UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 1-10639
CONNER PERIPHERALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2968210
(State of incorporation) (I.R.S. Employer
Identification No.)
3081 ZANKER ROAD, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408)456-4500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
As of April 28, 1995, 52,518,290 shares of the Registrant's Common Stock were
issued and outstanding.
1
CONNER PERIPHERALS, INC.
FORM 10-Q
INDEX
PAGE
----
Cover Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1995 and December 31, 1994 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1995 and 1994 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
March 31, December 31,
1995 1994
---------- ------------
ASSETS
------
Current assets:
Cash, cash equivalents and short-term investments $ 478,261 $ 443,239
Accounts receivable, net 334,468 307,454
Inventory 206,905 255,880
Deferred income taxes 51,950 51,950
Other 90,757 111,187
---------- ----------
Total current assets 1,162,341 1,169,710
Property, plant and equipment, net 228,867 237,066
Goodwill and other intangibles, net 38,936 39,255
Other 13,978 15,398
---------- ----------
$1,444,122 $1,461,429
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 200,893 $ 139,559
Accrued expenses 180,019 190,372
Current portion of long term debt 44,704 34,922
---------- ----------
Total current liabilities 425,616 364,853
Long-term debt, less current portion 543,776 627,059
Deferred income taxes and other 130,526 131,193
Minority interest 2,541 1,648
Stockholders' equity:
Preferred stock, $0.001 par value; 20,000,000
shares authorized, none outstanding -- --
Common stock and paid-in-capital,
$0.001 par value; 100,000,000 shares
authorized, 52,506,820 and 52,460,734
shares issued and outstanding 260,960 260,592
Retained earnings 80,703 76,084
---------- ----------
Total stockholders' equity 341,663 336,676
---------- ----------
$1,444,122 $1,461,429
========== ==========
See accompanying notes
3
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three months ended
March 31,
------------------------
1995 1994
----------- ----------
Net sales $610,395 $563,958
Cost of sales 518,615 436,143
-------- --------
Gross profit 91,780 127,815
-------- --------
Operating expenses:
Selling, general and administrative 50,998 48,216
Research and development 37,437 30,944
Amortization of goodwill and other intangibles 2,552 3,772
-------- --------
Total operating expenses 90,987 82,932
-------- --------
Income from operations 793 44,883
Interest expense (11,544) (12,651)
Other income/(expense), net 10,872 4,389
-------- --------
Income before income taxes and extraordinary item 121 36,621
Provision for income taxes (40) (12,817)
-------- --------
Income before extraordinary item 81 23,804
Extraordinary item:
Gain on extinguishment of debt
(less applicable income taxes of $3,153) 4,538 --
-------- --------
Net income $ 4,619 $ 23,804
======== ========
Net income per share:
Primary:
Income before extraordinary item $ 0.00 $ 0.46
Extraordinary item 0.09 --
-------- --------
$ 0.09 $ 0.46
======== ========
Fully diluted:
Income before extraordinary item $ 0.00 $ 0.40
Extraordinary item 0.09 --
-------- --------
$ 0.09 $ 0.40
======== ========
Weighted average shares:
Primary 52,682 52,019
======== ========
Fully diluted 52,682 74,331
======== ========
See accompanying notes
4
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three months ended
March 31,
-----------------------
1995 1994
---------- ---------
Cash flows from operating activities:
Net income $ 4,619 $ 23,804
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 22,538 21,905
Extraordinary item, net (4,538) --
Gain from sale of building (6,098) --
Minority interest and other 449 2,048
Changes in assets and liabilities:
Accounts receivable, net (27,014) (23,858)
Inventory 48,975 (29,577)
Accounts payable and accrued expenses 43,239 24,166
Other (5,832) (64,285)
--------- --------
Cash provided by/(used in) operating activities 76,338 (45,797)
Cash flows from investing activities:
Proceeds from Read Rite stock sale 18,664 --
Proceeds from note receivable 10,000 --
Proceeds from sale of building 15,925 --
Capital expenditures (22,884) (24,376)
Purchases of investments held to maturity (20,000) (66,531)
Purchases of investments available for sale (276,468) (59,990)
Maturity of investments held to maturity 45,520 96,737
Sale of investments available for sale 263,386 89,133
Purchase of minority interest (3,000) --
Merger with Quest Development Corporation -- (8,500)
--------- --------
Cash provided by investing activities 31,143 26,473
Cash flows from financing activities:
Repayments of long-term debt (60,389) (31,229)
Issuance of common stock 368 3,590
--------- --------
Cash used in financing activities (60,021) (27,639)
Net increase/(decrease) in cash and cash equivalents 47,460 (46,963)
Cash and cash equivalents at beginning of the period 202,386 197,499
--------- --------
Cash and cash equivalents at end of the period 249,846 150,536
Short-term investments 228,415 260,699
--------- --------
Total cash and short-term investments $ 478,261 $411,235
========= ========
See accompanying notes
5
CONNER PERIPHERALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements for the
three-month periods ended March 31, 1995 and 1994, have been prepared on
substantially the same basis as the annual consolidated financial statements.
