<PAGE>
UNITED STATES
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, 1995
[_] 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 of incorporation) (I.R.S. Employer
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
----- -----
As of July 28, 1995, 53,353,169 shares of the Registrant's Common Stock were
issued and outstanding.
<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, 1995 and December 31, 1994 3
Condensed Consolidated Statements of
Operations - Three months and six months
ended June 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash
Flows - Six months ended June 30, 1995 and 1994 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 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 Share Data)
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ------------
<S> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments $ 388,363 $ 443,239
Accounts receivable, net 379,032 307,454
Inventory 237,365 255,880
Deferred income taxes and other 158,080 163,137
---------- ----------
Total current assets 1,162,840 1,169,710
Property, plant and equipment, net 233,143 237,066
Goodwill and other intangibles, net 36,752 39,255
Other 13,275 15,398
---------- ----------
$1,446,010 $1,461,429
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 227,094 $ 139,559
Accrued expenses 186,484 190,372
Current portion of long term debt 3,053 34,922
---------- ----------
Total current liabilities 416,631 364,853
Long-term debt, less current portion 527,896 627,059
Deferred income taxes 129,395 129,668
Other 932 1,525
Minority interest 3,122 1,648
Stockholders' equity:
Preferred stock, $0.001 par value;
20,000,000 shares authorized,
none outstanding -- --
Common stock and paid-in-capital,
$0.001 par value; 100,000,000
shares authorized, 53,268,787 and
52,460,734 shares issued and
outstanding 268,956 260,592
Retained earnings 99,078 76,084
---------- ----------
Total stockholders' equity 368,034 336,676
---------- ----------
$1,446,010 $1,461,429
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements
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,
------------------ -----------------------
1995 1994 1995 1994
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $642,338 $650,079 $1,252,733 $1,214,037
Cost of sales 522,855 507,852 1,041,470 943,995
-------- -------- ---------- ----------
Gross profit 119,483 142,227 211,263 270,042
-------- -------- ---------- ----------
Operating expenses:
Selling, general and administrative 56,046 49,146 107,044 97,362
Research and development 32,755 31,954 70,192 62,898
Amortization of goodwill and other intangibles 2,531 3,727 5,083 7,499
-------- -------- ---------- ----------
Total operating expenses 91,332 84,827 182,319 167,759
-------- -------- ---------- ----------
Income from operations 28,151 57,400 28,944 102,283
Interest expense (8,967) (11,728) (20,511) (24,379)
Other income/(expense), net 5,804 129 16,676 4,518
-------- -------- ---------- ----------
Income before income taxes and
extraordinary item 24,988 45,801 25,109 82,422
Provision for income taxes (8,246) (14,331) (8,286) (27,148)
-------- -------- ---------- ----------
Income before extraordinary item 16,742 31,470 16,823 55,274
Extraordinary item:
Gain on extinguishment of debt (less
applicable income taxes of $1,135
and $4,288, respectively) 1,633 -- 6,171 --
-------- -------- ---------- ----------
Net income $ 18,375 $ 31,470 $ 22,994 $ 55,274
======== ======== ========== ==========
Net income per share:
Primary:
Income before extraordinary item $ 0.31 $ 0.60 $ 0.32 $ 1.06
Extraordinary item 0.03 -- 0.11 --
-------- -------- ---------- ----------
0.34 $ 0.60 $ 0.43 $ 1.06
======== ======== ========== ==========
Fully diluted:
Income before extraordinary item $ 0.30 $ 0.50 $ 0.32 $ 0.89
Extraordinary item 0.02 -- 0.11 --
-------- -------- ---------- ----------
$ 0.32 $ 0.50 $ 0.43 $ 0.89
======== ======== ========== ==========
Weighted average shares:
Primary 53,462 52,400 53,094 52,208
========= ======== ========= ==========
Fully diluted 73,734 74,712 53,340 74,519
========= ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements
4
<PAGE>
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,994 $ 55,274
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 48,297 44,393
