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 September 30, 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 October 27, 1995, 53,714,279 shares of the Registrant's Common Stock were
issued and outstanding.
CONNER PERIPHERALS, INC.
FORM 10-Q
INDEX
PAGE
----
Cover Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of
Operations - Three months and nine months
ended September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash
Flows - Nine months ended September 30, 1995 and 1994 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
ASSETS
------
September 30, December 31,
1995 1994
---- ----
Current assets:
Cash, cash equivalents and short-term $ 349,450 $ 443,239
investments
Accounts receivable, net 418,377 307,454
Inventory 265,356 255,880
Deferred income taxes and other 170,107 163,137
--------- ---------
Total current assets 1,203,290 1,169,710
Property, plant and equipment, net 242,076 237,066
Goodwill and other intangibles, net 35,099 39,255
Other 10,322 15,398
--------- ---------
$1,490,787 $1,461,429
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 259,649 $ 139,559
Accrued expenses 181,393 190,372
Current portion of long-term debt 3,014 34,922
--------- ---------
Total current liabilities 444,056 364,853
Long-term debt, less current portion 527,961 627,059
Deferred income taxes 129,346 129,668
Other 2,298 1,525
Minority interest 3,411 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, 53,537,032 and
52,460,734 shares issued and
outstanding 271,233 260,592
Retained earnings 112,482 76,084
--------- ---------
Total stockholders' equity 383,715 336,676
--------- ---------
$1,490,787 $1,461,429
========= =========
The accompanying notes are an integral part of these
condensed financial statements
3
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
Net sales $687,179 $559,504 $1,939,912 $1,773,541
Cost of sales 581,555 458,323 1,623,025 1,402,318
-------- -------- ---------- ----------
Gross profit 105,624 101,181 316,887 371,223
-------- -------- ---------- ----------
Operating expenses:
Selling, general and administrative 46,586 43,375 153,630 140,739
Research and development 29,670 32,297 99,862 95,195
Amortization of goodwill and other
intangibles 2,694 3,774 7,777 11,272
Unusual items 2,817 -- 2,817 --
-------- -------- ---------- ----------
Total operating expenses 81,767 79,446 264,086 247,206
-------- -------- ---------- ----------
Income from operations 23,857 21,735 52,801 124,017
Interest expense (8,671) (11,496) (29,182) (35,863)
Other income/(expense), net 4,820 5,033 21,496 9,540
-------- -------- ---------- ----------
Income before income taxes and
extraordinary item 20,006 15,272 45,115 97,694
Provision for income taxes (6,602) (5,042) (14,888) (32,190)
-------- -------- ---------- ----------
Income before extraordinary item 13,404 10,230 30,227 65,504
Extraordinary item:
Gain on extinguishment of debt
(less applicable income taxes
of $4,288) -- -- 6,171 --
-------- -------- ---------- ----------
Net income $ 13,404 $ 10,230 $ 36,398 $ 65,504
======== ======== ========== ==========
Net income per share:
Primary:
Income before extraordinary item $ 0.25 $ 0.20 $ 0.57 $ 1.26
Extraordinary item -- -- 0.11 --
---- ---- ---- ----
$ 0.25 $ 0.20 $ 0.68 $ 1.26
======= ======= ====== =======
Fully diluted:
Income before extraordinary item $ 0.25 $ 0.20 $ 0.56 $ 1.10
Extraordinary item -- -- 0.11 --
---- ---- ---- ----
$ 0.25 $ 0.20 $ 0.67 $ 1.10
======= ======= ====== =======
Weighted average shares:
Primary 54,240 52,209 53,471 52,175
======= ======= ====== =======
Fully diluted 74,871 52,209 54,365 74,489
======= ======= ====== =======
The accompanying notes are an integral part of these
condensed financial statements
4
CONNER PERIPHERALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine months ended
September 30,
------------
1995 1994
---- ----
Cash flows from operating activities:
Net income $ 36,398 $ 65,504
Adjustments to reconcile net income to
net cash provided by/(used in)
operating activities:
Depreciation and amortization 69,994 67,170
Unusual items 2,817 --
Gain from sale of building (6,098) --
Extraordinary item, net (6,171) --
Minority interest and other 2,536 4,063
Changes in assets and liabilities:
Accounts receivable, net (110,923) 38,709
Inventory (9,476) (122,033)
Accounts payable and accrued expenses 105,723 (47,472)
Other (29,078) (16,007)
----------- ---------
Cash provided by/(used in)
operating activities 55,722 (10,066)
----------- ---------
Cash flows from investing activities:
Proceeds from Read Rite stock sale 18,664 --
Proceeds from note receivable 10,807 --
Proceeds from sale of capital assets 31,996 --
