<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1994
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to __________
Commission file number 1-10639
CONNER PERIPHERALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2968210
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3081 ZANKER ROAD, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (408)456-4500
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, as of July 29, 1994 was 51,788,763.
<PAGE>
CONNER PERIPHERALS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cover Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
June 30, 1994 and December 31, 1993 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1994 and 1993 4
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1994 and 1993 5
Notes to Unaudited Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
<S> <C> <C>
Current assets:
Cash and short-term investments $ 409,716 $ 517,547
Accounts receivable, net 354,698 333,416
Inventory, net 276,154 173,860
Deferred income taxes 54,944 54,944
Other current assets 100,995 87,348
---------- ----------
Total current assets 1,196,507 1,167,115
Property, plant and equipment, net 248,851 231,337
Goodwill and other intangibles, net 53,439 42,944
Other 21,452 22,655
---------- ----------
$1,520,249 $1,464,051
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 464,671 $ 446,781
Current portion of long-term debt 43,326 43,112
---------- ----------
Total current liabilities 507,997 489,893
Long-term debt, less current portion 628,761 660,606
Deferred income taxes and other 105,119 102,171
Minority interest 1,731 2,530
Stockholders' equity:
Preferred stock, $0.001 par value; -- --
20,000,000 shares authorized,
none outstanding
Common stock and paid-in-capital, 254,970 242,454
$0.001 par value; 100,000,000
shares authorized, 51,757,341
and 50,565,083 shares issued
and outstanding
Retained earnings/(accumulated
deficit) 21,671 (33,603)
---------- ----------
Total stockholders' equity 276,641 208,851
---------- ----------
$1,520,249 $1,464,051
========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -----------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $650,079 $490,575 $1,214,037 $1,048,865
Cost of sales 507,852 451,994 943,995 919,764
-------- -------- ---------- ----------
Gross profit 142,227 38,581 270,042 129,101
-------- -------- ---------- ----------
Operating expenses:
Selling, general and
administrative 49,146 46,143 97,362 96,458
Research and development 31,954 37,648 62,898 71,668
Amortization of goodwill
and other intangibles 3,727 6,555 7,499 12,924
Unusual items -- -- -- 28,383
-------- -------- ---------- ----------
Total operating expenses 84,827 90,346 167,759 209,433
-------- -------- ---------- ----------
Income/(loss) from operations 57,400 (51,765) 102,283 (80,332)
Interest expense (11,728) (13,163) (24,379) (25,973)
Other income/(expense),net 129 6,103 4,518 15,274
-------- -------- ---------- ----------
Income/(loss) before income
taxes 45,801 (58,825) 82,422 (91,031)
(Provision)/benefit for income
taxes (14,331) -- (27,148) 9,662
-------- -------- ---------- ----------
Net income/(loss) $ 31,470 $(58,825) $ 55,274 $ (81,369)
======== ======== ========== ==========
Net income/(loss) per share:
Primary $0.60 $(1.19) $1.06 $(1.66)
======== ======== ========== ==========
Fully diluted $0.50 $(1.19) $0.89 $(1.66)
======== ======== ========== ==========
Weighted average shares:
Primary 52,400 49,303 52,208 48,929
======== ======== ========== ==========
Fully diluted 74,712 49,303 74,519 48,929
======== ======== ========== ==========
</TABLE>
See accompanying notes
4
<PAGE>
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 55,274 $ (81,369)
Adjustments to reconcile net
income/(loss) to net cash used in
operating activities:
Depreciation and amortization 44,393 54,464
Non-cash unusual items -- 28,383
Minority interest and other 4,246 397
Changes in assets and liabilities:
Accounts receivable, net (21,282) 67,111
Inventory, net (102,294) (61,031)
Accounts payable and accrued expenses 17,890 (90,051)
Other (21,938) (23,335)
--------- ---------
Cash used in operating activities (23,711) (105,431)
--------- ---------
Cash flows from investing activities:
Capital expenditures (56,505) (51,097)
Purchases of short-term investments (126,521) (899,411)
Sale and maturities of
short-term investments 231,002 958,294
Merger with Quest Development Corp. (8,500) --
Acquisition of technology rights -- (2,078)
--------- ---------
Cash provided by investing
activities 39,476 5,708
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt -- 903
Repayments of long-term debt (31,631) (17,663)
Issuance of common stock 12,516 18,310
--------- ---------
Cash provided by/(used in)
financing activities (19,115) 1,550
--------- ---------
Net decrease in cash and cash
equivalents (3,350) (98,173)
Cash and cash equivalents at beginning of
the period 197,499 258,985
