FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
or
[_] TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
Registrant's telephone number, including area code: (408) 456-4500
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value
6-1/2% Convertible Subordinated Debentures due 2001
6-3/4% Convertible Subordinated Debentures due 2002
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate value of voting stock held by nonaffiliates of the Registrant
was approximately $776,629,000 as of March 5, 1994 based upon the closing sales
price on the New York Stock Exchange reported for such date. Shares of Common
Stock held by each executive officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may, under certain circumstances, be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
50,767,965 shares of Common Stock issued and outstanding as of March 5, 1994.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference into
the Parts of this Annual Report on Form 10-K noted:
(1) Portions of the Annual Report to Stockholders for the fiscal year
ended January 1, 1994 (the "Annual Report") - Parts II and IV. With
the exception of the information specifically incorporated by
reference from the Annual Report into Parts II and IV hereof, the
Company's Annual Report is not to be deemed filed as part of this
report.
(2) Proxy Statement filed with the Securities and Exchange Commission in
connection with the Annual Meeting of Stockholders to be held April
19, 1994 (the "Proxy Statement") - Part III.
PART I
Item 1. BUSINESS
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Conner Peripherals, Inc. ("Conner" or the "Company") was incorporated in
California in June 1985 and was reincorporated in Delaware in September 1992.
The Company's principal executive offices are located at 3081 Zanker Road, San
Jose, California 95134, and its telephone number is (408) 456-4500.
GENERAL
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Conner designs, builds and sells information storage solutions products,
including a large selection of hard disk drives, tape drives, software and
integrated systems for a wide range of computer storage applications.
In June 1992, the Company began the process of repositioning itself from
being solely a manufacturer of Winchester disk drives to becoming a leading
supplier of total storage solutions for the computer industry. In December 1992
Conner completed the acquisition of Archive Corporation ("Archive") by means of
a merger. The acquisition of Archive strengthened Conner's position in the tape
drive, software and storage systems markets, thereby supporting its strategy of
being a leader in information storage solutions and storage and data protection
products. During 1993, the Company took action to rationalize these operations
in order to better streamline product development, sales and marketing and
support activities.
Demand for all of the Company's products is driven by several distinct
market trends. First, the shift from centralized computing based on mainframes
and minicomputers to networks and client-server architectures has resulted in an
increased demand for compact, high capacity, high-performance storage devices
and systems for use in networks of personal computers and workstations. Second,
the increasing complexity of personal computer operating systems, such as
Windows, OS/2, as well as the software applications designed to support them,
has resulted in the demand for greater storage capacity in individual
computers. Third, the substantial storage requirements necessary to store high
resolution images, sound and video data applications is adding significantly
to the amount of storage required on personal computer systems, both in the
business and home environments.
As the amount of data stored on individual computers increases, the need
for efficient and reliable data protection also increases. This need is causing
an increase in the demand for tape drives and the complex software which manages
the transfer of data from disk drives to tape drives on a network and on
individual computer systems.
The Company's products are sold to original equipment manufacturers
("OEMs"), distributors, Value-Added Resellers ("VARs"), dealers and
distributors in the U.S. and abroad, with the exact channel
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dependent on the product and division. In addition, the Company distributes
disk drive, tape drive and software products through its Storage Systems Group,
which acts as a VAR to dealers in the U.S.
DISK DRIVES
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Disk drives address the escalating requirements of high performance
microcomputers and workstations for greater storage capacity, faster access
time, lower power consumption and smaller size at increasingly lower costs
through the use of advanced technologies.
Every disk drive incorporates the same operating concepts. One or more
rigid disks are attached to a spin motor assembly, which rotates the disks at a
constant speed within a sealed, contamination-free enclosure. Typically, both
surfaces of each disk are coated with a thin layer of magnetic material.
Magnetic heads record and retrieve data from discrete magnetic domains located
on pre-formatted concentric tracks in the magnetic layers of the rotating disks.
An actuator positions the head over the proper track upon instructions from the
drive's electronic circuitry. Most disk drives are "intelligent" disk drives,
which incorporate an embedded controller to manage communications with the
computer.
Disk Drive Design
- -----------------
During the last five years, the Company has pioneered a variety of disk
drive innovations, many of which have achieved broad acceptance in the disk
drive industry in general. The Company was the first to utilize an architecture
employing a high microcode content, resulting in significant flexibility and
improved reliability in its drives. In addition, the Company was among the
earliest to introduce drives using a high-performance voice coil actuator and
on-board electronic diagnostics. As a result of various design innovations, the
Company's disk drives achieve high performance with low power consumption.
Finally, the Company was the first to introduce drives in a low-profile one
inch package. Many of these innovations are protected by patent rights
belonging to the Company.
The Company believes that its disk drive design has certain important
performance characteristics. The benefits to the user include (1) fast access
time; (2) low heat dissipation; (3) quiet operation; (4) low power consumption;
and, (5) extended product life. Fast access is a performance requirement for
systems incorporating 64-bit and 32-bit microprocessors, such as Intel
Corporation's ("Intel") Pentium and 80486 and Motorola's 68040 family of
microprocessors. Low heat dissipation is an important determinant of a disk
drive's reliability because heat may contribute to component failure. Low heat
dissipation allows the possibility of eliminating or reducing the size of
cooling fans in computers and thus increases the potential for quieter computer
system operation. Low power consumption is also a critical factor in all
portable computing applications because these computers use battery power
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supplies and disk drives are a large power consumer in such systems.
