-----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, Xp2maiiZk9l+MvbPL4apqltA7EDV5Zxv7XRRGWNaYW/xWRDP6okzDnpBMdW0uoqa 2KYWLYyztj/lZ4/XhRjODg== 0000898430-95-000900.txt : 19950517 0000898430-95-000900.hdr.sgml : 19950517 ACCESSION NUMBER: 0000898430-95-000900 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950516 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNER PERIPHERALS INC CENTRAL INDEX KEY: 0000792397 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [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: 95540049 BUSINESS ADDRESS: STREET 1: 3081 ZANKER RD CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084564500 10-Q 1 FORM 10-Q 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 March 31, 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 April 28, 1995, 52,518,290 shares of the Registrant's Common Stock were issued and outstanding. 1 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, March 31, 1995 and December 31, 1994 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1995 and 1994 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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 16 Signatures 17
2 PART I- FINANCIAL INFORMATION Item 1. Financial Statements CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data) (Unaudited)
March 31, December 31, 1995 1994 ---------- ------------ ASSETS ------ Current assets: Cash, cash equivalents and short-term investments $ 478,261 $ 443,239 Accounts receivable, net 334,468 307,454 Inventory 206,905 255,880 Deferred income taxes 51,950 51,950 Other 90,757 111,187 ---------- ---------- Total current assets 1,162,341 1,169,710 Property, plant and equipment, net 228,867 237,066 Goodwill and other intangibles, net 38,936 39,255 Other 13,978 15,398 ---------- ---------- $1,444,122 $1,461,429 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 200,893 $ 139,559 Accrued expenses 180,019 190,372 Current portion of long term debt 44,704 34,922 ---------- ---------- Total current liabilities 425,616 364,853 Long-term debt, less current portion 543,776 627,059 Deferred income taxes and other 130,526 131,193 Minority interest 2,541 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, 52,506,820 and 52,460,734 shares issued and outstanding 260,960 260,592 Retained earnings 80,703 76,084 ---------- ---------- Total stockholders' equity 341,663 336,676 ---------- ---------- $1,444,122 $1,461,429 ========== ==========
See accompanying notes 3 CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data) (Unaudited)
Three months ended March 31, ------------------------ 1995 1994 ----------- ---------- Net sales $610,395 $563,958 Cost of sales 518,615 436,143 -------- -------- Gross profit 91,780 127,815 -------- -------- Operating expenses: Selling, general and administrative 50,998 48,216 Research and development 37,437 30,944 Amortization of goodwill and other intangibles 2,552 3,772 -------- -------- Total operating expenses 90,987 82,932 -------- -------- Income from operations 793 44,883 Interest expense (11,544) (12,651) Other income/(expense), net 10,872 4,389 -------- -------- Income before income taxes and extraordinary item 121 36,621 Provision for income taxes (40) (12,817) -------- -------- Income before extraordinary item 81 23,804 Extraordinary item: Gain on extinguishment of debt (less applicable income taxes of $3,153) 4,538 -- -------- -------- Net income $ 4,619 $ 23,804 ======== ======== Net income per share: Primary: Income before extraordinary item $ 0.00 $ 0.46 Extraordinary item 0.09 -- -------- -------- $ 0.09 $ 0.46 ======== ======== Fully diluted: Income before extraordinary item $ 0.00 $ 0.40 Extraordinary item 0.09 -- -------- -------- $ 0.09 $ 0.40 ======== ======== Weighted average shares: Primary 52,682 52,019 ======== ======== Fully diluted 52,682 74,331 ======== ========
See accompanying notes 4 CONNER PERIPHERALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Three months ended March 31, ----------------------- 1995 1994 ---------- --------- Cash flows from operating activities: Net income $ 4,619 $ 23,804 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Depreciation and amortization 22,538 21,905 Extraordinary item, net (4,538) -- Gain from sale of building (6,098) -- Minority interest and other 449 2,048 Changes in assets and liabilities: Accounts receivable, net (27,014) (23,858) Inventory 48,975 (29,577) Accounts payable and accrued expenses 43,239 24,166 Other (5,832) (64,285) --------- -------- Cash provided by/(used in) operating activities 76,338 (45,797) Cash flows from investing activities: Proceeds from Read Rite stock sale 18,664 -- Proceeds from note receivable 10,000 -- Proceeds from sale of building 15,925 -- Capital expenditures (22,884) (24,376) Purchases of investments held to maturity (20,000) (66,531) Purchases of investments available for sale (276,468) (59,990) Maturity of investments held to maturity 45,520 96,737 Sale of investments available for sale 263,386 89,133 Purchase of minority interest (3,000) -- Merger with Quest Development Corporation -- (8,500) --------- -------- Cash provided by investing activities 31,143 26,473 Cash flows from financing activities: Repayments of long-term debt (60,389) (31,229) Issuance of common stock 368 3,590 --------- -------- Cash used in financing activities (60,021) (27,639) Net increase/(decrease) in cash and cash equivalents 47,460 (46,963) Cash and cash equivalents at beginning of the period 202,386 197,499 --------- -------- Cash and cash equivalents at end of the period 249,846 150,536 Short-term investments 228,415 260,699 --------- -------- Total cash and short-term investments $ 478,261 $411,235 ========= ========
