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 June 30, 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) - 52,830,247 shares outstanding at August 4,
1995.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 30, 1995
PAGE
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PART I - FINANCIAL INFORMATION
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
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 4 - Submission of Matters to a Vote of
Security Holders 28
Item 6 - Exhibits and Reports on Form 8-K 29
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Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In Thousands of Dollars)
06/30/95 12/30/94
--------- ---------
ASSETS
Current assets:
Cash, including cash equivalents $ 264,298 $ 228,081
Short-term investments 5,477
Accounts receivable, net 325,604 353,455
Notes and installment receivables 9,357 9,110
Net investment in sales-type leases 80,996 155,341
Inventories (Note 3) 263,160 261,705
--------- ---------
Total current assets 943,415 1,013,169
Notes and installment receivables 10,801 11,851
Net investment in sales-type leases 145,220 231,377
Equipment held for sale or lease, at cost (net) 144,699 146,320
Spare parts for field service, at cost (net) 58,520 62,421
Property, plant and equipment, at cost (net) 393,445 380,511
Deferred income tax assets, net 55,258 51,768
Other assets 229,136 247,041
--------- ---------
$1,980,494 $2,144,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease
commitments $ 22,727 $ 79,407
Current portion of other long-term debt 9,131 28,396
Accounts payable and accrued liabilities 398,735 394,842
Income taxes payable 3,258 9,459
--------- ---------
Total current liabilities 433,851 512,104
8% Convertible subordinated debentures 145,645 145,645
Nonrecourse borrowings secured by lease commitments 30,320 112,073
Other long-term debt 85,891 99,169
Deferred income tax liabilities 13,039 10,182
--------- ---------
Total liabilities 708,746 879,173
--------- ---------
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 June 30, 1995
and December 30, 1994, $172,500,000 aggregate
liquidation preference 35 35
Common stock, $.10 par value, 150,000,000 shares
authorized; 52,892,143 shares issued at June 30,
1995, and 52,517,626 shares issued at December 30,
1994 5,289 5,252
Capital in excess of par value 1,571,214 1,562,568
Accumulated deficit (294,453) (291,356)
Treasury stock of 43,447 shares at June 30, 1995
and 35,713 shares at December 30, 1994 (774) (773)
Unearned compensation (5,362) (6,150)
Notes receivable from stockholders (4,201) (4,291)
--------- ---------
Total stockholders' equity 1,271,748 1,265,285
--------- ---------
$1,980,494 $2,144,458
========= =========
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
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Six Months Ended
------------------------------------------
06/30/95 07/01/94 06/30/95 07/01/94
------------------------------------------
Sales $330,739 $277,605 $635,831 $531,758
Service and rental revenue 149,963 143,499 295,057 287,534
------- ------- ------- -------
Total revenue 480,702 421,104 930,888 819,292
------- ------- ------- -------
Cost of sales 210,244 168,888 401,792 344,239
Cost of service and rental revenue 96,698 90,671 193,239 180,824
------- ------- ------- -------
Total cost of revenue 306,942 259,559 595,031 525,063
------- ------- ------- -------
Gross profit 173,760 161,545 335,857 294,229
Research and product development
costs 45,207 46,365 93,383 94,459
Marketing, general,
administrative and other
income and expense, net 114,444 96,131 223,501 201,425
Merger expenses (Note 2) 14,352
------- ------- ------- -------
Operating profit (loss) 14,109 19,049 4,621 (1,655)
Interest expense 9,538 11,223 20,313 20,494
Interest income (11,784) (12,294) (24,133) (25,141)
------- ------- ------- -------
Income before income taxes 16,355 20,120 8,441 2,992
Provision for income taxes 4,500 4,400 5,500 4,300
------- ------- ------- -------
Net income (loss) 11,855 15,720 2,941 (1,308)
Preferred stock dividend 3,019 3,019 6,038 6,038
------- ------- ------- -------
Income (loss) applicable
to common shares $ 8,836 $ 12,701 $ (3,097) $ (7,346)
======= ======= ======= =======
Earnings (loss) per common
share $ 0.17 $ 0.24 $ (0.06) $ (0.14)
======= ======= ======= =======
Weighted average common
shares and equivalents 52,847 52,200 52,613 51,242
======= ======= ======= =======
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
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Six Months Ended
---------------------
06/30/95 07/01/94
--------- -------
OPERATING ACTIVITIES
Cash received from customers $1,129,442 $ 826,423
Cash paid to suppliers and employees (847,435) (851,753)
Interest received 33,378 31,665
Interest paid (19,640) (19,595)
Income taxes (paid) refunded, net (3,583) 2,356
--------- -------
Net cash from (used in) operating activities 292,162 (10,904)
--------- -------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (44,526) (64,185)
Short-term investments, net 5,557 19,016
Merger expenses (9,528)
Other assets, net (21,747) (11,183)
--------- -------
Net cash used in investing activities (70,244) (56,352)
--------- -------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 3,060 74,689
Repayments of nonrecourse borrowings (138,401) (80,454)
Proceeds from other debt 858 9,189
Repayments of other debt (52,222) (22,485)
Proceeds from employee stock plans 6,104 12,922
Preferred stock dividend payments (6,038) (6,038)
--------- -------
Net cash used in financing activities (186,639) (12,177)
--------- -------
Effect of exchange rate changes on cash 938 12,958
--------- -------
Increase (decrease) in cash and
cash equivalents 36,217 (66,475)
Cash and cash equivalents - beginning
of the period 228,081 280,973
--------- -------
Cash and cash equivalents - end of the period $ 264,298 $ 214,498
========= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 2,941 $ (1,308)
Depreciation and amortization expense 111,571 96,422
Translation gain (6,922) (10,231)
Other adjustments to income 20,804 1,927
(Increase) decrease in accounts receivable 35,672 (18,698)
Decrease in notes receivable and sales-type leases 163,978 34,963
(Increase) decrease in inventories 1,799 (59,697)
Increase in equipment held for sale or lease, net (29,261) (44,255)
Increase in spare parts, net (7,665) (16,509)
(Increase) decrease in net deferred income tax asset (1,518) 771
Decrease in accounts payable and accrued liabilities (2,672) (174)
Increase in income taxes payable 3,435 5,885
--------- --------
Net cash from (used in) operating activities $ 292,162 $ (10,904)
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Notes
Capital in Receivable
Preferred Common Excess of Accumulated Treasury Unearned From
Stock Stock Par Value Deficit Stock Compensation Stockholders
---------------------------------------------------------------------------------------------
<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
(394,266 shares) 39 7,568
Cash dividends paid on preferred
stock ($1.75 per share) (6,038)
Restricted stock amortization 371
Net income 2,941
Other (2) 1,078 (1) 417 90
-- ----- --------- -------- ---- ------ ------
Balances, June 30, 1995 $35 $5,289 $1,571,214 $(294,453) $(774) $(5,362) $(4,201)
== ===== ========= ======== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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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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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):
Six Months Ended
------------------------
06/30/95 07/01/94
------------------------
Revenue:
Pre-merger
StorageTek $400,013 $696,539
Network Systems 46,424 118,402
Merger adjustments 3,749 4,351
------- -------
450,186 819,292
Post-merger 480,702
------- -------
$930,888 $819,292
======= =======
Net income (loss):
Pre-merger
StorageTek $ 3,208 $ (5,225)
Network Systems (15,686) 2,599
Merger adjustments 3,564 1,318
------- -------
(8,914) (1,308)
Post-merger 11,855
------- -------
$ 2,941 $ (1,308)
======= =======
Pre-merger net income for the six months ended June 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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NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following (in thousands of dollars):
06/30/95 12/30/94
------------------------
Raw Materials $ 77,960 $ 51,938
Work-In-Process 97,317 105,605
Finished Goods 87,883 104,162
------- -------
$263,160 $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 has 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 will be recognized during the third quarter of 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 and its subsidiary, StorageTek Distributed
Systems Division, Inc. (StorageTek DSD) (formerly known as "XL/Datacomp,
Inc."), 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
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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 and StorageTek DSD 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. No trial date has been set and the case is in the discovery phase.
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. 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.
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.
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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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 SALE AND INTEGRATION
- --------------------------------------------------
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
quarter, the Company also announced plans to fully integrate StorageTek
Distributed Systems Division, Inc., the Company's wholly owned midrange
subsidiary, into StorageTek's operations. The sale of the midrange lease
assets generated cash of approximately $180 million with the majority of the
cash utilized for repayments of borrowings associated with the assets. The
gain associated with the lease asset sale was largely offset by transaction
and integration costs incurred during the second quarter and has been included
with marketing, general, administrative and other income and expense on the
Consolidated Statement of Operations.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1995
GENERAL
- -------
Storage Technology Corporation (StorageTek or the Company) reported net income
for the second quarter ended June 30, 1995, of $11.9 million on revenue of
$480.7 million, compared to net income for the second quarter ended July 1,
1994, of $15.7 million on revenue of $421.1 million. Net income of $2.9
million was reported for the six months of 1995 on revenue of $930.9 million,
compared to a net loss of $1.3 million for the six months of 1994 on revenue
of $819.3 million.
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. Merger expenses of $14.4
million were recognized in the first quarter of 1995 in connection with the
merger.
Revenue increased 14% in both the second quarter and six months of 1995
compared to the same periods in 1994. These increases were primarily as a
result of incremental sales revenue from the TimberLine 9490 (TimberLine), a
36-track tape cartridge subsystem, and the Iceberg 9200 Virtual Storage
Facility (Iceberg). While Iceberg provided incremental revenue and operating
profit contribution during the second quarter, the rate of growth slowed. The
Company believes this slowing is largely attributable to delayed purchase
decisions by customers in anticipation of Enterprise Systems Connection
(ESCON) support and other enhanced features for Iceberg, which became
available in July 1995. Revenue and operating profit contributions from
Iceberg during the second quarter of 1995, compared to the second quarter of
1994, were also reduced by continued price competition in the direct access
storage device (DASD) marketplace. As anticipated, revenue from the 4480 18-
track tape cartridge subsystem, Silverton 4490 36-track tape cartridge
subsystem, and midrange subsystems decreased during the second quarter of 1995
compared to the second quarter of 1994. Revenue from the Company's networking
products also decreased slightly during the second quarter, compared to the
same period in 1994, as the Company transitions to a new line of recently
introduced products. Operating results for the six months of 1995 were also
affected by merger expenses of $14.4 million and the discontinuance of
austerity measures, including salary reductions, which were in place during
the first half of 1994.
The continuing success of Iceberg and TimberLine is key to achieving
improvements in revenue and operating results for the remainder of 1995. The
Company's ability to gain further market acceptance of Iceberg is
significantly dependent upon the success of
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Page 13
several recently introduced functions and features. Market acceptance of
recently introduced networking products, including the Enterprise Routing
Switch (ERS), is also key to the Company's future results. Other factors that
may affect future results include the extent of future DASD price declines,
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 plans
to continue the implementation of cost-control measures in order to attain
targeted expense ratios. These cost-control measures may include further
redeployments or reductions in workforce.
As further discussed in Note 4 to the consolidated financial statements, the
Company's operating results for the third quarter of 1995 will include a one-
time charge of $30.7 million associated with the settlement of shareholder
litigation.
The Company's cash balances increased $36.2 million during the six months of
1995 as cash generated by the Company's operating activities was partially
offset by net repayments of debt and investments in property, plant and
equipment.
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 Six Months Ended
------------------ ------------------
06/30/95 07/01/94 06/30/95 07/01/94
------------------ ------------------
Revenue:
Serial Access Subsystems 61.2% 59.9% 58.9% 56.2%
Random Access Subsystems 16.4 9.9 18.7 7.6
Networking Products 11.2 14.4 11.3 15.1
Midrange Subsystems and Other 11.2 15.8 11.1 21.1
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 63.9 61.6 63.9 64.1
----- ----- ----- -----
Gross profit 36.1 38.4 36.1 35.9
Research and product
development costs 9.4 11.0 10.0 11.5
Marketing, general, administrative
and other income and expense, net 23.8 22.9 24.0 24.6
Merger expenses 1.6
----- ----- ----- -----
Operating profit (loss) 2.9 4.5 0.5 (0.2)
Interest (income) expense, net (0.5) (0.3) (0.4) (0.6)
----- ----- ----- -----
Income before income taxes 3.4 4.8 0.9 0.4
Provision for income taxes 0.9 1.1 0.6 0.6
----- ----- ----- -----
Net income (loss) 2.5% 3.7% 0.3% (0.2)%
===== ===== ===== =====
REVENUE
- -------
Revenue increased 14% in both the second quarter and six months of 1995
compared to the same periods of 1994, principally as a result of increases in
product sales of 19% and 20% for the second quarter and six months of 1995,
respectively. Service and
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Page 14
rental revenue also increased 5% and 3% in the second quarter and six months
of 1995, respectively, compared to the same periods of 1994.
