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 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to______________
___________________________
COMMISSION FILE NUMBER 1-7534
___________________________
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)
2270 South 88th Street, 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) - 53,156,316 shares outstanding at November 3,
1995.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 29, 1995
PAGE
----
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 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 6 - Exhibits and Reports on Form 8-K 30
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Form 10-Q
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In Thousands of Dollars)
09/29/95 12/30/94
--------- ---------
ASSETS
Current assets:
Cash, including cash equivalents $ 201,237 $ 228,081
Short-term investments 5,477
Accounts receivable, net 345,928 353,455
Notes and installment receivables 8,153 9,110
Net investment in sales-type leases 82,941 155,341
Inventories (Note 3) 260,729 261,705
--------- ---------
Total current assets 898,988 1,013,169
Notes and installment receivables 10,960 11,851
Net investment in sales-type leases 141,973 231,377
Equipment held for sale or lease, at cost (net) 145,258 146,320
Spare parts for field service, at cost (net) 53,468 62,421
Property, plant and equipment, at cost (net) 385,765 380,511
Deferred income tax assets, net 73,281 51,768
Other assets 219,849 247,041
--------- ---------
$1,929,542 $2,144,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease commitments $ 21,012 $ 79,407
Current portion of other long-term debt 65,511 28,396
Accounts payable and accrued liabilities 362,067 394,842
Income taxes payable 1,857 9,459
--------- ---------
Total current liabilities 450,447 512,104
8% Convertible subordinated debentures 145,645 145,645
Nonrecourse borrowings secured by lease commitments 24,923 112,073
Other long-term debt 28,769 99,169
Deferred income tax liabilities 17,562 10,182
--------- ---------
Total liabilities 667,346 879,173
--------- ---------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 40,000,000 shares
authorized; 3,450,000 shares of $3.50 Convertible
Exchangeable Preferred Stock issued at September 29,
1995 and December 30, 1994, $172,500,000 aggregate
liquidation preference 35 35
Common stock, $.10 par value, 150,000,000 shares
authorized; 52,901,768 shares issued at
September 29, 1995, and 52,517,626 shares
issued at December 30, 1994 5,290 5,252
Capital in excess of par value 1,571,406 1,562,568
Accumulated deficit (304,452) (291,356)
Treasury stock of 43,769 shares at September 29,
1995 and 35,713 shares at December 30, 1994 (777) (773)
Unearned compensation (5,194) (6,150)
Notes receivable from stockholders (4,112) (4,291)
--------- ---------
Total stockholders' equity 1,262,196 1,265,285
--------- ---------
$1,929,542 $2,144,458
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Nine Months Ended
---------------------------------------------
09/29/95 09/30/94 09/29/95 09/30/94
---------------------------------------------
Sales $291,885 $325,924 $ 927,716 $ 857,682
Service and rental revenue 147,711 143,638 442,768 431,172
------- ------- --------- ---------
Total revenue 439,596 469,562 1,370,484 1,288,854
------- ------- --------- ---------
Cost of sales 183,133 197,949 584,925 542,188
Cost of service and rental revenue 93,095 94,381 286,334 275,205
------- ------- --------- ---------
Total cost of revenue 276,228 292,330 871,259 817,393
------- ------- --------- ---------
Gross profit 163,368 177,232 499,225 471,461
Research and product development
costs 42,414 54,079 135,797 148,538
Marketing, general,
administrative and other
income and expense, net 92,793 101,381 316,294 302,806
Litigation and merger expenses
(Notes 2 and 4) 30,680 45,032
------- ------- --------- ---------
Operating profit (loss) (2,519) 21,772 2,102 20,117
Interest expense 6,662 10,510 26,975 31,004
Interest income (9,700) (12,182) (33,833) (37,323)
------- ------- --------- ---------
Income before income taxes 519 23,444 8,960 26,436
Provision for income taxes 7,500 4,800 13,000 9,100
------- ------- --------- ---------
Net income (loss) (6,981) 18,644 (4,040) 17,336
Preferred stock dividend 3,018 3,018 9,056 9,056
------- ------- --------- ---------
Income (loss) applicable to
common shares $ (9,999) $ 15,626 $ (13,096) $ 8,280
======= ======= ========= =========
Earnings (loss) per common share $ (0.19) $ 0.30 $ (0.25) $ 0.16
======= ======= ========= =========
Weighted average common shares
and equivalents 52,854 52,686 52,694 52,362
======= ======= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Nine Months Ended
-------------------------
09/29/95 09/30/94
-------------------------
OPERATING ACTIVITIES
Cash received from customers $1,550,463 $1,278,795
Cash paid to suppliers and employees (1,283,617) (1,322,185)
Interest received 42,553 45,036
Interest paid (24,908) (27,357)
Income taxes paid, net (35,400) (3,986)
--------- ---------
Net cash from (used in) operating activities 249,091 (29,697)
--------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (59,876) (90,244)
Short-term investments, net 5,530 18,714
Business acquisition, net of cash acquired (8,940)
Merger expenses (10,647) (1,592)
Other assets, net (13,506) (18,609)
--------- ---------
Net cash used in investing activities (78,499) (100,671)
--------- ---------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 3,066 130,884
Repayments of nonrecourse borrowings (145,711) (119,550)
Borrowings under revolving credit agreement 35,000
Proceeds from other debt 847 17,010
Repayments of other debt (52,630) (35,625)
Proceeds from employee stock plans 6,474 14,434
Preferred stock dividend payments (9,056) (9,056)
--------- ---------
Net cash from (used in) financing activities (197,010) 33,097
--------- ---------
Effect of exchange rate changes on cash (426) 20,028
--------- ---------
Decrease in cash and cash equivalents (26,844) (77,243)
Cash and cash equivalents - beginning
of the period 228,081 280,973
--------- ---------
Cash and cash equivalents - end of the period $ 201,237 $ 203,730
========= =========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (4,040) $ 17,336
Depreciation and amortization expense 166,222 150,072
Translation gain (4,035) (16,973)
Other adjustments to income 24,236 8,138
(Increase) decrease in accounts receivable 13,376 (39,808)
Decrease in notes receivable and sales-type
leases 166,355 35,759
(Increase) decrease in inventories 2,926 (79,819)
Increase in equipment held for sale or
lease, net (46,491) (73,844)
Increase in spare parts, net (7,046) (20,018)
Increase in net deferred income tax asset (15,873) (896)
Decrease in accounts payable and accrued
liabilities (40,012) (15,654)
Increase (decrease) in income taxes payable (6,527) 6,010
--------- ---------
Net cash from (used in) operating activities $ 249,091 $ (29,697)
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 6
<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In Thousands of Dollars)
<CAPTION>
Notes
Capital in Receivable
Preferred Common Excess of Accumulated Treasury Unearned From
Stock Stock Par Value Deficit Stock Compensation Stockholders
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<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 30, 1994,
as previously reported $35 $4,456 $1,449,240 $(372,261) $(773) $(6,150)
Pooling of interests with
Network Systems Corp. (Note 2) 796 113,328 80,905 $(4,291)
---------------------------------------------------------------------------------------
Balances, December 30, 1994,
as restated 35 5,252 1,562,568 (291,356) (773) (6,150) (4,291)
Shares issued under stock purchase
plan and for exercises of options
(403,928 shares) 40 7,761
Cash dividends paid on preferred
stock ($2.63 per share) (9,056)
Restricted stock amortization 539
Net loss (4,040)
Other (2) 1,077 (4) 417 179
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Balances, September 29, 1995 $35 $5,290 $1,571,406 $(304,452) $(777) $(5,194) $(4,112)
=======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
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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 subsidiaries (StorageTek or the Company) have been
prepared in accordance with the Securities and Exchange Commission
requirements for Form 10-Q. In the opinion of management, these statements
reflect all adjustments necessary for the fair presentation of results for
the periods presented, and such adjustments are of a normal, recurring
nature. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 30, 1994.
NOTE 2 - NETWORK SYSTEMS MERGER
- -------------------------------
On March 7, 1995, the Company issued approximately 8,000,000 shares of
StorageTek common stock in exchange for all of the outstanding common stock
of Network Systems Corporation (Network Systems). The Company also reserved
approximately 500,000 shares for issuance in connection with Network
Systems' outstanding employee stock purchase and option plans. The
transaction, which was accounted for as a pooling of interests, involved a
merger between a wholly owned subsidiary of StorageTek and Network Systems.
StorageTek's consolidated financial statements were restated for all periods
prior to the merger to include the operations of Network Systems, adjusted
to conform with StorageTek's accounting policies and presentation. In
connection with the merger, the Company assumed Network Systems' notes
receivable from shareholders ($4,291,000 as of March 7, 1995). These notes
relate to loans made by Network Systems to its officers prior to the merger
to fund the exercise price of employee stock options pursuant to a
restricted stock purchase program and are secured by the shares purchased
and any other collateral required to maintain 100% collateralization at the
time of each loan.
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Form 10-Q
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Network Systems designs, manufactures, markets and services computer
networking products worldwide. Separate pre-merger revenue and net income
of StorageTek and Network Systems, assuming the merger was consummated on
March 31, 1995, were as follows (in thousands of dollars):
Nine Months Ended
------------------------------
09/29/95 09/30/94
------------------------------
Revenue:
Pre-merger
StorageTek $ 400,013 $1,108,813
Network Systems 46,424 176,426
Merger adjustments 3,749 3,615
--------- ---------
450,186 1,288,854
Post-merger 920,298
--------- ---------
$1,370,484 $1,288,854
========= =========
Net income (loss):
Pre-merger
StorageTek $ 3,208 $ 13,325
Network Systems (15,686) 2,705
Merger adjustments 3,564 1,306
--------- ---------
(8,914) 17,336
Post-merger 4,874
--------- ---------
$ (4,040) $ 17,336
========= =========
Pre-merger net income for the nine months ended September 30, 1995, includes
merger expenses of $4,143,000 and $10,209,000 recognized by StorageTek and
Network Systems, respectively. These expenses, which aggregate $14,352,000,
consist principally of change in control payments, financial advisor fees,
legal fees, and accounting fees.
The merger adjustments relate to revenue recognition and income tax effects.
Adjustments were made to revenue and the associated costs and expenses to
reflect revenue recognition for certain Network Systems' product sales to
end-user customers at the time of customer acceptance, consistent with
StorageTek's policy, rather than at the time of shipment. Adjustments were
made to the combined tax position of StorageTek and Network Systems as if
the merger had occurred as of the beginning of the earliest period
presented.
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Form 10-Q
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NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following (in thousands of dollars):
09/29/95 12/30/94
-------------------------
Raw Materials $ 84,373 $ 51,938
Work-In-Process 100,625 105,605
Finished Goods 75,731 104,162
------- -------
$260,729 $261,705
======= =======
NOTE 4 - LITIGATION
- -------------------
In the second quarter of 1992, seven purported class actions were filed in
the U.S. District Court for the District of Colorado against the Company and
certain of its officers and directors. These actions were subsequently
consolidated into a single action, and a consolidated amended complaint was
filed on July 7, 1992, seeking an unspecified amount of damages. The
complaint alleged that the defendants failed to properly disclose the status
of development of a new product and the Company's business prospects. The
complaint further alleged that the individual defendants sold shares of the
Company's common stock based on material inside information, in violation of
federal securities and common law. The court certified a class consisting
(with certain exceptions) of those who purchased StorageTek's common stock
and related securities from December 23, 1991, to August 7, 1992. A
shareholder derivative action was also filed in the second quarter of 1992
based on substantially similar factual allegations and has been consolidated
with the class action. On July 27, 1995, the Company and the plaintiffs in
the shareholder class action and derivative litigation announced an
agreement to settle the litigation. The settlement agreement, which is
subject to approval by the U.S. District Court for the District of Colorado,
provides that the Company will pay $30,680,000 for its portion of the
settlement. The Company's insurance policies will also pay $24,320,000 as
part of the total settlement of $55,000,000. As a result of the settlement,
a one-time charge of $30,680,000 was recognized during the third quarter of
1995. A hearing date on the settlement has been set for December 1995.
In June 1993, the Company received a subpoena from the Denver Regional
Office of the Securities and Exchange Commission (the "Commission") to
produce certain documents in connection with the Commission's order for an
investigation of possible violations of federal disclosure, reporting and
insider trading requirements. The requests by the Commission relate
principally to announcements and related disclosures concerning the status
of development of a new product in 1992.
