Financial Contents
Selected Financial Data 8
Management's Discussion and Analysis 9
Consolidated Balance Sheets 15
Consolidated Statements of Operations 16
Consolidated Statements of Cash Flows 17
Consolidated Statements of Stockholders' Equity 18
Notes to Consolidated Financial Statements 19
Report of Independent Accountants 29
Report of Management 30
CONNER PERIPHERALS, INC.7
Consolidated Statement of Operations Data
Year ended December 31, 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $ 2,151,672 $ 2,238,423 $ 1,598,984 $ 1,337,593 $ 704,908
Gross profit 237,954 458,464 316,257 328,211 148,814
Income/(loss) from operations/1/ (446,430) 153,530 130,211 172,732 63,159
Net income/(loss) (445,314) 121,072 92,492 130,052 41,449
Net income/(loss) per share:
Primary $ (9.03) $ 2.19 $ 1.57 $ 2.51 $ 1.09
Fully diluted $ (9.03) $ 1.89 $ 1.54 $ 2.41 $ 1.00
Weighted average shares:
Primary 49,339 55,242 58,863 51,727 37,949
Fully diluted 49,339 74,723 65,252 54,527 45,484
Consolidated Balance Sheet Data
December 31, 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Assets:
Total current assets $ 1,167,115 $ 1,388,343 $ 1,123,665 $ 720,137 $ 366,114
Total assets 1,464,051 1,904,707 1,334,538 880,468 468,095
Liabilities and stockholders' equity:
Current liabilities 489,893 435,581 168,887 183,022 123,621
Long-term debt 660,606 704,845 367,916 36,731 122,893
Stockholders' equity 208,851 626,036 712,825 603,862 200,836
Summary Quarterly Data
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Quarter ended 1993 1993 1993 1993 1992 1992 1992 1992
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per
share amounts)
Net sales $574,449 $ 528,358 $ 490,575 $ 558,290 $ 620,466 $ 625,477 $551,347 $ 441,133
Gross profit 87,872 20,981 38,581 90,520 127,180 120,937 126,240 84,107
Income/(loss) from
operations/2/ 15,510 (381,608) (51,765) (28,567) (765) 55,039 63,254 36,002
Net income/(loss) 8,455 (372,400) (58,825) (22,544) 8,490 41,905 46,024 24,653
Net income/(loss) per share:
Primary $ 0.17 $ (7.54) $ (1.19) $ (0.46) $ 0.17 $ 0.79 $ 0.77 $ 0.42
Fully diluted $ 0.17 $ (7.54) $ (1.19) $ (0.46) $ 0.17 $ 0.64 $ 0.63 $ 0.40
Weighted average shares:
Primary 50,733 49,410 49,303 48,554 48,928 52,800 59,885 59,261
Fully diluted 51,116 49,410 49,303 48,554 49,068 75,106 82,191 69,979
1 Income/(loss) from operations includes unusual charges (credits) of
$378,702,000, $57,611,000 and ($3,389,000) in 1993, 1992 and 1991,
respectively (see Note 3).
2 Income/(loss) from operations includes unusual charges of $330,019,000,
$12,300,000, $36,383,000 and $57,611,000 for the quarters ended September 30,
1993, June 30, 1993, March 31, 1993 and December 31, 1992, respectively
(see Note 3).
8 CONNER PERIPHERALS, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following table sets forth items in the Company's Consolidated Statements of
Operations for each of the last three years ended December 31, 1993, as a
percent of net sales.
Year ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 88.9 79.5 80.2
---------------------------
Gross profit 11.1 20.5 19.8
Selling, general and administrative 8.7 6.8 6.5
Research and development 6.4 4.2 5.3
Amortization of goodwill and other
intangibles 1.0 -- --
Unusual items 15.7 2.6 (0.2)
--------------------------
Income/(loss) from operations (20.7) 6.9 8.2
Other income/(expense), net (1.2) 0.1 (0.3)
--------------------------
Income/(loss) before income taxes (21.9) 7.0 7.9
Benefit/(provision) for income taxes 1.2 (1.6) (2.1)
--------------------------
Net income/(loss) (20.7) 5.4 5.8
OVERVIEW
The Company had a net loss of $445.3 million in 1993 due primarily to two
principal causes. First, the margin the Company earned on sales of products,
primarily disk drives, came under tremendous pressure during 1993 and fell to
11.1% from 20.5% in 1992. The Company believes this deterioration of margins
resulted from pricing pressures caused by a combination of: (1) industry-wide
overcapacity, particularly for drives under 200 megabytes, and a rapid shift in
customer demand toward drives with capacities greater than 200 megabytes, and
(2) cost pressures caused by aging inventories with higher unit costs resulting
from distribution problems in Europe and delays in time-to-market (see
discussion below). The second, and more significant cause, was the revaluation
of goodwill and other intangibles necessitated by the occurrence in 1993 of
fundamental changes in the storage business and the Company's decision to take
various restructuring actions designed to put the Company on a more competitive
footing and return it to profitability. The combination of these actions
resulted in charges to income in 1993 of $378.7 million. Each of these charges
is described in more detail below under Gross Profit and Unusual Items.
SALES
The Company's net sales totaled $2.2 billion in 1993, the same as 1992. Included
in the 1993 results are the operations of Archive Corporation ("Archive"), which
was acquired by the Company at the end of the fourth quarter of 1992. Operations
of Archive, which include the sale of tape drive and data storage hardware and
software related products, are not included in the 1992 results, although the
results of the fourth quarter of 1992 include a charge of $57.6 million
associated with the write-off of in-process research and development of Archive.
Excluding Archive, net sales of disk drives in 1993 declined substantially as
compared to 1992. This resulted from significant declines in average unit
selling prices coupled with a decrease in the unit volume of shipments. The
Company believes that severe price erosion was experienced throughout the disk
drive industry, particularly for drives with capacities under 200 megabytes, due
to industry-wide overcapacity exacerbated by an unexpected rapid shift in
customer demand toward drives with capacities greater than 200 megabytes. This
shift in demand toward higher capacity drives, which is expected to continue in
the foreseeable future, is due to the higher storage capacity requirements of
new and more sophisticated software products. Individual price declines of the
Company's disk drives ranged from approximately 20% to 60% in 1993. These price
declines were offset to some extent by a favorable shift in product mix towards
the Company's newer, higher capacity disk drives. The unit volume of shipments
declined by approximately 6% in 1993. This decline was due to a disruption in
sales to European distributors resulting from the termination of the Company's
exclusive distribution relationship with its European master
CONNER PERIPHERALS, INC. 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations
distributor, which adversely affected sales in the first and second quarters of
1993, and disruptions in sales associated with the timing of certain new product
introductions during the first three quarters of 1993 which had a negative
impact on sales to OEM customers.
Similar to the disk drive product lines, tape product lines were negatively
impacted by price competition, although to a lesser extent, which resulted in
lower average unit selling prices. Revenue was also negatively impacted by
product availability of certain newer DAT products.
In 1993, international sales were approximately 54% of total sales compared to
61% in 1992 and 64% in 1991. Sales to distributors in 1993 were approximately
29% of total sales compared to 31% and 16% in 1992 and 1991, respectively. The
decrease in international sales and distributor sales in 1993 is primarily due
to the inclusion of Archive's tape operations, which carry a higher percentage
of sales to domestic and OEM customers as compared to disk drive operations and
the termination of the Company's exclusive distribution relationship with its
European master distributor.
In 1993, sales to Compaq Computer represented 13% of net sales as compared
with 15% in 1992 and 12% in 1991. One other customer accounted for more than 10%
of net sales in 1992, with 12%. In 1993 and 1991, no customer except for Compaq
accounted for 10% or more of net sales.
In 1992, the Company's net sales of disk drives totaled $2.2 billion,
representing a 40% increase over 1991. The annual growth in net sales of disk
drives was driven by a 62% increase in unit volume shipments and an improved
product mix, offset somewhat by a decrease in average unit selling prices. Unit
volumes increased due in large part to growth in unit shipments of 3.5-inch
products and an expanded OEM customer base.
