit facility that provides up to
$125 million in revolving credit (subject to outstanding letters of credit and
a borrowing base calculation), matures on September 20, 2003 and is secured by
the Companys accounts receivable, inventory, 65% of its stock in its foreign
subsidiaries and other assets (the Senior Credit Facility). At the option of
the Company, borrowings bear interest at either LIBOR (with option periods of
one to three months) or a base rate, plus a margin determined by the borrowing
base. The Senior Credit Facility requires the Company to maintain certain
amounts of tangible net worth, prohibits the payment of cash dividends on
common stock and contains a number of other covenants. As of the date hereof,
there were no borrowings under the facility. However, the availability under
the Senior Credit Facility has been reduced by $25.2 million for an outstanding
letter of credit (refer to Note 7 Legal Proceedings of the Notes to Condensed
Consolidated Financial Statements).
At September 27, 2002, the Company had a cash and cash equivalent balance
of $244.4 million and working capital of $45.1 million. In addition, the
Senior Credit Facility provides up to $125 million in revolving credit (subject
to outstanding letters of credit and a borrowing base calculation). The
Company believes its current cash and cash equivalents and the Senior Credit
Facility will be sufficient to meet its working capital needs through the
foreseeable future. There can be no assurance that the Senior Credit Facility
will continue to be available to the Company. Also, the Companys ability to
sustain its working capital position is dependent upon a number of factors that
are discussed below under the heading Risk Factors That May Affect Future
Results.
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Commitments
Except as otherwise disclosed, the Company does not have any commercial
commitments with terms greater than one year that would significantly impact
liquidity. The following is a summary of the Companys significant contractual
cash obligations and commercial commitments at September 27, 2002:
Convertible Debentures
The Company has Debentures due February 18, 2018. For a description of the
Debentures, see the discussion under Liquidity and Capital Resources.
Operating Leases
The Company leases certain facilities and equipment under long-term,
non-cancelable operating leases which expire at various dates through 2010. The
following table summarizes the future payments of these leases (in thousands):
Purchase Orders
In the normal course of business, to reduce the risk of component
shortages, the Company enters into purchase commitments with suppliers for the
purchase of hard drive components used to manufacture the Companys products.
These commitments generally cover forecasted component supplies needed for
production during the next quarter, become payable upon receipt of the
components and may be non-cancelable (cancellation charges may be significant).
The Companys relationship with suppliers allows for some flexibility within
these commitments and quantities are subject to change as a quarter progresses
and the Companys needs change.
Forward Exchange Contracts
Although the majority of the Companys transactions are in U.S. Dollars,
some transactions are based in various foreign currencies. The Company
purchases short-term, forward exchange contracts to hedge the impact of foreign
currency fluctuations on certain underlying assets, liabilities and commitments
for operating expenses denominated in foreign currencies. The Company does not
purchase short-term forward exchange contracts for trading purposes. As of
September 27, 2002, the Company had $12.0 million outstanding of purchased
foreign currency forward exchange contracts. The contracts have maturity dates
that do not exceed three months. At September 27, 2002, the carrying value of
the contracts approximated fair value.
New Accounting Pronouncements
Refer to Note 8 New Accounting Pronouncements of the Notes to Condensed
Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a
discussion of new accounting pronouncements affecting the Company for the
quarter ended September 27, 2002.
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Risk Factors That May Affect Future Results
Risk factors related to the hard drive industry in which we operate
Our operating results depend on our being among the first-to-market and
first-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:
our operating results could be adversely affected.
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 or new technology developed to accommodate more data on a single disk.
Our failure to bring these new products to market on time and at acceptable
costs could put us at a competitive disadvantage to companies that achieve
these results.
Short product life cycles make it difficult to recover the cost of development.
Product life cycles have extended during the past twelve months due to a
decrease in the rate of hard drive areal density growth. However, there can be
no assurance that this trend will continue. Historically, more rapid increases
in areal density resulted in shorter product life cycles, with each generation
of hard drives being more cost effective than the previous one. Shorter product
life cycles make it more difficult to recover the cost of product development
before the product becomes obsolete. While we believe that the current rate of
growth in areal density is lower than in the past several years, we expect that
areal density will continue to increase. Our failure to recover the cost of
product development in the future could adversely affect our operating results.
Short product life cycles and new products force us to continually qualify new
products with our customers.
Short product life cycles and continuously changing products require us to
regularly engage in new product qualification with our customers. To be
considered for qualification we must be among the leaders in time-to-market
with our new products. Once a product is accepted for qualification testing,
any failure or delay in the qualification process can result in our losing
sales to that customer until the next generation of products is introduced. The
effect of missing a product qualification opportunity is magnified by the
limited number of high volume computer manufacturers, most of which continue to
consolidate their share of the personal computer (PC) market. If product life
cycles continue to be extended due to a decrease in the rate of areal density
growth, we may have a significantly longer period to wait before we have an
opportunity to qualify a new product with a customer, which could harm our
competitive position. 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.
Increasing product life cycles may require us to reduce our costs to remain
competitive.
Longer product life cycles have resulted from a decrease in the rate of
areal density growth in the past twelve months. If longer product life cycles
continue, we may need to develop new technologies or programs to reduce our
costs on any particular product in
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order to maintain competitive pricing for such product. This may result in
an increase in our overall expenses, which could adversely affect our operating
results.
Unexpected technology advances in the hard drive industry could harm our
competitive position.
If one of our competitors were able to implement a significant advance in
head or disk drive technology that enables a step-change increase in areal
density that permits greater storage of data on a disk, it could put us at a
competitive disadvantage and harm our operating results.
Advances in magnetic, optical, semiconductor or other data storage
technologies could result in competitive products that have better performance
or lower cost per unit of capacity than our products. If these products prove
to be superior in performance or cost per unit of capacity, we could be at a
competitive disadvantage to the companies offering those products.
Our average selling prices are declining.
We expect that our average selling prices for hard drives will continue to
decline. Increases in areal density mean that the average drive we sell has
fewer heads and disks, and therefore lower component cost. Because of the
competitiveness of the hard drive industry, lower costs generally mean lower
prices. This is true even for those products that are competitive and
introduced into the market in a timely manner. Our average selling prices
decline even further when competitors lower prices as a result of decreased
costs or to absorb excess capacity, liquidate excess inventories, restructure
or attempt to gain market share.
The hard drive industry is highly competitive and characterized by rapid shifts
in market share among the major competitors.
The price of hard drives has fallen over time due to increases in supply,
cost reductions, technological advances and price reductions by competitors
seeking to liquidate excess inventories or attempting to gain market share. In
addition, rapid technological changes often reduce the volume and profitability
of sales of existing products and increase the risk of inventory obsolescence.
These factors, taken together, result in significant and rapid shifts in market
share among the industrys major participants. For example, during the first
quarter of 2000, the Company lost market share as a result of a product recall.
Similar losses in market share could adversely affect our operating results.