See accompanying notes 5 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 periods ended March 31, 1995 and 1994, have been prepared on substantially the same basis as the annual consolidated financial statements. In the opinion of management, the condensed consolidated 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, 1994, included in the Company's 1994 Annual Report on Form 10-K. NOTE 2 - Inventories - -------------------- Inventories consisted of the following components:
March 31, December 31, 1995 1994 ---------- ------------- (In Thousands) Purchased components $ 82,540 $ 86,970 Work-in-process 77,046 72,692 Finished goods 47,319 96,218 -------- -------- $206,905 $255,880 ======== ========
NOTE 3 - Other Income/(Expense), Net - ------------------------------------ Other income/(expense), net consisted of the following components:
Three months ended March 31, 1995 1994 -------- -------- (In Thousands) Interest income $ 6,269 $ 4,273 Gain on sale of building 6,098 -- Minority interest (893) 2,548 Other (602) (2,432) -------- -------- $ 10,872 $ 4,389 ======== ========
NOTE 4 - Acquisitions - --------------------- In February 1995, the Company increased its ownership interest from 78% in Arcada Software, Inc. to 81% through the purchase of additional shares from a minority stockholder for $3,000,000. 6 NOTE 5 - Supplemental Cash Flow Disclosure - ---------------------------------------------
Three months ended March 31, ------------------- 1995 1994 ------- --------- (In Thousands) Cash paid during the period for: Interest $23,904 $24,471 Income taxes $ 9,241 --
NOTE 6 - 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-month period ended March 31, 1995 were not material. NOTE 7 - Reduction of Debt and Extraordinary Item - ------------------------------------------------- During the three-month period ended March 31, 1995, the Company purchased at a discount, certain of its 6.5% and 6.75% Convertible Subordinated Debentures with a face value of $41,102,000 and entered into an agreement to retire the remaining $41,666,000 of its outstanding Series A and Series B Senior Notes in early April 1995 with a prepayment fee of $1,100,000. As a result of these transactions, the Company recorded a net extraordinary gain of $4,538,000 (less applicable income taxes of $3,153,000) or $0.09 per share. NOTE 8 - Income Taxes - --------------------- In December 1994, the Internal Revenue Service (IRS) completed its review of the Company's federal tax returns for 1989 and 1990 and issued a deficiency notice for $43,000,000 in additional taxes. This assessment results primarily from adjustments proposed by the IRS to the allocation of income between the Company and its foreign manufacturing subsidiaries. The Company believes it has meritorious defenses to the proposed adjustments and will contest this assessment vigorously. Upon final resolution, the deficiency payment, if any, will include interest. Management believes that the ultimate resolution of this matter will not have a material adverse impact on the Company's financial position or results of operations. 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 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 seeks declaratory relief to the effect that disk drives produced by IBM do not infringe certain patents held by the Company and seeks 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. The Company believes that it has meritorious defenses against these allegations, that it has valid claims against IBM and will defend this action vigorously. Although the Company has engaged in continuous discussions with IBM toward an appropriate cross-licensing arrangement, the Company is unable to predict the outcome of the settlement negotiations, the litigation and the 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. 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 subsidiaries. The Notice resulted in proposed tax deficiencies of approximately $43,000,000. 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 outcome of this matter will not have a material adverse effect on the Company's financial condition or results of operations. During the three-month period ended March 31, 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 has also 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 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 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 March 31, 1995 and 1994 and December 31, 1994, as a percentage of net sales in these periods. This data has been derived from the unaudited condensed consolidated financial statements.