SERIAL ACCESS SUBSYSTEMS
Revenue from serial access subsystem products increased 17% and 19% in the
second quarter and six 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 during the quarter. Revenue from the PowderHorn 9310, an automated
cartridge system (ACS) library, increased during the second quarter and six
months of 1995, while revenue from the first generation 4400 ACS library was
largely unchanged for those periods.
Incremental sales during 1995 associated with TimberLine and the new RedWood
SD-3 (RedWood), a helical tape cartridge subsystem, which became available in
the first quarter of 1995, are expected to offset anticipated declines in
revenue from earlier generation tape and library products. Revenue
contribution from RedWood during 1995 is significantly dependent upon the
Company's ability to develop and introduce Small Computer System Interface
(SCSI) support for RedWood on a timely basis. The serial access product
family generates more revenue than any other product line of the Company and
is expected to continue to be a major element of the Company's plans for 1995.
RANDOM ACCESS SUBSYSTEMS
Revenue from random access subsystem products increased 90% and 178% in the
second quarter and six months of 1995, respectively, compared to the same
periods of 1994, due to incremental sales of Iceberg, which became generally
available during the second quarter of 1994. While Iceberg sales revenue
increased during the second quarter, the rate of revenue growth slowed as a
result of continued price competition in the DASD marketplace. The Company
believes sales during the second quarter of 1995 were impacted by delays in
customer purchase decisions in anticipation of the availability of new Iceberg
feature enhancements, including the addition of ESCON support, a high-speed
fiber optic data transmission method. The Company announced availability of
ESCON connectivity for Iceberg in July 1995, as well as the availability of
features which allow advanced data compression and greater utilization of the
disk drives within Iceberg.
Sales of Iceberg during the remainder of 1995 are significantly dependent upon
continued market acceptance of Iceberg as a result of the recently announced
feature enhancements. The Company is committing substantial resources to
develop other new DASD products. While the Company believes the introduction
schedules for these products are achievable; there can be no assurances that
they will be met, or that they will gain market acceptance.
PAGE
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Page 15
NETWORKING PRODUCTS
Revenue from networking products decreased 11% and 15% in the second quarter
and six months of 1995, respectively, compared to the same periods of 1994.
These decreases reflect declining product sales of the Company's older
products as it transitions to a new line of recently introduced networking
products.
Network Systems and Northern Telecom Limited (NORTEL) are jointly developing
the Enterprise Routing Switch (ERS), a product which is designed to combine
local-area network and wide-area network routing and switching technology.
The Company recognized initial revenue from ERS during the second quarter of
1995. ERS currently supports Ethernet, FDDI, and Frame Relay. Asynchronous
Transfer Mode (ATM) support for ERS is currently in the planning stage.
The Company announced in July 1995 that it had accelerated plans to integrate
Network Systems at all levels within the Company's operations; including field
sales, support and maintenance, administration, finance and other functional
areas. The integration is expected to benefit the Company through combined
marketing and sales processes, as well as through anticipated cost savings on
an on-going basis. The Company expects to incur costs of approximately $2
million during the third quarter of 1995 associated with the integration of
Network Systems.
Revenue and operating results from the Company's networking products during
the remainder of 1995 are significantly dependent upon market acceptance of
ERS and other new networking products and the successful implementation of its
integration plans for Network Systems. The timely introduction of ATM support
for ERS is significantly dependent upon the success of the Company's joint
development program with 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 marketplace.
MIDRANGE SUBSYSTEMS AND OTHER
Revenue from midrange subsystems and other products decreased 19% and 40% in
the second quarter and six months of 1995, respectively, compared to the same
periods of 1994. 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 quarter, the Company also announced plans to fully
integrate StorageTek Distributed Systems Division, Inc., the Company's wholly
owned midrange subsidiary, into StorageTek's operations. The gain on the
lease asset sale was largely offset by transaction and integration costs
incurred during the second quarter. The Company will continue to support its
existing midrange and open-systems customer base and sell its storage
solutions in these marketplaces. However, revenue from the midrange product
line is expected to be reduced in future periods.
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Form 10-Q
Page 16
GROSS PROFIT
- ------------
Overall gross profit decreased to 36% for the second quarter of 1995, compared
to 38% for the second quarter of 1994, due to a decrease in both product sales
margins and service and rental margins. Overall gross profit of 36% for the
six months of 1995 was unchanged, compared to the six months of 1994, as
increased sales margins were offset by decreased service and rental margins.
Gross profit on product sales decreased to 36% in the second quarter of 1995,
compared to 39% in the second quarter of 1994. This decrease was primarily
due to reduced Iceberg margins as a result of the continuation of price
declines in the DASD marketplace, as well as decreased margin contribution
from the networking product line during the quarter.
Gross profit on product sales increased to 37% for the six months of 1995,
compared to 35% for the six months of 1994, primarily as a result of a
favorable mix of products sold during the first quarter of 1995. The product
sales mix in the first quarter of 1995 included greater revenue and margin
contribution from Iceberg and TimberLine and reduced revenue contribution from
midrange products, which generally have low margins.
Product sales margins in the second quarter and six months of 1995 were also
affected by increased operating expenses associated with the discontinuance of
salary reductions and other austerity measures which were in place during the
comparative periods of 1994.
Gross profit on service and rental revenue decreased to 36% and 35% for the
second quarter and six months of 1995, respectively, compared to 37% for the
same periods of 1994, primarily due to the discontinuance of austerity
measures, longer product warranty periods, and increased costs associated with
the installation of new products.
The Company's ability to sustain product sales margins during the remainder of
1995 is significantly dependent upon market acceptance of recently introduced
Iceberg feature enhancements and networking products. Product sales margins
may also be adversely affected by inventory writedowns as a result of more
rapid than anticipated technological changes and continuing price erosion in
the DASD marketplace. Service margins are expected to continue to be affected
during 1995 by longer warranty periods and increased costs associated with the
installation of new products.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures remained largely unchanged in
the second quarter and six months of 1995 compared to the same periods of
1994, but declined as a percentage of revenue from 11.0% and 11.5% for the
second quarter and six months of 1994, respectively, to 9.4% and 10.0% for the
second quarter and six months of 1995. While the Company continues to invest
in the development of new products and enhancements to existing products, the
decline in expenditures as a
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Form 10-Q
Page 17
percentage of revenue reflects the completion of several major product
development programs during 1994.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A)
increased 19% and 11% in the second quarter and six months of 1995 compared to
the same periods of 1994, primarily due to an increase in operating expenses
resulting from higher sales volumes. MG&A for the second quarter and six
months of 1994 also benefited from cost savings associated with austerity
measures which were discontinued at the end of the second quarter of 1994 and
a $5.7 million gain associated with the sale of an investment in the second
quarter of 1994. As further discussed in Note 6 to the Consolidated Financial
Statements, the midrange lease asset sale and integration was included within
MG&A during the second quarter of 1995, but had no material effect on the
Company's financial results.
Gains and losses associated with foreign currency transactions and translation
adjustments were largely offset by the associated foreign currency hedging
results from the second quarter and six 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.
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 4% in both the second quarter and six months of 1995
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 15% in the second quarter of 1995 compared to the
second quarter of 1994, primarily as a result of reduced levels of non-
recourse borrowings during the second quarter of 1995. Interest expense was
largely unchanged for the six months of 1995, compared to the same period of
1994.
As a result of the midrange lease asset sale on June 30, 1995, and the
repayment of associated lease borrowings, it is anticipated that future levels
of both interest income
PAGE
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Form 10-Q
Page 18
and expense will be reduced. These decreases are expected to be largely
offsetting and, accordingly, are not expected to affect the Company's
profitability.
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 $55.3 million of
deferred income tax assets as of June 30, 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 taxable earnings
associated with its international operations in certain foreign countries. 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
six months 1995. The remaining restructuring accrual of $6.5 million as of
December 31, 1994, was reduced by cash payments of $2.8 million during the
six months of 1995, leaving a remaining restructuring accrual of $3.7 million
as of June 30, 1995. The remaining accrual consists primarily of anticipated
future lease payments.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balances increased $36.2 million from December 30, 1994, to
June 30, 1995. The increase in cash during the six months of 1995 primarily
resulted from cash generated from operations; offset by net repayments of debt
of $186.7 million, and investments in property, plant and equipment of $44.5
million. Net cash provided by operations was $292.2 million for the six
months of 1995 compared to net cash used in operations of $10.9 million for
the six months of 1994. Net cash provided
PAGE
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Form 10-Q
Page 19
by operations for the six months of 1995 includes cash generated from the sale
of midrange lease assets of approximately $180 million and collections of
income tax refunds and associated interest by Network Systems from the
Internal Revenue Service of $18.9 million. Net cash used in operations for
the six months of 1994 includes collection of income tax refunds and
associated interest of $23.9 million. The net repayments of debt for the six
months of 1995 of $186.7 million was primarily due to the repayment of
borrowings associated with the sale of midrange lease assets.
The current ratio increased from 2.0 as of December 30, 1994, to 2.2 as of
June 30, 1995. Accounts receivable decreased from $353.5 million as of
December 30, 1994, to $325.6 million as of June 30, 1995, due primarily to
lower revenue in the second quarter of 1995 compared to the fourth quarter of
1994. Inventories as of June 30, 1995, of $263.2 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 (9.0% as of June 30, 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 June 30, 1995, the Company had no outstanding
advances under the Revolver and had approximately $171 million of available
credit under the Revolver.
In addition to the Revolver, the Company had lease assets in excess of $75
million available for financing as of June 30, 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 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.
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Form 10-Q
Page 20
LONG-TERM DEBT-TO-EQUITY
The Company's long-term debt-to-equity ratio decreased from 28% as of December
30, 1994, to 21% as of June 30, 1995. These debt-to-equity ratios include
$112.1 million and $30.3 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 six months of 1995 reflects the
repayment of non-recourse borrowings associated with the Company's sale of
midrange lease assets in the second quarter of 1995. Excluding long-term
nonrecourse borrowings, the Company's long-term debt-to-equity ratio decreased
from 19% as of December 30, 1994, to 18% as of June 30, 1995.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
Pursuant to the indenture related to the Company's 8% Convertible Subordinated
Debentures due 2015 (Convertible Debentures), the Company is required to make
semiannual interest payments on the $145.6 million principal amount of
Convertible Debentures outstanding. The Convertible Debentures are
convertible at the option of the holder into common stock at a price of $35.25
per share. The 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. Convertible Debentures in the principal amount of $8
million per annum, plus accrued interest, must be redeemed beginning May 31,
2000, through a sinking fund which provides for the retirement of 75% of the
Convertible Debentures prior to their maturity on May 31, 2015. Convertible
Debentures purchased by the Company in the open market and Convertible
Debentures converted to common stock may be applied to the sinking
fund requirements. As of June 30, 1995, the Company held 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.
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.
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Form 10-Q
Page 21
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. The
debentures, if issued, would contain conversion and optional redemption
provisions substantially identical to those of the Preferred Stock, and would
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 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
PAGE
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Form 10-Q
Page 22
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 enhancements to existing products during 1995.
These products include networking products being developed by the Company's
newly acquired 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
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 1995 high-end DASD manufacturing capacity and
total projected output are greater than anticipated demand. This over-
capacity has placed continued downward pressure on pricing. 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 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 networking products and successful
PAGE
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Form 10-Q
Page 23
implementation of integration plans for 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-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
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Form 10-Q
Page 24
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 earnings in 1995 may also be significantly affected by the
operating results of the Company's recently acquired subsidiary, Network
Systems. Network Systems' forecasted operating results for 1995, together
with merger expenses, are expected to be dilutive to the Company's reported
earnings 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
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
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Form 10-Q
Page 25
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.
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Form 10-Q
Page 26
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
See Part I, Item 3 of the Form 10-K for the year ended December 30, 1994.
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 has 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 will be recognized during the third quarter of 1995.
In February 1994, the Company and its subsidiary, StorageTek Distributed
Systems Division, Inc. (StorageTek DSD) (formerly known as "XL/Datacomp,
Inc."), 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 and StorageTek DSD 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. No trial date has been
set and the case is in the discovery phase.
