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RULE 424(C)
REGISTRATION NO.
33-55343
[LOGO OF NETWORK SYSTEMS CORPORATION(R) APPEARS HERE]
February 10, 1995
Dear Network Systems Stockholder:
We previously sent you a Proxy Statement/Prospectus dated January 9, 1995
relating to a special meeting of stockholders of Network Systems Corporation to
be held on February 8, 1995. As described in the Proxy Statement/Prospectus,
the special meeting was called to allow Network Systems stockholders to
consider and vote upon a proposed Agreement and Plan of Merger providing for
the merger of Network Systems with a newly formed subsidiary of Storage
Technology Corporation. NETWORK SYSTEMS AND STORAGETEK HAVE RESCHEDULED THE
SPECIAL MEETING TO 9:00 A.M., TUESDAY, MARCH 7, 1995, AT THE LUTHERAN
BROTHERHOOD BUILDING, 625 FOURTH AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55415.
The rescheduling of the special meeting is intended to give Network Systems
stockholders additional time to review the information included with this
letter in connection with considering the merger.
As a result of developments since the time of the mailing of the Proxy
Statement/Prospectus, we are providing you with the attached Supplement to the
Proxy Statement/Prospectus (the "Supplement"), which includes additional
information for your consideration of the merger.
In light of the developments described in the Supplement, including declines
in the price of StorageTek common stock since the date on which the Proxy
Statement/Prospectus was distributed, the Board of Directors of Network Systems
has again considered the value of the consideration offered by StorageTek in
the merger. As discussed in greater detail in the Supplement, after considering
all of the factors it believes to be relevant, THE NETWORK SYSTEMS BOARD OF
DIRECTORS REAFFIRMS ITS VIEW THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF NETWORK SYSTEMS AND ITS STOCKHOLDERS AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER.
Your vote is important, and we urge you to give the Proxy
Statement/Prospectus and this Supplement your immediate attention. You have
already received a proxy card on which you can vote, and you may have already
returned the card. HOWEVER, WE HAVE ENCLOSED A SECOND PROXY CARD (AND A RETURN
ENVELOPE) FOR YOUR USE IN CASE YOU HAVE MISPLACED THE PROXY PREVIOUSLY SENT OR
YOU WISH TO CHANGE YOUR VOTE.
Thank you for your cooperation.
Very truly yours,
/s/ Malcolm D. Reid
Malcolm D. Reid
Vice President, General Counsel
and Secretary
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THIS SUPPLEMENT TO PROXY STATEMENT/PROSPECTUS IS DATED
FEBRUARY 10, 1995 AND IS FIRST BEING MAILED TO
NETWORK SYSTEMS STOCKHOLDERS ON OR ABOUT FEBRUARY 13, 1995.
SUPPLEMENT TO
PROXY STATEMENT/PROSPECTUS, DATED JANUARY 9, 1995
This is a Supplement to the Proxy Statement/Prospectus dated January 9, 1995,
first mailed to stockholders of Network Systems Corporation ("Network Systems")
on January 10, 1995. This Supplement to the Proxy Statement/Prospectus (the
"Supplement") contains additional information for your consideration of the
merger of Network Systems with Storage Technology Corporation ("StorageTek")
described in the Proxy Statement/Prospectus (the "Merger"). THE SPECIAL MEETING
OF STOCKHOLDERS OF NETWORK SYSTEMS HAS BEEN RESCHEDULED TO 9:00 A.M., TUESDAY,
MARCH 7, 1995, AT THE LUTHERAN BROTHERHOOD BUILDING, 625 FOURTH AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55415. Capitalized terms used in this Supplement shall
have the meanings ascribed to them in the Proxy Statement/Prospectus.
Reconsideration of Merger by Network Systems' Board of Directors
After considering the matters discussed below, the Board of Directors of
Network Systems believes that the Merger continues to be fair to and in the
best interests of Network Systems and its stockholders.
As discussed in the Proxy Statement/Prospectus under the heading "The
Merger--Network Systems' Reasons for the Merger; Recommendation of Network
Systems' Board of Directors," the Board of Directors of Network Systems
considered a number of factors in reaching its conclusions in August 1994 to
enter into the Agreement and Plan of Merger, as subsequently amended and
restated (the "Merger Agreement"), among Network Systems, StorageTek and a
wholly owned subsidiary of StorageTek, and in reaffirming this decision in
January 1995. Between the initial approval of the Merger Agreement by the Board
of Directors in August 1994 and the distribution of the Proxy
Statement/Prospectus to stockholders in early January 1995, there were a number
of changes in the factors that the Board had initially considered, including a
decrease in the market price of StorageTek Stock. Accordingly, prior to the
distribution of the Proxy Statement/Prospectus, the Board of Directors of
Network Systems again considered the value of the consideration offered by
StorageTek in the Merger and unanimously reaffirmed its view that the Merger
was fair to and in the best interests of Network Systems and its stockholders.