Extraordinary item, net (6,171) --
Gain from sale of building (6,098) --
Minority interest and other 881 4,246
Changes in assets and liabilities:
Accounts receivable, net (71,578) (21,282)
Inventory 18,515 (102,294)
Accounts payable and accrued expenses 78,259 17,890
Other (20,013) (21,938)
--------- --------
Cash provided by/(used in)
operating activities 65,086 (23,711)
--------- --------
Cash flows from investing activities:
Proceeds from Read Rite stock sale 18,664 --
Proceeds from note receivable 10,807 --
Proceeds from sale of building 15,925 --
Capital expenditures (52,313) (56,505)
Purchases of investments held to maturity (76,681) (66,532)
Purchases of investments available for sale (659,669) (59,989)
Maturity of investments held to maturity 131,950 124,878
Sale of investments available for sale 613,457 106,124
Purchase of minority interest (3,000) --
Merger with Quest Development Corporation -- (8,500)
--------- --------
Cash provided by/(used in)
investing activities (860) 39,476
--------- --------
Cash flows from financing activities:
Repayments of long-term debt (118,409) (31,631)
Issuance of common stock 8,364 12,516
--------- --------
Cash used in financing activities (110,045) (19,115)
--------- --------
Net decrease in cash and cash equivalents (45,819) (3,350)
Cash and cash equivalents at beginning
of the period 202,386 197,499
--------- --------
Cash and cash equivalents at end of the period 156,567 194,149
Short-term investments 231,796 215,567
--------- --------
Total cash and short-term investments $ 388,363 $409,716
========= ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements
5
<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 and six-month periods ended June 30, 1995 and 1994, have been prepared on
substantially the same basis as the annual consolidated financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all material adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position,
operating results and cash flows for the interim periods presented. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements, and notes thereto, for
the year ended December 31, 1994, included in the Company's 1994 Annual Report
on Form 10-K.
NOTE 2 - Inventories
--------------------
Inventories consisted of the following components:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
(In Thousands)
<S> <C> <C>
Purchased components $102,096 $ 86,970
Work-in-process 61,075 72,692
Finished goods 74,194 96,218
-------- --------
$237,365 $255,880
======== ========
</TABLE>
NOTE 3 - Acquisitions
---------------------
In February 1995, the Company increased its ownership interest in Arcada
Software, Inc. from 78% to 81% through the purchase of additional shares from a
minority stockholder for $3,000,000.
NOTE 4 - Warranty Expense
-------------------------
The Company provides for the estimated cost which may be incurred under its
various product warranties upon product shipment. During the quarter ended June
30, 1995, the Company lowered its estimate of its future disk drive warranty
costs by $7,600,000 as a benefit to cost of sales due to cost saving
opportunities and expected future warranty cost reductions resulting from the
Company's relocation of its disk drive service center from Singapore to
Malaysia.
NOTE 5 - Restructuring
----------------------
There have been no significant changes to the Company's estimate of the total
cost of restructuring subsequent to December 31, 1994. Charges to restructuring
reserves for the three and six-month periods ended June 30, 1995 were not
material.
6
<PAGE>
NOTE 6 - Reduction of Debt and Extraordinary Item
-------------------------------------------------
During the six-month period ended June 30, 1995, the Company purchased at a
discount, certain of its 6.5% and 6.75% Convertible Subordinated Debentures with
a face value of $56,102,000. The Company also prepaid and retired the remaining
$41,666,000 of its outstanding Series A and Series B Senior Notes with a
prepayment fee of $1,100,000. As a result of these transactions, the Company
recorded a net extraordinary gain for the three and six-month periods ended June
30, 1995 of $1,633,000 and $6,171,000 (less applicable income taxes of
$1,135,000 and $4,288,000) or $0.03 and $0.11 per share, respectively.
