EXHIBIT 13.1
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Financial Contents
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Selected Financial Data Thirteen
Management's Discussion and Analysis of Financial Condition
and Results of Operations Fourteen
Consolidated Balance Sheets Twenty Two
Consolidated Statements of Operations Twenty Three
Consolidated Statements of Cash Flows Twenty Four
Consolidated Statements of Stockholders' Equity Twenty Five
Notes to Consolidated Financial Statements Twenty Six
Report of Independent Accountants Thirty Nine
Report of Management Forty
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Selected Financial Data
Year Ended December 31, 1994 1993 1992 1991 1990
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(in thousands, except per share amounts)
Net sales $2,365,152 $2,151,672 $2,238,423 $1,598,984 $1,337,593
Gross profit $ 468,649 $ 237,954 $ 458,464 $ 316,257 $ 328,211
Income/(loss) from operations/1/ $ 166,564 $ (446,430) $ 153,530 $ 130,211 $ 172,732
Net income/(loss) $ 109,687 $ (445,314) $ 121,072 $ 92,492 $ 130,052
Net income/(loss) per share:
Primary $ 2.10 $ (9.03) $ 2.19 $ 1.57 $ 2.51
Fully diluted $ 1.77 $ (9.03) $ 1.89 $ 1.54 $ 2.41
Total assets $1,461,429 $1,464,051 $1,904,707 $1,334,538 $ 880,468
Long-term debt, less current portion $ 627,059 $ 660,606 $ 704,845 $ 367,916 $ 36,731
Summary Quarterly Data--Unaudited
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Quarter Ended 1994 1994 1994 1994 1993 1993 1993 1993
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(in thousands, except per share amounts)
Net sales $591,611 $559,504 $650,079 $563,958 $574,449 $ 528,358 $490,575 $558,290
Gross profit $ 97,426 $101,181 $142,227 $127,815 $ 87,872 $ 20,981 $ 38,581 $ 90,520
Income/(loss) from operations/2/ $ 42,546 $ 21,735 $ 57,400 $ 44,883 $ 15,510 $(381,608) $(51,765) $(28,567)
Net income/(loss) $ 44,183 $ 10,230 $ 31,470 $ 23,804 $ 8,455 $(372,400) $(58,825) $(22,544)
Net income/(loss) per share:
Primary $ 0.84 $ 0.20 $ 0.60 $ 0.46 $ 0.17 $ (7.54) $ (1.19) $ (0.46)
Fully diluted $ 0.66 $ 0.20 $ 0.50 $ 0.40 $ 0.17 $ (7.54) $ (1.19) $ (0.46)
/1/ Income/(loss) from operations includes unusual charges (credits) of
$(33,019,000), $378,702,000 and $57,611,000 in 1994, 1993 and 1992,
respectively (see Note 4 to consolidated financial statements).
/2/ Income/(loss) from operations includes unusual charges (credits) of
$(33,019,000), $330,019,000, $12,300,000 and $36,383,000 for the quarters
ended December 31, 1994, September 30, 1993, June 30, 1993 and March 31,
1993, respectively (see Note 4 to consolidated financial statements).
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table sets forth items in the Company's Consolidated Statements
of Operations for each of the last three years ended December 31, 1994, as a
percent of net sales.
Year Ended December 31, 1994 1993 1992
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Net sales 100.0% 100.0% 100.0%
Cost of sales 80.2 88.9 79.5
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Gross profit 19.8 11.1 20.5
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Selling, general and administrative 8.0 8.7 6.8
Research and development 5.5 6.4 4.2
Amortization of goodwill and other
intangibles 0.7 1.0 --
Unusual items (1.4) 15.7 2.6
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Income/(loss) from operations 7.0 (20.7) 6.9
Other income/(expense), net (0.5) (1.2) 0.1
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Income/(loss) before income taxes 6.5 (21.9) 7.0
Benefit/(provision) for income taxes (1.9) 1.2 (1.6)
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Net income 4.6% (20.7)% 5.4%
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Overview
The Company returned to profitability in 1994 with net income of $109.7
million. This represents a significant turnaround as compared with the net
loss reported in 1993 of $445.3 million. The Company believes that the
significant improvement in operating results was due in part to the actions
taken at the end of 1993 to lower its cost structure, improve the efficiency and
effectiveness of new product launch operations, re-align its manufacturing
capacity with demand and improve asset utilization. The Company believes that
these actions have generally been successful and have contributed to its
improvement in operating results in 1994. Results of operations for 1994 also
include a gain of $22.3 million ($13.2 million net of taxes) on the sale of
Read-Rite Corporation common stock and a net credit to operating income of $33
million ($32.7 million net of taxes) as discussed below under "Other Income and
Unusual Items."
The net loss of $445.3 million reported in 1993 was due primarily to two
principal causes. First, the margin the Company earned on sales of products,
primarily disk drives, came under tremendous pressure during 1993 and fell to
11.1% from 20.5% in 1992. The Company believes this deterioration of margins
resulted from pricing pressures caused by a combination of: (1) industry-wide
overcapacity and a rapid shift in customer demand toward drives with
capacities greater than 200 megabytes, and (2) cost pressures caused by aging
inventories with higher unit costs. The second, and more significant cause,
was the impairment of goodwill and other intangibles and the Company's
decision to take various restructuring actions designed to put the Company on
a more competitive footing and return it to profitability. The combination of
these actions resulted in charges to income in 1993 of $378.7 million.
As a result of changing business conditions and modifications of some of its
operating plans, the results of fiscal 1994 include as part of pretax income
the reversal of $38 million in restructuring reserves established during
1993. This amount and the unusual charges taken in 1993 are described in more
detail below under "Gross Profit and Unusual Items."
Acquisitions
During 1994, the Company's then wholly-owned subsidiary, Arcada Software,
Inc. ("Arcada") acquired Quest Development Corporation ("Quest") for $8.5
million in cash and issuance of shares representing approximately 22%
ownership interest in Arcada. Arcada is engaged in developing, producing and
marketing software products for data storage management. The effect of the
acquisition of Quest was not material to the Company's financial condition or
results of operations with the exception of the write-off of in-process
research and development of $5 million included in "Unusual Items."
During 1994, the Company increased its ownership interest in its joint
venture, Conner Shenzhen Peripherals Company
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Fourteen
Ltd., located in Shenzhen, People's Republic of China, from 60% to 90% for $7
million of which $5 million was paid during 1994. During 1993, the Company
purchased for $16 million the remaining 49% minority interest owned by Olivetti,
S.p.A. in Conner Peripherals Europe, S.p.A. ("CPE"), the Company's majority-
owned subsidiary located in Italy. In connection with the acquisition, Olivetti
committed to purchase certain minimum quantities of the Company's products,
subject to certain conditions, for a period of three years. These acquisitions
had no material impact to the Company's financial condition or results of
operations.
In December 1992, the Company acquired all of the outstanding stock of
Archive Corporation ("Archive"), a manufacturer and supplier of tape back-up
and data storage products, for approximately $306 million, including debt
assumed. Operations of Archive subsequent to the acquisition date through
December 31, 1992, were not material and were not included in the Company's
consolidated results of operations in 1992 except for the write-off of
in-process research and development as described under "Unusual Items."
Operations of Archive have been included in the Company's consolidated
results of operations since the beginning of 1993.
Sales
The Company's net sales totaled $2.4 billion in 1994 compared with $2.2
billion in 1993 and 1992. The increase in 1994 net sales over 1993 was
primarily due to an increase in unit shipments of disk drives and a more
favorable product mix towards the Company's newer, higher capacity disk
drives, offset to some extent by lower average unit prices. Unit volume ship
ments of disk drives increased approximately 15% in 1994, primarily on the
strength of demand for the Company's Filepro 210 and 420 megabyte disk
drives. Average unit prices declined as the average price per megabyte of
disk drive capacity continued to decline throughout the industry. The
Company's average price per megabyte of disk drive capacity declined to $0.41
in 1994 from $0.81 in 1993. However, in 1994 the decline in average unit
prices stabilized to more normal levels, reversing the trend of severe price
erosion experienced in 1993.
Net sales from tape products increased modestly in 1994 as compared to 1993
as a significant increase in unit volume shipments was substantially offset
by changes in product mix, the phase-out of certain older products, as well
as lower average unit prices due to competitive pricing pressures experienced
within the tape drive industry.
The Company's net sales of $2.2 billion in 1993 were approximately equal with
1992. Net sales in 1993, however, included the operations of Archive. As
such, the increase in 1993 net sales resulting from the acquisition of
Archive was largely offset by a decline in net sales of disk drives due to a
decline in unit volume shipments and a substantial decline in average unit
selling prices as compared to 1992. The decline in unit volume shipments was
due to a disruption in sales resulting from the termination of the Company's
exclusive distribution relationship with its European master distributor and
disruptions in sales associated with the timing of certain new product
introductions. The Company believes that severe price erosion was experienced
throughout the disk drive industry during 1993.