As is common in the microcomputer industry, the Company's shipment patterns
during a quarter are frequently characterized by a significantly higher shipment
volume in the third month of the quarter than that experienced in the first two
months of the quarter. This pattern often causes quarterly results to be
difficult to predict. During the fourth quarter of 1993, demand for certain of
the Company's disk drives exceeded the Company's product availability and, as
such, were available to customers on an allocation basis. This trend appears to
be continuing into the Company's first quarter of 1994. However, there can be no
assurance that this trend will continue into future periods. In addition,
certain of the Company's customers have reduced their order lead-times which has
further reduced the Company's visibility to future orders. The Company's sales
and results of operations in future quarters will continue to be difficult to
predict as a result of these factors. Furthermore, the demand for the Company's
products depends principally on demand for high performance microcomputers
manufactured by its customers. A slowdown in demand for such computers or
continued price erosion may have an exaggerated effect on the demand for the
Company's products and/or profitability in any given period. In addition, the
market for disk drive products is transitioning towards more of a commodity-type
business with limited technological differentiation between the productsof the
Company and its competitors. As a result, pricing on the Company's newer
products is considerably more aggressive than in prior periods, as pricing has
become the key competitive point of product differentiation in the disk drive
industry.
GROSS PROFIT
The Company's gross margin decreased to 11.1% of net sales in 1993 from 20.5%
in 1992. The lower gross margin was due to a significant decline in average unit
selling prices, lower shipments into the distribution channel and special
inventory related charges included in cost of sales, offset partially by lower
average unit production costs and the inclusion in 1993 of sales of Archive's
tape products which carry higher gross margins. The price declines experienced
were driven by overcapacity in the disk drive industry, particularly for disk
drives with capacities under 200 megabytes. The Company believes this resulted
from increases in industry capacity during 1993 coupled with an unexpected rapid
shift in customer demand for disk drives with storage capacities exceeding 200
megabytes. Cost reductions achieved in 1993 were not sufficient to offset the
impact of declining selling prices. Shipments of disk drives into the
distribution channel were adversely affected, during principally the first and
second quarters, due to the Company's decision at the end of the first quarter
of 1993 to terminate the Company's exclusive distribution relationship with its
master European distributor. The Company believes that it has substantially
recovered from this action and now directly controls its relationships with its
distributors in Europe, Africa and the Middle East.
10 CONNER PERIPHERALS, INC
During the first, second and third quarters, the Company recorded as cost of
sales special charges totaling $40.3 million resulting from the Company's
decisions to accelerate the end-of-life of certain products.
Gross margins for tape products were adversely affected by a higher percentage
of sales of lower margin products, particularly the minicartridge product line.
The Company's gross margin increased to 20.5% of net sales in 1992, up from
19.8% in 1991. The increase in gross margin reflects improved product mix and
reductions in unit product costs that more than offset decreases in average unit
selling prices of disk drives. Unit product cost reductions were achieved
primarily through greater utilization of production capacity in Asia and reduced
component costs. Improved product mix resulted from a shift in customer demand
toward higher capacity, higher performance products and away from older, lower
capacity disk drives.
The Company anticipates the introduction of several new products during 1994.
The failure of the Company to successfully launch or achieve required production
volumes at anticipated costs for one or more of the new products could have a
material adverse effect on the Company's revenues and profitability. Costs and
disruptions associated with the launch of two new disk drive products during
1993 did have a material negative impact on the Company's quarterly revenues and
profitability. In addition, new products generally have lower initial
manufacturing yields and higher component costs than more mature products which
place additional pressure on gross margins. The Company believes it
significantly improved the efficiency and effectiveness of its new product
launch operations during 1993 as indicated by the successful launch of the
Filepro 210 megabyte disk drive in the quarter ended December 31, 1993. However,
there can be no assurance that the launch of new products in future periods will
be successful.
SELLING
GENERAL AND
ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased to $186.3
million in 1993 from $152.7 million in 1992 and $104.4 million in 1991. These
expenses represented 8.7%, 6.8% and 6.5% of net sales in 1993, 1992 and 1991,
respectively. The increase in SG&A in absolute dollars and as a percentage of
net sales in 1993 as compared to 1992 was primarily due to the inclusion of
Archive tapeoperations during 1993. Archive operations were consolidated with
the Company's disk drive operations commencing in the first quart er of 1993.
SG&A expenses increased to a lesser extent due to higher advertising and legal
costs. The increase in SG&A expenses was partially offset by lower profit
sharing and provisions for bad debt .
The increase in SG&A expenses in absolute dollars and as a percentage of net
sales in 1992 as compared to 1991 is primarily a result of increases in bad
debts expense and employee profit sharing. The increase in the Company's reserve
for doubtful accounts was consistent with the Company's growth in sales volume
and the additional credit risk associated with an expanded customer base.
In 1994, the Company expects lower SG&A expenses as a percentage of net sales
due to ongoing cost reduction programs and benefits received from its
restructuring actions. During the fourth quarter of 1993, SG&A declined to
approximately 7% of net sales from 9% in the third quarter as a result of such
actions.
RESEARCH AND
DEVELOPMENT
The Company's investment in research and development ("R&D") increased to $137.5
million in 1993 from $94.7 million in 1992 and $85.0 million in 1991. These
expenses represented 6.4%, 4.2%and 5.3% of net sales in 1993, 1992 and 1991,
respectively. The year-over-year increase in R&D expenses in absolute dollars
and as a percentage of net sales in 1993 as compared to 1992 is primarily a
result of the inclusion of the Archive tape operations in 1993. In addition, R&D
expenses increased in 1993 as a result of the acceleration of new product
introductions concurrent with the Company's decision to end-of-life certain
older products. Due to the timing of new R&D programs and the release of new
products to production, the level of R&D spending may vary from year to year in
absolute dollars and as a percentage of sales.
The increase in R&D expenses in absolute dollars in 1992 as compared to 1991
is primarily the result of the transitioning of new products from engineering to
product launch and volume production.
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
productlaunch activities. The Company believes this investment has significantly
improved the efficiency and effectiveness of its new product
CONNER PERIPHERALS 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations
launch operations. During 1994, this emphasis is planned to continue and R&D
expenditures are expected to increase modestly in absolute dollars in support of
new product introductions. The level of R&D spending reflects management's
belief that such spending is essential for the Company to remain competitive by
quickly and regularly introducing new products.
AMORTIZATION
OF GOODWILL
AND OTHER
INTANGIBLES
Amortization of goodwill and other intangibles totaling $22.2 million consisted
primarily of Archive related intangibles associated with the acquisition of
Archive in the fourth quarter of fiscal 1992. Commencing in the first quarter of
1993, goodwill was being amortized on a straight-line basis over a period of 12
years, and other intangibles were being amortized on a straight-line basis over
their estimated useful lives ranging from 3 to 10 years. At the end of the third
quarter of 1993, the remaining goodwill balance was written-off and other
intangibles were written-down to their estimated fair values. These special
charges are more fully described under Unusual Items. The remaining balance of
other intangibles is being amortized on a straight-line basis over their
estimated useful lives ranging from 2 to 10 years.
UNUSUAL ITEMS
During 1993, the Company recorded unusual charges totaling $378.7 million, of
which $40.3 million was included in cost of sales and $338.4 million was charged
to unusual items.
At the end of the third quarter of 1993, the Company recorded a charge of $330
million, of which $20 million was charged to cost of sales and $310 million was
charged to unusual items. The $20 million charge to cost of sales reflected the
cost of the Company's actions to accelerate the end-of-life of certain disk
drive products. The $310 million charge included a write-down of goodwill and
other intangibles of $213 million; a restructuring charge of $78 million for the
reduction of excess manufacturing capacity and the streamlining of operations;
and, a charge of $19 million for certain contingencies.
The write-down of intangible assets totaling $213 million consisted of $180
million of goodwill and $33 million of identified intangibles. The write-off
included all of the remaining goodwill associated with the Company's acquisition
of Archive as of the end of the third quarter. Identified intangibles include
certain patents, licenses, trademarks, technology and market data acquired
either directly or in connection with the acquisition of Archive. The Company
believes that the write-down of these assets was necessitated due to the
emergence during 1993 of fundamental changes in the storage business,
particularly the tape business. These changes had led to lower expectations for
revenue growth and gross margins. Both these factors have a direct bearing on
the value of intangibles and caused the value of these assets to be permanently
impaired, based on the related discounted cash flows.
The restructuring charge of $78 million resulted from the Company's decision
to reduce excess manufacturing capacity to a level more consistent with
sustainable demand and to streamline operations and administrative processes to
reduce the Company's cost structure. This charge also included costs to further
integrate and reduce SG&A and R&D activities of both the disk and tape drive
operations. The $78 million was comprised of approximately $27.5 million for
facilities related expenses, $17.5 million for write-off of certain assets and
$33 million for employee headcount reductions and other miscellaneous items.