In the opinion of management, the condensed consolidated financial statements
reflect all material adjustments necessary for a fair presentation of the
financial position, operating results and cash flows for the interim periods
presented. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements, and notes thereto, for
the year ended December 31, 1994, included in the Company's 1994 Annual Report
on Form 10-K.
NOTE 2 - Inventories
- --------------------
Inventories consisted of the following components:
March 31, December 31,
1995 1994
---------- -------------
(In Thousands)
Purchased components $ 82,540 $ 86,970
Work-in-process 77,046 72,692
Finished goods 47,319 96,218
-------- --------
$206,905 $255,880
======== ========
NOTE 3 - Other Income/(Expense), Net
- ------------------------------------
Other income/(expense), net consisted of the following components:
Three months ended
March 31,
1995 1994
-------- --------
(In Thousands)
Interest income $ 6,269 $ 4,273
Gain on sale of building 6,098 --
Minority interest (893) 2,548
Other (602) (2,432)
-------- --------
$ 10,872 $ 4,389
======== ========
NOTE 4 - Acquisitions
- ---------------------
In February 1995, the Company increased its ownership interest from 78% in
Arcada Software, Inc. to 81% through the purchase of additional shares from a
minority stockholder for $3,000,000.
6
NOTE 5 - Supplemental Cash Flow Disclosure
- ---------------------------------------------
Three months ended
March 31,
-------------------
1995 1994
------- ---------
(In Thousands)
Cash paid during the period for:
Interest $23,904 $24,471
Income taxes $ 9,241 --
NOTE 6 - Restructuring
- ----------------------
There have been no significant changes to the Company's estimate of the total
cost of restructuring subsequent to December 31, 1994. Charges to restructuring
reserves for the three-month period ended March 31, 1995 were not material.
NOTE 7 - Reduction of Debt and Extraordinary Item
- -------------------------------------------------
During the three-month period ended March 31, 1995, the Company purchased at a
discount, certain of its 6.5% and 6.75% Convertible Subordinated Debentures with
a face value of $41,102,000 and entered into an agreement to retire the
remaining $41,666,000 of its outstanding Series A and Series B Senior Notes in
early April 1995 with a prepayment fee of $1,100,000. As a result of these
transactions, the Company recorded a net extraordinary gain of $4,538,000 (less
applicable income taxes of $3,153,000) or $0.09 per share.
NOTE 8 - Income Taxes
- ---------------------
In December 1994, the Internal Revenue Service (IRS) completed its review of the
Company's federal tax returns for 1989 and 1990 and issued a deficiency notice
for $43,000,000 in additional taxes. This assessment results primarily from
adjustments proposed by the IRS to the allocation of income between the Company
and its foreign manufacturing subsidiaries. The Company believes it has
meritorious defenses to the proposed adjustments and will contest this
assessment vigorously. Upon final resolution, the deficiency payment, if any,
will include interest. Management believes that the ultimate resolution of this
matter will not have a material adverse impact on the Company's financial
position or results of operations.
NOTE 9 - Litigation
- -------------------
The Company and certain of its officers and certain directors are defendants in
a securities class action lawsuit which purports to represent a class of
investors who purchased or otherwise acquired the Company's common stock between
January 1992 and May 1993. Certain officers and directors are also defendants
in a related stockholders derivative suit. The complaints seek unspecified
damages and other relief. The Company intends to defend the actions vigorously.