In 1992, the Company's net sales of disk drives of $2.2 billion represented a
40% increase over 1991. The annual growth in net sales of disk drives was
driven by a 62% increase in unit volume shipments and an improved product
mix, offset somewhat by a decrease in average unit selling prices.
In 1994, international sales accounted for approximately 48% of total sales
compared to 54% in 1993 and 61% in 1992. The decrease in the international
sales mix in 1994 was primarily due to a 7% decline in sales of Disk products
into the European market, offset slightly by higher sales of Tape products in
Europe and Asia, while domestic sales increased across each of the Company's
product lines a combined 23%. The decrease in disk drive sales to the
European market generally occurred during the first half of 1994 as the
Company's European sales force was reorganized and demand for certain of the
Company's newer products exceeded supply.
Sales to distributors in 1994 were approximately 26% of total sales compared
to 29% and 31% in 1993 and 1992, respectively. In 1994, sales to OEM
customers increased 11% for Disk and 35% for Tape while growth in total sales
to distributors
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Fifteen
remained flat. Certain of the Company's products were on allocation during the
first half of 1994 which had a negative impact on distributor sales.
The decrease in international and distributor sales in 1993 as compared to
1992 was due to the impact on the mix of sales from the acquisition of Archive.
Sales to Compaq Computer represented 13% of net sales in 1994 and 1993 as
compared with 15% in 1992. One other customer accounted for more than 10% of
net sales in 1992, with 12%. In 1994 and 1993, no other customer accounted
for 10% or more of net sales.
As is common in the microcomputer industry, the Company's shipment patterns
during a quarter are frequently characterized by a 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 certain of the Company's customers. This trend has impacted the
Company's visibility to future orders and accordingly has also affected the
predictability of financial results.
The demand for the Company's products 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
Company has seen an increase in manufacturing capacity and inventory levels in
the disk drive industry during 1994. These characteristics have generally
resulted in periods of severe price erosion. Accordingly, periods of severe
price declines may be expected to occur in the future.
Gross Profit
The Company's gross margin increased to 19.8% of net sales in 1994 from 11.1%
in 1993. The higher gross margin in 1994 represents the return to an
historically normal gross margin level from the unusually low gross margin
achieved in 1993 and reflects the increase in unit shipment volumes of higher
capacity, lower cost disk drive products introduced in the fourth quarter of
1993, particularly the Filepro 210 and 420 megabyte disk drives. The higher
margins received on these products were slightly offset by lower gross
margins on tape drive products resulting primarily from changes in product
mix, delays in the launch of certain new products and higher provisions for
inventory end-of-life charges. Additionally, the Company's gross margin was
negatively impacted in the fourth quarter ended December 31, 1994, as a
result of minor delays in new product introductions and returns of certain
older Disk and Tape products from a major customer.
In 1993, the Company's gross margin decreased to 11.1% of net sales from
20.5% in 1992. The lower gross margin was due to a significant decline in
average unit selling prices of disk drives, lower shipments into the
distribution channel and special inventory-related charges included in cost
of sales, offset partially by lower average unit production costs and the
inclusion in 1993 of sales of Archive's tape products which carry higher gross
margins. The price declines experienced were driven by overcapacity in the
disk drive industry, particularly for disk drives with capacities under 200
megabytes. During 1993, the Company recorded as cost of sales special charges
totaling $40.3 million resulting from the Company's decisions to accelerate
the end-of-life of certain products.
The Company has launched several new disk drive products during the fourth
quarter of 1994 and anticipates the launch of several more during 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. Minor
delays in the launch of certain of the Company's disk drive products in the
fourth quarter of 1994 did have a negative impact on the Company's quarterly
and annual results of ongoing operations. The Company believes that it has
overcome the delays experienced in most of its new product introductions and
has successfully launched those products during the fourth quarter of 1994.
However, there can be no assurance that the launch of new products in future
periods will be successful or that the Company will not experience production
problems, low yields or other difficulties with respect to recently
introduced products.
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The computer storage industry has historically been cyclical and is
characterized by periods of severe product shortages, followed by periods of
significant overcapacity. During such periods of overcapacity, the prices of
storage products have declined rapidly, resulting in significant declines in
gross margin for industry participants. The Company expects that such
cyclicality and fluctuations in business conditions will recur in the future.
Additionally, the Company anticipates that pricing pressures may result as
the disk drive industry continues to migrate rapidly toward higher storage
capacities. Further, competition in the tape drive industry continues to be
aggressive, placing pressure on pricing and gross margins of tape drive
products.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to $189.2
million in 1994 from $186.3 million in 1993 and $152.7 million in 1992. These
expenses represented 8.0%, 8.7% and 6.8% of net sales in 1994, 1993 and 1992,
respectively. SG&A expenses decreased as a percentage of net sales in 1994
due primarily from lower employee headcount resulting from restructuring
actions taken in the second half of 1993 and lower provisions for bad debt.
In absolute dollars, these cost savings were offset by higher profit sharing
and legal expenses and higher SG&A expenses resulting from the acquisition of
Quest.
The increase in SG&A in absolute dollars and as a percentage of net sales in
1993 as compared to 1992 was primarily due to the acquisition of Archive,
which was consolidated with the Company's disk drive operations commencing in
the first quarter of 1993, and to a lesser extent, higher advertising and
legal costs. The increase in SG&A expenses was partially offset by lower profit
sharing and provisions for bad debt.
SG&A expenses are expected to increase in 1995 to support anticipated revenue
growth but should decrease modestly as a percentage of net sales.
Research and Development
The Company's investment in research and development ("R&D") was $130.8
million in 1994, $137.5 million in 1993 and $94.7 million in 1992,
representing 5.5%, 6.4% and 4.2% of net sales, respectively. R&D expenses
decreased in 1994 as compared to 1993 in absolute dollars and as a percentage
of net sales due to restructuring actions taken in the second half of 1993
and cost savings realized from the implementation of a more efficient product
launch process. Lower costs resulting from these actions were partially
offset by higher R&D expenses from the acquisition of Quest and an increase
in product development activity to support the launch of new Disk and Tape
products.
The year-over-year increase in R&D expenses in absolute dollars and as a
percentage of net sales in 1993 as compared to 1992 is primarily a result of
the inclusion of the Archive tape operations in 1993 and the acceleration of
new product introductions concurrent with the Company's decision to end-of-
life certain older products.
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 year to year 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. During 1995, 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.
Amortization of Goodwill and Other Intangibles
Amortization of goodwill and other intangibles decreased to $15.1 million in
1994 from $22.2 in 1993. This reduction results primarily from the charge
taken in the third quarter of 1993 for the write-down of goodwill and other
intangibles related to the acquisition of Archive. These special charges are
more fully described under Unusual Items. The reduction in amortization from
this action was partially offset by the amortization of goodwill and other
intangibles acquired upon the acquisition
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Seventeen
of Quest in the first quarter of 1994. Goodwill and other intangibles are being
amortized over their remaining estimated useful lives ranging from 2 to 8 years.
Unusual Items
In the fourth quarter of 1994, the Company recorded $33 million as a net
pretax credit to income for two unusual items. As discussed below, the
Company recorded an unusual credit of $38 million for the reduction of
restructuring reserves established during 1993. This credit was partially
offset by a $5 million unusual charge taken to write-off in-process research
and development associated with the acquisition of Quest.
During 1993, the Company recorded special charges totaling $378.7 million, of
which $40.3 million was charged to cost of sales and $338.4 was charged to
unusual items. The $40.3 million charge to cost of sales reflected the cost
of the Company's actions to accelerate the end-of-life of certain disk drive
products. The $338.4 million charge included a write-down of goodwill and
other intangibles of $213 million, restructuring charges of $106.4 million
for the reduction of excess manufacturing capacity and the streamlining of
operations and a charge of $19 million for certain contingencies.
The write-down of intangible assets totaling $213 million consisted of $180
million for the remaining unamortized balance of goodwill related to the
Archive acquisition and $33 million of identified intangibles. The Company
believes that the write-down of these assets was necessitated by the
emergence during 1993 of fundamental changes in the storage business,
primarily the increase in competition and the standardization of technologies
in the tape drive industry, which caused the value of these assets to be
permanently impaired.
The restructuring charges totaling $106.4 million resulted from the Company's
decision to reduce excess manufacturing capacity to a level more consistent
with sustainable demand, to streamline operations as well as administrative
processes to reduce the Company's cost structure and to further integrate and
reduce SG&A and R&D activities of both the disk and tape drive operations. As
part of this restructuring, the Company had decided to close certain of its
manufacturing operations.
In the fourth quarter of 1994, the Company lowered its estimate of the total
cost of restructuring and recorded an adjustment to its restructuring
reserves thereby increasing operating income by $38 million. 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. These changing business conditions primarily
pertain to the improvement in local economies, the reduction in manufacturing
cost benefits achieved by shifting production to other locations and certain
other strategic benefits realized by maintaining a local presence.