As a result of the above actions and other cost saving programs, total
operating expenses decreased by approximately $20 million to 12.6% of net sales
for the fourth quarter of 1993 from 17.5% for the third quarter of 1993.
During the first and second quarters of 1993, the Company recorded special
charges totaling $48.7 million, of which $20.3 million was charged to cost of
sales and $28.4 million was charged to unusual items. These charges reflected
the cost of the Company's actions to accelerate the phase-out of certain disk
drive products, consolidate headcount and facilities in response to increased
productivity and lower short-term production levels and to further integrate the
tape drive operations. The $28.4 million charge included in unusual items was
comprised of approximately $17.4 million for property, plant and equipment
related expenses and $11 million for employee headcount reductions and other
miscellaneous items.
In December 1992, in connection with the acquisition of Archive, the Company
recorded a nonrecurring charge of $57.6 million ($35.7 million net of tax)
representing the fair value of acquired R&D projects in-process at the date of
the acquisition .
12 CONNER PERIPHERALS, INC.
During 1991, the Company sold the head-stack portion of it's Malaysian
operation to Read-Rite Corporation ("Read-Rite"). The net assets associated
with this operation were sold in exchange for approximately 1.7 million shares
of Read-Rite common stock that resulted in a gain of $11.3 million. The
Company also reduced its world-wide work force by 8%, repositioned some of its
manufacturing capacity from Singapore to Malaysia and relocated some of its
new product engineering launch activities from San Jose, California to
Longmont, Colorado. These actions resulted in charges to income that
substantially offset the gain which resulted from the transaction with Read-
Rite.
Interest expense increased to $51.2 million in 1993 from $46.9 million in 1992
and $23.3 million in 1991. The increase in interest expense in 1993 and 1992
in relation to the preceding year results from the Company's 6.5% subordinated
debentures totaling $345 million issued in March of 1992. Average outstanding
long-term borrowings have remained relatively constant since March of 1992.
Other income/expense reflects the net of, principally, interest income,
realized gains on sale of investments, royalty income and minority interest
associated with the Company's Italian subsidiary. In 1993, this resulted in
net other income of $26.7 million compared to $49.1 million in 1992 and $18.9
million in 1991. Net other income in 1993 decreased as compared to 1992
primarily as a result of a nonrecurring gain of $22.5 million recorded in 1992
for the sale of the Company's equity interest in Read-Rite, and lower interest
income resulting from lower invested funds and declining interest rates. The
decrease was partially offset by royalty income.
The year-over-year change in 1992 from 1991 resulted from the $22.5 million
gain on the sale of the Company's equity interest in Read-Rite and increased
interest income of approximately $7.5 million resulting from higher average
balances of cash and short-term investments.
TAXES
The Company's effective tax rate was a benefit of 5.4% in 1993 as compared to
provisions of 22.3% in 1992 and 26.5% in 1991. The decrease in the 1993
effective tax rate resulted primarily from the impact of goodwill and
intangible asset amortization and write-offs during 1993 which are not
deductible for income tax purposes. In addition, a significant amount of the
Company's losses were generated by operations in foreign tax jurisdictions
where the Company enjoys tax holidays or where losses can only be carried
forward. As a result, there was less direct tax benefit to the Company in the
current year for the foreign losses.
The Company's effective tax rate differs from the federal
statutory rate primarily as a result of differences between United States and
foreign tax rates and the impact of goodwill. The Company enjoys tax holidays in
Singapore and Malaysia with respect to disk drive operations which expire in
1997 and 1995, respectively, subject to certain extensions and post-holiday
benefits. However, the Company provides for United States taxes on that portion
of income from these jurisdictions that is not considered to be indefinitely
reinvested.
During 1993, the U.S. federal statutory tax rate increased from 34%
to 35%. The effect of the increase in the tax rate was not material to the
Company's financial position or results of operations.
The decrease in the 1992 effective tax rate of 22.3% from 26.5% in 1991
resulted from the tax benefit recognized upon the write-off of in-process R&D
in connection with the acquisition of Archive Corporation. Excluding this one-
time charge, the Company's effective tax rate was 26.5%.
During 1992, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" which superseded SFAS No. 96,
"Accounting for Income Taxes", under which the Company previously reported.
Both statements require the liability method for accounting for income taxes.
The effect of adopting SFAS No. 109 was not material to the Company's
financial position or results of operations.
The Company anticipates that its effective income tax rate will be
approximately 35% in fiscal 1994. The expected increase from the effective tax
rates in prior years is primarily due to the anticipation of a higher
percentage of total income being generated in taxable jurisdictions.
LIQUIDITY
AND CAPITAL
RESOURCES
At December 31, 1993, the Company's principal sources of liquidity consisted
of $517.5 million in cash and short-term investments and a combined $100
million revolving credit facility with several financial institutions. At
December 31, 1993, the Company had no borrowings under the revolving credit
facility. Availability of this line of credit is subject to the Company's
continued maintenance of certain financial covenants. At December 31, 1993,
the Company had outstanding letters of credit of approximately $40.3 million.
CONNER PERIPHERALS, INC. 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Cash generated from operating activities was approximately $20.2 million in
1993 compared with $269.8 million in 1992 and $83.7 million in 1991. The
decrease in cash generated from operating activities in 1993 was primarily due
to the Company's net loss of $445.3 million, offset to some extent by an
increase in adjustments for non-cash items, including non-cash charges for
unusual items totaling $230.4 million. This decrease was partially offset by
reductions in accounts receivable and inventory levels and increases in
accounts payable and accrued expenses. Accrued expenses at December 31, 1993
include accruals for potential future cash outlays primarily associated with
the restructuring actions taken at the end of the third quarter.
Other significant uses of cash in 1993 included $16 million for the purchase
of the 49% minority interest in Conner Peripherals Europe S.p.A. held by the
Company's joint venture partner. As of December 31, 1993, Conner Peripherals
Europe S.p.A. is a wholly-owned subsidiary of the Company.
The increase in operating cash flow in 1992 from 1991 was primarily due to
an increase in net income adjusted for non-cash expenses and revenues,
reduction in inventory levels and growth in accounts payable and accrued
expenses, offset to some extent by an increase in accounts receivable.
In December 1992, the Company acquired Archive, a manufacturer and supplier
of removable tape back-up and data storage products, to complement the
Company's existing products and markets. Total cash used in connection with
the acquisition of Archive was approximately $288 million, net of cash
acquired, including cash used to retire Archive debt of approximately $14
million and $90 million in 1993 and 1992, respectively.
The Company's capital expenditures during 1993 were approximately $102
million compared with $70 million in 1992 and $88 million in 1991. The
increase in capital expenditures in 1993 as compared to 1992 and 1991 reflects
increased spending on manufacturing assets, in particular, the expansion of
the Company's disk media manufacturing facility in California. The Company
currently expects to make capital expenditures of approximately $75 million
during 1994. These expenditures will be used primarily for manufacturing
equipment in support of new product lines and realignment of manufacturing
capacity between manufacturing locations. The Company believes that current
capital resources and cash generated from operating activities will be
sufficient to meet its liquidity and capital expenditure requirements for the
foreseeable future.
LITIGATION
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 believes there are meritorious defenses to the
matters raised and intends to defend the actions vigorously.
In August 1993, the Company was served with a patent infringement complaint
filed by IBM in the United States District Court for the Northern District of
California. The complaint alleges that products manufactured by the Company
infringe nine patents owned by IBM. In addition, the complaint seeks
declaratory relief to the effect that disk 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 infringesix patents
owned by Conner, including the five contained in the IBM complaint. The
Company expects that it may engage in cross-licensing negotiations with IBM
with a view towards resolving this matter; however, the Company believes that
it has meritorious defenses against these allegations and will defend this
action vigorously. The Company is unable to predict the outcome of the
litigation or ultimate effect, if any, on its operations or financial
condition.