Consequently, low power consumption in disk drives reduces the need for a
computer to incorporate a large power supply as a standard feature.
The benefits of the Company's disk drive design include reduced parts
count, higher reliability and the built-in ability for self-testing. These
benefits may result in the possibility of lower aggregate component costs and
reduced requirements for expensive disk drive test equipment, when compared to
conventional disk drive designs.
Disk Drive Products
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The Company's disk drive products include 2.5-inch and 3.5-inch disk drives
which offer storage capacities ranging from 170 megabytes to over 1 gigabyte of
formatted capacity. The Company's products include the following product
families:
Filepro Series. The Filepro Series products include one- and two-disk,
--------------
low-profile (one-inch high) 3.5-inch hard disk drives, in capacities of 210 and
420 megabytes. The Filepro Series is designed to offer the entry level PC user
a combination of high capacity, performance, reliability and low price.
Filepro Advantage Series. The Filepro Advantage Series of 3.5-inch disk
------------------------
drives offers low cost storage for value systems, including networked and
desktop PCs used for advanced applications, databases and multimedia. The
Filepro Advantage Series is available in capacities of 340 and 540 megabytes.
The Company has announced new versions of these products with storage capacities
of 810 and 1080 megabytes. The Company expects to commence volume shipment of
these products during the second quarter of 1994.
Filepro Performance Series. The Filepro Performance Series disk drives are
--------------------------
available with 545 and 1060 megabytes of capacity and feature seek times as fast
as 9 milliseconds and data transfer rates of up to 55 megabits per second.
These disk drives are primarily used in advanced workstation and network
systems.
Filepro Notebook Series. The Filepro Notebook Series of 2.5-inch disk
-----------------------
drives provide capacities from 170 to 340 megabytes and addresses the needs of
mobile users of portable PCs and notebook computers, with low power, light
weight and a high degree of shock resistance.
TAPE DRIVES
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Tape drives are peripheral hardware devices which enable low cost storage
or data protection of large volumes of data through use of digital tape stored
on small cartridges used singly or in multiple autoloader applications.
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Tape Drive Products
- -------------------
Computer systems of all types increasingly need dedicated backup storage
peripherals that combine high capacity, exceptional performance, low cost
and reliability. Conner's full line of minicartridge, DAT and data cartridge
tape products meets the needs of the entry, value, performance and portable
markets to complement Conner's line of disk drive products.
Minicartridge Tape Drives. Conner produces a number of low profile
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minicartridge tape drives which are designed to provide up to 250 megabytes of
reliable data storage on a single low cost removable cartridge. These drives
are currently manufactured for Conner in Japan.
DAT Drives. High speed, networked computer environments need automatic
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data protection and backup in the form of dedicated removable storage
peripherals that combine high capacity, absolute reliability, state-of-the-art
backup performance and low cost per megabyte in a small form factor. The Conner
family of True Computer Grade Digital Audio Tape (DAT) products provides a
balance of these features, storing up to 8 gigabytes of data on a single 4mm
cartridge. In addition, the Company offers DAT Autoloaders, which enable the
storage of up to 96 gigabytes through an automated loading mechanism of up to
12 DAT tape cartridges in a single tape drive.
Data Cartridge Drives. Conner Data Cartridge Drives provide high capacity
---------------------
and field-proven data storage in a 5.25-inch, half-high form factor. These Data
Cartridge drives are available in internal and external models with capacities
ranging from 250 megabytes to 1.35 gigabytes, and provide high performance data
storage using the industry standard Quarter Inch Cartridge (QIC) format that
guarantees full backward read compatibility with previous generations of drives.
SOFTWARE PRODUCTS
- -----------------
Conner offers a variety of data protection and storage management software
through Arcada Holdings, Inc. ("Arcada"), a majority-owned subsidiary. Arcada
develops data protection and storage management software products that operate
across multiple desktop and client-server environments, including those of
Microsoft, Inc. and Novell, Inc. Arcada markets its products worldwide under
the Backup Exec(TM) brand name to OEMs, systems integrators, VARs, retailers
--
and large corporate users.
Backup Exec for NetWare. Backup Exec for NetWare delivers sophisticated
-----------------------
client/server based data protection for all servers and workstations on certain
networks, including, DOS, Windows, OS/2, Apple Macintosh, and UNIX workstations
as well as NetWare 3.x and 4.x, LAN Manager, LAN Server and Lotus Notes servers.
Backup Exec is the first storage software certified by Novell for its new
NetWare 4.x network operating system. Backup Exec is offered in single server,
enterprise wide and Windows workstation editions.
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Backup Exec for Windows NT. Backup Exec for Windows NT is a 32-bit backup
--------------------------
application created for Microsoft Windows NT which offers a comprehensive data
storage solution for Windows NT workstations and servers operating in both
local and wide area networks.