7
In 1993, the Company was served with a patent infringement complaint, filed by
IBM, alleging that products manufactured by the Company have infringed certain
patents owned by IBM. In addition, the complaint seeks declaratory relief to
the effect that disk drives produced by IBM do not infringe certain patents held
by the Company and seeks to have such patents declared invalid. The Company
answered the complaint, denying all material allegations and counterclaiming
that IBM disk drives infringe certain patents owned by the Company, including
those patents contained in the IBM complaint. The Company believes that it has
meritorious defenses against these allegations, that it has valid claims against
IBM and will defend this action vigorously. Although the Company has engaged in
continuous discussions with IBM toward an appropriate cross-licensing
arrangement, the Company is unable to predict the outcome of the settlement
negotiations, the litigation and the ultimate effect, if any, on its operations
or financial condition. Regardless of the merits of the respective patent
claims, the Company believes that the existence of the IBM litigation could have
an adverse effect on its business. In addition, this litigation is causing the
Company to incur significant costs, including substantial legal expenses.
In December 1994, the Internal Revenue Service concluded a field audit of the
Company's federal income tax returns for the fiscal years 1989 and 1990 and
issued to the Company a "Notice of Deficiency" ("Notice") with respect to those
fiscal years. The majority of the proposed adjustments to income in the Notice
related to the allocation of income between the Company and its foreign
subsidiaries. The Notice resulted in proposed tax deficiencies of approximately
$43,000,000. On March 20, 1995, the Company filed a Petition in the United
States Tax Court entitled Conner Peripherals, Inc. v. Commissioner of Internal
Revenue, Docket No. 4322-95. The Company believes that the outcome of this
matter will not have a material adverse effect on the Company's financial
condition or results of operations.
During the three-month period ended March 31, 1995, the Company received a newly
issued patent concerning various aspects of the power management features
incorporated in the Company's disk drives. Promptly following the issuance of
the patent, the Company filed a complaint with the United States International
Trade Commission alleging that various disk drives produced by IBM infringe the
new power management patent, and seeking an exclusion order concerning IBM
products incorporating these infringing drives. The Company has also filed a
lawsuit in Federal Court, Southern District of New York, seeking damages and
injunctive relief related to the infringement of the power management patent.
In 1992, the Company filed a patent infringement lawsuit against Western
Digital Corporation ("Western Digital") alleging the infringement of five of
the Company's patents by Western Digital. Western Digital has filed a
counterclaim alleging infringement of certain of its patents by the Company.
The Company believes it has valid claims against Western Digital and
meritorious defenses to the claims asserted by Western Digital.
NOTE 10 - Presentation
- ----------------------
Certain prior year quarter and prior year financial statement balances have
been reclassified to conform to the 1995 presentation.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
---------------------
The following table sets forth certain income statement data for the quarters
ended March 31, 1995 and 1994 and December 31, 1994, as a percentage of net
sales in these periods. This data has been derived from the unaudited
condensed consolidated financial statements.
Three months ended
-----------------------------------
March 31, December 31,
1995 1994 1994
------ ---------- -------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 85.0 77.3 83.5
----- ----- -----
Gross profit 15.0 22.7 16.5
----- ----- -----
Selling, general and
administrative 8.4 8.5 8.2
Research and development 6.1 5.5 6.0
Amortization of goodwill
and other intangibles 0.4 0.7 0.7
Unusual items -- -- (5.6)
----- ----- -----
Income from operations 0.1 8.0 7.2
Income before extraordinary item 0.1 4.2 7.5
Extraordinary item 0.7 -- --
----- ----- -----
Net income 0.8% 4.2% 7.5%
===== ===== =====
NET SALES
- ---------
Net sales for the first quarter of 1995 were $610.4 million, an increase of 8.2%
from the same quarter of 1994 and an increase of 3.2% from the fourth quarter of
1994. The increase in net sales over the first quarter of 1994 resulted
primarily from an increase in unit volume shipments of tape and software
products, a more favorable product mix towards the Company's new higher capacity
disk drives, sales of disk media to third-party customers and higher average
unit prices resulting from new tape drive products, partially offset by a
significant decline in average unit prices of disk drive products.
The increase in net sales over the fourth quarter of 1994 was primarily due to
sales of disk media to third-party customers and a more favorable product mix of
shipments towards new disk and tape drive products with higher average unit
prices. These increases were offset partially by slightly lower shipments of
disk and tape drive products and a decline in disk drive average unit prices.