Subsequent to the distribution of the Proxy Statement/ Prospectus, there have
been certain developments regarding StorageTek and Network Systems. On January
24, 1995, StorageTek issued a press release reporting its 1994 financial
results, a copy of which is attached hereto as Appendix A and is incorporated
herein by reference. On January 26, 1995, Network Systems issued a press
release reporting its 1994 financial results, a copy of which is attached
hereto as Appendix B and is incorporated herein by reference. On February 7,
1995, the closing price of StorageTek Stock was $23.00, indicating that the
Merger consideration per share of Network Systems Stock at that date was $6.02
(plus an additional $.05 per share in connection with the redemption of
outstanding Network Systems preferred stock purchase rights (the "Rights
Payment")).
Because of the decrease in the market price of StorageTek Stock, the reported
results of Network Systems and StorageTek for the fourth quarter of 1994 and
other changed circumstances since the Board of Directors reaffirmed the
fairness of the Merger on January 5, 1995, the Board of Directors of Network
Systems has again considered the value of the consideration offered by
StorageTek in the Merger. The Board of Network Systems has considered that
StorageTek has stated that it does not presently intend to increase the value
of the Merger consideration. Thus, it still appears likely that the value to be
received by Network Systems' stockholders in the Merger will not be any greater
than the value of the shares of StorageTek Stock to be received under the
existing Exchange Ratio (plus the Rights Payment).
BASED UPON FURTHER CONSIDERATION OF THE MERGER AND THE FACTORS DISCUSSED
BELOW, ON FEBRUARY 8, 1995 THE NETWORK SYSTEMS BOARD, WITH ALL BUT ONE DIRECTOR
VOTING IN FAVOR, REAFFIRMED ITS VIEW THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF NETWORK SYSTEMS AND ITS STOCKHOLDERS.
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The information contained in the following sections captioned "Reasons of
Network Systems' Board of Directors" and "Opinion of Financial Advisor" have
been supplied by Network Systems and its financial advisor, Needham & Company,
Inc. Any projections or predictions contained or incorporated therein have not
been prepared by StorageTek and have not been adopted by StorageTek with
respect to either StorageTek or Network Systems.
Reasons of Network Systems' Board of Directors
In reaffirming its decision to enter into the Merger Agreement, the Board of
Directors considered the various factors it had taken into account in reaching
its original decision on August 8, 1994 to recommend the Merger and its
reaffirmation of this decision on January 5, 1995. These factors are summarized
in the Proxy Statement/Prospectus under "The Merger--Network Systems' Reasons
for the Merger; Recommendation of Network Systems' Board of Directors." The
Board found that these reasons, as summarized in the Proxy
Statement/Prospectus, continue to be valid.
In addition, the Board of Directors considered a number of additional
factors, including the following:
Absence of Competing Offers; Ability of Board to Accept Superior Offer.
Although the Merger Agreement permits the Board of Directors to receive and
consider competing offers for Network Systems and although the Merger was
publicly announced six months ago, no party has approached Network Systems
or its advisors with a competing offer. While the Merger Agreement
prohibits Network Systems from soliciting another offer, the Board of
Directors is able to accept a superior offer and terminate the Merger
Agreement if (a) the Board determines, in the exercise of its fiduciary
duty, that the offer will result in a transaction more favorable to the
Network Systems stockholders from a financial point of view than the
Merger, and (b) StorageTek does not make, within seven business days of
receiving notice of such offer, an offer that the Board of Directors of
Network Systems deems to be superior to the competing offer. Network
Systems would be required to pay StorageTek a termination fee of $16
million and reimburse it for its expenses only in the event a competing
offer yielded more than $10.00 per share of value to holders of Network
Systems Stock.
Desirability of StorageTek as Merger Partner. The Network Systems Board
believes that strategic and operating synergies as well as other benefits
will result from the Merger. The Network Systems Board believes that
StorageTek's financial, technical, distribution, customer service and
management resources will be of significant value and provide the
opportunity for significant economies of scale. The Network Systems Board
also determined that as a result of the Merger, Network Systems would
benefit from increased access to StorageTek's large customer base,
increased credibility in the marketplace, a broader and higher level of
contact with existing and potential customers, an increase in the level and
range of support and service that could be provided to customers and
differentiation from other channel and internetworking vendors in the
marketplace. The Network Systems Board also believes that StorageTek's
commitment to bring network-attached storage products to the marketplace
will be highly complementary to Network Systems' competitive strategy. The
Board believes that the current stockholders of Network Systems Stock, who
will become StorageTek stockholders as a result of the Merger, will share
in these benefits of a combination with StorageTek.