STORAGE SYSTEMS
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Conner Storage Systems integrates hardware and software solutions to
allow consumers to meet the demanding requirements of the current mixed
network environments. The products offered include those manufactured or
developed by Conner, as well as integrated systems which include components or
products of third parties. Storage Systems products address the entire storage
solutions marketplace, including disk, optical, and tape subsystems and
storage management software for local area networks and workstation
environments. Conner Storage Systems products are marketed and sold to VARs
and distributors for resale to large corporate users and financial
institutions to manage their network storage and data protection needs.
Storage Systems Products
- ------------------------
From basic single-user needs to complex network storage requirements,
Conner Storage Systems delivers turn-key solutions, coupled with customized
service and support. Conner's Storage Systems products address the needs of
users ranging from entry-level PCs to enterprise-wide network administrators.
Conner MS Systems. Conner MS Systems disk and tape products offer data
-----------------
storage and protection for networks including OS/2, DOS, Macintosh and Windows,
workstations, and LAN Manager and NetWare servers. Conner MS Systems are
supported by Conner's Backup Exec software.
GENERAL SALES AND DISTRIBUTION
- ------------------------------
The Company sells its disk and tape drive and software products principally
to OEMs through a direct sales force. The Company focuses its sales efforts on
manufacturers of desktop computers and workstations, as well as to manufacturers
of portable computers and storage subsystems such as servers and arrays.
Many of the Company's OEM customers enter into master purchase agreements
with the Company. These agreements do not require the OEMs to purchase minimum
quantities of the Company's products. Product deliveries are scheduled upon the
Company's receipt of purchase orders under the related agreements. Generally,
these purchase agreements also allow customers to reschedule delivery dates and
cancel purchase orders under certain circumstances without significant
penalties.
Sales of the Company's disk drives to Compaq Computer Corporation
("Compaq") accounted for approximately 13%, 15% and 12% of the Company's
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net sales in 1993, 1992 and 1991, respectively. Sales to Peripherals Europe
GmbH accounted for 12% of the Company's net sales in 1992. No other customer
represented more than 10% of net sales for the three years ended December 31,
1993. The Company's sales to any single OEM customer are subject to significant
variability from quarter to quarter based on a variety of factors including new
product acceptance, price, end user demand, product availability and competitive
offerings.
The Company also sells products to non-OEM purchasers, such as
distributors. Such sales represented 29%, 31% and 16% of net sales for the
years ended December 31, 1993, 1992 and 1991, respectively. The Company's
distributors typically enter into non-exclusive agreements for the distribution
of the Company's products. Product deliveries are scheduled upon the Company's
receipt of purchase orders. Certain of these agreements provide the distributors
with price protection with respect to their inventory of drives and also provide
limited rights to return the products. The Company also sells its products
through VARs and has recently began to expand its marketing efforts to address
different channels that sell computer systems through retailers that sell
directly to end users.
The Company's foreign sales are generally made directly, or through the
Company's wholly-owned subsidiaries Peripherals Singapore or Conner
Peripherals Europe. Sales to foreign customers may be subject to certain
risks, including requirements for the obtaining of export/import licenses,
exposure to tariffs and other trade regulations, currency fluctuations and
repatriation of profits. The Company's foreign sales represented 54%, 61% and
64% of total net sales for 1993, 1992 and 1991, respectively.
Backlog
- -------
At December 31, 1993, the Company's backlog of orders was approximately
$486 million as compared to a backlog of approximately $241 million (including
Archive) at December 31, 1992. Backlog includes only those units for which a
customer has specified delivery within six months.
Demand for the Company's products is cyclical as the industry has recently
experienced alternating periods of severe product shortages and significant
overcapacity. During periods of product shortages, the Company's backlog has
increased significantly and frequently reflects abnormal customer order
patterns, including double ordering, as customers seek to insure the
availability of products to support future production. During periods of
overcapacity, the Company's backlog has declined precipitously as both OEM
customers and distributors seek to reduce their inventories of disk drives or
reduce their purchase commitments. During the first quarter of 1994, the
Company has also experienced a significantly higher backlog due to increased
demand for the Company's new disk drive products.
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The Company's backlog may fluctuate due to certain OEM practices of
submitting single large purchase orders to be shipped over an extended period of
time. Lead times for the release of purchase orders from other customers depend
upon the scheduling practices of the customers, and the Company anticipates that
the rate of new purchase orders will vary significantly from month to month. In
addition, the Company's actual shipments depend on its production capacity and
component availability. Moreover, the pricing of the Company's products as
delivered often depends on the date of delivery as prices may be adjusted
between the time an order is booked into backlog and the time the product is
actually shipped.
Based on its past experience and knowledge of the disk drive industry, the
Company anticipates that it will experience significant volatility in the
scheduling of present and future orders. For these reasons, the Company's
backlog as of any particular date may not be indicative of the Company's actual
sales for any succeeding fiscal period.
Competition
- -----------
The disk drive and tape drive industry is intensely competitive. The
principal competitive factors in the industry are price, early product
availability, product performance, storage capacity, low cost manufacturing,
responsiveness to customers, and increasingly schedule predictability.