Our prices and margins are subject to declines due to unpredictable end-user
demand and periodic oversupply of hard drives.
Demand for our hard drives depends on the demand for systems manufactured
by our customers and on storage upgrades to existing systems. The demand for
systems has been volatile in the past and often has had an exaggerated effect
on the demand for hard drives in any given period. As a result, the hard drive
market tends to experience periods of excess capacity, which typically lead to
intense price competition. During calendar year 2001 and the first half of
calendar year 2002, the industry experienced weak PC demand in the U.S. and
other markets due in part to general economic conditions worldwide. If intense
price competition occurs as a result of weak demand, we may be forced to lower
prices sooner and more than expected, which could result in lower revenues and
gross margins.
Changes in the markets for hard drives require us to develop new products.
Over the past few years the consumer market for desktop computers has
shifted significantly towards lower priced systems, especially those systems
priced below $1,000. Although we were late to market with a value line hard
drive to serve the low-cost PC market, we are now offering such value line
products at prices that we view as competitive. However, if we are not able to
continue to offer a competitively priced value line hard drive for the low-cost
PC market, our share of that market will likely fall, which could harm our
operating results.
The PC market is fragmenting into a variety of computing devices and
products. Some of these products, such as Internet appliances, may not contain
a hard drive. On the other hand, many industry analysts expect, as do we, that
as broadcasting and communications are increasingly converted to digital
technology from the older, analog technology, the technology of computers and
consumer electronics and communication devices will converge, and hard drives
will be found in many consumer products other than computers. For the quarter
ended September 27, 2002, approximately 7% of our unit sales were for consumer
products other than computers, primarily gaming devices. If we are not
successful in using our hard drive technology and expertise to develop new
products for these emerging markets, it will likely harm our operating results.
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The market acceptance for hard disk drives in game consoles continues to be
uncertain.
The use of hard disk drives in the game console market is a fairly recent
trend. Due to the price competitive nature of the hard disk drive industry,
with selling prices of personal computers being substantially higher than game
consoles, game manufacturers may not have the ability to either incorporate or
continue to incorporate hard disk drives into their overall architecture. In
addition, current price reduction demands from either current or future game
console customers may not make hard disk drive integration an attractive market
for us or other hard drive manufacturers.
We depend on our key personnel and skilled employees.
Our success depends upon the continued contributions of our key personnel
and skilled employees, many of whom would be extremely difficult to replace.
Worldwide competition for skilled employees in the hard drive industry is
intense. Volatility or lack of positive performance in our stock price may
adversely affect our ability to retain key personnel or skilled employees who
have been granted stock options. If we are unable to retain our existing key
personnel or skilled employees or hire and integrate new key personnel or
skilled employees, our operating results would likely be harmed.
Risk factors relating to Western Digital particularly
Loss of market share with a key customer could harm our operating results.
A majority of our revenue comes from a few customers. For example, during
2002, sales to our top 10 customers accounted for approximately 58% of revenue.
These customers have a variety of suppliers to choose from and therefore can
make substantial demands on us. Even if we successfully qualify a product with
a customer, the customer generally is not obligated to purchase any minimum
volume of products from us and is able to terminate its relationship with us at
any time. Our ability to maintain strong relationships with our principal
customers is essential to our future performance. If we lose a key customer, or
if any of 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 with our enterprise hard
drive product line early in the third quarter of 2000 and is one of the factors
which led to our decision to exit the enterprise hard drive market.
Dependence on a limited number of qualified suppliers of components could lead
to delays, lost revenue or increased costs.
Because we do not manufacture any of the basic components in our hard
drives, an extended shortage of required components or the failure of key
suppliers to remain in business, adjust to market conditions, or to meet our
quality, yield or production requirements could harm us more severely than our
competitors, some of whom manufacture certain of the components for their hard
drives, and could significantly harm our operating results. A number of the
components used by us are available from only a single or limited number of
qualified outside suppliers. If a component is in short supply, or a supplier
fails to qualify or has a quality issue with a component, we may experience
delays or increased costs in obtaining that component. In addition, if a
component becomes unavailable, we could suffer significant loss of revenue. For
example, we lost revenue in September 1999 when we had to shut down our Caviar
product line production for approximately two weeks as a result of a faulty
power driver chip that was sole-sourced from a third party supplier.
To reduce the risk of component shortages, we attempt to provide
significant lead times when buying these components. As a result, we may have
to pay significant cancellation charges to suppliers if we cancel orders, as we
did in 1998 when we accelerated our transition to magnetoresistive recording
head technology, and as we did in 2000 as a result of our decision to exit the
enterprise hard drive market.
In April 1999, we entered into a three-year volume purchase agreement with
Komag under which we buy a substantial portion of our media components from
Komag. In October 2001, we amended the Komag volume purchase agreement to
extend the initial term to six years. Similarly, in February 2001, we entered
into a two-year volume purchase agreement with IBM under which we buy a
substantial portion of our read channel chips from IBM. Effective June 2002, we
amended the IBM volume purchase agreement to extend the initial term through
December 31, 2003. These strategic relationships have increased our dependence
on each of Komag and IBM as a supplier. Our future operating results may depend
substantially on Komags ability to timely qualify its media components in our
new development programs, and each of Komags and IBMs ability to supply us
with these components or chips, as the case may be, in sufficient volume to
meet our production requirements. A significant disruption in Komags ability
to manufacture and supply us with media components or IBMs ability to
manufacture and supply us with read channel chips could harm our operating
results.
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To develop new products we must maintain effective partner relationships with
our strategic component suppliers.
Under our business model, we do not manufacture any of the component parts
used in our hard drives. As a result, the success of our products depends on
our ability to gain access to and integrate parts that are best in class from
reliable component suppliers. To do so we must effectively manage our
relationships with our strategic component suppliers. We must also effectively
integrate different products from a variety of suppliers, each of which employs
variations on technology which can impact, for example, feasible combinations
of heads and media components. We are currently engaged in litigation with
Cirrus, a supplier who previously was the sole source of read channel chips for
our hard drives. As a result of the disputes that gave rise to the litigation,
our business operations were at risk until another suppliers read channel
chips could be designed into our products. Similar disputes with other
strategic component suppliers could adversely affect our operating results.
We have only one primary high-volume manufacturing facility, and a secondary
smaller facility, which subjects us to the risk of damage or loss of either
facility.
The majority of our manufacturing volume comes from one facility in
Malaysia. During 2002, we acquired a second, smaller manufacturing facility in
Thailand. A fire, flood, earthquake or other disaster, condition or event that
adversely affects either our Malaysia or Thailand facility or ability to
manufacture could result in a loss of sales and revenue and harm our operating
results.
Terrorist attacks may adversely affect our business and operating results.