Capital expenditures (95,736) (69,442)
Purchases of investments held to maturity (100,053) (197,877)
Purchases of investments available for sale (1,016,845) (143,886)
Maturity of investments held to maturity 197,738 277,558
Sale of investments available for sale 974,719 190,013
Business acquisitions (7,500) (8,500)
----------- ---------
Cash provided by investing activities 13,790 47,866
----------- ---------
Cash flows from financing activities:
Repayments of long-term debt (118,383) (40,755)
Issuance of common stock 10,641 11,883
----------- ---------
Cash used in financing activities (107,742) (28,872)
----------- ---------
Net increase/(decrease) in cash and
cash equivalents (38,230) 8,928
Cash and cash equivalents at beginning
of the period 202,386 197,499
----------- ---------
Cash and cash equivalents at end of the period 164,156 206,427
Short-term investments 185,294 194,240
----------- ---------
Total cash and short-term investments $ 349,450 $ 400,667
=========== =========
The accompanying notes are an integral part of these
condensed financial statements
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 and nine-month periods ended September 30, 1995 and 1994, have been
prepared on substantially the same basis as the annual consolidated financial
statements. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all material adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods presented.
These unaudited 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:
September 30, December 31,
1995 1994
---- ----
(In Thousands)
Purchased components $113,893 $ 86,970
Work-in-process 76,979 72,692
Finished goods 74,484 96,218
------- -------
$265,356 $255,880
======= =======
NOTE 3 - ACQUISITIONS AND PENDING MERGER
- ----------------------------------------
In August 1995, Arcada Software, Inc. (Arcada), a majority-owned subsidiary of
the Company, acquired the assets of Sytron Corporation, a subsidiary of REXON,
Inc., for $4,500,000 in cash and the assumption of certain liabilities. In
connection with the acquisition, the Company recorded $2,817,000 to write-off
in-process research and development to Unusual Items for the three and nine-
month periods ended September 30, 1995. The acquisition was accounted for as a
purchase and did not have a material impact on the Company's financial
condition or results of operations.
6
On September 20, 1995, the Company and Seagate Technology, Inc. (Seagate), a
Delaware corporation, announced negotiations concerning the possible business
combination of the two companies. On October 3, 1995, the Company entered into
an Agreement and Plan of Reorganization (Reorganization Agreement) with Seagate
and Athena Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Seagate (Sub), pursuant to which Sub will merge with and into the
Company (Merger). As a result of the Merger, each outstanding share of the
Company's common stock, par value $0.001 per share (Company Common Stock), will
be converted into 0.442 shares of common stock, par value $0.01 per share, of
Seagate. The Merger is conditioned upon, among other things, approval by
shareholders of the Company and by shareholders of Seagate, the effectiveness of
Seagates registration statement on Form S-4 to be filed with the Securities and
Exchange Commission, the expiration of any waiting period applicable to the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
approval of certain foreign governmental entities. The Merger will be accounted
for as a pooling of interests.
As a condition to the Reorganization Agreement, the Company and Seagate on
October 3, 1995, entered into a Stock Option Agreement between the Company, as
issuer, and Seagate, as grantee, (Company Option Agreement), pursuant to which
the Company granted Seagate the right, upon the terms and subject to the
conditions set forth therein, to purchase up to 8,015,420 of the outstanding
shares of Company Common Stock (equivalent to approximately 15% of the
outstanding shares of Company Common Stock) at a price of $17.90 per share. The
rights granted to Seagate in the Company Option Agreement become exercisable in
the event a third party acquires 20% of the outstanding Company Common Stock, or
commences a tender offer or exchange offer (or enters into an agreement to make
such a tender offer or exchange offer) for at least 20% of the outstanding
Company Common Stock, or the Company enters into a written definitive agreement
or written agreement in principle with a third party in connection with a
liquidation, dissolution, recapitalization, merger, consolidation or acquisition
or purchase of all or a material portion of the assets or the equity interest in
the Company.