As of December 31, 1994, the Company has executed all of its restructuring
actions. As a result, approximately 780 employees from manufacturing,
research and development, sales and marketing and administrative departments
have been terminated and facilities have been reduced by approximately
360,000 square feet. The Company's annual savings from operations resulting from
these actions was to reduce salaries and benefits by approximately $32 million,
depreciation expense by approximately $7 million and rental expense by
approximately $2 million.
The following table sets forth the Company's restructuring reserves as of
December 31, 1993 and 1994:
Restructuring Reserves
Severances Excess Equipment
and benefits facilities and other Total
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(in thousands)
1993 restructuring charges $22,403 $ 28,511 $ 55,543 $106,457
Cash charges (7,077) (623) (1,723) (9,423)
Non-cash charges -- -- (30,654) (30,654)
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Reserve balances,
December 31, 1993 15,326 27,888 23,166 66,380
Cash charges (3,824) (2,126) (7,793) (13,743)
Non-cash charges -- (240) (6,829) (7,069)
Adjustments (9,482) (21,595) (6,942) (38,019)
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Reserve balances,
December 31, 1994 $ 2,020 $ 3,927 $ 1,602 $ 7,549
================================================
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Eighteen
The Company expects that substantially all of the remaining employee
termination payments will be paid during 1995. Lease rental obligations
included in excess facilities are net of approximately $2.1 million of
estimated sublease income expected to be derived from the subleasing of the
effected facilities. These obligations will be paid through the year 2018 or
sooner to the extent the Company is able to negotiate a lease settlement or
otherwise dispose of the properties. Write-offs of assets and payments against
other reserves at December 31, 1994, are expected to be substantially
completed by the end of 1996.
In December 1992, in connection with the acquisition of Archive, the Company
recorded an unusual charge of $57.6 million representing the fair value of
acquired R&D projects in-process at the date of the acquisition.
Interest Expense and Other Income, Net
Interest expense decreased to $47.2 million in 1994 from $51.2 million in
1993. This decrease was due to lower debt balances resulting from principal
payments made during 1994.
Interest expense increased to $51.2 million in 1993 from $46.9 million in
1992. The increase in interest expense in 1993 resulted from a full year's
interest expense recorded on the Company's $345 million, 6.5% subordinated
debentures issued in March of 1992.
Other income/expense reflects the net of, principally, interest income,
realized gains on sale of investments, foreign exchange gains and losses and
minority interest associated with certain of the Company's subsidiaries. In
1994, this resulted in net other income of $35.2 million compared to $26.7
million in 1993 and $49.1 million in 1992. Net other income increased in 1994
compared to 1993 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.
("Sunward"). The Company acquired the shares of Sunward in 1992 in connection
with the licensing of certain patents. This gain was partially offset by lower
interest income from lower invested funds and an increase in foreign exchange
losses.
Net other income in 1993 decreased as compared to 1992 primarily as a result
of a nonrecurring gain of $22.5 million recorded in 1992 for the sale of the
Company's then existing equity interest in Read-Rite, and lower interest
income resulting from lower invested funds and declining interest rates. The
decrease was partially offset by royalty income.
Taxes
The Company's effective tax rate was a provision of 29% in 1994, a benefit of
5.4% in 1993 and a provision of 22.3% in 1992. In 1994, the effective tax
rate was lower than the federal statutory rate of 35% due primarily to
differences between United States and foreign tax rates and the impact of
reversing in 1994 certain restructuring reserves as described under "Unusual
Items." No tax benefit was recorded in 1993 on the establishment of certain
restructuring reserves that were anticipated to be utilized in foreign
jurisdictions where a benefit would not have been realized. Accordingly, no
provision was recorded in 1994 upon the reversal of such reserves. The Company
expects that its effective income tax rate will increase to the 33% range in
fiscal 1995 depending on the mix of income received from foreign and domestic
operations.
In 1993, the Company recorded an income tax benefit at the effective rate of
5.4%. The low effective tax rate in 1993 was primarily due to the impact of
goodwill and intangible asset amortization and write-offs during 1993 which
were not deductible for income tax purposes. In addition, a significant
amount of the Company's losses were generated by operations in foreign tax
jurisdictions where the Company enjoys tax holidays or where losses can only
be carried forward.
During 1993, the U.S. federal statutory tax rate increased from 34% to 35%.
The effect of the increase in the tax rate was not material to the Company's
financial position or results of operations.
The Company enjoys tax holidays in Singapore and China with respect to disk
drive operations which expire in 1997 and 1995, respectively, subject to
certain extensions and post-holiday benefits. In addition, the Company has
applied for a
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Nineteen
Singapore tax holiday through June 1997, relating to the manufacture of tape
drives and has applied for a five-year extension of the tax holiday in Malaysia
with respect to the manufacture of disk drives which expired in December 1994.
The Company provides for United States taxes on that portion of income from
these jurisdictions that is not considered to be indefinitely reinvested.
In December 1994, the IRS completed its review of the Company's federal
income 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 assessed 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.
Liquidity and Capital Resources
At December 31, 1994, the Company's principal sources of liquidity consisted
of $443.2 million in cash and short-term investments and a combined $100
million revolving credit facility with several financial institutions which
is subject to the continued maintenance of certain financial covenants. At
December 31, 1994, the Company had no borrowings under this credit facility. As
of this date, the Company had outstanding letters of credit and guarantees of
approximately $58 million.
Cash generated from operating activities was approximately $55.5 million in
1994 compared to $20.2 million in 1993 and $269.8 million in 1992. Cash
generated from operations increased in 1994 primarily as a result of the
substantial increase in net earnings offset by non-cash items and changes in
other working capital, particularly inventory to support an increase in new
products available for the disk drive market. The decrease in cash generated
from operating activities in 1993 as compared to 1992 was primarily due to
the Company's net loss of $445.3 million, offset to some extent by an
increase in adjustments for non-cash items, including non-cash charges for
unusual items totaling $230.4 million.
The Company's capital expenditures during 1994 were $95 million compared to
$102 million in 1993 and $70 million in 1992. Capital expenditures in 1994 and
1993 reflect increased spending on manufacturing assets, in particular, the
expansion of the Company's disk media manufacturing facility in California
and the purchase in 1994 of land adjacent to the Company's headquarters in
San Jose, California. The disk media facility expansion has been completed
and the Company currently expects that capital expenditures in 1995 will be
slightly lower than the 1994 and 1993 spending levels.
Other significant cash flows in 1994 included $8.5 million used in the
acquisition of Quest and normal debt repayments totaling $42.2 million. In
1993, the Company paid $16 million to purchase the remaining 49% minority
interest in Conner Peripherals Europe S.p.A. held by the Company's joint
venture partner. In December 1992, total cash used in connection with the
acquisition of Archive was approximately $288 million, net of cash acquired,
including cash used to retire Archive debt of approximately $14 million and
$90 million in 1993 and 1992, respectively.
The Company believes that current capital resources and cash generated from
operating activities 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
Japanese Yen, British Pound Sterling, Malaysian Ringgit, Italian Lira and
Singapore Dollars. To hedge against these currency exposures incurred in the
ordinary course of business, the Company enters into foreign currency forward
contracts and purchases foreign currency option contracts for periods and
amounts consistent
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Twenty
with the amounts and timing of its anticipated 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. As of December 31, 1994, deferred gains and
losses on these financial instruments were not material and gains and losses
from hedging transactions have not had a material effect on the results of
operations of the Company to date.
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 December 31, 1994, the Company had
outstanding foreign currency forward contracts and foreign currency option
contracts aggregating approximately $60.9 million and $22.9 million,
respectively. These contracts mature at various periods through April 1995
and are consistent with the amounts and timing of the underlying anticipated
cash flow requirements and purchase commitments.
Litigation
The Company and certain of its officers and 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 August 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 Conner, 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 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.
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"). This claim was settled by the Company and Iomega during 1994 and
had no material effect on the results of operations.
------
Twenty One
Consolidated Balance Sheets
December 31, 1994 1993
--------------------------------------------------------------------------------
(in thousands, except par value and share data)
Assets
Current assets:
Cash, cash equivalents and short-term investments $ 443,239 $ 517,547
Accounts receivable, net of reserves and allowances
of $31,492 in 1994 and $39,430 in 1993 307,454 333,416
Inventory 255,880 173,860
Deferred income taxes 51,950 54,944
Other 111,187 87,348
---------------------
Total current assets 1,169,710 1,167,115
Property, plant and equipment, net 237,066 231,337
Goodwill and other intangibles, net 39,255 42,944
Other 15,398 22,655
---------------------
$1,461,429 $1,464,051
=====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 139,559 $ 229,721
Accrued expenses 190,372 217,060
Current portion of long-term debt 34,922 43,112
---------------------
Total current liabilities 364,853 489,893
Long-term debt, less current portion 627,059 660,606
Deferred income taxes 129,668 98,162
Other 1,525 4,009
Minority interest 1,648 2,530
Commitments and contingencies (Notes 9 and 15)
Stockholders' equity:
Preferred stock, $0.001 par value; 20,000,000 shares
authorized, none outstanding -- --
Common stock and paid-in capital in excess of
$0.001 par value; 100,000,000 shares authorized,
52,460,734 and 50,565,083 shares issued and
outstanding 260,592 242,454
Retained earnings/(accumulated deficit) 76,084 (33,603)
---------------------
Total stockholders' equity 336,676 208,851
---------------------
$1,461,429 $1,464,051
=====================
The accompanying notes are an integral part of these financial statements.