Value of StorageTek Stock. Although the closing price of StorageTek Stock
was $23.00 on February 7, 1995, indicating that the value of Merger
consideration on that date was $6.02 (plus the Rights Payment), the Board
of Directors of Network Systems believes, based in part on the analysis of
Needham & Company, Inc. ("Needham") (see "Opinion of Financial Advisor"
below), that StorageTek Stock has the potential to improve in value over
the next year. Of course, there can be no assurance that any such
improvement will occur. In addition, the Board of Directors also views the
Merger as an investment by the Network Systems stockholders in a combined
entity including both StorageTek and Network Systems. Despite the decrease
in the price of StorageTek Stock since August 1994, the stockholders of
Network Systems will, upon the completion of the Merger, own the same
percentage of the outstanding StorageTek Stock as contemplated at the time
the Merger Agreement was executed.
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Challenges of Remaining Independent. The Board of Directors believes that
the value of Network Systems as an independent entity is lower than the
value immediately prior to the execution of the Merger Agreement on August
8, 1994. Although the current market value of StorageTek Stock is below its
level on the date of the Proxy Statement/Prospectus, the Network Systems
Board of Directors still believes that there is less risk and greater
opportunity to the stockholders of Network Systems in receiving the Merger
consideration than in continuing to own stock of Network Systems as an
independent entity. As an independent company, Network Systems would
continue to confront alone the challenges in the networking industry
resulting from increasing consolidation, slower growth of mature markets
and increasing focus on the high-growth LAN switching and ATM markets, and
the need to reduce costs and make further investments in research and
development. There are significant challenges to the achievement of the
Network Systems 1995 operating plan. The plan is dependent in part upon the
successful introduction of several new products, and either delays in the
introduction of these products or lack of acceptance by the market of these
products would adversely affect the achievement of this plan. In any event,
even if Network Systems as an independent entity were able to achieve the
goals of its 1995 operating plan, the Board of Network Systems believes
that the stockholders of Network Systems would be unlikely to realize value
greater than that offered by the current Merger consideration.
Opinion of Financial Advisor
In connection with its further consideration of the Merger, the Board of
Directors of Network Systems requested Needham to provide a revised and updated
opinion as to the fairness, from a financial point of view, to the Network
Systems stockholders of the consideration offered in the Merger.
Needham has delivered its written opinion to the Board of Directors of
Network Systems, reaffirming its opinions dated August 7, 1994 and January 5,
1995, that as of February 8, 1995 and based upon the matters described therein,
the consideration to be received by the stockholders of Network Systems in the
Merger is fair to the stockholders of Network Systems from a financial point of
view. Needham's opinion is directed only to the financial terms of the Merger
Agreement and does not constitute a recommendation to any stockholder of
Network Systems as to how such stockholder should vote at the Network Systems
Meeting. The complete text of the February 8, 1995 opinion (the "February
Needham Opinion") is attached hereto as Appendix C and is incorporated herein
by reference, and the summary set forth below is qualified in its entirety by
reference to the text of the February Needham Opinion and the section in the
Proxy Statement/Prospectus entitled "The Merger--Opinion of Network Systems'
Financial Advisor." Network Systems stockholders are urged to read the February
Needham Opinion carefully in its entirety for a description of the procedures
followed, the factors considered and the assumptions made by Needham.
In arriving at the February Needham Opinion, Needham reviewed and analyzed,
among other things, (i) the Merger Agreement; (ii) certain other documents
related to the Merger, including the Proxy Statement/Prospectus; (iii) certain
publicly available information concerning Network Systems and StorageTek; (iv)
the historical stock prices and trading volumes of Network Systems Stock and
StorageTek Stock; (v) publicly available financial data of public companies
that it deemed generally comparable to Network Systems; (vi) the financial
terms of certain other recent business combinations that it deemed generally
relevant; and (vii) certain financial forecasts and projections prepared by
Network Systems' and StorageTek's respective managements. In addition, Needham
held discussions with certain members of both Network Systems' and StorageTek's
senior management concerning their current and future business prospects and
participated in discussions among representatives of Network Systems and
StorageTek and their legal advisors and independent auditors. Needham visited
the principal facilities of both StorageTek and Network Systems, and performed
such other studies, analyses, inquiries and investigations as it deemed
appropriate. Needham assumed and relied upon, without independent verification,
the accuracy and completeness of the information it reviewed for purposes of
its opinion. With respect to Network Systems' and Storagetek's financial
forecasts provided to Needham by their respective managements, Needham has
assumed that such forecasts have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of such managements, at
the time of preparation, of the future operating and
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financial performance of Network Systems and StorageTek. Such forecasts were
prepared for the internal purposes of the respective companies and not with a
view toward disclosure. The February Needham Opinion states that it is
necessarily based on economic, monetary and market conditions existing as of
the date of such opinion.