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
PAGE
<PAGE>
Form 10-Q
Page 27
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. 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.
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.
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.
PAGE
<PAGE>
Form 10-Q
Page 28
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The annual meeting of stockholders of the Company was held on May 24, 1995. A
quorum of stockholders was represented at the meeting in person or by proxy.
There was no solicitation in opposition to management's nominees as listed in
the proxy statement and all managerial nominees were elected. The directors
elected at the annual meeting were:
For Withheld
---------- ---------
Ryal R. Poppa 40,031,878 2,597,802
Judith E.N. Albino 40,034,974 2,594,706
William L. Armstrong 40,066,610 2,563,070
Robert A. Burgin 40,054,361 2,575,319
Paul Friedman 40,053,826 2,575,854
William R. Hoover 40,056,764 2,572,916
Stephen J. Keane 40,061,985 2,567,695
Robert E. LaBlanc 40,061,948 2,567,732
Robert E. Lee 40,060,570 2,569,110
Harrison Shull 40,053,561 2,576,119
Richard C. Steadman 40,061,671 2,568,009
Thomas A. Vanderslice 40,056,525 2,573,155 *
Robert C. Wilson 39,846,427 2,783,253
At the annual meeting, the stockholders ratified the adoption of the 1995
Equity Participation Plan and the reservation of 2,200,000 shares of Common
Stock for issuance to employees thereunder, by a vote of 36,601,955 in favor
to 5,622,107 against, with 405,618 abstentions.
The stockholders also approved the ratification of the appointment of Price
Waterhouse LLP as the Company's independent accountants for the current fiscal
year, by a vote of 42,069,162 in favor to 376,433 against, with 184,085
abstentions.
Two proposals made by a stockholder were presented to the stockholders for a
vote. The first, a proposal that the Company file with the Internal Revenue
Service under Section 501(c)(3) to operate as a non-profit organization was
defeated, by a vote of 27,136 in favor to 42,603,759 against, with no
abstentions. The second proposal, that Ryal R. Poppa resign as Chief
Executive Officer of the Company was defeated, by a vote of 27,679 in favor to
42,602,178 against, with no abstentions. There were no broker non-votes on
any of the proposals.
- --------------------------------------
* On July 25, 1995, the Company announced the resignation of Thomas A.
Vanderslice as a director. Mr. Vanderslice and the Company mutually
agreed that potential business conflicts could arise due to Mr.
Vanderslice's brother assuming a new position within the storage
systems unit of IBM, a direct competitor of the Company.
PAGE
<PAGE>
Form 10-Q
Page 29
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
*10.1 Storage Technology Corporation 1995 Equity Participation Plan
*10.2 First Amendment and Waiver dated as of April 20, 1995, to the
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994
*10.3 Second Amendment and Waiver dated as of June 27, 1995, to the
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994
*10.4 Amendment to Employment Agreement between the Company and
Ryal R. Poppa dated July 27, 1995
*11.0 Computation of Earnings (Loss) Per Common Share
*27.0 Financial Data Schedule
(b) Reports on Form 8-K
During the second quarter of 1995, the Company filed two
reports on Form 8-K. The first Form 8-K was filed on April 3, 1995,
in connection with the retention of Price Waterhouse LLP as the
independent accountants of all subsidiaries, including Network
Systems, the newly-acquired subsidiary, and the resulting
disengagement of Ernst & Young LLP. On April 7, 1995, and April 12,
1995, the Company filed amendments on Form 8-K/A to the April 3,
1995, Form 8-K to include correspondence from Ernst & Young LLP.
The second Form 8-K was filed on May 17, 1995, in connection with a
publicly disseminated news release concerning the Company's intent
to sell substantially all of the lease assets of its subsidiary,
StorageTek Distributed Systems Division, Inc. The Company did not
file any other reports on Form 8-K during the quarter ended June 30,
1995.
- ---------------------
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
PAGE
<PAGE>
Form 10-Q
Page 30
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)
August 11, 1995 /s/ DAVID E. LACEY
- --------------- --------------------------------
(Date) David E. Lacey
Interim Chief Financial Officer
and Corporate Vice President
(Principal Financial Officer)
August 11, 1995 /s/ MARK D. MCGREGOR
- --------------- -----------------------------
(Date) Mark D. McGregor
Treasurer, Interim Controller
and Corporate Vice President
(Principal Accounting Officer)
<PAGE>
<PAGE>
EXHIBITS INDEX
--------------
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------
10.1 Storage Technology Corporation 1995 Equity Participation Plan
10.2 First Amendment and Waiver dated as of April 20, 1995, to the
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994
10.3 Second Amendment and Waiver dated as of June 27, 1995, to the
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994
10.4 Amendment to Employment Agreement between the Company and
Ryal R. Poppa dated July 27, 1995
11.0 Computation of Earnings (Loss) Per Common Share
27.0 Financial Data Schedule
EXHIBIT 10.1
- ------------
STORAGE TECHNOLOGY CORPORATION
1995 EQUITY PARTICIPATION PLAN
Section 1
Introduction.
1.1 Establishment. Effective as provided in Section 21, the
Company hereby establishes a plan of long-term stock-based compensation
incentives for selected employees of the Company and its affiliated
corporations. The plan shall be known as the Storage Technology
Corporation 1995 Equity Participation Plan (the "1995 Plan").
1.2 Purpose. The purpose of the 1995 Plan is to provide
employees selected for participation in the 1995 Plan with added
incentives to continue in the service of the Company and its affiliates
and to create in such employees a more direct interest in the future
success of the operations of the Company and its affiliated corporations
by relating incentive compensation to the achievement of long-term
corporate economic objectives. The 1995 Plan is also designed to attract
key employees and to retain and motivate participating employees by
providing an opportunity for equity investment in the Company.
1.3 No Effect on 1987 Plan Options. Options granted pursuant
to the Storage Technology Corporation 1987 Equity Participation Plan (the
"1987 Plan") shall be governed by the terms and provisions of the option
agreements covering such grants and by the provisions of the 1987 Plan.
Section 2
Definitions.
2.1 Definitions. The following terms shall have the meanings
set forth below:
(a) "Affiliated Corporation" means any corporation that
is either a parent corporation with respect to the Company or a
subsidiary corporation with respect to the Company (within the meaning of
Sections 424(e) and (f), respectively, of the Internal Revenue Code).
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means a committee designated by the Board
to administer the Plan or, if no committee is so designated, the Board.
(d) "Common Stock" means the Company's $.10 par value
voting common stock.
<PAGE>
(e) "Effective Date" means the effective date of the 1995
Plan, as set forth in Section 21 hereof.
(f) "Eligible Employees" means those employees (inclu-
ding, without limitation, officers and directors who are also employees)
of the Company, or any Affiliated Corporation, or any division thereof,
upon whose judgment, initiative and efforts the Company or the Affiliated
Corporations are, or are expected to become, largely dependent for the
successful conduct of their business.
(g) "Fair Market Value" means with respect to Common
Stock, as of any date, the closing price of a share of Common Stock on
the New York Stock Exchange as reported by The Wall Street Journal for
the last trading day prior to that date. If no such prices are reported,
then Fair Market Value shall mean the average of the high and low sale
prices for the Common Stock (or if no sale prices are reported, the
average of the high and low bid prices) as reported by the principal
regional stock exchange, or if not so reported, as reported by Nasdaq or
a quotation system of general circulation to brokers and dealers.
(h) "Incentive Stock Option" means the right to purchase
Common Stock granted to a participant pursuant to Sections 6 and 7, which
constitutes an incentive stock option within the meaning of Section 422
of the Internal Revenue Code, and which may or may not be issued with
related Stock Appreciation Rights.
(i) "Internal Revenue Code" means the Internal Revenue
Code of 1986, as it may be amended from time to time.
(j) "MBO Payment" means a payment to a Participant
pursuant to the Company's MBO Equity Plan, which payment may be made
either in shares of Common Stock or in cash, or partly in Common Stock
and partly in cash, as determined in accordance with the provisions of
Section 12.
(k) "MBO Equity Plan" means the Company's Management By
Objective Plan, as established by the Board or the Committee from time to
time, pursuant to which MBO Payments are made from time to time in the
manner and under the conditions established by the Board or the
Committee.
(l) "Non-Qualified Option" means a right to purchase
Common Stock granted to a participant pursuant to Sections 6 and 8, which
does not qualify as an Incentive Stock Option or which is designated as a
<PAGE>
Non-Qualified Option, and which may or may not be issued with related
Stock Appreciation Rights.
(m) "Participant" means an Eligible Employee designated
by the Committee from time to time during the term of the 1995 Plan to
receive one or more of the stock-based compensation incentives provided
under the 1995 Plan.
(n) "Restricted Stock Award" means an award of Common
Stock granted to a Participant pursuant to Section 10 that is subject to
certain restrictions imposed in accordance with the provisions of such
Section.
(o) "Stock Appreciation Right" means a right granted to a
Participant pursuant to Section 9 to receive a payment from the Company
equal to the difference between the Fair Market Value of one or more
shares of Common Stock subject to a Non-Qualified Option or an Incentive
Stock Option and the exercise price of such shares under the terms of
such Stock Option.
(p) "Stock Option" means an Incentive Stock Option or a
Non-Qualified Option.
2.2 Gender and Number. Except when otherwise indicated by the
context, the masculine gender shall also include the feminine gender, and
the definition of any term herein in the singular shall also include the
plural.
Section 3
Plan Administration.
3.1 Administration Generally. The 1995 Plan shall be
administered by the Board or Committee. In accordance with the
provisions of the 1995 Plan, the Committee, in its sole discretion:
(i) shall select the Participants from Eligible Employees; (ii) shall
determine the number of shares of Common Stock to be subject to Incentive
Stock Options, Non-Qualified Options, Stock Appreciation Rights,
Restricted Stock Awards and other Common Stock awards granted pursuant to
the 1995 Plan; (iii) shall determine the number of shares of Common Stock
to be issued as MBO Payments; (iv) shall determine the time at which such
options, rights, awards and payments are to be granted; (v) shall fix the
exercise price, period and the manner in which a Stock Option becomes
exercisable; (vi) shall establish the duration and nature of Restricted
Stock Award restrictions; (vii) shall determine the Fair Market Value of
the Common Stock, in accordance with Section 2.1(g) of the 1995 Plan;
<PAGE>
(viii) shall determine whether and under what circumstances, if any, a
Stock Option or Stock Appreciation Right may be settled in cash instead
of Common Stock; (ix) may reduce the exercise price of any Stock Option
or Stock Appreciation Right to the then current Fair Market Value if the
Fair Market Value of the Common Stock covered by such option or right
shall have declined since the date the Stock Option was granted; (x) may
modify or amend the terms and conditions of any Stock Option, Stock
Appreciation Right, Restricted Stock Award or other Common Stock award,
subject to Section 18 of the Plan (including, but not limited to,
accelerating vesting or waiving forfeiture restrictions); (xi) may
institute an option exchange program; (xii) may authorize any person to
execute on behalf of the Company any instrument required to effect the
grant of a Stock Option, Stock Appreciation Right, Restricted Stock Award
or other Common Stock award previously granted by the Committee; and
(xiii) shall establish such other terms and requirements of the various
compensation incentives under the 1995 Plan as the Committee may deem
necessary or desirable and consistent with the terms of the 1995 Plan.
The Committee shall determine the form or forms of the agreements with
Participants, which shall evidence the particular provisions, terms,
conditions, rights and duties of the Company and the Participants with
respect to Incentive Stock Options, Non-Qualified Options, Stock Appre-
ciation Rights and Restricted Stock Awards granted pursuant to the 1995
Plan, which provisions need not be identical except as may be provided
herein. The Committee may from time to time adopt such rules and
regulations for carrying out the purposes of the 1995 Plan as it may deem
proper and in the best interests of the Company. The Committee may
correct any defect or supply any omission or reconcile any inconsistency
in the 1995 Plan or in any agreement entered into hereunder in the manner
and to the extent it shall deem expedient to carry the 1995 Plan into
effect, and it shall be the sole and final judge of such expediency. No
member of the Committee shall be liable for any action or determination
made in good faith. The determinations, interpretations and other
actions of the Committee pursuant to the provisions of the 1995 Plan
shall be binding and conclusive for all purposes and on all persons,
subject only to the review and control of the Board on all Plan matters
except selection of Participants.
3.2 Multiple Administrative Bodies. If permitted by Rule 16b-
3, the 1995 Plan may be administered by different bodies with respect to
directors of the Company who are Eligible Employees, officers (within the
meaning of Rule 16a-1(f)) who are not directors, and employees who are
neither directors nor officers.