------
Twenty Two
Consolidated Statements of Operations
Year Ended December 31, 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $2,365,152 $2,151,672 $2,238,423
Cost of sales 1,896,503 1,913,718 1,779,959
--------------------------------------
Gross profit 468,649 237,954 458,464
--------------------------------------
Selling, general and administrative 189,237 186,269 152,671
Research and development 130,771 137,465 94,652
Amortization of goodwill and other intangibles 15,096 22,248 --
Unusual items (33,019) 338,402 57,611
--------------------------------------
Total operating expenses 302,085 684,384 304,934
--------------------------------------
Income/(loss) from operations 166,564 (446,430) 153,530
Interest expense (47,237) (51,213) (46,866)
Other income, net 35,224 26,667 49,056
--------------------------------------
Income/(loss) before income taxes 154,551 (470,976) 155,720
Provision/(benefit) for income taxes 44,864 (25,662) 34,648
--------------------------------------
Net income/(loss) $ 109,687 $ (445,314) $ 121,072
======================================
Net income/(loss) per share:
Primary $ 2.10 $ (9.03) $ 2.19
======================================
Fully diluted $ 1.77 $ (9.03) $ 1.89
======================================
Weighted average shares:
Primary 52,253 49,339 55,242
======================================
Fully diluted 74,558 49,339 74,723
======================================
The accompanying notes are an integral part of these financial statements.
------
Twenty Three
Consolidated Statements of Cash Flows
Year Ended December 31, (in thousands) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income/(loss) $ 109,687 $ (445,314) $ 121,072
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Depreciation and amortization 91,681 104,747 77,463
Non-cash unusual items (33,019) 230,417 57,611
Deferred income taxes 29,728 (32,745) (13,067)
Gain on sale of Read-Rite Corporation common stock (22,294) -- (22,540)
Loss on asset dispositions 4,569 11,468 5,595
Minority interest and other (3,366) 720 9,330
Changes in assets and liabilities, net of effect of acquired businesses:
Accounts receivable, net 25,962 67,712 (132,401)
Inventory (82,020) 91,135 39,362
Other current assets (5,175) (19,006) (19,193)
Other non-current assets 7,486 (20,907) (18,108)
Accounts payable and accrued expenses (67,776) 31,994 164,654
---------------------------------------
Total cash provided by operating activities 55,463 20,221 269,778
Cash flows from investing activities:
Capital expenditures (95,011) (102,111) (69,744)
Purchases of short-term investments -- (1,429,492) (1,013,148)
Sales and maturities of short-term investments -- 1,464,986 795,839
Purchases of investments held to maturity (313,501) -- --
Purchases of investments available for sale (344,511) -- --
Maturity of investments held to maturity 394,675 -- --
Sale of investments available for sale 342,532 -- --
Purchase of minority interest (5,000) (16,000) --
Acquisition of acquired businesses, net of cash acquired (8,500) -- (181,537)
Acquisition of technology rights -- (2,078) (28,061)
Proceeds from sale of Read-Rite Corporation common stock 3,630 -- 39,189
--------------------------------------
Total cash used in investing activities (25,686) (84,695) (457,462)
Cash flows from financing activities:
Proceeds from other borrowings 500 2,782 345,672
Repayments of long-term debt (42,237) (10,990) (24,752)
Repayments of Archive Corporation long-term debt -- (13,713) (90,239)
Issuance of common stock 16,847 24,909 17,322
Repurchase of common stock -- -- (241,505)
Contribution by minority stockholder -- -- 8,000
--------------------------------------
Total cash provided by (used in) financing activities (24,890) 2,988 14,498
Net increase/(decrease) in cash and cash equivalents 4,887 (61,486) (173,186)
Cash and cash equivalents at beginning of the year 197,499 258,985 432,171
--------------------------------------
Cash and cash equivalents at end of the year 202,386 197,499 258,985
Short-term investments 240,853 320,048 355,542
--------------------------------------
Total cash, cash equivalents and short-term investments $ 443,239 $ 517,547 $ 614,527
======================================
The accompanying notes are an integral part of these financial statements.
------
Twenty Four
Consolidated Statements of Stockholders' Equity
Common Stock
--------------------------
Par Value Retained
and Paid-in Earnings Total
Capital in (Accumulated Stockholders'
Shares Excess of Par Deficit) Equity
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
Balance at December 31, 1991 58,089,297 $ 422,186 $ 290,639 $ 712,825
Issuance of common stock under various
employee stock plans 1,866,677 31,008 -- 31,008
Repurchase of common stock, at cost (11,638,802) (241,505) -- (241,505)
Income tax benefit of disqualifying dispositions
of employee stock -- 2,636 -- 2,636
Net income -- -- 121,072 121,072
--------------------------------------------------------
Balance at December 31, 1992 48,317,172 214,325 411,711 626,036
Issuance of common stock under various
employee stock plans 2,247,911 24,909 -- 24,909
Income tax benefit of disqualifying dispositions
of employee stock -- 3,220 -- 3,220
Net loss -- -- (445,314) (445,314)
--------------------------------------------------------
Balance at December 31, 1993 50,565,083 242,454 (33,603) 208,851
Issuance of common stock under various
employee stock plans 1,895,651 16,847 -- 16,847
Income tax benefit of disqualifying dispositions
of employee stock -- 1,291 -- 1,291
Net income -- -- 109,687 109,687
--------------------------------------------------------
Balance at December 31, 1994 52,460,734 $ 260,592 $ 76,084 $ 336,676
========================================================
The accompanying notes are an integral part of these financial statements.
------
Twenty Five
Notes to Consolidated Financial Statements
Note 1 The Company
------
Conner Peripherals, Inc. ("Company") was incorporated in California in June
1985, and reincorporated in Delaware in September 1992. The Company sells,
designs and builds a comprehensive line of information storage solutions
products, including disk drives, tape drives, storage management software and
storage systems for a wide range of computer applications.
During each of 1994 and 1993, sales to one customer accounted for
approximately 13% of net sales. During 1992, sales to two customers
accounted for approximately 15% and 12% of net sales.
The Company's fiscal year ends on the Saturday nearest to December 31.
Results of operations for the years ended in 1994 and 1993 include 52 weeks.
Results of operations for the year ended 1992 includes 53 weeks. The Company
reports quarterly results on thirteen-week quarterly periods, each ending on
the Saturday closest to month-end. For purposes of presentation, the Company
has indicated its accounting year as ending on December 31 or the month-end
for interim quarterly periods.
Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Conner Peripherals, Inc. and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition: Revenue from product sales to customers is recognized
upon shipment. Revenue from sales to certain distributors is subject to
agreements allowing certain rights of return and price protection on unsold
merchandise held by those distributors. Accordingly, reserves for estimated
future returns, exchanges and credits for marketing and other sales
incentives are also provided upon shipment.
Warranty Expense: The Company provides for the estimated cost which may be
incurred under its various product warranties upon product shipment.
Cash, Cash Equivalents and Short-Term Investments: The Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents. Short-term investments consist primarily of
certificates of deposit, bankers acceptances, preferred stock, corporate
debt, municipal debt and U.S. Government agency debt securities. These
investments generally mature within 12 months and prior to 1994 were carried at
cost, which approximated market.
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 the Company to
classify debt and equity securities into one of three categories; held to
maturity, trading or available for sale. The Company's investments are
classified as held to maturity and available for sale as of December 31,
1994. Investment securities classified as held to maturity are measured at
amortized cost based on the Company's positive intent to hold such securities
to maturity. Investment securities classified as available for sale are
measured at market value and net unrealized gains and losses are recorded as
a separate component of stockholders' equity until realized. Any gains or
losses on sales of investments are computed on specific identification. As of
December 31, 1994, net unrealized gains and losses on investments available
for sale were not material. The cumulative effect of adopting FAS 115 was not
material to the Company's financial position or results of operations.
Inventory: Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Equipment and furniture are depreciated using the straight-line method
based upon the estimated useful lives of the related assets which range from
eighteen months to 5 years. Leasehold improvements are amortized using the
straight-line method based upon the shorter of the estimated useful lives or the
lease term of the respective assets. Buildings
------
Twenty Six
are depreciated using the straight-line method over the estimated useful life of
25 to 30 years.
Land and buildings held for sale, which are no longer used in the Company's
operations or held for future expansion, are stated at the lower of cost or
estimated fair value.