Based on this information, Needham performed a variety of financial analyses
of the Merger and the Merger consideration, some of which are summarized below
and in the Proxy Statement/Prospectus. In arriving at the February Needham
Opinion, Needham confirmed the appropriateness of its reliance on the analyses
used to render its prior opinions by performing procedures to update certain of
such analyses and by reviewing the assumptions on which such analyses were
based and the factors considered in connection therewith. Needham also
performed and/or considered such additional studies, analyses, inquiries and
investigations as it deemed appropriate.
The following paragraphs summarize significant analyses performed by Needham
in connection with the February Needham Opinion which were presented to the
Network Systems Board of Directors.
Review of Events Since January 5, 1995. Needham reviewed the events which
have occurred since its prior opinion reaffirming the fairness of the Merger
was delivered on January 5, 1995. These events included changes in the market
prices for Network Systems Stock and StorageTek Stock since January 5, 1995 and
announcements made by both companies since that date.
Analysis of Combined Companies. Needham analyzed the contribution to
revenues, operating income and net income, on a pro forma combined basis, of
Network Systems and StorageTek. This analysis showed that on a pro forma
combined basis, for the year ended December 31, 1994, Network Systems
contributed approximately 12.5% of pro forma combined revenues and, because of
Network Systems' operating and net losses, contributed in a negative manner to
pro forma combined operating income and net income. Needham noted that Network
Systems stockholders would have an ownership position of approximately 15% of
the combined company. The contribution analysis based upon projected 1995
results for Network Systems and StorageTek showed that, depending upon the
achievement of different revenue levels in management's plans, Network Systems'
contribution to the pro forma combined revenues would range from 10.6% to
12.5%, its contribution to the pro forma combined operating income would range
from 4.5% to 14.4%, and its contribution to the pro forma combined net income
would range from 5.9% to 16.9%.
Market Price of StorageTek Stock. Needham reviewed earnings estimates for
StorageTek for 1995 in light of recently announced 1994 StorageTek results.
Needham prepared hypothetical trading prices of a share of StorageTek Stock and
the resulting values of the Merger consideration (based on the Exchange Ratio),
utilizing a range of projected 1995 earnings and a range of price/earnings
multiples based upon multiples of companies deemed generally comparable. This
analysis resulted in a range of prices modestly higher than the current market
price of StorageTek Stock.
Market Price of Network Systems Stock. Needham reviewed a range of
hypothetical trading prices of a share of Network Systems Stock assuming that
the Merger were not to occur. These prices were prepared utilizing a range of
projected 1995 earnings, based upon management's forecasts, and a range of
price/earnings multiples based upon multiples of companies deemed generally
comparable. This analysis resulted in a range of prices modestly lower than the
price indicated by the current value of the Merger consideration.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion.
In its analyses, Needham made numerous assumptions with respect to industry
performances, general business and economic and other
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matters, many of which are beyond the control of either Network Systems or
StorageTek. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable as set forth therein.
Needham will receive an additional fee of $100,000 for rendering the February
Needham Opinion. In addition, as noted in the Proxy Statement/Prospectus under
"The Merger--Opinion of Network Systems' Financial Advisor," Needham is
eligible to receive an additional fee, due and payable upon the closing of the
Merger, based upon the amount by which the aggregate consideration to be
exchanged in the Merger exceeds the aggregate market value of Network Systems
Stock on May 24, 1994. Based on the closing price of the StorageTek Stock on
the NYSE of $23.00 on February 7, 1995, if this was the price at the Effective
Time of the Merger, Needham would receive no additional fee.
During 1994 and the first month of 1995, based upon information published by
AutEx, Needham was not a significant market maker for Network Systems Common
Stock. However, in the normal course of its market-making activities Needham
may, from time to time, have a long or short position in, and buy or sell,
Network Systems securities, which positions on occasion may be material in size
relative to the volume of trading activity. In the normal course of its
business, Needham may actively trade the equity securities of StorageTek for
its own account or for the account of its customers and, therefore, may at any
time hold a long or short position in such securities. In addition, as
described in the Proxy Statement/Prospectus, Needham has previously provided
investment banking services to StorageTek on matters unrelated to the Merger.