Copies of the Reorganization Agreement and the Company Option Agreement have
been filed as exhibits to the Companys current report on Form 8-K dated October
19, 1995.
In February 1995, the Company purchased additional shares from a minority
stockholder for $3,000,000.
NOTE 4 - WARRANTY EXPENSE
- -------------------------
The Company provides for the estimated cost which may be incurred under its
various product warranties upon product shipment. During the three and nine-
month periods ended September 30, 1995, the Company lowered its estimate of its
future disk drive warranty costs by $5,000,000 and $12,600,000, respectively, as
a benefit to cost of sales due to cost saving opportunities resulting from the
Company's relocation of its disk drive service center from Singapore to a lower
cost structure in Malaysia and lower required warranty reserves due to favorable
warranty returns experience.
7
NOTE 5 - RESTRUCTURING
- ----------------------
There have been no significant changes to the Company's estimate of the total
cost of restructuring subsequent to December 31, 1994. During the nine-month
period ended September 30, 1995, the restructuring reserves decreased by
$1,609,000 primarily due to employee severance and benefit payments and
noncancellable rent costs of excess facilities. This decrease represented
approximately $1,360,000 and $249,000 of cash and non-cash charges,
respectively.
NOTE 6 - REDUCTION OF DEBT AND EXTRAORDINARY ITEM
- -------------------------------------------------
During the nine-month period ended September 30, 1995, the Company purchased at
a discount, certain of its 6.5% and 6.75% Convertible Subordinated Debentures
with a face value of $56,102,000. The Company also prepaid and retired the
remaining $41,666,000 of its outstanding Series A and Series B Senior Notes with
a prepayment fee of $1,100,000. As a result of these transactions, the Company
recorded a net extraordinary gain for the period of $6,171,000 (less applicable
income taxes of $4,288,000) or $0.11 per share on a fully diluted basis.
NOTE 7 - OTHER INCOME/(EXPENSE), NET
- ------------------------------------
Other income/(expense), net consisted of the following components:
Three months ended Nine months ended
September 30, September 30,
------------- ------------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands) (In Thousands)
Interest income $5,302 $ 4,036 $17,233 $11,989
Gain on sale of building -- -- 6,098 --
Minority interest (289) 614 (1,763) 2,651
Other (193) 383 (72) (5,100)
------ ------- ------- -------
$4,820 $ 5,033 $21,496 $ 9,540
====== ======= ======= =======
NOTE 8 - SUPPLEMENTAL CASH FLOW DISCLOSURE
- -------------------------------------------
Nine months ended
September 30,
-------------
1995 1994
---- ----
(In Thousands)
Cash paid during the period for:
Interest $40,971 $48,456
Income taxes $15,215 $ 4,016
8
NOTE 9 - LITIGATION
- --------------------
The Company and certain of its officers and directors are defendants in a
securities class action lawsuit that 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 sought declaratory relief to
the effect that disk drives produced by IBM did not infringe certain patents
held by the Company and sought 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.
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 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 late July 1995, the Company and IBM agreed to dismiss all of the litigation
against each other and entered into patent cross license agreements. The Company
and IBM also established a five year commercial relationship, whereby, IBM may
buy the Company's products. The outcome of the litigation settlement did not
have an adverse effect on the Company's results of operations or financial
position.
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
manufacturing subsidiaries. The Notice resulted in proposed tax deficiencies of
approximately $43,000,000 and assessed interest. 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 ultimate outcome of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
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.
9
NOTE 10 - SUBSEQUENT EVENTS
- ----------------------------
On October 30, 1995, the Company re-negotiated the terms of its $100 million
revolving credit facility agreement (Agreement) with certain banks. Borrowings
under the Agreement continue to carry interest at the banks prime rate or, at
the option of the Company, at an interbank offered rate with a fixed spread. The
Agreement continues to prohibit the Company from payment of cash dividends,
requires the maintenance of various financial covenants and requires the payment
of commitment fees and other costs. In addition, the Company continues to be
prohibited from incurring debt and lease commitments in excess of specified
amounts or entering into an acquisition, sale of business, merger or joint
venture agreement in excess of certain amounts without the prior consent of the
banks. The banks granted a waiver permitting the Company to enter into the
Agreement and Plan of Reorganization with Seagate and Sub, pursuant to which Sub
will merge with and into the Company as discussed in Note 3 - Acquisitions and
Pending Merger. However, upon consummation of the Merger this credit facility
will terminate and any outstanding balance will be required to be repaid. This
credit facility expires on October 28, 1996.
