Form 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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Commission File Number 1-7534
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STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One StorageTek Drive, Louisville, Colorado 80028-4309
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 673-5151
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. /X/ YES / / NO
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock ($.10 Par Value) - 104,811,775 shares outstanding at November 5,
2001.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
September 28, 2001
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 33
Exhibit Index 34
2
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
09/28/01 12/29/00
------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 352,423 $ 279,731
Accounts receivable 471,939 553,790
Inventories (Note 2) 244,625 218,218
Deferred income tax assets 121,332 121,703
Other current assets (Note 4) 4,198 -
---------- ----------
Total current assets 1,194,517 1,173,442
Property, plant, and equipment, net 248,846 267,082
Spare parts for maintenance, net 32,137 41,614
Deferred income tax assets 74,364 73,997
Other assets 92,121 97,423
---------- ----------
Total assets $ 1,641,985 $ 1,653,558
========== ==========
LIABILITIES
Current liabilities:
Credit facilities (Note 3) $ 74,853 $ 78,381
Current portion of long-term debt 957 6,110
Accounts payable 74,560 99,675
Accrued liabilities 345,441 363,048
Income taxes payable 158,745 155,626
---------- ----------
Total current liabilities 654,556 702,840
Long-term debt 10,002 12,083
---------- ----------
Total liabilities 664,558 714,923
---------- ----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares
authorized; 104,239,529 shares issued at
September 28, 2001, and 103,172,244 shares
issued at December 29, 2000 10,424 10,320
Capital in excess of par value 864,020 854,744
Retained earnings 110,083 82,922
Accumulated other comprehensive income (Note 5) 1,562 -
Treasury stock, 160,145 shares at September 28,
2001, and 113,774 shares at December 29, 2000 (2,937) (2,334)
Unearned compensation (5,725) (7,017)
---------- ----------
Total stockholders' equity 977,427 938,635
---------- ----------
Total liabilities and stockholders' equity $ 1,641,985 $ 1,653,558
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Nine Months Ended
------------------------------------------
09/28/01 09/29/00 09/28/01 09/29/00
------------------------------------------
Revenue
Storage products $322,960 $325,301 $ 974,591 $ 975,308
Storage services 175,039 161,316 504,361 483,455
------- ------- --------- ---------
Total revenue 497,999 486,617 1,478,952 1,458,763
------- ------- --------- ---------
Cost of revenue
Storage products 174,204 179,254 538,184 578,502
Storage services 101,768 99,941 301,702 308,554
------- ------- --------- ---------
Total cost of revenue 275,972 279,195 839,886 887,056
------- ------- --------- ---------
Gross profit 222,027 207,422 639,066 571,707
Research and product development
costs 60,563 63,112 185,770 192,594
Selling, general, administrative,
and other income and expense, net 135,055 129,403 414,138 396,380
Restructuring expense (Note 7) - 3,376 - 27,176
------- ------- --------- ---------
Operating profit (loss) 26,409 11,531 39,158 (44,443)
Interest income 2,465 1,442 7,222 7,843
Interest expense (1,759) (3,353) (5,219) (13,617)
------- ------- --------- ---------
Income (loss) before income taxes 27,115 9,620 41,161 (50,217)
Benefit (provision) for income taxes (9,200) (3,350) (14,000) 17,600
------- ------- --------- ---------
Net income (loss) $ 17,915 $ 6,270 $ 27,161 $ (32,617)
======= ======= ========= =========
EARNINGS (LOSS) PER COMMON SHARE (Note 9)
Basic earnings (loss) per share $ 0.17 $ 0.06 $ 0.26 $ (0.32)
======= ======= ========= =========
Weighted-average shares 103,352 101,300 102,886 100,871
======= ======= ========= =========
Diluted earnings (loss) per share $ 0.17 $ 0.06 $ 0.26 $ (0.32)
======= ======= ========= =========
Weighted-average and dilutive
potential shares 105,140 102,064 104,500 100,871
======= ======= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Nine Months Ended
-------------------------
09/28/01 09/29/00
-------------------------
OPERATING ACTIVITIES
Cash received from customers $ 1,548,705 $ 1,582,149
Cash paid to suppliers and employees (1,414,958) (1,336,949)
Cash paid for restructuring activities (Note 7) - (25,373)
Interest received 7,222 7,843
Interest paid (4,197) (12,287)
Income taxes (paid) refunded (11,252) 61,293
---------- ----------
Net cash provided by operating activities 125,520 276,676
---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (50,029) (50,367)
Proceeds from sale of property, plant, and equipment 82 2,053
Other assets (6,173) (18,984)
---------- ----------
Net cash used in investing activities (56,120) (67,298)
---------- ----------
FINANCING ACTIVITIES
Repayments of credit facilities, net (3,163) (173,220)
Proceeds from other debt 1,913 20,963
Repayments of other debt (8,607) (44,198)
Proceeds from employee stock plans 8,437 9,174
---------- ----------
Net cash used in financing activities (1,420) (187,281)
---------- ----------
Effect of exchange rate changes on cash 4,712 (15,905)
---------- ----------
Increase in cash and cash equivalents 72,692 6,192
Cash and cash equivalents - beginning of the period 279,731 215,421
---------- ----------
Cash and cash equivalents - end of the period $ 352,423 $ 221,613
========== ==========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ 27,161 $ (32,617)
Depreciation and amortization expense 87,418 106,848
Inventory writedowns 40,417 62,495
Non-cash restructuring expense (Note 7) - 5,720
Translation (gain) loss (19,433) 18,393
Other non-cash adjustments to income 25,116 (4)
Decrease in accounts receivable 70,120 139,714
Increase in other current assets (1,831) -
Increase in inventories (62,364) (26,325)
Increase in spare parts (7,391) (18,413)
(Increase) decrease in deferred income tax assets (500) 452
Decrease in accounts payable and accrued liabilities (36,441) (21,292)
Increase in income taxes payable 3,248 41,705
---------- ---------
Net cash provided by operating activities $ 125,520 $ 276,676
========== =========
The accompanying notes are an integral part of the consolidated
financial statements.
5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands of Dollars)
Accumulated
Capital in Other
Common Excess of Retained Comprehensive Treasury Unearned
Stock Par Value Earnings Income Stock Compensation Total
-------- --------- --------- --------- -------- ---------- ---------
Balances, December 29, 2000 $ 10,320 $ 854,744 $ 82,922 $ - $ (2,334) $ (7,017) $ 938,635
-------- -------- -------- -------- ------- -------- --------
Components of comprehensive income:
Net income - - 27,161 - - - 27,161
Other comprehensive income (Note 5) - - - 1,562 - - 1,562
-------- -------- -------- -------- ------- -------- --------
Total comprehensive income - - 27,161 1,562 - - 28,723
-------- -------- -------- -------- ------- -------- --------
Common stock issued under stock
option and purchase plans 103 8,334 - - - - 8,437
Other 1 942 - - (603) 1,292 1,632
-------- -------- -------- -------- ------- -------- --------
Balances, September 28, 2001 $ 10,424 $ 864,020 $ 110,083 $ 1,562 $ (2,937) $ (5,725) $ 977,427
-------- -------- -------- -------- ------- -------- --------
The accompanying notes are an integral part of the consolidated
financial statements.
6
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
The accompanying consolidated financial statements of Storage Technology
Corporation and its wholly owned subsidiaries (StorageTek or the Company) have
been prepared on substantially the same basis as the Company's annual
consolidated financial statements and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 29, 2000. In
the opinion of management, the interim consolidated financial statements reflect
all adjustments necessary for the fair presentation of results for the periods
presented, and such adjustments are of a normal, recurring nature. Certain prior
period information has been reclassified to conform to the current period
presentation.
The consolidated results for interim periods are not necessarily indicative of
expected results for the full fiscal year.
NOTE 2 - INVENTORIES
Inventories, net of associated reserves, consist of the following (in thousands
of dollars):
09/28/01 12/29/00
-------------------
Raw materials $ 53,605 $ 54,773
Work-in-process 60,740 43,175
Finished goods 130,280 120,270
------- -------
$244,625 $218,218
======= =======
NOTE 3 - DEBT AND FINANCING ARRANGEMENTS
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $75,000,000 at any one time.
The agreement, which expires in January 2002, provides for commitments by the
bank to purchase the Company's promissory notes denominated in a number of
foreign currencies. As of September 28, 2001, the Company had promissory notes
of approximately $74,853,000 outstanding under this financing agreement and had
committed to borrowings between October 2001 and January 2002 in the cumulative
principal amount of approximately $99,066,000. The notes must be repaid only to
the extent of future revenue. Obligations under the agreement are not cancelable
by the Company or the bank. The promissory notes, together with accrued
interest, are payable in U.S. dollars within 40 days from the date of issuance.