In February 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array
and Tandem to either support certain disk drives purchased from them or
provide the Company with technical data necessary for StorageTek to provide
such customer support. In March 1994, Array and
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Form 10-Q
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Tandem filed their answer and also filed counterclaims against the Company
alleging breach of contract and claiming damages. In June 1994, the court
ordered Array and Tandem to continue to provide support for these products
and to maintain, in an independent escrow account, the materials necessary
to enable the Company to support the products in the event Array and Tandem
failed to provide such services. In May 1995, the Company filed an amended
complaint seeking damages. The case is now in the discovery phase. A trial
date has been set for November 1996.
In January 1994, Stuff Technology Partners II, a Colorado Limited
Partnership (Stuff), filed suit in Boulder County, Colorado, District Court
against the Company and certain subsidiaries. The suit alleges that the
Company breached a 1990 settlement agreement that had resolved earlier
litigation between the parties. The suit seeks injunctive relief and
damages in the amount of $2,400,000,000. The Company has filed a motion to
dismiss the complaint, as well as an alternative motion to bifurcate certain
of the claims. In July 1994, the court partially granted the Company's
motion to dismiss, dismissing claims based on facts or conduct occurring
before the 1990 settlement of the previous litigation. In June 1995, the
court dismissed the majority of Stuff's remaining claims. The court has
permitted limited discovery on Stuff's remaining claims that the Company is
improperly using Stuff's technology to design optical disk products or
optical media. The Company has filed a motion for summary judgment on the
remaining claims. No trial date has been established.
In September 1994, EMC Corporation filed suit in U.S. District Court in
Wilmington, Delaware, alleging infringement of a patent pertaining to disk
storage technology. The complaint seeks an injunction, treble damages in an
unspecified amount and an award of attorney fees and costs. The Company has
filed an answer. The Company also has filed a counterclaim for infringement
of one of its patents. The case is now in the discovery phase. A trial
date has been set for March 1996.
In June 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging infringement of a patent pertaining to the
tape cartridge interchange feature of certain of the Company's products.
The complaint seeks an injunction, treble damages in an unspecified amount
and an award of attorney fees and costs. The Company has filed an answer
and counterclaim alleging, among other things, infringement of three of its
patents. The case is now in the discovery phase. A trial date has been set
for January 1996.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. There can be no guarantee, however, that these cases
will result in outcomes favorable to the Company. In the event of an
adverse outcome, the Company currently believes that the amount of the
ultimate potential loss would not be material to the Company's financial
position, but could have a material effect on the Company's reported results
of operations in a particular quarter.
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Form 10-Q
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NOTE 5 - INCOME TAXES
- ---------------------
In May 1995, the Company entered into a settlement agreement with the
Internal Revenue Service with respect to proposed adjustments of
approximately $400,000,000 to the Company's federal income tax returns for
the years 1985 through 1990. As a result of the settlement, substantially
all of the proposed adjustments have been resolved and the Company's U.S.
net operating loss carryforwards will be reduced to approximately
$220,000,000 from approximately $400,000,000. The settlement did not have a
material effect on the Company's financial position or results of
operations.
NOTE 6 - MIDRANGE LEASE ASSET AND SERVICE BUSINESS SALES
- --------------------------------------------------------
On June 30, 1995, the Company completed the sale of substantially all of its
midrange lease assets to AT&T Systems Leasing Corporation. During the
second quarter, the Company also announced plans to fully integrate
StorageTek Distributed Systems Division, Inc., the Company's wholly owned
midrange subsidiary, into StorageTek. The gain associated with the lease
asset sale was largely offset by transaction and integration costs.
On September 27, 1995, the Company completed the sale of its IBM AS/400 and
Systems 3X midrange service business to Decision Servcom, Inc. A gain of
approximately $8,800,000 was recognized in the third quarter of 1995 in
connection with this transaction and has been included within marketing,
general, administrative and other income and expense on the Consolidated
Statement of Operations. The sale of the midrange lease assets and service
business generated cash of approximately $193,000,000 during the nine months
of 1995 and has been included with operating activities on the Consolidated
Statement of Cash Flows. The majority of this cash was utilized for
repayments of borrowings associated with the assets.
NOTE 7 - SUBSEQUENT EVENTS
- --------------------------
RESTRUCTURING
On October 11, 1995, the Company announced that it is evaluating significant
changes to its business operations and cost structure in an effort to
improve profitability. The Company is currently identifying opportunities
to eliminate non-essential product development programs, eliminate
overlapping activities, consolidate functions and facilities, and flatten
the organizational structure. The Company anticipates it will finalize and
begin implementation of its restructuring plan during the fourth quarter of
1995. The Company expects that it will incur significant restructuring
charges during the fourth quarter of 1995, including charges associated with
additional reductions in the workforce. As a result, the Company
anticipates it will report a net loss for the fourth quarter and full year
of 1995.
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Form 10-Q
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PREFERRED STOCK EXCHANGE
On November 13, 1995, the Company announced that on December 15, 1995, it
will exercise its right to exchange 7% Convertible Subordinated Debentures
due 2008 (7% Convertible Debentures) for all of its outstanding shares of
$3.50 Convertible Exchangeable Preferred Stock, $.01 par value (Preferred
Stock). The Preferred Stock will be exchanged at a rate of $50 principal
amount of 7% Convertible Debentures for each share of Preferred Stock.
Based upon the number of issued and outstanding shares of Preferred Stock as
of November 13, 1995, the exchange will result in the Company issuing 7%
Convertible Debentures in the principal amount of $172,500,000. Dividends
on the Preferred Stock will cease to accrue as of December 15, 1995, and the
Company will begin making interest payments on the 7% Convertible Debentures
payable in equal amounts semiannually on March 15 and September 15. The
Company is required to make annual payments into a sinking fund beginning
March 15, 2003, in the amount of $17,250,000 to provide for the retirement
of 50% of the 7% Convertible Debentures prior to their maturity on March 15,
2008. The 7% Convertible Debentures contain conversion and optional
redemption provisions substantially identical to those of the Preferred
Stock.
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Form 10-Q
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 29, 1995
GENERAL
- -------
Storage Technology Corporation (StorageTek or the Company) reported a net
loss for the third quarter ended September 29, 1995, of $7.0 million on
revenue of $439.6 million, compared to net income for the third quarter
ended September 30, 1994, of $18.6 million on revenue of $469.6 million. A
net loss of $4.0 million was reported for the nine months of 1995 on revenue
of $1.37 billion, compared to net income of $17.3 million for the nine
months of 1994 on revenue of $1.29 billion. The Company's results for the
third quarter and nine months of 1995 include one-time charges of $30.7
million and $45.0 million, respectively, associated with litigation and
merger expenses.
As more fully discussed in Note 2 to the consolidated financial statements,
the Company, through a wholly owned subsidiary, completed a merger with
Network Systems Corporation (Network Systems) on March 7, 1995. The merger
was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements were restated for all periods prior to the
merger to include the operations of Network Systems, adjusted to conform
with StorageTek's accounting policies and presentation.
Revenue decreased 6% during the third quarter of 1995, but increased 6%
during the nine months of 1995, as compared to the same periods in 1994.
The decrease in revenue during the third quarter resulted principally from
reduced midrange revenue as a result of the sale of substantially all of the
Company's midrange lease assets in the second quarter of 1995. As
anticipated, revenue from older generation products, including the 4480 18-
track tape cartridge subsystem, Silverton 4490 36-track tape cartridge
subsystem, and 4410 automated cartridge system (ACS) library, decreased
during the quarter. Revenue contribution from networking products also
decreased slightly during the third quarter of 1995, compared to the same
period in 1994, as the Company transitions to a new line of networking
products. During the quarter, the Company received incremental sales
revenue and operating profit contributions from the TimberLine 9490
(TimberLine), a 36-track tape cartridge subsystem, as compared to the third
quarter of 1994. While revenue from the Company's Iceberg 9200 Virtual
Storage Facility (Iceberg) increased during the third quarter, the rate of
growth fell short of the Company's expectations primarily due to continued
price competition in the direct access storage device (DASD) marketplace, as
well as slower than expected customer acceptance during the quarter. The
increase in revenue during the nine months of 1995, compared to the same
period in 1994, is primarily a result of incremental sales revenue from
TimberLine and Iceberg.
The Company announced on October 11, 1995, that it is evaluating significant
changes to its business operations and cost structure in an effort to
improve profitability. The Company expects to incur significant charges
during the fourth quarter of 1995 in
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Form 10-Q
Page 14
connection with its restructuring plan. As a result, the Company
anticipates it will report a net loss during the fourth quarter and full
year of 1995. On November 13, 1995, the Company announced that on December
15, 1995, it will exercise its right to exchange 7% Convertible Subordinated
Debentures due 2008 for all of its outstanding shares of $3.50 Convertible
Exchangeable Preferred Stock, $.01 par value. See Note 7 to the
consolidated financial statements and "RECENT DEVELOPMENTS," below, for
further discussion of these matters.
The Company's future revenue and operating results are significantly
dependent upon gaining further market acceptance for existing products, and
reducing the cost of manufacturing these products in order to offset price
declines, principally in the DASD marketplace. The Company's reported
operating results may also be affected by the financial results of Network
Systems, which was acquired in March 1995. Network Systems' financial
results, together with merger and integration expenses, are expected to be
dilutive to the Company's reported operating results at least through 1995.
Other factors that may affect future results include the introduction of new
products by competitors, technological advances within the computer
industry, and changes in the worldwide economy, among others. See "OTHER
FACTORS THAT MAY AFFECT FUTURE RESULTS," below.
The Company's cash balances decreased $26.8 million during the nine months
of 1995 as net repayments of debt, and investments in property, plant and
equipment, were partially offset by cash generated from operations.
The following table, stated as a percentage of total revenue, presents
consolidated statement of operations information and revenue by product line
which includes product sales, service and rental, and software revenue.
Quarter Ended Nine Months Ended
----------------------------------------
09/29/95 09/30/94 09/29/95 09/30/94
----------------------------------------
Revenue:
Serial Access Subsystems 62.8% 55.7% 60.2% 56.0%
Random Access Subsystems 19.5 15.0 19.0 10.3
Networking Products 12.0 12.4 11.5 14.1
Midrange Subsystems and Other 5.7 16.9 9.3 19.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 62.8 62.3 63.6 63.4
----- ----- ----- -----
Gross profit 37.2 37.7 36.4 36.6
Research and product
development costs 9.7 11.5 9.9 11.5
Marketing, general,
administrative and other
income and expense, net 21.1 21.6 23.1 23.5
Litigation and merger expenses 7.0 3.2
----- ----- ----- -----
Operating profit (loss) (0.6) 4.6 0.2 1.6
Interest (income) expense, net (0.7) (0.4) (0.5) (0.5)
----- ----- ----- -----
Income before income taxes 0.1 5.0 0.7 2.1
Provision for income taxes 1.7 1.0 1.0 0.8
----- ----- ----- -----
Net income (loss) (1.6)% 4.0% (0.3)% 1.3%
===== ===== ===== =====
<PAGE>
<PAGE>
Form 10-Q
Page 15
REVENUE
- -------
SERIAL ACCESS SUBSYSTEMS
Revenue from serial access subsystem products increased 5% and 14% in the
third quarter and nine months of 1995, respectively, compared to the same
periods of 1994, primarily due to incremental sales of the TimberLine 36-
track tape cartridge subsystem, which became available in the fourth quarter
of 1994. As anticipated, sales of the 4480 18-track and Silverton 4490 36-
track tape cartridge subsystems, which represent earlier generation tape
subsystems, declined in the third quarter and nine months of 1995, compared
to the same periods in 1994. Revenue from the PowderHorn 9310, an automated
cartridge system (ACS) library, decreased slightly during the third quarter,
but increased during the nine months of 1995, compared to the same periods
in 1994. Revenue from the first generation 4400 ACS library decreased in
each of these periods.
Incremental sales associated with TimberLine and the RedWood SD-3 (RedWood),
a helical tape cartridge subsystem, which became available in the first
quarter of 1995, are expected to offset future declines in revenue from
earlier generation tape and library products. RedWood currently provides
Small Computer System Interface (SCSI) support for the IBM RS/6000 and Sun
workstation environments. SCSI support for RedWood in other operating
environments is currently in the prototype testing phase. Future revenue
contribution from RedWood is significantly dependent upon the Company's
ability to deliver a version of the product which allows for the use of
higher capacity tape cartridges. The Company does not expect any
significant revenue contribution from RedWood until 1996.