On October 26, 1995, the Company's wholly-owned subsidiary, CDD Conner Mexico
S.A. de C.V. (CDD), purchased the assets of Stormex, S.A. de C.V. (Stormex),
located in Mexicali, Mexico, and certain assets of Computer Memory Disk
Corporation (CMD), based in San Jose, California and Eugene, Oregon for
approximately $21,200,000 in cash and certain future royalty payments not to
exceed $3,000,000. Both Stormex and CMD are wholly-owned subsidiaries of
Furukawa Electric North America. The acquisition is being accounted for as a
purchase. Pursuant to the asset purchase agreement, CDD has assumed ownership
of the assets of two Stormex substrate processing factories in Mexicali and
associated intellectual property and manufacturing processes.
NOTE 11 - PRESENTATION
- ----------------------
Certain prior year interim and year end financial statement balances have been
reclassified to conform to the 1995 presentation.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain income statement data for the quarters
ended September 30, 1995 and 1994 and June 30, 1995, as a percentage of net
sales in these periods. This data has been derived from the unaudited condensed
consolidated financial statements.
Three months ended
September 30, June 30,
------------ -------
1995 1994 1995
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 84.6 81.9 81.4
---- ---- ----
Gross profit 15.4 18.1 18.6
---- ---- ----
Operating expenses:
Selling, general and administrative 6.8 7.7 8.7
Research and development 4.3 5.8 5.1
Amortization of goodwill
and other intangibles 0.4 0.7 0.4
Unusual items 0.4 -- --
--- --- ---
Income from operations 3.5 3.9 4.4
Income taxes and other 1.5 2.1 1.8
--- --- ---
Income before extraordinary item 2.0 1.8 2.6
Extraordinary item -- -- 0.3
--- --- ---
Net income 2.0% 1.8% 2.9%
=== === ===
ACQUISITIONS AND PENDING MERGER
- -------------------------------
On October 26, 1995, the Company's wholly-owned subsidiary, CDD Conner Mexico
S.A. de C.V. (CDD), purchased the assets of Stormex, S.A. de C.V. (Stormex),
located in Mexicali, Mexico, and certain assets of Computer Memory Disk
Corporation (CMD), based in San Jose, California and Eugene, Oregon for $21.2
million in cash and certain future royalty payments not to exceed $3.0 million.
Both Stormex and CMD are wholly-owned subsidiaries of Furukawa Electric North
America. The acquisition is being accounted for as a purchase. Pursuant to the
asset purchase agreement, CDD has assumed ownership of the assets of two Stormex
substrate processing factories in Mexicali and associated intellectual property
and manufacturing processes. This acquisition is intended to help supply the
Company with aluminum substrates for the Company's disk media manufacturing
operations.
11
On September 20, 1995, the Company and Seagate Technology, Inc. (Seagate), a
Delaware corporation, announced negotiations concerning the possible business
combination of the two companies. On October 3, 1995, the Company entered into
an Agreement and Plan of Reorganization (Reorganization Agreement) with Seagate
and Athena Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Seagate (Sub), pursuant to which Sub will merge with and into the
Company (Merger). As a result of the Merger, each outstanding share of the
Company's common stock, par value $0.001 per share (Company Common Stock), will
be converted into 0.442 shares of common stock, par value $0.01 per share, of
Seagate. The Merger is conditioned upon, among other things, approval by
shareholders of the Company and by shareholders of Seagate, the effectiveness of
Seagates registration statement on Form S-4 to be filed with the Securities and
Exchange Commission, the expiration of any waiting period applicable to the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
approval of certain foreign governmental entities. The Merger will be accounted
for as a pooling of interests.