The weighted average interest rate associated with the promissory notes
outstanding as of September 28, 2001, was 5.58%. Under the terms of the
agreement, the Company is required to comply with certain covenants and, under
certain circumstances, may be required to maintain a collateral account,
including cash and qualifying investments, in an amount up to the outstanding
balance of the promissory notes. See Note 4 for a discussion of the accounting
treatment for gains and losses under this arrangement.
The Company entered into a $150,000,000 revolving credit facility (the Revolver)
in October 2001 that expires in October 2004. The interest rates for borrowing
under the Revolver are dependent upon the Company's total debt to rolling four
quarter Earnings Before Interest Expense, Taxes, Depreciation, and Amortization
(EBITDA) ratio and upon the term of the outstanding borrowing. The rate ranges
7
from the applicable LIBOR plus 1.75% to 2.50% or the agent bank's base rate plus
0.00% to 0.50%. The Revolver is secured by the Company's U.S. accounts
receivable and U.S. inventory, and contains certain financial and other
covenants, including restrictions on the payment of cash dividends on the
Company's common stock. The Revolver replaces a previous revolving credit
facility that expired in October 2001.
NOTE 4 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS
On December 30, 2000, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an amendment of FASB Statement No. 133." These
accounting standards require that all derivative instruments be recorded on the
balance sheet at their estimated fair value. Changes in fair value are recorded
each period either in the Consolidated Statement of Operations or, in the case
of certain hedges, as a component of Other Comprehensive Income (OCI). In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a loss of approximately $7,535,000, net of tax, in OCI to recognize the fair
value of all derivatives that were designated as cash flow hedges as of December
30, 2000. The adoption of SFAS No. 133 and SFAS No. 138 did not have a material
impact on the Consolidated Statement of Operations.
The functional currency for the Company's foreign subsidiaries is the U.S.
dollar. A significant portion of the Company's revenue is generated by its
international operations. As a result, the Company's financial position,
earnings, and cash flows can be materially affected by changes in foreign
currency exchange rates. The Company attempts to mitigate this exposure as part
of its foreign currency hedging program. The primary goal of the Company's
foreign currency hedging program is to reduce the risk of adverse foreign
currency movements on the reported financial results of its non-U.S. dollar
transactions. To operate this hedging program, the Company uses a combination of
foreign currency forwards embedded in a financing agreement, stand-alone foreign
currency options, and stand-alone foreign currency forwards. The Company does
not believe that these derivatives present significant credit risks, because the
counterparties to the derivatives consist of major financial institutions and
the Company manages the notional amount of contracts entered into with any one
counterparty.
The Company does not hold or issue derivatives or any other financial
instruments for trading purposes.
Cash Flow Hedges
The Company attempts to mitigate the risk that forecasted cash flows associated
with revenue denominated in foreign currencies may be adversely affected by
changes in foreign currency exchange rates through a combination of foreign
currency forwards embedded in the Company's borrowing commitments under a
financing agreement, stand-alone foreign currency options, and stand-alone
foreign currency forwards. See Note 3 for further discussion of the financing
agreement. Typically, the maximum length of time over which the Company hedges
its exposure to the variability of forecasted cash flows with these derivatives
is 16 months. The Company's derivatives used for hedging forecasted cash flows
had a notional amount of $467,534,000 as of September 28, 2001, and $396,502,000
as of December 29, 2000.
The Company records these derivatives designated as cash flow hedges at their
estimated fair value within other current assets or other current liabilities in
the Consolidated Balance Sheet. The gains and losses associated with changes in
the fair value of the derivatives are deferred in OCI to the extent that the
derivatives are effective in offsetting the changes in value of the forecasted
cash flows being hedged. The gains and losses are then reclassified as an
adjustment to revenue in the same period that the related forecasted revenue is
recognized in the Consolidated Statement of Operations. If a derivative is
8
terminated or discontinued as a hedge, the effective portion of gains and losses
to that date are deferred in OCI and subsequently recognized in the Consolidated
Statement of Operations in the same period that the related forecasted revenue
is recognized. The ineffective portion of the derivatives is immediately
recognized as a component of selling, general, administrative, and other income
and expense (SG&A) in the Consolidated Statement of Operations.
In evaluating hedge effectiveness for foreign currency forwards, the Company
assesses changes in the forward rates. The forward rates are defined as the sum
of the forward points as quoted by independent quote services and the spot rates
as of the end of the fiscal period. With respect to the foreign currency options
used as cash flow hedges, these options are considered perfectly effective based
on the currencies, notional amounts, pricing, and maturity of the options
utilized by the Company - consistent with guidance provided by the Derivatives
Implementation Group of the Financial Accounting Standards Board. Accordingly,
the Company records all of the changes in the options' fair value, including
changes in the time value of the options, in OCI. The fair value is based on a
Black-Scholes option pricing model.
During the quarter ended September 28, 2001, the Company had no expense for
ineffectiveness associated with hedging instruments. During the nine months
ended September 28, 2001, the Company recognized approximately $500,000 of SG&A
expense for ineffectiveness associated with hedging instruments. Of the net
estimated gain of $1,562,000 recorded in Accumulated OCI as of September 28,
2001, associated with cash flow hedges, approximately $1,286,000 is expected to
be reclassified into revenue during the next twelve months.
Other Derivatives
The Company also utilizes foreign currency forwards, generally with durations of
less than two months, to reduce its exposure to foreign currency exchange rate
fluctuations in connection with monetary assets and liabilities denominated in
foreign currencies. The Company accounts for these derivatives in accordance
with SFAS No. 52, "Foreign Currency Translation." The Company records these
forwards at their estimated fair value within other current assets or
liabilities in the Consolidated Balance Sheet. Changes in the fair value of
these derivatives are immediately recognized as a component of SG&A in the
Consolidated Statement of Operations. The notional amount of outstanding foreign
currency forwards utilized to reduce the Company's exposure to foreign currency
rate fluctuations in connection with monetary assets and liabilities denominated
in foreign currencies was approximately $172,961,000 as of September 28, 2001,
and $230,515,000 as of December 29, 2000.
9
NOTE 5 - OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are as
follows (in thousands of dollars):
Quarter Nine Months
Ended Ended
09/28/01 09/28/01
----------------------
Other comprehensive income (loss), before tax:
Cumulative effect of change in accounting principle $ - $(11,416)
Net gains (losses) on foreign currency cash flow hedges (10,241) 24,739
Reclassification adjustment for net gains included in
net income (1,270) (10,956)
------- -------
Other comprehensive income (loss), before tax (11,511) 2,367
Income tax benefit (expense) related to items of
other comprehensive income (loss) 3,914 (805)
------- -------
Other comprehensive income (loss), net of tax $ (7,597) $ 1,562
======== =======
All of the changes in the components of other comprehensive income (loss) relate
to the accounting for derivative instruments. See Note 4 for a discussion of the
Company's accounting for derivative instruments.
NOTE 6 - LITIGATION
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the District
Court) against the Company and certain subsidiaries. The suit alleged that the
Company breached a 1990 settlement agreement that had resolved earlier
litigation between the parties concerning an optical disk drive storage
development project entered into in 1981 which was unsuccessful and terminated
in 1985. The suit sought injunctive relief and damages in the amount of
$2,400,000,000. In December 1995, the District Court granted the Company's
motion for summary judgment and dismissed the complaint. Stuff appealed the
dismissal to the Colorado Court of Appeals (the Court of Appeals). In March
1997, the Court of Appeals reversed the District Court's judgment and remanded
the case to the District Court for further proceedings. In July 1999, the
District Court again dismissed, with prejudice, all of Stuff's material claims
against the Company. In August 1999, Stuff filed a notice of appeal with the
Appeals Court seeking to overturn the decision of the District Court. In August
2000, the Court of Appeals remanded the case back to the District Court for a
trial on the factual issues relating to the interpretation of the language
embodied in the 1990 settlement agreement. The Company filed a Petition for
Rehearing with the Court of Appeals. In October 2000, the Court of Appeals
modified its decision, but denied the Company's Petition for Rehearing. In
November 2000, the Company filed a Petition for Certiorari with the Supreme
Court of Colorado (the Supreme Court). In April 2001, the Supreme Court denied
the Company's petition. The case has been remanded to the District Court for
trial. In June 2001, the Company filed a motion with the District Court to
bifurcate the trial into a liability phase and, if Stuff were to prevail in the
liability phase, a damages phase. In July 2001, the District Court granted the
Company's request for a bifurcated trial. No trial date has been set. The
Company continues to believe that Stuff's claims are wholly without merit and
intends to defend vigorously any further actions arising from this complaint.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
10
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
NOTE 7 - RESTRUCTURING
On October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. The key elements of the
restructuring included a reduction in headcount, a reduction of investment in
certain businesses, a recommitment to the Company's core strengths,
modifications to the sales model for the United States and Canada, and other
organizational and operational changes.