The terrorist attacks on the United States on September 11, 2001, the
United States-led military response to counter terrorism and the continued
threat of terrorist activity and other acts of war or hostility have created
uncertainty in the financial and insurance markets and have significantly
increased the political, economic and social instability in some of the
geographic areas in which the Company operates. Further acts of terrorism,
either domestically or abroad, could create further uncertainties and
instability. To the extent this results in disruption or delays of our
manufacturing capabilities or shipments of our products, our business,
operating results and financial condition could be adversely affected.
Manufacturing our products abroad subjects us to numerous risks.
We are subject to risks associated with our foreign manufacturing
operations, including:
We have attempted to manage the impact of foreign currency exchange rate
changes by, among other things, entering into short-term, forward exchange
contracts. However, those contracts do not cover our full exposure and can be
canceled by the issuer if currency controls are put in place, which occurred in
Malaysia during the first quarter of 1999. As a result of the Malaysian
currency controls, we are no longer hedging the Malaysian currency risk.
Currently, we hedge the Thai Baht and British Pound Sterling.
18
The nature of our business and our reliance on intellectual property and other
proprietary information subjects us to the risk of significant litigation.
The hard drive industry has been characterized by significant litigation.
This includes litigation relating to patent and other intellectual property
rights, product liability claims and other types of litigation. We are
currently evaluating notices of alleged patent infringement or notices of
patents from patent holders. We also are a party to several judicial and other
proceedings relating to patent and other intellectual property rights. If we
conclude that a claim of infringement is valid, we may be required to obtain a
license or cross-license, modify our existing technology or design a new
non-infringing technology. Such licenses or design modifications can be
extremely costly. We may also be liable for any past infringement. If there is
an adverse ruling against us in an infringement lawsuit, an injunction could be
issued barring production or sale of any infringing product. It could also
result in a damage award equal to a reasonable royalty or lost profits or, if
there is a finding of willful infringement, treble damages. Any of these
results would likely increase our costs and harm our operating results.
Our reliance on intellectual property and other proprietary information
subjects us to the risk that these key ingredients of our business could be
copied by competitors.
Our success depends, in significant part, on the proprietary nature of our
technology, including non-patentable intellectual property such as our process
technology. Despite safeguards, to the extent that a competitor is able to
reproduce or otherwise capitalize on our technology, it may be difficult,
expensive or impossible for us to obtain necessary legal protection. Also, the
laws of some foreign countries may not protect our intellectual property to the
same extent as do the laws of the United States. In addition to patent
protection of intellectual property rights, we consider elements of our product
designs and processes to be proprietary and confidential. We rely upon
employee, consultant and vendor non-disclosure agreements and contractual
provisions and a system of internal safeguards to protect our proprietary
information. However, any of our registered or unregistered intellectual
property rights may be challenged or exploited by others in the industry, which
might harm our operating results.
Inaccurate projections of demand for our product can cause large fluctuations
in our quarterly results.
We typically book and ship a high percentage (at times in excess of 50%)
of our total quarterly sales in the third month of the quarter, which makes it
difficult for us to forecast our financial results prior to the end of the
quarter. In addition, our quarterly projections and results may be subject to
significant fluctuations as a result of a number of other factors including:
If we do not forecast total quarterly demand accurately, it can have a
material adverse effect on our quarterly results.
19
Rapidly changing market conditions in the hard drive industry make it difficult
to estimate actual results.
We have made and continue to make a number of estimates and assumptions
relating to our consolidated financial reporting. The rapidly changing market
conditions with which we deal means that actual results may differ
significantly from our estimates and assumptions. Key estimates and assumptions
for us include:
The market price of our common stock is volatile.
The market price of our common stock has been, and may continue to be,
extremely volatile. Factors such as the following may significantly affect the
market price of our common stock:
In addition, general economic conditions may cause the stock market to
experience extreme price and volume fluctuations from time to time that
particularly affect the stock prices of many high technology companies. These
fluctuations often appear to be 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
suits have been filed against us in the past, and should any new lawsuits be
filed, such matters could result in substantial costs and a diversion of
resources and managements attention.
We may be unable to raise future capital through debt or equity financing.
Due to the risks described herein, in the future we may be unable to
maintain adequate financial resources for capital expenditures, expansion or
acquisition activity, working capital and research and development. We have a
credit facility, which matures on September 20, 2003. If we decide to increase
or accelerate our capital expenditures or research and development efforts, or
if results of operations do not meet our expectations, we could require
additional debt or equity financing. However, we cannot ensure that additional
financing will be available to us or available on acceptable terms. An equity
financing could also be dilutive to our existing stockholders.
20
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure About Foreign Currency Risk
Although the majority of the Companys transactions are in U.S. Dollars,
some transactions are based in various foreign currencies. The Company
purchases short-term, forward exchange contracts to hedge the impact of foreign
currency fluctuations on certain underlying assets, liabilities and commitments
for operating expenses denominated in foreign currencies. The purpose for
entering into these hedge transactions is to minimize the impact of foreign
currency fluctuations on the results of operations. A majority of the increases
or decreases in the Companys local currency operating expenses are offset by
gains and losses on the hedges. The contracts have maturity dates that do not
exceed three months. The Company does not purchase short-term forward exchange
contracts for trading purposes. Currently, the Company focuses on hedging its
foreign currency risk related to the British Pound Sterling and the Thai Baht.
As of September 27, 2002, the Company had outstanding the following
purchased foreign currency forward exchange contracts (in millions, except
average contract rate):
During the three months ended September 27, 2002 and September 28, 2001
total realized transaction and forward exchange contract currency gains and
losses were not material to the condensed consolidated financial statements.
At September 27, 2002 and September 28, 2001 the carrying value of the
contracts approximated fair value. Based on historical experience, the Company
does not expect that a significant change in foreign exchange rates would
materially affect the Companys condensed consolidated financial statements.
Disclosure About Other Market Risks
Fixed Interest Rate Risk
At September 27, 2002, the market value of the Debentures was
approximately $72.4 million, compared to the related book value of $72.6
million. At the option of the holder, the Debentures will be repurchased by the
Company, as of February 18, 2003, February 18, 2008, or February 18, 2013, or
if there is a Fundamental Change (as defined in the Debenture documents), at
the issue price plus accrued original issue discount to the date of redemption.
The payment on those dates, with the exception of a Fundamental Change, can be
in cash, stock or any combination, at the Companys option.
Variable Interest Rate Risk
At the option of the Company, borrowings under the Senior Credit Facility
would bear interest at either LIBOR (with option periods of one to three
months) or a base rate, plus a margin determined by the borrowing base. This is
the only Company debt which does not have a fixed rate of interest. At
September 27, 2002, there were no borrowings outstanding under the Senior
Credit Facility.