As a condition to the Reorganization Agreement, the Company and Seagate on
October 3, 1995, entered into a Stock Option Agreement between the Company, as
issuer, and Seagate, as grantee, (Company Option Agreement), pursuant to which
the Company granted Seagate the right, upon the terms and subject to the
conditions set forth therein, to purchase up to 8,015,420 of the outstanding
shares of Company Common Stock (equivalent to approximately 15% of the
outstanding shares of Company Common Stock) at a price of $17.90 per share. The
rights granted to Seagate in the Company Option Agreement become exercisable in
the event a third party acquires 20% of the outstanding Company Common Stock, or
commences a tender offer or exchange offer (or enters into an agreement to make
such a tender offer or exchange offer) for at least 20% of the outstanding
Company Common Stock, or the Company enters into a written definitive agreement
or written agreement in principle with a third party in connection with a
liquidation, dissolution, recapitalization, merger, consolidation or acquisition
or purchase of all or a material portion of the assets or the equity interest in
the Company.
Copies of the Reorganization Agreement and the Company Option Agreement have
been filed as exhibits to the Company's current report on Form 8-K dated October
19, 1995.
In August 1995, Arcada Software, Inc., a majority-owned subsidiary of the
Company, acquired the assets of Sytron Corporation, a subsidiary of REXON, Inc.,
for $4.5 million in cash and the assumption of certain liabilities. In
connection with the acquisition, the Company charged $2.8 million to write-off
in-process research and development during the third quarter of 1995. The
acquisition was accounted for as a purchase and did not have a material impact
on the Company's financial condition or results of operations.
NET SALES
- ---------
Net sales for the third quarter of 1995 were $687.2 million, an increase of
22.8% from the same quarter of 1994 and an increase of 7.0% from the second
quarter of 1995. The increase in net sales over the third quarter of 1994
resulted primarily from record level unit volume shipments of disk drive
products and DAT (Digital Audio Tape) tape drive products and higher disk and
tape drive weighted average unit prices, partially attributable to a more
favorable product mix. In addition, sales of disk media to third-party
customers and an increase in software revenue during the third quarter
of 1995 also contributed to the increase in sales.
12
The increase in net sales over the second quarter of 1995 resulted primarily
from higher unit volume shipments of disk and tape drive products and a richer
mix of shipments towards higher capacity, higher priced disk drive products
offset partially by lower tape drive average unit prices and continuing declines
in disk drive average unit prices.
Sales to Compaq Computer represented 10.3% of net sales during the third quarter
of 1995 compared to 13.7% for the same quarter of 1994. No other customer
represented more than 10% of net sales during these periods and during the
second quarter of 1995. The following table summarizes the net sales percentages
between OEM and distributor customers and foreign and domestic customers.
Three months ended
September 30, June 30,
-------------- ---------
1995 1994 1995
---- ---- ----
OEM 81% 74% 76%
Distributor 19 26 24
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Foreign 43% 49% 49%
Domestic 57 51 51
---- ---- ----
Total 100% 100% 100%
==== ==== ====
The increase in OEM revenue during the third quarter of 1995 as compared to the
same quarter in 1994 and the second quarter of 1995 is primarily due to
increased revenue from large corporate OEM customers consistent with the
Company's efforts to recapture lost market share from these customers. The
decrease in foreign revenue in the third quarter of 1995 as compared to the
third quarter of 1994 and the second quarter of 1995 is due to higher sales
volumes to domestic customers and lower sales volumes to customers located in
Asia partially offset by an increase in European sales. The increase in sales
from European customers is due primarily to the sales and marketing
reorganization by the Company to increase European sales. The reduction in
Asian sales is due primarily to continued demand from Asian customers for disk
drive products with capacities of 540 megabytes and less as compared to the
Company's migration towards higher capacity disk drive products with capacities
greater than 540 megabytes.
During 1995, the Company implemented a program designed to ensure the timely
introduction of disk drive products and to address new design-in opportunities
with major OEM customers. In addition, the Company introduced several new
products intended to meet the needs of these major OEM customers and recapture
lost market share. While the Company has made progress through the adoption of
certain of the Company's high-capacity desktop and high-performance disk drives
by major OEM customers, there can be no assurance that the Company's efforts to
regain its position with major OEM customers will be successful or that
continued improvement in sales to such customers will occur in subsequent
quarters. The Company believes that an increase in sales to major OEM customers
is important to the Company's long-term competitive position.