3.3 Administration With Respect to Directors and Officers.
With respect to grants of Stock Options, Stock Appreciation Rights,
<PAGE>
Restricted Stock Awards or other Common Stock awards under the 1995 Plan
to employees who are also officers or directors, the 1995 Plan shall be
administered by (a) the Board, if the Board may administer the Plan in
compliance with the rules governing a plan intended to qualify as a
discretionary grant or award plan under Rule 16b-3, or (b) a Committee
designated by the Board to administer the 1995 Plan, which Committee
shall be constituted (i) in such a manner as to permit the Plan to comply
with the rules governing a plan intended to qualify as a discretionary
grant or award plan under Rule 16b-3 and (ii) in such a manner as to
satisfy applicable laws.
3.4 Administration With Respect to Other Persons. With
respect to grants of Stock Options, Stock Appreciation Rights, Restricted
Stock Awards or other Common Stock awards to employees who are neither
directors nor officers, the 1995 Plan shall be administered by (a) the
Board or (b) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy applicable laws.
3.5 Committee Composition. Once a Committee has been
appointed pursuant to Section 3.3 or 3.4, such Committee shall continue
to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies (however caused) or remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
applicable laws and, in the case of a Committee appointed under
Section 3.3, to the extent permitted by Rule 16b-3 as it applies to a
plan intended to qualify thereunder as a discretionary grant or award
plan.
Section 4
Stock Subject to The Plan.
4.1 Number of Shares. Two million two hundred thousand
(2,200,000) shares of Common Stock are authorized for issuance under the
1995 Plan in accordance with the provisions of the 1995 Plan and subject
to such restrictions or other provisions as the Committee may from time
to time deem necessary. This authorization may be increased from time to
time by approval of the Board and the stockholders of the Company.
Shares of Common Stock that are issued upon exercise of Incentive Stock
Options, Non-Qualified Options, or Stock Appreciation Rights or pursuant
to MBO Payments, shares of Common Stock that are issued as Restricted
Stock Awards, and shares of Common Stock that are issued pursuant to a
plan adopted pursuant to Section 14, shall be applied to reduce the
<PAGE>
number of shares of Common Stock remaining available for future issuance
under the 1995 Plan.
4.2 Unused and Forfeited Stock. Any shares of Common Stock
that are subject to an Incentive Stock Option or a Non-Qualified Option
that expires or for any reason is terminated unexercised, and with
respect to which no related Stock Appreciation Right has been exercised,
any shares of Common Stock that are subject to a Restricted Stock Award
and that are forfeited (the "Forfeited Restricted Stock"), and any shares
of Common Stock that for any other reason are not issued to an Eligible
Employee (not including shares withheld pursuant to Section 19.2) or are
forfeited (if forfeited, the "Other Forfeited Stock"), shall
automatically become available for use under the 1995 Plan; provided,
however, that (i) no shares of Forfeited Restricted Stock or Other
Forfeited Stock may be subject to Incentive Stock Options and (ii) such
shares shall not be returned to the 1995 Plan if prohibited by
Rule 16b-3.
4.3 Capital Adjustments.
(a) Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of shares of Common
Stock covered by each outstanding Stock Option and Stock Appreciation
Right (the "Outstanding Rights"), and the number of shares of Common
Stock that have been authorized for issuance under the Plan but as to
which no Stock Options or Stock Appreciation Rights have yet been granted
or that have been returned to the Plan upon cancellation or expiration of
a Stock Option or Stock Appreciation Right (the "Shares Available for
Future Grant"), as well as the price per share of Common Stock covered by
each Outstanding Right, shall be proportionately adjusted for any
increase or decrease in the number of issued and outstanding shares of
Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued and outstanding shares
of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such proportionate adjustment shall be made by the
Committee, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into
or exercisable for shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number of
Shares Available for Future Grant or the number or price of shares of
Common Stock subject to Outstanding Rights.
<PAGE>
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, to the extent that a
Stock Option or Stock Appreciation Right has not been previously
exercised, it will terminate immediately prior to the consummation of
such proposed action. The Committee may, in the exercise of its sole
discretion in such instances, declare that any Stock Option or Stock
Appreciation Right shall terminate as of a date fixed by the Committee
and give each Participant the right to exercise his or her Stock Option
or Stock Appreciation Right in whole or in part, including with respect
to shares as to which the Stock Option or Stock Appreciation Right would
not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger or
consolidation of the Company with or into another corporation, or the
sale of all or substantially all of the assets of the Company, each
outstanding Stock Option and Stock Appreciation Right may be assumed or
an equivalent Stock Option or Stock Appreciation Right may be substituted
by the successor corporation or a parent or subsidiary of the successor
corporation. The Committee may, in lieu of such assumption or
substitution, provide for the Optionee to have the right to exercise his
or her Stock Option or Stock Appreciation Right in whole or in part,
including with respect to shares as to which it would not otherwise be
exercisable. If the Committee makes a Stock Option or Stock Purchase
Right exercisable in lieu of assumption or substitution in the event of a
merger, consolidation or sale of assets, the Committee shall notify the
Optionee that the Stock Option or Stock Appreciation Right shall be fully
exercisable for a period of thirty (30) days from the date of such
notice, and the Stock Option or Stock Appreciation Right will terminate
upon the expiration of such period. For the purposes of this paragraph,
the Stock Option or Stock Appreciation Right shall be considered assumed
if, following the merger, consolidation or sale of assets, the Stock
Option or Stock Appreciation Right confers the right to purchase or
receive, for each share of Common Stock subject to the Stock Option or
Stock Appreciation Right immediately prior to the merger, consolidation
or sale of assets, the consideration (whether stock, cash or other
securities or property) received in the merger, consolidation or sale of
assets by holders of Common Stock for each share held on the effective
date of the transaction (and, if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares); provided, however, that if such
consideration received in the merger, consolidation or sale of assets was
not solely common stock of the successor corporation or its parent, the
Committee may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Stock Option or
Stock Appreciation Right, for each share of Common Stock subject to the
<PAGE>
Stock Option or Stock Appreciation Right, to be solely common stock of
the successor corporation or its parent equal in fair market value to the
per share consideration received by holders of Common Stock in the
merger, consolidation or sale of assets.
Section 5
Participation.
5.1 Eligibility. Participants in the 1995 Plan shall be those
Eligible Employees who, in the judgment of the Committee, are performing,
or during the term of their incentive arrangement are expected to
perform, vital services in the management, operation and development of
the Company or an Affiliated Corporation, and significantly contribute or
are expected to significantly contribute to the achievement of long-term
corporate economic objectives. Participants may be granted from time to
time one or more Incentive Stock Options (with or without Stock
Appreciation Rights), one or more Non-Qualified Options (with or without
Stock Appreciation Rights), one or more Restricted Stock Awards, one or
more MBO Payments in shares of Common Stock, and one or more other Common
Stock awards pursuant to Section 14; provided, however, that the grant of
each such option, right, award or payment shall be separately approved by
the Committee, and receipt of one such option, right, award or payment
shall not result in automatic receipt of any other option, right, award
or payment. Upon determination by the Committee that a Stock Option,
Stock Appreciation Right, Restricted Stock Award, MBO Payment or other
Common Stock award is to be granted to a Participant, written notice
shall be given to such person, specifying the terms, conditions, rights
and duties related thereto. Each Participant shall, if required by the
Committee, enter into an agreement with the Company, in such form as the
Committee shall determine and as is consistent with the provisions of the
1995 Plan, specifying such terms, conditions, rights and duties. Stock
Options, Stock Appreciation Rights, Restricted Stock Awards, MBO Payments
and other Common Stock awards shall be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date shall
be the date of any related agreement with the Participant. In the event
of any inconsistency between the provisions of the 1995 Plan and any such
agreement entered into hereunder, the provisions of the 1995 Plan shall
govern.
5.2 Limitations. The following limitations shall apply to
grants of Stock Options and Stock Appreciation Rights to Participants:
<PAGE>
(a) No Participant shall be granted, in any fiscal year
of the Company, Stock Options and Stock Appreciation Rights to purchase
more than 500,000 shares.
(b) The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's
capitalization as described in Section 4.3.
(c) If a Stock Option or Stock Appreciation Right is
canceled in the same fiscal year of the Company in which it was granted
(other than in connection with a transaction described in Section 4.3),
the canceled Stock Option or Stock Appreciation Right shall be counted
against the limit set forth in Section 5.2(a). For this purpose, if the
exercise price of a Stock Option or Stock Appreciation Right is reduced,
the transaction will be treated as a cancellation of the Stock Option or
Stock Appreciation Right and the grant of a new Stock Option or Stock
Appreciation Right.
5.3 Rule 16b-3. Stock Options, Stock Appreciation Rights,
Restricted Stock Awards, MBO Payments and other Common Stock awards
granted to Participants who are subject to Section 16 of the Exchange Act
must comply with the applicable provisions of Rule 16b-3 and shall
contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to 1995 Plan transactions.
Section 6
Stock Options.
6.1 Grant of Stock Options. Coincident with or following
designation for participation in the 1995 Plan, a Participant may be
granted one or more Stock Options. The Committee in its sole discretion
may designate whether a Stock Option is to be considered an Incentive
Stock Option or a Non-Qualified Option. The Committee may grant both an
Incentive Stock Option and a Non-Qualified Option to the same Participant
at the same time or at different times. Incentive Stock Options and Non-
Qualified Options, whether granted at the same or different times, shall
be deemed to have been awarded in separate grants, shall be clearly
identified, and in no event will the exercise of one Stock Option affect
the right to exercise any other Stock Option or affect the number of
shares of Common Stock for which any other Stock Option may be exercised.
6.2 Manner of Stock Option Exercise. A Stock Option may be
exercised by a Participant in whole or in part from time to time, subject
to the conditions contained herein, (i) by delivery of written notice of
<PAGE>
exercise to the Company at its principal office in Louisville, Colorado
(Attention: Corporate Secretary), in person or through mail, facsimile or
electronic mail, or by delivery of notice of exercise in such other
method as has been approved by the Committee, and (ii) by paying in full,
with the written notice of exercise or at such other time as the
Committee may establish, the total exercise price under the Stock Option
for the shares being purchased. Such notice shall be in a form
satisfactory to the Committee and shall specify the particular Stock
Option (or portion thereof) that is being exercised and the number of
shares with respect to which the Stock Option is being exercised. The
exercise of the Stock Option shall be deemed effective upon receipt of
such notice by the Corporate Secretary and payment to the Company. As
soon as practicable after the effective exercise of the Stock Option, and
upon satisfaction of all applicable withholding requirements pursuant to
Section 19, the Participant shall be recorded on the stock transfer books
of the Company as the owner of the shares purchased and the Company shall
deliver to the Participant one or more duly issued and executed stock
certificates evidencing such ownership.
6.3 Payment of Stock Option Exercise Price. At the time of
the exercise of a Stock Option, payment of the total Stock Option
exercise price for the shares to be purchased shall be made: (i) in cash
or by check; (ii) by transfer from the Participant to the Company of
shares of Common Stock (other than shares of Common Stock that the
Committee determines by rule may not be used to exercise Stock Options)
with a then current aggregate Fair Market Value equal to the total Stock
Option exercise price; (iii) delivery to the Company of (A) a properly
executed exercise notice, (B) irrevocable instructions to a broker to
sell a sufficient number of the shares being exercised to cover the
exercise price and to promptly deliver to the Company the amount of sale
proceeds required to pay the exercise price and any required tax
withholding relating to the exercise, and (C) such other documentation as
the Committee and the broker shall require to effect a same-day exercise
and sale; (iv) delivery to the Company of (A) a properly executed
exercise notice, (B) irrevocable instructions to a broker or other third
party acceptable to the Company to hold the shares being exercised as
collateral for a loan to the Optionee of an amount sufficient to cover
the exercise price and to promptly deliver to the Company the amount of
loan proceeds required to pay the exercise price and any required tax
withholding relating to the exercise and (C) such other documentation as
the Committee and the broker or other third party shall require to effect
the transaction; (v) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement; (vi) any combination of the foregoing methods of payment; or
<PAGE>
(vii) such other consideration and method of payment for the issuance of
Shares to the extent permitted by applicable laws, rules and regulations
and by the agreement relating to the Stock Option being exercised. The
Committee shall have the discretion to reject a Participant's election to
pay all or a part of the total Stock Option exercise price in
consideration other than cash and may require such Stock Option exercise
price to be paid entirely in cash.