Rescheduling of Stockholder Meeting
In order to give Network Systems stockholders additional time to review and
consider the additional information included in this Supplement, Network
Systems and StorageTek have decided to delay the date of the special meeting to
9:00 a.m., Tuesday, March 7, 1995, at the Lutheran Brotherhood Building, 625
Fourth Avenue South, Minneapolis, Minnesota 55415. The Merger Agreement as
restated in November 1994, provides that it may be terminated prior to the
Effective Time of the Merger by either party if the Merger has not been
consummated on or before February 28, 1995, other than due to a breach by the
terminating party. On February 9, 1995, Network Systems and StorageTek amended
the Merger Agreement to extend this date to March 17, 1995, and the full text
of this amendment is attached hereto as Appendix D and is incorporated by
reference herein.
Further Board Consideration
After the mailing of this Supplement and prior to the Network Systems
stockholder meeting on March 7, 1995, the Board of Directors of Network Systems
will consider the fairness of the Merger to Network Systems and its
stockholders in light of circumstances as they may change further during this
period. Changed circumstances after the date of this Supplement which might be
relevant to the Board of Directors in its future consideration of the fairness
of the Merger include further changes in the market price of StorageTek Stock
and the prospects of StorageTek, changes in the value and prospects of Network
Systems, changes in the value of companies comparable to Network Systems and
changes in the value of recently completed acquisitions of other comparable
companies. The Network Systems Board's further consideration of the fairness of
the Merger may include seeking an updated fairness opinion from Needham. In
connection with any further review of the Merger, the Board of Network Systems
will review all factors that it then considers to be relevant to its
consideration of the fairness of the Merger. In light of the nature and extent
of these factors, the Board is unable to determine at present their relative
importance. In particular, the Board has not established any minimum price of
StorageTek Stock below which the Board would withdraw its recommendation and
recommend against the approval of the Merger.
In the event that the Network Systems Board, after the mailing of this
Supplement, in the exercise of its fiduciary duty, determines that it must
withdraw its recommendation and recommend against the approval
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of the Merger, it will communicate its changed recommendation to the
stockholders in additional supplemental proxy materials. If the Board were to
recommend against the approval of the Merger, approval of the Merger would
require the affirmative vote of 80% of the outstanding shares of Network
Systems Stock. In the event that the Network Systems stockholders did not
approve the Merger, Network Systems would be entitled to terminate the Merger
Agreement (and would not be required to pay any fee to StorageTek by reason of
such termination). See "The Merger--Conditions for Merger and Other Provisions"
and "--Expenses; Topping Offer" in the Proxy Statement Prospectus.
If the Network Systems Board were to change its recommendation concerning the
Merger, Network Systems would reschedule the stockholder meeting to a future
date that would, in the view of the Board, provide additional time for
stockholders to evaluate any further changes. Because the Merger Agreement, as
amended, permits either party to terminate the agreement in the event the
Merger is not consummated on or before March 17, 1995, if the parties do not
agree to a further amendment to the Merger Agreement, either party would have
the right after March 17, 1995 to terminate the Merger Agreement for any
reason. If it is necessary to reschedule the stockholder meeting to a later
date, it may be necessary under applicable Delaware law to establish a new
record date and circulate a complete, revised Proxy Statement/Prospectus to the
stockholders of Network Systems as of the new record date.
Stockholder Litigation
In late January 1995 two complaints were filed against Network Systems and
members of its Board of Directors in the state Chancery Court in Delaware. In
one of the complaints, StorageTek is also named as a defendant.
The complaints assert that they were filed on behalf of Network Systems
stockholders and allege that the directors of Network Systems breached their
fiduciary duties in connection with the pending merger between Network Systems
and StorageTek. One of the complaints alleges that StorageTek aided and abetted
this breach of fiduciary duty. The relief requested by the plaintiffs includes
enjoining the Merger, amending the Merger Agreement in certain respects,
compelling the Network Systems directors to reconsider its recommendation
concerning the merger and issue a supplemental disclosure to stockholders, and
awarding damages and costs to the plaintiffs.
Network Systems believes that the allegations contained in these complaints
are without merit and intends to defend the lawsuits vigorously.
Interests of Certain Persons in the Merger
As discussed in the Proxy Statement/Prospectus under the heading "The
Merger--Management of Network Systems after the Merger; Interests of Certain
Persons in the Merger," StorageTek has entered into Supplemental Compensation
Agreements with certain Network Systems executive officers who StorageTek would
like to remain following the Merger. The details of such Supplemental
Compensation Agreements are set forth in the Proxy Statement/Prospectus. In
addition to the executive officers identified in the Proxy
Statement/Prospectus, Michael F.G. Ashby, the Chief Operating Officer of
Network Systems, has entered into a Supplemental Compensation Agreement.