13
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 makes quarterly results difficult to
predict. Furthermore, order lead-times have been reduced by many of the
Company's customers. This trend which is expected to continue, has impacted the
visibility of future orders and, accordingly, has also affected the
predictability of financial results. During the first quarter of 1995, the
Company experienced shipment delays for certain disk drive products introduced
during the first quarter of 1995 and the fourth quarter of 1994 due to certain
technical issues and shortages of key components as certain vendors were unable
to meet volume production of several new disk drive products. The Company
generally resolved the product technical issues but experienced a continued
shortage of certain key components during the second and third quarters of 1995.
No assurance can be given that these events will not recur in future quarters.
Consistent with the second quarter of 1995, demand for certain of the Company's
new disk drive products exceeded availability during the third quarter of 1995.
These products were available to customers on an allocation basis. This
situation appears to be continuing for a number of the Company's desktop disk
drive products as the Company enters the fourth quarter of 1995. However, there
can be no assurance that these trends will or will not continue throughout the
fourth quarter or into future periods.
GROSS PROFIT
- ------------
The Company's gross profit as a percentage of net sales (gross margin) for the
third quarter of 1995 was 15.4% compared to 18.1% for the same quarter of 1994
and 18.6% for the second quarter of 1995. The decrease in gross margin compared
to the same quarter of 1994 is largely due to lower average unit prices for disk
drive products in volume manufacturing not offset by similar reductions in unit
material costs, as a result of a continued imbalance in supply and demand of key
components. In addition, declines in gross margins for certain DC2000 tape
drive products also contributed to the lower overall gross margin due to severe
price competition and certain promotional incentives. This decline was
partially offset by the reduction of warranty reserves totaling $5.0 million
during the third quarter of 1995 resulting from favorable warranty returns
experience. Sales of disk media to third-party customers and a growing software
business, which carry higher than average gross margins, had a positive impact
on the Company's overall gross margin.
The decrease in gross margin as compared to the second quarter of 1995 was
primarily due to lower disk and tape drive gross margins. In relation to disk
drive products, this decrease was primarily attributable to lower average unit
prices and higher material costs as discussed above. This decrease, as it
relates to tape drive products, was primarily attributable to lower than average
gross margins for certain DC2000 products resulting from severe price
competition and promotional incentives. Higher gross margins from DAT products
partially offset this decline in the DC2000 products.
14
The demand for the Company's disk drives depends principally on demand for
desktop and 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 in this intensely competitive industry 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 remains strong, there
can be no assurance that this trend will 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 launched several new disk and tape drive products during 1995 and
anticipates the launch of additional products during the remainder of 1995 and
the first half of 1996. 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,
profitability and competitive position. As is common in periods of product
transition, the Company has experienced certain technical difficulties and
delays in achieving volume production of certain products during 1995. The
Company has generally resolved these issues and has launched these products into
volume manufacturing. In addition, shortages of certain key disk drive
components during 1995 has inhibited the Company's ability to satisfy customer
demand. There can be no assurance that the Company will not experience such
difficulties during the remainder of 1995 and into the first half of 1996.
SELLING, GENERAL AND ADMINISTRATIVE
- -----------------------------------
The Company's selling, general and administrative expenses (SG&A) for the third
quarter of 1995 were $46.6 million, or 6.8% of sales, compared to $43.4 million,
or 7.7% of sales, for the same quarter of 1994 and $56.0 million, or 8.7% of
sales, for the second quarter of 1995. The increase in SG&A in absolute dollars
for the third quarter of 1995 as compared to the prior year quarter is primarily
due to an increase in sales and marketing efforts within most product groups,
headcount increases and a larger international sales force to support a growing
European market. This was partially offset by reductions in legal expenses and
other cost reductions. The decrease in SG&A compared to the second quarter was
due primarily to the absence of profit sharing and other cost reductions in the
third quarter of 1995.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's investment in research and development (R&D) for the third quarter
of 1995 was $29.7 million, or 4.3% of sales compared to $32.3 million, or 5.8%
of sales for the same quarter of 1994 and $32.8 million, or 5.1% of sales, for
the second quarter of 1994. The decrease in R&D expenses for the third quarter
of 1995 as compared to the same quarter of 1994 and second quarter of 1995 is
due primarily to certain departmental reclassifications between R&D and
manufacturing and fewer new product launches.