Goodwill and Other Intangibles: Goodwill and other intangibles, which include
patents and acquired technology, are being amortized over their estimated
useful lives ranging from 2 to 10 years. The Company evaluates the
recoverability of intangible assets based on future discounted cash flows.
Charges for impairment of intangible assets are recorded to the extent
unamortized book value of such assets exceed the related future discounted cash
flows.
Income Taxes: The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." See Note 7 for additional information regarding the Company's
accounting for income taxes.
Net Income (Loss) Per Share: Primary net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding. Common equivalent shares consist of stock options (using the
treasury stock method). Fully diluted net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding and assuming the conversion, if dilutive, of all outstanding
convertible subordinated debentures from the date of issuance for all periods
in which they remained outstanding. For purposes of the fully diluted
computation, net income is adjusted by the after-tax interest expense
applicable to the convertible subordinated debentures. Primary and fully
diluted net loss per share is computed using the weighted average number of
common shares outstanding.
Foreign Currency Translation: The Company currently uses the U.S. dollar as
the functional currency of its foreign operations. Gains or losses from
foreign currency translation are included in the determination of net income.
To date, such amounts have been immaterial.
Concentration of Credit Risk: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally
of cash and cash equivalents, short-term investments and trade accounts
receivable. The Company places its cash and cash equivalents and short-term
investments in a variety of financial instruments such as certificates of
deposit, bankers acceptances, preferred stock, corporate debt, municipal debt
and U.S. Government agency debt securities. The Company, by policy, limits
the amount of credit exposure to any one financial institution or commercial
issuer.
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of
all accounts receivable.
Foreign Currency Financial Instruments: To hedge against certain balance
sheet and operating income currency exposures incurred in the ordinary course
of business, the Company enters into foreign currency forward contracts and
purchases foreign currency option contracts for periods and amounts
consistent with the amounts and timing of operating cash flow requirements
and vendor purchase commitments. Gains and losses are deferred and offset by
gains and losses on the underlying hedged exposures. The Company does not
hold or issue financial instruments for trading purposes. The counterparties
to these contracts consist of international financial institutions. The
Company monitors the credit ratings and capital and surplus of its
counterparties.
Presentation: Certain prior year financial statement balances have been
reclassified to conform to the 1994 presentations.
------
Twenty Seven
Note 2 Short-Term Investments
------
The amortized cost and estimated fair value of securities held to maturity
and available for sale as of December 31, 1994, are as follows:
Gross Gross Gross Estimated
amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------------------------------------
(in thousands)
Held to maturity:
U.S. Government
and agency bonds $ 27,235 $-- $(155) $ 27,080
State and political
subdivision bonds 66,077 -- (380) 65,697
Corporate debt
securities 64,085 80 (128) 64,037
Other 71,852 5 -- 71,857
--------------------------------------------
229,249 85 (663) 228,671
Available for sale-
Auction preferred stock 94,800 -- -- 94,800
--------------------------------------------
Total debt and
equity securities 324,049 $85 $(663) $323,471
====================================
Less cash
equivalents 83,196
--------
Short-term investments $240,853
========
The contractual maturities of investments held to maturity and available for
sale are one year or less. The realized gains and losses as of December 31,
1994, had no material impact to the Company's financial position or results of
operations. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Note 3 Balance Sheet and Statement of Operations Components
------
December 31, 1994 1993
-----------------------------------------------------------------------------
(in thousands)
Inventories:
Purchased components $ 86,970 $ 81,620
Work-in-process 72,692 37,939
Finished goods 96,218 54,301
-----------------------
$255,880 $173,860
=======================
Property plant and equipment:
Building $ 28,394 $ 47,335
Equipment and furniture 345,689 289,517
Leasehold improvements 63,404 60,762
Construction-in-progress 28,257 34,026
-----------------------
465,744 431,640
Less accumulated depreciation
and amortization 256,131 200,303
-----------------------
209,613 231,337
Buildings and improvements
held for sale, net 27,453 --
-----------------------
$237,066 $231,337
=======================
Goodwill and other intangibles:
Goodwill $ 5,073 $ --
Intangibles 70,337 64,003
-----------------------
75,410 64,003
Less accumulated amortization 36,155 21,059
-----------------------
$ 39,255 $ 42,944
=======================
Accrued expenses:
Accrued employee compensation $ 32,997 $ 33,041
Accrued income taxes 41,841 14,298
Accrued warranty costs 45,422 38,299
Accrued restructuring costs 7,549 66,380
Other liabilities 62,563 65,042
-----------------------
$190,372 $217,060
=======================
------
Twenty Eight
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------
(in thousands)
Other income, net:
Interest income $16,193 $17,700 $35,050
Minority interest in joint ventures 2,120 649 (6,457)
Gain on sale of Read-Rite
Corporation common stock 22,294 -- 22,540
Other (5,383) 8,318 (2,077)
------------------------------
$35,224 $26,667 $49,056
==============================
Note 4 Unusual Items
------
In the fourth quarter of 1994, the Company recorded $33,019,000 as a net
pretax credit to income for two unusual items. As discussed below, the
Company recorded an unusual credit of $38,019,000 for the reduction of
restructuring reserves established during 1993. This credit was partially
offset by a $5,000,000 unusual charge taken to write-off in-process research
and development associated with the acquisition of Quest Development
Corporation.
During 1993, the Company recorded special charges totaling $378,702,000, of
which $40,300,000 was charged to cost of sales and $338,402,000 was charged
to unusual items. The $40,300,000 charge to cost of sales reflected the cost
of the Company's actions to accelerate the end-of-life of certain disk drive
products. The $338,402,000 charge included a write-down of goodwill and other
intangibles of $212,945,000, restructuring charges of $106,457,000 for the
reduction of excess manufacturing capacity and the streamlining of operations
and a charge of $19,000,000 for certain contingencies.
The write-down of intangible assets totaling $212,945,000 consisted of
$180,000,000 for the remaining unamortized balance of goodwill related to the
Archive Corporation acquisition and $32,945,000 of identified intangibles.
The Company believes that the write-down of these assets was necessitated by
the emergence during 1993 of fundamental changes in the storage business,
primarily the increase in competition and the standardization of technologies
in the tape drive industry, which caused the value of these assets to be
permanently impaired.
The restructuring charges totaling $106,457,000 resulted from the Company's
decision to reduce excess manufacturing capacity to a level more consistent
with sustainable demand, to streamline operations as well as administrative
processes to reduce the Company's cost structure and to further integrate and
reduce selling, general and administrative and research and development
activities of both the disk and tape drive operations. As part of this
restructuring, the Company had decided to close certain of its manufacturing
operations.
In the fourth quarter of 1994, the Company lowered its estimate of the total
cost of restructuring and recorded an adjustment to its restructuring
reserves thereby increasing operating income by $38,019,000. 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. These changing business conditions primarily
pertain to the improvement in local economies, the reduction in manufacturing
cost benefits achieved by shifting production to other locations and certain
other strategic benefits realized by maintaining a local presence.
------
Twenty Nine
As of December 31, 1994, the Company has executed all of its restructuring
actions. As a result, approximately 780 employees from manufacturing,
research and development, sales and marketing and administrative departments
have been terminated and facilities have been reduced by approximately
360,000 square feet. The Company's annual savings from operations resulting
from these actions was to reduce salaries and benefits by approximately
$32,000,000, depreciation expense by approximately $7,000,000 and rental
expense by approximately $2,000,000.
The following table sets forth the Company's restructuring reserves as of
December 31, 1993 and 1994:
Restructuring Reserves
---------------------------------------------
Severances Excess Equipment
and benefits facilities and other Total
-------------------------------------------------------------------------------
(in thousands)
1993 restructuring
charges $22,403 $ 28,511 $ 55,543 $106,457
Cash charges (7,077) (623) (1,723) (9,423)
Non-cash charges -- -- (30,654) (30,654)
---------------------------------------------
Reserve balances,
December 31, 1993 15,326 27,888 23,166 66,380
Cash charges (3,824) (2,126) (7,793) (13,743)
Non-cash charges -- (240) (6,829) (7,069)
Adjustments (9,482) (21,595) (6,942) (38,019)
---------------------------------------------
Reserve balances,
December 31, 1994 $ 2,020 $ 3,927 $ 1,602 $ 7,549
=============================================
The Company expects that substantially all of the remaining employee termination
payments will be paid during 1995. Lease rental obligations included in excess
facilities are net of approximately $2,119,000 of estimated sublease income
expected to be derived from subleasing of the effected facilities. These
obligations will be paid through the year 2018 or sooner to the extent the
Company is able to negotiate a lease settlement or otherwise dispose of the
properties. Write-offs of assets and payments against other reserves at December
31, 1994, are expected to be substantially completed by the end of 1996.
In December 1992, in connection with the acquisition of Archive Corporation,
the Company recorded an unusual charge of $57,611,000 representing the fair
value of acquired research and development projects in-process at the date of
the acquisition.