The Company incurred approximately $3,376,000 of restructuring expense in the
third quarter of 2000, and approximately $27,176,000 of restructuring expense
during the nine months of 2000. Of the $27,176,000 of restructuring expense
incurred during the nine months of 2000, approximately $21,456,000 related to
employee severance expense, $5,258,000 related to the impairment writedown of
assets at the Company's manufacturing facility in Toulouse, France and to asset
writedowns associated with the spin-off of the Company's managed storage
services business, and $462,000 related to excess lease space in Canada and
legal and accounting expenses associated with the spin-off of the Company's
managed storage services business. The restructuring program was completed in
the third quarter of 2000.
NOTE 8 - OPERATIONS OF BUSINESS SEGMENTS
The Company is organized into two reportable segments based on the definitions
of segments provided under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information": storage products and storage services. The
storage products segment includes revenue from tape, disk, and network products
for the enterprise and open systems computing environments, including storage
area networks (SANs). The products segment also includes revenue from licensed
software tools and applications for improving storage product performance and
simplifying information storage management. The storage services segment
provides maintenance services for Company and third-party products, as well as
storage consulting services associated mainly with SANs, virtual technologies,
and software solutions.
11
The Company does not have any intersegment revenue and evaluates segment
performance based on gross profit. The sum of the segment gross profits equals
the consolidated gross profit. The Company does not allocate research and
product development costs; selling, general, administrative, and other income
and expense; interest expense; interest income; or provision for income taxes to
the segments. The revenue and gross profit by segment are as follows (in
thousands of dollars):
Quarter Ended Nine Months Ended
---------------------------------------------------
09/28/01 09/29/00 09/28/01 09/29/00
---------------------------------------------------
Revenue:
Storage products $322,960 $325,301 $ 974,591 $ 975,308
Storage services 175,039 161,316 504,361 483,455
------- ------- --------- ---------
Total revenue $497,999 $486,617 $1,478,952 $1,458,763
======= ======= ========= =========
Gross profit:
Storage products $148,756 $146,047 $436,407 $396,806
Storage services 73,271 61,375 202,659 174,901
------- ------- ------- -------
Total gross profit $222,027 $207,422 $639,066 $571,707
======= ======= ======= =======
The following table provides supplemental financial data regarding revenue from
the Company's storage products segment (in thousands of dollars):
Quarter Ended Nine Months Ended
---------------------------------------------------
09/28/01 09/29/00 09/28/01 09/29/00
---------------------------------------------------
Tape products $258,125 $249,006 $791,325 $761,157
Disk products 23,500 32,226 75,098 104,392
Network and other products 41,335 44,069 108,168 109,759
------- ------- ------- -------
Total storage products
revenue $322,960 $325,301 $974,591 $975,308
======= ======= ======= =======
NOTE 9 - EARNINGS (LOSS) PER SHARE
The following table presents the calculation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
Quarter Ended Nine Months Ended
---------------------------------------------------
09/28/01 09/29/00 09/28/01 09/29/00
---------------------------------------------------
Net income (loss) $ 17,915 $ 6,270 $ 27,161 $(32,617)
======= ======= ======= =======
Weighted-average shares 103,352 101,300 102,886 100,871
Effect of dilutive shares 1,788 764 1,614 -
------- ------- ------- -------
Weighted-average and
dilutive potential shares 105,140 102,064 104,500 100,871
======= ======= ======== =======
Basic earnings (loss) per
share $ 0.17 $ 0.06 $ 0.26 $ (0.32)
======= ======= ======= =======
Diluted earnings (loss)
per share $ 0.17 $ 0.06 $ 0.26 $ (0.32)
======= ======= ======= =======
For the quarters ended September 28, 2001, and September 29, 2000, options to
purchase 6,081,221 and 12,640,860 shares of common stock, respectively, were
excluded from the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the Company's
12
common stock and, therefore, the effect would have been antidilutive. For the
nine months ended September 28, 2001, options to purchase 6,755,375 shares of
common stock were excluded from the computation of diluted earnings per share
for the same reason. For the nine months ended September 29, 2000, options to
purchase 12,787,883 shares of common stock were excluded from the computation of
diluted earnings per share because they were antidilutive as a result of the net
loss incurred in that period.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations." This statement requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 141 is effective for
the Company's financial statements for the year ending December 28, 2001. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS No. 142 requires that
goodwill and indefinite lived intangible assets no longer be amortized, that
goodwill be tested for impairment at least annually at the reporting unit level,
that intangible assets deemed to have an indefinite life be tested for
impairment at least annually, and that the amortization period of intangible
assets with finite lives no longer be limited to forty years. SFAS No. 142 is
effective for the Company's financial statements for the year ending December
27, 2002. The adoption of this statement is not currently anticipated to have a
material impact on the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 is effective for the
Company's financial statements for the year ending December 27, 2002. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
13
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 28, 2001
All assumptions, anticipations, expectations, and forecasts contained in the
following discussion regarding the Company's future products, business plans,
financial results, performance, and events are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
Company's actual results may differ materially because of a number of risks and
uncertainties. Some of these risks are detailed below in "Factors That May
Affect Future Results" and elsewhere in this Form 10-Q. The forward-looking
statements contained herein represent a good-faith assessment of the Company's
future performance for which management believes there is a reasonable basis.
The Company disclaims any obligation to update forward-looking statements
contained herein, except as may be otherwise required by law.
GENERAL
The Company reported net income for the third quarter ended September 28, 2001,
of $17.9 million on revenue of $498.0 million, compared to net income of $6.3
million for the third quarter ended September 29, 2000, on revenue of $486.6
million. Net income of $27.2 million was reported for the nine months of 2001 on
revenue of $1.48 billion, compared to a net loss of $32.6 million for the nine
months of 2000 on revenue of $1.46 billion. The Company's reported results for
the third quarter and nine months of 2000 include one-time, pre-tax expenses of
$3.4 million and $27.2 million, respectively, associated with restructuring.
Excluding the one-time, pre-tax charges, the Company would have reported net
income of $8.4 million and a net loss of $15.0 million during the third quarter
and nine months of 2000, respectively.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation, and acceptance of the Company's products.
This evaluation process results in a variable sales cycle and makes it difficult
to predict if or when revenue will be earned, which may therefore adversely
impact the Company's financial results. Further, gross margins may be adversely
impacted in an effort to complete the sales cycle. Future financial results also
depend upon the Company's ability to manage its costs and operating expenses in
line with revenue; the timely development, manufacture, and introduction of new
products and services; and the implementation of its disk and storage area
network (SAN) strategy. For a discussion of these and other risk factors, see
"Factors That May Affect Future Results."
The Company's operating activities provided cash of $125.5 million during the
nine months of 2001 compared to cash of $276.7 million provided by operating
activities during the same period in 2000. The decrease in cash provided by
operating activities during the nine months of 2001, compared to the same period
in 2000, was primarily a result of reduced cash received from customers due to a
lower level of sales revenue in the fourth quarter of 2000, compared to the
fourth quarter of 1999; increased purchases of inventory; and increased income
tax payments. See "Liquidity and Capital Resources -- Working Capital" for
additional discussion of working capital. Cash used in investing activities
decreased from $67.3 million during the nine months of 2000 to $56.1 million
during the nine months of 2001, primarily due to investments made in a spin-off
company and a storage solutions company during the nine months of 2000. Cash
used in financing activities decreased from $187.3 million during the nine
months of 2000 to $1.4 million during the nine months of 2001, primarily due to
repayments of borrowings under the Company's credit facilities.
14
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment:
Quarter Ended Nine Months Ended
--------------------------------------
09/28/01 09/29/00 09/28/01 09/29/00
--------------------------------------
Storage products revenue:
Tape products 51.9% 51.2% 53.5% 52.2%
Disk products 4.7 6.6 5.1 7.2
Network and other products 8.3 9.0 7.3 7.5
----- ----- ----- -----
Total storage products revenue 64.9 66.8 65.9 66.9
Storage services revenue 35.1 33.2 34.1 33.1
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 55.4 57.4 56.8 60.8
----- ----- ----- -----
Gross profit 44.6 42.6 43.2 39.2
Research and product development costs 12.2 13.0 12.5 13.2
Selling, general, administrative,
and other income and expense, net 27.1 26.5 28.0 27.1
Restructuring expense - 0.7 - 1.9
----- ----- ----- -----
Operating profit (loss) 5.3 2.4 2.7 (3.0)
Interest income (expense), net 0.1 (0.4) 0.1 (0.4)
----- ----- ----- -----
Income (loss) before income taxes 5.4 2.0 2.8 (3.4)
Benefit (provision) for income taxes (1.8) (0.7) (1.0) 1.2
----- ----- ----- -----
Net income (loss) 3.6% 1.3% 1.8% (2.2)%
===== ===== ===== =====
REVENUE
STORAGE PRODUCTS
The Company's storage products revenue consists of sales of tape, disk, and
network products for the enterprise and open systems markets, including SANs.