The Company believes that it is currently able to compete on the basis of
all of these factors. The Company believes that its reliance on outside
vendors-- which is different from certain other companies in the industry that
have become more vertically integrated -- has given it a competitive advantage
both in establishing strong relationships with vendors and in permitting
maximum flexibility in product design. The Company believes that competition
in the OEM sector of the disk drive industry has become more intense as major
disk drive manufacturers commit greater resources to the timely introduction
of new products.
The Company primarily competes against independent manufacturers of 2.5-
inch and 3.5-inch disk drives, including companies such as Maxtor Corporation,
Quantum Corporation, Seagate Technology, Inc. and Western Digital Corporation.
The Company also competes indirectly with disk drive divisions of larger
computer manufacturers such as Digital Equipment Corporation, The Hewlett-
Packard Company, IBM and Toshiba. Should other major OEMs develop disk drive
manufacturing capabilities, the demand for the Company's products would be
reduced. The Company's principal competitors in tape drive products are
Hewlett-Packard, Exabyte Corp. and Rexon, Inc.
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MANUFACTURING
- -------------
The Company expects that it will continue to purchase a substantial
majority of most components from outside sources. However, from time to time
the Company may establish limited internal production of certain components,
particularly during periods of supply constraints or when internal production
capability may contribute to new product development efforts. For example, the
Company is currently manufacturing the majority of its media requirements. The
Company's disk drive manufacturing operations consist primarily of final
assembly of heads and disks in a class-10 clean area as well as the formatting
and testing of the assembly. Printed circuit boards are tested before they are
assembled with head/disk assemblies into disk drives. After assembly, each disk
drive is operated in a self-diagnostic mode where actual data transfers take
place and various parameters in the disk drive are tested and adjusted
specifically for that disk drive. The Company's testing procedures may vary
depending upon the requirements of particular OEM customers.
From time-to-time in the past, the Company has experienced production
delays due to yield shortfalls and other production difficulties and the Company
could experience similar delays in the future. Control and continuous
improvement of process yields by both Conner and its suppliers are key
determinants of manufacturing output and efficiency, product quality and
reliability and overall profitability. Moreover, there can be no assurance that
a defect will not escape identification in the factory and require costly recall
from customer sites.
The Company's business conditions require it to establish high-volume
manufacturing capability in anticipation of market demand. The Company's
ability to establish high-volume, low-cost manufacturing capacity depends in
part on its ability to obtain uninterrupted access to advanced technology
components in required volumes and at competitive prices. At the present time,
certain of these components are available only from single sources, although the
Company maintains ongoing programs to qualify additional sources for such
components where practicable. In particular, the Company has recently
experienced shortages of certain semiconductor and head components, which
shortage has adversely affected the Company's sales and ability to satisfy
customer demand in recent periods. There can be no assurance that these supply
constraints will not recur.
To reduce its exposure to production delays at times of component shortage,
the Company often seeks to qualify alternative components when practicable.
However, a prolonged interruption, or a reduction in the supply of one or more
key components, could nevertheless occur and would adversely affect the
Company's operating results and customer relationships.
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As part of an effort to improve manufacturing costs, the Company continues
to shift volume production of its disk drives to Singapore and Malaysia. The
Company is currently expanding its Malaysia production facilities and is
consolidating its Singapore operations. The Company also began in December 1992
to manufacture in the People's Republic of China through Conner-Shenzhen
Peripherals, Ltd., a joint venture with Shenzhen CPC. Through this venture,
Conner became the first company to establish disk drive manufacturing in the
People's Republic of China. The expansion of production in offshore facilities
requires tight inventory and cost controls and employee training. In addition,
the transfer of production of a product to a new facility requires qualification
of the facility by certain of the Company's major OEM customers. Accordingly,
such transfers may have a short-term disruptive effect on the Company's
operations. Foreign manufacturing is also subject to certain risks, including
changes of governmental policies, transportation delays and interruptions and
the imposition of tariffs and import and export controls. There are also risks
inherent in being the first company to manufacture disk drives in the People's
Republic of China. Furthermore, currency exchange fluctuations could increase
the cost of components manufactured abroad.
A significant portion of Conner's tape drive manufacturing is done by one
outside vendor, Matsushita Kotubuki Electronics ("MKE"). Conner also
manufactures and/or assembles some of its own tape drive products at its
Singapore facility. Conner has consolidated its existing Singapore facilities
with those of Archive.
RESEARCH AND DEVELOPMENT
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The Company participates in an industry that is subject to rapid
technological changes, and its ability to remain competitive depends on, among
other things, its ability to maintain a leadership position in technology
innovation. As a result, the Company has devoted and will continue to devote
substantial resources to product development and process engineering efforts.
In 1993, 1992 and 1991 the Company's research and development expenses were
$137,465,000, $94,652,000 and $85,007,000, respectively. The Company's research
and development expenses have increased substantially in the past year as the
Company has expanded prototype production and testing associated with the
planned introduction of several new products and technologies.
The Company's current research and development efforts are principally
directed to the development and prototype production of new high performance
3.5-inch and 2.5-inch disk drives. Disk drives currently in development employ
more complex designs and a greater number of technologically advanced components
than previous disk drive generations. Accordingly, it is possible that it will
be more difficult to introduce these disk drives to volume manufacturing than
was the case with previous disk drive generations.