9
Sales to Packard Bell represented approximately 10% of net sales during the
first quarter of 1995 and Compaq Computer represented approximately 13% of net
sales for the same quarter a year ago. No customer accounted for more than 10%
of net sales for the fourth quarter of 1994 and no other customer represented
more than 10% of net sales during the first quarters of 1995 and 1994.
Distributor sales represented approximately 25% of net sales during the first
quarter of 1995 compared to 23% for the same quarter of 1994 and 32% for the
fourth quarter of 1994. International sales represented 50% of net sales for
the first quarter of 1995 compared to 47% for the same quarter of 1994 and 48%
for the fourth quarter of 1994. The decline in distributor sales as compared to
the fourth quarter of 1994 is primarily due to decreases in sales to domestic
disk and tape distributors while sales to OEM customers increased in most
geographic locations.
Recently the Company has experienced a decline in sales of disk drive products
to major U.S. OEM customers. The Company has implemented a program to improve
its timely introduction of disk drive products, supporting an effort to address
new design-in opportunities with major OEM customers. The Company has recently
introduced several new products intended to meet the needs of these major OEM
customers and recapture lost market share. There can be no assurance that the
Company's efforts to regain its position with major OEM customers will be
successful, or that any such improvement in sales to such customers will occur
in the near term. In particular, the Company does not expect a significant
increase in penetration of OEM customers in the first half of 1995. The Company
believes that an increase in sales to major OEM customers is important to the
Company's long-term competitive position.
As is common in the microcomputer industry, the Company's shipment patterns
during a quarter are frequently characterized by significantly higher shipment
volume in the third month of the quarter than that experienced in the first two
months of the quarter. This pattern often causes quarterly results to be
difficult to predict. Furthermore, order lead-times have been reduced by many
of the Company's customers. This trend has impacted the visibility of future
orders and, accordingly, has also affected the predictability of financial
results. During the first quarter of 1995, shipment delays were experienced
for certain disk drive products introduced during the quarter and the fourth
quarter of 1994 due to certain technical issues and shortages of key
components, particularly headstacks, as certain vendors were unable to meet the
volume ramp of several new disk drive products. No assurance can be given that
these events will not recur in the future.
During the first quarter of 1994, demand for certain of the Company's new disk
drive products exceeded availability due in part to difficulty in producing or
ramping production of certain of the Company's new disk drive products. These
products were available to customers on an allocation basis. This situation
appears to be continuing into the Company's second quarter of 1995. In
addition, quarter over quarter, price erosion is expected to be less severe
during the second quarter of 1995 as compared to the first quarter of 1995.
There can be no assurance that these trends will continue throughout the second
quarter or into future periods.
10
GROSS PROFIT
- ------------
The Company's gross profit as a percentage of net sales ("gross margin") for the
first quarter of 1995 was 15.0% compared to 22.7% for the same quarter of 1994
and 16.5% for the fourth quarter of 1994. The significant decrease in gross
margin compared to the prior year quarter is largely due to severe price erosion
for disk drive products with capacities of 540 megabytes and less. In addition,
a customer cancellation of certain disk drive orders and acceleration of write-
offs of certain lower capacity disk drive products nearing end-of-life resulted
in a $5.5 million charge during the quarter. This decline was partially offset
by higher gross margin resulting from changes in the mix of shipments towards
the Company's new tape and disk drive products with higher than average gross
margins, an increase in software shipments and first time sales of disk media to
third-party customers which carry higher than average gross margins.
The decline in gross margin as compared to the fourth quarter of 1994 was
primarily due to lower disk drive average unit prices, particularly for the
Company's lower capacity disk drive products, and higher inventory related
charges to accelerate the phase-out of certain of these lower capacity products.
Contributing to the gross margin decline was a decrease in the average unit
prices of tape drive products. These decreases in gross margin were partially
offset by sales of new disk and tape drive products and first time third party
sales of disk media.