RANDOM ACCESS SUBSYSTEMS
Revenue from random access subsystem products increased 22% and 95% in the
third quarter and nine months of 1995, respectively, compared to the same
periods of 1994, due to incremental sales of Iceberg, which became available
during the second quarter of 1994. While Iceberg sales revenue increased
during the third quarter, the rate of revenue growth fell short of the
Company's expectations primarily due to the continuation of price
competition in the DASD marketplace, as well as, slower than expected
customer acceptance during the quarter. During the third quarter of 1995,
the Company announced the availability of a new disk array product, the
Kodiak 9890 Scalable Storage Facility (Kodiak). The Company does not expect
any significant revenue contribution from Kodiak until 1996.
Future revenue contribution from random access products is significantly
dependent upon continued market acceptance of Iceberg and gaining initial
market acceptance for Kodiak in the highly competitive DASD marketplace.
The Company is committing substantial resources to develop additional
functions and features for both Iceberg and Kodiak. While the Company
believes the introduction schedules for these additional functions and
features are achievable; there can be no assurances that the schedules
<PAGE>
<PAGE>
Form 10-Q
Page 16
will be met, or that these functions and features will result in additional
market acceptance for Iceberg and Kodiak.
NETWORKING PRODUCTS
Revenue from networking products decreased 10% and 13% in the third quarter
and nine months of 1995, respectively, compared to the same periods of 1994.
These decreases reflect anticipated declines in older mainframe channel
extension networking products, coupled with slower than expected market
acceptance of the Enterprise Routing Switch (ERS) and other new
internetworking products which support communication between networks. ERS,
which became available during the second quarter of 1995, is designed to
combine local-area network and wide-area network routing and switching
technology. ERS currently supports Ethernet, FDDI, and Frame Relay.
Asynchronous Transfer Mode (ATM) support for ERS is currently under
development.
The Company announced in July 1995 that it had accelerated plans to
integrate Network Systems at all levels within the Company's operations.
The Company incurred costs of approximately $1.8 million during the third
quarter of 1995 associated with the integration of Network Systems.
Future revenue and operating results from the Company's networking products
are significantly dependent upon the timely introduction of ATM support for
ERS, gaining market acceptance of the Company's other new internetworking
products, and the successful integration of Network Systems. The timely
introduction of ATM support for ERS is dependent upon the success of the
Company's joint development program with Northern Telecom Limited (NORTEL).
There can be no assurances that these products will be introduced on a
timely basis or that they will gain acceptance in this rapidly evolving and
highly competitive marketplace.
MIDRANGE SUBSYSTEMS AND OTHER
Revenue from midrange subsystems and other products decreased 68% and 49% in
the third quarter and nine months of 1995, respectively, compared to the
same periods of 1994. These declines resulted primarily from the sale of
substantially all of the Company's midrange lease assets to AT&T Systems
Leasing Corporation during the second quarter of 1995. No material gain or
loss resulted from the sale of the midrange lease assets during the second
quarter as the gain on the lease asset sale was largely offset by
transaction and integration costs. During the third quarter, the Company
sold its IBM AS/400 and Systems 3X midrange service business to Decision
Servcom, Inc. A gain of approximately $8.8 million was recognized during
the third quarter of 1995 in connection with the sale of this service
business. As a result of the midrange lease asset and service business
sales, revenue from the midrange product line is expected to be
significantly reduced in future periods.
<PAGE>
<PAGE>
Form 10-Q
Page 17
GROSS PROFIT
- ------------
Overall gross profit decreased to 37% for the third quarter of 1995,
compared to 38% for the third quarter of 1994, due primarily to a decrease
in product sales margins. Overall gross profit decreased to 36% for the
nine months of 1995 compared to 37% for the same period of 1994, due
primarily to a decrease in service and rental margins.
Gross profit on product sales decreased to 37% in the third quarter of 1995,
compared to 39% in the third quarter of 1994. Gross profit on product sales
of 37% for the nine months of 1995 was unchanged, compared to the nine
months of 1994. Gross profit was reduced by the continuation of price
declines in the DASD marketplace, as well as decreased margin contribution
from the networking product line. These declines were partially offset by
reduced sales revenue contribution from lower margin midrange products as a
result of the midrange lease asset sale in the second quarter of 1995.
Gross profit on service and rental revenue increased to 37% for the third
quarter, compared to 34% for the third quarter of 1994, primarily due to
benefits realized from cost-control measures. Gross profit on service and
rental revenue decreased to 35% for the nine months of 1995, compared to 36%
for the nine months of 1994, primarily due to the discontinuance of
austerity measures which were in effect during the first half of 1994 and
longer product warranty periods.
The Company's ability to sustain product sales margins in the future is
significantly dependent upon achieving cost savings associated with the
manufacture of its products to offset the effects of continued price
competition, particularly in the DASD marketplace. Product sales margins
also may be adversely affected by inventory writedowns as a result of more
rapid than anticipated technological changes. Service margins also may be
affected in the future due to increased price competition and longer
warranty periods associated with the Company's newer products.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures decreased 22% and 9% in the
third quarter and nine months of 1995 compared to the same periods of 1994,
and declined as a percentage of revenue from 11.5% for the third quarter and
nine months of 1994, to 9.7% and 9.9% for the third quarter and nine months
of 1995, respectively. While the Company continues to invest in the
development of new products and enhancements to existing products, these
decreases reflect the completion of several major product development
programs and the implementation of cost-control measures in order to attain
targeted expense ratios.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- ---------------------------------------------
Marketing, general, administrative and other income and expense (MG&A)
decreased 8% in the third quarter of 1995, compared to the third quarter of
1994, primarily due to a one-time gain of $8.8 million realized on the sale
of the IBM AS/400 and System 3X midrange service business. MG&A increased
4% in the nine months of 1995,
<PAGE>
<PAGE>
Form 10-Q
Page 18
compared to the same period of 1994, as an increase in operating expenses
resulting from higher sales volumes, as well as costs associated with
workforce reductions, more than offset the gain associated with the midrange
service business. MG&A for the nine months of 1994 also benefited from cost
savings associated with austerity measures which were discontinued at the
end of the second quarter of 1994.
Gains and losses associated with foreign currency transactions and
translation adjustments were largely offset by the associated foreign
currency hedging results from the third quarter and nine months of 1995 and
1994. See "INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES," below, for
further discussion of the foreign exchange risks associated with the
Company's international operations and the related foreign currency hedging
activities.
LITIGATION SETTLEMENT
- ---------------------
As more fully discussed in Note 4 to the consolidated financial statements
and Part II, the Company and the plaintiffs in a shareholder class action
and derivative litigation announced on July 27, 1995, an agreement to settle
the litigation. The settlement agreement, which is subject to approval by
the U.S. District Court for the District of Colorado, provides that the
Company will pay $30.7 million for its portion of the total settlement. As
a result of the settlement, a one-time charge of $30.7 million was
recognized during the third quarter of 1995.
MERGER EXPENSES
- ---------------
As more fully discussed in Note 2 to the consolidated financial statements,
the Company, through a wholly owned subsidiary, completed a merger with
Network Systems on March 7, 1995. The merger was accounted for as a pooling
of interests and, accordingly, the consolidated financial statements have
been restated for all periods prior to the merger to include the operations
of Network Systems, adjusted to conform with StorageTek's accounting
policies and presentation. Merger expenses of $14.4 million were recognized
in the first quarter of 1995 in connection with the transaction.
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income decreased 20% and 9% in the third quarter and nine months of
1995, respectively, compared to the same periods of 1994, primarily due to a
reduction in the Company's net investment in sales-type lease balances.
Interest expense decreased 37% and 13% in the third quarter and nine months
of 1995 compared to the periods of 1994, primarily as a result of reduced
levels of nonrecourse borrowings.
The significant decreases in interest income and interest expense during the
third quarter of 1995 reflect the sale of the Company's midrange lease
assets and the repayment of the associated lease borrowings during the
second quarter of 1995.
<PAGE>
<PAGE>
Form 10-Q
Page 19
INCOME TAXES
- ------------
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. The Company evaluates a variety of factors
in determining the amount of the deferred income tax assets to be recognized
pursuant to SFAS No. 109, including the number of years the Company's
operating loss and tax credits can be carried forward, the existence of
taxable temporary differences, the Company's earnings history, the Company's
near-term earnings expectations and possible reductions in the Company's net
operating loss carryforwards as a result of proposed adjustments by the
Internal Revenue Service to the Company's previously filed federal income
tax returns. Based on the currently available information, management has
determined that the Company will more likely than not realize $73.3 million
of deferred income tax assets as of September 29, 1995. See Note 5 to the
consolidated financial statements for a discussion of the settlement
agreements with the Internal Revenue Service with respect to proposed
adjustments to the Company's federal income tax returns for the years 1985
through 1990.
The Company's provision for income taxes relates primarily to taxes
associated with its operations in Puerto Rico and certain foreign countries,
as well as U.S. state income taxes. The Company's effective tax rate can be
subject to significant fluctuations due to dynamics associated with the mix
of its U.S. and international taxable earnings.
RESTRUCTURINGS
- --------------
StorageTek and Network Systems recorded restructuring, acquisition, and
acquired research and development costs which aggregated $8.0 million and
$90.4 million during 1994 and 1993, respectively. No additional charges or
material changes in estimates to prior provisions were recorded during the
nine months of 1995. The remaining restructuring accrual of $12.4 million
as of December 31, 1994, was reduced by cash payments of $5.8 million during
the nine months of 1995, leaving a remaining restructuring accrual of $6.6
million as of September 29, 1995. The remaining accrual consists primarily
of anticipated future payments associated with excess lease space.
As further discussed in Note 7 to the consolidated financial statements and
under the caption "RECENT DEVELOPMENTS," below, the Company announced on
October 11, 1995, that it is evaluating significant changes to its business
operations and cost structure in an effort to improve profitability. The
Company expects to incur significant charges during the fourth quarter of
1995 in connection with its restructuring plan.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balances decreased $26.8 million from December 30, 1994,
to September 29, 1995. The decrease in cash during the nine months of 1995
primarily
<PAGE>
<PAGE>
Form 10-Q
Page 20
resulted from net repayments of debt of $194.4 million; and investments in
property, plant and equipment of $59.9 million. These cash outlays were
partially offset by cash generated from operations. Net cash provided by
operations was $249.1 million for the nine months of 1995 compared to net
cash used in operations of $29.7 million for the nine months of 1994. Net
cash provided by operations for the nine months of 1995 includes cash
generated from the sale of midrange lease assets and service business of
approximately $193 million, as well as a one-time payment associated
with the settlement of shareholder litigation of approximately $30.7 million.
The net repayments of debt for the nine months of 1995 of $194.4 million
resulted principally from the repayment of borrowings associated with
midrange lease assets during the second quarter.
The current ratio of 2.0 as of September 29, 1995, was largely unchanged
from December 30, 1994. Accounts receivable decreased from $353.5 million
as of December 30, 1994, to $345.9 million as of September 29, 1995, due
primarily to lower revenue in the third quarter of 1995 compared to the
fourth quarter of 1994. Inventories as of September 29, 1995, of $260.7
million were largely unchanged from the balance held as of December 30,
1994, of $261.7 million.
AVAILABLE FINANCING LINES
The Company has a $200 million secured multicurrency credit agreement with a
group of U.S. and international banks (the Revolver) which expires in March
1996. The interest rates available under the Revolver depend on the type of
advance selected; however, the primary advance rate is the agent bank's
prime lending rate (8.75% as of September 29, 1995). The total amount
available under the Revolver is limited to a monthly borrowing base
determined as a percentage of the Company's eligible accounts receivable,
lease assets (primarily net investments in sales-type leases not previously
utilized for other secured borrowings), and equipment awaiting revenue
recognition. To obtain funds under the Revolver, the Company is required to
comply with certain financial and other covenants, including restrictions on
the payment of cash dividends on its common stock. As of September 29,
1995, the Company had no outstanding advances under the Revolver and had
approximately $139 million of available credit under the Revolver.
In addition to the Revolver, the Company had lease assets in excess of $73
million available for financing as of September 29, 1995. If required, the
Company can utilize existing lease discounting lines and believes it can
develop additional lease discounting lines to finance these lease assets.