The open systems market consists of products designed to operate in the UNIX,
NT, and other non-MVS operating environments. Revenue from the storage products
segment was largely unchanged during the third quarter and nine months of 2001,
compared to the same periods in 2000.
Tape Products
Tape product revenue increased 4% during the third quarter and nine months of
2001, compared to the same periods in 2000. The increases in tape revenue were
primarily due to increased sales of the Virtual Storage Manager(R) (VSM), the
L-series open systems tape automation products, and the 9840/9940 family of tape
drives. These increases were partially offset by decreased sales of the
Timberline(R) 9490, earlier generation open systems tape automation products,
and the Powderhorn(R) automated tape library. Continuing to extend the Company's
reach into the open systems market with tape and tape automation products will
be key in growing tape product revenue. See "Factors That May Affect Future
Results - Emerging Markets" for a discussion of the risks associated with future
revenue growth in the open systems market.
Disk Products
Disk product revenue decreased 27% and 28% during the third quarter and nine
months of 2001, respectively, compared to the same periods in 2000. Disk revenue
15
for the third quarter of 2001 continued to be adversely affected by significant
price erosion and competition in the disk market. The Company is still
developing its direct sales force for disk products in the United States and
Canada. Disk revenue in the third quarter of 2001 was also adversely affected by
the worldwide slowdown in customer spending for disk storage. With the
introduction of the V960 Shared Virtual Array (TM) disk subsystem in August
2001, the Company is continuing its strategy of targeting sales of its disk
products in those environments in which its virtual technology provides the most
effective solution to customers' data storage requirements. See "Factors That
May Affect Future Results - New Products and Services" for a discussion of the
risks associated with new disk products.
Network and Other Products
Network and other products revenue decreased 6% and 1% during the third quarter
and nine months of 2001, respectively, compared to the same periods in 2000. The
decrease in network revenue for the third quarter of 2001, as compared to the
third quarter of 2000, was primarily due to decreased sales of StorageTek
hardware and connectivity products, partially offset by incremental sales
revenue from the StorageNet(TM) 6000 series of domain managers. The Company is
focusing its StorageNet(TM) 6000 efforts on the development of enhanced
applications for managing tape storage. Future revenue growth is significantly
dependent upon the Company's ability to successfully compete in the SANs market.
See "Factors That May Affect Future Results - New Products and Services and
Emerging Markets" for a discussion of the risks associated with the Company's
SAN strategy.
STORAGE SERVICES
The Company's storage services revenue primarily consists of revenue associated
with the maintenance of the Company's and third-party storage products, as well
as integration service revenue associated with storage consulting activities.
Storage services revenue increased 9% and 4% during the third quarter and nine
months of 2001, respectively, compared to the same periods in 2000. These
increases are primarily due to the Company's progress in service delivery
initiatives.
GROSS PROFIT
Gross profit margins increased to 45% and 43% for the third quarter and nine
months of 2001, respectively, compared to 43% for the third quarter of 2000 and
39% for the nine months of 2000. Gross profit margins for the Company's products
segment increased to 46% and 45% for the third quarter and nine months of 2001,
respectively, compared to 45% and 41% for the same periods of 2000. These
increases in product margins reflect favorable product mixes for the Company's
tape products, a shift in the concentration of revenue towards direct sales
channels, and benefits associated with operational efficiencies and cost
reduction activities. See "Factors That May Affect Future Results - Indirect
Channels" for a discussion of the risks associated with the Company's indirect
channels. Gross profit margins for the Company's services segment increased to
42% and 40% for the third quarter and nine months of 2001, respectively,
compared to 38% and 36% for the same periods in 2000, primarily as a result of
progress in service delivery initiatives, as well as an increased focus on
profitable storage consulting and integration service activities during 2001.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses decreased 4% during the third quarter
and nine months of 2001, compared to the same periods in 2000, primarily due to
the elimination of several lower priority research and product development
programs. The Company continues to focus research and development activities on
the core businesses of tape and tape automation, virtual technologies, and SANs.
16
SELLING, GENERAL, ADMINISTRATIVE, AND OTHER
Selling, general, administrative, and other income and expense (SG&A) increased
4% during the third quarter and nine months of 2001, compared to the same
periods in 2000, primarily as a result of increases in sales headcount and other
expenses incurred to strengthen the sales organization. The increased investment
in the sales organization was partially offset by ongoing cost reduction
activities.
LITIGATION
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the District
Court) against the Company and certain subsidiaries. The suit alleged that the
Company breached a 1990 settlement agreement that had resolved earlier
litigation between the parties concerning an optical disk drive storage
development project entered into in 1981 which was unsuccessful and terminated
in 1985. The suit sought injunctive relief and damages in the amount of $2.4
billion. In December 1995, the District Court granted the Company's motion for
summary judgment and dismissed the complaint. Stuff appealed the dismissal to
the Colorado Court of Appeals (the Court of Appeals). In March 1997, the Court
of Appeals reversed the District Court's judgment and remanded the case to the
District Court for further proceedings. In July 1999, the District Court again
dismissed, with prejudice, all of Stuff's material claims against the Company.
In August 1999, Stuff filed a notice of appeal with the Appeals Court seeking to
overturn the decision of the District Court. In August 2000, the Court of
Appeals remanded the case back to the District Court for a trial on the factual
issues relating to the interpretation of the language embodied in the 1990
settlement agreement. The Company filed a Petition for Rehearing with the Court
of Appeals. In October 2000, the Court of Appeals modified its decision, but
denied the Company's Petition for Rehearing. In November 2000, the Company filed
a Petition for Certiorari with the Supreme Court of Colorado (the Supreme
Court). In April 2001, the Supreme Court denied the Company's petition. The case
has been remanded to the District Court for trial. In June 2001, the Company
filed a motion with the District Court to bifurcate the trial into a liability
phase and, if Stuff were to prevail in the liability phase, a damages phase. In
July 2001, the District Court granted the Company's request for a bifurcated
trial. No trial date has been set. The Company continues to believe that Stuff's
claims are wholly without merit and intends to defend vigorously any further
actions arising from this complaint.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
RESTRUCTURING
On October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. The key elements of the
restructuring included a reduction in headcount, a reduction of investment in
certain businesses, a recommitment to the Company's core strengths,
modifications to the sales model for the United States and Canada, and other
organizational and operational changes.
17
The Company incurred approximately $3.4 million of restructuring expense in the
third quarter of 2000, and approximately $27.2 million of restructuring expense
in the nine months of 2000. Of the $27.2 million of restructuring expense
incurred during the nine months of 2000, approximately $21.5 million related to
employee severance expense, $5.3 million related to the impairment writedown of
assets at the Company's manufacturing facility in Toulouse, France and to asset
writedowns associated with the spin-off of the Company's managed storage
services business, and $462,000 related to excess lease space in Canada and
legal expenses associated with the spin-off of the Company's managed storage
services business. The restructuring program was completed in the third quarter
of 2000.
The Company is focusing efforts on cost reduction and productivity gains. This
focus is particularly critical given the recent slowdown in information
technology spending, partially due to economic uncertainties associated with the
September 11th terrorist attacks. The Company is currently developing detailed
action plans for the implementation of new cost saving initiatives.
There can be no assurance that these initiatives will be successful or
sufficient to allow the Company to generate improved operating results in future
periods. It is possible that changes in the Company's business or its industry
may necessitate additional restructuring expense in the future. The necessity
for additional restructuring activities may result in expenses that adversely
affect reported results of operations in the period the restructuring plan is
adopted, and may require incremental cash payments.
INTEREST INCOME AND EXPENSE
Interest income increased $1.0 million during the third quarter of 2001,
compared to the same period in 2000, primarily due to increased levels of cash.
Interest income decreased $621,000 during the nine months of 2001, compared to
the same period in 2000, primarily due to approximately $3.0 million of interest
received in 2000 that was related to an income tax refund. Interest expense
decreased $1.6 million and $8.4 million during the third quarter and nine months
of 2001, respectively, compared to the same periods in 2000, primarily due to
decreased borrowings under the Company's debt and financing arrangements.
INCOME TAXES
The Company's effective tax rate decreased from 35% for the third quarter and
nine months of 2000, to 34% for the third quarter and nine months of 2001.