Note 5 Acquisitions
------
During 1994, the Company's then wholly-owned subsidiary, Arcada Software,
Inc. ("Arcada") acquired Quest Development Corporation ("Quest") for
$8,500,000 in cash and issuance of shares representing approximately 22%
ownership interest in Arcada. Arcada is engaged in developing, producing and
marketing software products for data storage management. The effect of the
acquisition of Quest was not material to the Company's financial condition or
results of operations with the exception of the write-off of in-process
research and development of $5,000,000 included in "Unusual Items" (see Note
4).
During 1994, the Company increased its ownership interest in its joint
venture, Conner Shenzhen Peripherals Company Ltd., located in Shenzhen,
People's Republic of China, from 60% to 90% for $7,000,000 of which
$5,000,000 was paid during 1994. During 1993, the Company purchased for
$16,000,000 the remaining 49% minority interest owned by Olivetti S.p.A in
Conner Peripherals Europe, S.p.A. ("CPE"), the Company's majority-owned
subsidiary located in Italy. In connection with the acquisition, Olivetti
committed to purchase certain minimum quantities of the Company's products,
subject to certain conditions, for a period of three years. These acquisitions
had no material impact to the Company's financial condition or results of
operations.
------
Thirty
In December 1992, the Company acquired Archive Corporation ("Archive"), a
manufacturer and supplier of tape back-up and data storage products for
$185,000,000 paid in cash, assumption of debt for $104,000,000 (all of which was
repaid during 1993 and 1992) and $17,000,000 for exchange of Archive stock
options and transaction costs. The excess of the purchase price over the fair
market value of the net tangible assets acquired was $303,893,000, of which
$57,611,000 was allocated to in-process research and development, $55,000,000
was allocated to various intangibles and the remaining $191,282,000 was
allocated to goodwill. The in-process research and development of $57,611,000
purchased in connection with the acquisition was expensed in 1992. During the
third quarter of 1993, the Company wrote-off all the unamortized goodwill and
certain other intangibles due to impairment resulting from changes in the
storage business (see Note 4). Operations of Archive have been included in the
Company's consolidated results of operations since the beginning of 1993.
Had the acquisition of Archive occurred as of the beginning of 1992,
unaudited net sales, net income and earnings per share presented on a pro
forma basis for the year ended December 31, 1992 would have been
$2,590,635,000, $157,804,000 and $2.36, respectively. This information was
prepared as if the acquisition had been consummated as of the beginning of 1992
and after giving effect to certain pro forma adjustments. The pro forma
information excludes the effects of the nonrecurring charges of $57,611,000
for in-process research and development (see Note 4). This pro forma
information does not purport to be indicative of what would have occurred had
the acquisition been consummated at the beginning of 1992 or of the results
which may occur in the future.
Note 6 Supplemental Cash Flow Disclosure
------
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------
(in thousands)
Cash paid during the year for:
Interest $48,663 $49,896 $ 40,506
Income taxes $ 4,821 $20,187 $ 17,218
Non-cash investing and
financing activities:
Fair market value of
Archive assets acquired,
including goodwill $ -- $ -- $ 306,485
Debt assumed $ -- $ -- $(104,000)
Note 7 Income Taxes
------
Income (loss) before income taxes includes $156,155,000, $(148,738,000), and
$185,708,000 of income (loss) relating to non-U.S. operations for 1994, 1993
and 1992, respectively.
The provision (benefit) for income taxes includes the following:
Year Ended December 31, 1994 1993 1992
------------------------------------------------------------------------------
(in thousands)
Current:
Federal $10,669 $ 1,902 $ 24,607
State 1,000 142 5,657
Foreign 3,467 5,039 17,451
------------------------------
15,136 7,083 47,715
------------------------------
Deferred:
Federal 23,097 (27,848) (8,700)
State 6,631 (4,897) (4,367)
------------------------------
29,728 (32,745) (13,067)
------------------------------
Total $44,864 $(25,662) $ 34,648
==============================
------
Thirty One
Deferred taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Deferred tax liabilities (assets) are comprised of the
following:
December 31, 1994 1993
-------------------------------------------------------------------------------
(in thousands)
Inventory valuation $ (14,028) $ (13,552)
Depreciation and amortization (11,465) (9,781)
Accounts receivable reserves (11,435) (15,030)
Accrued expenses and other (33,591) (41,178)
Net operating loss and tax credit
carryforwards (41,764) (69,491)
-----------------------------
(112,283) (149,032)
-----------------------------
Unremitted earnings of foreign
subsidiaries 169,415 138,459
Technology and other intangibles 11,821 13,328
State income taxes 5,375 6,846
-----------------------------
186,611 158,633
-----------------------------
Valuation reserves 3,390 33,617
-----------------------------
Total $ 77,718 $ 43,218
=============================
A reconciliation of the income tax provision (benefit) computed by applying
the domestic federal statutory rate to pretax income, to the recorded
provision (benefit) for income taxes follows:
Year Ended December 31, 1994 1993 1992
----------------------------------------------------------------------------
(in thousands)
Provision (benefit) at
statutory rate 35.0% (35.0)% 34.0%
Differences between United
States and foreign taxes
and limitations on the benefits
of foreign losses (9.9) 12.6 (13.0)
State taxes, net of federal
benefit 3.2 (0.7) 0.6
Goodwill -- 13.7 --
Change in federal valuation
reserve -- 1.9 --
Impact of rate change -- 0.3 --
Other 0.7 1.8 0.7
----------------------------
29.0% (5.4)% 22.3%
============================
In connection with the Internal Revenue Service ("IRS") examination of the tax
returns of Archive and its subsidiaries, in 1994 the Company filed amended
federal tax returns reporting certain adjustments to income which reduced the
net operating loss carryforwards relating to pre-acquisition operations of
Archive and its subsidiaries by approximately $86,000,000. These adjustments
resulted in a reduction of the pre-acquisition unremitted foreign earnings of
Archive and its subsidiaries by the same amount. Consequently, the
------
Thirty Two
Company reduced its gross deferred tax assets by approximately $30,000,000 and
made a corresponding reduction to its valuation reserves of approximately
$30,000,000. These adjustments had no impact on the tax provision or the net
deferred tax liabilities of the Company. At December 31, 1994, the Company has
net operating loss carryforwards of approximately $72,000,000 expiring 1997
through 2007, relating to pre-acquisition operations of Archive and its
subsidiaries. These losses may be used to offset future taxable income, subject
to an annual maximum limitation of approximately $12,000,000.
At December 31, 1994, the Company had deferred tax assets of approximately
$9,000,000 relating to post-acquisition net operating loss carryforwards of
Archive and its subsidiaries and foreign tax credit carryforwards which,
subject to certain restrictions, are available to reduce taxes on future
taxable income and expire in 1995 through 2008. At December 31, 1994, the
Company had not provided U.S. federal and state income taxes of approximately
$78,300,000 on cumulative unremitted earnings of its consolidated foreign
subsidiaries which are intended to be indefinitely reinvested.
The Company enjoys a tax holiday in Singapore relating to the manufacture of
disk drives, which expires in 1997, subject to post-holiday benefits. The
Company currently enjoys no tax holiday in Singapore with respect to the
manufacture of tape drives. However, the Company has applied for a Singapore
tax holiday through June 1997, relating to the manufacture of its newly
developed tape drives. The Company's initial tax holiday in Malaysia expired
on December 31, 1994 with respect to the manufacture of disk drives and
related subassemblies. The Company has applied for a five-year extension of
the tax holiday with respect to the manufacture of disk drives in Malaysia.
The Company also enjoys a tax holiday in China through December 1995,
relating to the manufacture of disk drives. The net impact of these tax
holidays was to increase net taxable income by $16,000,000 ($0.21 per share
fully diluted) in 1994, reduce the net loss by approximately $3,000,000
($0.06 per share fully diluted) in 1993 and increase net income by approximately
$27,800,000 ($0.37 per share fully diluted) in 1992.
The IRS is currently reviewing Archive and its subsidiaries' federal income
tax returns for 1985 through 1989. 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 $43,000,000 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. Upon final resolution, the deficiency payment,
if any, will include assessed interest. Management believes that the ultimate
resolution of the ongoing IRS audits and pending assessments will not have a
material adverse impact on the Company's financial position or results of
operations.
Note 8 Long-Term Debt and Lines of Credit
------
December 31, 1994 1993
---------------------------------------------------------------------------
(in thousands)
Convertible subordinated debentures,
6.75%, due 2001, convertible into
7,931,035 shares of common stock $230,000 $230,000
Convertible subordinated debentures,
6.5%, due 2002, convertible into
14,375,000 shares of common stock 345,000 345,000
Senior unsecured notes, 8.84% and
9.08%, due through 1998 73,333 105,000
Senior unsecured note, 12% -- 9,000
Italian Lira debentures and notes,
7% to 7.38%, due through 2000 12,393 13,628
Other borrowings 1,255 1,090
----------------------
661,981 703,718
Less current portion 34,922 43,112
----------------------
$627,059 $660,606
======================
------
Thirty Three
During 1993, the Company modified certain terms of the senior unsecured notes.