In order to sustain desired levels of cash balances, the Company may from
time-to-time borrow against its Revolver. The Company believes it has
adequate working capital and financing capabilities to meet its anticipated
operating and capital requirements for the next 12 months, including new
product offerings. The Company intends to continue to commit substantial
amounts of its resources to research and development projects and may, from
time to time, as market and business conditions warrant, invest in or
acquire complementary businesses, products or technologies. The Company may
seek
<PAGE>
<PAGE>
Form 10-Q
Page 21
to fund these activities or possible transactions through the issuance of
additional equity or debt. The issuance of equity or convertible debt
securities could result in dilution to the Company's stockholders. There
can be no assurance that additional financing, if required, can be completed
on terms acceptable to the Company.
LONG-TERM DEBT-TO-EQUITY
The Company's long-term debt-to-equity ratio decreased from 28% as of
December 30, 1994, to 16% as of September 29, 1995. These debt-to-equity
ratios include $112.1 million and $24.9 million, respectively, of long-term
nonrecourse borrowings secured by customer lease commitments included within
total assets (primarily net investment in sales-type leases). The
significant decrease in the long-term debt-to-equity ratio during the nine
months of 1995 reflects the repayment of nonrecourse borrowings associated
with midrange lease assets, and the reclassification to current liabilities
of the Company's 9.53% Senior Secured Notes, in the aggregate principal
amount of $55 million, which are payable on August 31, 1996. Excluding long-
term nonrecourse borrowings, the Company's long-term debt-to-equity ratio
decreased from 19% as of December 30, 1994, to 14% as of September 29, 1995.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
Pursuant to the indenture related to the Company's 8% Convertible
Subordinated Debentures due 2015 (8% Convertible Debentures), the Company is
required to make semiannual interest payments on the $145.6 million
principal amount of 8% Convertible Debentures outstanding. The 8%
Convertible Debentures are convertible at the option of the holder into
common stock at a price of $35.25 per share. The 8% Convertible Debentures
are currently redeemable at the option of the Company at a premium of 4.0%,
and are redeemable at decreasing premiums through May 30, 2000 and
thereafter at 100% of the principal amount. The Company is required to make
annual payments into a sinking fund beginning May 31, 2000, in the amount of
$8 million to provide for the retirement of 75% of the 8% Convertible
Debentures prior to their maturity on May 31, 2015. 8% Convertible
Debentures purchased by the Company in the open market and 8% Convertible
Debentures converted to common stock may be applied to the sinking fund
requirements. As of September 29, 1995, the Company held 8% Convertible
Debentures in the principal amount of $14.3 million available for sinking
fund payments.
In connection with the Company's 9.53% Senior Secured Notes due August 31,
1996 (the Notes), the Company is required to make semiannual interest
payments on the $55 million principal amount outstanding. All principal
amounts are due and payable on August 31, 1996. Upon repayment of the
Notes, approximately $60 million of additional lease assets which currently
secure the Notes will become available for financing. The Notes are
redeemable at the option of the Company, in whole or in part, from time to
time, at a premium which is determined based on current interest rates and
the time remaining until maturity.
<PAGE>
<PAGE>
Form 10-Q
Page 22
The Company's $3.50 Convertible Exchangeable Preferred Stock, $.01 par value
(Preferred Stock) provides for cumulative dividends payable quarterly in
arrears at an annual rate of $3.50 per share, when and as declared by the
Company's board of directors. Annual dividends associated with the
Preferred Stock aggregate $12.1 million. The Notes contain restrictions
that limit the payment of dividends on the Company's Preferred Stock;
however, these restrictions are not expected to limit the ability of the
Company to pay dividends on its Preferred Stock.
The Preferred Stock is convertible at any time at the option of the holder,
unless previously redeemed, into shares of StorageTek common stock at an
initial conversion rate of 2.128 shares of common stock for each share of
Preferred Stock (equivalent to a conversion price of $23.50 per share of
common stock). The Preferred Stock is redeemable for cash at any time on
and after March 15, 1996, in whole or in part, at the option of the Company,
initially at a redemption price of $52.45 per share, and thereafter at
prices decreasing ratably annually to $50.00 per share on and after March
15, 2003, plus accrued and unpaid dividends.
The Preferred Stock is also exchangeable, in whole but not in part, at the
option of the Company on any dividend payment date, for 7% Convertible
Subordinated Debentures due 2008 at the rate of $50.00 principal amount of
debentures for each share of Preferred Stock. As further discussed in Note
7 to the consolidated financial statements and under the caption "RECENT
DEVELOPMENTS," below, on November 13, 1995, the Company announced that on
December 15, 1995, it will exercise its right to exchange 7% Convertible
Subordinated Debentures for all outstanding shares of its Preferred Stock.
The debentures, when issued, will contain conversion and optional redemption
provisions substantially identical to those of the Preferred Stock, and will
be subject to a mandatory sinking fund.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
During 1994, approximately 39% of the Company's revenue was generated by its
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, the United
Kingdom and Italy; Scandinavia; 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 operations and financial results can be materially affected by
changes in foreign currency exchange rates.
In an attempt to mitigate the impact of foreign currency fluctuations, the
Company employs a hedging program which utilizes foreign currency options
and forward exchange contracts. The Company utilizes foreign currency
options, generally with maturities of less than one year, to hedge its
exposure to exchange-rate fluctuations in connection with anticipated
revenue from its international operations. Gains and losses on the options
are deferred and recognized as an adjustment to the hedged revenue. The
Company also utilizes forward exchange contracts, generally with maturities
of less than two months, to hedge its exposure to exchange-rate fluctuations
in connection with
<PAGE>
<PAGE>
Form 10-Q
Page 23
net monetary assets held in foreign currencies. The forward contracts are
marked-to-market each month with any gains or losses recognized within MG&A
as an adjustment to the foreign exchange gains and losses on the translation
of net monetary assets. See "OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS -
INTERNATIONAL OPERATIONS," below, for further discussion of other factors
which may affect the Company's international operations.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------------
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The Company believes that the successful and timely development and shipment
of its new products will play a key role in determining its results of
operations and competitive strength in the future. During the past several
years, the Company has introduced many new products and product
enhancements, and has plans to introduce new key products and additional
enhancements to existing products. These products include networking
products being developed by the Company's subsidiary, Network Systems.
There can be no assurance that the Company will successfully develop,
manufacture or market these products. Delays in the availability of new
products and enhancements to existing products could adversely affect the
Company's financial results.
The market for the Company's products is characterized by rapid
technological advances which necessitate frequent product introductions and
enhancements, and can result in unpredictable product transitions and
shortened product life cycles. To be successful in this market, the Company
must make significant investments in research and product development and
introduce competitive new products and enhancements to existing products on
a timely basis. These factors can reduce the effective life of product-line-
specific assets, a problem that has been experienced in the midrange line of
products and have resulted in inventory writedowns. There can be no
assurance that new products developed by the Company will be accepted in the
marketplace. Moreover, certain components of the Company's products operate
near the present limits of electronic and physical capabilities of
performance and are designed and manufactured with relatively small
tolerances. If flaws in design or production occur, the Company may
experience a rate of failure in its products that results in substantial
costs for the repair or replacement of defective products and potential
damage to the Company's reputation.
DEPENDENCE ON IBM SYSTEMS; COMPETITION; PRICING PRESSURES
The Company competes with several large, multinational companies having
substantially greater resources than the Company's, principally IBM and
Hitachi Ltd., as well as other companies, including EMC Corporation.
Industry estimates show the industry's high-end DASD manufacturing
capacity and total projected output are greater than anticipated demand for
the remainder of 1995 and 1996. This over-capacity has resulted in downward
pressure on pricing, and is expected to continue into 1996. Because of the
significance of the IBM mainframe and midrange operating environments, many
of the Company's products are designed to be compatible with certain IBM
operating systems and many of its products function like IBM equipment. As
a result, the Company's
<PAGE>
<PAGE>
Form 10-Q
Page 24
business in the past has been, and in the future may be, adversely affected
by a number of factors outside the control of the Company, including, among
others, modifications in the design or configuration of IBM computer
systems; the inability to access required interface information; the
announcement and introduction of new products by competitors; changes in
customer requirements; and price competition for comparable systems,
equipment or services.
Future sales levels are also dependent upon the Company's ability to
successfully address the migration to networked computing with networking
products being developed by Network Systems. Significant competitors in
this marketplace include Bay Networks, Inc., Cabletron Systems, Inc., Cisco
Systems, Inc. and Computer Network Technology Corporation. The timely
development of a new line of internetworking products and successful
integration of Network Systems are key to the Company's ability to compete
in the networking marketplace.
The Company's ability to sustain or increase sales levels depends to a
significant extent upon continued demand for existing products, and
acceptance of new products and enhancements to existing products planned for
introduction in the future. There can be no assurance that the Company's
current product offerings, products and enhancements in development, or
products in the early stages of market introduction will achieve or sustain
market acceptance, or that they will be able to successfully compete against
other companies' products. Also, the Company's service business may be
adversely affected in the future by aggressive pricing and litigation
strategies utilized by competitors in an effort to gain market share, as
well as the current trend toward granting extended warranties.
MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS
The Company's manufacturing processes have increased in complexity as the
number and diversity of products offered to customers has increased. The
manufacturing process for many of the Company's products is highly complex
and precise. Unexpected difficulties in the manufacturing process can cause
component parts, or systems to be rejected. Many of these difficulties are
hard to diagnose and expensive to remedy.
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. However, the
Company purchases certain important components and products from single
suppliers that the Company believes are currently the only manufacturers of
the particular components that meet the Company's qualification requirements
and other specifications. In addition, the Company manufactures some key
components, or its products include components, for which alternative
sources of supply are not readily available. In the past, certain suppliers
have experienced occasional technical, financial or other problems that have
delayed deliveries to the Company, without significant effect on it. An
unanticipated failure of any sole-source supplier to meet the Company's
requirements for an extended period, or an interruption of the Company's
ability to secure comparable components, could have a material adverse
effect on its revenue and results of operations. In the event a sole-
<PAGE>
<PAGE>
Form 10-Q
Page 25
source supplier was unable or unwilling to continue to supply components,
the Company would have 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 the Company's production requirements on a timely basis.
EARNINGS FLUCTUATIONS
The Company's reported earnings can fluctuate significantly from quarter to
quarter due to a variety of factors, including among others, the effects of
(i) customers' historical tendencies to make purchase decisions near the end
of the calendar year, (ii) the timing of the announcement and availability
of products and product enhancements by the Company and its competitors,
(iii) fluctuating foreign currency exchange rates, (iv) longer than
anticipated customer acceptance periods for the Company's products, and (v)
changes in the mix of products sold. The Company's reported operating
results may also be affected by the financial results of Network Systems,
which was acquired in March 1995. Network Systems' financial results,
together with merger and integration expenses, are expected to be dilutive
to the Company's reported operating results at least through 1995.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has fluctuated substantially
in the past in response to reported earnings, industry conditions, new
product or product development announcements by the Company or its
competitors, announced acquisitions and joint ventures by the Company or its
competitors, general market and economic conditions, international currency
fluctuations and other events or factors. Further, the volatility of the
stock markets in recent years has caused wide fluctuations in trading prices
of stocks of high technology companies independent of their individual
operating results. The market value of the Company's common stock may at
any given time in the future be adversely affected by these and other
factors.
INTELLECTUAL PROPERTY
The Company's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its intellectual property
rights through a combination of patents, trademarks, copyrights,
confidentiality procedures, trade secret laws and licensing arrangements.
The Company's policy is to apply for patents, or other appropriate
proprietary or statutory protection when it develops new or improved
technology that is important to its business. Such protection, however, may
not preclude competitors from developing products similar to the Company's
products. In addition, competitors attempt to restrict the Company's
ability to compete by advancing various intellectual property law theories
which could, if enforced by the courts, restrict the Company's ability to
develop and manufacture interoperable products. Also, the laws of certain
foreign countries do not protect the Company's intellectual property rights
to the same extent as the laws of the United States. The Company also
relies on certain technology that is licensed from others. The Company's
intellectual property rights are
<PAGE>
<PAGE>
Form 10-Q
Page 26
material to the Company's business. The failure to successfully protect its
intellectual property rights could have a material adverse effect on the
Company's business, financial condition and operating results.
The high technology industry is characterized by vigorous pursuit and
protection of intellectual property rights or positions, which in some
instances has resulted in significant litigation, which is often protracted
and expensive. Litigation by or against the Company could result in
significant expense and divert the efforts of the Company's technical and
management personnel, whether or not such litigation results in an
unfavorable determination against the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurances that the Company would be
successful in such development or that such license would be available on
reasonable terms, or at all, and any such development or license could
require expenditures by the Company of substantial time and other resources.