Statement of Financial Accounting Standards (SFAS) No. 109 requires that
deferred income tax assets be recognized to the extent realization of such
assets is more likely than not. Based on the currently available information,
management has determined that the Company will more likely than not realize
$195.7 million of deferred income tax assets as of September 28, 2001. The
Company's valuation allowance of approximately $21.3 million as of September 28,
2001, relates principally to net deductible temporary differences, tax credit
carryforwards and net operating loss carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations." This statement requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 141 is effective for
18
the Company's financial statements for the year ending December 28, 2001. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS No. 142 requires that
goodwill and indefinite lived intangible assets no longer be amortized, that
goodwill be tested for impairment at least annually at the reporting unit level,
that intangible assets deemed to have an indefinite life be tested for
impairment at least annually, and that the amortization period of intangible
assets with finite lives no longer be limited to forty years. SFAS No. 142 is
effective for the Company's financial statements for the year ending December
27, 2002. The adoption of this statement is not currently anticipated to have a
material impact on the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 is effective for the
Company's financial statements for the year ending December 27, 2002. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's operating activities provided cash of $125.5 million during the
nine months of 2001 compared to cash of $276.7 million provided by operating
activities during the same period in 2000. The decrease in cash provided by
operating activities during the nine months of 2001, compared to the same period
in 2000, was primarily a result of reduced cash received from customers due to a
lower level of sales revenue in the fourth quarter of 2000, compared to the
fourth quarter of 1999; increased purchases of inventory; and increased income
tax payments. Cash used in investing activities decreased from $67.3 million
during the nine months of 2000 to $56.1 million during the nine months of 2001,
primarily due to investments made in a spin-off company and a storage solutions
company during the nine months of 2000. Cash used in financing activities
decreased from $187.3 million during the nine months of 2000 to $1.4 million
during the nine months of 2001, primarily due to repayments of borrowings under
the Company's credit facilities.
The average collection period for Company receivables decreased from 87 days for
the third quarter of 2000, to 86 days for the third quarter of 2001. Inventory
balances increased from $218.2 million as of December 29, 2000, to $244.6
million as of September 28, 2001, primarily as a result of the Company
fulfilling the final portion of its commitment to purchase disk drives from IBM
and completing end-of-life manufacturing for a line of older tape products.
Available Financing Lines
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $75.0 million at any one time.
The agreement, which expires in January 2002, provides for commitments by the
bank to purchase the Company's promissory notes denominated in a number of
foreign currencies. As of September 28, 2001, the Company had promissory notes
19
of approximately $74.9 million outstanding under this financing agreement and
had committed to borrowings between October 2001 and January 2002 in the
cumulative principal amount of approximately $99.1 million. The notes must be
repaid only to the extent of future revenue. Obligations under the agreement are
not cancelable by the Company or the bank. The promissory notes, together with
accrued interest, are payable in U.S. dollars within 40 days from the date of
issuance. The weighted average interest rate associated with the promissory
notes outstanding as of September 28, 2001, was 5.58%. Under the terms of the
agreement, the Company is required to comply with certain covenants and, under
certain circumstances, may be required to maintain a collateral account,
including cash and qualifying investments, in an amount up to the outstanding
balance of the promissory notes.
The Company entered into a $150.0 million revolving credit facility (the
Revolver) in October 2001 that expires in October 2004. The interest rates for
borrowing under the Revolver are dependent upon the Company's Total Debt to
rolling four quarter Earnings Before Interest Expense, Taxes, Depreciation, and
Amortization (EBITDA) ratio and the term of the outstanding borrowing. The rate
ranges from the applicable LIBOR plus 1.75% to 2.50% or the agent bank's base
rate plus 0.00% to 0.50%. The Revolver is secured by the Company's U.S. accounts
receivable and U.S. inventory, and contains certain financial and other
covenants, including restrictions on the payment of cash dividends on the
Company's common stock. The Revolver replaces a previous revolving credit
facility that expired in October 2001.
The Company believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. Over the longer term, the Company may choose to fund these activities
through the issuance of additional equity or debt financing. The issuance of
equity or convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that any additional long-term financing,
if required, can be completed on terms that are favorable to the Company.
Total Debt-to-Capitalization
The Company's total debt-to-capitalization ratio decreased from 9% as of
December 29, 2000, to 8% as of September 28, 2001, primarily due to the
repayment of a note payable. See "Working Capital," above, for a discussion of
cash sources and uses.
INTERNATIONAL OPERATIONS
International operations accounted for approximately 49% and 50% of the
Company's revenue for the third quarter and nine months of 2001, respectively,
unchanged when compared to the same periods of 2000. The Company also sells
products through domestic indirect distribution channels that have end-user
customers located outside the United States. The Company expects that it will
continue to generate a significant portion of its revenue from international
operations. The majority of the Company's international operations involve
transactions denominated in the local currencies of countries within Western
Europe, principally Germany, France, and the United Kingdom; Japan; Canada; and
Australia. An increase in the exchange value of the U.S. dollar reduces the
value of revenue and profits generated by the Company's international
operations. As a result, the Company's operating and financial results can be
materially affected by fluctuations in foreign currency exchange rates. In an
attempt to mitigate the impact of foreign currency fluctuations, the Company
employs a foreign currency hedging program. See "Market Risk Management," below.
The Company's international business may be affected by changes in demand
resulting from global and localized economic, business, and political
conditions. The Company is subject to the risks of conducting business outside
the United States, including adverse political and economic conditions;
20
impositions of, or changes in, tariffs, quotas, and legislative or regulatory
requirements; difficulty in obtaining export licenses; potentially adverse
taxes; the burdens of complying with a variety of foreign laws; and other
factors outside the Company's control. The Company expects these risks to
increase in the future as it expands its operations in Eastern Europe and Asia.
There can be no assurances that these factors will not have a material adverse
effect on the Company's business or financial results in the future.
MARKET RISK MANAGEMENT
Foreign Currency Exchange Rate Risk
The Company's primary market risk relates to changes in foreign currency
exchange rates. The functional currency for the Company's foreign subsidiaries
is the U.S. dollar. A significant portion of the Company's revenue is generated
by its international operations. As a result, the Company's financial position,
earnings, and cash flows can be materially affected by changes in foreign
currency exchange rates. The Company attempts to mitigate this exposure as part
of its foreign currency hedging program. The primary goal of the Company's
foreign currency hedging program is to reduce the risk of adverse foreign
currency movements on the reported financial results of its non-U.S. dollar
transactions. Factors that could have an impact on the effectiveness of the
Company's hedging program include the accuracy of forecasts and the volatility
of foreign currency markets. All foreign currency derivatives are authorized and
executed pursuant to the Company's policies. The Company does not hold or issue
derivatives or any other financial instruments for trading purposes.
To implement its foreign currency hedging program, the Company uses a
combination of foreign currency forwards embedded in a financing agreement, as
well as stand-alone foreign currency options and forwards. These derivatives are
used to hedge the risk that forecasted revenue denominated in foreign currencies
might be adversely affected by changes in foreign currency exchange rates.
Foreign currency forwards are also used to reduce the Company's exposure to
foreign currency exchange rate fluctuations in connection with monetary assets
and liabilities denominated in foreign currencies.
A hypothetical 10% adverse movement in foreign exchange rates applied to the
Company's foreign currency exchange rate sensitive instruments held as of
September 28, 2001, and as of December 29, 2000, would result in a hypothetical
loss of approximately $67.2 million and $69.5 million, respectively. These
hypothetical losses do not take into consideration the Company's underlying
international operations. The Company anticipates that any hypothetical loss
associated with the Company's foreign currency exchange rate sensitive
instruments would be offset by gains associated with its underlying
international operations.
Interest Rate Risk
Changes in interest rates affect interest income earned on the Company's cash
investments, as well as interest expense on short-term borrowings. A
hypothetical 10% adverse movement in interest rates applied to cash investments
and short-term borrowings would not have a material adverse effect on the
Company's financial position, earnings, or cash flows.
Credit Risk
The Company is exposed to credit risk associated with cash investments, foreign
currency derivatives, and trade receivables. The Company does not believe that
its cash investments and foreign currency derivatives present significant credit
risks, because the counterparties to the instruments consist of major financial
institutions and the Company manages the notional amount of contracts entered
21
into with any one counterparty. Substantially all trade receivable balances are
unsecured. The concentration of credit risk with respect to trade receivables is
limited due to the large number of customers in the Company's customer base and
their dispersion across various industries and geographic areas.
