-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, CDEnaV7Xu2MOWv7NixAm7PfEpj6XKgRCiWq7aq+4EDSK5XzxiuJQXLLnSSwcTRbs 4wLCeRufWz4oaq3zYXjodw== 0000898430-94-000577.txt : 19940815 0000898430-94-000577.hdr.sgml : 19940815 ACCESSION NUMBER: 0000898430-94-000577 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNER PERIPHERALS INC CENTRAL INDEX KEY: 0000792397 STANDARD INDUSTRIAL CLASSIFICATION: 3572 IRS NUMBER: 942968210 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10639 FILM NUMBER: 94543193 BUSINESS ADDRESS: STREET 1: 3081 ZANKER RD CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084564500 10-Q 1 QUARTERLY REPORT 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. CONNER PERIPHERALS, INC. FORM 10-Q INDEX
PAGE ---- 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
2 PART I- FINANCIAL INFORMATION Item 1. Financial Statements CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Data) (Unaudited) ASSETS ------
June 30, December 31, 1994 1993 ---------- ------------ 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 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ 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 ========== ==========
See accompanying notes 3 CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data) (Unaudited)
Three months ended Six months ended June 30, June 30, ------------------- ----------------------- 1994 1993 1994 1993 ------ ------ ------ ------ 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 ======== ======== ========== ==========
See accompanying notes 4 CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Six months ended June 30, ----------------------- 1994 1993 ---------- ---------- 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 ========= =========
(continued) See accompanying notes 5 CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) (continued)
Six months ended June 30, ----------------- 1994 1993 ------- ------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $25,421 $25,021 Income taxes $ 3,943 $14,307
See accompanying notes 6 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:
June 30, December 31, 1994 1993 --------- ------------ (In Thousands) Purchased components $102,997 $ 81,620 Work-in-process 66,170 37,939 Finished goods 106,987 54,301 -------- -------- $276,154 $173,860 ======== ========
7 NOTE 4 - Other Income/Expense, Net - ---------------------------------- Other income/(expense), net consists of the following components:
Three months ended Six months ended June 30, June 30, 1994 1993 1994 1993 --------- -------- -------- ------- (In Thousands) (In Thousands) 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 ======= ====== ======= =======
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 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 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.
Three months ended ------------------------------- June 30, March 31, 1994 1993 1994 ------ --------- ---------- 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
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 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 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 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 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 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 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: 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
16 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 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 CONNER PERIPHERALS, INC. INDEX TO EXHIBITS Exhibit Number Description - ------- ---------------------------------------------- 11.1 Statement of Computation of Earnings/(Loss) Per Share EX-11 2 COMPUTATION OF EARNINGS Exhibit 11.1 CONNER PERIPHERALS, INC. (11.1) - STATEMENT RE: COMPUTATION OF EARNINGS/(LOSS) PER SHARE (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, ------------------- ------------------- 1994 1993 1994 1993 ------- --------- ------- --------- 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) ======= ======== ======= ========
____________________ N/A - not applicable, item is anti-dilutive and therefore excluded from the calculation of earnings/(loss) per share -----END PRIVACY-ENHANCED MESSAGE-----