14 CONNER PERIPHERALS, INC.
Consolidated Balance Sheets
December 31, 1993 1992
- --------------------------------------------------------------------------------------
(in thousands, except par value and share data)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 517,547 $ 614,527
Accounts receivable, net 333,416 401,128
Inventory 173,860 264,995
Deferred income taxes 54,944 39,351
Other 87,348 68,342
------------------------
Total current assets 1,167,115 1,388,343
Property, plant and equipment, net 231,337 231,396
Goodwill and other intangibles, net 42,944 259,843
Other 22,655 25,125
------------------------
$ 1,464,051 $ 1,904,707
LIABILITIES And ------------------------
STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 229,721 $ 250,103
Accrued expenses 217,060 180,397
Current portion of long-term debt 43,112 5,081
-------------------------
Total current liabilities 489,893 435,581
Long-term debt, less current portion 660,606 704,845
Deferred income taxes 98,162 115,314
Other 4,009 5,861
Minority interest 2,530 17,070
Commitments and contingencies (Notes 9 and 13)
Stockholders' equity:
Preferred stock, $0.001 par value; 20,000,000 shares
authorized, none outstanding -- --
Common stock and paid-in-capital in excess of
$0.001 par value; 100,000,000 shares authorized,
50,565,083 and 48,317,172 shares issued and
outstanding 242,454 214,325
Retained earnings/(accumulated deficit) (33,603) 411,711
-------------------------
Total stockholders' equity 208,851 626,036
-------------------------
$ 1,464,051 $ 1,904,707
-------------------------
The accompanying notes are an integral part of these financial statements.
CONNER PERIPHERALS, INC. 15
Consolidated Statements of Operations
Year ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $ 2,151,672 $ 2,238,423 $ 1,598,984
Cost of sales 1,913,718 1,779,959 1,282,727
---------------------------------------
Gross profit 237,954 458,464 316,257
---------------------------------------
Selling, general and administrative 186,269 152,671 104,428
Research and development 137,465 94,652 85,007
Amortization of goodwill and other intangibles 22,248 -- --
Unusual items, (income)/expense, net 338,402 57,611 (3,389)
---------------------------------------
Total operating expenses 684,384 304,934 186,046
---------------------------------------
Income/(loss) from operations (446,430) 153,530 130,211
Interest expense (51,213) (46,866) (23,290)
Other income, net 26,667 49,056 18,920
---------------------------------------
Income/(loss) before income taxes (470,976) 155,720 125,841
Benefit/(provision) for income taxes 25,662 (34,648) (33,349)
---------------------------------------
Net income/(loss) $ (445,314) $ 121,072 $ 92,492
---------------------------------------
Net income/(loss) per share:
Primary $ (9.03) $ 2.19 $ 1.57
---------------------------------------
Fully diluted $ (9.03) $ 1.89 $ 1.54
---------------------------------------
Weighted average shares:
Primary 49,339 55,242 58,863
---------------------------------------
Fully diluted 49,339 74,723 65,252
---------------------------------------
The accompanying notes are an integral part of these financial statements.
16 CONNER PERIPHERALS, INC.
Consolidated Statements of Cash Flows
Year ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income/(loss) $ (445,314) $ 121,072 $ 92,492
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Depreciation and amortization 104,747 77,463 51,138
Deferred income taxes (32,745) (13,067) 19,435
Non-cash unusual items 230,417 57,611 (11,283)
Gain on sale of Read-Rite Corporation
common stock -- (22,540) --
Loss on asset dispositions 11,468 5,595 5,238
Minority interest and other 720 9,330 7,687
Changes in assets and liabilities, net of effect
of Archive Corporation acquisition:
Accounts receivable, net 67,712 (132,401) 29,445
Inventory 91,135 39,362 (60,581)
Other current assets (19,006) (19,193) (23,855)
Other non-current assets (20,907) (18,108) 1,070
Accounts payable and accrued expenses 31,994 164,654 (27,049)
-------------------------------------
Total cash provided by operating activities 20,221 269,778 83,737
Cash flows from investing activities:
Capital expenditures (102,111) (69,744) (87,720)
Purchases of short-term investments (1,429,492) (1,013,148) (552,932)
Sales and maturities of short-term investments 1,464,986 795,839 414,699
Purchase of minority interest (16,000) -- --
Acquisition of Archive Corporation, net
of cash acquired -- (181,537) --
Acquisition of technology rights (2,078) (28,061) (14,000)
Proceeds from sale of Read-Rite Corporation
common stock -- 39,189 --
Acquisition of equity interest, net -- -- (4,262)
-------------------------------------
Cash used in investing activities (84,695) (457,462) (244,215)
Cash flows from financing activities:
Proceeds from long-term debt 2,782 345,672 348,335
Repayments of long-term debt (10,990) (24,752) (4,388)
Repayments of Archive Corporation
long-term debt (13,713) (90,239) --
Issuance of common stock 24,909 17,322 11,325
Repurchase of common stock -- (241,505) --
Contribution by minority stockholder -- 8,000 --
-------------------------------------
Cash provided by financing activities 2,988 14,498 355,272
Net increase (decrease) in cash and cash equivalents (61,486) (173,186) 194,794
Cash and cash equivalents at beginning of the year 258,985 432,171 237,377
-------------------------------------
Cash and cash equivalents at end of the year 197,499 258,985 432,171
Short-term investments 320,048 355,542 138,233
-------------------------------------
Total cash, cash equivalents and short-term
investments $ 517,547 $ 614,527 $ 570,404
-------------------------------------
The accompanying notes are an integral part of these financial statements.
CONNER PERIPHERALS, INC. 17
Consolidated Statements of Stockholders' Equity
Common Stock
---------------------------- Retained Total
Par Value and Earnings Stock-
Paid-in-Capital (Accumulated holders'
Shares in excess of par Deficit) Equity
- --------------------------------------------------------------------------------------------------------
(in thousands, except share data)
Balance at December 31, 1990 56,773,669 $ 405,715 $ 198,147 $ 603,862
Issuance of common stock
under various employee
stock plans 1,315,628 11,325 -- 11,325
Income tax benefit of
disqualifying dispositions
of employee stock -- 5,146 -- 5,146
Net income -- -- 92,492 92,492
-------------------------------------------------------------------
Balance at December 31, 1991 58,089,297 422,186 290,639 712,825
Issuance of common stock
under various employee
stock plans 1,866,677 31,008 -- 31,008
Repurchase of common stock,
at cost (11,638,802) (241,505) -- (241,505)
Income tax benefit of
disqualifying dispositions
of employee stock -- 2,636 -- 2,636
Net income -- -- 121,072 121,072
-------------------------------------------------------------------
Balance at December 31, 1992 48,317,172 214,325 411,711 626,036
Issuance of common stock
under various employee
stock plans 2,247,911 24,909 -- 24,909
Income tax benefit of
disqualifying dispositions
of employee stock -- 3,220 -- 3,220
Net loss -- -- (445,314) (445,314)
-------------------------------------------------------------------
Balance at December 31, 1993 50,565,083 $ 242,454 $ (33,603) $ 208,851
-------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18 CONNER PERIPHERALS, INC.
Notes to Consolidated Financial Statements
NOTE 1
THE COMPANY
Conner Peripherals, Inc. ("Company") was incorporated in California in June
1985, and reincorporated in Delaware in September 1992. The Company sells,
designs and builds a comprehensive line of information storage solutions
products, including disk drives, tape drives, storage management software and
storage systems, for a wide range of computer applications.
During 1993, sales to one customer accounted for approximately 13% of net
sales. During 1992, sales to two customers accounted for approximately 15% and
12% of net sales, respectively. During 1991, sales to one customer accounted for
approximately 12% of net sales.
The Company's fiscal year ends on the Saturday nearest to December 31. Results
of operations for the year ended in 1993 include 52 weeks. Results of operations
for the years ended 1992 and 1991 include 53 weeks and 52 weeks, respectively.
The Company reports quarterly results on thirteen-week quarterly periods each
ending on the Saturday closest to month-end. For purposes of presentation, the
Company has indicated its accounting year as ending on December 31 or the month-
end for interim quarterly periods.
SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Conner Peripherals, Inc. and its majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition: Revenue from product sales to customers is recognized upon
shipment. Revenue from sales to certain distributors is subject to agreements
allowing certain rights of return and price protection on unsold merchandise
held by those distributors. Accordingly, reserves for estimated future returns,
exchanges and credits for price protection are also provided upon shipment.
Warranty Expense: The Company provides for the estimated cost which may be
incurred under its various product warranties upon product shipment.
Cash, Cash Equivalents and Short-term Investments: The Company considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents. Short-term investments consist primarily of certificates
of deposit, bankers acceptances, commercial paper, corporate debt, municipal
debt and U.S. Government agency debt securities. These investments generally
mature within 12 months and are carried at cost, which approximates market.