The Company from time to time has commenced actions against other companies
to protect or enforce its intellectual property rights. Similarly, the
Company from time to time has been notified that it may be infringing
certain patent or other intellectual property rights of others. Currently,
the Company is involved in several proceedings relating to its intellectual
property and patent infringement. See Part II, Item 1, "Legal Proceedings"
and Note 4 to the consolidated financial statements for additional
information with respect to the Company's legal proceedings.
INTERNATIONAL OPERATIONS
During 1994, approximately 39% of the Company's revenue was derived from
sales in markets outside of the United States, primarily in Europe. The
Company expects that international sales will continue to account for a
significant portion of its revenue for the foreseeable future. Further,
during 1995, the Company commenced manufacturing operations in France. The
Company's international business may be affected by changes in demand
resulting from localized economic and market conditions. For example, in
the past the Company's business has been adversely affected by recessions in
Europe. In addition, the Company is subject to the risks of conducting
business outside of the United States, including fluctuations in currency
exchange rates, changes in or impositions of legislative or regulatory
requirements, tariffs, quotas, difficulty in obtaining export licenses,
potentially adverse taxes, the burdens of complying with a variety of
foreign laws and other factors beyond the Company's control. In addition,
the laws of certain foreign countries in which the Company's products are or
may be manufactured or sold may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States. To
date, the Company has not experienced any material adverse effects on its
operations as a result of the foregoing factors; however, there can be no
assurances that in the future one or more of the foregoing factors will not
have a material adverse effect on the Company's business, financial
condition or operating results.
<PAGE>
<PAGE>
Form 10-Q
Page 27
RECENT DEVELOPMENTS
- -------------------
RESTRUCTURING
On October 11, 1995, the Company announced that it is evaluating significant
changes to its business operations and cost structure in an effort to
improve profitability. The Company is currently identifying opportunities
to eliminate non-essential product development programs, eliminate
overlapping activities, consolidate functions and facilities, and flatten
the organizational structure. The Company anticipates it will finalize and
begin implementation of its restructuring plan during the fourth quarter of
1995. While the restructuring plan has not been finalized, the Company
currently anticipates that the plan will result in annual cost savings in
excess of $100 million. The Company expects that it will incur significant
restructuring charges during the fourth quarter of 1995, including charges
associated with additional reductions in the workforce. As a result, the
Company anticipates it will report a net loss for the fourth quarter and
full year of 1995.
PREFERRED STOCK EXCHANGE
On November 13, 1995, the Company announced that on December 15, 1995, it
will exercise its right to exchange 7% Convertible Subordinated Debentures
due 2008 (7% Convertible Debentures) for all of its outstanding shares of
$3.50 Convertible Exchangeable Preferred Stock, $.01 par value (Preferred
Stock). The Preferred Stock will be exchanged at a rate of $50 principal
amount of 7% Convertible Debentures for each share of Preferred Stock.
Based upon the number of issued and outstanding shares of Preferred Stock as
of November 13, 1995, the exchange will result in the Company issuing 7%
Convertible Debentures in the principal amount of $172.5 million. Dividends
on the Preferred Stock will cease to accrue as of December 15, 1995, and the
Company will begin making interest payments on the 7% Convertible Debentures
payable in equal amounts semiannually on March 15 and September 15. The
Company is required to make annual payments into a sinking fund beginning
March 15, 2003, in the amount of $17.3 million to provide for the retirement
of 50% of the 7% Convertible Debentures prior to their maturity on March 15,
2008. The 7% Convertible Debentures contain conversion and optional
redemption provisions substantially identical to those of the Preferred
Stock.
<PAGE>
<PAGE>
Form 10-Q
Page 28
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
See Part II, Item 1 of the Form 10-Q for the periods ending March 31, 1995,
and June 30, 1995.
In the second quarter of 1992, seven purported class actions were filed in
the U.S. District Court for the District of Colorado against the Company and
certain of its officers and directors. These actions were subsequently
consolidated into a single action, and a consolidated amended complaint was
filed on July 7, 1992, seeking an unspecified amount of damages. The
complaint alleged that the defendants failed to properly disclose the status
of development of a new product and the Company's business prospects. The
complaint further alleged that the individual defendants sold shares of the
Company's common stock based on material inside information, in violation of
federal securities and common law. The court certified a class consisting
(with certain exceptions) of those who purchased StorageTek's common stock
and related securities from December 23, 1991, to August 7, 1992. A
shareholder derivative action was also filed in the second quarter of 1992
based on substantially similar factual allegations and has been consolidated
with the class action. On July 27, 1995, the Company and the plaintiffs in
the shareholder class action and derivative litigation announced an
agreement to settle the litigation. The settlement agreement, which is
subject to approval by the U.S. District Court for the District of Colorado,
provides that the Company will pay $30,680,000 for its portion of the
settlement. The Company's insurance policies will also pay $24,320,000 as
part of the total settlement of $55,000,000. As a result of the settlement,
a one-time charge of $30,680,000 was recognized during the third quarter of
1995. A hearing date on the settlement has been set for December 1995.
In February 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array
and Tandem to either support certain disk drives purchased from them or
provide the Company with technical data necessary for StorageTek to provide
such customer support. In March 1994, Array and Tandem filed their answer
and also filed counterclaims against the Company alleging breach of contract
and claiming damages. In June 1994, the court ordered Array and Tandem to
continue to provide support for these products and to maintain, in an
independent escrow account, the materials necessary to enable the Company to
support the products in the event Array and Tandem failed to provide such
services. In May 1995, the Company filed an amended complaint seeking
damages. The case is now in the discovery phase. A trial date has been set
for November 1996.
In September 1994, EMC Corporation filed suit in U.S. District Court in
Wilmington, Delaware, alleging infringement of a patent pertaining to disk
storage technology. The complaint seeks an injunction, treble damages in an
unspecified amount and an award of attorney fees and costs. The Company has
filed an answer. The Company also has filed
<PAGE>
<PAGE>
Form 10-Q
Page 29
a counterclaim for infringement of one of its patents. The case is now in
the discovery phase. A trial date has been set for March 1996.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging infringement of a patent pertaining to the
tape cartridge interchange feature of certain of the Company's products.
The complaint seeks an injunction, treble damages in an unspecified amount
and an award of attorney fees and costs. The Company has filed an answer
and counterclaim alleging, among other things, infringement of three of its
patents. The case is now in the discovery phase. A trial date has been set
for January 1996.
Information concerning certain of these legal proceedings is also contained
in Note 4 to the consolidated financial statements identified in Part I of
this Form 10-Q.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. There can be no guarantee, however, that these cases
will result in outcomes favorable to the Company. In the event of an
adverse outcome, the Company currently believes that the amount of the
ultimate potential loss would not be material to the Company's financial
position, but could have a material effect on the Company's reported results
of operations in a particular quarter.
ITEM 5 - OTHER INFORMATION
- --------------------------
On November 7, 1995, the Company announced that Ryal Poppa, Chairman,
President and Chief Executive Officer, will retire from active management of
the Company at the end of the term of his employment agreement which extends
through January 1997. A successor was not named. The Board of Directors of
the Company will commence a search for a successor.
<PAGE>
<PAGE>
Form 10-Q
Page 30
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
*3.1(ii) Restated Bylaws of Storage Technology
Corporation dated July 28, 1987.
*3.2(ii) First Amendment dated February 2, 1988, to
the Restated Bylaws of Storage Technology Corporation,
amending Article IV.
*3.3(ii) Second Amendment dated May 25, 1995, to the
Restated Bylaws of Storage Technology Corporation,
amending Article II.
*10.1 Third Amendment and Waiver dated September 28,
1995, to the Amended and Restated Multicurrency Credit
Agreement dated September 28, 1994.
*11.0 Computation of Earnings (Loss) Per Common Share
*27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
- ---------------------------------
* Indicates Exhibits filed with this Quarterly Report on Form
10-Q.
<PAGE>
<PAGE>
Form 10-Q
Page 31
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 13, 1995 /s/ DAVID E. LACEY
- ---------------- ---------------------------------
(Date) David E. Lacey
Corporate Vice President
and Interim Chief Financial Officer
(Principal Financial Officer)
November 13, 1995 /s/ MARK D. MCGREGOR
- ----------------- ---------------------------------
(Date) Mark D. McGregor
Corporate Vice President, Treasurer
and Interim Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
---------- ---------------------------------------------------------
*3.1(ii) Restated Bylaws of Storage Technology
Corporation dated July 28, 1987.
*3.2(ii) First Amendment dated February 2, 1988, to the
Restated Bylaws of Storage Technology Corporation,
amending Article IV.
*3.3(ii) Second Amendment dated May 25, 1995, to the
Restated Bylaws of Storage Technology Corporation,
amending Article II.
*10.1 Third Amendment and Waiver dated September 28, 1995,
to the Amended and Restated Multicurrency Credit
Agreement dated September 28, 1994.
*11.0 Computation of Earnings (Loss) Per Common Share
*27.0 Financial Data Schedule
FORM OF RESTATED BYLAWS
-----------------------
BYLAWS
OF
STORAGE TECHNOLOGY CORPORATION
ARTICLE I
Offices
-------
Section 1. Business Offices. The principal office of the
corporation shall be located in Louisville, Colorado. The corporation may
also have offices at such other places both within and without the State of
Delaware or Colorado as the Board of Directors may from time to time
determine or the business of the corporation may require.
Section 2. Registered Office. The registered office of the
corporation shall be 1209 Orange Street in the City of Wilmington, County of
New Castle, State of Delaware. The registered office may be changed from
time to time by the Board of Directors.
ARTICLE II
Stockholders
------------
Section 1. Annual Meeting. An annual meeting of the stockholders
shall be held for the purpose of electing directors and for the transaction
of such other business as may come before the meeting on the third Tuesday
in May or such other date as may be designated by the Board of Directors at
such time and place, either within or without the State of Delaware, as may
be designated by resolution of the Board of Directors from time to time.
Section 2. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, may be called at any time by the Board of
Directors, a committee of the Board of Directors which has been duly
designated by the Board of Directors and whose powers and authority, as
expressly provided in a resolution of the Board of Directors, include the
power to call such meetings, any two directors or stockholders possessing in
the aggregate at least 10% of the outstanding shares of capital stock
entitled to vote generally upon the election of directors, considered for
such purpose as one class, but such special meetings may not be called by
any other person or persons. Business transacted at any special meeting of
the stockholders shall be limited to the purpose or purposes stated in the
notice.
Section 3. Place of Meeting. Each meeting of the stockholders
shall be held at such place or places either within or outside the State of
Delaware or Colorado as may be designated in the notice of meeting, or, if
no place is designated in the notice, at the principal office of the
corporation.
Section 4. Fixing Date for Determination of Stockholders of Record.
For the purpose of determining stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for any other lawful action, the Board of
Directors may fix, in advance, a date as the record date for any such
determination of stockholders, which date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to
any other action. If no record date is fixed then the record date shall be:
(a) for determining stockholders entitled to notice of or to vote at a
meeting of stockholders, the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, the close of business
on the day next preceding the day on which the meeting is held; (b) for
determining stockholders entitled to express consent to corporate action
without a meeting, when no prior action by the Board of Directors is
necessary, the day on which the first written consent is expressed; and (c)
for determining stockholders for any other purpose the close of business on
the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 5. Notice of Meeting. Except as otherwise provided by
statute, written notice stating the place, day and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be given not less than 10 nor more than 60 days
before the date of the meeting, unless otherwise required by statute, either
personally or by mail, to each stockholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting
the corporation may transact any business which might have been transacted
at the original meeting. If the adjournment is for more than 30 days, or if
after the adjournment a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 6. Voting Lists. The secretary of the corporation shall
cause to be prepared, at least 10 days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting,
arranged in alphabetical order, and showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least 10 days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to
be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock books shall be the only evidence of
who are the stockholders entitled to examine the stock books, the list of
stockholders or other books or records of the corporation, or to vote in
person or by proxy at any meeting of stockholders.