Fair Value Risk
The Company owns approximately 1.0 million shares of Vixel Corporation
common stock (the Vixel Stock). As of September 27, 2002, the market value of
the Vixel Stock was approximately $1.2 million. Changes in the market value of
the Vixel Stock are recorded as unrealized gains or losses in other
comprehensive income (shareholders equity). As of September 27, 2002, a $1.2
million total accumulated unrealized gain has been recorded in accumulated
other comprehensive income related to the Vixel Stock. If the Company sells any
portion of the Vixel Stock, the related unrealized gain or loss on the date of
sale will become realized and reflected as a gain or loss in the Companys
statement of income. As a result of market conditions, the market value of the
Vixel Stock had increased from approximately $1.2 million as of September 27,
2002 to approximately $1.7 million as of October 25, 2002. Due to market
fluctuations, a decline in the Vixel Stocks fair market value could occur in
future periods.
21
Item 4.
CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
Refer to Part I, Item 1, Notes to Condensed Consolidated Financial
Statements, Note 7 Legal Proceedings of this Quarterly Report on Form 10-Q.
Item 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 27, 2002, the Company engaged in
transactions pursuant to which it exchanged an aggregate principal amount at
maturity of $32.6 million of the Debentures for an aggregate of 49,900 shares
of the Companys common stock and $14,345,150 in cash. These transactions were
undertaken in reliance upon the exemption from the registration requirements of
the Securities Act afforded by Section 3(a)(9) thereof, as exchanges of
securities by the Company with its existing security holders. No commission or
other remuneration was paid or given directly or indirectly for soliciting such
exchanges. These exchanges were consummated in private, individually negotiated
transactions with institutional investors.
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
Delaware
33-0956711
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
20511 Lake Forest Drive
Lake Forest, California
92630
(Address of principal executive offices)
(Zip Code)
REGISTRANTS WEB SITE: http://www.westerndigital.com
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INDEX
PAGE NO.
3
4
5
6
10
21
22
22
22
22
23
24
Form 10-Q.
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THREE-MONTHS ENDED
SEP. 27,
SEP. 28,
2002
2001
$
582,909
$
440,943
499,266
384,936
83,643
56,007
31,914
28,845
26,444
27,368
58,358
56,213
25,285
(206
)
(1,269
)
(351
)
24,016
(557
)
1,801
22,215
(557
)
21,075
$
22,215
$
20,518
$
.12
$
(.00
)
.11
$
.12
$
.11
$
.11
$
(.00
)
.11
$
.11
$
.11
192,464
186,635
196,823
186,635
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SEP. 27,
JUN. 28,
2002
2002
(unaudited)
$
244,448
$
223,728
233,037
218,832
91,503
73,395
8,981
11,554
577,969
527,509
109,178
107,520
1,240
1,651
$
688,387
$
636,680
$
344,389
$
302,998
115,891
103,474
72,599
86,204
532,879
492,676
27,657
41,142
1,955
1,954
684,995
710,945
(494,077
)
(516,292
)
1,240
2,559
(66,262
)
(96,304
)
127,851
102,862
$
688,387
$
636,680
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THREE-MONTHS ENDED
SEP. 27,
SEP. 28,
2002
2001
$
22,215
$
20,518
(21,075
)
11,634
11,260
1,189
1,583
2,000
(14,205
)
(84,318
)
(18,108
)
2,562
855
1,954
41,391
94,471
732
(15,879
)
(677
)
(1,638
)
45,026
11,438
(12,362
)
(12,013
)
(12,362
)
(12,013
)
3,367
1,562
(14,345
)
(10,978
)
1,562
(966
)
32,013
20,720
33,000
223,728
167,582
$
244,448
$
200,582
$
953
$
689
$
234
$
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1.
Basis of Presentation
The accounting policies followed by the Company are set forth in Note 1 of
the Notes to Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K as of and for the year ended June 28, 2002. In
the opinion of management, all adjustments necessary to fairly state the
unaudited condensed consolidated financial statements have been made. All
such adjustments are of a normal recurring nature. Certain information and
footnote disclosures normally included in the consolidated financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
the notes thereto included in the Companys Annual Report on Form 10-K as of
and for the year ended June 28, 2002. The results of operations for interim
periods are not necessarily indicative of results to be expected for the full
year.
Certain prior period amounts have been reclassified to conform to the current
period presentation as a result of the adoption of Statement of Financial
Accounting Standards (SFAS) No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145) and the termination of the Companys new business ventures.
2.
Supplemental Financial Statement Data (in thousands)
SEP. 27,
JUN. 28,
2002
2002
$
67,536
$
54,483
16,708
9,523
7,259
9,389
$
91,503
$
73,395
THREE-MONTHS
ENDED
SEP. 27,
SEP. 28,
2002
2001
$
795
$
1,329
(2,064
)
(2,030
)
350
$
(1,269
)
$
(351
)
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3.
Income (loss) per Share
The following table illustrates the computation of basic and diluted income
(loss) per common share from continuing operations (in thousands, except per
share data):
THREE-MONTHS
ENDED
SEP. 27,
SEP. 28,
2002
2001
$
22,215
$
(557
)
192,464
186,635
4,359
196,823
186,635
$
.12
$
(.00
)
$
.11
$
(.00
)
For purposes of computing diluted income (loss) per share, weighted average
common share equivalents do not include stock options with an exercise price
which exceeded the average fair market value of the common stock for the
period. For the three months ended September 27, 2002 and September 28, 2001,
options to purchase 26.6 and 29.1 million common shares, respectively, were
excluded from the computation of diluted income (loss) per share. The
computation of diluted income (loss) per share for the three months ended
September 27, 2002 and September 28, 2001 excludes 2.4 and 4.0 million common
shares, respectively, issuable upon conversion of the 5.25% zero coupon
convertible subordinated debentures due February 18, 2018 (the Debentures).
These items were not included in the computation of diluted income (loss) per
share as their effect would have been anti-dilutive. The computation of
diluted loss per share for the three months ended September 28, 2001 excludes
incremental common shares attributable to exercise of stock options, stock
awards and Employee Stock Purchase Plan (ESPP) contributions as their
effect would have been anti-dilutive.
4.
Common Stock Transactions
During the three months ended September 27, 2002, the Company issued
approximately 841,000 shares of its common stock in connection with ESPP
purchases and 187,000 shares of its common stock in connection with common
stock option exercises, for aggregate cash proceeds of $3.4 million. During
the three months ended September 28, 2001, the Company issued approximately
514,000 shares of its common stock in connection with ESPP purchases and
12,000 shares of its common stock in connection with common stock option
exercises, for aggregate cash proceeds of $1.6 million.
During the three months ended September 27, 2002, the Company issued
approximately 50,000 shares of common stock and paid $14.3 million in cash to
extinguish a portion of the Debentures with a book value of $14.7 million,
and an aggregate principal amount at maturity of $32.6 million. These
redemptions were private, individually negotiated transactions with certain
institutional investors. As of September 27, 2002, the book value of the
remaining outstanding Debentures was approximately $72.6 million and the
aggregate principal amount at maturity was approximately $160.9 million.
5.