The demand for the Company's disk drives depends principally on demand for high-
performance microcomputers manufactured by its customers. A slowdown in demand
for such computers, reduction in demand from significant OEM customers, or
continued price erosion may have an exaggerated effect on the demand for the
Company's products and/or profitability in any given period. In addition, the
disk drive industry has been characterized by periods of excess manufacturing
capacity contributing to higher inventory levels and severe price erosion
resulting in lower gross margins. While current demand for the Company's
products remain strong, there can be no assurance that this trend will not recur
and that gross margins will recover to historical levels. The Company
anticipates that pricing and gross margin pressures will continue as the
industry migrates rapidly to higher storage capacity products for entry level
systems. In addition, competition in the tape drive industry continues to be
aggressive, placing pressure on pricing and gross margins of tape drive
products.
The Company has launched several new disk and tape drive products during the
last six months and anticipates the launch of additional products during the
remainder of 1995. The failure of the Company to successfully launch or achieve
required production volumes at anticipated costs for one or more of the new
products could have a material adverse effect on the Company's revenues and
profitability. As is common in periods of product transition, the Company has
experienced certain difficulties and delays in achieving volume production of
certain products. Such delays related to the launch of the Company's high
performance Cayman disk drive products. In addition, shortages of certain key
disk drive components occurred during the first quarter of 1995 which inhibited
the Company's ability to satisfy customer demand. A prolonged inability to
increase production yields and resolve certain technical issues of the
Company's new disk drive products can result in unexpected delays in product
shipments and potentially higher initial rates of return of products from
customers which may significantly impair the Company's profitability and
competitive position. There can be no assurance that the Company will not
experience such difficulties during the remainder of 1995.
11
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
The Company's selling, general and administrative expenses ("SG&A") for the
first quarter of 1995 were $51 million, or 8.4% of sales, compared to $48.2
million or 8.5% of sales for the same quarter in 1994 and $48.5 million, or 8.2%
of sales for the fourth quarter of 1994. The increase in SG&A in the first
quarter of 1995 as compared to the prior year quarter is primarily due to an
increase in marketing efforts within the disk, tape and software groups and an
increase in the international sales force to support a growing European market.
This increase was partially offset by certain headcount reductions and profit
sharing contributions made in the first quarter of 1994 which were not made in
the first quarter of 1995. The increase in SG&A compared to the fourth quarter
of 1994 was primarily attributable to an increase in marketing efforts directed
at the end user consumer and promotional efforts directed towards the retail and
distribution channels.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's investment in research and development ("R&D") for the first
quarter of 1995 was $37.4 million, or 6.1% of sales compared to $31 million, or
5.5% of sales for the same quarter in 1994 and $35.6 million, or 6% of sales for
the fourth quarter of 1994. The increase in R&D expenditures as compared to the
first quarter of 1994 is primarily due to product development activity to
support the launch of new disk and tape drive products and certain other costs
to increase the efficiency of the product launch process. The increase in R&D
expenses as compared to the fourth quarter of 1994 is primarily due to continued
product development activity for disk and tape drive products and an increase in
headcount.
Due to the timing of new R&D programs and the release of new products to
production, the level of R&D spending may vary from quarter to quarter in
absolute dollars and as a percentage of sales. As product life cycles have
shortened and the need to rapidly introduce new products has become essential,
the Company has increased its focus on new product launch activities. The
Company believes this investment has significantly improved the efficiency and
effectiveness of its new product launch operations. This emphasis is planned to
continue and R&D expenditures are expected to increase modestly in absolute
dollars in support of new product introductions. The level of R&D spending
reflects management's belief that such spending is essential in order for the
Company to regularly and predictably introduce new products and remain
competitive.
The Company has initiated a business process re-engineering program of its
infrastructure and operations to reduce operating expenses, including SG&A and
R&D, during the remainder of 1995.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
- ----------------------------------------------
The Company's amortization of goodwill and other intangibles was $2.6 million in
the first quarter of 1995 compared to $3.8 million in the same quarter in 1994
and fourth quarter of 1994. Amortization decreased primarily as a result of
lower intangible balances resulting from completing full amortization of certain
intangibles. Goodwill and other intangibles are being amortized over their
remaining estimated useful lives ranging from 2 to 8 years.
12
UNUSUAL ITEMS
- -------------
In the fourth quarter of 1994, the Company recorded $33 million as a net pretax
credit to income for two unusual items. The Company recorded an unusual credit
of $38 million for the reduction of restructuring reserves established during
1993. This reduction resulted from the modification of the Company's operating
plans, primarily the decision to cancel the closure of certain manufacturing
operations due to changing business conditions. This credit was partially
offset by a $5 million unusual charge taken to write-off in-process R&D
associated with the Company's acquisition of Quest Development Corporation.
