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 September 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 October 28, 1994 was 52,233,766.
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,
September 30, 1994 and December 31, 1993 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1994 and 1993 4
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 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 14
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)
ASSETS
------
September 30, December 31,
1994 1993
------------- ------------
Current assets:
Cash and short-term investments $ 400,667 $ 517,547
Accounts receivable, net 294,707 333,416
Inventory, net 295,893 173,860
Deferred income taxes 54,944 54,944
Other current assets 96,200 87,348
---------- ----------
Total current assets 1,142,411 1,167,115
Property, plant and equipment, net 242,407 231,337
Goodwill and other intangibles, net 49,665 42,944
Other 20,317 22,655
---------- ----------
$1,454,800 $1,464,051
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 140,564 $ 229,721
Accrued expenses 258,745 217,060
Current portion of long
term debt 34,249 43,112
---------- ----------
Total current liabilities 433,558 489,893
Long-term debt, less current portion 628,714 660,606
Deferred income taxes and other 105,173 102,171
Minority interest 1,117 2,530
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, 51,818,721
and 50,565,083 shares issued
and outstanding 254,337 242,454
Retained earnings/(accumulated
deficit) 31,901 (33,603)
---------- ----------
Total stockholders' equity 286,238 208,851
---------- ----------
$1,454,800 $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 Nine months ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
Net sales $559,504 $ 528,358 $1,773,541 $1,577,223
Cost of sales 458,323 507,377 1,402,318 1,427,141
-------- --------- ---------- ----------
Gross profit 101,181 20,981 371,223 150,082
-------- --------- ---------- ----------
Operating expenses:
Selling, general and
administrative 43,375 49,435 140,739 145,893
Research and development 32,297 37,001 95,195 108,669
Amortization of goodwill
and other intangibles 3,774 6,134 11,272 19,058
Unusual items -- 310,019 -- 338,402
-------- --------- ---------- ----------
Total operating expenses 79,446 402,589 247,206 612,022
-------- --------- ---------- ----------
Income/(loss) from operations 21,735 (381,608) 124,017 (461,940)
Interest expense (11,496) (12,704) (35,863) (38,677)
Other income, net 5,033 5,912 9,540 21,186
-------- --------- ---------- ----------
Income/(loss) before income
taxes 15,272 (388,400) 97,694 (479,431)
(Provision)/benefit for income
taxes (5,042) 16,000 (32,190) 25,662
-------- --------- ---------- ----------
Net income/(loss) $ 10,230 $(372,400) $ 65,504 $ (453,769)
======== ========= ========== ==========
Net income/(loss) per share:
Primary $0.20 $(7.54) $1.26 $(9.24)
===== ====== ===== ======
Fully diluted $0.20 $(7.54) $1.10 $(9.24)
===== ====== ===== ======
Weighted average shares:
Primary 52,209 49,410 52,175 49,089
======== ========= ========== ==========
Fully diluted 52,209 49,410 74,489 49,089
======== ========= ========== ==========
See accompanying notes
4
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine months ended
September 30,
------------------------
1994 1993
---------- ------------
Cash flows from operating activities:
Net income/(loss) $ 65,504 $ (453,769)
Adjustments to reconcile net
income/(loss) to net cash used in
operating activities:
Depreciation and amortization 67,170 81,391
Non-cash unusual items -- 230,417
Minority interest and other 4,063 284
Changes in assets and liabilities:
Accounts receivable, net 38,709 99,103
Inventory, net (122,033) 22,228
Accounts payable and accrued expenses (47,472) 24,116
Other (16,007) (37,843)
-------- -----------
Cash used in operating activities (10,066) (34,073)
-------- -----------
Cash flows from investing activities:
Capital expenditures (69,442) (79,880)
Purchases of short-term investments (341,763) (1,094,577)
Sale and maturities of
short-term investments 467,571 1,119,871
Merger with Quest Development Corp. (8,500) --
Purchase of minority interest -- (8,000)
Acquisition of technology rights -- (2,078)
-------- -----------
Cash provided by/(used in)
investing activities 47,866 (64,664)
-------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- 2,453
Repayments of long-term debt (40,755) (20,019)
Issuance of common stock 11,883 19,150
-------- -----------
Cash (used in)/provided by
financing activities (28,872) 1,584
-------- -----------
Net increase/(decrease) in cash
and cash equivalents 8,928 (97,153)
Cash and cash equivalents at beginning of
the period 197,499 258,985
-------- -----------
Cash and cash equivalents at end of
the period 206,427 161,832
Short-term investments 194,240 330,248
-------- -----------
Total cash and short-term investments $400,667 $ 492,080
======== ===========
(continued)
See accompanying notes
5
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
(continued)
Nine months ended
September 30,
-----------------
1994 1993
-------- -------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $48,456 $45,181
Income taxes $ 4,016 $20,059
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 nine-month periods ended September 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 September 30, 1994, the Company had cash equivalents and
short-term investments of $276,689,000 with a market value of approximately
$276,132,000, 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:
September 30, December 31,
1994 1993
------------- ------------
(In Thousands)
Purchased components $124,785 $ 81,620
Work-in-process 54,171 37,939
Finished goods 116,937 54,301
-------- --------
$295,893 $173,860
======== ========
7
NOTE 4 - Other Income/(Expense), Net
- ------------------------------------
Other income/(expense), net consists of the following components:
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- -------- -------
(In Thousands) (In Thousands)
Interest income $4,036 $3,852 $11,989 $13,498
Minority interest 614 277 2,651 558
Royalty income -- 1,269 -- 3,792
Other 383 514 (5,100) 3,338
------ ------ ------- -------
$5,033 $5,912 $ 9,540 $21,186
====== ====== ======= =======
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 - Income Taxes
- ---------------------
The Company anticipates that the Internal Revenue Service ("IRS") may issue a
Notice of Deficiency prior to December 31, 1994 for IRS examinations of the
Company's 1989 and 1990 federal income tax returns. The Company believes that
the ultimate outcome of these examinations 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 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
8
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 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 discussions with IBM directed 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 Corporation
("Iomega"). The dispute was settled in September of this year when the Company
entered into a license agreement with Iomega. The terms of the agreement were
not material to the Company's current or projected results of operations.