NOTE 7 - Other Income/(Expense), Net
------------------------------------
Other income/(expense), net consisted of the following components:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
1995 1994 1995 1994
--------- -------- -------- --------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Interest income $5,662 $ 3,680 $11,931 $ 7,953
Gain on sale of building -- -- 6,098 --
Minority interest (581) (511) (1,474) 2,037
Other 723 (3,040) 121 (5,472)
------ ------- ------- -------
$5,804 $ 129 $16,676 $ 4,518
====== ======= ======= =======
</TABLE>
NOTE 8 - Supplemental Cash Flow Disclosure
-------------------------------------------
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
1995 1994
-------- -------
(In Thousands)
<S> <C> <C>
Cash paid during the period for:
Interest $24,264 $25,421
Income taxes $13,333 $ 3,943
</TABLE>
NOTE 9 - Litigation
-------------------
The Company and certain of its officers and certain directors are defendants in
a securities class action lawsuit which purports 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 stockholders derivative suit. The complaints seek unspecified
damages and other relief. The Company intends to defend the actions vigorously.
7
<PAGE>
In 1993, the Company was served with a patent infringement complaint, filed by
IBM, alleging that products manufactured by the Company have infringed certain
patents owned by IBM. In addition, the complaint sought declaratory relief to
the effect that disk drives produced by IBM did not infringe certain patents
held by the Company and sought to have such patents declared invalid. The
Company answered the complaint, denying all material allegations and
counterclaiming that IBM disk drives infringe certain patents owned by the
Company, including those patents contained in the IBM complaint.
During the first quarter of 1995, the Company received a newly issued patent
concerning various aspects of the power management features incorporated in the
Company's disk drives. Promptly following the issuance of the patent, the
Company filed a complaint with the United States International Trade Commission
alleging that various disk drives produced by IBM infringe the new power
management patent, and seeking an exclusion order concerning IBM products
incorporating these infringing drives. The Company filed a lawsuit in Federal
Court, Southern District of New York, seeking damages and injunctive relief
related to the infringement of the power management patent.
In late July 1995, the Company and IBM agreed to dismiss all of the litigation
against each other and entered into patent cross license agreements. The
Company and IBM also established a five year commercial relationship, whereby,
IBM would buy the Company's products. The outcome of the litigation settlement
did not have an adverse effect on the Company's results of operations or
financial position.
In December 1994, the Internal Revenue Service concluded a field audit of the
Company's federal income tax returns for the fiscal years 1989 and 1990 and
issued to the Company a " Notice of Deficiency " (Notice) with respect to those
fiscal years. The majority of the proposed adjustments to income in the Notice
related to the allocation of income between the Company and its foreign
manufacturing subsidiaries. The Notice resulted in proposed tax deficiencies of
approximately $43,000,000 and assessed interest. On March 20, 1995, the Company
filed a Petition in the United States Tax Court entitled Conner Peripherals,
Inc. v. Commissioner of Internal Revenue, Docket No. 4322-95. The Company
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
In 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. Western Digital has filed a counterclaim alleging
infringement of certain of its patents by the Company. The Company believes it
has valid claims against Western Digital and meritorious defenses to the claims
asserted by Western Digital.
NOTE 10 - Presentation
----------------------
Certain prior year quarter and prior year financial statement balances have been
reclassified to conform to the 1995 presentation.
8
<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, 1995 and 1994 and March 31, 1995, as a percentage of net sales in
these periods. This data has been derived from the unaudited condensed
consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended
June 30, March 31,
------------------ ----------
1995 1994 1995
-------- -------- ----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 81.4 78.1 85.0
----- ----- -----
Gross profit 18.6 21.9 15.0
----- ----- -----
Selling, general and administrative 8.7 7.6 8.4
Research and development 5.1 4.9 6.1
Amortization of goodwill
and other intangibles 0.4 0.6 0.4
----- ----- -----
Income from operations 4.4 8.8 0.1
Income taxes and other 1.8 4.0 --
----- ----- -----
Income before extraordinary item 2.6 4.8 0.1
Extraordinary item 0.3 -- 0.7
----- ----- -----
Net income 2.9% 4.8% 0.8%
===== ===== =====
</TABLE>
NET SALES
---------
Net sales for the second quarter of 1995 were $642.3 million, a decrease of 1.2%
from the same quarter of 1994 and an increase of 5.2% from the first quarter of
1995. The decrease in net sales over the second quarter of 1994 resulted
primarily from a decrease in unit volume shipments of disk drive products and
disk drive weighted average unit prices, partially offset by a more favorable
product mix towards the Company's high-performance disk drives, sales of disk
media to third-party customers, higher average unit prices resulting from new
tape drive products and an increase in software revenue.