--------- ---------
Cash and cash equivalents at end of
the period 194,149 160,812
Short-term investments 215,567 296,659
--------- ---------
Total cash and short-term investments $ 409,716 $ 457,471
========= =========
</TABLE>
(continued)
See accompanying notes
5
<PAGE>
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
1994 1993
------- -------
<S> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $25,421 $25,021
Income taxes $ 3,943 $14,307
</TABLE>
See accompanying notes
6
<PAGE>
CONNER PERIPHERALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
- -------------------------------
The accompanying unaudited condensed consolidated financial statements for the
three-month and six-month periods ended June 30, 1994 and 1993, have been
prepared on substantially the same basis as the annual consolidated financial
statements. In the opinion of management, the financial statements reflect all
material adjustments necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods presented.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements, and notes thereto, for the year
ended December 31, 1993, included in the Company's 1993 Annual Report on Form
10-K.
Note 2 - Cash Equivalents and Short-Term Investments
- ----------------------------------------------------
Effective at the beginning of 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115), which requires investment securities to be
classified as either held to maturity, trading or available for sale.
Securities that the Company has both the positive intent and ability to hold to
maturity are classified as Investment Securities Held to Maturity and are
carried at historical cost, adjusted for amortization of premiums and accretion
of discounts. As of June 30, 1994, the Company had cash equivalents and short-
term investments of $286,140,000 with a market value of approximately
$286,027,000, all of which had been classified as Investment Securities Held to
Maturity. The adoption of FAS 115 did not have a material impact on the
Company's financial condition or results of operations.
NOTE 3 - Inventories
- --------------------
Inventories consisted of the following components:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
--------- ------------
(In Thousands)
<S> <C> <C>
Purchased components $102,997 $ 81,620
Work-in-process 66,170 37,939
Finished goods 106,987 54,301
-------- --------
$276,154 $173,860
======== ========
</TABLE>
7
<PAGE>
NOTE 4 - Other Income/Expense, Net
- ----------------------------------
Other income/(expense), net consists of the following components:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1994 1993 1994 1993
--------- -------- -------- -------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Interest income $ 3,680 $4,254 $ 7,953 $ 9,646
Minority interest (511) 1,017 2,037 281
Royalty income -- 1,194 -- 2,523
Other (3,040) (362) (5,472) 2,824
------- ------ ------- -------
$ 129 $6,103 $ 4,518 $15,274
======= ====== ======= =======
</TABLE>
NOTE 5 - Income/(Loss) Per Share
- --------------------------------
Net income/(loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding. Net income per share
computed on a fully diluted basis assumes conversion of the Company's
subordinated debentures during each period in which they were issued and
outstanding, if dilutive.
NOTE 6 - Merger Of Subsidiary With Quest Development Corp.
- ----------------------------------------------------------
In January 1994, the Company merged the operations of its wholly-owned
subsidiary, Arcada Software, Inc. ("Arcada") with those of Quest Development
Corp. The Company currently holds a 77% interest in Arcada for which the
Company contributed cash, technology, employees and certain on-going support.
Arcada was formed to develop, produce and market software products for data
storage management. The effect of the merger was not material to the Company's
financial condition or results of operations.
NOTE 7 - Investment in Joint Venture
- ------------------------------------
In January 1994, the Company increased its ownership interest from 60% to 90% in
its joint venture with Shenzhen CPC, a subsidiary of China Electronics
Corporation. The joint venture, located in Shenzhen, People's Republic of
China, manufactures disk drives. The effect of the additional investment in the
joint venture was not material to the Company's financial condition or results
of operations.
NOTE 8 - Litigation
- -------------------
The Company and certain of its officers and directors are defendants in several
securities class action lawsuits which purport to represent a class of investors
who purchased or otherwise acquired the Company's common stock between January
1992 and May 1993. Certain officers and directors are also defendants in a
related shareholders derivative suit. The complaints seek unspecified damages
and other relief. The Company intends to defend the actions vigorously.