Under the modified terms, in exchange for revising certain financial covenants,
the Company agreed to increase the interest rates of the notes by half a percent
for periods commencing from October 1, 1993, and ending the earlier of March 31,
1995, or the due dates of the notes.
Based upon quoted market prices, the fair value of the convertible subordinated
debentures was approximately $402,500,000 at December 31, 1994. The estimated
fair value of the Company's remaining long-term debt was $88,573,000 at December
31, 1994. The fair values of debt for which quoted prices were not available has
been determined based upon interest rates available to the Company for the
issuance of debt with similar terms and remaining maturities.
At December 31, 1994, future minimum principal payments on long-term debt and
capitalized lease obligations were as follows:
Year Ended December 31,
--------------------------------------------------------------------------------
(in thousands)
1995 $ 34,922
1996 34,309
1997 6,993
1998 7,107
1999 2,255
Thereafter 576,395
--------
$661,981
========
On December 23, 1993, the Company entered into a revolving credit facility
agreement ("Agreement") with a group of banks allowing borrowings of up to
$100,000,000 through December 23, 1995. Borrowings under the revolving credit
facility carry interest at the banks' prime rate or, at the option of the
Company, at an interbank offered rate (as defined in the Agreement). The
Agreement provides for a commitment fee. As of December 31, 1994, the Company
had no borrowings under the revolving credit facility. At December 31, 1994,
the Company had outstanding letters of credit and guarantees of $58,429,000.
The revolving credit facility and senior unsecured notes prohibit the payment
of cash dividends and require the maintenance of various financial covenants.
Without the prior consent of the lenders, the Company is also prohibited from
incurring debt and lease commitments in excess of specified amounts or
entering into acquisition, sale of business, merger or joint venture
agreements in excess of certain amounts. At December 31, 1994, the Company
was in full compliance with all covenants and conditions.
Note 9 Lease Commitments
------
The Company leases certain property, facilities and equipment under
non-cancelable operating leases. The terms of the leases for property,
facilities and equipment expire over the next 25 years with renewal options
in certain instances. In addition, the Company has leased certain equipment
under capitalized leases with outstanding lease obligations of less than one
million dollars as of December 31, 1994. These obligations mature sub-
stantially in 1995 and 1996.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1994 are as follows:
Year Ended December 31,
--------------------------------------------------------------------------------
(in thousands)
1995 $17,372
1996 11,899
1997 9,445
1998 7,272
1999 6,603
Thereafter 36,895
-------
$89,486
=======
------
Thirty Four
Rent expense for all operating leases was approximately $22,767,000 in 1994,
$24,446,000 in 1993 and $15,958,000 in 1992.
Note 10 Employee Benefit Plans
-------
Incentive Stock Plans: In 1986, the Company adopted the 1986 Incentive Stock
Plan ("Plan"). The Plan provides for the issuance of non-transferable stock
options to employees of the Company and non-statutory stock options and stock
purchase rights to directors, employees and consultants of the Company. The
Company has never issued any stock purchase rights. A total of 18,500,000
shares of common stock have been reserved for issuance of options and stock
purchase rights under the Plan. At December 31, 1994, 4,086,125 shares were
available for future grants of options and stock purchase rights.
Stock options are granted at prices of not less than 100% of the fair market
value of the common stock at the time of grant, except that stock options
granted to any employee who owns stock representing more than 10% of total
voting power must have an exercise price of not less than 110% of fair market
value. Options granted under the Plan prior to July 1992 expire five years
after the date of grant and vest over a period of four years. In July 1992,
the Plan was amended to provide an expiration period for subsequent stock
grants to ten years from the date of grant.
On December 29, 1992, upon completion of the acquisition of Archive, the
Company assumed the obligations existing under Archive's Incentive Stock
Option and Restricted Stock Purchase Plans ("Archive Plans"). Effective on
that date, the Company converted existing options to purchase Archive common
stock under the Archive Plans into an equivalent number of options to
purchase the Company's common stock. A total of 1,125,000 shares of the
Company's common stock were reserved for issuance of options of which
1,059,258 were issued upon the conversion. These options expire at various
times through 2002.
The following table summarizes stock option activity under the Plan and
Archive Plans:
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------
Options outstanding at
beginning of the year 8,529,767 8,592,493 5,510,468
Granted 2,781,277 3,292,099 3,213,825
Conversion of the
Archive Plans -- -- 1,059,258
Exercised ($0.15 per share
to $23.50 per share) (746,332) (1,329,620) (868,619)
Canceled (1,646,116) (2,025,205) (322,439)
----------------------------------------
Options outstanding at
end of the year 8,918,596 8,529,767 8,592,493
========================================
Options exercisable at
end of the year 3,784,502 3,547,071 2,871,736
Range of exercise price
of outstanding options
at end of the year $ 5.19 $ 5.19 $ 5.00
$26.88 $26.88 $26.88
Restricted Stock Plan: In 1992, the Company's stockholders approved the adoption
of the 1992 Restricted Stock Plan ("Restricted Plan"). A total of 1,000,000
shares of common stock are reserved for issuance under the Restricted Plan. The
aggregate fair value of the shares granted under the Restricted Plan is
considered unearned compensation at the time of grant and compensation is earned
ratably over the vesting period of seven years. Total compensation expense
recognized during 1994, 1993 and 1992 was not material. At December 31, 1994,
379,937 shares had been issued under the Restricted Plan.
Arcada Stock Plan: During 1994, the Board of Directors of the Company's
majority-owned subsidiary, Arcada Holdings, Inc. ("Arcada"), approved a stock
option plan for employees and consultants of Arcada. This plan provides for
the issuance of up to 7,667,186 shares of common stock of Arcada. During
1994, options were granted at prices of $0.08 and $0.09 per
------
Thirty five
share which represents the fair market value of Arcada common stock at the
date of grant, as determined by Arcada's Board of Directors. Options granted
under this plan expire ten years after the date of grant and vest over a
period of four years. If all options were issued and exercised, they would
dilute the Company's ownership in Arcada from 78% to approximately 64%. As of
December 31, 1994, the number of options outstanding was 5,022,341.
Employee Stock Purchase Plan: In 1988, the Company adopted an Employee Stock
Purchase Plan ("Purchase Plan"). A total of 4,500,000 shares of common stock
are reserved for issuance under the Purchase Plan. Shares may be purchased by
participants at the lower of 85% of the fair market value of the common stock
at the beginning or end of each six-month offering period. Shares are to be
purchased from payroll deductions which are limited to 15% of an employee's
compensation. At December 31, 1994, 3,810,557 shares had been issued under
the Purchase Plan.
Profit Sharing Plan: The Company had a profit sharing plan which provided for
additional compensation to substantially all employees of the Company, with
the exception of certain marketing and sales personnel who were compensated
on a commission basis, Arcada employees and certain non-U.S. employees. Prior
to 1994, the additional compensation was determined on a quarterly basis,
based upon a percentage of the amount of operating profit in excess of a
stipulated return on equity. As a result of operating losses incurred in
1993, the Company did not distribute profit sharing or record charges to income
relating to profit sharing. Charges to income for the profit sharing plan
during 1992 were approximately $14,686,000 which is included in selling,
general and administrative costs.
During 1994, upon certain stockholder approval, the Company adopted new
profit sharing and incentive compensation bonus plans ("Plans") for eligible
employees, with the exception of certain sales-commissioned personnel and
Arcada employees. Additional compensation is earned and paid on a quarterly
or semi-annual basis on the achievement by the Company of revenue and operating
income targets as a percentage of the Company's financial plan established at
the beginning of the fiscal year. Individual performance for those employees
participating in the incentive compensation bonus plans are earned and paid
on a quarterly or semi-annual basis. In addition, certain eligible employees
participating in plans are entitled to receive additional year end bonus
awards based on the achievement by the Company of annual revenue and
operating income targets as a percentage of the Company's financial plan.
Charges to income for the Plans during 1994 were approximately $9,042,000
which is included in selling, general and administrative costs.
401(k) Savings Plan: In 1990, the Company adopted a 401(k) savings plan
("Savings Plan") covering substantially all of its U.S. employees. Under the
Savings Plan, eligible employees may contribute up to 15% of their
compensation to the Savings Plan with the Company matching participants'
contributions up to $250 per employee per year at the rate of 50% of the
employee contribution. Both the participants' and the Company's contributions
are fully vested. To date, the Company's contributions have not been material.
Note 11 Repurchase of Common Stock
-------
As of December 31, 1991, Compaq Computer Corporation ("Compaq") owned
approximately 21% of the outstanding common stock of the Company. In August
1992, the Company repurchased and retired 11,638,802 shares of the Company's
common stock from Compaq, representing substantially all of Compaq's equity
interest in the Company.