Volume shipments of disk drive products were relatively consistent with the
first quarter of 1995 due primarily to an industry shortage of key componentry.
However, the increase in net sales over the first quarter of 1995 was primarily
due to a more favorable product mix towards new disk and tape drive products
which sell at higher than average unit prices and less severe disk drive price
erosion, partially offset by lower shipment volume of tape drives.
9
<PAGE>
No customer accounted for more than 10% of net sales for the second quarter of
1995 while Compaq Computer represented approximately 18% of net sales for the
same quarter a year ago. Sales to Packard Bell represented approximately 10% of
net sales during the first quarter of 1995. The following table summarizes the
net sales percentages between OEM and distributor customers and foreign and
domestic customers.
<TABLE>
<CAPTION>
Three months ended
June 30, March 31,
-------------------------- ----------
1995 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
OEM 76% 76% 75%
Distributor 24 24 25
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Foreign 49% 47% 50%
Domestic 51 53 50
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
During the second half of 1994, the Company experienced a decline in sales of
disk drive products to major U.S. OEM customers. As a result, the Company
implemented a program to improve its timely introduction of disk drive products,
supporting an effort to address new design-in opportunities with major OEM
customers. The Company has introduced several new products intended to meet the
needs of these major OEM customers and recapture lost market share. While the
Company has made progress in meeting these objectives during the second quarter
of 1995 through the adoption of certain of the Company's high-capacity desktop
and high-performance disk drives by major OEM customers, there can be no
assurance that the Company's efforts to regain its position with major OEM
customers will be successful, or that continued improvement in sales to such
customers will occur in subsequent quarters. The Company believes that an
increase in sales to major OEM customers is important to the Company's long-term
competitive position.
As is common in the microcomputer industry, the Company's shipment patterns
during a quarter are frequently characterized by significantly higher shipment
volume in the third month of the quarter than that experienced in the first two
months of the quarter. 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.
During the first quarter of 1995, shipment delays were experienced for certain
disk drive products introduced during the first quarter of 1995 and the fourth
quarter of 1994 due to certain technical issues and shortages of key components,
particularly headstacks, as certain vendors were unable to meet the volume ramp
of several new disk drive products. The Company generally resolved the product
technical issues but experienced a continued shortage of certain key componentry
during the second quarter of 1995. No assurance can be given that these events
will not recur in the future.
During the second quarter of 1995, demand for certain of the Company's new disk
drive products exceeded availability. These products were available to
customers on an allocation basis. This situation appears to be continuing for
certain of the Company's disk drive products into the third quarter of 1995.
There can be no assurance that these trends will or will not continue throughout
the third quarter or into future periods.
10
<PAGE>
GROSS PROFIT
------------
The Company's gross profit as a percentage of net sales (gross margin) for the
second quarter of 1995 was 18.6% compared to 21.9% for the same quarter of 1994
and 15.0% for the first quarter of 1995. The decrease in gross margin compared
to the prior year quarter is largely due to severe price erosion for disk drive
products with capacities of 540 megabytes and less. This decline was partially
offset by the reduction of warranty reserves totaling $7.6 million during the
second quarter of 1995 resulting from the Company's decision to move the disk
drive service center from Singapore to Malaysia. This move was initiated to take
advantage of cost saving opportunities in Malaysia which reduced the Company's
existing warranty reserves and is also expected to reduce warranty costs in the
future. Changes in the mix of shipments towards the Company's new disk and tape
drive products and sales of disk media to third-party customers which carry
higher than average gross margins also had a positive impact on the Company's
total gross margin.