Three months ended ----------------------------------- March 31, December 31, 1995 1994 1994 ------ ---------- ------------- Net sales 100.0% 100.0% 100.0% Cost of sales 85.0 77.3 83.5 ----- ----- ----- Gross profit 15.0 22.7 16.5 ----- ----- ----- Selling, general and administrative 8.4 8.5 8.2 Research and development 6.1 5.5 6.0 Amortization of goodwill and other intangibles 0.4 0.7 0.7 Unusual items -- -- (5.6) ----- ----- ----- Income from operations 0.1 8.0 7.2 Income before extraordinary item 0.1 4.2 7.5 Extraordinary item 0.7 -- -- ----- ----- ----- Net income 0.8% 4.2% 7.5% ===== ===== =====
NET SALES - --------- Net sales for the first quarter of 1995 were $610.4 million, an increase of 8.2% from the same quarter of 1994 and an increase of 3.2% from the fourth quarter of 1994. The increase in net sales over the first quarter of 1994 resulted primarily from an increase in unit volume shipments of tape and software products, a more favorable product mix towards the Company's new higher capacity disk drives, sales of disk media to third-party customers and higher average unit prices resulting from new tape drive products, partially offset by a significant decline in average unit prices of disk drive products. The increase in net sales over the fourth quarter of 1994 was primarily due to sales of disk media to third-party customers and a more favorable product mix of shipments towards new disk and tape drive products with higher average unit prices. These increases were offset partially by slightly lower shipments of disk and tape drive products and a decline in disk drive average unit prices. 9 Sales to Packard Bell represented approximately 10% of net sales during the first quarter of 1995 and Compaq Computer represented approximately 13% of net sales for the same quarter a year ago. No customer accounted for more than 10% of net sales for the fourth quarter of 1994 and no other customer represented more than 10% of net sales during the first quarters of 1995 and 1994. Distributor sales represented approximately 25% of net sales during the first quarter of 1995 compared to 23% for the same quarter of 1994 and 32% for the fourth quarter of 1994. International sales represented 50% of net sales for the first quarter of 1995 compared to 47% for the same quarter of 1994 and 48% for the fourth quarter of 1994. The decline in distributor sales as compared to the fourth quarter of 1994 is primarily due to decreases in sales to domestic disk and tape distributors while sales to OEM customers increased in most geographic locations. Recently the Company has experienced a decline in sales of disk drive products to major U.S. OEM customers. The Company has 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 recently introduced several new products intended to meet the needs of these major OEM customers and recapture lost market share. There can be no assurance that the Company's efforts to regain its position with major OEM customers will be successful, or that any such improvement in sales to such customers will occur in the near term. In particular, the Company does not expect a significant increase in penetration of OEM customers in the first half of 1995. 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 quarter 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. No assurance can be given that these events will not recur in the future. During the first quarter of 1994, demand for certain of the Company's new disk drive products exceeded availability due in part to difficulty in producing or ramping production of certain of the Company's new disk drive products. These products were available to customers on an allocation basis. This situation appears to be continuing into the Company's second quarter of 1995. In addition, quarter over quarter, price erosion is expected to be less severe during the second quarter of 1995 as compared to the first quarter of 1995. There can be no assurance that these trends will continue throughout the second quarter or into future periods. 10 GROSS PROFIT - ------------ The Company's gross profit as a percentage of net sales ("gross margin") for the first quarter of 1995 was 15.0% compared to 22.7% for the same quarter of 1994 and 16.5% for the fourth quarter of 1994. The significant 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. In addition, a customer cancellation of certain disk drive orders and acceleration of write- offs of certain lower capacity disk drive products nearing end-of-life resulted in a $5.5 million charge during the quarter. This decline was partially offset by higher gross margin resulting from changes in the mix of shipments towards the Company's new tape and disk drive products with higher than average gross margins, an increase in software shipments and first time sales of disk media to third-party customers which carry higher than average gross margins. The decline in gross margin as compared to the fourth quarter of 1994 was primarily due to lower disk drive average unit prices, particularly for the Company's lower capacity disk drive products, and higher inventory related charges to accelerate the phase-out of certain of these lower capacity products. Contributing to the gross margin decline was a decrease in the average unit prices of tape drive products. These decreases in gross margin were partially offset by sales of new disk and tape drive products and first time third party sales of disk media. 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 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 the last six months 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 and profitability. 