During May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115"), which requires a change in the method
used to account for certain investments. FAS 115 will be effective for the
Company's fiscal year ending December 31, 1994. The Company has evaluated the
implications of the Statement and does not expect it to have a material impact
on the Company's financial condition or results of operations.
Concentration of Credit Risk: Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of
cash, cash equivalents and short-term investments and trade accounts receivable.
The Company places its cash, cash equivalents and short-term investments in a
variety of financial instruments such as certificates of deposit, bankers
acceptances, commercial paper, corporate debt, municipal debt and U.S.
Government agency debt. The Company, by policy, limits the amount of credit
exposure to any one financial institution or commercial issuer.
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of all
accounts receivable.
Inventory: Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Property, Plant and Equipment: Property, plant and equipment are stated at cost.
Equipment and furniture are depreciated using the straight-line method based
upon the estimated useful lives of the related assets which range from 2 to 10
years. Leasehold improvements are amortized using the straight-line method based
upon the shorter of the estimated useful lives or the lease term of the
respective assets. Buildings are depreciated using the straight-line method over
the estimated useful life of 25 years.
CONNER PERIPHERALS, INC. 19
Notes to Consolidated Financial Statements
Goodwill and Other Intangibles: Goodwill represents the excess of the purchase
price over the fair market value of net assets acquired in connection with the
1992 acquisition of Archive Corporation (see Note 4). At the end of the quarter
ended September 30, 1993, all remaining goodwill pertaining to the acquisition
of Archive was written-off (see Note 3). Previous to the write-off, goodwill was
being amortized on a straight-line basis over 12 years. Other intangibles
primarily include patents and acquired technology, which are being amortized
over their estimated useful lives ranging from 2 to 10 years.
The Company evaluates the recoverability of intangible assets based on future
discounted cash flows. Charges for impairment of intangible assets are recorded
to the extent unamortized book value of such assets exceed the related future
discounted cash flows.
Income Taxes: Effective at the beginning of 1992, the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
superseded Statement of Financial Accounting Standards No. 96, "Accounting for
Income Taxes," under which the Company previously reported. Both statements
require the liability method for accounting for income taxes. The current and
cumulative effect of adopting this statement were not material to the Company's
financial position or results of operations.
No U.S. federal income taxes are provided on the portion of unremitted
earnings of the foreign subsidiaries which are intended to be indefinitely
reinvested.
Net Income (Loss) Per Share: Primary and fully diluted net loss per share is
computed using the weighted average number of common shares outstanding. Primary
net income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding. Common equivalent shares consist
of stock options (using the treasury stock method). Fully diluted net income per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding and assuming the conversion, if dilutive,
of all outstanding convertible subordinated debentures from the date of issuance
for all periods in which they remained outstanding. For purposes of the fully
diluted computation, net income is adjusted by the after tax interest expense
applicable to the convertible subordinated debentures.
Foreign Currency Translation and Transactions: The Company currently uses the
U.S. dollar as the functional currency of its foreign operations. Gains or
losses from foreign currency translation are included in the determination of
net income. To date, such amounts have been immaterial.
The Company enters into forward exchange contracts and foreign currency options
to hedge certain foreign currency transactions for periods consistent with the
terms of the underlying transactions. Gains and losses on these contracts are
deferred and offset against losses and gains on the underlying transactions. At
December 31, 1993, the Company had approximately $28,000,000 of forward
exchanges contracts and $28,000,000 of foreign currency options outstanding.
Presentation: Certain prior year financial statement balances have been
reclassified to conform to the 1993 presentations.
20 CONNER PERIPHERALS, INC.
Note 2
Balance Sheet
and Statement
of Operations
Components
December 31, 1993 1992
- -------------------------------------------------------------------------------------
(in thousands)
Accounts receivable:
Gross receivables $ 372,846 $ 434,820
Less reserves and allowances 39,430 33,692
----------------------------------
$ 333,416 $ 401,128
==================================
Inventories:
Purchased components $ 81,620 $ 125,261
Work-in-process 37,939 85,887
Finished goods 54,301 53,847
----------------------------------
$ 173,860 $ 264,995
==================================
Property, plant and equipment:
Building $ 47,335 $ 47,959
Equipment and furniture 289,517 276,746
Leasehold improvements 60,762 41,390
Construction-in-progress 34,026 14,774
----------------------------------
431,640 380,869
Less accumulated depreciation and amortization 200,303 149,473
----------------------------------
$ 231,337 $ 231,396
==================================
Goodwill and other intangibles:
Goodwill $ -- $ 169,249
Intangibles 64,003 98,260
----------------------------------
64,003 267,509
Less accumulated amortization 21,059 7,666
----------------------------------
$ 42,944 $ 259,843
==================================
Accrued expenses:
Accrued employee compensation $ 33,041 $ 24,736
Accrued income taxes 14,298 26,320
Accrued warranty costs 38,299 36,738
Accrued restructuring costs 66,380 --
Other liabilities 65,042 92,603
----------------------------------
$ 217,060 $ 180,397
----------------------------------
Year ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------------
(in thousands)
Other income, net:
Interest income $ 17,700 $ 35,050 $ 27,566
Minority interest in joint ventures 649 (6,457) (2,541)
Gain on sale of Read-Rite Corporation stock -- 22,540 --
Other 8,318 (2,077) (6,105)
========================================
$ 26,667 $ 49,056 $ 18,920
========================================
NOTE 3
UNUSUAL ITEMS
During 1993, the Company recorded unusual charges totaling $378,702,000, of
which $40,300,000 was included in cost of sales and $338,402,000 was charged to
unusual items.
At the end of the third quarter of 1993, the Company recorded a charge of
$330,019,000, of which $20,000,000 was charged to cost of sales and $310,019,000
was charged to unusual items. The $20,000,000 charge to cost of sales reflected
the cost of the Company's actions to accelerate the end-of-life of certain disk
drive products. The $310,019,000 charge included a write-down of goodwill and
other intangibles of $212,945,000; a restructuring charge of $78,074,000 for the
reduction of excess manufacturing capacity and the streamlining of operations;
and, a charge of $19,000,000 for certain contingencies.
CONNOR PERIPHERALS, INC. 21
Notes to Consolidated Financial Statements
The write-down of intangible assets totaling $212,945,000 consisted of
$180,000,000 of goodwill and $32,945,000 of identified intangibles. The write-
off included all of the remaining goodwill associated with the Company's
acquisition of Archive Corporation ("Archive") (see Note 4) as of the end of the
third quarter. Identified intangibles include certain patents, licenses,
trademarks, technology and market data acquired either directly or in connection
with the acquisition of Archive. The Company believes that the write-down of
these assets was necessitated by the emergence during 1993 of fundamental
changes in the storage business, particularly the tape business. These changes
had led to lower expectations for revenue growth and gross margins. Both these
factors have a direct bearing on the value of intangibles and caused the value
of these assets to be permanently impaired based on the related discounted cash
flows.
The restructuring charge of $78,074,000 resulted from the Company's decision
to reduce excess manufacturing capacity to a level more consistent with
sustainable demand and to streamline operations and administrative processes to
reduce the Company's cost structure. This charge also included costs to further
integrate and reduce sales, general and administrative and research and
development activities of both the disk and tape drive operations. The
$78,074,000 was comprised of $27,496,000 for facilities related expenses,
$17,472,000 for write-off of certain assets and $33,106,000 for employee
headcount reductions and other miscellaneous items.
During the first and second quarters of 1993, the Company recorded special
charges totaling $48,683,000, of which $20,300,000 was charged to cost of sales
and $28,383,000 was charged to unusual items. These charges reflected the cost
of the Company's actions to accelerate the phase-out of certain disk drive
products, consolidate headcount and facilities in response to increased
productivity and lower short-term production levels and to further integrate the
tape drive operations. The $28,383,000 charge included in unusual items was
comprised of approximately $17,400,000 for property, plant and equipment related
expenses and $10,983,000 for employee headcount reductions and other
miscellaneous items.
In December 1992, in connection with the acquisition of Archive, the Company
recorded a nonrecurring charge of $57,611,000 representing the fair value of
acquired research and development projects in-process at the date of
acquisition.
During the fourth quarter of 1991, the Company took several actions to
streamline operations, contain costs and reposition manufacturing activities.
These actions included a world-wide reduction in work force and the sale of the
Company's headstack assembly operations in Malaysia to Read-Rite Corporation.