Comprehensive Income
Comprehensive income includes net income as well as the components of other
comprehensive income (loss) which include all revenue, expense, gain and loss
items that are recorded as an element of shareholders equity but are
excluded from net income. The Companys other comprehensive loss is
comprised of unrealized gains and losses on marketable securities categorized
as available for sale under SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities. The components of
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comprehensive income for the three months ended September 27, 2002 and
September 28, 2001 were as follows (in thousands):
THREE-MONTHS
ENDED
SEP. 27,
SEP. 28,
2002
2001
$
22,215
$
20,518
(1,319
)
(1,531
)
$
20,896
$
18,987
6.
Business Segment and Discontinued Operations
The Company operates in one segment, the hard drive business.
During 2002, the Company terminated the operations of all new business
ventures, including Connex, Inc. (Connex), SANavigator, Inc.
(SANavigator), Keen Personal Media, Inc. (Keen) and other smaller
businesses. In conjunction with these business terminations, substantially
all of the operating assets of Connex were sold to Quantum Corporation in
August 2001 for cash proceeds of $11.0 million, and substantially all of the
operating assets of SANavigator were sold to McData Corporation in September
2001 for cash proceeds of $29.8 million. These transactions generated a gain
of $24.5 million, net of costs incurred from the measurement date of July 1,
2001 through the end of the period to shutdown the businesses. At September
27, 2002, there were no material assets or liabilities attributable to any of
the new business ventures. Accordingly, the operating results of Connex,
SANavigator and Keen for the periods reported, and the net gain recognized on
the sale of substantially all of the assets of Connex and SANavigator during
the three months ended September 28, 2001, have been segregated from
continuing operations and reported separately on the unaudited condensed
consolidated statements of income as discontinued operations.
7.
Legal Proceedings
The following discussion contains forward-looking statements within the
meaning of the federal securities laws. These statements relate to the
Companys legal proceedings described below. Litigation is inherently
uncertain and may result in adverse rulings or decisions. Additionally, the
Company may enter into settlements or be subject to judgments that may,
individually or in the aggregate, have a material adverse effect on the
Companys consolidated financial position, results of operations or
liquidity. In addition, the costs of defending such litigation, individually
or in the aggregate, may be material, regardless of the outcome. Accordingly,
results could differ materially from those projected in the forward-looking
statements.
In the normal course of business, the Company is subject to legal
proceedings, lawsuits and other claims, including proceedings under laws and
government regulations related to environmental, labor, product and other
matters. The ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at September 27, 2002 is subject to many
uncertainties and is therefore not predictable with assurance. While these
matters could affect the operating results of any one quarter when resolved
in future periods, management believes that, after final disposition, any
monetary liability or financial impact to the Company from these matters,
beyond that provided at September 27, 2002, would not be material to the
condensed consolidated financial statements. However, there can be no
assurance with respect to such result. Where deemed advisable, the Company
may seek or extend licenses or negotiate settlements. Although patent holders
often offer such licenses, no assurance can be given that in a particular
case a license will be offered or that the offered terms will be acceptable
to the Company.
In 1992, Amstrad plc (Amstrad) brought suit against the Company in
California State Superior Court, County of Orange, alleging that disk drives
supplied to Amstrad by the Company in 1988 and 1989 were defective and caused
damages to Amstrad of not less than $186 million. The suit also sought
punitive damages. The Company denied the material allegations of the
complaint and filed cross-claims against Amstrad. The case was tried, and in
June 1999 the jury returned a verdict in favor of Western Digital. Amstrad
appealed the judgment and the judgment awarding costs and attorneys fees to
the Company. The Company and Amstrad have entered into a settlement agreement
settling all claims between them relating to the litigation, and dismissal of
the remaining appeal was filed on September 25, 2002. Accordingly, all of
the Amstrad proceedings have been terminated.
In June 1994, Papst Licensing (Papst) brought suit against the Company
in the United States District Court for the Central District of California,
alleging infringement by the Company of five disk drive motor patents owned
by Papst. In December 1994, Papst dismissed its case without prejudice. In
July 2002, Papst filed a new complaint against the Company and several other
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defendants. The suit alleges infringement by the Company of seventeen of
Papsts patents related to disk drive motors that the Company purchased from
motor vendors. Papst is seeking an injunction and damages. The Company filed
an answer on September 4, 2002, denying Papsts complaint. The Company
intends to vigorously defend the suit.
On July 5, 2001, the Company (and its Malaysian subsidiary) filed suit
against Cirrus Logic, 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 Companys
hard drives. The Company also stopped making payments to Cirrus for past
deliveries of chips and terminated all outstanding purchase orders from
Cirrus for such chips. The Companys complaint alleges that Cirrus unlawful
conduct caused damages in excess of any amounts that may be owing on
outstanding invoices or arising out of any alleged breach of the outstanding
purchase orders. On August 20, 2001, Cirrus filed an answer and
cross-complaint. Cirrus denied the allegations contained in the Companys
complaint and asserted counterclaims against the Company for, among other
things, the amount of the outstanding invoices and the Companys alleged
breach of the outstanding purchase orders. The disputed payable, which is
included in the Companys balance sheet in accounts payable, is approximately
$27 million. Cirrus claims that the canceled purchase orders, which are not
reflected in the Companys financial statements, total approximately $26
million. On October 9, 2001, the Court granted Cirrus Motion for Judgment on
the Pleadings, with leave to amend, and on November 8, 2001, the Company
filed its First Amended Complaint. Cirrus demurred to the First Amended
Complaint, and on December 18, 2001, the Court denied Cirrus demurrer. On
November 2, 2001, Cirrus filed Applications for Right to Attach Orders and
for Writs of Attachment against the Company and its Malaysian subsidiary in
the amount of $25.2 million as security for the approximately $27 million
allegedly owed for read-channel chips purchased from Cirrus that is disputed
by the Company. On December 20, 2001, the Court granted Cirrus Applications
but required Cirrus to post undertakings in the amount of approximately $0.5
million on each Writ before issuance. Pursuant to agreement with Cirrus, the
Company posted a letter of credit in the amount of $25.2 million in
satisfaction of the Writs. Discovery in the case is currently underway, and
the Company expects that it will continue until early calendar year 2003.
8.
New Accounting Pronouncements
During April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS 145. SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, which required all gains and losses from the
extinguishment of debt to be classified as an extraordinary item. The Company
adopted SFAS 145 on June 29, 2002 at which time it began classifying gains
and losses resulting from the extinguishment of debt as other income and
expense, instead of extraordinary items. The adoption did not have a material
impact on the Companys results of operations or liquidity.