NOTE 10 - 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 September 30, 1994 and 1993 and June 30, 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
--------------------------
September 30, June 30,
1994 1993 1994
------- ------ ---------
Net sales 100.0% 100.0% 100.0%
Cost of sales 81.9 96.0 78.1
Gross profit 18.1 4.0 21.9
Selling, general and
administrative 7.7 9.4 7.6
Research & development 5.8 7.0 4.9
Amortization of goodwill
and other intangibles 0.7 1.1 0.6
Unusual items -- 58.7 --
Income/(loss) from operations 3.9 (72.2) 8.8
Net income/(loss) 1.8 (70.5) 4.8
Net Sales
- ---------
Net sales for the third quarter of 1994 were $559.5 million, an increase of 5.9%
from the same quarter of 1993 and a decrease of 13.9% from the second quarter of
1994. The increase in net sales over the third quarter of 1993 resulted
primarily from higher shipment volumes of both disk and tape drives which were
partially offset by lower average unit prices.
The decrease in net sales over the second quarter of 1994 was due to decreases
in unit shipments of both disk drives and tape drives. The decrease in disk
drive revenue was due to lower shipments of the Company's desktop disk drive
product lines primarily due to the traditional summer slowdown experienced
within the industry and to declining sales to major OEM customers. The decrease
in tape drive revenue resulted primarily from a decrease in unit shipments of
the Company's DAT product line.
Sales to Compaq Computer ("Compaq") represented approximately 14% of net sales
during the third quarter of 1994 compared to 11% for the same quarter of 1993
and 18% for the second quarter of 1994. No other customer represented more than
10% of net sales during these periods. Distributor sales represented
approximately 26% of net sales during
10
the third quarter of 1994 compared to 32% for the same quarter of 1993 and 24%
for the second quarter of 1994. International sales represented 49% of net sales
for the third quarter of 1994 compared to 54% for the same quarter of 1993 and
47% for the second quarter of 1994. The decline in international sales as
compared to the same quarter of 1993 is primarily due to a higher percentage of
tape drive shipments to domestic customers partially offset by a higher
percentage of disk drive shipments to international customers, primarily in the
European market.
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.
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 ("gross margin") for the
third quarter of 1994 was 18.1% compared to 4.0% for the same quarter of 1993
and 21.9% for the second quarter of 1994. The large increase in gross margin
compared to the prior year quarter is primarily due to the unusually low gross
profits reported by the Company in the third quarter of 1993 which resulted from
extreme price erosion in average unit sales prices due to industry overcapacity
which were not offset by similar decreases in average unit costs, pricing on new
products that resulted in lower than historically achieved gross margins and a
$20 million inventory-related charge included in cost of sales. This charge
resulted from the Company's decision to accelerate the transition to its newer
products which rendered certain older product inventory obsolete or caused the
Company to write-down such inventory to their net realizable value.
The decline in gross margin from the second quarter of 1994 to the third quarter
of 1994 was primarily due to lower disk drive average unit prices and margin
pressure as the Company's cost structure transitions to the 420 megabyte disk
drive as the entry-level capacity. This margin decline was offset to some
extent by higher tape drive margins as a result of a higher mix of shipments
into the distribution channel.
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 migrates rapidly to higher storage
capacities for entry level systems. As a result, the Company's gross margin may
decline in subsequent quarters. In addition, competition in the tape drive
industry has
11
become aggressive, placing more pressure on pricing and gross margins on tape
drive products.