15
Due to the timing of new R&D programs and the release of new products into
volume manufacturing, 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 improved the efficiency and effectiveness
of its new product launch operations. 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
- ----------------------------------------------
The Company's amortization of goodwill and other intangibles was $2.7 million in
the third quarter of 1995 compared to $3.8 million for the same quarter of 1994
while remaining relatively flat compared to $2.5 million for the second quarter
of 1995. Amortization decreased from the third quarter of 1994 primarily as a
result of reduced intangible asset balances. Goodwill and other intangibles are
being amortized over their remaining estimated useful lives ranging from 1 to 8
years.
UNUSUAL ITEMS
- -------------
The Company's unusual item charge of $2.8 million for the third quarter of 1995
represents the write-off of in-process research and development resulting from
the acquisition of Sytron Corporation by the Company's majority-owned
subsidiary, Arcada Software, Inc. in August 1995.
There have been no significant changes in the Company's estimate of the total
cost of restructuring subsequent to December 31, 1994. During the nine-month
period ended September 30, 1995, the restructuring reserves decreased by $1.6
million primarily due to employee severance and benefit payments and
noncancellable rent costs of excess facilities. This decrease represented
approximately $1.4 million and $0.2 million of cash and non-cash charges,
respectively.
INTEREST EXPENSE, OTHER INCOME/EXPENSE
- --------------------------------------
Interest expense was $8.7 million for the third quarter of 1995 compared to
$11.5 million for the same quarter of 1994 and $9.0 million for the second
quarter of 1995. Interest expense declined as compared to the same quarter of
1994 and the second quarter of 1995 due to the Company's early retirement of its
Senior Notes and a portion of its Convertible Subordinated Debentures during the
first and second quarters of 1995.
Other income/expense was a net gain of $4.8 million for the third quarter of
1995, which was relatively consistent when compared to the net gain of $5.0
million for the same quarter of 1994, and a net gain of $5.8 million for the
second quarter of 1995. The decrease in the net gain for the third quarter of
1995 as compared to the second quarter of 1995 is due primarily to higher
foreign exchange losses during the third quarter of 1995. However, the overall
foreign exchange gains and losses continue to have an immaterial impact on the
Company's results of operations.
16
INCOME TAXES
- ------------
The Company's effective tax rate for the second and third quarters of 1995 was
approximately 33%, excluding the impact of the extraordinary items recorded
during the first and second quarters which were recorded at the rate of 41%.
EXTRAORDINARY ITEM
- ------------------
During the first and second quarters of 1995, the Company purchased at a
discount certain of its 6.5% and 6.75% Convertible Subordinated Debentures with
a face value of $56.1 million. The Company also prepaid and retired the
remaining $41.7 million of its outstanding Series A and Series B Senior Notes
with a prepayment fee of $1.1 million. As a result of these transactions, the
Company recorded a net extraordinary gain for the nine-month period ended
September 30, 1995 of $6,171,000 (less applicable income taxes of $4,288,000) or
$0.11 per share on a fully diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1995, the Company's principal sources of liquidity consisted of
cash and short-term investments of $349.5 million and a combined $100 million
revolving credit facility agreement (Agreement) with several banks which is
subject to the continued maintenance of certain covenants. The Company had no
borrowings outstanding under this credit facility as of September 30, 1995.
On October 30, 1995, the Company re-negotiated the terms of its $100 million
revolving credit facility agreement (Agreement) with certain banks. The terms
of the Agreement prohibit or limit certain transactions without the prior
consent of the banks and require the maintenance of various covenants. This
credit facility expires on October 28, 1996. As of September 30, 1995, the
Company had outstanding letters of credit and guarantees of approximately $48.6
million.
Cash provided by operating activities was approximately $55.7 million for the
nine-month period ended September 30, 1995 compared to cash used in operating
activities of $10.1 million for the same period in 1994. This increase was
primarily attributable to an increase in accounts payable and other accrued
expenses and a decrease in inventory partially offset by an increase in accounts
receivable.
Capital expenditures for the nine-month period ended September 30, 1995,
amounted to $95.7 million. These expenditures primarily related to the purchase
of manufacturing and R&D equipment for the Company's operations, upgrades in
computer equipment and the expansion of the Companys disk media manufacturing
capacity. The Company is expanding the disk media manufacturing operation into
Singapore. This expansion is scheduled to begin production during the first
half of 1996. For the nine-month period ended September 30, 1995, the capital
expenditures related to this expansion have approximated $20.2 million. The
Company plans to spend approximately $55.0 million on additional capital
expenditures during the remainder of 1995.