6.4 Stockholder Privileges. No Participant shall have any
rights as a stockholder with respect to any shares of Common Stock
covered by a Stock Option until the Participant becomes the holder of
record of such Common Stock, and no adjustments shall be made for
dividends or other distributions or other rights as to which there is a
record date preceding the date such Participant becomes the holder of
record of such Common Stock.
Section 7
Incentive Stock Options.
7.1 Incentive Stock Option Exercise Price. The per share
price to be paid by a Participant at the time an Incentive Stock Option
is exercised shall be determined by the Committee at the time an
Incentive Stock Option is granted, but in no event shall such exercise
price be less than: (a) one hundred percent of the Fair Market Value, on
the date the Incentive Stock Option is granted, of one share of the stock
to which such Stock Option relates; or (b) one hundred and ten percent of
the Fair Market Value, on the date the Incentive Stock Option is granted,
of one share of the stock to which such Stock Option relates if, at the
time the Incentive Stock Option is granted, the Participant owns,
directly or indirectly (as determined pursuant to Section 424(d) of the
Internal Revenue Code), ten percent or more of the total combined voting
power of all classes of stock of the Company or of any Affiliated
Corporation (such a Participant is referred to as a "10% Holder").
7.2 Number of Option Shares. The number of shares of Common
Stock subject to an Incentive Stock Option shall be designated by the
Committee at the time the Committee decides to grant an Incentive Stock
Option.
7.3 Aggregate Limitation of Stock Exercisable Under Options.
Notwithstanding any other provision of the 1995 Plan, the aggregate Fair
Market Value, determined as of the time an Incentive Stock Option is
granted, of the shares of Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by an Option Holder in
<PAGE>
any calendar year under the 1995 Plan or otherwise, granted by the
Company and Affiliated Corporations, shall not exceed $100,000.
7.4 Duration of Incentive Stock Options. The period during
which an Incentive Stock Option may be exercised shall be fixed by the
Committee, but in no event shall such period be more than ten years from
the date the Stock Option is granted, or, in the case of Participants who
are 10% Holders as described in Section 7.1(b), five years from the date
the Stock Option is granted. No Incentive Stock Option with respect to
which Stock Appreciation Rights have been granted may be exercised during
the six-month period following the date on which such Stock Option was
granted. Upon the expiration of such exercise period, the Incentive
Stock Option, to the extent not then exercised, shall terminate. Except
as otherwise provided in Section 11, all Incentive Stock Options granted
to a Participant hereunder shall terminate and may no longer be exercised
if the Participant ceases to be an employee of the Company and all
Affiliated Corporations.
7.5 Restrictions on Exercise of Incentive Stock Options.
Incentive Stock Options may be granted subject to such restrictions as to
the timing of exercise of all or various portions thereof as the
Committee may determine at the time it grants Incentive Stock Options to
Participants.
7.6 Disposition of Stock Acquired Pursuant to the Exercise of
Incentive Stock Options - Withholding. In the event that a Participant
makes a disposition (as defined in Section 424(c) of the Internal Revenue
Code) of any Common Stock acquired pursuant to the exercise of an
Incentive Stock Option prior to the expiration of two years from the date
on which the Incentive Stock Option was granted or prior to the
expiration of one year from the date on which the Stock Option was
exercised, the Participant shall send written notice to the Company at
its principal office in Louisville, Colorado (Attention: Corporate
Secretary) of the date of such disposition, the number of shares disposed
of, the amount of proceeds received from such disposition and any other
information relating to such disposition as the Company may reasonably
request. The Participant shall, in the event of such a disposition, make
appropriate arrangements with the Company to provide for the amount of
additional withholding required by federal, state and local income and
other tax laws.
Section 8
Non-Qualified Options.
<PAGE>
8.1 Option Exercise Price. The per share price to be paid by
the Participant at the time a Non-Qualified Option is exercised shall be
determined by the Committee at the time the Stock Option is granted, but
in no event shall such exercise price per share be less than eighty-five
percent of the Fair Market Value of one share of Common Stock on the date
the Stock Option is granted.
8.2 Number of Option Shares. The number of shares of Common
Stock subject to a Non-Qualified Option shall be designated by the
Committee at the time the Committee decides to grant a Non-Qualified
Option.
8.3 Duration of Non-Qualified Options; Restrictions on
Exercise. The period during which a Non-Qualified Option may be
exercised, and the installment restrictions on option exercise during
such period, if any, shall be fixed by the Committee, but in no event
shall such period be more than ten years from the date the Stock Option
is granted, and no Non-Qualified Option with respect to which Stock
Appreciation Rights have been granted may be exercised during the six-
month period immediately following the date on which such Stock Option
was granted. Upon the expiration of such exercise period, the Non-
Qualified Option, to the extent not then exercised, shall terminate.
Except as otherwise provided in Section 11, all Non-Qualified Options
granted to a Participant hereunder shall terminate and may no longer be
exercised if the Participant ceases to be an employee of the Company and
all Affiliated Corporations.
Section 9
Stock Appreciation Rights.
9.1 Grant of Rights. A Stock Appreciation Right may be
granted to a Participant in conjunction with any Incentive Stock Option
or Non-Qualified Option granted to such Participant, as determined by the
Committee, either at the time of the grant of such Stock Option in the
case of an Incentive Stock Option or at the time of grant, or at any
subsequent time during the term of the Stock Option, in the case of a
Non-Qualified Option. Once granted, the term of a Stock Appreciation
Right shall be equal to the term of its related Stock Option. Upon
exercise of a Stock Appreciation Right by a Participant for a share of
Common Stock, the related Stock Option shall be terminated with respect
to such share. Incentive Stock Options and Non-Qualified Options shall
not be exercisable with respect to shares of Common Stock for which Stock
Appreciation Rights have been exercised. Upon such Stock Appreciation
Right exercise, the Participant shall be entitled to receive the economic
<PAGE>
value of such Stock Appreciation Right determined in the manner
prescribed in Section 9.2.
9.2 Exercise of Stock Appreciation Rights. Stock Appreciation
Rights shall be subject to such terms and conditions consistent with
other provisions of the 1995 Plan as may be determined from time to time
by the Committee and shall include the following:
(a) A Stock Appreciation Right shall be exercisable, in
whole or in part, at such time or times and only to the extent that the
Stock Option to which it relates shall be exercisable; provided, however,
that, except as otherwise provided in Section 11, no Stock Appreciation
Right shall be exercisable during the six-month period following the date
of its grant, and Stock Appreciation Rights shall be exercisable only
between the third and twelfth business days following public release of
any of the Company's quarterly or annual financial results. A Stock
Appreciation Right shall be exercised by the giving of notice in the same
manner as the Stock Option to which it relates may be exercised.
(b) Upon the exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive the economic value thereof,
which shall be equal to (i) the excess of the then Fair Market Value of
one share of Common Stock over the exercise price per share specified in
the related Stock Option, multiplied by (ii) the number of shares in
respect of which the Stock Appreciation Right is being exercised.
(c) The Committee shall have the sole discretion either
to determine the form in which payment of the economic value of exercised
Stock Appreciation Rights will be made to the Participant (i.e., cash,
Common Stock, or any combination thereof) or to consent to or disapprove
the election of the Participant to receive cash in full or partial
payment of such economic value.
9.3 Stockholder Privileges. No Participant shall have any
rights as a stockholder with respect to any shares of Common Stock
covered by a Stock Appreciation Right until the Participant becomes the
holder of record of such Common Stock, and no adjustments shall be made
for dividends or other distributions or other rights as to which there is
a record date preceding the date such Participant becomes the holder of
record of such Common Stock.
<PAGE>
Section 10
Restricted Stock Awards.
10.1 Awards Granted by Committee. Coincident with or following
designation for participation in the 1995 Plan, a Participant may be
granted one or more Restricted Stock Awards consisting of shares of
Common Stock. The number of shares granted as a Restricted Stock Award
shall be determined by the Committee. The Committee may, in its
discretion, require the payment by the Participant of cash in an amount
equal to the par value of the Common Stock subject to the Restricted
Stock Award as a condition precedent to the issuance of Common Stock to
the Participant.
10.2 Restrictions. A Participant's right to retain a
Restricted Stock Award granted to him or her under Section 10.1 shall be
subject to such restrictions, including but not limited to the
Participant's continuous employment by the Company or an Affiliated
Corporation for a restriction period specified by the Committee, or the
attainment of specified performance goals and objectives, as may be
established by the Committee with respect to such award. The Committee
may in its sole discretion require different periods of employment or
different performance goals and objectives with respect to different
Participants, to different Restricted Stock Awards or to separate,
designated portions of the Common Stock shares constituting a Restricted
Stock Award. Subject to the provisions of Sections 11 and 13, if a
Participant's employment terminates prior to the end of such restriction
period or the attainment of such goals and objectives as may be specified
by the Committee, the Restricted Stock Award shall be forfeited and all
shares of Common Stock related thereto shall be immediately returned to
the Company.
10.3 Privileges of a Stockholder; Transferability. A
Participant shall have all voting, dividend, liquidation and other rights
with respect to Common Stock in accordance with its terms received by him
or her as a Restricted Stock Award under this Section 10 upon becoming
the holder of record of such Common Stock; provided, however, that the
Participant's right to sell, encumber, or otherwise transfer such Common
Stock (and any other securities issued in respect of such shares of
Common Stock as a stock dividend, stock split or the like) shall be
subject to the limitations of Section 15.2 hereof.
10.4 Enforcement of Restrictions. The Committee may in its
sole discretion require one or more of the following methods of enforcing
the restrictions referred to in Section 10.2 and 10.3:
<PAGE>
(a) Placing a legend on the stock certificates referring
to the restrictions;
(b) Requiring the Participant to keep the stock
certificates, duly endorsed, in the custody of the Company while the
restrictions remain in effect; or
(c) Requiring that the stock certificates, duly endorsed,
be held in the custody of a third party while the restrictions remain in
effect.
Section 11
Effect of Termination of Employment on Stock Options,
Stock Appreciation Rights and Restricted Stock Awards
11.1 Effect of Termination of Employment on Stock Options and
Stock Appreciation Rights. No Stock Option or Stock Appreciation Right
may be exercised unless, at the time of such exercise, the Participant
is, and has been continuously since the date of grant of such Stock
Option or Stock Appreciation Right, employed by the Company or an
Affiliated Corporation, except that if and to the extent the Stock Option
or Stock Appreciation Right agreement or instrument so provides:
(a) The Stock Option or Stock Appreciation Right may be
exercised within such period of time of up to one year as is
specified in the Stock Option or Stock Appreciation Right
agreement or instrument, but only to the extent that the
Participant was entitled to exercise it at the date of termi-
nation. In the absence of a specified time in the Stock Option
or Stock Appreciation Right agreement or instrument, the Stock
Option or Stock Appreciation Right shall remain exercisable for
90 days following the Participant's ceasing to be an employee
of the Company or an Affiliated Corporation. In the case of an
Incentive Stock Option, such period of time shall not exceed 90
days from the date of termination;
(b) If the Participant dies while in the employ of the
Company or an Affiliated Corporation, or within three months
after the Participant ceases to be such an employee, the Stock
Option or Stock Appreciation Right may be exercised by the
person to whom it is transferred by will or the laws of descent
and distribution within the period of one year after the date
of death (or within such lesser period as may be specified in
the agreement or instrument); and
<PAGE>
(c) If the Participant becomes disabled (within the
meaning of Section 22(e)(3) of the Internal Revenue Code) while
in the employ of the Company or an Affiliated Corporation, the
Stock Option or Stock Appreciation Right may be exercised
within the period of one year after the date the Participant
ceases to be an employee of any of the foregoing entities
because of such disability (or within such lesser period as may
be specified in the agreement or instrument);
provided, however, that in no event may any Stock Option or Stock
Appreciation Right be exercised after the expiration date thereof. For
all purposes of the 1995 Plan and any Stock Option or Stock Appreciation
Right granted hereunder, "employment" shall be defined in accordance with
the provisions of Section 1.421-7(h) of the Income Tax Regulations (or
any successor regulations).
11.2 Effect of Termination of Employment on Restricted Stock
Awards. In the event of the death or disability (as defined in
Section 11.1(c)) of a Participant, or the retirement of a Participant in
accordance with the Company's established retirement policy, all
employment period and other restrictions applicable to Restricted Stock
Awards then held by such Participant shall lapse, and such awards shall
become fully vested and nonforfeitable. In the event of a Participant's
termination of employment for any other reason, any Restricted Stock
Awards as to which the employment period or other restrictions have not
been satisfied shall be forfeited.