The increase in gross margin as compared to the first quarter of 1995 was
primarily due to higher disk and tape drive average unit prices, particularly
due to the Company's higher mix of shipments towards the new and higher capacity
disk and tape products and reduced warranty reserves as discussed above. This
increase was partially offset by an increase in the mix of shipments of the
Company's older DAT (Digital Audio Tape) tape drives which carry lower than
average gross margins.
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, reduction in demand from significant OEM customers, or
continued price erosion in this intensely competitive industry may have an
exaggerated effect on the demand for the Company's products and/or profitability
in any given period. In addition, the disk drive industry has been
characterized by periods of excess manufacturing capacity contributing to higher
inventory levels and severe price erosion resulting in lower gross margins.
While current demand for the Company's products remain strong, there can be no
assurance that this trend will not recur and that gross margins will recover to
historical levels. The Company anticipates that pricing and gross margin
pressures will continue as the industry migrates rapidly to higher storage
capacity products for entry level systems. In addition, competition in the tape
drive industry continues to be aggressive, placing pressure on pricing and
gross margins of tape drive products.
The Company has launched several new disk and tape drive products during 1995
and anticipates the launch of additional products during the remainder of 1995.
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, profitability and competitive
position. As is common in periods of product transition, the Company has
experienced certain difficulties and delays in achieving volume production of
certain products. Such delays have included the launch of the Company's high
performance Cayman disk drive products during the first quarter of 1995. During
the second quarter of 1995, the Company generally resolved these product
technical issues and launched these products into volume manufacturing. In
addition, shortages of certain key disk drive components occurred during the
first and second quarters of 1995 which inhibited the Company's ability to
satisfy customer demand. There can be no assurance that the Company will not
experience such difficulties during the remainder of 1995.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
-----------------------------------
The Company's selling, general and administrative expenses (SG&A) for the
second quarter of 1995 were $56.0 million, or 8.7% of sales, compared to $49.1
million, or 7.6% of sales, for the same quarter in 1994 and $51.0 million, or
8.4% of sales, for the first quarter of 1995. The increase in SG&A in the
second quarter of 1995 as compared to the prior year quarter is primarily due to
an increase in sales and marketing efforts within the tape and software product
groups and a larger international sales force to support a growing European
market. The increase in SG&A compared to the first quarter of 1995 was
primarily attributable to profit sharing contributions made during the second
quarter of 1995 partially offset by a reduction in legal expenses due to the
settlement of the IBM litigation.
RESEARCH AND DEVELOPMENT
------------------------
The Company's investment in research and development (R&D) for the second
quarter of 1995 was $32.8 million, or 5.1% of sales. This remained relatively
flat when compared to $32.0 million, or 4.9% of sales for the same quarter in
1994. The R&D expenses for the first quarter of 1995 were $37.4 million, or
6.1% of sales. The decrease in R&D expenditures as compared to the first
quarter of 1995 is primarily due to the ramp up of certain disk drive product
launches from new product development in the first quarter of 1995 to volume
manufacturing in the second quarter of 1995.
Due to the timing of new R&D programs and the release of new products to volume
manufacturing, the level of R&D spending may vary from quarter to quarter in
absolute dollars and as a percentage of sales. As product life cycles have
shortened and the need to rapidly introduce new products has become essential,
the Company has increased its focus on new product launch activities. The
Company believes this investment has improved the efficiency and effectiveness
of its new product launch operations. The level of R&D spending reflects
management's belief that such spending is essential in order for the Company to
regularly and predictably introduce new products and remain competitive.
The Company is initiating a business process re-engineering program of its
infrastructure and operations to reduce operating expenses, including SG&A and
R&D, during the third quarter of 1995. The Company anticipates seeing the
benefits of this program commencing in the fourth quarter of 1995.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
----------------------------------------------
The Company's amortization of goodwill and other intangibles was $2.5 million in
the second quarter of 1995 compared to $3.7 million in the same quarter in 1994
while remaining relatively flat compared to $2.6 million in the first quarter of
1995. Amortization decreased from the second quarter of 1994 primarily as a
result of lower intangible balances. Goodwill and other intangibles are being
amortized over their remaining estimated useful lives ranging from 1 to 8 years.