Merger Consideration
As discussed in the Proxy Statement/Prospectus under the heading "The
Merger--Conditions for Merger and Other Provisions", if the Average Price of
StorageTek Stock during the period before the Effective Time of the Merger is
less than $30.37 per share, Network Systems could notify StorageTek of Network
Systems' intent to terminate the Merger. Although StorageTek would then have
the right to avoid such termination by increasing the value received for each
share of Network Systems Stock to at least $7.95, StorageTek has stated that it
does not presently intend to make such an adjustment. Thus, it appears likely
that the value to be received by Network Systems stockholders in the Merger
will not be any greater than the value of the shares of StorageTek Stock to be
received under the existing Exchange Ratio (plus the Rights Payment of $.05 per
share).
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[STORAGE TECHNOLOGY PRESS RELEASE LETTERHEAD APPEARS HERE]
APPENDIX A TO SUPPLEMENT
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News Release
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For Immediate Release Contact: Michael Klatman
January 24, 1995 (303) 673-5020
David Reid
(303) 673-4815
</TABLE>
STORAGETEK REPORTS 1994 FINANCIAL RESULTS
LOUISVILLE, Colo.--Storage Technology Corp. (NYSE:STK) today reported net
income for the fourth quarter of $28.1 million. Earnings available to common
shares were $.56 per share, after consideration of the quarterly preferred
dividend of $3 million. By comparison, the company reported net income of
$6.3 million, or $.08 per share, for the fourth quarter of 1993. Revenue for
the fourth quarter of 1994 was $516.1 million, a quarterly record for the
company and a 29 percent increase over the $400.2 million reported for the
comparable period a year ago.
For 1994, the company reported net income of $41.4 million, compared with a
net loss of $77.8 million in 1993. On a per share basis, the company earned
$.66 in 1994 versus a loss of $2.05 in 1993. Revenue for 1994 increased 16
percent to $1.6 billion from $1.4 billion in 1993.
"We made substantial progress in revenue and profitability during 1994," said
Ryal R. Poppa, StorageTek chairman, president and chief executive officer, "and
closed the year with a strong balance sheet, including $206 million in cash. We
believe this progress will continue in 1995 on the strength of new products
introduced in 1994 and planned introductions in 1995. We have scheduled major
product announcements for the week of Feb. 6.
"While the fourth quarter was our best from operations since 1991, it fell
short of our expectations, nonetheless," he said. "Several factors associated
with Iceberg kept us from having a better quarter. Unit volume, configuration
size and pricing were all somewhat lower than anticipated. Margins on Iceberg
were slightly below expectations, but they continue to be excellent and, with
planned technological improvements in 1995, we believe, sustainable.
"Offsetting the negative factors was a very strong tape library business,"
Poppa said. "For example, order, shipment and revenue activity increased
substantially for both PowderHorn upgrades and WolfCreek libraries. In
addition, previously announced cost-control measures have begun to be
implemented."
Poppa gave this update on the status of products:
. 153 Iceberg subsystems were revenue recognized, bringing the total to 247
since inception of the program. Some 400 units representing about 70
terabytes of storage had been shipped by year-end. The first dynamic,
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virtual-disk storage solution for mainframe computers, the Iceberg 9200
Virtual Storage Facility was named one of the year's 10 most important
products by Information Week magazine. "Iceberg's first year in the market
was a success and the backlog of systems not yet revenue recognized gives us
a good start for the new year in this highly competitive market," said Poppa.
. Production capacity of the TimberLine 36-track subsystem is sold out for the
first quarter of 1995, after a sellout in the fourth quarter of 1994. "We are
at volume production for the TimberLine product and recording backlog for the
second quarter," said Poppa. "Tape transport shipments nearly doubled from
1993 to 1994, our largest year ever, and we continue to sell a mix of 18-
track, Silverton 36-track, and TimberLine 36-track transports."
. Some 450 PowderHorn and WolfCreek libraries were revenue recognized in the
fourth quarter to bring the worldwide installed base to more than 7,000.
Customers also upgraded 130 of the original 4400 Automated Cartridge System
libraries to PowderHorn models. "We added 180 new library sites in 1994,
demonstrating that the trend toward automation continues," Poppa added.
Turning to major products scheduled for introduction in 1995, Poppa gave this
summary:
. Initial customer shipment of Arctic Fox, StorageTek's Hi-performance Shared-
access Facility, was achieved in January.
. Kodiak, StorageTek's Scalable Storage Facility, is expected to be shipped to
a beta site in the first quarter.
. The RedWood helical tape subsystem, which is capable of storing substantially
more data on a half-inch tape cartridge than any other product now on the
market, is in beta test at several sites and due to be introduced at customer
events beginning Feb. 7.
StorageTek will hold its annual meeting at 10 a.m. May 24 at the Ritz Carlton
Hotel in Boston, Mass.