These actions resulted in a net reduction to operating expenses of approximately
$3,389,000.
NOTE 4
ACQUISITION
OF ARCHIVE
CORPORATION
In December 1992, the Company acquired all of the outstanding stock of Archive
Corporation, a manufacturer and supplier of removable tape back-up and data
storage products, for approximately $202,000,000, including cash of
approximately $185,000,000, conversion of outstanding stock options and
transaction costs. In addition, the Company assumed approximately $104,000,000
of Archive debt, all of which had been repaid as of December 31, 1993. The
transaction has been accounted for as a purchase, and accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based
upon their estimated fair market values at the date of acquisition. The excess
of the purchase price over the fair market value of the net tangible assets
acquired was initially estimated at approximately $287,860,000.
During 1993, the Company revised the estimates of certain reserves and
accruals established in connection with the purchase accounting which increased
the excess of the purchase price over the fair market value of net tangible
assets acquired to $303,893,000, of which $57,611,000 was allocated to in-
process research and development, $55,000,000 was allocated to various
intangibles including technology, software, patents and trademarks and the
remaining $191,282,000 was allocated to goodwill. During the third quarter of
1993, the Company wrote-off the remaining unamortized goodwill and certain other
intangibles due to impairment resulting from changes in the storage business
(see Note 3). The consolidated statement of operations for the year ended
December 31, 1992 includes a charge of $57,611,000 ($35,719,000 net of tax) for
in-process research and development purchased in connection with the
acquisition. Operations of Archive subsequent to the date of acquisition through
December 31, 1992 were not material and have not been included in the
consolidated statement of operations for the year ended December 31, 1992.
22 CONNOR PERIPHERALS, INC.
The following unaudited pro forma information reflects the results of
operations for the years ended December 31, 1992 and 1991 as if the acquisition
of Archive had occurred as of the beginning of 1991, and after giving effect to
certain adjustments, including amortization of goodwill and other intangibles,
discontinuation of certain product lines, lost interest income, reduction of
interest expense on retired debt, accounting conformance and related income tax
effects. The pro forma information excludes the effects of the nonrecurring
charge of $57,611,000 for in-process research and development. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what operating results would have been had the acquisition
actually taken place at the beginning of 1991 or of operating results which may
occur in the future.
Year ended December 31, 1992 1991
- -------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) (Unaudited)
Net sales $ 2,590,635 $ 1,910,483
Net income $ 157,804 $ 30,761
Earnings per share $ 2.36 $ 0.52
NOTE 5
SUPPLEMANTAL
CASH FLOW
INFORMATION
Year ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------------
(in thousands)
Cash paid during the year for:
Interest, net of $1,682
capitalized in 1991 $49,896 $ 40,506 $ 18,374
Income taxes, net of refunds
amounting to $4,341 in 1993 15,846 17,218 23,546
Non-cash investing and financing activities:
Capital lease obligations -- -- 742
Fair market value of common stock of
Read-Rite Corporation acquired on
sale of the Headstack operations -- -- 16,649
Fair market value of Archive assets
acquired, including goodwill -- 306,485 --
Debt assumed -- (104,000) --
NOTE 6
INVESTMENT IN
JOINT VENTURES
In August 1993, the Company executed an agreement ("Agreement") with Olivetti,
S.p.A. ("Olivetti") under which the Company purchased for $16,000,000 the 49%
minority interest owned by Olivetti in Conner Peripherals Europe, S.p.A.
("CPE"), the Company's majority-owned subsidiary located in Italy. The Company
is also obligated to make additional payments to Olivetti should earnings of CPE
during the three years ending December 31, 1996 exceed certain amounts. Under
the Agreement, Olivetti has agreed that if certain performance conditions are
met, it will purchase at least 70% of its requirements for disk drives from the
Company during the same three-year period.
In September 1992, the Company entered into a contract with Shenzhen CPC, a
subsidiary of China Electronics Corporation, to establish a joint venture in
Shenzhen, People's Republic of China, for manufacture and distribution of disk
drives. The Company holds a 60% interest in the joint venture. In January 1994,
the Company agreed, subject to certain regulatory approvals, to increase its
ownership in the joint venture to 90%.
CONNOR PERIPHERALS, INC. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
INCOME TAXES
Income (loss) before income taxes includes $(148,738,000), $185,708,000, and
$118,065,00 of income (loss) relating to non-U.S. operations for 1993, 1992 and
1991, respectively.
The provision (benefit) for income taxes includes:
Year ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------
(in thousands)
Current:
Federal $ 1,902 $ 24,607 $ 6,067
State 142 5,657 1,962
Foreign 5,039 17,451 5,885
------------------------------------
7,083 47,715 13,914
------------------------------------
Deferred:
Federal (27,848) (8,700) 14,385
State (4,897) (4,367) 5,050
-----------------------------------
(32,745) (13,067) 19,435
------------------------------------
Total $ (25,662) $ 34,648 $ 33,349
====================================
Deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Deferred tax liabilities (assets) are comprised of the following:
December 31, 1993 1992
- -------------------------------------------------------------------------
(in thousands)
Inventory valuation $ (13,552) $ (14,137)
Depreciation and amortization (9,781) (2,486)
Accounts receivable reserves (15,030) (13,753)
Accrued expenses and other (41,178) (17,543)
Net operating loss and tax credit
carryforwards (69,491) (56,151)
---------------------------
(149,032) (104,070)
---------------------------
Unremitted earnings of foreign subsidiaries 138,459 132,286
Technology and other intangibles 13,328 23,180
State income taxes 6,846 2,519
---------------------------
158,633 157,985
---------------------------
Valuation reserves 33,617 22,048
---------------------------
Total $ 43,218 $ 75,963
---------------------------
A reconciliation of the income tax provision (benefit) computed by applying the
domestic federal statutory rate to pretax income, to the recorded provision
(benefit) for income taxes follows:
Year ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
(in thousands)
Provision/(benefit) at statutory rate (35.0%) 34.0% 34.0%
Differences between United States and foreign taxes
and limitations on the benefits of foreign losses 12.6 (13.0) (9.3)
State taxes, net of federal benefit (0.7) 0.6 3.7
Goodwill 13.7 _ _
Change in federal valuation reserve 1.9 _ _
Impact of rate change 0.3 _ _
Other 1.8 0.7 (1.9)
---------------------------------------
(5.4%) 22.3% 26.5%
=======================================
24 CONNER PERIPHERALS, INC.
At December 31, 1993, the Company has net operating loss carryforwards of
approximately $150,000,000, expiring 1995 through 2007, relating to
preacquisition operations of Archive and its subsidiaries. The majority of
these losses were generated in years that have not yet been examined by the
Internal Revenue Service ("IRS"). These losses may be used to offset taxable
income, subject to an annual maximum of approximately $12,000,000, in future
years. For financial reporting purposes, at the time of acquisition, the
Company recognized tax benefits relating to a portion of these losses to
reduce goodwill and established valuation reserves of $22,048,000 relating to
the remaining losses. Benefits of such remaining losses, if realized, would be
used to reduce the remaining balance of other intangibles relating to the
Archive acquisition. During 1993, the Company increased the valuation reserves
relating to these losses to reflect changes in management's judgment regarding
the realization of these losses.
At December 31, 1993, the Company has alternative minimum tax credit
carryforwards of approximately $6,000,000, which, subject to certain
restrictions, are available to reduce taxes on future taxable income without
any time limitations.
The Company enjoys tax holidays in Singapore and Malaysia with respect to
the manufacture of disk drives, which expire in 1997 and 1995, respectively,
subject to certain extensions and post-holiday benefits. Tax holidays for the
manufacture of tape drives in Singapore expired in June 1993. The net impact
of these tax holidays was to reduce the net loss by approximately $3,000,000
($0.06 per share fully diluted) in 1993, increase net income by approximately
$27,800,000 ($0.37 per share fully diluted) in 1992, and increase net income
by approximately $12,200,000 ($0.19 per share fully diluted) in 1991.
At December 31, 1993, the Company had not provided U.S. federal and state
income taxes of approximately $65,000,000 on cumulative unremitted earnings of
its consolidated foreign subsidiaries and approximately $28,000,000 on
cumulative preacquisition unremitted earnings of Archive's consolidated
foreign subsidiaries, which are intended to be indefinitely reinvested.