FACTORS THAT MAY AFFECT FUTURE RESULTS
New Products and Services
The Company's results of operations and competitive strength depend upon its
ability to successfully develop, manufacture, and market innovative new products
and services. Short product life cycles are inherent in the high-technology
market. The Company devotes significant resources to research and product
development projects and must effectively manage the risks inherent in new
product transitions. Developing new technologies, products, and services is
complex and involves various uncertainties. In the third quarter of 2001, the
Company introduced the V960 Shared Virtual Array(TM) (SVA), the Company's next
generation virtual disk storage product that offers significant improvements in
performance. In October 2001, the Company introduced the T9840B, the Company's
next generation fast-access tape drive. In addition, the Company is still
developing the necessary product modifications and professional services
knowledge to successfully implement its SAN solutions in various customer
operating environments. Delays in product development, manufacturing, or in
customer evaluation and purchasing decisions may make product transitions
difficult. The manufacture of new products involves integrating complex designs
and processes, collaborating with sole source suppliers for key components, and
increasing manufacturing capacities to accommodate demand. A design flaw, the
failure to obtain sufficient quantities of key components, or manufacturing
constraints could adversely affect the Company's operating and financial
results. The Company has experienced product development and manufacturing
delays in the past that adversely affected the Company's financial results and
competitive position. There can be no assurance that the Company will be able to
successfully manage the development and introduction of new products and
services in the future.
Emerging Markets
Future revenue growth is partially dependent upon successfully developing and
introducing products for two primary emerging markets: the open systems market
and the storage area networking (SAN) market.
The open systems market includes products designed to operate in the UNIX, NT,
and other non-MVS operating environments. Competition in the open systems market
is aggressive and is primarily based on technology, performance, reliability,
quality, system scalability, price, product availability, customer service, and
brand recognition. The open systems market encompasses a broad range of
customers, including customers outside of the Company's traditional customer
base. Many of the Company's potential customers in the open systems market
purchase their storage requirements as part of a bundled product, which may
provide a competitive advantage to the Company's rivals. The Company expects to
address these competitive factors through the delivery of storage solutions that
provide customers with superior functionality, performance, and quality. The
Company's customer base continues to shift to the open systems market and there
can be no assurance that the Company's strategy will be effective in expanding
its open systems market sales.
The SAN market has only recently begun to develop and is characterized by
rapidly changing technology and standards. Because this market is new and
standards are still being defined, it is difficult to predict its potential size
or future growth rate. Customers may be reluctant to adopt new data storage
standards, and competing standards may emerge that will be preferred by
customers.
22
Competition
The markets for the Company's products and services are intensely competitive
and are subject to continuous, rapid technological change, frequent product
performance improvements, short product life cycles, and aggressive pricing. The
Company competes in a number of markets that include a broad spectrum of
customers primarily on the basis of technology, performance, reliability,
quality, system scalability, price, product availability, customer service, and
brand recognition. The Company believes that its ability to compete depends upon
a number of factors, both within and outside of its control. These factors
include the price and cost of the Company's and its competitors' product
offerings, the timing and success of new products and applications, new product
introductions by the Company's competitors, the Company's service and
distribution capabilities, and general economic and business conditions within
and outside the United States. Strong competition has resulted in price erosion
in the past and the Company expects this trend to continue. Price competition
for the Company's products and services may continue to have a significant
impact on the Company's gross profit margins as well. The Company's ability to
sustain or improve total gross margins is significantly dependent upon
designing, developing, and manufacturing competitive products, pricing those
products, improving margins on the Company's disk and network products, and
reducing costs associated with the sourcing of production materials. Storage
product gross margins may also be affected in future periods by inventory
reserves and writedowns resulting from rapid technological changes or delays in
gaining market acceptance for products.
The Company expects that the markets for its products and services, and its
competitors within these markets, will continue to change in response to
shifting customer storage requirements and technological advances. The Company's
competitors include, among others, Advanced Digital Information Corporation,
Compaq Computer Corporation, Dell Computer Company, EMC Corporation,
Hewlett-Packard Company, Hitachi Ltd., IBM, Network Appliance Inc., Quantum
Corporation, and Sun Microsystems. The competitive environment is characterized
by rapid change, partially as a result of mergers and alliances. For example, in
September 2001, Hewlett-Packard Company and Compaq Computer Corporation
announced their intention to merge. In October 2001, Dell Computer Company and
EMC Corporation announced that the two companies had reached an agreement under
which Dell will market EMC Corporation's mid-range disk products. A number of
the Company's competitors have significantly greater financial resources than
the Company.
Partners/Competitors
The markets in which the Company competes are characterized by various alliances
formed to promote industry standards and deliver tested, interoperable
technology. For example, Seagate Technology, Inc., IBM, and Hewlett-Packard
Company have jointly developed the Linear Tape Open (LTO) drive, a high-capacity
tape drive technology for the open systems market. The Company has developed
versions of its tape libraries that will support LTO tape drives. However, the
Company may be at a cost disadvantage when selling tape libraries that use LTO
tape drives. The Company also competes with vendors with which it has
established relationships, including Hewlett-Packard Company and Sun
Microsystems. The Company anticipates that it will continue to establish
distribution alliances with other equipment manufacturers, software vendors, and
service providers. There can be no assurance that the Company will be able to
successfully realize the benefits from these alliances while competing against
these companies at the same time.
Indirect Channels
The Company continues to develop its indirect distribution channels, including
original equipment manufacturers (OEMs), value-added distributors (VADs),
23
value-added resellers (VARs), and other distributors. The Company's ability to
forecast future demand for its products may be adversely affected by unforeseen
changes in demand from its indirect channel customers. There can be no assurance
that the Company will be successful in expanding or maintaining its indirect
channel sales. Furthermore, there can be no assurance that profit margins on
indirect channel sales will not deteriorate due to competitive pressures. There
also can be no assurance that maintenance revenue will not decline in future
periods as a result of customers of these indirect channels electing to purchase
maintenance services from vendors other than the Company.
The Company's indirect channel sales were adversely impacted during the third
quarter and nine months of 2001 by the downturn in the economy. The Company's
financial results may be negatively affected if the Company is unsuccessful in
its efforts to develop its indirect channels, if the financial condition of one
or more of these customers weakens, or if the current slowdown in customer
spending continues.
Significant Personnel Changes
The Company has experienced significant changes in its executive management
team. Since December 29, 2000, five executive officers have departed and five
new executive officers have been appointed to positions in the Company. There
can be no assurance that there will not be any future changes in the executive
management team, and it may take a period of time before the new executive
management team becomes fully productive.
The Company experienced increased turnover in its United States and Canadian
direct sales force in the first six months of 2000 as a result of its
restructuring activities. Even though the Company has replaced most of the sales
headcount and United States and Canada direct sales have improved in the nine
months of 2001, the Company is still in the process of delivering the product
training and sales tools to increase the effectiveness of its sales force in the
United States and Canada.
The Company experienced significant changes in the remainder of its employee
base during 1999 and 2000 as a result of the voluntary and involuntary severance
programs implemented in connection with its restructuring activities, as well as
increased levels of employee attrition. While the Company's restructuring
activities have now been completed and attrition rates have declined to
historical rates, the future success of the Company depends in large part upon
its ability to attract, retain, and motivate highly skilled employees. The
Company faces significant competition for individuals who possess the skills
required to sell and deliver the products and services offered to its customers.
An inability to successfully sell and deliver products and services required by
Company customers could have an adverse effect on future operating results.
Ability to Develop and Protect Intellectual Property Rights
The Company relies heavily on its ability to develop new intellectual property
rights that do not infringe on the rights of others in order to remain
competitive and develop and manufacture products that are competitive in terms
of technology and cost. There can be no assurance that the Company will continue
to be able to develop such new intellectual property.
The Company relies on a combination of United States patent, copyright,
trademark, and trade secret laws to protect its intellectual property rights.
With respect to certain of the Company's international operations, the Company
files patent applications with foreign governments. However, many foreign
countries do not have intellectual property laws that are as well developed as
those of the United States. The Company enters into confidentiality agreements
relating to its intellectual property with its employees and consultants. In
addition, the Company includes confidentiality provisions in license and
non-exclusive sales agreements with its customers.
24
Despite all of the Company's efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy or otherwise obtain or use the
Company's intellectual property. Monitoring the unauthorized use of the
Company's intellectual property rights is difficult, particularly in foreign
countries. There can be no assurance that the Company will be able to protect
its intellectual property rights, particularly in foreign countries.