INTEREST EXPENSE, OTHER INCOME/EXPENSE
- --------------------------------------
Interest expense was $11.5 million for the first quarter of 1995 compared to
$12.7 million for the same quarter of 1994 and $11.4 million for the fourth
quarter of 1994. Interest expense declined as compared to the same quarter of
1994 primarily as a result of principal payments on the Company's long-term
debt.
Other income/expense was a net gain of $10.9 million in the first quarter of
1995 compared to a net gain of $4.4 million in the same quarter of 1994 and
$25.7 million in the fourth quarter of 1994. The increase in the net gain in
the first quarter of 1995 as compared to the prior year quarter relates
primarily to the gain of $6.1 million on the sale a manufacturing building
located in Singapore. The decrease as compared to the fourth quarter of 1994 is
primarily due to a gain of $22.3 million recorded in the fourth quarter of 1994
on the sale of Read-Rite Corporation ("Read-Rite") common stock which was
acquired upon the merger of Read-Rite and Sunward Technology, Inc. This decrease
was offset partially by the gain on the sale of the manufacturing building
located in Singapore and an increase in interest income from cash and short-term
investments.
INCOME TAXES
- ------------
The Company's effective tax rate for the first quarter of 1995 was approximately
33% excluding the impact of the extraordinary item recorded during the quarter
which was recorded at the rate of 41%. The tax effect of the extraordinary item
was a $3.2 million tax charge.
In December 1994, the IRS completed its review of the Company's federal tax
returns for 1989 and 1990 and issued a deficiency notice for $43 million in
additional taxes. This assessment results primarily from adjustments proposed
by the IRS to the allocation of income between the Company and its foreign
manufacturing subsidiaries. The Company believes it has meritorious defenses to
the proposed adjustments and will contest this assessment vigorously. Upon
final resolution, the deficiency payment, if any, will include interest.
Management believes that the ultimate resolution of this matter will not have a
material adverse impact on the Company's financial position or results of
operations.
13
EXTRAORDINARY ITEM
- ------------------
During the three-month period ended March 31, 1995, the Company purchased at a
discount, its 6.5% and 6.75% Convertible Subordinated Debentures ("Debentures")
with a face value of $41.1 million and entered into an agreement to retire the
remaining $41.7 million of its outstanding Series A and Series B Senior Notes in
early April 1995 with a prepayment fee of $1.1 million. As a result of these
transactions, the Company recorded a net extraordinary gain of $4.5 million
(less applicable income taxes of $3.2 million) or $0.09 per share. The Company
anticipates that some portion of its outstanding Debentures will be purchased
from time to time during the remainder of 1995 depending on the price, market
conditions and other considerations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1995, the Company's principal sources of liquidity consisted of
cash and short-term investments of $478.3 million and a combined $100 million
revolving credit facility with several financial institutions which is subject
to the continued maintenance of certain financial covenants. The Company had no
borrowings outstanding under this credit facility as of March 31, 1995. As of
this date, the Company had outstanding letters of credit and guarantees of
approximately $46 million.
Cash provided by operating activities was approximately $76.3 million for the
three-month period ended March 31, 1995 compared to cash used in operating
activities of $45.8 million for the same period in 1994. This increase was
primarily attributable to changes in working capital partially offset by
increases in adjustments for the extraordinary item and gain from the sale of a
manufacturing building.
Capital expenditures for the three-month period amounted to $22.9 million.
These expenditures primarily related to the purchase of manufacturing and R&D
equipment for the Company's operations in the United States and the Far East and
upgrades in computer equipment. The Company plans to spend approximately $90
million on capital expenditures during the remainder of 1995.
During the three-month period, the Company's cash expenditures to retire its
Debentures in the open market and normal repayments of long-term debt were $60.4
million. The Company received $15.9 million in cash proceeds during the period
for the sale of a manufacturing building located in Singapore. In addition,
$28.7 million was received from proceeds of the sale of Read-Rite stock and
proceeds from a note receivable. Subsequent to the first quarter of 1995, the
Company paid $42.8 million to retire its outstanding Senior Notes. The Company
believes that current capital resources and cash generated from operations will
be sufficient to meet its liquidity and capital expenditure requirements for the
foreseeable future.