The IRS is currently reviewing Conner Peripherals' federal income tax
returns for 1989 and 1990 and Archive and its subsidiaries' federal income tax
returns for 1985 through 1989. Management believes that the ultimate outcome
of these reviews will not have a material adverse impact on the Company's
financial position or results of operations.
NOTE 8
LONG-TERM
DEBT AND LINES
OF CREDIT
December 31, 1993 1992
- --------------------------------------------------------------------------------------------------
(in thousands)
Convertible subordinated debentures, 6.75%, due 2001,
convertible into 7,931,035 shares of common stock $ 230,000 $ 230,000
Convertible subordinated debentures, 6.5%, due 2002,
convertible into 14,375,000 shares of common stock 345,000 345,000
Senior unsecured notes, 8.84%, and 9.08%, due through 1998 105,000 105,000
Senior unsecured note, 12%, due through 1994 9,000 10,500
Italian Lire debentures and notes, 7% to 7.38%,
due through 2000 13,628 16,071
Capitalized lease obligations 1,090 3,355
-----------------------------
703,718 709,926
Less current portion 43,112 5,081
-----------------------------
$ 660,606 $ 704,845
=============================
During 1993, the Company modified certain terms of the senior unsecured notes.
Under the modified terms, in exchange for revising certain financial covenants,
the Company agreed to increase the interest rates of the notes by half a
percent for periods commencing from October 1, 1993 and ending the earlier of
March 31, 1995 or the due dates of the notes.
Based upon quoted market prices, the fair value of the convertible
subordinated debentures was approximately $512,325,000 at December 31, 1993. The
estimated fair value of the Company's other long-term debt was approximately
$144,737,000 at December 31, 1993. The fair values of debt for which quoted
prices were not available has been determined based upon interest rates
available to the Company for issuance of debt with similar terms and remaining
maturities.
CONNER RERIPHERALS, INC. 25
Notes to Consolidated Financial Statements
At December 31, 1993, future minimum principal payments on long-term debt
and capitalized lease obligations were as follows:
Year ended December 31,
- --------------------------------------------------
(in thousands)
1994 $ 43,112
1995 34,092
1996 33,778
1997 6,854
1998 6,987
Thereafter 578,895
--------------
$ 703,718
==============
On December 23, 1993, the Company entered into a revolving credit facility
agreement ("Agreement") with a group of banks allowing borrowings of up to
$100,000,000 through December 31, 1995. Borrowings under the revolving credit
facility carry interest at the banks' prime rate or, at the option of the
Company, at an interbank offered rate (as defined in the Agreement). The
Agreement provides for a commitment fee. As of December 31, 1993, the Company
had no borrowings under the revolving credit facility. At December 31, 1993, the
Company had outstanding letters of credit of approximately $40,300,000.
The revolving credit facility and senior unsecured notes prohibit the
payment of cash dividends and require the maintenance of various financial
covenants. Without the prior consent of the lenders, the Company is also
prohibited from incurring debt and lease commitments in excess of specified
amounts or entering into acquisition, sale of business, merger or joint venture
agreements in excess of certain amounts. At December 31, 1993, the Company was
in full compliance with all covenants and conditions.
NOTE 9
LEASE
COMMITMENTS
The Company leases certain property, facilities and equipment under
non-cancelable operating leases and certain equipment under capitalized leases.
The terms of the leases for property, facilities and equipment expire over the
next 2 years with renewal options in certain instances.
Future minimum lease payments under capitalized and non-cancelable
operating leases as of December 31, 1993 are as follows:
Capital Operating
Year ended December 31, leases leases
- ----------------------------------------------------------------------
(in thousands)
1994 $ 821 $ 23,273
1995 283 12,266
1996 128 7,348
1997 12 6,347
1998 _ 5,996
Thereafter _ 21,595
-------------------------
Total minimum payments 1,244 $ 76,825
----------
Less imputed interest 154
------
Present value of payments under capital
leases 1,090
Less current portion 744
------
Long-term lease obligations $ 346
======
Rent expense for all operating leases was approximately $24,446,000 in 1993,
$15,958,000 in 1992, and $16,855,000 in 1991.
26 CONNER PERIPHERALS, INC
NOTE 10
EMPLOYEE
BENEFIT
PLANE
Incentive Stock Plans: In 1986, the Company adopted the 1986 Incentive Stock
Plan ("Plan"). The Plan provides for the issuance of non-transferable stock
options to employees of the Company and non-statutory stock options and stock
purchase rights to directors, employees and consultants of the Company. The
Company has never issued any stock purchase rights. A total of 18,500,000 shares
of common stock have been reserved for issuance of options and stock purchase
rights under the Plan. At December 31, 1993, 5,255,238 shares were available for
future grants of options and stock purchase rights under the Plan.
Stock options are granted at prices of not less than 100% of the fair
market value of the common stock at the time of grant, except that stock options
granted to any employee who owns stock representing more than 10% of total
voting power must have an exercise price of not less than 110% of fair market
value. Options granted under the Plan prior to July 1992 expire five years after
the date of grant and vest over a period of four years. In July 1992, the Plan
was amended to provide an expiration period for subsequent stock grants to 10
years from the date of grant.
On December 29, 1992, upon completion of the acquisition of Archive, the
Company assumed the obligations existing under Archive's Incentive Stock Option
and Restricted Stock Purchase Plans ("Archive Plans"). Effective on that date,
the Company converted existing options to purchase Archive common stock under
the Archive Plans into an equivalent number of options to purchase the Company's
common stock. A total of 1,125,000 shares of the Company's common stock were
reserved for issuance of options of which 1,059,258 were issued upon the
conversion. These options expire at various times through 2002.
The following table summarizes stock option activity under the Plan and
Archive Plans:
Year ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 8,592,493 5,510,468 4,666,995
Granted 3,292,099 3,213,825 2,073,763
Conversion of the Archive Plans _ 1,059,258 _
Exercised ($0.05 per share to $26.88 per share) (1,329,620) (868,619) (840,018)
Canceled (2,025,205) (322,439) (390,272)
---------------------------------------------------------
Options outstanding at end of the year 8,529,767 8,592,493 5,510,468
---------------------------------------------------------
Options exercisable at end of the year 3,547,071 2,871,736 1,820,837
Range of exercise price of outstanding options
at end of the year $ 5.19 $ 5.00 $ 0.15
$ 26.88 $ 26.88 $ 26.88
A total of 3,572,286 non-statutory stock options were outstanding at December
31, 1993.
Restricted Stock Plan: In 1992, the Company's stockholders approved the adoption
of the 1992 Restricted Stock Plan ("Restricted Plan"). A total of 1,000,000
shares of common stock are reserved for issuance under the Restricted Plan. The
aggregate fair value of the shares granted under the Restricted Plan is
considered unearned compensation at the time of grant and compensation is earned
ratably over the vesting period of seven years. Charges to income for the
Restricted Plan during 1993 and 1992 were approximately $1,073,000 and $514,000,
respectively. At December 31, 1993, 440,000 shares have been issued under the
Restricted Plan.
Employee Stock Purchase Plan: In 1988, the Company adopted an Employee Stock
Purchase Plan ("Purchase Plan"). A total of 3,000,000 shares of common stock are
reserved for issuance under the Purchase Plan. Shares may be purchased by
participants at the lower of 85% of the fair market value of the common stock at
the beginning or end of each six-month offering period. Shares are to be
purchased from payroll deductions which are limited to 15% of an employee's
compensation. At December 31, 1993, 2,601,175 shares have been issued under the
Purchase Plan.
Profit Sharing Plan: The Company has a profit sharing plan which provides for
additional compensation to all employees of the Company with the exception of
certain marketing and sales personnel who are compensated on a commission basis
and certain non-U.S. employees. The additional compensation is determined on a
quarterly basis, based upon a percentage of the amount of operating profit in
excess
CONNER PERIPHERALS, INC. 27
Notes to Consolidated Financial Statements
of a stipulated return on equity. As a result of operating losses
incurred in 1993, the Company did not distribute profit sharing or record
charges to income relating to profit sharing. Charges to income for the profit
sharing plan during 1992 and 1991 were approximately $14,686,000 and $2,225,000,
respectively, which have been included in selling, general and administrative
costs.
401(k) Savings Plan: In 1990, the Company adopted a 401(k) savings plan
("Savings Plan") covering substantially all of its U.S. employees. Under the
Savings Plan, eligible employees may contribute up to 15% of their compensation
to the Saving Plan with the Company matching participant's contributions up to
$250 per employee per year at the rate of 50% of the employee contribution. Both
the participant's and the Company's contributions are fully vested. To date, the
Company's contributions have not been material.