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The Company's disk drive research and new product development is
conducted primarily at its facilities in San Jose, California and Longmont,
Colorado. The Company's process engineering and final product development is
conducted principally in San Jose and at its facilities in Singapore.
PATENTS AND LICENSES
- --------------------
The Company has been granted or has acquired 31 United States patents and
has approximately 65 patent applications pending related to disk drive
technology. The Company's issued patents include a patent covering the
Company's microprocessor and microcode based architecture, and a patent covering
the self-testing diagnostic features incorporated in its disk drives. In
addition, the Company has been granted a patent covering its brushless motor
design and a patent covering certain mechanical design features of its low
profile drives, including various design features related to the one-inch high
form factor.
The Company has obtained or applied for a variety of additional patents
relating to other aspects of its drives, including certain features used in
achieving the low power functionalities of its disk drives which are important
for laptop and notebook applications, as well as certain desktop applications.
The Company has also acquired or been granted 80 United States patents, and has
approximately 25 patent applications pending, as part of the Archive acquisition
in December 1992 which relate to tape drive designs or technologies.
In addition to patent protection, the Company relies on the laws of unfair
competition, copyright and trade secrets to protect its proprietary rights. The
Company believes that its technological know-how and abilities, protectable on
these bodies of law, are equally important to its business as technical
innovations subject to patent protection.
As is typical in the disk drive industry, Conner has from time to time been
notified that it may be infringing certain patents and other intellectual
property rights of others, and the Company is engaged in several patent
infringement lawsuits, both as plaintiff and defendant. Although the Company
may offer licenses in connection with these claims, there can be no assurance
that such claims will not result in litigation in the future regarding patents,
mask works, copyrights, trademarks or trade secrets, or that any licenses or
other rights can be obtained on acceptable terms. See "Legal Proceedings."
FACTORS AFFECTING EARNINGS AND STOCK PRICE
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In the past, the Company's sales and earnings have experienced significant
fluctuations due to precipitous changes in industry demand, product cycles and
pricing pressures. During 1993, the Company experienced substantial losses as a
result of distribution problems in Europe, new product introduction delays and
severe competition across
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all the Company's product lines. Although the Company has successfully
introduced a range of new disk drive and tape drive products since then, there
can be no assurance that the Company will not again experience these problems in
the future. In addition, there can be no assurance that the Company will
succeed in ramping production of new products in time to take advantage of
customer demand or that the Company will achieve profitable operations in any
given period or fiscal quarter.
Due to the volatility in the Company's business, the Company expects that
its stock price will continue to be subject to significant fluctuations. The
Company's stock price could decline precipitously due to unsubstantiated rumors
or to actual short-term performance that fails to meet analysts' expectations
for sales or net income. Investors in the Company's securities must be willing
to accept the risk of such fluctuations and stock price volatility.
EMPLOYEES
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At December 31, 1993, the Company had 9,097 employees, of whom 817 were in
research and development or process development engineering; 395 were in
marketing, sales and service; 584 were in general administration; and 7,301 were
in operations, with 4,851 in direct labor and the remainder in quality
assurance, test and manufacturing engineering, procurement and material
management and production management. None of the Company's employees, except
those in Italy, are represented by a labor union. The Company believes that its
relationship with its employees is satisfactory.
Item 2. PROPERTIES
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Facilities
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The following table sets forth information concerning the principal
operating facilities of the Company as of December 31, 1993:
Square
Feet
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Manufacturing:
United States (7 buildings)............... 410,000
Asia (4 buildings)........................ 830,000
Europe (3 buildings)...................... 142,000
Administration, Research and Development:
United States (13 buildings).............. 440,000
Asia (1 building)......................... 1,200
Sales and Customer Service:
Sales and customer service offices
(28 buildings in North America,
Asia and Europe)......................... 148,000
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The Company believes that it may require additional facilities in the
United States to address its near term space requirements and expects to be
able to lease such facilities on a short term basis, although there is no
assurance such short term leases will be available at attractive rates.
Item 3. LEGAL PROCEEDINGS
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The Company and certain 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 shareholders derivative suit. Both complaints seek
unspecified damages and other relief. The Company intends to defend the
actions vigorously.
In August 1993, the Company was served with a patent infringement complaint
filed by IBM in the United States District Court for the Northern District of
California. The complaint alleges that products manufactured by the Company
have infringed nine patents owned by IBM. In addition, the complaint seeks
declaratory relief to the effect that drives produced by IBM do not infringe
five patents held by the Company and seeks to have such patents declared
invalid. The Company answered the complaint, denying all material allegations
and counter claiming that IBM disk drives infringe six patents owned by Conner,
including the five contained in the IBM complaint. The Company believes that it
has meritorious defenses against these allegations, that it has valid claims
against IBM and will defend this action vigorously. However, the Company is
unable to predict the outcome of the litigation or ultimate effect, if any, on
its operations or financial condition. Regardless of the merits of the
respective patent claims, the Company believes that the existence of the IBM
litigation could have an adverse effect on its business and expects that this
litigation will require the Company to incur significant costs and uncertainty,
including substantial legal expenses. Although the Company has engaged in
continuous discussions with IBM toward an appropriate cross-licensing
arrangement, no assurance can be given as to the outcome of the litigation or
settlement negotiations.