In August 1993, the Company was served with a patent infringement complaint
filed by IBM in the United States District Court for the Northern District of
California. The complaint alleges that products manufactured by the Company
infringe nine patents owned by IBM. In
8
<PAGE>
addition, the complaint seeks declaratory relief to the effect that drives
produced by IBM do not infringe five patents held by the Company and seeks to
have such patents declared invalid. The Company answered the complaint, denying
all material allegations and counter claiming that IBM disk drives infringe six
patents owned by Conner, including the five contained in the IBM complaint.
Subsequently, the claims have been amended such that IBM now asserts that the
Company's products infringe eleven IBM patents and the Company asserts that IBM
products infringe seven Conner patents. The Company believes that it has
meritorious defenses against the IBM allegations, that it has valid claims
against IBM and will defend this action vigorously. However, the Company is
unable to predict the outcome of the litigation or ultimate effect, if any, on
its operations or financial condition. Regardless of the merits of the
respective patent claims, the Company believes that the existence of the IBM
litigation could have an adverse effect on its business. In addition, this
litigation is causing the Company to incur significant costs, including
substantial legal expenses. Although the Company has been engaged in concurrent
discussions with IBM toward an appropriate cross-licensing arrangement, no
assurance can be given as to the outcome of the litigation or settlement
negotiations.
In February 1992, the Company filed a patent infringement lawsuit against
Western Digital Corporation ("Western Digital") alleging the infringement of
five of the Company's patents by Western Digital. The suit is currently pending
in the Northern District of California. Shortly after the commencement of this
action, Western Digital filed a claim in the Central District of California
alleging infringement of one patent by the Company. Subsequently, Western
Digital amended its claim to assert infringement by the Company of two
additional disk drive patents. The Western Digital complaint has been
transferred to the Northern District of California. The Company believes it has
valid claims against Western Digital and meritorious defenses to the claims
asserted by Western Digital.
In 1994, the Company was served with a patent litigation claim alleging that the
Company's DC2000 tape drives infringe a patent held by Iomega Corp. In
addition, Iomega moved for a preliminary injunction seeking an order prohibiting
the further sale of the allegedly infringing tape drive. A hearing on the
preliminary injunction will occur on August 11, 1994. The Company believes it
has meritorious defenses to this claim and will vigorously defend the claim.
NOTE 8 - Reclassifications
- --------------------------
Certain prior year balances have been reclassified to conform with the 1994
presentations.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain income statement data for the quarters
ended June 30, 1994 and 1993 and March 31, 1994, as a percentage of net sales in
these periods. This data has been derived from the unaudited consolidated
financial statements.
<TABLE>
<CAPTION>
Three months ended
-------------------------------
June 30, March 31,
1994 1993 1994
------ --------- ----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 78.1 92.1 77.3
Gross profit 21.9 7.9 22.7
Selling, general and
administrative 7.6 9.4 8.5
Research & development 4.9 7.7 5.5
Amortization of goodwill
and other intangibles 0.6 1.3 0.7
Income/(loss) from operations 8.8 (10.5) 8.0
Net income/(loss) 4.8 (12.0) 4.2
</TABLE>
NET SALES
- ---------
Net sales for the second quarter of 1994 were $650 million, an increase of 32.5%
from the second quarter of 1993 and an increase of 15.3% from the first quarter
of 1994. The increase in net sales over the second quarter of 1993 resulted
primarily from higher shipment volumes of disk drives. Disk drive shipments
reached a record 3 million units during the first quarter due in part to strong
demand for the Company's Filepro 210 and 420 megabyte disk drives. Higher
revenues for tape, storage systems and software products also contributed to the
revenue growth for this period.
The increase in net sales over the first quarter of 1994 was also due to an
increase in disk drive revenue resulting from an increase in unit shipments.
The increase in disk drive revenue was offset slightly by lower tape drive
revenues resulting from a decrease in shipments of the DC2000 and DC6000 product
lines.