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 related to the launch of the Company's high performance Cayman disk drive products. In addition, shortages of certain key disk drive components occurred during the first quarter of 1995 which inhibited the Company's ability to satisfy customer demand. A prolonged inability to increase production yields and resolve certain technical issues of the Company's new disk drive products can result in unexpected delays in product shipments and potentially higher initial rates of return of products from customers which may significantly impair the Company's profitability and competitive position. There can be no assurance that the Company will not experience such difficulties during the remainder of 1995. 11 SELLING, GENERAL AND ADMINISTRATIVE - ----------------------------------- The Company's selling, general and administrative expenses ("SG&A") for the first quarter of 1995 were $51 million, or 8.4% of sales, compared to $48.2 million or 8.5% of sales for the same quarter in 1994 and $48.5 million, or 8.2% of sales for the fourth quarter of 1994. The increase in SG&A in the first quarter of 1995 as compared to the prior year quarter is primarily due to an increase in marketing efforts within the disk, tape and software groups and an increase in the international sales force to support a growing European market. This increase was partially offset by certain headcount reductions and profit sharing contributions made in the first quarter of 1994 which were not made in the first quarter of 1995. The increase in SG&A compared to the fourth quarter of 1994 was primarily attributable to an increase in marketing efforts directed at the end user consumer and promotional efforts directed towards the retail and distribution channels. RESEARCH AND DEVELOPMENT - ------------------------ The Company's investment in research and development ("R&D") for the first quarter of 1995 was $37.4 million, or 6.1% of sales compared to $31 million, or 5.5% of sales for the same quarter in 1994 and $35.6 million, or 6% of sales for the fourth quarter of 1994. The increase in R&D expenditures as compared to the first quarter of 1994 is primarily due to product development activity to support the launch of new disk and tape drive products and certain other costs to increase the efficiency of the product launch process. The increase in R&D expenses as compared to the fourth quarter of 1994 is primarily due to continued product development activity for disk and tape drive products and an increase in headcount. Due to the timing of new R&D programs and the release of new products to production, 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 significantly improved the efficiency and effectiveness of its new product launch operations. This emphasis is planned to continue and R&D expenditures are expected to increase modestly in absolute dollars in support of new product introductions. 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 has initiated a business process re-engineering program of its infrastructure and operations to reduce operating expenses, including SG&A and R&D, during the remainder of 1995. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES - ---------------------------------------------- The Company's amortization of goodwill and other intangibles was $2.6 million in the first quarter of 1995 compared to $3.8 million in the same quarter in 1994 and fourth quarter of 1994. Amortization decreased primarily as a result of lower intangible balances resulting from completing full amortization of certain intangibles. Goodwill and other intangibles are being amortized over their remaining estimated useful lives ranging from 2 to 8 years. 12 UNUSUAL ITEMS - ------------- In the fourth quarter of 1994, the Company recorded $33 million as a net pretax credit to income for two unusual items. The Company recorded an unusual credit of $38 million for the reduction of restructuring reserves established during 1993. This reduction resulted from the modification of the Company's operating plans, primarily the decision to cancel the closure of certain manufacturing operations due to changing business conditions. This credit was partially offset by a $5 million unusual charge taken to write-off in-process R&D associated with the Company's acquisition of Quest Development Corporation. INTEREST EXPENSE, OTHER INCOME/EXPENSE - -------------------------------------- Interest expense was $11.5 million for the first quarter of 1995 compared to $12.7 million for the same quarter of 1994 and $11.4 million for the fourth quarter of 1994. Interest expense declined as compared to the same 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 $10.9 million in the first quarter of 1995 compared to a net gain of $4.4 million in the same quarter of 1994 and $25.7 million in the fourth quarter of 1994. The increase in the net gain in the first quarter of 1995 as compared to the prior year quarter relates primarily to the gain of $6.1 million on the sale a manufacturing building located in Singapore. The decrease as compared to the fourth quarter of 1994 is primarily due to a gain of $22.3 million recorded in the fourth quarter of 1994 on the sale of Read-Rite Corporation ("Read-Rite") common stock which was acquired upon the merger of Read-Rite and Sunward Technology, Inc. This decrease was offset partially by the gain on the sale of the manufacturing building located in Singapore and an increase in interest income from cash and short-term investments. INCOME TAXES - ------------ The Company's effective tax rate for the first quarter of 1995 was approximately 33% excluding the impact of the extraordinary item recorded during the quarter which was recorded at the rate of 41%. The tax effect of the extraordinary item was a $3.2 million tax charge. In December 1994, the IRS completed its review of the Company's federal tax returns for 1989 and 1990 and issued a deficiency notice for $43 million in additional taxes. This assessment results primarily from adjustments proposed by the IRS to the allocation of income between the Company and its foreign manufacturing subsidiaries. The Company believes it has meritorious defenses to the proposed adjustments and will contest this assessment vigorously. Upon final resolution, the deficiency payment, if any, will include interest. Management believes that the ultimate resolution of this matter will not have a material adverse impact on the Company's financial position or results of operations. 