Section 7. Quorum. Except as otherwise provided by statute or by
the certificate of incorporation, the holders of a majority of the
outstanding shares of the corporation entitled to vote, represented in
person or by proxy, shall constitute a quorum at a meeting of stockholders,
and the affirmative vote of a majority of the shares represented at a
meeting at which a quorum is present and entitled to vote on the subject
matter shall be the act of the stockholders. If less than a majority of the
outstanding shares entitled to vote are represented at a meeting, a majority
of the shares so represented may adjourn the meeting from time to time in
accordance with Section 5 of this Article II, until a quorum shall be
present or represented.
Section 8. Voting of Shares. Unless otherwise provided in the
certificate of incorporation or a resolution of the Board of Directors
fixing the designations, powers, preferences and other rights of any series
of Preferred Stock and subject to the provisions of Section 4 of this
Article, each stockholder entitled to vote at any meeting of stockholders
shall be entitled to one vote at any meeting of stockholders shall be
entitled to one vote for each share of capital stock held by him which has
voting power upon the matter in question. In the election of directors each
record holder of stock entitled to vote at such election shall have the
right to vote the number of shares owned by him for as many persons as there
are directors to be elected, and for whose election he has the right to
vote. Cumulative voting for any purpose shall not be allowed.
Section 9. Voting of Shares by Certain Holders. Persons holding
voting stock in a fiduciary capacity shall be entitled to vote the shares so
held. Persons whose voting stock is pledged shall be entitled to vote,
unless in the transfer by the pledgor on the books of the corporation he has
expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his proxy may represent such shares and vote thereon. If shares
entitled to vote stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, tenants by the entirety or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, unless the
secretary of the corporation is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating
the relationship wherein it is so provided, their acts with respect to
voting shall be as set forth in the General Corporation Law of the State of
Delaware.
Section 10. Conduct of Meetings. The chairman of the annual or any
special meeting of the stockholders shall be the chairman of the Board of
Directors (or any person designated by the Board of Directors), unless and
until a different person is elected by a majority of the shares of stock
entitled to vote, represented in person or by proxy present at a duly
constituted meeting at which a quorum is present.
Meeting of stockholders shall be conducted in accordance with the
following rules:
(a) The chairman of the meeting shall have absolute
authority over matters of procedure and there shall be no appeal from the
ruling of the chairman. If the chairman, in his absolute discretion, deems
it advisable to dispense with the rules of parliamentary procedures as to
any one meeting of stockholders or part thereof, the chairman shall so state
and shall clearly state the rules under which the meeting or appropriate
part thereof shall be conducted.
(b) If disorder should arise which prevents continuation of
the legitimate business of the meeting, the chairman may quit the chair and
announce the adjournment of the meeting; and upon his so doing, the meeting
is immediately adjourned; provided, however, if a majority of the shares
entitled to vote, represented in person or by proxy, present at a duly
constituted meeting at which a quorum is present desire to continue such
meeting, they may by, affirmative vote, elect a new chairman and continue
such meeting.
(c) The chairman may ask or require that anyone not a bona
fide stockholder or proxy leave the meeting.
(d) A resolution or motion shall be considered for vote only
if proposed by a stockholder or a duly authorized proxy and seconded by an
individual, who is a stockholder or a duly authorized proxy, other than the
individual who proposed the resolution or motion.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of its Board of
Directors, except as otherwise provided in the General Corporation Law of
the State of Delaware or the certificate of incorporation. Directors shall
be removable in the manner provided in Section 2 of this Article III.
Section 2. Number, Tenure Qualifications and Nomination. The
number of directors of the corporation shall be not fewer than three nor
more than 15, the exact number of directors to be determined from time to
time by resolution adopted by the affirmative vote of the whole Board of
Directors or by the affirmative vote of a majority of the outstanding shares
of capital stock entitled to vote generally upon the election of directors
(considered for such purpose as one class). As used in these Bylaws, the
term "whole board of Directors" shall mean the total number of directors
that the corporation would have if there were no vacancies.
Directors shall be elected to one-year terms, to succeed those whose
terms expire. Each director shall hold office until his successor shall
have been elected and qualified or until his death, resignation or removal.
Directors need not be residents of Delaware or stockholders of the
corporation.
Only persons who are nominated in accordance with the procedures set
forth in this Section 2 of Article III shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of
the corporation may be made at a meeting of stockholders by or at the
direction of the Board of Directors or by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who complies
with the notice procedures set forth in this Section 2 of Article III. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the
secretary of the corporation. To be timely, a stockholders' notice shall be
delivered to or mailed and received at the principal executive offices of
the corporation not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure
was made. Such stockholder's notice shall set forth: (a) as to each person
whom the stockholder proposes to nominate for election or re-election as a
director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii)
the class and number of shares of the corporation which are owned by such
person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including without
limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as
to the stockholder giving the notice, (i) the name and address, as they
appear on the corporation's books, of such stockholder and (ii) the class
and number of shares of the corporation which are beneficially owned by such
stockholder.
At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a director shall furnish to the secretary
of the corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless
nominated in accordance with the procedures set forth in this Section 2 of
Article III. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should
so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing, nothing
contained herein shall limit the authority of stockholders to act by consent
without following the foregoing procedures with respect to the election of
directors without a meeting, without notice and without a vote.
Section 3. Vacancies. Any director may resign at any time by
giving written notice to the corporation. A director's resignation shall
take effect at the time specified therein; and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make
it effective. Any vacancy for any reason or any newly created directorship
resulting from any increase in the authorized number of directors may be
filled by a majority of directors then in office, although less than a
quorum, or by the affirmative vote of two directors if there are only two
directors remaining, or by a sole remaining director, or by the stockholders
if there are no directors remaining, and a director so chosen shall hold
office until the next election of the class for which such director has been
chosen and until his successor is duly elected and qualified, unless soon
displaced. No decrease in the number of directors shall shorten the term of
any incumbent director.
If the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors, vacancies and newly created
directorships of such class or classes or series may be filled by a majority
of the directors elected by such class or classes or series then in office,
or by the affirmative vote of two such directors if there are only two
directors if there are only two directors remaining of such class or classes
or series, or by a sole remaining director so elected, or by the
stockholders of such class or classes or series if there are no such
directors remaining, and a director so chosen shall hold office until the
next succeeding annual meeting of stockholders and until his successor is
duly elected and qualified, unless sooner displaced.
When one or more directors shall resign from the board, effective at a
future date, a majority of directors then in office, including those who
have so resigned, shall have the power to fill such vacancy or vacancies,
the vote thereon to take effect when such resignation or resignations shall
become effective, and each director so chosen shall hold office as provided
in this Section 3 of Article III for the filling of other vacancies.
Section 4. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately after and at the same place as the
annual meeting of stockholders, or as soon as practicable thereafter at the
time and place, either within or without Delaware or Colorado, determined by
the Board of Directors, for the purpose of electing officers and for the
transaction of such other business as may come before the meeting. The
Board of Directors may provide by resolution the time and place, either
within or outside Delaware or Colorado for the holding of additional regular
meetings. Notices of any regular meetings of the Board of Directors need
not be given.
Section 5. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the chief executive officer,
the president or any two voting members of the Board of Directors. The
person or persons authorized to call special meetings of the Board of
Directors may fix any place, either within or outside Delaware or Colorado
as the place for holding any special meeting of the Board of Directors
called by him or them.
Section 6. Organization. Meetings of the Board of Directors shall
be presided over by the chairman of the board, if any, or in his absence by
the vice chairman of the board, if any, or in their absence by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting,
but in his absence the chairman of the meeting may appoint any person to act
as secretary of the meeting.
Section 7. Notice. Except as provided in Section 4 of this Article
III, notice of each meeting of the Board of Directors stating the place, day
and hour of the meeting shall be given to each director at least four days
prior thereto by the mailing of written notice by first class, certified or
registered mail, or at least one day prior thereto by personal delivery of
written notice or by telephonic or telegraphic notice. The method of notice
need not be the same to each director. Notice shall be deemed to be given,
if mailed, when deposited in the United States mail, with postage thereon
prepaid, addressed to the director at his business or residence address; if
personally delivered, when delivered to the director or to any responsible
employee of the director if delivered to his business; if telegraphed, when
the telegram is delivered to the telegraph company; if telephoned, when
communicated to the director or to any responsible employee of the director
at his place of business. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or any waiver of notice of such meeting.
Section 8. Quorum and Voting. A quorum for the transaction of any
business at a meeting of the Board of Directors shall consist of a majority
of the number of directors fixed by Section 2 of this Article III, present
in person, and, except as otherwise provided in the certificate of
incorporation or these Bylaws, the vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the
Board of Directors. If less than a quorum is present at a meeting, the
directors present may adjourn the meeting from time to time without further
notice other than announcement at the meeting, until a quorum shall be
present. No director may vote or act by proxy or power of attorney at any
meeting of the Board of Directors.
Section 9. Committees. The Board of Directors may, from time to
time designate one or more committees as provided by law. Unless the Board
of Directors otherwise provides, any committee designated by the Board of
Directors may make, alter and repeal rules for the conduct of its business.
In the absence of such rules each committee shall conduct its business in
the same manner as the Board of Directors conducts its business pursuant to
this Article III of these Bylaws. Each committee shall keep regular minutes
of its meetings and report the same to the Board of Directors when required.
Section 10. Compensation. The Board of Directors shall have the
authority to fix the compensation of directors. No such payment of
compensation shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor. Members of any
committee of the Board of Directors may be allowed like compensation for
attending committee meetings.
ARTICLE IV
Officers and Agents
-------------------
Section 1. Number and Qualifications. The officers of the
corporation shall be a chief executive officer, a chief operating officer, a
chief financial officer, a chief administrative officer, a secretary, and a
treasurer. The Board of Directors may also elect or appoint such other
officers, assistant officers and agents, including one or more vice-
presidents, a corporate controller, assistant secretaries and assistant
treasurers, as they may consider necessary. Any number of offices may be
held by the same person, except that no person may simultaneously hold the
offices of chief executive officer and secretary.
Section 2. Election and Term of Office. The officers of the
corporation shall be elected by the Board of Directors annually at the first
meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as conveniently may
be. The Board of Directors may delegate to any officer the power to
appoint, or remove subordinate officers, agents or employees. Each officer
shall hold office until his successor shall have been duly elected and
qualified or until his earlier death, resignation or removal.
Section 3. Salaries. The salaries of the officers shall be as
fixed from time to time by the Board of Directors and no officer shall be
prevented from receiving a salary by reason of the fact that he is also a
director of the corporation.
Section 4. Removal. Any officer or agent elected or appointed by
the Board of Directors may be removed at any time by the Board of Directors,
or a duly authorized committee thereof, as provided in the contract, if any,
with such officer or agent or whenever in the judgment of the Board of
Directors or such committee the best interests of the corporation will be
served thereby. Such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an
officer or agent shall not in itself create contract rights.
Section 5. Vacancies. Any officer may resign at any time, subject
to any rights or obligations under any existing contracts between the
officer and the corporation, by giving written notice to the corporation.
An officer's resignation shall take effect at the time specified in such
notice; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Any vacancy
occurring in any office by the death, resignation, removal or otherwise
shall be filled by the Board of Directors for the unexpired portion of the
term.
Section 6. Authority and Duties of Officers. The officers of the
corporation shall have the authority and shall exercise the powers and
perform the duties specified below and as may be additionally specified by
the chief executive officer, the Board of Directors or these Bylaws, except
that in any event each officer shall exercise such powers and perform such
duties as may be required by law:
(a) Chief Executive Officer. The chairman of the Board of
Directors shall be the chief executive officer of the corporation. Subject
to the direction and supervision of the Board of Directors, he shall: (i)
have primary authority with respect to all matters regarding corporate
policy; (ii) supervise and control the business of the corporation, its
officers and employees; (iii) preside at all meetings of the corporation's
stockholders and Board of Directors; and (iv) perform such other duties as
may be assigned to him from time to time by the Board of Directors.
(b) Chief Operating Officer. The president and chief
operating officer shall be the principal operating officer of the
corporation. Subject to the direction and supervision of the Board of
Directors, the president and chief operating officer shall: (i) supervise
the day to day operations of the corporation and (ii) perform all other
duties incident to the office of chief operating officer and as from time to
time may be assigned to him by the chief executive officer or by the Board
of Directors.
(c) Chief Financial Officer. The chief financial officer
shall be the principal financial and accounting officer of the corporation
responsible for the day-to-day supervision and oversight of the treasury and
accounting functions of the corporation. Subject to the direction and
supervision of the Board of Directors, the chief financial officer shall:
(i) supervise the principal accounting officer and the treasurer in the
conduct of the duties of those offices and (ii) perform all other duties
incident to the office of chief financial officer and as from time to time
may be assigned by the chief executive officer the chief operating officer
or the Board of Directors.