Entering the second quarter, demand for certain of the Company's disk drive
products exceeded product availability. These products were therefore available
to customers on an allocation basis. This trend has ended as the Company enters
its third quarter due in part to lower seasonal demand and an increase in
industry capacity. As a result, the Company expects that demand for its disk
drive products, and
10
<PAGE>
resulting sales and net income, will decline in the third quarter as compared to
the second quarter of 1994.
Sales to Compaq Computer ("Compaq") represented approximately 18% of net sales
during the quarter compared to 16% for the same quarter a year ago and 13% for
the first quarter of 1994. No other customer represented more than 10% of net
sales during these periods. Distributor sales represented approximately 24% of
net sales during the quarter compared to 27% for the same quarter a year ago and
23% for the first quarter of 1994. International sales were 47% of net sales
compared to 53% for the same quarter a year ago and 47% for the first quarter of
1994. The decline in international and distributor sales as a percentage of net
sales as compared to the second quarter of 1993 is primarily due to a higher
percentage of tape drive shipments to domestic OEM customers.
As is common in the microcomputer industry, the Company's shipment patterns
during a quarter are frequently characterized by a significant higher shipment
volume in the third month of the quarter than that experienced in the first two
months of the quarter. Although this pattern was not substantial in the second
quarter, the Company believes that this shipment pattern may arise in future
quarters. This pattern often causes quarterly results to be difficult to
predict. Furthermore, order lead-times have been reduced by many of the
Company's customers. This trend has impacted the visibility of future orders,
and accordingly, has also affected the predictability of financial results.
The demand for the Company's disk drives depends principally on demand for high
performance microcomputers manufactured by its customers. A slowdown in demand
for such computers may have an exaggerated effect on the demand for the
Company's products in any given period.
GROSS PROFIT
- ------------
The Company's gross profit as a percentage of net sales for the second quarter
of 1994 was 21.9% compared to 7.9% for the same quarter of 1993 and 22.7% for
the first quarter of 1994. The large increase in gross profit percentage as
compared to the prior year quarter is primarily due to the unusually low gross
profits reported by the Company in the second quarter of 1993 that resulted from
severe price erosion of disk drive products due to industry overcapacity,
particularly for disk drives carrying 120 megabytes or less of storage, and
special charges totaling $12.3 million included in cost of sales to write-down
certain older inventory to their net realizable value.
The quarter-over-quarter decline in gross margin from the first quarter of 1994
was primarily due to lower tape drive margins as a result of a higher mix of
shipments to large, OEM customers and lower shipments to distributors. This
decline in margin offset higher disk drive margins which resulted from a higher
mix of shipments of larger capacity, higher margin disk drives.
The disk drive industry has experienced periods of severe price erosion and
related pressure on gross margins. There can be no assurance that periods of
severe price erosion will not reoccur. The Company anticipates that pricing
pressures may result as the industry
11
<PAGE>
migrates rapidly to higher storage capacities for entry level systems. In
particular, the Company expects that gross margin may decline in the third
quarter as compared to the second quarter of 1994. In addition, competition in
the tape drive industry has become aggressive, placing more pressure on pricing
and gross margins on tape products.
The Company anticipates the introduction of several new products during the
second half of 1994. The failure of the Company to successfully launch or
achieve required production volumes at anticipated costs for one or more of the
new products could have a material adverse effect on the Company's revenues and
profitability. New products generally have lower initial manufacturing yields
and higher component costs than more mature products which may place additional
pressure on gross margins.
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
The Company's selling, general and administrative expenses ("SG&A") for the
quarter were $49.1 million, or 7.6% of sales, compared to $46.1 million or 9.4%
of sales for the same quarter in 1993 and $48.2 million, or 8.5% of sales for
the first quarter of 1994. The increase in SG&A expense in the second quarter
of 1994 as compared to the same quarter in 1993 is primarily due to employee
profit sharing and the acquisition of Quest Development Corp. ("Quest") in the
first quarter of 1994, offset partially by lower employee headcount resulting
from restructuring actions taken during the third quarter of 1993 and a lower
provision for bad debt. The increase in SG&A in the second quarter of 1994 as
compared to the first quarter of 1994 is primarily due to an increase in
employee headcount to support higher sales volumes offset partially by lower
provisions for bad debt due to better loss experience.