On September 11, 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 02-15, Determining Whether Certain Conversions of
Convertible Debt to Equity Securities are within the Scope of FASB Statement
No. 84, Induced Conversions of Convertible Debt (SFAS 84). The EITF
deliberated this issue because of diversity in practice in the accounting for
conversions of convertible debt to equity initiated by the debt holder. In
practice, some registrants accounted for these transactions following SFAS 84
while others followed Accounting Principles Board Opinion No. 26, Early
Extinguishment of Debt (APB 26). The EITF concluded that SFAS 84 applies
to conversions of convertible debt when the offer 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. Previous extinguishments of portions of the
Debentures involving the issuance of common 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 Debentures over the fair value of the
consideration paid. Following the guidance in EITF Issue No. 02-15, similar
early extinguishment of the Debentures or a portion of the Debentures
involving common 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. Due to improved cash and working capital balances, the
Company does not expect to extinguish additional balances of the Debentures
using its common stock. Accordingly, the Company does not expect EITF Issue
No. 02-15 to have a significant impact on its future results of operations.
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the financial prospects of the Company;
litigation and other contingencies potentially affecting the Companys financial position, operating results or liquidity;
trends affecting the Companys financial condition or operating results;
the Companys strategies for growth, operations, product development and commercialization; and
conditions or trends in or factors affecting the computer, data storage, home entertainment or hard drive industry.
Table of Contents
THREE- MONTHS ENDED
SEP 27,
SEP 28,
JUN 28,
2002
2001
2002
100.0
%
100.0
%
100.0
%
14.3
%
12.7
%
13.7
%
10.0
%
12.7
%
10.5
%
4.3
%
(0.0
)%
3.2
%
4.1
%
(0.1
)%
3.1
%
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Operating
Leases
$
8,211
8,468
7,060
7,004
5,508
19,559
$
55,810
Table of Contents
develop new products with features required by our customers,
consistently maintain or improve our time-to-market performance with our new products,
produce these products in sufficient volume within our rapid product cycle,
qualify these products with key customers on a timely basis by
meeting our customers performance and quality specifications,
achieve acceptable manufacturing yields and costs with these products, or
consistently meet stated quality requirements on delivered products,
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obtaining requisite United States and foreign governmental permits and approvals;
currency exchange rate fluctuations or restrictions;
political instability and civil unrest;
transportation delays or higher freight rates;
labor problems;
trade restrictions or higher tariffs;
exchange, currency and tax controls and reallocations;
increasing labor and overhead costs; and
loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.
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the timing of orders from and shipment of products to major customers;
our product mix;
changes in the 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 as Komag and IBM;
competition and consolidation in the data storage industry; and
seasonal and other fluctuations in demand for computers often due to technological advances.
Table of Contents
accruals for warranty costs related to product defects;
price protection adjustments and other sales promotions and
allowances on products sold to retailers, resellers and distributors;
inventory adjustments for write-down of inventories to lower of cost or market value (net realizable value);
reserves for doubtful accounts;
accruals for product returns;
accruals for litigation and other contingencies; and
reserves for deferred tax assets.
actual or anticipated fluctuations in our operating results;
announcements of technological innovations by us or our competitors
which may decrease the volume and profitability of sales of our existing
products and increase the risk of inventory obsolescence;
new products introduced by us or our competitors;
periods of severe pricing pressures due to oversupply or price erosion resulting from competitive pressures;
developments with respect to patents or proprietary rights;
conditions and trends in the hard drive, data and content management, storage and communication industries; and
changes in financial estimates by securities analysts relating specifically to us or the hard drive industry in general.
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SEPTEMBER 27, 2002
WEIGHTED
CONTRACT
AVERAGE
UNREALIZED
AMOUNT
CONTRACT RATE
GAIN (LOSS)
(U.S. DOLLAR EQUIVALENT AMOUNTS)
$
3.9
1.55
$
8.1
43.43
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(a)
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the
participation of our Chief Executive Officer and our Chief Financial
Officer of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective.
(b)
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
(a)
Exhibits:
(b)
Reports on form 8-K:
On August 6, 2002, the Company filed a current report on Form 8-K to file its
press release dated August 5, 2002, naming Michael D. Lambert as the eighth
member of its board of directors to fill the vacancy created as a result of
an increase in the size of its board of directors.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION | ||
Registrant | ||
/s/ Scott Mercer | ||
|
||
D. Scott Mercer | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
/s/ Joseph R. Carrillo | ||
|
||
Joseph R. Carrillo | ||
Vice President and Corporate Controller | ||
(Principal Accounting Officer) | ||
Date: November 8, 2002 |
23
CERTIFICATIONS
Certification of Chief Executive Officer
I, Matthew E. Massengill, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Western Digital Corporation; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
b) | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and | ||
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and | ||
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and |
6. | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: November 8, 2002 | ||
/s/ Matthew E. Massengill | ||
|
||
Matthew E. Massengill | ||
Chief Executive Officer |
24
Certification of Chief Financial Officer
I, D. Scott Mercer, certify that:
25
1.
I have reviewed this quarterly report on Form 10-Q of Western Digital
Corporation;
2.
Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4.
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a)
designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b)
evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and
c)
presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5.
The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
a)
all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and
6.
The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 8, 2002
/s/ Scott Mercer
D. Scott Mercer
Chief Financial Officer
Table of Contents
EXHIBIT INDEX
26
EXHIBIT 10.4
INDEMNITY AGREEMENT
This Indemnification Agreement ("Agreement") is made as of September __, 2002 by and between Western Digital Corporation, a Delaware corporation (the "Company"), and ___________________ ("Indemnitee").
RECITALS
WHEREAS, highly competent persons have become more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;
WHEREAS, the Board of Directors of the Company (the "Board") has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The By-laws of the Company require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware ("DGCL"). The By-laws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification;
WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;
WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;
WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder;
WHEREAS, Indemnitee does not regard the protection available under the Company's Bylaws and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; and
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1. Services to the Company. Indemnitee agrees to serve as a director of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee's employment with the Company (or any of its subsidiaries or any Enterprise), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), other applicable formal severance policies duly adopted by the Board, or, with respect to service as a director or officer of the Company, by the Company's Certificate of Incorporation, the Company's By-laws, and the General Corporation Law of the State of Delaware. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as a director of the Company.
Section 2. Definitions. As used in this Agreement:
(a) A "Change in Control" shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:
(i) Acquisition of Stock by Third Party. Any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities;
(ii) Change in Board of Directors. During any period of two
(2) consecutive years (not including any period prior to the execution of this
Agreement), individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person who
has entered into an agreement with the Company to
effect a transaction described in Sections 2(a)(i), 2(a)(iii) or 2(a)(iv)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a least a majority of the members of the Board;
(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 51% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;
(iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; and
(v) Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company is then subject to such reporting requirement.
For purposes of this Section 2(a), the following terms shall have the following meanings:
(A) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(B) "Person" shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(C) "Beneficial Owner" shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity.
(b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership or joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.
(f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
(g) The term "Proceeding" shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or of any action on his part while acting as director or officer of the Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement, or advancement of expenses can be provided under this Agreement; except one initiated by a Indemnitee to enforce his rights under this Agreement.
(h) Reference to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in manner "not opposed to the best interests of the Company" as referred to in this Agreement.