The Company anticipates introduction of several new products during the
remainder of 1994 and into the first quarter 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. In the past,
significant product transitions have resulted in substantial pressures on gross
margins, unexpected costs and other disruptions. There can be no assurance that
the Company will not experience such difficulties in the fourth quarter of 1994
and the first quarter of 1995, particularly in light of the magnitude of the
Company's current product transition. 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
third quarter of 1994 were $43.4 million, or 7.7% of sales, compared to $49.4
million or 9.4% of sales for the same quarter in 1993 and $49.1 million, or 7.6%
of sales for the second quarter of 1994. The decrease in SG&A expense in the
third quarter of 1994 as compared to the prior year quarter is primarily due to
lower employee headcount resulting from restructuring actions taken during the
third quarter of 1993, lower expenses associated with Co-op advertising, a lower
provision for bad debt, offset partially by the acquisition of Quest Development
Corp. ("Quest") in the first quarter of 1994 and an increase in legal expenses.
The decrease in SG&A in the third quarter of 1994 as compared to the second
quarter of 1994 is primarily due to employee profit sharing.
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 third quarter
of 1994 was $32.3 million, or 5.8% of sales compared to $37.0 million, or 7.0%
of sales for the same quarter in 1993 and $32.0 million, or 4.9% of sales for
the second quarter of 1994. The decrease in R&D spending as compared to the
third 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 R&D expenses as compared to the second quarter of
1994 are relatively consistent as product development activity continued for
both new disk and tape drive products as the Company anticipates several new
product introductions during the fourth quarter of 1994 and the first quarter of
1995.
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
12
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 $3.8 million in
the third quarter of 1994 compared to $6.1 million in the same quarter in 1993
and $3.7 million in the second quarter of 1994. Amortization decreased as
compared to the prior year quarter 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 second quarter of 1994,
amortization of goodwill and other intangibles remained relatively stable.
Interest Expense, Other Income/Expense and Income Taxes
- -------------------------------------------------------
Interest expense was $11.5 million for the third quarter of 1994, $12.7 million
for the same quarter of 1993 and $11.7 million for the second quarter of 1994.
Interest expense declined as compared to the same quarter of 1993 and the second
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 $5.0 million in the third quarter of 1994
compared to a net gain of $5.9 million in the same quarter of 1993 and $0.1
million in the second quarter of 1994. The decrease in the net gain in the
third quarter of 1994 as compared to the prior year quarter relates primarily to
the inclusion of royalties relating to the Company's tape drive operations in
the third quarter of 1993. The increase as compared to the second quarter of
1994 is primarily the result of foreign exchange gains on forward contracts
and purchase options.
Income Taxes
- ------------
The Company's effective tax rate for the nine months ended September 30, 1994
was approximately 33.0% which is consistent with the effective tax rate for the
six month period ended June 30, 1994. The Company anticipates that the Internal
Revenue Service ("IRS") may issue a Notice of Deficiency prior to December 31,
1994 for IRS examinations of the Company's 1989 and 1990 federal income tax
returns. The Company believes that the ultimate outcome of these examinations
will not have a material adverse impact on the Company's financial position or
results of operations.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1994, the Company's principal sources of liquidity consisted of
cash and short-term investments of $401 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 September 30, 1994. As
of this date, the Company had outstanding letters of credit and guarantees
totaling approximately $54 million.
Cash used in operating activities of $10.1 million for the nine months ended
September 30, 1994 was down from $34.1 million for the same period in 1993
primarily due to a significant increase in net income
13
for the period. This increase was offset by decreases in adjustments for non-
cash items, accounts receivable balances, accounts payable and accrued expenses
and an increase in inventory levels.
Capital expenditures for the nine month period amounted to $69.4 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 $15 million on capital expenditures during the remainder of 1994.
During the period the Company made normal repayments of long-term debt totaling
$40.8 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 exposed to certain foreign currency fluctuations. To hedge against
certain balance sheet and operating income currency exposures incurred in the
ordinary course of business, the Company enters into forward currency contracts
and foreign currency purchase options for periods and amounts consistent with
the amounts and timing of operating cash flow requirements and vendor purchase
commitments. Gains and losses on these foreign currency contracts and options
are deferred and offset by gains and losses on the underlying hedged
transactions.
The counterparties to these contracts consist of international financial
institutions. By policy, the Company monitors the credit ratings and capital
and surplus of its counterparties. Though the Company attempts to hedge
significant 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 September 30, 1994, the Company had outstanding forward
currency contracts and foreign currency options aggregating approximately $37
million and $20 million, respectively. These contracts mature at various
periods through January 1995, consistent with forecasted cash flow requirements
and 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 discussions with IBM directed 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 Corporation
("Iomega"). The dispute was settled in September of this year when the Company
entered into a license agreement with Iomega. The terms of the agreement were
not material to the Company's current or projected results of operations.
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/loss 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 September 30, 1994.
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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: November 10, 1994 /s/ P. JACKSON BELL
----------------- ---------------------------------
P. Jackson Bell,
Executive Vice President - Finance
and Chief Financial Officer
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CONNER PERIPHERALS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ----------------------------------------------
11.1 Statement of Computation of Earnings/(Loss) Per Share
27.0 Article 5 of Regulation S-X - Financial Data Schedule
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