The percentage of SG&A expenses to net sales may vary from quarter to quarter
because expenditures, and the benefits derived therefrom often occur in
different periods.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's spending in research and development ("R&D") for the quarter was
$32.0 million, or 4.9% of sales compared to $37.6 million, or 7.7% of sales for
the same quarter in 1993 and $30.9 million, or 5.5% of sales for the first
quarter of 1994. The decrease in R&D spending as compared to the second quarter
of 1993 is primarily due to restructuring actions taken during 1993 and the
implementation of a more efficient product launch process. This decrease was
offset to some extent by higher R&D expenses resulting from the acquisition of
Quest. The increase in R&D spending as compared to the first quarter of 1994 is
primarily due to an increase in product development activity to support planned
product introductions of both disk and tape drive products which are scheduled
for the second half of 1994.
12
<PAGE>
Due to the timing involved with new R&D programs and the release of new products
to production, the level of R&D may vary from quarter to quarter in both
absolute dollars and as a percentage of sales. The Company's continued spending
in this area reflects management's belief that R&D is essential to maintaining a
competitive product offering.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
- ----------------------------------------------
The Company's amortization of goodwill and other intangibles was $3.7 million in
the second quarter of 1994 compared to $6.6 million in the same quarter in 1993
and $3.8 million in the first quarter of 1994. This amortization decreased as
compared to the second quarter of 1993 as a result of the write-off of goodwill
and certain intangibles associated with the acquisition of Archive Corporation
during the third quarter of 1993. As compared to the first quarter of 1994,
amortization of goodwill and other intangibles remained relatively stable.
INTEREST EXPENSE, OTHER INCOME/EXPENSE AND INCOME TAXES
- -------------------------------------------------------
Interest expense was $11.7 million for the second quarter of 1994, $13.2 million
for the second quarter of 1993 and $12.6 million for the first quarter of 1994.
Interest expense has declined as compared to the same quarter of 1993 and the
first quarter of 1994 primarily as a result of principal payments on the
Company's long-term debt.
Other income/expense was a net gain of $0.1 million in the second quarter of
1994 compared to net gains of $6.1 million in the second quarter of 1993 and
$4.4 million in the first quarter of 1994. The decrease in the net gain in the
current quarter as compared to the same quarter a year ago and the preceding
quarter results from lower interest income on lower invested funds, higher
foreign exchange losses due to the declining value of the U.S. dollar against
certain foreign currencies and higher minority interest expense due to higher
net income from the Company's joint venture subsidiaries.
INCOME TAXES
- ------------
The Company's effective tax rate for the second quarter of 1994 was
approximately 31.3% compared to 35% in the first quarter. The lower rate in the
second quarter is due to the lower expected annual tax rate of 33%. The
Company's forecasted annual effective tax rate decreased to 33% from 35% due to
a shift in projected income between various taxable jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1994, the principal sources of liquidity consisted of cash and
short-term investments of $410 million and a combined $100 million revolving
credit facility with several financial institutions which is subject to the
continued maintenance of certain financial covenants. The Company has no
borrowings outstanding under this credit facility as of June 30, 1994. As of
this date, the Company had outstanding letters of credit and guarantees totaling
approximately $65 million.
Cash used in operating activities of $23.7 million for the six months ended June
30, 1994 was down from $105.4 million for the same period in 1993 primarily due
to a significant increase in net income for the
13
<PAGE>
period and higher accrued expenses. This increase was offset to some extent by
an increase in the Company's investment in inventories and higher accounts
receivable balances consistent with higher sales volumes.
Capital expenditures for the six month period amounted to $56.5 million. These
expenditures primarily related to the expansion of the Company's disk media
manufacturing operation, the purchase of manufacturing equipment for the
Company's operations in the Far East and the purchase of land adjacent to the
Company's headquarters in San Jose, California. The Company plans to spend
approximately $40 million on capital items during the remainder of 1994.
During the period the Company made normal repayments of long-term debt totaling
$31.6 million and merged the operations of Quest Development Corp. with the
Company's subsidiary, Arcada Software, Inc. The cost of the merger included a
cash payment of $8.5 million.