12
<PAGE>
INTEREST EXPENSE, OTHER INCOME/EXPENSE
--------------------------------------
Interest expense was $9.0 million for the second quarter of 1995 compared to
$11.7 million for the same quarter of 1994 and $11.5 million for the first
quarter of 1995. Interest expense declined as compared to the same quarter of
1994 and the first quarter of 1995 due to the Company's early retirement of its
Senior Notes and a portion of its Convertible Subordinated Debentures during
the first and second quarters of 1995.
Other income/expense was a net gain of $5.8 million in the second quarter of
1995 compared to a net gain of $.1 million in the same quarter of 1994 and $10.9
million in the first quarter of 1995. The increase in the net gain in the
second quarter of 1995 as compared to the prior year quarter relates primarily
to increased rates of return on invested funds and lower foreign exchange losses
as a result of the declining value of the U.S. dollar during the second quarter
of 1994 against certain foreign currencies. The decrease as compared to the
first quarter of 1995 is primarily due to the gain of $6.1 million recognized in
the first quarter of 1995 on the sale of a manufacturing building located in
Singapore.
INCOME TAXES
------------
The Company's effective tax rate for the first and second quarters of 1995 was
approximately 33% excluding the impact of the extraordinary item recorded during
both quarters which were recorded at the rate of 41%. The tax effect of the
extraordinary items were $4.3 million and $1.1 million for the first and second
quarters of 1995, respectively.
EXTRAORDINARY ITEM
------------------
The Company purchased at a discount, certain of its 6.5% and 6.75% Convertible
Subordinated Debentures (Debentures) with a total face value of $56.1 million
during the first and second quarters of 1995. In addition, the Company prepaid
and retired the remaining $41.7 million of its outstanding Series A and Series B
Senior Notes with a prepayment fee of $1.1 million. As a result of these
transactions, the Company recorded a net extraordinary gain of $1.6 million and
$4.5 million (less applicable income taxes of $1.1 million and $3.2 million) or
$0.02 and $0.09 on a fully diluted basis per share for the three-month periods
ended June 30, 1995 and March 31, 1995, respectively. The Company anticipates
that some portion of its outstanding Debentures may be purchased from time to
time during the remainder of 1995 depending on the price, market conditions and
other considerations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At June 30, 1995, the Company's principal sources of liquidity consisted of cash
and short-term investments of $388.4 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 had no
borrowings outstanding under this credit facility as of June 30, 1995. As of
this date, the Company had outstanding letters of credit and guarantees of
approximately $48.6 million.
13
<PAGE>
Cash provided by operating activities was approximately $65.1 million for the
six-month period ended June 30, 1995 compared to cash used in operating
activities of $23.7 million for the same period in 1994. This increase was
primarily attributable to an increase in accounts payable and other accrued
expenses and a decrease in inventory partially offset by increases in accounts
receivable.
Capital expenditures for the six-month period ended June 30, 1995, amounted to
$52.3 million. These expenditures primarily related to the purchase of
manufacturing and R&D equipment for the Company's operations, upgrades in
computer equipment and the expansion of the Company's disk media manufacturing
in Singapore. An initial capital investment of approximately $44 million has
been designated to build a new disk media manufacturing MINT (Magnetic
Information Technology) line in Singapore. This line is scheduled to begin
production during the first half of 1996. For the six-month period ended June
30, 1995, approximately $2.0 million in capital expenditures relates to this
expansion. The Company plans to spend approximately $44 million on additional
capital expenditures during the remainder of 1995.
During the six-month period ended June 30, 1995, the Company's cash expenditures
to retire its Debentures in the open market and normal repayments of long-term
debt were $118.4 million. The Company received $15.9 million in cash proceeds
during the period for the sale of a manufacturing building located in Singapore.