------
Thirty Six
Note 12 Preferred Shares Rights Agreement
-------
On November 29, 1994, the Board of Directors ("Board") adopted a Preferred
Shares Rights Agreement ("Agreement") and pursuant to the Agreement
authorized and declared a dividend of one preferred share purchase right
("Right") for each common share outstanding of the Company on January 10,
1995. The Rights are designed to protect and maximize the value of the
outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company, in a manner or terms not
approved by the Board. Each Right becomes exercisable to purchase one-hundredth
of a share of Series A Participating Preferred Stock at an exercise price of
$70.00 and expire on November 29, 2004. The Company may redeem the Rights at a
price of $0.01 per Right.
Note 13 Foreign Currency Exposure and Risk Management
-------
The Company enters into foreign currency forward contracts and purchases
foreign currency option contracts to hedge operating cash flow requirements
and vendor purchase commitments denominated in foreign currency (principally
British Pound Sterling, Singapore Dollars, Italian Lira and Japanese Yen). The
terms of such hedging instruments are not more than three months for all
currencies other than those for Yen which are up to eight months. The purpose of
the Company's foreign currency hedging activities is to protect the Company's
foreign currency assets and liabilities and foreign currency operating cash
flows from adverse changes in exchange rates. As of December 31, 1994, the
realized and deferred gains and losses on option and forward contracts were not
material. At December 31, 1994, the Company had outstanding foreign currency
forward contracts and foreign currency option contracts aggregating
approximately $60,890,000 and $22,870,000, respectively. The contract amounts
approximate the fair value of outstanding contracts and options at December 31,
1994. These contracts mature at various periods through April 1995 and are
consistent with the amounts and timing of the underlying anticipated cash flow
requirements and purchase commitments.
Note 14 Foreign Operations
-------
The Company operates in one industry segment (see Note 1). The following is a
summary of the Company's operations:
Year Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------
(in thousands)
Sales to third-party
customers:
United States:
Customers in
United States $ 1,240,099 $ 997,764 $ 867,916
Customers in
Europe & Asia 902,896 859,447 892,506
-----------------------------------------
2,142,995 1,857,211 1,760,422
-----------------------------------------
Asia 142,562 193,257 326,502
Europe 79,595 101,204 151,499
-----------------------------------------
2,365,152 2,151,672 2,238,423
-----------------------------------------
Intercompany
sales between
geographic areas:
United States 239,341 285,250 74,579
Asia 1,787,390 1,426,370 1,388,617
Europe 2,929 98,007 106,037
-----------------------------------------
2,029,660 1,809,627 1,569,233
-----------------------------------------
Consolidation
eliminations (2,029,660) (1,809,627) (1,569,233)
-----------------------------------------
Net sales $ 2,365,152 $ 2,151,672 $ 2,238,423
-----------------------------------------
Operating income:
United States $ 14,000 $ (295,722) $ (3,287)
Asia 110,194 (88,303) 119,348
Europe 42,370 (62,405) 37,469
-----------------------------------------
$ 166,564 $ (446,430) $ 153,530
=========================================
Identifiable assets:
United States $ 666,106 $ 577,962 $ 815,382
Asia 295,359 313,319 404,506
Europe 56,725 55,223 70,292
-----------------------------------------
1,018,190 946,504 1,290,180
General corporate assets 443,239 517,547 614,527
-----------------------------------------
Total assets $ 1,461,429 $ 1,464,051 $ 1,904,707
=========================================
------
Thirty Seven
Intercompany sales are accounted for at prices intended to approximate those
that would be charged to unaffiliated customers. At December 31, 1994, 1993
and 1992, foreign liabilities (excluding intercompany balances) were
$143,038,000, $273,288,000 and $280,053,000, respectively.
Note 15 Litigation
-------
The Company and certain of its officers and 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 August 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 Conner, 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 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.
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"). This claim was settled by the Company and Iomega during 1994 and
had no material effect on the results of operations.
------
Thirty Eight
Report of Independent Accountants
To the Board of Directors and
Stockholders of Conner Peripherals, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Conner Peripherals, Inc. and its subsidiaries at December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 15, the Company is a defendant in a lawsuit alleging
infringement of certain patents. The Company is unable to predict the outcome
of the litigation or ultimate effect, if any, on its operations or financial
condition.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
January 11, 1995
------
Thirty Nine
Report of Management
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with Conner management. The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles.
Conner maintains an effective internal control structure. It consists, in part,
of organizational arrangements which clearly define lines of responsibility and
comprehensive systems of review and control procedures. We believe this
structure provides reasonable assurance that transactions are executed in
accordance with management's authorization, that they are appropriately
recorded, in conformity with generally accepted accounting principles and that
they adequately safeguard, verify and maintain accountability of assets. In
order to assure an effective internal control system, we carefully select and
train our employees, develop and disseminate written policies and procedures and
foster an environment conducive to the effective functioning of controls. We
believe that it is essential for the Company to conduct its business affairs in
accordance with the highest ethical standards.
The Audit Committee of the Board of Directors is composed solely of outside
directors, and is responsible for recommending to the Board the independent
accounting firm to be retained for the coming year, subject to stockholder
approval. The Audit Committee meets periodically and privately with the
independent accountants, with our internal auditors, as well as with Conner
management, to review accounting, auditing, internal control structure and
financial reporting matters.
Price Waterhouse LLP, independent accountants, are retained to examine
Conner's financial statements. Their accompanying report is based on an
examination conducted in accordance with generally accepted auditing
standards, including a review of the internal control structure and tests of
accounting procedures and records.
/s/ David T. Mitchell /s/ P. Jackson Bell
David T. Mitchell P. Jackson Bell
President and Chief Operating Executive Vice President and Chief
Officer Financial Officer
Market Price of Common Stock
The Company's common stock is traded on the New York Stock Exchange under the
symbol "CNR." The following table shows the high and low closing sales prices
for the common stock of the Company for the periods indicated, as reported by
the New York Stock Exchange Composite Tape.
1994 High Low
--------------------------------------------------------------------------------
Quarter ended March 31, 1994 19 3/8 14 3/8
Quarter ended June 30, 1994 16 3/4 11 7/8
Quarter ended September 30, 1994 13 3/8 10 3/8
Quarter ended December 31, 1994 13 9 1/8
1993 High Low
--------------------------------------------------------------------------------
Quarter ended March 31, 1993 24 3/8 13 1/2
Quarter ended June 30, 1993 13 5/8 9 1/4
Quarter ended September 30, 1993 13 9 1/4
Quarter ended December 31, 1993 14 5/8 9 1/4
The Company has not paid cash dividends on its common stock and does not plan to
pay cash dividends to its stockholders in the near future. The Company presently
intends to retain its earnings to finance further growth of its business. As of
December 31, 1994, the Company had 2,686 stockholders of record.
------
Forty
Corporate Directory
Executive Officers and Directors
Finis F. Conner
Chairman of the Board of Directors
and Chief Executive Officer
David T. Mitchell
President, Chief Operating Officer
and Director
P. Jackson Bell
Executive Vice President
and Chief Financial Officer
Donald J. Massaro
Executive Vice President of Sales &
Marketing and President of Tape Division
Dr. Michael L. Workman
Senior Vice President of Engineering
and Chief Technical Officer
Kenneth F. Potashner
Executive Vice President and General
Manager of Disk Drive Operations
William S. Anderson/1,2/
Retired Chairman of the Board and Chief Executive Officer
NCR Corporation
Director*
Ambassador L. Paul Bremer, III/2/
Managing Director
Kissinger Associates, Inc.
Director
W. Howard Lester/2/
Chairman of the Board and Chief Executive Officer
Williams-Sonoma, Inc.
Director
Mark S. Rossi/1,2/
Vice President Prudential Venture Capital
Director
Linda Wertheimer Hart/1,2/
Vice Chairman Hart Group, Inc.
Director
R. Elton White/1/
Retired President of AT&T Global
Information Solutions, Inc.
(formerly NCR Corporation)
Director
/1/ Member of the Audit Committee
/2/ Member of the Compensation Committee
* Not standing for re-election in 1995
Legal Counsel
Wilson, Sonsini, Goodrich & Rosati, P.C.
Palo Alto, CA
Independent Accountants
Price Waterhouse LLP
San Jose, CA
Registrar and Transfer Agent
The First National Bank of Boston
Boston, MA
Bank of Boston stockholder services inquiry number 1-800-442-2001.
Form 10-K
A copy of the Company's Form 10-K, filed with the Securities and Exchange
Commission, is available without charge upon written request to the Investor
Relations Department, Conner Peripherals, Inc., 3081 Zanker Road,
San Jose, California 95134-2128.
Annual Meeting
The annual meeting of stockholders of Conner Peripherals, Inc. will be held
at 10:00 a.m. on April 25, 1995, at the Fairmont Hotel at the Fairmont Plaza
located at 170 S. Market Street, San Jose, California 95113. All Conner
stockholders' are encouraged to attend.
For additional copies of this annual report, contact the Investor Relations
Department, Conner Peripherals, Inc., 3081 Zanker Road, San Jose, California
95134-2128.