Sole Source Suppliers
The Company generally uses standard parts and components for its products and
believes that, in most cases, there are a number of alternative, competent
vendors for most of those parts and components. Many non-standard parts are
obtained from a single source or a limited group of suppliers. However, there
are other vendors who could produce these parts in satisfactory quantities after
a period of pre-qualification and product ramping. Certain key components and
products are purchased from sole source suppliers that the Company believes are
currently the only manufacturers of the particular components that meet the
Company's qualification requirements and other specifications or for which
alternative sources of supply are not readily available. Imation Corporation is
a sole source supplier for the 9840 and 9940 tape cartridges and the Company is
dependent upon Imation to economically produce large volumes of high-quality
tape cartridges at a cost acceptable to the Company and its customers. IBM was a
sole source supplier for disk drives used in the Company's V960 and 9500 SVA
products, as well as the Company's VSM products. As a result of IBM
discontinuing the manufacture of these drives, the Company entered into a final
purchase commitment with IBM based on forecasted requirements. The Company has
recognized inventory writedowns during the nine months of 2001 related to the
excess inventory of IBM disk drives obtained as part of the final purchase
commitment. The Company is currently developing an industry standard drive
interface for its SVA and VSM products. This project is in the engineering and
development stage. Failure to accurately forecast drive requirements or changes
in the development schedule for the drive interface could result in additional
inventory writedowns, or the inability to meet customer needs for these
products.
Certain suppliers have experienced occasional technical, financial, or other
problems that have delayed deliveries in the past. An unanticipated failure of
any sole source supplier to meet the Company's requirements for an extended
period, or the inability to secure comparable components in a timely manner,
could result in a shortage of key components, longer lead times, and reduced
control over production and delivery schedules. These factors could have a
material adverse effect on revenue and operating results. In the event a sole
source supplier was unable or unwilling to continue to supply components, the
Company would need to identify and qualify other acceptable suppliers. This
process could take an extended period, and no assurance can be given that any
additional source would become available or would be able to satisfy production
requirements on a timely basis or at a price acceptable to the Company.
The Company is dependent upon a sole subcontractor, Herald Datanetics Ltd.
(HDL), to manufacture a key component used in certain tape products. HDL is
located in the People's Republic of China (PRC). To date, the Company has not
experienced any material problems with HDL. The Company's dependence upon HDL is
subject to additional risks beyond those associated with other sole suppliers,
including the lack of a well-established court system or acceptance of the rule
of law in the PRC, the degree to which the PRC permits economic reform policies
to continue, the political relationship between the PRC and the United States,
and broader political and economic factors, such as whether the PRC is admitted
to the World Trade Organization.
25
Manufacturing
A significant portion of the Company's products is manufactured in facilities
located in Puerto Rico. The Company's ability to manufacture product may be
affected by weather-related risks beyond the control of the Company. If the
Puerto Rico manufacturing facility were affected by such an event, the Company
may not have an alternative source to meet the demand for its products without
substantial delays and disruption to its operations. The Company carries
interruption insurance to mitigate some of the risk. There is no assurance that
the Company could obtain sufficient alternate manufacturing sources or repair
the facilities in a timely manner to satisfy the demand for its products.
Failure to fulfill manufacturing demands could adversely affect the Company's
operating and financial results in the future.
From time to time, the Company has experienced delivery delays, increased lead
times in ordering parts and components for its products, and rapid changes in
the demand by customers for certain products. These longer lead times, coupled
with rapid changes in the demand for products, could result in a shortage of
parts and components, reduced control over delivery schedules, and an inability
to fulfill customer orders in a timely manner. The complexities of these issues
increase when the Company transitions to newer technologies and products. These
factors could have a material adverse effect on revenue and operating results.
Earnings Fluctuations
The Company's financial and operating results may fluctuate from quarter to
quarter for a number of reasons. Many of the Company's customers undertake
detailed procedures relating to the evaluation, testing, implementation, and
acceptance of the Company's products. This evaluation process results in a
variable sales cycle and makes it difficult to predict if or when revenue will
be earned. Furthermore, gross margins may be adversely impacted in an effort to
complete the sales cycle. In the past, the Company's results have followed a
seasonal pattern, which reflects the tendency of customers to make their
purchase decisions at the end of a calendar year. During any fiscal quarter, a
disproportionately large percentage of the total product sales is earned in the
last weeks or days of the quarter. A number of other factors may also cause
revenue to fall below expectations, such as product and technology transitions
announced by the Company or its competitors, delays in the availability of new
products, changes in the purchasing patterns of the Company's customers and
distribution partners, or adverse global economic conditions. The mix of sales
among the Company's business segments and sales concentration in particular
geographic regions may carry different gross profit margins and may cause the
Company's operating margins to fluctuate. These factors make the forecasting of
revenue inherently difficult. Because the Company plans its operating expenses
on expected revenue, a shortfall in revenue may cause earnings to be below
expectations in that period.
The Company has experienced adverse effects from the recent slowdown in the
global economy as some customers have delayed purchase decisions and are
reevaluating their information technology spending budgets. In an attempt to
protect itself from this economic downturn, the Company has implemented various
cost saving measures, including reduced discretionary spending. There can be no
assurance that a prolonged economic downturn will not have an adverse effect on
the Company's future revenue or operating results. Although the Company has a
large number of customers who are dispersed across different industries and
geographic areas, a prolonged economic downturn would also increase the
Company's exposure to credit risk on its trade receivables.
26
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this Item 3 is included in the section above
entitled "Market Risk Management."
27
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the District
Court) against the Company and certain subsidiaries. The suit alleged that the
Company breached a 1990 settlement agreement that had resolved earlier
litigation between the parties concerning an optical disk drive storage
development project entered into in 1981 which was unsuccessful and terminated
in 1985. The suit sought injunctive relief and damages in the amount of $2.4
billion. In December 1995, the District Court granted the Company's motion for
summary judgment and dismissed the complaint. Stuff appealed the dismissal to
the Colorado Court of Appeals (the Court of Appeals). In March 1997, the Court
of Appeals reversed the District Court's judgment and remanded the case to the
District Court for further proceedings. In July 1999, the District Court again
dismissed, with prejudice, all of Stuff's material claims against the Company.
In August 1999, Stuff filed a notice of appeal with the Appeals Court seeking to
overturn the decision of the District Court. In August 2000, the Court of
Appeals remanded the case back to the District Court for a trial on the factual
issues relating to the interpretation of the language embodied in the 1990
settlement agreement. The Company filed a Petition for Rehearing with the Court
of Appeals. In October 2000, the Court of Appeals modified its decision, but
denied the Company's Petition for Rehearing. In November 2000, the Company filed
a Petition for Certiorari with the Supreme Court of Colorado (the Supreme
Court). In April 2001, the Supreme Court denied the Company's petition. The case
has been remanded to the District Court for trial. In June 2001, the Company
filed a motion with the District Court to bifurcate the trial into a liability
phase and, if Stuff were to prevail in the liability phase, a damages phase. In
July 2001, the District Court granted the Company's request for a bifurcated
trial. No trial date has been set. The Company continues to believe that Stuff's
claims are wholly without merit and intends to defend vigorously any further
actions arising from this complaint.