In February 1992, the Company filed a patent infringement lawsuit against
Western Digital Corporation ("Western Digital") alleging the infringement of
five of the Company's patents by Western Digital. The suit is currently pending
in the Northern District of California. Shortly after the commencement of this
action, Western Digital filed a claim in the Central District of California
alleging infringement of one patent by the Company. Subsequently, Western
Digital amended its claim to assert infringement by the Company of two
additional disk drive patents. The Western Digital complaint has been
transferred to the Northern District of California. Although the Company
believes it has valid claims against Western Digital and meritorious defenses to
the claims asserted by Western Digital, there can be no assurance as to the
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outcome of this litigation or that the Company will prevail in its claims and
defenses.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
Information regarding the market for the Registrant's common equity and
related stockholder matters is set forth under the heading "Consolidated
Statements of Stockholders' Equity" on page 18 and under the heading "Market
Price of Common Stock" on the inside back cover of the Annual Report, which
sections are incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
-----------------------
Information regarding selected financial information is set forth under the
headings "Consolidated Statement of Operations Data," "Consolidated Balance
Sheet Data," and "Summary Quarterly Data" on page 8 of the Annual Report, which
sections are incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Information regarding management's discussion and analysis of financial
condition and results of operations is set forth under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 9-14 of the Annual Report, which section is incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Consolidated Financial Statements of the Company at January 1, 1994 and
January 2, 1993, and for each of the three fiscal years in the period ended
January 1, 1994 and the report of independent accountants therein, as well as
the Company's unaudited quarterly financial information for the two-year period
ended January 1, 1994 is set forth on pages 15 through 29 and on page 8 of the
Annual Report, which sections are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
-15-
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Company has filed a definitive proxy statement pursuant
to Regulation 14A with respect to the Annual Meeting of Stockholders to be
held April 19, 1994 (the "Proxy Statement") with the Securities and Exchange
Commission and certain information included therein is incorporated herein by
reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated by reference to the
information under the caption "PROPOSAL NO. 1-- ELECTION OF DIRECTORS" in the
Proxy Statement. The information concerning executive officers of the Company
is incorporated by reference to the information under the caption "Proposal No.
1--ELECTION OF DIRECTORS" and under the caption "OTHER INFORMATION--Executive
Officers" in the Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to the
information under the captions "EXECUTIVE OFFICER COMPENSATION--Summary
Compensation Table," "--Option Grants in Last Fiscal Year", and "--Aggregate
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values" in the
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to the
information under the caption "OTHER INFORMATION-- Share Ownership by Principal
Stockholders and Management" in the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated by reference to the
information under the captions "CERTAIN TRANSACTIONS" and "EXECUTIVE
COMPENSATION--Compensation Committee Interlocks and Insider Participation" in
the Proxy Statement.
-16-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The financial statements listed in the following index to consolidated
financial statements are filed as part of this Annual Report on Form 10-K.
Page in
1. Financial Statements Annual Report
-------------
Consolidated Balance Sheets at December 31, 1993 15
and December 31, 1992
Consolidated Statements of Operations for the 16
three years ended December 31, 1993
Consolidated Statements of Cash Flows for the 17
three years ended December 31, 1993
Consolidated Statement of Stockholders' Equity 18
for the three years ended December 31, 1993
Notes to Consolidated Financial Statements 19
Report of Independent Accountants 29
2. Financial Statement Schedules
Schedule Description Page
---------- ----------------------------------- ----
I Marketable Securities - Other S-1
Investments
VIII Valuation and Qualifying Accounts S-2
Report of Independent Accountants S-3
Schedules not listed above have been omitted because they are either
inapplicable or the required information has been provided in the
financial statements or notes thereto.
3. Exhibits
Refer to (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed on behalf of Registrant during the
quarter ended January 1, 1994.
(c) Exhibits
-17-
Exhibit
Number Description
------------ -----------
2.1(6) Agreement and Plan of Merger between Conner
Peripherals, Inc., a Delaware corporation, and
Conner Peripherals, Inc., a California corporation,
dated July 13, 1992.
2.2(7) Agreement and Plan of Merger between Archive
Corporation, Conner Acquisition Corp. and Conner
Peripherals, Inc. dated November 18, 1992, as
amended.
3.1(6) Certificate of Incorporation of Registrant, as
amended to date.
3.2(6) Bylaws of Registrant as amended to date.
4.1(3) Form of Indenture relating to the Registrant's
6-3/4% Convertible Sub-ordinated Debentures due 2001.
4.2(4) Form of Indenture relating to the Registrant's
6-1/2% Convertible Sub-ordinated Debentures due 2002.
10.1(2) * Registrant's Profit Sharing Plan, as amended to
date.
10.2(9) * Registrant's 1986 Incentive Stock Plan, together
with forms of agreements thereunder, as amended.
10.3(5) * Registrant's 1992 Restricted Stock Plan.
10.4(6) * Form of Officer and Director Amended and Restated
Indemnification Agreement.
10.6 * Registrant's Employee Stock Purchase Plan, as
amended.