In addition, $28.7 million was received from proceeds of the sale of Read-Rite
stock and proceeds from notes receivable. 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 exposed to certain foreign currency fluctuations, primarily British
Pound Sterling, Malaysian Ringgit, Italian Lira and Singapore Dollars. At June
30, 1995, the Company had outstanding foreign currency forward contracts
aggregating approximately $61.2 million. These contracts mature at various
periods through September 1995 and are consistent with the amounts and timing of
the underlying anticipated cash flow requirements and purchase commitments.
LITIGATION
----------
The Company and certain of its officers and certain directors are defendants in
a securities class action lawsuit which purports 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 stockholders derivative suit. The complaints seek unspecified
damages and other relief. The Company intends to defend the actions vigorously.
In 1993, the Company was served with a patent infringement complaint, filed by
IBM, alleging that products manufactured by the Company have infringed certain
patents owned by IBM. In addition, the complaint sought declaratory relief to
the effect that disk drives produced by IBM did not infringe certain patents
held by the Company and sought to have such patents declared invalid. The
Company answered the complaint, denying all material allegations and
counterclaiming that IBM disk drives infringe certain patents owned by the
Company, including those patents contained in the IBM complaint.
14
<PAGE>
During the first quarter of 1995, the Company received a newly issued patent
concerning various aspects of the power management features incorporated in the
Company's disk drives. Promptly following the issuance of the patent, the
Company filed a complaint with the United States International Trade Commission
alleging that various disk drives produced by IBM infringe the new power
management patent, and seeking an exclusion order concerning IBM products
incorporating these infringing drives. The Company filed a lawsuit in Federal
Court, Southern District of New York, seeking damages and injunctive relief
related to the infringement of the power management patent.
In late July 1995, the Company and IBM agreed to dismiss all of the litigation
against each other and entered into patent cross license agreements. The
Company and IBM also established a five year commercial relationship, whereby,
IBM would buy the Company's products. The outcome of the litigation settlement
did not have an adverse effect on the Company's results of operations or
financial position.
In December 1994, the Internal Revenue Service concluded a field audit of the
Company's federal income tax returns for the fiscal years 1989 and 1990 and
issued to the Company a "Notice of Deficiency" (Notice) with respect to those
fiscal years. The majority of the proposed adjustments to income in the Notice
related to the allocation of income between the Company and its foreign
manufacturing subsidiaries. The Notice resulted in proposed tax deficiencies of
approximately $43 million and assessed interest. On March 20, 1995, the Company
filed a Petition in the United States Tax Court entitled Conner Peripherals,
Inc. v. Commissioner of Internal Revenue, Docket No. 4322-95. The Company
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
In 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. Western Digital has filed a counterclaim alleging
infringement of certain of its patents by the Company. The Company believes it
has valid claims against Western Digital and meritorious defenses to the claims
asserted by Western Digital.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 9 of notes to unaudited 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 25, 1995.
(b) At the meeting Finis F. Conner, David T. Mitchell, L. Paul Bremer, III, W.
Howard Lester, Mark S. Rossi, Linda Wertheimer Hart and R. Elton White
were elected to serve as directors of the Company for the ensuing year and
until their successors are elected. Effective May 17, 1995, Mr. Mitchell
resigned as an Officer of the Company and from the Board of Directors.
(c) Other matters voted on at the meeting:
(i) Ratification and 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 2,300,000 shares to a
total of 6,800,000 shares. The stockholders approved the amendment to the
Employee Stock Purchase Plan by a vote of 38,452,617 Common equivalent
shares for, 6,326,167 Common equivalent shares against and 710,849 Common
equivalent shares abstaining.
(ii) Ratification and approval of the Company's 1995 Director Stock Plan,
under which a total of 300,000 shares were reserved for issuance. The
stockholders approved the plan by a vote of 34,956,240 Common equivalent
shares for, 9,794,011 Common equivalent shares against and 739,382 Common
equivalent shares abstaining.