The Company believes that current capital resources and cash generated from
operations will be sufficient to meet its liquidity and capital expenditure
requirements for the foreseeable future.
FOREIGN CURRENCY RISKS
- ----------------------
The Company's cash flows are substantially U.S. dollar denominated. However,
the Company is subject to foreign currency risk on funds required for certain
local operating costs of its foreign subsidiaries. The Company does not
consider the risk of loss on these transactions to be material.
Additionally, certain of the Company's tape drive products are purchased in
Japanese Yen from a manufacturer located in Japan. As a hedge against this
exposure, the Company enters into forward currency contracts and foreign
currency purchase options for periods and amounts consistent with the amounts
and timing of the related purchase commitments. Gains and losses on these
contracts are deferred and offset by gains and losses on the underlying sale of
the products. Though the Company attempts to hedge substantially all of the
related foreign currency exposure, no assurance can be given that exchange rate
movements will not have a material adverse impact on the Company's results of
operations. At June 30, 1994, the Company had outstanding forward currency
contracts and foreign currency options aggregating approximately $55 million and
$21 million, respectively. These contracts mature at various periods through
January 1995, consistent with forecasted commitments.
LITIGATION
- ----------
The Company and certain of its officers and directors are defendants in several
securities class action lawsuits which purport to represent a class of investors
who purchased or otherwise acquired the Company's common stock between January
1992 and May 1993. Certain officers and directors are also defendants in a
related shareholders derivative suit. The complaints seek unspecified damages
and other relief. The Company intends to defend the actions vigorously.
In August 1993, the Company was served with a patent infringement complaint
filed by IBM in the United States District Court for the
14
<PAGE>
Northern District of California. The complaint alleges that products
manufactured by the Company infringe nine patents owned by IBM. In addition, the
complaint seeks declaratory relief to the effect that drives produced by IBM do
not infringe five patents held by the Company and seeks to have such patents
declared invalid. The Company answered the complaint, denying all material
allegations and counter claiming that IBM disk drives infringe six patents owned
by Conner, including the five contained in the IBM complaint. Subsequently, the
claims have been amended such that IBM now asserts that the Company's products
infringe eleven IBM patents and the Company asserts that IBM products infringe
seven Conner patents. The Company believes that it has meritorious defenses
against these allegations, that it has valid claims against IBM and will defend
this action vigorously. However, the Company is unable to predict the outcome of
the litigation or ultimate effect, if any, on its operations or financial
condition. Regardless of the merits of the respective patent claims, the Company
believes that the existence of the IBM litigation could have an adverse effect
on its business. In addition, this litigation is causing the Company to incur
significant costs, including substantial legal expenses. Although the Company
has engaged in continuous discussions with IBM toward an appropriate cross-
licensing arrangement, no assurance can be given as to the outcome of the
litigation or settlement negotiations.
In February 1992, the Company filed a patent infringement lawsuit against
Western Digital Corporation ("Western Digital") alleging the infringement of
five of the Company's patents by Western Digital. The suit is currently pending
in the Northern District of California. Shortly after the commencement of this
action, Western Digital filed a claim in the Central District of California
alleging infringement of one patent by the Company. Subsequently, Western
Digital amended its claim to assert infringement by the Company of two
additional disk drive patents. The Western Digital complaint has been
transferred to the Northern District of California. The Company believes it has
valid claims against Western Digital and meritorious defenses to the claims
asserted by Western Digital.
In 1994, the Company was served with a patent litigation claim alleging that the
Company's DC2000 tape drives infringe a patent held by Iomega Corp. In
addition, Iomega moved for a preliminary injunction seeking an order prohibiting
the further sale of the allegedly infringing tape drive. A hearing on the
preliminary injunction will occur on August 11, 1994. The Company believes it
has meritorious defenses to this claim and will vigorously defend the claim.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 8 of notes to condensed consolidated financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on April 19, 1994.
(b) At the meeting Finis F. Conner, William S. Anderson, Ambassador L. Paul
Bremer III, Linda Wertheimer Hart, Mark Rossi, William J. Schroeder and
David T. Mitchell were elected to serve as directors of the Company for the
ensuing year and until their successors are elected.