Section 12
MBO Payments.
12.1 Participant Election As to MBO Payment. At such time as
the Committee determines that a Participant has become eligible for an
MBO Payment pursuant to the MBO Equity Plan, the Committee shall notify
the Participant as to the total dollar amount of such MBO Payment and as
to whether or not the Participant may elect to, or will be required by
the Committee to, accept all or a part of such MBO Payment in the form of
shares of Common Stock. If the Participant is given the right to elect
whether to accept the MBO Payment in cash or stock, then the Participant
shall have ten (10) business days after the receipt of such notice from
the Committee to make such election. The Participant shall notify the
Committee with respect to his or her election on such form as may be
provided for this purpose by the Committee, setting forth thereon the
dollar value of the portion of the MBO Payment which he or she desires to
receive in shares of Common Stock. If a Participant fails to make an
<PAGE>
election pursuant to this Section with respect to the mode of payment of
an MBO Payment, the entire MBO Payment shall be made in cash.
12.2 Determination of Number of Shares. The number of shares
of Common Stock that shall be issued as an MBO Payment shall be
determined by dividing the dollar value of the portion of the MBO Payment
that is to be paid in shares of Common Stock (whether as elected above or
as adjusted by the Committee pursuant to Section 12.3) by the Fair Market
Value of the Common Stock on the date the Participant delivers his or her
election with respect to such Payment to the Committee. No fractional
shares of Common Stock shall be issued as a part of an MBO Payment and
the value of any such fractional share that would otherwise be issued
pursuant to the Participant's election shall be paid in cash.
12.3 Decision of Committee. The Committee shall have the sole
discretion to either accept the Participant's election with respect to
the payment of an MBO Payment, in whole or in part, in shares of Common
Stock or to determine that a lesser portion, or none, of the MBO Payment
will be made in shares of Common Stock, and the Committee's determination
in this regard shall be final and binding on the Participant.
Section 13
Tender Offers and Acquisitions.
If any person or entity (other than the Company or any person
or entity that is controlled by the Company) shall make a tender offer or
exchange offer for all or any part of the Common Stock or other capital
shares of the Company and shall purchase any part of the Common Stock or
other capital shares tendered to it, and the Board opposes or does not
affirmatively recommend acceptance of such tender offer or exchange
offer, then (a) all Stock Options with respect to which no Stock
Appreciation Rights have been granted, and all Stock Options with respect
to which Stock Appreciation Rights have been issued (and all such related
Stock Appreciation Rights) that have been outstanding for at least six
months, shall become immediately exercisable in full during the remaining
term thereof, whether or not the Participants to whom such options and
rights have been granted remain employees of the Company or an Affiliated
Corporation; provided, however, that Stock Appreciation Rights shall
remain subject to the requirements of Section 9.2(a) with respect to the
exercise thereof only within prescribed periods after public release of
Company financial information; and (b) all restrictions with respect to
outstanding Restricted Stock Awards shall immediately lapse.
<PAGE>
Section 14
Other Common Stock Programs
From time to time during the duration of the 1995 Plan,
the Board may, in its sole discretion, adopt one or more incentive
compensation arrangements for Eligible Employees pursuant to which such
Eligible Employees may acquire shares of Common Stock, whether by
purchase, outright grant or otherwise. Any such arrangements shall be
subject to the general provisions of the 1995 Plan and all shares of
Common Stock issued pursuant to such arrangements shall be issued under
the 1995 Plan if so designated by the Committee.
Section 15
Rights of Employees; Participants
15.1 Employment. Nothing contained in the 1995 Plan or in any
Stock Option, Stock Appreciation Right, Restricted Stock Award or other
Common Stock award granted under the 1995 Plan shall confer upon any
Participant any right with respect to the continuation of his or her
employment by the Company or any Affiliated Corporation, or interfere in
any way with the right of the Company or any Affiliated Corporation,
subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or
decrease the compensation of the Participant from the rate in existence
at the time of the grant of a Stock Option, Stock Appreciation Right,
Restricted Stock Award or other Common Stock award. Whether an
authorized leave of absence, or absence in military or government
service, shall constitute termination of employment shall be determined
by the Committee at the time.
15.2 Nontransferability. Except as otherwise approved by the
Committee and set forth in the agreement between the Company and the
Participant, no right or interest of any Participant in a Stock Option, a
Stock Appreciation Right, a Restricted Stock Award prior to the
completion of the restriction period applicable thereto, or other Common
Stock award granted pursuant to the 1995 Plan shall be assignable or
transferable during the lifetime of the Participant, either voluntarily
or involuntarily, or subjected to any lien, directly or indirectly, by
operation of law, or otherwise, including execution, levy, garnishment,
attachment, pledge or bankruptcy. If permitted by applicable law
(including Rule 16b-3, as amended from time to time), the Committee may
(but need not) permit the transfer of Stock Options, Stock Appreciation
Rights, Restricted Stock Awards and/or other Common Stock awards either
generally, to a limited class of persons or on a case-by-case basis. In
the event of a Participant's death, a Participant's rights and interest
<PAGE>
in Stock Options, Stock Appreciation Rights, Restricted Stock Awards and
other Common Stock awards shall be transferable by testamentary will or
the laws of descent and distribution, and payment of any amounts due
under the 1995 Plan shall be made to, and exercise of any Stock Options
or Stock Appreciation Rights may be made by, the Participant's legal
representatives, heirs or legatees. If in the opinion of the Committee a
person entitled to payments or to exercise rights with respect to the
1995 Plan is disabled from caring for his or her affairs because of
mental condition, physical condition, or age, payment due such person may
be made to, and such rights shall be exercised by, such person's
guardian, conservator or other legal personal representative upon
furnishing the Committee with evidence satisfactory to the Committee of
such status.
Section 16
General Restrictions.
16.1 Investment Representations. The Company may require any
person to whom a Stock Option, Stock Appreciation Right, Restricted Stock
Award, MBO Payment or other Common Stock award is granted, as a condition
of exercising such Stock Option or Stock Appreciation Right, or receiving
such Restricted Stock Award, MBO Payment or other Common Stock award, to
give written assurances in substance and form satisfactory to the Company
and its counsel to the effect that such person is acquiring the Common
Stock subject to the Stock Option, Stock Appreciation Right, Restricted
Stock Award, MBO Payment or Common Stock award for his or her own account
for investment and not with any present intention of selling or otherwise
distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable
state securities laws.
16.2 Compliance with Securities Laws. Each Stock Option and
Stock Appreciation Right shall be subject to the requirement that, if at
any time counsel to the Company shall determine that the listing,
registration or qualification of the shares subject to such Stock Option
or Stock Appreciation Right upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental or
regulatory body, is necessary as a condition of, or in connection with,
the issuance or purchase of shares thereunder, such Stock Option or Stock
Appreciation Right may not be accepted or exercised in whole or in part
unless such listing, registration, qualification, consent or approval
shall have been effected or obtained on conditions acceptable to the
Committee. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification.
<PAGE>
16.3 Changes in Accounting Rules. Notwithstanding any other
provision of the 1995 Plan to the contrary, if, during the term of the
1995 Plan, any changes in the financial or tax accounting rules
applicable to Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, MBO Payments or other Common Stock awards shall occur that, in
the sole judgment of the Committee, may have a material adverse effect on
the reported earnings, assets or liabilities of the Company, the
Committee shall have the right and power to modify as necessary, or
cancel, any then outstanding and unexercised Stock Options or Stock
Appreciation Rights, any then outstanding Restricted Stock Awards as to
which the applicable employment restriction has not been satisfied and
any other Common Stock awards.
Section 17
Other Employee Benefits.
The amount of any compensation deemed to be received by an
employee as a result of the exercise of a Stock Option, a Stock
Appreciation Right or the sale of shares received upon such exercise or
the vesting of any Restricted Stock Awards or the receipt of any other
Common Stock award will not constitute "earnings" with respect to which
any other employee benefits of such employee are determined, including
without limitation benefits under any pension, profit sharing, life
insurance or salary continuation plan.
Section 18
Plan Amendment, Modification and Termination.
The Board, upon recommendation of the Committee or at its own
initiative, at any time may terminate and at any time and from time to
time and in any respect, may amend or modify the 1995 Plan; provided,
however, that no such action of the Board, without approval of the
stockholders of the Company, may:
(a) Materially increase the total amount of Common Stock
that may be awarded under the 1995 Plan, except as provided in
Section 4.3 of the 1995 Plan;
(b) Materially change the classes of Eligible Employees
from which plan Participants may be selected or materially
modify the requirements as to eligibility for participation in
the 1995 Plan;
<PAGE>
(c) Materially increase the benefits accruing to
Participants; or
(d) Extend the duration of the 1995 Plan.
Any Stock Option, Stock Appreciation Right, Restricted Stock
Award or other Common Stock award granted to a Participant
prior to the date the 1995 Plan is amended, modified or
terminated will remain in effect according to its terms unless
otherwise agreed upon by the Participant; provided, however,
that this sentence shall not impair the right of the Committee
to take whatever action it deems appropriate under Section 4.3,
Section 13 or Section 16.3. The termination or any
modification or amendment of the 1995 Plan shall not, without
the consent of a Participant, affect his or her rights under a
Stock Option, Stock Appreciation Right, Restricted Stock Award
or other Common Stock award previously granted to him or her.
With the consent of the Participant affected, the Committee may
amend outstanding option agreements in a manner not
inconsistent with the 1995 Plan. The Board shall have the
right to amend or modify the terms and provisions of the 1995
Plan and of any outstanding Incentive Stock Options granted
under the 1995 Plan to the extent necessary to qualify any or
all such Stock Options for such favorable treatment as may be
afforded Incentive Stock Options under Section 422 of the
Internal Revenue Code.
Section 19
Withholding.
19.1 Withholding Requirement. The Company's obligations to
deliver shares of Common Stock upon the exercise of any Stock Option or
Stock Appreciation Right granted under the 1995 Plan or upon any MBO
Payment under the 1995 Plan or pursuant to any other Common Stock award,
shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and other tax withholding requirements.
19.2 Withholding With Common Stock. At the time the Committee
grants a Stock Option, Stock Appreciation Right, MBO Payment or any other
Common Stock award, it may, in its sole discretion, grant the Participant
an election to pay all such amounts of tax withholding, or any part
thereof, by electing to transfer to the Company, or to have the Company
withhold from shares otherwise issuable to the Participant, shares of
Common Stock having a value equal to the amount required to be withheld
or such lesser amount as may be elected by the Participant. All
elections shall be subject to the approval or disapproval of the
<PAGE>
Committee. The value of shares of Common Stock to be withheld shall be
based on the Fair Market Value of the Common Stock on the date that the
amount of tax to be withheld is to be determined (the "Tax Date"). Any
such elections by Participants to have shares of Common Stock withheld
for this purpose will be subject to the following restrictions:
(a) All elections must be made prior to the Tax Date.
(b) All elections shall be irrevocable.
(c) If the Participant is an officer of the Company
within the meaning of Section 16 of the Securities Exchange Act of 1934
("Section 16"), the Participant may not elect to use Common Stock for tax
withholding upon the exercise of a Stock Option or Stock Appreciation
Right within six months of the grant of the Stock Option or Stock
Appreciation Right.
(d) If a Participant is an officer of the Company within
the meaning of Section 16, any such election must be made either at least
six months prior to the Tax Date or in the ten-day "window period"
beginning on the third day following the release of the Company's
quarterly or annual summary statements of sales and earnings.
Section 20
Requirements of Law.
20.1 Requirements of Law. The issuance of stock and the
payment of cash pursuant to the 1995 Plan shall be subject to all
applicable laws, rules and regulations.
20.2 Governing Law. The 1995 Plan and all agreements hereunder
shall be construed in accordance with and governed by the laws of the
State of Colorado.
Section 21
Effective Date of the 1995 Plan.
21.1 Effective Date. The 1995 Plan is effective as of March 8,
1995, the date it was adopted by the Board of Directors of the Company,
subject to the approval of the stockholders of the Company prior to the
one-year anniversary of such date. Stock Options, Stock Appreciation
Rights, Restricted Stock Awards and other Common Stock awards may be
granted prior to stockholder approval if made subject to stockholder
approval.