(iii) Ratification of the appointment of Price Waterhouse LLP as certified
public accountants for the Company for the fiscal year ending December 31,
1995. The stockholders ratified the appointment by a vote of 44,613,248
Common equivalent shares for, 324,760 Common equivalent shares against and
551,625 Common equivalent shares abstaining.
16
<PAGE>
(iv) Separate tabulation with respect to each nominee for office:
<TABLE>
<CAPTION>
<S> <C> <C>
Finis F. Conner: For: 44,190,810
Withheld: 1,298,823
David T. Mitchell: For: 44,156,511
Withheld: 1,333,122
L. Paul Bremer, III: For: 43,888,451
Withheld: 1,601,182
W. Howard Lester: For: 44,200,176
Withheld: 1,289,457
Mark S. Rossi: For: 44,228,420
Withheld: 1,261,213
Linda Wertheimer Hart: For: 44,214,415
Withheld: 1,275,218
R. Elton White: For: 44,222,225
Withheld: 1,267,408
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Earnings 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, 1995
Form 10-Q)
27.0 Article 5 of Regulation S-X - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed on behalf of Registrant during the
quarter ended June 30, 1995.
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 11, 1995 /s/ P. Jackson Bell
----------------- -------------------
P. Jackson Bell
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
CONNER PERIPHERALS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
11.1 Statement Regarding Computation of Earnings Per Share
27.0 Article 5 of Regulation S-X - Financial Data Schedule
19
<PAGE>
Exhibit 11.1
CONNER PERIPHERALS, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1995 1994 1995 1994
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 53,023 51,660 52,745 51,190
Net effect of dilutive stock options 439 740 349 1,018
------- ------- ------- -------
Total 53,462 52,400 53,094 52,208
======= ======= ======= =======
Net income $18,375 $31,470 $22,994 $55,274
======= ======= ======= =======
Earnings per share $ 0.34 $ 0.60 $ 0.43 $ 1.06
======= ======= ======= =======
Fully diluted:
Weighted average shares outstanding 53,023 51,660 52,745 51,190
Net effect of dilutive stock options 595 746 595 1,023
Assumed conversion of:
6.75% Subordinated Convertible Debentures 7,221 7,931 NA 7,931
6.5% Subordinated Convertible Debentures 12,895 14,375 NA 14,375
------- ------- ------- -------
Total 73,734 74,712 53,340 74,519
======= ======= ======= =======
Net income $18,375 $31,470 $22,994 $55,274
Add:
6.75% Subordinated Convertible Debenture
interest, net of income taxes 2,085 2,290 NA 4,580
6.5% Subordinated Convertible Debenture
interest, net of income taxes 2,967 3,308 NA 6,615
------- ------- ------- -------
Total $23,427 $37,068 $22,994 $66,469
======= ======= ======= =======
Earnings per share $ 0.32 $ 0.50 $ 0.43 $ 0.89
======= ======= ======= =======
</TABLE>
----------------
NA - not applicable, item is anti-dilutive and therefore excluded from the
calculation of earnings per share
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1995 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 156,567
<SECURITIES> 231,796
<RECEIVABLES> 406,484
<ALLOWANCES> 27,452
<INVENTORY> 237,365
<CURRENT-ASSETS> 1,162,840
<PP&E> 524,518
<DEPRECIATION> 291,375
<TOTAL-ASSETS> 1,446,010
<CURRENT-LIABILITIES> 416,631
<BONDS> 527,896
<COMMON> 268,956
0
0
<OTHER-SE> 99,078
<TOTAL-LIABILITY-AND-EQUITY> 1,446,010
<SALES> 1,252,733
<TOTAL-REVENUES> 1,252,733
<CGS> 1,041,470
<TOTAL-COSTS> 1,041,470
<OTHER-EXPENSES> 182,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,511
<INCOME-PRETAX> 25,109
<INCOME-TAX> 8,286
<INCOME-CONTINUING> 16,823
<DISCONTINUED> 0
<EXTRAORDINARY> 6,171
<CHANGES> 0
<NET-INCOME> 22,994
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