Storage Technology Corp. designs, manufactures, markets and services,
worldwide, information storage and retrieval subsystems for enterprisewide
computer systems and networks.
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STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
QUARTER ENDED YEAR ENDED
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12/30/94 12/31/93 12/30/94 12/31/93
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Sales............................... $383,562 $269,966 $1,115,802 $ 902,482
Service and rental.................. 132,584 130,233 509,157 502,270
-------- -------- ---------- ---------
Total revenue..................... 516,146 400,199 1,624,959 1,404,752
-------- -------- ---------- ---------
Cost of sales....................... 242,761 178,854 728,983 641,411
Cost of service and rental.......... 87,307 84,212 328,267 324,502
-------- -------- ---------- ---------
Total cost of revenue............. 330,068 263,066 1,057,250 965,913
-------- -------- ---------- ---------
Gross profit...................... 186,078 137,133 567,709 438,839
Research and product development
costs.............................. 47,588 42,532 169,811 163,286
Marketing, general, administrative
and other.......................... 99,001 87,488 341,747 324,823
Restructuring and other charges..... 4,872 74,772
-------- -------- ---------- ---------
Operating profit (loss)........... 39,489 2,241 56,151 (124,042)
Interest expense.................... 9,794 10,348 40,678 43,670
Interest income..................... (8,717) (13,952) (42,964) (54,916)
-------- -------- ---------- ---------
Income (loss) before income taxes
and cumulative effect of
accounting change................ 38,412 5,845 58,437 (112,796)
Provision (benefit) for income
taxes.............................. 10,300 (500) 17,000 5,000
-------- -------- ---------- ---------
Income (loss) before cumulative
effect of accounting change...... 28,112 6,345 41,437 (117,796)
Cumulative effect on prior years of
change in method of accounting for
income taxes....................... 40,000
-------- -------- ---------- ---------
Net income (loss)................. 28,112 6,345 41,437 (77,796)
Preferred dividend requirement...... 3,019 3,019 12,075 9,805
-------- -------- ---------- ---------
Income (loss) applicable to common
shares........................... $ 25,093 $ 3,326 $ 29,362 $ (87,601)
======== ======== ========== =========
EARNINGS (LOSS) PER COMMON SHARE:
Primary:
Income (loss) before cumulative
effect of accounting change...... $ 0.56 $ 0.08 $ 0.66 $ (2.98)
Cumulative effect of change in
method of accounting for income
taxes............................ 0.93
-------- -------- ---------- ---------
$ 0.56 $ 0.08 $ 0.66 $ (2.05)
======== ======== ========== =========
Fully Diluted....................... $ 0.54 (A) (A) (A)
======== ======== ========== =========
</TABLE>
- --------
(A) Fully diluted earnings per share for the fourth quarter of 1994 reflects
the assumed conversion of the Company's convertible preferred stock,
whereas the convertible preferred stock was not dilutive for all other
periods presented.
A-3
<PAGE>
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
12/30/94
(UNAUDITED) 12/31/93
----------- ----------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents............................... $ 205,926 $ 255,062
Short-term investments.................................. 16,042
Accounts receivable, net................................ 313,231 218,701
Notes and installment receivables....................... 8,203 9,973
Net investment in sales-type leases..................... 155,341 171,165
Inventories............................................. 240,019 203,257
---------- ----------
Total current assets.................................. 922,720 874,200
Notes and installment receivables....................... 9,918 13,968
Net investment in sales-type leases..................... 231,377 252,678
Computer equipment, at cost (net)....................... 137,374 97,324
Spare parts for field service, at cost (net)............ 56,977 50,150
Property, plant and equipment, at cost (net)............ 332,651 306,034
Deferred income tax assets (net)........................ 51,603 52,260
Other assets............................................ 147,387 146,395
---------- ----------
$1,890,007 $1,793,009
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
LIABILITIES
Nonrecourse borrowings secured by lease commitments..... $ 79,407 $ 74,191
Current portion of other long-term debt................. 27,396 32,581
Accounts payable........................................ 113,794 91,890
Accrued liabilities..................................... 219,139 192,874
Income taxes payable.................................... 8,764 14,167
---------- ----------
Total current liabilities............................. 448,500 405,703
8% Convertible subordinated debentures.................. 145,645 145,645
Nonrecourse borrowings secured by lease commitments..... 112,073 96,975
Other long-term debt.................................... 99,169 119,098
Deferred income tax liabilities......................... 10,073 8,285
---------- ----------
Total liabilities..................................... 815,460 775,706
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value......................... 35 35
Common stock, $.10 par value............................ 4,456 4,310
Capital in excess of par value.......................... 1,449,240 1,421,860
Accumulated deficit..................................... (372,261) (401,623)
Treasury stock.......................................... (773) (735)
Unearned compensation................................... (6,150) (6,544)
---------- ----------
Total stockholders' equity............................ 1,074,547 1,017,303
---------- ----------
$1,890,007 $1,793,009
========== ==========
</TABLE>
A-4
<PAGE>
[NETWORK SYSTEMS PRESS RELEASE LETTERHEAD APPEARS HERE]
APPENDIX B TO SUPPLEMENT
FOR IMMEDIATE RELEASE
Contacts: Julia Samsal or Paul JJ Payack
800-672-7670 612/424-1555
612/424-1649 Internet: [email protected]
Internet: julie.samsal@network. com
Web Server: HTTP://www.network.com
NETWORK SYSTEMS CORPORATION REPORTS 1994
FOURTH QUARTER AND YEAR-END RESULTS
Minneapolis, January 26, 1995--Network Systems Corporation (NASDAQ-NMS:
NSCO), a leader in the high-performance internetworking marketplace, today
announced unaudited results for the three- and twelve-months periods ended
December 31, 1994.