Section 3. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding had no reasonable cause to believe that his conduct was unlawful.
Section 4. Indemnity in Proceedings by or in the Right of the Company.
The Company shall indemnify Indemnitee in accordance with the provisions of this
Section 4 if Indemnitee is, or is threatened to be made, a party to or a
participant in any Proceeding by or in the right of the Company to procure a
judgment in its favor. Pursuant to this Section 4, Indemnitee shall be
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection with such Proceeding or any claim, issue or matter
therein, if Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No
indemnification for Expenses shall be made under this Section 4 in respect of
any claim, issue or matter as to which Indemnitee shall have been finally
adjudged by a court to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, Indemnitee is fairly
and reasonably entitled to indemnification.
Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company
shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. If the Indemnitee is not wholly successful in such Proceeding, the Company also shall indemnify Indemnitee against all Expenses reasonably incurred in connection with a claim, issue or matter related to any claim, issue, or matter on which the Indemnitee was successful. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 6. Indemnification For Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.
Section 7. Additional Indemnification.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding.
(b) For purposes of Section 7(a), the meaning of the phrase "to the fullest extent permitted by law" shall include, but not be limited to:
i. to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL, and
ii. to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
Section 8. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or
(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board of Directors of the Company authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.
Section 9. Advances of Expenses. In accordance with the pre-existing requirement of Article VII, Section 7.02 of the By-laws of the Company, and notwithstanding any provision of this Agreement to the contrary, the Company shall advance, to the extent not prohibited by law, the expenses incurred by Indemnitee in connection with any Proceeding within 30 days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee's ability to repay the expenses and without regard to Indemnitee's ultimate entitlement to indemnification under the other provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed. The Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that the Indemnitee undertakes to repay the advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 9 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 8.
Section 10. Procedure for Notification and Defense of Claim.
(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The omission to notify the Company will not relieve the Company from any liability which it may have to Indemnitee otherwise than under this Agreement. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.
(b) The Company will be entitled to participate in the Proceeding at its own expense.
Section 11. Procedure Upon Application for Indemnification.
(a) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 10(a), a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(b) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 11(a)
hereof, the Independent Counsel shall be selected as provided in this Section
11(b). If a Change in Control shall not have occurred, the Independent Counsel
shall be selected by the Board of Directors, and the Company shall give written
notice to Indemnitee advising him of the identity of the Independent Counsel so
selected. If a Change in Control shall have occurred, the Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the Company
advising it of the identity of the Independent Counsel so selected. In either
event, Indemnitee or the Company, as the case may be, may, within 10 days after
such written notice of selection shall have been given, deliver to the Company
or to Indemnitee, as the case may be, a written objection to such selection;
provided, however, that such objection may be asserted only on the ground that
the Independent Counsel so selected does not meet the requirements of
"Independent Counsel" as defined in Section 2 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall
act as Independent Counsel. If such written objection is so made and
substantiated, the Independent Counsel so selected may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined
that such objection is without merit. If, within 20 days after submission by
Indemnitee of a written request for indemnification pursuant to Section 10(a)
hereof, no Independent Counsel shall have been selected and not objected to,
either the Company or Indemnitee may petition a court of
competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 11(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 13(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
Section 12. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Neither the failure of the Company (including by its directors or independent legal counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
(b) If the person, persons or entity empowered or selected under
Section 11 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within sixty (60) days after
receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 60-day period may be extended for a
reasonable time, not to exceed an additional thirty (30) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating of documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 12(b) shall not apply (i)
if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 11(a) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors has resolved to submit such determination
to the stockholders for their consideration at an annual meeting thereof to be
held within seventy five (75) days after such receipt and such determination is
made thereat, or (B) a special meeting of stockholders is called within fifteen
(15) days after such receipt for the purpose of making such determination, such
meeting is held for such purpose within sixty (60) days after having been so
called and such determination is
made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 11(a) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.
(d) Reliance as Safe Harbor. For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with the reasonable care by the Enterprise. The provisions of this Section 12(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.
(e) Actions of Others. The knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.
Section 13. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant to
Section 11 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 9 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 11(a) of this Agreement
within 45 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 5 or 6 or the
last sentence of Section 11(a) of this Agreement within ten (10) days after
receipt by the Company of a written request therefor, or (v) payment of
indemnification pursuant to Section 3, 4 or 7 of this Agreement is not made
within ten (10) days after a determination has been made that Indemnitee is
entitled to indemnification, Indemnitee shall be entitled to an adjudication by
a court of his entitlement to such indemnification or advancement of Expenses.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within 180 days following the
date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 13(a); provided, however, that the foregoing clause
shall not apply in respect of a proceeding brought by Indemnitee to enforce his
rights under Section 5 of
this Agreement. The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or Arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 13 the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
(d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance such expenses to Indemnitee, to the extent not prohibited by law, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.
Section 14. Non-exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company's Certificate of Incorporation, the Company's Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company's Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and
every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable (or for which advancement is provided hereunder) hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
(e) The Company's obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.
Section 15. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as a director of the Company or (b) 1 year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators.
Section 16. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby and shall remain
enforceable to the fullest extent permitted by law; (b) such provision or
provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties
hereto; and (c) to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of any Section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
Section 17. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.
Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise.
Section 20. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide to the Company.
(b) If to the Company to
Western Digital Corporation 20511 Lake Forest Drive Lake Forest, CA 92630 Attention: General Counsel
or to any other address as may have been furnished to Indemnitee by the Company.
Section 21. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).
Section 22. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 10(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the "Delaware Court"), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, irrevocably RL&F Service Corp., One Rodney Square, 10th Floor, 10th and King Streets, Wilmington, Delaware 19801 as its agent in the State of Delaware as such party's agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
Section 23. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
Section 24. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.
WESTERN DIGITAL CORPORATION INDEMNITEE By: By: --------------------------- --------------------------------- Name: Name: --------------------------- ------------------------------- Office: Address: ------------------------- ---------------------------- ---------------------------- |
EXHIBIT 10.5
INDEMNITY AGREEMENT
This Indemnification Agreement ("Agreement") is made as of September __, 2002 by and between Western Digital Corporation, a Delaware corporation (the "Company"), and ____________________ ("Indemnitee").
RECITALS
WHEREAS, highly competent persons have become more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;
WHEREAS, the Board of Directors of the Company (the "Board") has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The By-laws of the Company require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware ("DGCL"). The By-laws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification;
WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;
WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;
WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder;
WHEREAS, Indemnitee does not regard the protection available under the Company's Bylaws and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; and
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1. Services to the Company. Indemnitee agrees to serve as an officer of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee's employment with the Company (or any of its subsidiaries or any Enterprise), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), other applicable formal severance policies duly adopted by the Board, or, with respect to service as a director or officer of the Company, by the Company's Certificate of Incorporation, the Company's By-laws, and the General Corporation Law of the State of Delaware. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as an officer of the Company.