<PAGE>
21.2 Duration of the 1995 Plan. The 1995 Plan shall terminate
at midnight on March 7, 2005, which is the day before the tenth
anniversary of the Effective Date, and may be terminated prior thereto by
Board action; and no Stock Option, Stock Appreciation Right, Restricted
Stock Award or other Common Stock award shall be granted after such
termination. Stock Options, Stock Appreciation Rights, Restricted Stock
Awards and other Common Stock awards outstanding at the time of the 1995
Plan termination may continue to be exercised, or become free of
restrictions, in accordance with their terms.
EXHIBIT 10.2
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FIRST AMENDMENT AND WAIVER
THIS FIRST AMENDMENT AND WAIVER (this "Amendment") is entered
into as of April 20, 1995 by and among STORAGE TECHNOLOGY CORPORATION, a
Delaware corporation, STORAGETEK FINANCIAL SERVICES CORPORATION, a
Delaware corporation, STORAGE TECHNOLOGY DE PUERTO RICO, INC., a Delaware
corporation, STORAGETEK DISTRIBUTED SYSTEMS DIVISION, INC. (formerly
XL/Datacomp, Inc.), a Delaware corporation, and NETWORK SYSTEMS
CORPORATION, a Delaware corporation ("NSC") (each individually a
"Borrower" and 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 (other than NSC), the Lenders and the
Agent for the Lenders (in its capacity as such and as Swing Line Bank and
Issuing Bank) are parties to an Amended and Restated Multicurrency Credit
Agreement, dated as of September 28, 1994 (the "Credit Agreement");
WHEREAS, the Borrowers desire to amend the Credit Agreement to
include NSC as a borrower thereunder and to effect certain other changes
to the Credit Agreement and the other Loan Documents as herein provided;
WHEREAS, the Lenders, the Agent, the Swing Line Bank and the
Issuing Bank are willing to agree to such request, subject to the terms
and conditions hereof;
NOW, THEREFORE, the parties hereto agree as follows:
1. All capitalized terms used in this Amendment and not
otherwise defined herein shall have the meanings assigned to them in the
Credit Agreement.
2. Section 1.01 of the Credit Agreement is hereby amended by:
(a) inserting the following definitions in the appropriate
alphabetical order:
"Alternative Default Rate" has the meaning specified in
Section 2.06(d).
"Borrowers" means STK, SFSC, STPR, SDSD and NSC.
<PAGE>
"SDSD" means StorageTek Distributed Systems Division,
Inc., a Delaware corporation (formerly XL/Datacomp, Inc.).
(b) inserting ", NSC" immediately following the word "SFSC"
appearing in the eighth line of the definition of "Account";
(c) inserting ", NSC" immediately following the word "STPR"
appearing in the second line of the definition of "Domestic Accounts
Borrowing Base";
(d) inserting the phrase "or NSC" immediately following the
word "SFSC" appearing in the fourth line of paragraph (e) of the
definition of "Eligible Accounts";)
(e) inserting the phrase ", NSC (other than Accounts relating
to Eligible STK-Originated Lease Receivables)" immediately following the
phrase "SFSC (other than Accounts relating to Eligible STK-Originated
Lease Receivables)" appearing in the seventh line of paragraph (e) of the
definition of "Eligible Accounts";
(f) inserting ", NSC" immediately following the word "SFSC"
appearing in the eighth line of paragraph (m) of the definition of
"Eligible Accounts";
(g) inserting ", NSC" immediately following the word "SFSC"
appearing in the second line of the definition of "Eligible Lease
Receivables";
(h) deleting the parenthetical "(excluding the current portion
of non-recourse Debt secured by lease commitments)" appearing in clause
(iii) of the definition of "Fixed Charges" and inserting in lieu thereof
the parenthetical "(excluding the current portion of (I) non-recourse
Debt secured by lease commitments and (II) STK's 9.53% Senior Secured
Notes due August 31, 1996)";
(i) inserting " other than NSC" immediately following the word
"Borrower" appearing in the second line of the definition of "Foreign
Accounts Borrowing Base";
(i) inserting the following proviso at the end of the
definition of "Foreign Accounts Borrowing Base":
; provided, however, that, for purposes only of
calculating the amount of the Foreign Accounts
<PAGE>
Borrowing Base for the first month of each Fiscal
Quarter of a Borrower (as reported, pursuant to
Section 6.04(l) hereof, in the second month of such
Fiscal Quarter), such amount shall be deemed to be an
amount equal to eighty percent (80%) of such
Borrower's Foreign Accounts Borrowing Base for the
last month of the immediately preceding Fiscal
Quarter.
(j) inserting ", and any other Guaranty executed and delivered
by any Borrower pursuant to this Agreement as amended from time to time"
immediately following the phrase "from time to time" in the fifth line of
the definition of "Guaranties".
(k) inserting ", a Delaware corporation" immediately following
the word "Corporation" appearing in the definition of "NSC"; and
(l) inserting ", NSC" immediately following the word "STK"
appearing in the second line of the definition of "U.S. Security
Agreements".
3. Section 2.06(e) of the Credit Agreement is hereby amended
by inserting the phrase "(the 'Alternative Default Rate')" immediately
following the phrase "at the rate" appearing in the second proviso
thereof.
4. Paragraph (ii) of Section 3.03(a) is hereby amended by
inserting the phrase "(in the case of any Letter of Credit payable in
Dollars) or Alternative Default Rate (in the case of any Letter of Credit
payable in an Alternative Currency)" immediately following the phrase
"equal to the Default Rate".
5. Paragraph (iii) of Section 6.02(b) of the Credit Agreement
is hereby amended by inserting the phrase "or NSC" immediately following
the word "SFSC" each place that it appears in clause (E) thereof.
6. Paragraph (i) of Section 6.02(d) of the Credit Agreement
is hereby amended by inserting the phrase "(including any Subsidiary that
is also a Borrower)" immediately following the word "Borrower" appearing
in the first line thereof.
7. Section 6.04(a) of the Credit Agreement is hereby amended
by inserting ", NSC" immediately following the word "SFSC" in clause (ii)
thereof.
<PAGE>
8. Section 6.04(b) of the Credit Agreement is hereby amended
by inserting ", NSC" immediately following the word "SFSC" in clause (ii)
thereof.
9. Section 6.04(l) of the Credit Agreement is hereby amended
by inserting "NSC," immediately following "STK," in clause (iii) thereof.
10. Section 7.01(m) of the Credit Agreement is hereby amended
by inserting ", NSC" immediately following the word "SFSC" therein.
11. Each of the representations and warranties contained in
Section 5.01 of the Credit Agreement and Section 4 of the Security
Agreement are incorporated herein by this reference thereto and shall be
deemed made as of the date hereof by NSC and each of the other Borrowers;
provided, however, that, for purposes of such representations and
warranties being made by NSC only, each reference to "Closing Date"
contained in such representations and warranties shall be deemed to be a
reference to the date hereof; and, further provided, that such
representations and warranties shall be deemed to be qualified by the
schedules attached hereto. Such schedules shall constitute amendments to
the schedules previously delivered by the Borrowers under the Credit
Agreement.
12. Paragraph I.A. of the Investment Guidelines in Schedule
1.01(c)(1) to the Credit Agreement is hereby deleted in its entirety and
inserted in lieu thereof is the following:
The Company shall follow the investment guidelines
outlined herein and in Exhibits A and B. These exhibits
present the types and qualifications of instruments in
which cash may be invested. Investments in cash
equivalents that do not comply with the terms of such
Exhibits are prohibited; provided, however, that
exceptions as to any maximum dollar limit, maturity, or
investment selection criteria set forth on such Exhibit A
may be made if approved in writing by StorageTek's
Corporate Treasurer or Chief Financial Officer. Any such
approval shall only be applicable as to the investment
then being proposed to be made, and shall not be deemed to
be an amendment, modification or waiver of the terms of
such Exhibit A as to any other investment.
13. Schedule 5.01(w) to the Credit Agreement is hereby amended
to delete the reference therein to the lockbox account number 4191813
maintained by STPR with Harris Bank in Chicago, Illinois and, pursuant to
<PAGE>
Section 6.05(b) of the Credit Agreement, the Majority Lenders hereby
consent to the closing of such lockbox account.
14. Each reference to the word "XL/DC" in the Credit Agreement
and in each other Loan Document is hereby amended by inserting the word
"SDSD" in lieu thereof.
15. For purposes of determining STK's compliance with Section
6.03(d)(ii) of the Credit Agreement only, the Lenders hereby waive the
requirement that NSC Merger Expenses (as hereinafter defined) be included
in the calculation of Consolidated Net Loss for the Fiscal Quarter ended
March 31, 1995. As used herein, "NSC Merger Expenses" shall mean all
costs and expenses, up to Fifteen Million Dollars ($15,000,000), of STK
and its Subsidiaries associated with the merger of StorageTek Eagle
Corporation, a Delaware corporation and a direct, wholly-owned subsidiary
of STK, with and into NSC.
16. The effectiveness of this Amendment is subject to the
conditions precedent that the Agent shall have received the following,
each document dated as of April 20, 1995 (unless otherwise specified
below or by the Agent and the Lenders), and, each document, in form and
substance satisfactory to the Agent and each Lender:
(a) Certified copies of (i) the resolutions of (A) the Board
of Directors of each Borrower and each other Loan Document to which it is
or is to be a party and the transactions contemplated hereby and thereby,
and (ii) all documents evidencing other necessary corporate action and
governmental approvals with respect to each Loan Document and the
transactions contemplated thereby.
(b) A certificate of the Secretary or an Assistant Secretary
of NSC certifying the names and true signatures of the officers of NSC
authorized to sign each Loan Document to which it is or is to be a party
and the other documents to be delivered by it hereunder which
certificates may be conclusively relied on by the Agent until the Agent
shall receive a further certification of the Secretary or Assistant
Secretary of NSC cancelling or amending the prior certificate of NSC and
submitting the names and signatures of the officers named in such further
certificate.
(c) The Borrowers shall have paid all accrued and unpaid fees,
costs and expenses to the extent then due and payable on the date hereof
(including, but not limited to, all reasonable Attorney Costs and
expenses incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment.
<PAGE>
(d) A favorable opinion of Shearman & Sterling, counsel for
the Borrowers as to such matters as any Lender through the Agent may
reasonably request.
(e) NSC shall have executed and delivered (i) a U.S. Security
Agreement in form and substance satisfactory to the Lenders and (ii) the
documents required to be provided pursuant to Section 3(a) thereof.
(f) NSC shall have executed and delivered a Guaranty in form
and substance satisfactory to the Lenders.
(g) NSC shall have executed and delivered a Pledge Agreement
in form and substance satisfactory to the Lenders.
(h) each of the Borrowers shall have executed and delivered
amendments to the Intercompany Subordination Agreement, the Guaranties
(other than the Guaranty delivered pursuant to paragraph (f) above) and
the forms of certain notices, requests and certificates, each to reflect
the amendments effected hereby, in form and substance satisfactory to the
Lenders.
(i) A certificate signed by a Responsible Officer of STK,
dated as of the date hereof, stating that:
(i) the representations and warranties contained in Article V
of the Credit Agreement are true and correct on and as of such
date, as though made on and as of such date;
(ii) no Default or Event of Default exists or would result from
the amendments contemplated herein; and
(iii) there has occurred since September 28, 1994, no event
or circumstance that has had or reasonably could be expected to
have a Material Adverse Effect.
(j) STK has paid to the Agent, for the account of each Lender,
an amendment fee equal to 0.05% of such Lender's Commitment.
(k) Such other documents and materials as the Agent or any
Lender through the Agent may request.
Each of the parties hereby acknowledge and agree that, upon the
effectiveness of this Amendment, NSC shall be a Borrower under and
pursuant to the terms of the Credit Agreement, as amended hereby.
<PAGE>
16. (a) Except as expressly amended or 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 other documents and instruments in connection herewith shall not
be deemed to create a course of dealing or otherwise create any express
or implied duty by any of them to provide any other or further
amendments, consents or waivers in the future.
(b) The provisions of this Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns.
(c) This Amendment may be executed by one or more of the
parties to this Amendment in any number of separate counterparts, each of
which, when so executed, shall be deemed an original, and all of said
counterparts taken together shall be deemed to constitute but one and the
same instrument.