(d) Chief Administrative Officer. The chief administrative
officer shall be the principal officer responsible for the day-to-day
supervision and oversight of the administrative functions of the
corporation. Subject to the direction and supervision of the Board of
Directors, the chief administrative officer shall: (i) supervise the
internal corporate support and service functions, including internal audit,
corporate communications, legal services, data processing and human
resources and (ii) perform all other duties incident to the office as chief
administrative officer and as from time to time may be assigned by the chief
executive officer, the chief operating officer or the Board of Directors.
(e) Vice-Presidents. The vice-president, (or if there is
more than one then each vice-president) shall assist the chief officers and
shall perform such duties as may be assigned to them by the chief officer or
the Board of Directors. The vice-president, (or if there is more than one,
then the vice-president designated by the Board of Directors, of if there be
no such designation then the vice-presidents in order of their election),
shall, at the request of the appropriate chief officer, or in his absence or
inability or refusal to act, perform the duties of the president and chief
operating officer, and when so acting shall have all of the powers of and be
subject to all of the restrictions upon such chief officer.
(f) Secretary. The secretary shall: (i) keep the minutes
of the proceedings of the stockholders, the Board of Directors and any
committees of the Board; (ii) see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; (iii)
be custodian of the corporate records and of the seal of the corporation;
(iv) keep at the corporation's registered office or principal place of
business a record containing the names and addresses of all stockholders and
the number and class of shares held by each, unless such a record shall be
kept at the office of the corporation's transfer agent or registrar; (v)
have general charge of the stock books of the corporation, unless the
corporation has a transfer agent; and (vi) in general, perform all duties
incident to the office of secretary and such other duties as from time to
time may be assigned to him by the chief executive officer, the president
and chief operating officer or the Board of Directors.
(g) Treasurer. The treasurer shall: (i) have care and
custody of all funds, securities, evidences of indebtedness and other
personal property of the corporation and deposit the same in accordance with
the instructions of the Board of Directors; (ii) receive and give receipts
and acquittances for moneys paid in on account of the corporation, and pay
out of the funds on hand all bills, payrolls and other just debts of the
corporation of whatever nature upon maturity; and (iii) perform all other
duties incident to the office of treasurer and such other duties as from
time to time may be assigned by the chief executive officer, the chief
operating officer, the chief financial officer or the Board of Directors.
Section 7. Surety Bonds. The Board of Directors may require any
officer, employee or agent of the corporation to execute to the corporation
a bond in such sums and with such sureties as shall be satisfactory to the
Board of Directors, conditioned upon the faithful performance of his duties
and for the restoration to the corporation of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his
control belonging to the corporation.
ARTICLE V
Stock
-----
Section 1. Issuance of Shares. The issuance or sale by the
corporation of any shares of its authorized capital stock of any class,
including treasury shares, shall be made only upon authorization by the
Board of Directors or a duly authorized committee thereof, except as
otherwise may be provided by statute.
Section 2. Certificates. Every holder of stock in the corporation
shall be entitled to have a certificate signed by, or in the name of the
corporation by, the chief executive officer and by the secretary of the
corporation, representing the number of shares owned by him in the
corporation registered in certificate form. Any of or all the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent
or registrar at the date of issue. Certificates of stock shall be
consecutively numbered and shall be in such form consistent with law as
shall be prescribed by the Board of Directors.
Section 3. Payment for Shares. Except as otherwise required by the
certificate of incorporation shares shall be issued for such consideration
(but not less than the par value thereof) as shall be determined from time
to time by the Board of Directors or duly authorized committee thereof.
Treasury shares shall be disposed of for such consideration as may be
determined from time to time by the Board of Directors or duly authorized
committee thereof. Such consideration shall be paid in such form and in
such manner as the Board of Directors or such committee shall determine. In
the absence of actual fraud in the transaction, the judgment of the
directors as to the value of such consideration shall be conclusive. The
capital stock issued by the corporation shall be deemed to be fully paid and
non-assessable stock if: (a) the entire amount of the consideration has been
received by the corporation in the form of cash, services rendered, personal
property, leases of real property or a combination thereof; or (b) not less
than the amount of the consideration determined to be capital pursuant to
statute has been received by the corporation in such form and the
corporation has received a binding obligation of the subscriber or purchaser
to pay the balance of the subscription or purchase price; provided, however,
nothing contained herein shall prevent the Board of Directors from issuing
partly paid shares pursuant to statute.
Section 4. Lost Certificates. In case of the alleged loss, theft,
destruction or mutilation of a certificate of stock the Board of Directors
may direct the issuance of a new certificate in lieu thereof upon such terms
and conditions in conformity with law as it may prescribe. The Board of
Directors may in its discretion require a bond in such form and amount and
with such surety sufficient to indemnify the corporation against any claim
that may be made against it or account of the alleged loss, theft,
destruction or mutilation of any such certificate or the issuance of such
new certificate.
Section 5. Transfer of Shares. Upon surrender to the corporation
or to a transfer agent of the corporation of a certificate of stock duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation to issue a
new certificate to the person entitled thereto, cancel the old certificate
and record the transaction in the stock books.
Section 6. Registered Stockholders. The corporation shall be
entitled to recognize the exclusive right of a person registered on its
books as the owner of shares to receive dividends, and to vote as such
owner, and to hold liable for calls and assessments a person registered on
its books as the owner of shares, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part
of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
Section 7. Transfer Agents, Registrars and Paying Agents. The
Board of Directors may at its discretion appoint 1 or more transfer agents,
registrars and agents for making payment upon any class of stock, bond,
debenture or other security of the corporation. Such agents and registrars
may be located either within or outside Delaware or Colorado. They shall
have such rights and duties and shall be entitled to such compensation as
may be agreed.
ARTICLE VI
Miscellaneous
-------------
Section 1. Waivers of Notice. Whenever notice is required to be
given by law, by the certificate of incorporation or by these Bylaws, a
written waiver thereof, signed by the person entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
to notice. Attendance of a person at a meeting or (in the case of a
stockholder) by proxy shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting was not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders, directors or members of a committee of
directors need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
Section 2. Presumption of Assent. A director of the corporation
who is present at a meeting of the Board of Directors shall be presumed to
have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
secretary of the corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 3. Voting of Securities by the Corporation. Unless
otherwise provided by resolution of the Board of Directors, on behalf of the
corporation the chief executive officer or any chief officer or officers
designated by him shall attend in person or by substitute appointed by him
or them, shall execute written instruments appointing a proxy or proxies to
represent the corporation at, all meetings of the stockholders of any other
corporation, association or other entity in which the corporations hold any
stock or other securities, and may execute written waivers of notice with
respect to any such meetings. At all such meetings and otherwise, the chief
executive officer or any corporate officer or officers designated by him, in
person or by substitute or proxy as aforesaid, may vote the stock or other
securities so held by the corporation and may execute written consents and
any other instruments with respect to such stock or securities and may
exercise any and all rights and powers incident to the ownership of said
stock or securities, subject, however, to the instructions, if any, of the
Board of Directors.
Section 4. Fiscal Year. The fiscal year of the corporation shall
be as established by the Board of Directors.
Section 5. Audits of Books and Accounts. The corporation's books
and accounts shall be audited at such times and by such auditors as shall be
specified and designated by resolution of the Board of Directors.
Section 6. Emergency Bylaws. The Board of Directors may adopt
emergency bylaws in accordance with and pursuant to the provisions therefor
from time to time set forth in the General Corporation Law of the State of
Delaware.
Section 7. Amendments. These Bylaws, other than Article II,
Sections 2, 4, 7 and 10; Article III, Sections 2, 5 and 7, Article V,
Section 3; and Article VI, Section 7 may be amended or repealed and new
Bylaws adopted by the affirmative vote of not less than a majority of the
whole Board of Directors. These Bylaws may be amended or repealed and new
Bylaws adopted by the affirmative vote of the holders of not less than a
majority of the outstanding shares of stock entitled to vote generally upon
the election of directors (considered for this purpose as one class).
FIRST AMENDMENT TO THE
RESTATED BYLAWS
OF
STORAGE TECHNOLOGY CORPORATION
------------------------------
ARTICLE IV
Officers and Agent
------------------
Section 1 is deleted in its entirety and the following is substituted
in its stead:
Section 1. Enumeration. The president together with the Board
of Directors of the corporation shall have such authority to elect or
appoint such officers as may be necessary to conduct the business of the
corporation and to perform such undertakings, acts and deeds as may be
required by law. Any number of offices may be held by the same person,
except that no person may simultaneously hold the offices of president and
secretary.
Section 6 is deleted in its entirety and the following is substituted
in its stead:
Section 6. Authority and Duties of Officers. The officers of the
corporation shall have the authority and shall exercise the powers and
perform the duties specified below and additional officers may be appointed
to perform such other duties as may be additionally specified by the
president, the Board of Directors or these Bylaws, except that in any event,
each officer shall exercise such powers and perform such duties as may be
required by law.
(a) President. The president shall be the chief executive
officer of the corporation unless such title is assigned to a Chairman of
the Board. The president shall, subject to the direction of the Board of
Directors, have general charge and supervision of the corporation. Unless
otherwise provided by the Board of Directors, he shall preside at all
meetings of the stockholders and of the Board of Directors. The president
shall perform such other duties and shall have such other powers as the
Board of Directors may from time to time prescribe.
(b) Vice Presidents. The vice president, (or if there is more
than one then each vice president) shall assist any chief officers and shall
perform such duties as may be assigned to them by any chief officer or the
Board of Directors. The vice president, (or if there is more than one, then
the vice president designated by the Board of Directors, or if there be no
such designation, then the vice presidents in order of their election),
shall, at the request of the appropriate chief officer, or in his absence or
inability or refusal to act, perform the duties of the president and chief
operating officer, and when so acting shall have all of the powers of and be
subject to all of the restrictions upon such chief officer.
(c) Secretary. The secretary shall: (i) keep the minutes of the
proceedings of the stockholders, the Board of Directors and any Committee of
the board; (ii) see that all notices are duly given in accordance with the
provisions of these Bylaws or as required by law; (iii) be custodian of the
corporate records and of the seal of the corporation; (iv) keep at the
corporation's registered office or principal place of business a record
containing the names and addresses of all stockholders and the number and
class of shares held by each, unless such record shall be kept at the office
of the corporation's transfer agent or registrar; (v) have general charge of
the stock books of the corporation, unless the corporation has a transfer
agent; and (vi) in general, perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him
by the president or the Board of Directors.
(d) Treasurer. The treasurer shall: (i) have care and custody of
all funds, securities, evidence of indebtedness and other personal property
of the corporation and deposit the same in accordance with the instructions
of the Board of Directors; (ii) receive and give receipts and acquittances
for moneys paid in on account of the corporation, and pay out of funds on
hand all bills, payrolls and other just debts of the corporation of whatever
nature upon maturity; and (iii) perform all other duties incident to the
office of treasurer and such other duties as from time to time may be
assigned by the president or the Board of Directors.
SECOND AMENDMENT TO THE
RESTATED BYLAWS
OF
STORAGE TECHNOLOGY CORPORATION
------------------------------
ARTICLE II
Stockholders
------------
Article II is amended by adding a new Section numbered 11, reading as
follows:
"Section 11. Notice of Stockholder Business.
At an annual meeting of the Stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder. For
business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
secretary of the Corporation, and be presented in the manner provided in
Section 10 of this Article II. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of
the Corporation, not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure
was made. A stockholders' notice to the secretary shall set forth as to
each matter the stockholder proposes to bring before the annual meeting: (a)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting;
(b) the name and address, as they appear on the Corporation's books, of the
stockholder(s) proposing such business, or the name and address of the
beneficial holder(s) or other party on whose behalf the proposal is made;
(c) the class and number of shares of the Corporation which are beneficially
owned by the stockholder(s) or beneficial holder(s) or other party on whose
behalf the proposal is made; and (d) any material interest of the
stockholder(s) or beneficial holder(s) or other party on whose behalf the
proposal is made in such business. Notwithstanding anything in the Bylaws
to the contrary, no business shall be conducted at an annual meeting except
in accordance with the procedures set forth in Article II, Section 10 and
this Section 11. The chairman of the annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting, and, if he should so determine, he shall so
declare to the meeting and any such business not properly
brought before the meeting shall not be transacted."