Section 2. Definitions. As used in this Agreement:
(a) A "Change in Control" shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:
(i) Acquisition of Stock by Third Party. Any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities;
(ii) Change in Board of Directors. During any period of two
(2) consecutive years (not including any period prior to the execution of this
Agreement), individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person who
has entered into an agreement with the Company to
effect a transaction described in Sections 2(a)(i), 2(a)(iii) or 2(a)(iv)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a least a majority of the members of the Board;
(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 51% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;
(iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; and
(v) Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company is then subject to such reporting requirement.
For purposes of this Section 2(a), the following terms shall have the following meanings:
(A) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(B) "Person" shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(C) "Beneficial Owner" shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity.
(b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership or joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.
(f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
(g) The term "Proceeding" shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or of any action on his part while acting as director or officer of the Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement, or advancement of expenses can be provided under this Agreement; except one initiated by a Indemnitee to enforce his rights under this Agreement.
(h) Reference to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in manner "not opposed to the best interests of the Company" as referred to in this Agreement.
Section 3. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding had no reasonable cause to believe that his conduct was unlawful.
Section 4. Indemnity in Proceedings by or in the Right of the Company. The
Company shall indemnify Indemnitee in accordance with the provisions of this
Section 4 if Indemnitee is, or is threatened to be made, a party to or a
participant in any Proceeding by or in the right of the Company to procure a
judgment in its favor. Pursuant to this Section 4, Indemnitee shall be
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection with such Proceeding or any claim, issue or matter
therein, if Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No
indemnification for Expenses shall be made under this Section 4 in respect of
any claim, issue or matter as to which Indemnitee shall have been finally
adjudged by a court to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, Indemnitee is fairly
and reasonably entitled to indemnification.
Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company
shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. If the Indemnitee is not wholly successful in such Proceeding, the Company also shall indemnify Indemnitee against all Expenses reasonably incurred in connection with a claim, issue or matter related to any claim, issue, or matter on which the Indemnitee was successful. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 6. Indemnification For Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.
Section 7. Additional Indemnification.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding.
(b) For purposes of Section 7(a), the meaning of the phrase "to the fullest extent permitted by law" shall include, but not be limited to:
i. to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL, and
ii. to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
Section 8. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or
(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board of Directors of the Company authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.
Section 9. Advances of Expenses. In accordance with the pre-existing requirement of Article VII, Section 7.02 of the By-laws of the Company, and notwithstanding any provision of this Agreement to the contrary, the Company shall advance, to the extent not prohibited by law, the expenses incurred by Indemnitee in connection with any Proceeding within 30 days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee's ability to repay the expenses and without regard to Indemnitee's ultimate entitlement to indemnification under the other provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed. The Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that the Indemnitee undertakes to repay the advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 9 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 8.
Section 10. Procedure for Notification and Defense of Claim.
(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The omission to notify the Company will not relieve the Company from any liability which it may have to Indemnitee otherwise than under this Agreement. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.
(b) The Company will be entitled to participate in the Proceeding at its own expense.
Section 11. Procedure Upon Application for Indemnification.
(a) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 10(a), a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 11(a) hereof, the Independent Counsel shall be selected as provided in this Section 11(b). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 2 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition a court of
competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 11(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 13(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
Section 12. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Neither the failure of the Company (including by its directors or independent legal counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
(b) If the person, persons or entity empowered or selected under
Section 11 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within sixty (60) days after
receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 60-day period may be extended for a
reasonable time, not to exceed an additional thirty (30) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating of documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 12(b) shall not apply (i)
if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 11(a) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors has resolved to submit such determination
to the stockholders for their consideration at an annual meeting thereof to be
held within seventy five (75) days after such receipt and such determination is
made thereat, or (B) a special meeting of stockholders is called within fifteen
(15) days after such receipt for the purpose of making such determination, such
meeting is held for such purpose within sixty (60) days after having been so
called and such determination is
made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 11(a) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.
(d) Reliance as Safe Harbor. For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with the reasonable care by the Enterprise. The provisions of this Section 12(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.
(e) Actions of Others. The knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.
Section 13. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant to
Section 11 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 9 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 11(a) of this Agreement
within 45 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 5 or 6 or the
last sentence of Section 11(a) of this Agreement within ten (10) days after
receipt by the Company of a written request therefor, or (v) payment of
indemnification pursuant to Section 3, 4 or 7 of this Agreement is not made
within ten (10) days after a determination has been made that Indemnitee is
entitled to indemnification, Indemnitee shall be entitled to an adjudication by
a court of his entitlement to such indemnification or advancement of Expenses.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within 180 days following the
date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 13(a); provided, however, that the foregoing clause
shall not apply in respect of a proceeding brought by Indemnitee to enforce his
rights under Section 5 of
this Agreement. The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or Arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 13 the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
(d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance such expenses to Indemnitee, to the extent not prohibited by law, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.
Section 14. Non-exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company's Certificate of Incorporation, the Company's Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company's Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and
every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable (or for which advancement is provided hereunder) hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
(e) The Company's obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.
Section 15. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as an officer of the Company or (b) 1 year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators.
Section 16. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including without limitation, each portion of any Section of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; (b) such provision or provisions shall be
deemed reformed to the extent necessary to conform to applicable law and to give
the maximum effect to the intent of the parties hereto; and (c) to the fullest
extent possible, the provisions of this Agreement (including, without
limitation, each portion of any Section of this Agreement containing any such
provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.
Section 17. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.
Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise.
Section 20. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide to the Company.
(b) If to the Company to
Western Digital Corporation
20511 Lake Forest Drive
Lake Forest, CA 92630
Attention: General Counsel
or to any other address as may have been furnished to Indemnitee by the Company.
Section 21. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).
Section 22. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 10(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the "Delaware Court"), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, irrevocably RL&F Service Corp., One Rodney Square, 10th Floor, 10th and King Streets, Wilmington, Delaware 19801 as its agent in the State of Delaware as such party's agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
Section 23. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
Section 24. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.
WESTERN DIGITAL CORPORATION INDEMNITEE By: By: ------------------------------ ------------------------------- Name: Name: ---------------------------- ----------------------------- Office: Address: -------------------------- -------------------------- -------------------------- |
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, in his capacity as Chief Executive Officer of Western Digital Corporation (the Company), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
| the Quarterly Report of the Company on Form 10-Q for the period ended September 27, 2002 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and | ||
| the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 8, 2002
/s/ MATTHEW E. MASSENGILL
Matthew E. Massengill Chief Executive Officer |
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, in his capacity as Chief Financial Officer of Western Digital Corporation (the Company), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
| the Quarterly Report of the Company on Form 10-Q for the period ended September 27, 2002 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and | ||
| the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 8, 2002
/s/ SCOTT MERCER
D. Scott Mercer Chief Financial Officer |