(d) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO
PRINCIPLES OF CONFLICTS OF LAWS, EXCEPT AS REQUIRED BY MANDATORY
PROVISIONS OF LAW AND TO THE EXTENT THE VALIDITY OR PERFECTION OF THE
LIENS UNDER THE SECURITY AGREEMENT, OR THE REMEDIES THEREUNDER, IN
RESPECT OF ANY COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER
THAN CALIFORNIA.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWERS:
STORAGE TECHNOLOGY CORPORATION
By: /s/ Mark D. McGregor
--------------------------------
Name: Mark D. McGregor
Title: Corporate Vice President,
Treasurer and Interim Controller
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/ Mark D. McGregor
--------------------------------
Name: Mark D. McGregor
Title: Assistant Treasurer
STORAGETEK DISTRIBUTED SYSTEMS DIVISION,
INC.
By: /s/ Mark D. McGregor
--------------------------------
Name: Mark D. McGregor
Title: Assistant Treasurer
NETWORK SYSTEMS CORPORATION
By: /s/ Mark D. McGregor
--------------------------------
Name: Mark D. McGregor
Title: Assistant Treasurer
THE AGENT:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
By: /s/ Judith L. Kramer
--------------------------------
Name: Judith L. Kramer
Title: Vice President
THE SWING LINE BANK:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Swing Line Bank
By: /s/ Kevin McMahon
--------------------------------
Name: Kevin McMahon
Title: Vice President
THE ISSUING BANK:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Issuing Bank
By: /s/ Kevin McMahon
--------------------------------
Name: Kevin McMahon
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
By: /s/ Thomas A. Levasseur
--------------------------------
Name: Thomas A. Levasseur
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/ Jay L. Massino
--------------------------------
Name: Jay L. Massino
Title: Vice President
BANQUE NATIONALE DE PARIS
By: /s/ Christian Morio
--------------------------------
Name: Christian Morio
Title: SVP and Manager
By: /s/ Tjalling Terpstra
--------------------------------
Name: Tjalling Terpstra
Title: Vice President
THE SUMITOMO BANK LIMITED
By: /s/ Hiroshi Amano
--------------------------------
Name: Hiroshi Amano
Title: General Manager
EXHIBIT 10.3
- ------------
SECOND AMENDMENT AND WAIVER
THIS SECOND AMENDMENT AND WAIVER (this "Amendment") is entered
into as of June 27, 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, STORAGETEK DISTRIBUTED SYSTEMS DIVISION, INC.
(formerly XL/Datacomp, Inc.), a Delaware corporation ("DSD"), 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, the Lenders and the Agent for the
Lenders (in its capacity as such and as Swing Line Bank and 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 (as amended, the "Credit
Agreement");
WHEREAS, DSD desires to sell all or substantially all of its
assets to an unaffiliated third party (the "DSD Sale") and the Borrowers
have requested that the Agent and the Lenders consent thereto and that
certain covenants of the Credit Agreement be waived by the Agent and the
Lenders in connection therewith (the assets to be sold by DSD in the DSD
Sale are referred to herein as the "Transferred Assets");
WHEREAS, the Borrowers also desire to amend the Credit
Agreement to effect certain other changes to the Credit Agreement as
herein provided; 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. Waiver. Subject to the terms and conditions set forth in
Section 4 hereof, the Lenders hereby waive the applicability of Sections
6.02(f) and 6.02(g) of the Credit Agreement to the DSD Sale. Upon the
<PAGE>
closing of the DSD Sale, the Transferred Assets so sold by DSD shall no
longer constitute Collateral. For purposes of Section 5(i) and the other
terms and provisions of the DSD Security Agreement, the DSD Sale shall be
deemed to constitute a Transfer of Collateral permitted pursuant to
Section 6.02(g) of the Credit Agreement.
3. Consent of Lenders; Certain Related Agreements.
(a) Each of the Lenders hereby acknowledges and consents to the
terms of Section 2 hereof and all of the other matters, terms and
provisions set forth herein.
(b) In furtherance of the foregoing, each of the parties
hereto agree to the following: (i) immediately prior to or simultaneously
with the closing of the DSD Sale, the Liens on the Transferred Assets
granted under the U.S. Security Agreement of DSD shall terminate and be
released and the Agent shall execute and deliver to STK or DSD such
documents and instruments reasonably requested by STK or DSD as shall be
necessary to evidence termination and release of all security interests
as to the Transferred Assets given by DSD to the Agent under the Credit
Agreement and such U.S. Security Agreement; (ii) as of the termination of
such Liens, DSD shall no longer be a Borrower under the Credit Agreement
or under any of the other Loan Documents; provided, however, that for
purposes only of Section 6.02(b) of the Credit Agreement, DSD shall,
following the DSD Sale, be deemed to be a Borrower and thus shall be
entitled to the rights provided by, and subject to the obligations
imposed by, such Section 6.02(b); and (iii) following the closing of the
DSD Sale, (I) the assets (if any) remaining with DSD may be sold or
transferred by DSD to STK, to another Subsidiary of STK or to any other
Person to the extent permitted by the terms of the Credit Agreement and
(II) DSD may be dissolved or merged with and into STK or another
Subsidiary of STK.
4. Conditions of Effectiveness. The effectiveness of this
Amendment shall be subject to the following conditions precedent:
(a) All agreements, instruments and other documents entered
into by DSD or any of its Affiliates in connection with or arising out of
the DSD Sale 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 no Default or Event of Default then exists and that, after giving
effect to the DSD Sale, no Default or Event of Default would occur.
<PAGE>
(c) The Agent has received evidence (if requested by the Agent
on behalf of a Lender), in form and substance satisfactory to the Agent,
that all actions necessary or, in the opinion of the Agent, desirable to
continue to perfect and protect and maintain the priority of the Liens
created by the Loan Documents have been taken with respect to (i) any
Collateral of DSD that is not sold in the DSD Sale and (ii) the
consideration received by DSD or its Affiliate in exchange for the
Transferred Assets sold in the DSD Sale, which consideration shall
constitute Proceeds of Collateral and, as such, shall remain subject to
the terms and provisions of one of the U.S. Security Agreements.
(d) The Borrowers shall have paid or reimbursed the Agent for
all fees, costs and expenses (including, but not limited to, all
reasonable Attorney Costs) incurred in connection with the development,
preparation, negotiation, execution and delivery of this Amendment and
the consummation of the transactions contemplated hereby.
(e) DSD shall have delivered to the Agent a Periodic Release
Certificate and complied with the other terms of Section 6.02(b)(ii) of
the Credit Agreement, if applicable to the DSD Sale.
(f) The Agent shall have received such other documents and
materials as the Agent or any Lender through the Agent may request.
5. Amendment to the Credit Agreement. Section 6.02(f) of the
Credit Agreement is hereby amended by inserting the phrase "(other than
the NSC Acquisition)" immediately following the phrase "after the Closing
Date and prior to the Termination Date" appearing in clause (ii) thereof.
6. 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 other documents and
instruments in connection herewith shall not be deemed to create a course
of dealing or otherwise create any express or implied duty by any of them
to provide any other or further amendments, consents or waivers in the
future.
(b) Successors and Assigns. The provisions of this Amendment
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
<PAGE>
(c) Counterparts. This Amendment may be executed by one or
more of the parties to this Amendment in any number of separate
counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
(d) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT
REFERENCE TO PRINCIPLES 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/MARK D. MCGREGOR
--------------------------------
Name: Mark D. McGregor
Title: Vice President, Treasurer
and Interim Controller
STORAGETEK FINANCIAL SERVICES CORPORATION
By: /s/ROBERT J. KALI
--------------------------------
Name: Robert J. Kali
Title: Vice President and Chief
Operating Offier
STORAGE TECHNOLOGY DE PUERTO RICO, INC.
By: /s/MARK D. MCGREGOR
--------------------------------
Name: Mark D. McGregor
Title: Vice President and Treasurer
<PAGE>
STORAGETEK DISTRIBUTED SYSTEMS DIVISION,
INC.
By: /s/MARK D. MCGREGOR
--------------------------------
Name: Mark D. McGregor
Title: Vice President and Treasurer
NETWORK SYSTEMS CORPORATION
By: /s/MARK D. MCGREGOR
--------------------------------
Name: Mark D. McGregor
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/R. STRONG
--------------------------------
Name: Robert K. Strong
Title: Managing Director
NBD BANK
By: /s/JAMES R. FRYE
--------------------------------
Name: James R. Frye
Title: Assistant Vice President
<PAGE>
FIRST INTERSTATE BANK OF DENVER
By: /s/DAVID L. ERICSON
--------------------------------
Name: David L. Ericson
Title: Senior Vice President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/MELISSA S. FORBES
--------------------------------
Name: Melissa S. Forbes
Title: Vice President
BANQUE NATIONALE DE PARIS
By: /s/CLIVE BETTLES
--------------------------------
Name: Clive Bettles
Title: Vice President
By: /s/TJALLING TERPSTRA
--------------------------------
Name: Tjalling Terpstra
Title: Vice President
THE SUMITOMO BANK LIMITED
By: /s/HIROSHI AMANO
--------------------------------
Name: Hirohi Amano
Title: Genral Manager
EXHIBIT 10.4
- ------------
[Storage Technology Corporation Letterhead Appears Here]
July 27, 1995
Ryal R. Poppa
7075 Rustic Trail
Boulder, Colorado 80301
Dear Ryal:
This letter (the "Amendment") amends the terms and conditions of your
continued employment with Storage Technology Corporation (the "Company") from
and after July 27, 1995. Except to the extent specifically amended hereby, all
other prior agreements between you and the Company, including, but not limited
to, our letter agreements of December 13, 1989 (the "1989 Agreement"), October
1, 1991, and March 8, 1995 remain in full force and effect. In consideration
of your continued employment by the Company and the mutual covenants and
agreements contained herein, you and the Company agree that your Employment
Term, as that term is defined and used in the 1989 Agreement be, and hereby is,
extended through January 20, 1997.
If this letter accurately sets forth the terms of our agreement relating
to the matters covered herein, please sign the enclosed copy of this letter in
the space provided below and return it to the Company.
Very truly yours,
Storage Technology Corporation
/s/ STEPHEN J. KEANE
--------------------------------------
Stephen J. Keane
Director and Chairman, Human Resources
and Compensation Committee
Accepted and Agreed:
/s/ RYAL R. POPPA
- --------------------
Ryal R. Poppa
EXHIBIT 11.0
<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF LOSS PER COMMON SHARE
(In thousands, except per share amounts)
<CAPTION>
Quarter Ended Six Months Ended
---------------------- ----------------------
06/30/95 07/01/94 06/30/95 07/01/94
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY (a)
Earnings (loss)
Net income (loss) $11,855 $15,720 $2,941 ($1,308)
Preferred dividend requirement 3,019 3,019 6,038 6,038
---------- ---------- ---------- ----------
Income (loss) applicable to common shares $8,836 $12,701 ($3,097) ($7,346)
========== ========== ========== ==========
Shares
Weighted average common shares outstanding 52,734 51,548 52,613 51,242
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 113 652
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents 52,847 52,200 52,613 51,242
========== ========== ========== ==========
Earnings (loss) per common share $0.17 $0.24 ($0.06) ($0.14)
========== ========== ========== ==========
FULLY DILUTED (b)
Earnings (loss)
Net income (loss) $11,855 $15,720 $2,941 ($1,308)
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 2,480 2,568 4,959 5,137
---------- ---------- ---------- ----------
Net income (loss), as adjusted $14,335 $18,288 $7,900 $3,829
========== ========== ========== ==========
Shares
Weighted average common shares outstanding 52,734 51,548 52,613 51,242
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 178 818 191 939
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 64,384 63,838 64,276 63,653
========== ========== ========== ==========
Earnings (loss) per common share $0.22 $0.29 $0.12 $0.06
========== ========== ========== ==========
(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 JUNE 30,
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> 6-MOS
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-END> JUN-30-1995
<CASH> 264,298
<SECURITIES> 0
<RECEIVABLES> 345,762 <F1>
<ALLOWANCES> 0
<INVENTORY> 263,160
<CURRENT-ASSETS> 943,415
<PP&E> 393,445 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,980,494
<CURRENT-LIABILITIES> 433,851
<BONDS> 261,856
<COMMON> 5,289
0
35
<OTHER-SE> 1,266,424
<TOTAL-LIABILITY-AND-EQUITY> 1,980,494
<SALES> 635,831
<TOTAL-REVENUES> 930,888
<CGS> 401,792
<TOTAL-COSTS> 595,031
<OTHER-EXPENSES> 107,735 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,313
<INCOME-PRETAX> 8,441
<INCOME-TAX> 5,500
<INCOME-CONTINUING> 2,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,941
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
<FN>
<F1> Asset values for the interim period
represent net amounts.
<F2> Includes merger expenses of $14,352,000.
</FN>
</TABLE>