Dated: May 25, 1995
THIRD AMENDMENT AND WAIVER
THIS THIRD AMENDMENT AND WAIVER (this "Amendment") is entered into
as of September 28, 1995 by and among STORAGE TECHNOLOGY CORPORATION, a
Delaware corporation ("STK"), STORAGETEK FINANCIAL SERVICES CORPORATION, a
Delaware corporation, STORAGE TECHNOLOGY DE PUERTO RICO, INC., a Delaware
corporation, and NETWORK SYSTEMS CORPORATION, a Delaware corporation
(collectively, the "Borrowers"), the banks listed on the signature pages
hereof and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national
banking association, as agent for the Lenders (the "Agent"), and as Swing
Line Bank and Issuing Bank.
WHEREAS, the Borrowers, Storagetek Distributed Systems Division,
Inc. (formerly XL/Datacomp, Inc.), a Delaware corporation ("DSD"), the
Lenders, the Agent for the Lenders, the Swing Line Bank and the Issuing Bank
are parties to an Amended and Restated Multicurrency Credit Agreement, dated
as of September 28, 1994, as amended pursuant to a First Amendment and
Waiver, dated as of April 20, 1995, and a Second Amendment and Waiver, dated
as of June 27, 1995 (as so amended, the "Credit Agreement");
WHEREAS, pursuant to Section 3(b) of the Second Amendment and
Waiver referred to above, DSD is no longer party to the Credit Agreement;
WHEREAS, STK (i) desires to exchange all outstanding shares of its
Convertible Exchangeable Preferred Stock for an aggregate principal amount of
up to $172,500,000 of 7% Convertible Subordinated Debentures due 2008 (the
"Debentures") to be issued by STK pursuant to the Indenture, dated as of
March 15, 1993, between STK and American Stock Transfer & Trust Company, as
trustee, (the "Exchange") and (ii) may subsequently convert all of the
Debentures into shares of common stock of STK (the "Debenture Conversion").
In connection with the foregoing, STK has requested that the Agent and the
Lenders consent to the Exchange and Debenture Conversion;
WHEREAS, the Borrowers also desire to amend the Credit Agreement to
effect certain other changes thereto as provided herein; and
WHEREAS, the Agent and the Lenders are willing to agree to such
requests, subject to the terms and conditions hereof;
NOW, THEREFORE, the parties hereto agree as follows:
1. Terms Defined in Credit Agreement. All capitalized terms
used in this Amendment and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement.
2. Consent to the Exchange of CEP Stock. Subject to the terms
and conditions hereof, the Agent and the Lenders hereby consent to the Exchange
and the Debenture Conversion. The parties hereto acknowledge and agree that
the Debentures shall constitute Subordinated Debt under the terms and
conditions of the Credit Agreement.
3. Amendments, Waivers and Certain Related Consents.
-------------------------------------------------
(a) Section 6.03(a) of the Credit Agreement is hereby amended
by deleting "690,000,000" appearing in the fourth line thereof and inserting
"$517,500,000" in lieu thereof; provided, however, that upon the Debenture
Conversion then, as of the effective date thereof, Section 6.03(a) of the
Credit Agreement is hereby amended to increase such dollar amount to
"$560,500,000".
STK hereby agrees to provide notice (in accordance with
Section 9.02 of the Credit Agreement) to the Agent of the effective date of
the Debenture Conversion at least one Business Day prior thereto.
(b) The Agent and the Lenders hereby waive the applicability
of Section 6.02(g) regarding the sale (in one or a series of transactions) by
STK to one or more unaffiliated third parties of Inventory of STK having an
aggregate fair market value of up to $8,500,000 (the "Inventory Sale"). Upon
the closing of the Inventory Sale, the Inventory transferred pursuant thereto
shall no longer constitute Collateral. For purposes of Section 5(i) and the
other terms and provisions of the U.S. Security Agreement of STK, the
Inventory Sale shall be deemed to constitute a Transfer of Collateral
permitted pursuant to Section 6.02(g) of the Credit Agreement.
In furtherance of the foregoing, each of the parties
hereto agree that immediately prior to or simultaneously with the closing of
the Inventory Sale, the Liens on the Inventory sold pursuant thereto granted
under the U.S. Security Agreement of STK shall terminate and be released and
the Agent shall execute and deliver to STK such documents and instruments
reasonably requested by STK as shall be necessary to evidence termination and
release of all security interests as to the Inventory sold in the Inventory
Sale given by STK to the Agent under the Credit Agreement and such U.S.
Security Agreement.
(c) Section 1.01 of the Credit Agreement is hereby amended by
(I) inserting "(i)" immediately following the phrase "pursuant to" appearing
in the third line of the definition of "Program" and (II) inserting "or (ii)
a Receivables Financing Agreement (as amended and supplemented from time to
time) among the Trust as borrower, SFSC as servicer, STK as performance
guarantor and Royal Bank of Canada or its affiliate as lender and/or agent",
immediately following the parenthetical "(the 'Receivables Financing
Agreement')" appearing in the eighth line of the definition of "Program".
(d) Section 6.02(g) shall be amended by deleting
"$100,000,000" appearing in the proviso of clause (vii) thereof and
"$150,000,000" shall be inserted in lieu thereof.
(e) The Agent and the Lenders hereby (i) waive the
applicability of Sections 6.01(b) and 6.02(f) of the Credit Agreement to the
merger of NSC with and into STK (the "NSC Merger") and (ii) consent to the
NSC Merger provided that upon the effective date thereof STK has assumed, by
operation of law or otherwise, all obligations and liabilities of NSC.
(f) The Agent and the Lenders hereby consent to the exclusion
of $30,700,000, net of the tax impact thereof, to be paid by STK, pursuant to
the settlement of the shareholder class action filed against STK in April,
1992, from all calculations made for purposes of determining the Borrowers'
compliance with Section 6.03(d) of the Credit Agreement.
4. Conditions of Effectiveness. The effectiveness of this
Amendment shall be subject to the following conditions:
(a) All agreements, instruments and other documents entered into
by STK or any of its Affiliates in connection with or arising out of the
transactions described in Sections 2 and 3 above are in form and substance
satisfactory to the Agent and the Lenders.
(b) The Agent has received evidence (if requested by the Agent on
behalf of a Lender), in form and substance satisfactory to the Agent, that
(i) the representations and warranties contained in Article V of the Credit
Agreement are true and correct on and as of the date hereof as though made on
and as of such date and (ii) no Default or Event of Default then exists or
would result after giving effect to the matters set forth in Sections 2 and 3
above.
(c) The Agent shall have received such other documents and
materials as the Agent or any Lender through the Agent may request.
5. Miscellaneous.
--------------
(a) Loan Documents Otherwise Not Affected. Except as expressly
waived pursuant hereto, the Loan Documents shall remain unchanged and in full
force and effect and are hereby ratified and confirmed in all respects. The
Lenders' and the Agent's execution and delivery of, or acceptance of, this
Amendment and any <PAGE>
<PAGE>
OF CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
THE BORROWERS:
--------------
STORAGE TECHNOLOGY CORPORATION
------------------------------
By:/s/ David E. Lacey
---------------------------
Name: David E. Lacey
Title: Corporate Vice President
& Interim Chief Financial
Officer
STORAGETEK FINANCIAL SERVICES
------------------------------
CORPORATION
-----------
By:/s/ Robert J. Kali
---------------------------
Name: Robert J. Kali
Title: Vice President and Chief
Operating Officer
STORAGE TECHNOLOGY DE PUERTO RICO,
----------------------------------
INC.
----
By:/s/ Timothy F. Neises
---------------------------
Name: Timothy F. Neises
Title: Assistant Treasurer
NETWORK SYSTEMS CORPORATION
---------------------------
By:/s/ Eileen M. Jonikas
---------------------------
Name: Eileen M. Jonikas
Title: Assistant Treasurer
THE AGENT:
BANK OF AMERICA NATIONAL TRUST
------------------------------
AND SAVINGS ASSOCIATION,
------------------------
as Agent
By:/s/ Wendy M. Young
---------------------------
Name: Wendy M. Young
Title: Vice President
THE LENDERS:
BANK OF AMERICA NATIONAL TRUST
------------------------------
AND SAVINGS ASSOCIATION
-------------------------
By:/s/ Kevin McMahon
---------------------------
Name: Kevin McMahon
Title: Vice President
BANK OF MONTREAL
-------------------------
By:/s/ Robert K. Strong, Jr.
---------------------------
Name: Robert K. Strong, Jr.
Title: Managing Director
NBD BANK (formerly NBD BANK, N.A.)
----------------------------------
By:/s/ Larry E. Schuster
---------------------------
Name: Larry E. Schuster
Title: Vice President
FIRST INTERSTATE BANK OF DENVER
-------------------------------
By:/s/ Jack W. Haye
---------------------------
Name: Jack W. Haye
Title: Vice President
THE FIRST NATIONAL BANK OF BOSTON
---------------------------------
By:/s/ Elizabeth C. Everett
---------------------------
Name: Elizabeth C. Everett
Title: Vice President
BANQUE NATIONALE DE PARIS
-------------------------
By:/s/ Clive Bettles
---------------------------
Name: Clive Bettles
Title: Senior Vice President
and Manager
By:/s/ Mitchell M. Ozawa
---------------------------
Name: Mitchell M. Ozawa
Title: Vice President
THE SUMITOMO BANK LIMITED
-------------------------
By:/s/ Toshihide Orita
---------------------------
Name: Toshihide Orita
Title: Joint General Manage
EXHIBIT 11
<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF LOSS PER COMMON SHARE
(In thousands, except per share amounts)
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- ----------------------
09/29/95 09/30/94 09/29/95 09/30/94
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY (a)
Earnings (loss)
Net income (loss) ($6,981) $18,644 ($4,040) $17,336
Preferred dividend requirement 3,018 3,018 9,056 9,056
---------- ---------- ---------- ----------
Income (loss) applicable to common shares ($9,999) $15,626 ($13,096) $8,280
========== ========== ========== ==========
Shares
Weighted average common shares outstanding 52,854 51,919 52,694 51,469
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 767 893
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents 52,854 52,686 52,694 52,362
========== ========== ========== ==========
Earnings (loss) per common share ($0.19) $0.30 ($0.25) $0.16
========== ========== ========== ==========
FULLY DILUTED (b)
Earnings (loss)
Net income (loss) ($6,981) $18,644 ($4,040) $17,336
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 2,480 2,568 7,439 7,705
---------- ---------- ---------- ----------
Net income (loss), as adjusted ($4,501) $21,212 $3,399 $25,041
========== ========== ========== ==========
Shares
Weighted average common shares outstanding 52,854 51,919 52,694 51,469
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 227 767 184 893
Adjustment for shares issuable upon assumed
conversion of $3.50 Convertible
Exchangeable Preferred Stock 7,340 7,340 7,340 7,340
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,132 4,132 4,132 4,132
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents, as adjusted 64,553 64,158 64,350 63,834
========== ========== ========== ==========
Earnings (loss) per common share ($0.07) $0.33 $0.05 $0.39
========== ========== ========== ==========
(a) These figures agree with the related amounts in the Consolidated Statement of Operations.
(b) This calculation is submitted in accordance with Regulation S-K, Item 601(b)(11) although
it is contary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive
result.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q DATED SEPTEMBER 29,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000094673
<NAME> STORAGE TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-END> SEP-29-1995
<CASH> 201,237
<SECURITIES> 0
<RECEIVABLES> 365,041 <F1>
<ALLOWANCES> 0
<INVENTORY> 260,729
<CURRENT-ASSETS> 898,988
<PP&E> 385,765 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,929,542
<CURRENT-LIABILITIES> 450,447
<BONDS> 199,337
<COMMON> 5,290
0
35
<OTHER-SE> 1,256,871
<TOTAL-LIABILITY-AND-EQUITY> 1,929,542
<SALES> 927,716
<TOTAL-REVENUES> 1,370,484
<CGS> 584,925
<TOTAL-COSTS> 871,259
<OTHER-EXPENSES> 180,829 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,975
<INCOME-PRETAX> 8,960
<INCOME-TAX> 13,000
<INCOME-CONTINUING> (4,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,040)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> 0
<FN>
<F1> Asset values for the interim period
represent net amounts.
<F2> Includes litigation settlement of
$30,680,000 and merger expense of
$14,352,000.
</FN>
</TABLE>