(c) Other matters voted on at the meeting:
(i) Approval of an amendment to the Company's Employee Stock Purchase Plan
increasing the total number of shares of the Company's Common Stock
reserved for issuance thereunder by 1,500,000 shares to a total of
4,500,000 shares. The stockholders approved the amendment to the Employee
Stock Purchase Plan by a vote of 40,047,352 Common equivalent shares for,
2,789,541 Common equivalent shares against and 245,670 Common equivalent
shares abstaining.
(ii) Approval of the Company's Performance-Based Executive Compensation
Plan. The stockholders approved the plan by a vote of 37,993,512 Common
equivalent shares for, 4,802,607 Common equivalent shares against and
286,444 Common equivalent shares abstaining.
(iii) Ratification of the appointment of Price Waterhouse as certified
public accountants for the Company for the fiscal year ending December 31,
1994. The stockholders ratified the appointment by a vote of 42,741,725
Common equivalent shares for, 200,162 Common equivalent shares against and
140,676 Common equivalent shares abstaining.
(iv) Separate tabulation with respect to each nominee for office:
<TABLE>
<S> <C> <C>
Finis F. Conner: For: 42,437,343
Withheld: 645,220
William S. Anderson: For: 42,439,207
Withheld: 643,356
Ambassador L. Paul Bremer: For: 42,430,006
Withheld: 652,557
Linda Wertheimer Hart: For: 42,431,483
Withheld: 651,080
</TABLE>
16
<PAGE>
David T. Mitchell: For: 42,422,413
Withheld: 660,150
Mark Rossi: For: 42,445,973
Withheld: 636,590
William J. Schroeder: For: 42,434,628
Withheld: 647,935
(d) Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
11.1 Statement regarding computation of earnings/loss per share.
22.1 Published Report Regarding Matters Submitted to a Vote of Security
Holders. (see page 16, Part I Item 4 of the June 30, 1994
Form 10-Q.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed on behalf of Registrant during the quarter
ended June 30, 1994.
17
<PAGE>
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.
CONNER PERIPHERALS, INC.
(Registrant)
Date: August 10, 1994 /s/ P. JACKSON BELL
--------------- -------------------------
P. Jackson Bell,
Executive Vice President - Finance
and Chief Financial Officer
18
<PAGE>
CONNER PERIPHERALS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ----------------------------------------------
11.1 Statement of Computation of Earnings/(Loss) Per Share
<PAGE>
Exhibit 11.1
CONNER PERIPHERALS, INC.
(11.1) - STATEMENT RE: COMPUTATION OF EARNINGS/(LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1994 1993 1994 1993
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares
outstanding 51,660 49,303 51,190 48,929
Net effect of dilutive
stock options 740 N/A 1,018 N/A
------- -------- ------- --------
Total 52,400 49,303 52,208 48,929
======= ======== ======= ========
Net income/(loss) $31,470 $(58,825) $55,274 $(81,369)
======= ======== ======= ========
Earnings/(loss) per share $ 0.60 $ (1.19) $ 1.06 $ (1.66)
======= ======== ======= ========
Fully diluted:
Weighted average shares
outstanding 51,660 49,303 51,190 48,929
Net effect of dilutive
stock options 746 N/A 1,023 N/A
Assumed conversion of:
6.75% Subordinated
Convertible Debentures 7,931 N/A 7,931 N/A
6.5% Subordinated
Convertible Debentures 14,375 N/A 14,375 N/A
------- -------- ------- --------
Total 74,712 49,303 74,519 48,929
======= ======== ======= ========
Net income/(loss) $31,470 $(58,825) $55,274 $(81,369)
Add:
6.75% Subordinated
Convertible Debenture
interest, net of income
taxes 2,290 N/A 4,580 N/A
6.5% Subordinated
Convertible Debenture
interest, net of income
taxes 3,308 N/A 6,615 N/A
------- -------- ------- --------
Total $37,068 $(58,825) $66,469 $(81,369)
======= ======== ======= ========
Earnings/(loss) per share $ 0.50 $ (1.19) $ 0.89 $ (1.66)
======= ======== ======= ========
</TABLE>
____________________
N/A - not applicable, item is anti-dilutive and therefore excluded from the
calculation of earnings/(loss) per share