10.7(1) Lease Agreement dated August 19, 1988 between
Registrant and Corporate Plaza, Phase I, a
California general partnership, for certain land and
improvements commonly known as Corporate Plaza,
located in San Jose, California.
10.8(1) Lease Agreement dated June 16, 1988 between Conner
Peripherals, Singapore, Ltd. and
-18-
Exhibit
Number Description
------------ -----------
Newton Investment Ltd. for the sixth story of 151
Lorong Chuan, Singapore.
10.9(1) Lease Agreement dated December 8, 1988 between
Conner Peripherals Singapore, Ltd. for the fifth
story of 151 Lorong Chuan, Singapore.
10.10(4) Amendment to Lease Agreements dated June 16, 1988
and December 8, 1988 between Conner Peripherals,
Singapore, Ltd. and Newton Investment Ltd. for the
sixth and fifth stories, respectively, of 151 Lorong
Chuan, Singapore, dated October 23, 1991. See
Exhibits 10.8 and 10.9 listed above.
10.11 Sixth Amendment dated December 22, 1993 (the "Sixth
Amendment") to Note Purchase Agreement among
Registrant and Principal Mutual Life Insurance
Company, Northwestern National Life Insurance
Company, Northern Life Insurance Company, The North
Atlantic Life Insurance Company of America and
Ministers Life - a Mutual Life Insurance Company
dated June 1, 1989 (the "Note Purchase Agreement").
Exhibit A to the Sixth Amendment is a copy of the
Amended and Restated Note Purchase Agreement which
includes all amendments and agreements entered into
to date with respect to the Note Purchase Agreement.
10.12 Fifth Amendment dated December 22, 1993 (the "Fifth
Amendment") to the Note Agreement dated as of March
29, 1991 (the "Note Agreement") among the Registrant
and the Purchasers listed in such agreement relating
to the Registrant's Series A and Series B Senior
Notes. Exhibit A to the Fifth Amendment is a copy
of the Amended and Restated Note Agreement which
includes all amendments and agreements entered into
to date with respect to the Note Agreement.
10.13(6) Lease Agreement to supersede the Lease Agreement
that is dated August 1, 1989, on August 1, 1992 for
Building 1 at 2400 Trade Centre Drive, Longmont, CO.
-19-
Exhibit
Number Description
------------ -----------
10.14(6) Stock Purchase Agreement between Compaq Computer
Corporation and the Registrant, dated July 28, 1992.
10.15(8) * Stock Option and Restricted Stock Purchase Plan -
1981 and form of option agreement with respect
thereto.
10.16(8) * Incentive Stock Option Plan - 1981 and form of
option agreement with respect thereto.
10.17(9) Lease Agreement dated March 21, 1992 between Newton
Investment LTD and Conner Peripherals PTE LTD for
the third story of 151 Lorong Chuan, Singapore.
10.18 Sublease Agreement between the Registrant and
General Signal Corporation for the property located
at 195 South Milpitas Boulevard, Milpitas,
California, dated February 20, 1993.
10.19 Credit Agreement dated December 23, 1993 among the
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 Registrant's
earnings per share.
13 1993 Annual Report to Stockholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (see pages 22 and 23).
______________________
-20-
(1) Incorporated by reference to exhibit filed with Registration Statement No.
33-26831.
(2) Incorporated by reference to exhibit filed with Registrant's Report on Form
10-K for the fiscal year ended December 31, 1989.
(3) Incorporated by reference to exhibit filed with Registrant's Report on Form
10-K for the fiscal year ended December 31, 1990.
(4) Incorporated by reference to exhibit filed with Registrant's Report on Form
10-K for the fiscal year ended December 31, 1991.
(5) Incorporated by reference to exhibit filed with Registrant's Registration
Statement No. 33-46886.
(6) Incorporated by reference to exhibit filed with Registrant's Form 8-B filed
with the Securities and Exchange Commission on September 9, 1992.
(7) Incorporated by reference to exhibit filed with the Tender Offer Statement
on Schedule 14D-1, as amended, of Conner Acquisition Corporation and Conner
Peripherals, Inc., filed with the Securities and Exchange Commission on
November 24, 1992.
(8) Incorporated by reference to exhibit filed with Registrant's Registration
Statement No. 33-56878.
(9) Incorporated by reference to exhibit filed with Registrant's Report on Form
10-K for the fiscal year ended December 31, 1992.
___________________________
* Denotes a management contract or compensatory plan or arrangement.
-21-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
San Jose, State of California, on the 30th day of March, 1994.
CONNER PERIPHERALS, INC.