FOREIGN CURRENCY RISKS
- ----------------------
The Company's cash flows are substantially U.S. dollar denominated. However, the
Company is exposed to certain foreign currency fluctuations, primarily British
Pound Sterling, Malaysian Ringgit, Italian Lira and Singapore Dollars. At March
31, 1995, the Company had outstanding foreign currency forward contracts and
foreign currency option contracts aggregating approximately $34.1 million and
$5.3 million, respectively. These contracts mature at various periods through
June 1995 and are consistent with the amounts and timing of the underlying
anticipated cash flow requirements and purchase commitments.
14
LITIGATION
- ----------
The Company and certain of its officers and certain directors are defendants in
a securities class action lawsuit which purports to represent a class of
investors who purchased or otherwise acquired the Company's common stock between
January 1992 and May 1993. Certain officers and directors are also defendants
in a related stockholders derivative suit. The complaints seek unspecified
damages and other relief. The Company intends to defend the actions vigorously.
In 1993, the Company was served with a patent infringement complaint, filed by
IBM, alleging that products manufactured by the Company have infringed certain
patents owned by IBM. In addition, the complaint seeks declaratory relief to
the effect that disk drives produced by IBM do not infringe certain patents held
by the Company and seeks to have such patents declared invalid. The Company
answered the complaint, denying all material allegations and counterclaiming
that IBM disk drives infringe certain patents owned by the Company, including
those patents contained in the IBM complaint. The Company believes that it has
meritorious defenses against these allegations, that it has valid claims against
IBM and will defend this action vigorously. Although the Company has engaged in
continuous discussions with IBM toward an appropriate cross-licensing
arrangement, the Company is unable to predict the outcome of the settlement
negotiations, the litigation and the ultimate effect, if any, on its operations
or financial condition. Regardless of the merits of the respective patent
claims, the Company believes that the existence of the IBM litigation could have
an adverse effect on its business. In addition, this litigation is causing the
Company to incur significant costs, including substantial legal expenses.
In December 1994, the Internal Revenue Service concluded a field audit of the
Company's federal income tax returns for the fiscal years 1989 and 1990 and
issued to the Company a "Notice of Deficiency" ("Notice") with respect to those
fiscal years. The majority of the proposed adjustments to income in the Notice
related to the allocation of income between the Company and its foreign
subsidiaries. The Notice resulted in proposed tax deficiencies of approximately
$43 million. On March 20, 1995, the Company filed a Petition in the United
States Tax Court entitled Conner Peripherals, Inc. v. Commissioner of Internal
Revenue, Docket No. 4322-95. The Company believes that the outcome of this
matter will not have a material adverse effect on the Company's financial
condition or results of operations.
During the first quarter of 1995, the Company received a newly issued patent
concerning various aspects of the power management features incorporated in the
Company's disk drives. Promptly following the issuance of the patent, the
Company filed a complaint with the United States International Trade Commission
alleging that various disk drives produced by IBM infringe the new power
management patent, and seeking an exclusion order concerning IBM products
incorporating these infringing drives. The Company has also filed a lawsuit in
Federal Court, Southern District of New York, seeking damages and injunctive
relief related to the infringement of the power management patent.
In 1992, the Company filed a patent infringement lawsuit against Western Digital
Corporation ("Western Digital") alleging the infringement of five of the
Company's patents by Western Digital. Western Digital has filed a counterclaim
alleging infringement of certain of its patents by the Company. The Company
believes it has valid claims against Western Digital and meritorious defenses to
the claims asserted by Western Digital.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 9 of notes to condensed consolidated financial
statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement regarding computation of earnings per share
27.0 Article 5 of Regulation S-X - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed on behalf of Registrant during the
quarter ended March 31, 1995.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONNER PERIPHERALS, INC.
(Registrant)
Date: May 15, 1995 /s/ P. Jackson Bell
------------ ------------------
P. Jackson Bell
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
CONNER PERIPHERALS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------- ------------------------------------------------------
11.1 Statement Regarding Computation of Earnings Per Share
27.0 Article 5 of Regulation S-X - Financial Data Schedule