NOTE 11
REPURCHASE OF
COMMON STOCK
As of December 31, 1991, Compaq Computer Corporation ("Compaq") owned
approximately 21% of the outstanding common stock of the Company. In August
1992, the Company repurchased 11,638,802 shares of the Company's common stock
from Compaq representing substantially all of Compaq's equity interest in the
Company.
NOTE 12
FOREIGN
OPERATIONS
The Company operates in one industry segment (see Note 1). The following is a
summary of the Company's operations:
1993 1992 1991
- ---------------------------------------------------------------------------------------
(in thousands)
Sales to third party customers:
United States:
Customers in United States $ 997,764 $ 867,916 $ 581,400
Customers in Europe & Asia 859,447 892,506 488,032
-----------------------------------------------
1,857,211 1,760,422 1,069,432
-----------------------------------------------
Asia 193,257 326,502 436,276
Europe 101,204 151,499 93,276
-----------------------------------------------
2,151,672 2,238,423 1,598,984
-----------------------------------------------
Intercompany sales between geographic
areas:
United States 285,250 74,579 85,327
Asia 1,426,370 1,388,617 1,046,122
Europe 98,007 106,037 80,931
----------------------------------------------
1,809,627 1,569,233 1,212,380
----------------------------------------------
Consolidation eliminations (1,809,627) (1,569,233) (1,212,380)
----------------------------------------------
Net sales $ 2,151,672 $ 2,238,423 $ 1,598,984
==============================================
Operating income:
United States $ (295,722) $ (3,287) $ 8,765
Asia (88,303) 119,348 108,279
Europe (62,405) 37,469 13,167
----------------------------------------------
$ (446,430) $ 153,530 $ 130,211
==============================================
Identifiable assets:
United States $ 577,962 $ 815,382 $ 306,257
Asia 313,319 404,506 390,613
Europe 55,223 70,292 67,264
----------------------------------------------
946,504 1,290,180 764,134
General corporate assets 517,547 614,527 570,404
----------------------------------------------
Total assets $ 1,464,051 $ 1,904,707 $ 1,334,538
==============================================
28 CONNER PERIPHERALS, INC
Intercompany sales are accounted for at prices intended to approximate those
that would be charged to unaffiliated customers. At December 31, 1993 and 1992,
foreign liabilities (excluding intercompany balances) were $273,288,000 and
$280,053,000, respectively.
NOTE 13
LITIGATIOR
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 believes there are meritorious defenses to the matters
raised and intends to defend the actions vigorously.
In August 1993, the Company was served with a patent infringement complaint
filed by IBM in the United States District Court for the Northern District of
California. The complaint alleges that products manufactured by the Company
infringe nine patents owned by IBM. In addition, the complaint seeks declaratory
relief to the effect that drives produced by IBM do not infringe five patents
held by the Company and seeks to have such patents declared invalid. The Company
answered the complaint, denying all material allegations and counter claiming
that IBM disk drives infringe six patents owned by Conner, including the five
contained in the IBM complaint. The Company expects that it may engage in cross-
licensing negotiations with IBM with a view towards resolving this matter;
however, the Company believes that it has meritorious defenses against these
allegations and will defend this action vigorously. The Company is unable to
predict the outcome of the litigation or ultimate effect, if any, on its
operations or financial condition.
Report of Independent Accountents
To the Board of Directors and
Stockholders of Conner Peripherals, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Conner
Peripherals, Inc. and its subsidiaries at December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 13, the Company is a defendant in a lawsuit alleging
infringement of certain patents. The Company is unable to predict the outcome of
the litigation or ultimate effect, if any, on its operations or financial
condition.
/s/ PRICE WATERHOUSE
PRICE WATERHOUSE
San Jose, California
January 20, 1994
CONNER PERIPHERALS, INC. 29
Report of Management
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with Conner management. The accompanying
financial statements have been prepared in conformity with generally accepted
accounting principles.
Conner maintains an effective internal control structure. It consists,
in part, of organizational arrangements which clearly define lines of
responsibility and comprehensive systems of review and control procedures. We
believe this structure provides reasonable assurance that transactions are
executed in accordance with management's authorization, that they are
appropriately recorded, in conformity with generally accepted accounting
principles and that they adequately safeguard, verify and maintain
accountability of assets. In order to assure an effective internal control
system, we carefully select and train our employees, develop and disseminate
written policies and procedures and foster an environment conducive to the
effective functioning of controls. We believe that it is essential for the
Company to conduct its business affairs in accordance with the highest ethical
standards.
The Audit Committee of the Board of Directors is composed solely of outside
directors, and is responsible for recommending to the Board, the independent
accounting firm to be retained for the coming year, subject to stockholder
approval. The Audit Committee meets periodically and privately with the
independent accountants, with our internal auditors, as well as with Conner
management, to review accounting, auditing, internal control structure and
financial reporting matters.
Price Waterhouse, independent accountants, are retained to examine
Conner's financial statements. Their accompanying report is based on an
examination conducted in accordance with generally accepted auditing standards,
including a review of the internal control structure and tests of accounting
procedures and records.
/s/DAVID T. MITCHELL /s/P. JACKSON BELL
David T. Mitchell P. Jackson Bell
President and Executive Vice President
Chief Operating Officer and Chief Financial Officer
30 CONNER PERIPHERALS, INC.
Corporate Directory
EXECUTIVE
OFFICERS AND
DIRECTORS
Finis F. Conner
Chairman of the Board of Directors
and Chief Executive Officer
William J. Schroeder
Vice Chairman and Director
David T. Mitchell
President, Chief Operating Officer
and Director
John P. Squires
Executive Vice President of Research
and Development and Director
P. Jackson Bell
Executive Vice President
and Chief Financial Officer
William S. Anderson/1/,/2/
Director
Roger S. Penske
Director
Mark Rossi/1/,/2/
Director
Linda Wertheimer Hart/1/,/2/
Director
Ambassador
L. Paul Bremer, III/2/
Director
/1/ Member of the Audit Committee
/2/ Member of the Compensation Committee
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati, P.C.
Palo Alto, CA
INDEPENDENT ACCOUNTANTS
Price Waterhouse
San Jose, CA
REGISTRAR AND TRANSFER AGENT
The First National Bank of Boston
Boston, MA
Bank of Boston stockholder services inquiry number 1-800-442-2001.
ANNUAL MEETING
The annual meeting of stockholders of Conner Peripherals, Inc. will be held at
10:00 a.m. on April 19, 1994, at the Fairmont Hotel at the Fairmont Plaza
located at 170 S. Market Street, San Jose, California 95113. All Conner
stockholders are encouraged to attend.
For additional copies of this annual report, contact the Investor Relations
Department, Conner Peripherals, Inc., 3081 Zanker Road, San Jose, California
95134-2128.
FORM 10-K
A copy of the Company's Form 10-K, filed with the Securities and Exchange
Commission, is available without charge upon written request to the Investor
Relations Department, Conner Peripherals, Inc., 3081 Zanker Road, San Jose,
California 95134-2128.
MARKET PRICE OF COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange under the
symbol "CNR." The following table shows the high and low closing sales prices
for the Common Stock of the Company for the periods indicated, as reported by
the New York Stock Exchange Composite Tape.
1993 High Low
- ---------------------------------------------------
Quarter ended March 31, 1993 24 3/8 13 1/2
Quarter ended June 30, 1993 13 5/8 9 1/4
Quarter ended September 30, 1993 13 0/0 9 1/4
Quarter ended December 31, 1993 14 5/8 9 1/4
1992 High Low
- ---------------------------------------------------
Quarter ended March 31, 1992 21 3/8 15 5/8
Quarter ended June 30, 1992 23 1/2 17 1/2
Quarter ended September 30, 1992 22 0/0 16 7/8
Quarter ended December 31, 1992 22 5/8 18 1/2
The Company has not paid cash dividends on its common stock and does not plan
to pay cash dividends to its stockholders in the near future. The Company
presently intends to retain its earnings to finance further growth of its
business.
As of December 31, 1993, the Company had 2,713 stockholders of record.
Conner Peripherals, Inc.
3081 Zanker Road
San Jose, CA 95134-2128
408-456-4500
1994 Conner Peripherals, Inc. Printed in U.S.A. 63K