17
During the nine-month period ended September 30, 1995, the Company's cash
expenditures to retire its Debentures in the open market and normal repayments
of long-term debt were $118.4 million. The Company received $32.0 million in
cash proceeds during the period for the sale of a manufacturing building located
in Singapore and other capital assets. In addition, $29.5 million was received
from proceeds from the sale of Read-Rite stock and notes receivable. The
acquisition of Sytron Corporation during the period included a cash payment of
$4.5 million and the acquisition of certain assets of Stormex, S.A. de C.V. and
Computer Memory Corporation subsequent to the nine-month period ended September
30, 1995 included a cash payment of $21.2 million. The Company believes that
current capital resources and cash generated from operations will be sufficient
to meet its liquidity and capital expenditure requirements for the foreseeable
future.
FOREIGN CURRENCY RISKS
- ----------------------
The Company's cash flows are substantially U.S. dollar denominated. However, the
Company is exposed to certain foreign currency fluctuations, primarily British
Pound Sterling, Malaysian Ringgit, Italian Lira, Singapore Dollars and Japanese
Yen. At September 30, 1995, the Company had outstanding foreign currency forward
contracts and foreign currency purchase option contracts aggregating
approximately $68.1 million and $12.0 million, respectively. These contracts
mature at various periods through December 1995 and are consistent with the
amounts and timing of the Company's underlying cash flow requirements and
purchase commitments.
LITIGATION
- ----------
The Company and certain of its officers and directors are defendants in a
securities class action lawsuit that 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 sought declaratory relief to
the effect that disk drives produced by IBM did not infringe certain patents
held by the Company and sought 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.
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 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.
18
In late July 1995, the Company and IBM agreed to dismiss all of the litigation
against each other and entered into patent cross license agreements. The
Company and IBM also established a five year commercial relationship, whereby,
IBM may buy the Companys products. The outcome of the litigation settlement did
not have an adverse effect on the Companys results of operations or financial
position.
In December 1994, the Internal Revenue Service concluded a field audit of the
Companys 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
manufacturing subsidiaries. The Notice resulted in proposed tax deficiencies of
approximately $43 million and assessed interest. 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 ultimate outcome of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
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.
19
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Reference is made to Note 9 of notes to unaudited condensed consolidated
financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization dated as of October 3, 1995
among the Registrant, Seagate Technology, Inc. and Athena
Acquisition Corporation (incorporated by reference to Exhibit 1
to the Registrant's current report on Form 8-K dated October
19, 1995)
2.2 Stock Option Agreement dated as of October 3, 1995 by and between
the Registrant and Seagate Technology, Inc. (incorporated by
reference to Exhibit 2 to the Registrant's current report on Form
8-K dated October 19, 1995)
10.1 Credit Agreement dated as of October 30, 1995 among Registrant and
Bank of America National Trust and Savings Association, as Agent,
and the other financial institutions which are parties thereto
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 September 30, 1995. A report on Form 8-K was filed by the
Registrant on October 19, 1995.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONNER PERIPHERALS, INC.
(Registrant)
Date: November 8, 1995 /s/ P. Jackson Bell
----------------- -------------------
P. Jackson Bell
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
CONNER PERIPHERALS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------------------
2.1 Agreement and Plan of Reorganization dated as of October 3,
1995 among the Registrant, Seagate Technology, Inc. and
Athena Acquisition Corporation (incorporated by reference to
Exhibit 1 to the Registrant's current report on Form 8-K
dated October 19, 1995)
2.2 Stock Option Agreement dated as of October 3, 1995 by and
between the Registrant and Seagate Technology, Inc.
(incorporated by reference to Exhibit 2 to the Registrant's
current report on Form 8-K dated October 19, 1995)
10.1 Credit Agreement dated as of October 30, 1995 among
Registrant and Bank of America National Trust and Savings
Association, as Agent, and the other financial institutions
which are parties thereto
11.1 Statement Regarding Computation of Earnings Per Share
27.0 Article 5 of Regulation S-X - Financial Data Schedule
22