By: /s/ P. Jackson Bell
-----------------------------------------
P. Jackson Bell, Executive Vice President
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David T. Mitchell and Finis F. Conner
and each of them, his or her attorneys-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign on behalf of
the undersigned any amendments to this Report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, and each of the undersigned does
hereby ratify and confirm all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Finis F. Conner
------------------------- Chairman of the Board March 30, 1994
(Finis F. Conner) of Directors and Chief
Executive Officer
(Principal Executive
Officer)
/s/ David T. Mitchell
------------------------- President, Chief March 30, 1994
(David T. Mitchell) Operating Officer and
Director
-22-
/s/ William J. Schroeder
------------------------- Vice Chairman and March 30, 1994
(William J. Schroeder) Director
Director March __, 1994
- -------------------------
(John P. Squires)
/s/ P. Jackson Bell
- ------------------------- Executive Vice President March 30, 1994
(P. Jackson Bell) and Chief Financial Officer
(Principal Financial and
and Accounting Officer)
/s/ William S. Anderson Director March 30, 1994
- -------------------------
(William S. Anderson)
/s/ Mark Rossi Director March 30, 1994
- -------------------------
(Mark Rossi)
/s/ Linda Wertheimer Hart Director March 30, 1994
- -------------------------
(Linda Wertheimer Hart)
/s/ L. Paul Bremer Director March 30, 1994
- -------------------------
(L. Paul Bremer)
/s/ Roger S. Penske Director March 30, 1994
- -------------------------
(Roger S. Penske)
-23-
CONNER PERIPHERALS, INC.
1993 Annual Report on Form 10-K
Index to Financial Statement Schedules
Schedule Description Page
- ---------- --------------------------- ----
I Marketable Securities-Other S-1
Investments
VIII Valuation and Qualifying S-2
Accounts
Report of Independent S-3
Accountants
-24-
CONNER PERIPHERALS, INC.
------------------------
SCHEDULE I--MARKETABLE SECURITIES--OTHER INVESTMENTS
Amount At
Number Of Which Carried
Shares Or Market In Balance
Description Principal Amount Cost Value Sheet
- ----------- ---------------- ---- ----- -----
U.S. Government and Agencies $ 20,000,000 $ 19,936,000 $ 19,967,000 $ 19,969,000
U.S. Certificates of Deposit 25,000,000 25,000,000 25,000,000 25,000,000
European Certificates of Deposit 16,000,000 16,004,000 16,004,000 16,004,000
European Bonds 41,285,000 42,969,000 42,606,000 42,643,000
Money Market Funds 103,206,000 103,033,000 103,206,000 103,206,000
Commercial Paper 25,000,000 24,713,000 24,829,000 24,829,000
Corporate Notes, Bonds
and Medium Term Notes 107,000,000 98,519,000 107,251,000 107,278,000
Taxable Municipal Bonds 14,500,000 14,500,000 14,520,000 14,500,000
Tax Exempt Municipal Bonds 12,000,000 12,000,000 12,000,000 12,000,000
Taxable Floating Preferred
Stock 16,000,000 16,000,000 16,000,000 16,000,000
Tax Exempt Floating Preferred
Stock 76,850,000 76,817,000 76,821,000 76,821,000
------------
$458,250,000
============
S-1
CONNER PERIPHERALS, INC.
------------------------
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Charged to Balance
Beginning to Costs Other at End
Classification of Period and Expenses Accounts/1/ Deductions of Period
-------------- --------- ------------ ----------- ---------- ---------
1991:
Allowance for accounts receivable $ 6,694,000 $ 3,360,000 $ -- $ -- $10,054,000
1992:
Allowance for accounts receivable $10,054,000 $19,339,000 $4,299,000 $ -- $33,692,000
1993:
Allowance for accounts receivable $33,692,000 $ 9,749,000 $ -- $(4,011,000) $39,430,000
- -----------------------------
/1/ Charged to Other Accounts in 1992 includes reserves relating to Archive
Corporation.
S-2
REPORT OF INDEPENDENT ACCOUNTANTS ON
------------------------------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
To the Board of Directors
of Conner Peripherals, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 20, 1994 appearing on page 29 of the 1993 Annual Report to
Stockholders of Conner Peripherals, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedules listed in item
14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE
Price Waterhouse
San Jose, California
January 20, 1994
S-3
CONNER PERIPHERALS, INC.
1993 Annual Report on Form 10-K
Index to Exhibits
Number Description
- ------ -----------
10.6 Registrant's Employee Stock Purchase Plan, as amended.
10.11 Sixth Amendment dated December 22, 1993 (the "Sixth
Amendment") to Note Purchase Agreement among Regis-
trant and Principal Mutual Life Insurance Company,
Northwestern National Life Insurance Company, Northern
Life Insurance Company, The North Atlantic Life
Insurance Company of America and Ministers Life - a
Mutual Life Insurance Company dated June 1, 1989 (the
"Note Purchase Agreement"). Exhibit A to the Sixth
Amendment is a copy of the Amended and Restated Note
Purchase Agreement which includes all amendments and
agreements entered into to date with respect to the
Note Purchase Agreement.
10.12 Fifth Amendment dated December 22, 1993 (the "Fifth
Amendment") to the Note Agreement dated as of
March 29, 1991 (the "Note Agreement") among the
Registrant and the Purchasers listed in such agreement
relating to the Registrant's Series A and Series B
Senior Notes. Exhibit A to the Fifth Amendment is a
copy of the Amended and Restated Note Agreement which
includes all amendments and agreements entered into to
date with respect to the Note Agreement.
10.18 Sublease Agreement between the Registrant and General
Signal Corporation for the property located at 195
South Milpitas Boulevard, Milpitas, California, dated
February 20, 1993.
10.19 Credit Agreement dated December 23, 1993 among the
Registrant 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 Registrant's
earnings per share.
13.1 1993 Annual Report to Stockholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.