In December 1999, the Company filed suit in the U.S. District Court for the
Western District of Wisconsin against Cisco Systems, Inc. ("Cisco"), alleging
that Cisco infringed upon a certain patent of the Company that Cisco used in its
products. The Company filed an amended complaint on December 30, 1999, in which
the Company alleged that Cisco had infringed upon a second patent used in its
products. Cisco filed an answer in January 2000 denying the Company's claims,
alleging that the Company's patents are invalid and asserting that a microchip
used in one of the Company's network security products infringed upon one of
Cisco's patents. Subsequently, Cisco amended its answer to drop its infringement
counterclaim and to drop certain equitable defenses to the Company's claims. In
March 2000, the case was transferred to the U.S. District Court for the Northern
District of California. A trial date is set for March 11, 2002.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this Quarterly Report on Form
10-Q or are incorporated by reference into this Quarterly Report on Form 10-Q:
3.1 Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987 (previously filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.3 Certificate of Second Amendment dated May 28, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.4 Certificate of Third Amendment dated May 21, 1999, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 25, 1999, filed on August 9, 1999, and
incorporated herein by reference)
3.5 Restated Bylaws of Storage Technology Corporation, as amended through
November 11, 1998 (previously filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated November 19, 1998, and incorporated
herein by reference)
4.1 Specimen Certificate of Common Stock, $0.10 par value of Registrant
(previously filed as Exhibit (c)(2) to the Company's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by reference)
10.1(1) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended (previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein
by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.3(1) Storage Technology Corporation Management by Objective Bonus Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2001, filed on
May 14, 2001, and incorporated herein by reference)
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
29
10.4(1) Storage Technology Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1996, filed on August 12, 1996, and incorporated herein by
reference)
10.5(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(previously filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, filed on March
6, 1998, and incorporated herein by reference)
10.6(1) Form of Executive Officer Employment Agreement between the Company
and Each Executive Officer Named in Exhibit 10.7 hereto, dated
October 1999 (previously filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.7(1) Schedule of Differences in Terms and Conditions of Executive Officer
Employment Agreement (previously filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
10.8(1) CEO Employment Agreement, dated July 11, 2000, between the Company
and Patrick J. Martin (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2000, filed on August 11, 2000, and incorporated herein by
reference)
10.9(1,2) Severance Agreement, dated as of July 1, 2001, between the Company
and Robert S. Kocol
10.10 Amended and Restated Credit Agreement, dated as of January 13, 2000,
among the Company, Bank of America, N.A., as Administrative Agent,
Swingline Bank and Letter of Credit Issuing Bank and the other
financial institutions party thereto (previously filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed on March 10, 2000, and incorporated
herein by reference)
10.11 Security Agreement, dated as of January 13, 2000, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein (previously filed as
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.12 Waiver Agreement, dated as of April 25, 2001, among the Company, the
several financial institutions from time to time party to the Credit
Agreement, and Bank of America, N.A., as swingline bank, letter of
credit issuing bank and sole administrative agent for the Banks
(previously filed as Exhibit 10.21 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2001, filed on
May 14, 2001, and incorporated herein by reference)
10.13(2) Credit Agreement, dated as of October 10, 2001, among the Company,
the several financial institutions thereto, Bank of America, N.A., as
letter of credit issuing bank and sole administrative agent for the
Banks, Key Corporate Capital, Inc. as Documentation Agent, Fleet
National Bank as Syndication Agent, and Banc of America Securities
LLC as sole lead arranger and sole book manager
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
30
10.14(2) Security Agreement, dated as of October 10, 2001, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein
10.15(2) Guaranty, dated as of October 10, 2001, by StorageTek Holding
Corporation, in favor of the Banks party to a certain Credit
Agreement and Bank of America, N.A., as Agent and Issuing Bank and
Collateral Agent
10.16 Contingent Multicurrency Note Purchase Commitment Agreement dated as
of December 12, 1996, between the Company and Bank of America
National Trust and Savings Association (previously filed as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 27, 1996, filed on March 7, 1997, and incorporated
herein by reference)
10.17 Second Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated November 20,
1998, between Bank of America National Trust and Savings Association
and the Company (previously filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 25,
1998, filed on March 5, 1999, and incorporated herein by reference)
10.18 Third Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated August 13,
1999, between Bank of America National Trust and Savings Association
and the Company (previously filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.19 Fourth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated January 5,
2000, between the Company and Bank of America, N.A. (previously filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.20 Fifth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated August 15,
2000, between the Company and Bank of America, N.A. (previously filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
10.21 Waiver to Second Amended and Restated Multicurrency Note Purchase
Commitment Agreement, dated as of April 25, 2001, by and between the
Company and Bank of America, N.A. (previously filed as Exhibit 10.22
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 30, 2001, filed on May 14, 2001, and incorporated herein
by reference)
10.22(1) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
(previously filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporate herein by reference)
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
31
10.23(1) Offer Letter, dated February 9, 2001, from the Company to Jill F.
Kenney (previously filed as Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.24(1) Offer Letter, dated February 9, 2001, from the Company to Roger
Gaston (previously filed as Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.25(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000 (previously filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.26(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000 (previously filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.27(1) Form of LEAP Participation Agreement, dated April 30, 2001
(previously filed as Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
10.28(1,2) Offer Letter, dated July 16, 2001, from the Company to Roy Perry
10.29(1,2) Offer Letter, dated June 27, 2001, from the Company to Angel Garcia
10.30(1,2) Letter Agreement, dated July 1, 2001, between the Company and Bruce
Taafe
(b) Reports on Form 8-K.
Current Report on Form 8-K, filed on October 15, 2001, relating to an Item 5,
Other Events and Regulation FD Disclosure, regarding an announcement by the
Company that it expects to exceed the third-quarter 2001 earnings per share
expectations.
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
November 8, 2001 /s/ ROBERT S. KOCOL
------------------------ ------------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 8, 2001 /s/ THOMAS G. ARNOLD
------------------------ ------------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Principal Accounting Officer)
33
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.6 Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987 (previously filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.7 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.8 Certificate of Second Amendment dated May 28, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.9 Certificate of Third Amendment dated May 21, 1999, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 25, 1999, filed on August 9, 1999, and
incorporated herein by reference)
3.10 Restated Bylaws of Storage Technology Corporation, as amended through
November 11, 1998 (previously filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated November 19, 1998, and incorporated
herein by reference)
4.2 Specimen Certificate of Common Stock, $0.10 par value of Registrant
(previously filed as Exhibit (c)(2) to the Company's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by reference)
10.1(1) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended (previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein
by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.3(1) Storage Technology Corporation Management by Objective Bonus Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2001, filed on
May 14, 2001, and incorporated herein by reference)
10.4(1) Storage Technology Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1996, filed on August 12, 1996, and incorporated herein by
reference)
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
34
10.5(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(previously filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, filed on March
6, 1998, and incorporated herein by reference)
10.6(1) Form of Executive Officer Employment Agreement between the Company
and Each Executive Officer Named in Exhibit 10.7 hereto, dated
October 1999 (previously filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.7(1) Schedule of Differences in Terms and Conditions of Executive Officer
Employment Agreement (previously filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
10.8(1) CEO Employment Agreement, dated July 11, 2000, between the Company
and Patrick J. Martin (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2000, filed on August 11, 2000, and incorporated herein by
reference)
10.9(1,2) Severance Agreement, dated as of July 1, 2001, between the Company
and Robert S. Kocol
10.10 Amended and Restated Credit Agreement, dated as of January 13, 2000,
among the Company, Bank of America, N.A., as Administrative Agent,
Swingline Bank and Letter of Credit Issuing Bank and the other
financial institutions party thereto (previously filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed on March 10, 2000, and incorporated
herein by reference)
10.11 Security Agreement, dated as of January 13, 2000, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein (previously filed as
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.12 Waiver Agreement, dated as of April 25, 2001, among the Company, the
several financial institutions from time to time party to the Credit
Agreement, and Bank of America, N.A., as swingline bank, letter of
credit issuing bank and sole administrative agent for the Banks
(previously filed as Exhibit 10.21 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2001, filed on
May 14, 2001, and incorporated herein by reference)
10.13(2) Credit Agreement, dated as of October 10, 2001, among the Company,
the several financial institutions thereto, Bank of America, N.A., as
letter of credit issuing bank and sole administrative agent for the
Banks, Key Corporate Capital, Inc. as Documentation Agent, Fleet
National Bank as Syndication Agent, and Banc of America Securities
LLC as sole lead arranger and sole book manager
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
35
10.14(2) Security Agreement, dated as of October 10, 2001, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein
10.15(2) Guaranty, dated as of October 10, 2001, by StorageTek Holding
Corporation, in favor of the Banks party to a certain Credit
Agreement and Bank of America, N.A., as Agent and Issuing Bank and
Collateral Agent
10.16 Contingent Multicurrency Note Purchase Commitment Agreement dated as
of December 12, 1996, between the Company and Bank of America
National Trust and Savings Association (previously filed as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 27, 1996, filed on March 7, 1997, and incorporated
herein by reference)
10.17 Second Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated November 20,
1998, between Bank of America National Trust and Savings Association
and the Company (previously filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 25,
1998, filed on March 5, 1999, and incorporated herein by reference)
10.18 Third Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated August 13,
1999, between Bank of America National Trust and Savings Association
and the Company (previously filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.19 Fourth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated January 5,
2000, between the Company and Bank of America, N.A. (previously filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.20 Fifth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated August 15,
2000, between the Company and Bank of America, N.A. (previously filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
10.21 Waiver to Second Amended and Restated Multicurrency Note Purchase
Commitment Agreement, dated as of April 25, 2001, by and between the
Company and Bank of America, N.A. (previously filed as Exhibit 10.22
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 30, 2001, filed on May 14, 2001, and incorporated herein
by reference)
10.22(1) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
(previously filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporate herein by reference)
10.23(1) Offer Letter, dated February 9, 2001, from the Company to Jill F.
Kenney (previously filed as Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
36
10.24(1) Offer Letter, dated February 9, 2001, from the Company to Roger
Gaston (previously filed as Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.25(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000 (previously filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.26(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000 (previously filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.27(1) Form of LEAP Participation Agreement, dated April 30, 2001
(previously filed as Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
10.28(1,2) Offer Letter, dated July 16, 2001, from the Company to Roy Perry
10.29(1,2) Offer Letter, dated June 27, 2001, from the Company to Angel Garcia
10.30(1,2) Letter Agreement, dated July 1, 2001, between the Company and Bruce
Taafe
----------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
37