13 EXTRAORDINARY ITEM - ------------------ During the three-month period ended March 31, 1995, the Company purchased at a discount, its 6.5% and 6.75% Convertible Subordinated Debentures ("Debentures") with a face value of $41.1 million and entered into an agreement to retire the remaining $41.7 million of its outstanding Series A and Series B Senior Notes in early April 1995 with a prepayment fee of $1.1 million. As a result of these transactions, the Company recorded a net extraordinary gain of $4.5 million (less applicable income taxes of $3.2 million) or $0.09 per share. The Company anticipates that some portion of its outstanding Debentures will 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 March 31, 1995, the Company's principal sources of liquidity consisted of cash and short-term investments of $478.3 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 March 31, 1995. As of this date, the Company had outstanding letters of credit and guarantees of approximately $46 million. Cash provided by operating activities was approximately $76.3 million for the three-month period ended March 31, 1995 compared to cash used in operating activities of $45.8 million for the same period in 1994. This increase was primarily attributable to changes in working capital partially offset by increases in adjustments for the extraordinary item and gain from the sale of a manufacturing building. Capital expenditures for the three-month period amounted to $22.9 million. These expenditures primarily related to the purchase of manufacturing and R&D equipment for the Company's operations in the United States and the Far East and upgrades in computer equipment. The Company plans to spend approximately $90 million on capital expenditures during the remainder of 1995. During the three-month period, the Company's cash expenditures to retire its Debentures in the open market and normal repayments of long-term debt were $60.4 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 a note receivable. Subsequent to the first quarter of 1995, the Company paid $42.8 million to retire its outstanding Senior Notes. 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 March 31, 1995, the Company had outstanding foreign currency forward contracts and foreign currency option contracts aggregating approximately $34.1 million and $5.3 million, respectively. These contracts mature at various periods through June 1995 and are consistent with the amounts and timing of the underlying anticipated cash flow requirements and purchase commitments. 14 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 seeks declaratory relief to the effect that disk drives produced by IBM do not infringe certain patents held by the Company and seeks 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. The Company believes that it has meritorious defenses against these allegations, that it has valid claims against IBM and will defend this action vigorously. Although the Company has engaged in continuous discussions with IBM toward an appropriate cross-licensing arrangement, the Company is unable to predict the outcome of the settlement negotiations, the litigation and the 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. 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 subsidiaries. The Notice resulted in proposed tax deficiencies of approximately $43 million. 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 outcome of this matter will not have a material adverse effect on the Company's financial condition or results of operations. 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 has also 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 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 PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 9 of notes to condensed consolidated financial statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement regarding computation of earnings per share 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 March 31, 1995. 16 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: May 15, 1995 /s/ P. Jackson Bell ------------ ------------------ P. Jackson Bell Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 17 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
EX-11.1 2 COMPUTATION OF EARNINGS Exhibit 11.1 CONNER PERIPHERALS, INC. STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (In Thousands, Except Per Share Data)
Three months ended March 31, ------------------- 1995 1994 ------- --------- Primary: Weighted average shares outstanding 52,466 50,720 Net effect of dilutive stock options 216 1,299 ------- ------- Total 52,682 52,019 ======= ======= Net income $ 4,619 $23,804 ======= ======= Earnings per share $ 0.09 $ 0.46 ======= ======= Fully diluted: Weighted average shares outstanding 52,466 50,720 Net effect of dilutive stock options 216 1,305 Assumed conversion of: 6.75% Subordinated Convertible Debentures NA 7,931 6.5% Subordinated Convertible Debentures NA 14,375 ------- ------- Total 52,682 74,331 ======= ======= Net income $ 4,619 $23,804 Add: 6.75% Subordinated Convertible Debenture interest, net of income taxes NA 2,290 6.5% Subordinated Convertible Debenture interest, net of income taxes NA 3,308 ------- ------- Total $ 4,619 $29,402 ======= ======= Earnings per share $ 0.09 $ 0.40 ======= =======
____________________ NA - not applicable, item is anti-dilutive and therefore excluded from the calculation of earnings per share EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1995 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 178,378 299,883 364,206 29,738 206,905 1,162,341 499,258 270,391 1,444,122 425,616 543,776 260,960 0 0 80,703 1,444,122 610,395 610,395 518,615 518,615 90,987 0 11,544 121 40 81 0 4,538 0 4,619 0.09 0.09
-----END PRIVACY-ENHANCED MESSAGE-----