Reported revenues for the fourth quarter ended December 31, 1994, were $55.3
million, down 18 percent from the $67.1 million recorded in the fourth quarter
of the prior year. The net loss was $26.5 million after taxes (87 cents per
share). This includes a pre-tax charge of $8 million related to an expense
reduction program, as previously announced in December 1994, and other
expenses, partially related to the transition to new products, including
inventory and receivable writedowns and increased development expenses. In
addition, consistent with operating results for the quarter and the year, the
company increased deferred tax-asset valuation reserves during the quarter.
This compares to a net loss of $5.1 million (17 cents per share) in the fourth
quarter of 1993. The fourth quarter of 1993 included a $15.6 million charge for
the acquisition of Bytex and associated restructuring. For the year, revenues
increased 7 percent to $231.8 million from $215.6 million recorded for the
prior year. For the year, the net loss was $23.8 million after taxes (79 cents
per share), including the restructing charge and the valuation reserve on
deferred tax assets compared to net income of $2.2 million (7 cents per share)
in the prior year.
"While these are disappointing results, these measures will help keep NSC
lean and should enable us to compete more effectively in the months ahead,"
said Michael F.G. Ashby, Chief Operating Officer. "We believe our results can,
in part, be attributed to uncertainty over our planned merger with StorageTek,
particularly true in the U.S. field, where we lost a number of sales
representatives following the merger announcement. However, the situation has
been stabilized, and we are currently close to nearly full field staffing."
The $8 million charge covered a worldwide workforce reduction on the order of
10 percent that was completed in mid-January, and the cost of the abandonment
of certain fixed assets and leases related to these actions.
(more)
B-1
<PAGE>
The cost of transition to our new products and other expenses have
significantly added to our loss in the fourth quarter. These costs include
approximately $1.3 million of additional development costs related to the final
stages of our new internetworking products to be introduced in early 1995;
obsolesence reserves of approximately $1.4 million as a result of both the
reduced revenue for the quarter and the transition to our new products, an
additional provision of approximately $1.5 million related to bad debts
identified in the fourth quarter, and $1.4 million related to our cancellation
of an OEM contract in the quarter.
As discussed earlier, the company increased deferred tax asset valuation
reserves during the fourth quarter. These additional reserves (relating
principally to previously established deferred tax assets) increased the fourth
quarter and year-to-date income tax expense by approximately $7.2 million. In
addition, the company recorded no tax benefit relating to the 1994 operating
loss.
The reductions in force excluded key field sales and service functions, as
well as key development projects. NSC is in the final stages of the most
extensive development effort in its history, which will result in eight new
products being introduced in 1995. Five of these product launches will occur in
the first quarter. These products, which address some of the fastest- growing
segments of the internetworking marketplace, include the Enterprise Routing
Switch(TM) (ERS(TM)), the Bytex 7700 Port-Switching Ethernet Hub(TM), and the
Security Router(TM).
Michael Ashby said, "We are exiting 1994 with a strong balance sheet and a
healthy cash position and have received notification of an approximate $17
million refund from the IRS before the end of the first quarter. By
aggressively cutting expenses in the first quarter, the corporation will more
quickly return to fiscal health as our newly revitalized product line is rolled
out during 1995," Michael Ashby concluded, "As a company, we are convinced that
our new product set, together with the merger with StorageTek that we expect to
complete shortly, will help us realize our vision."
Network Systems Corporation (NASDAQ: NSCO) is a leader in providing high
performance, heterogeneous, secure Networks-on- Demand(TM) creating virtual
networks across the enterprise from the data center to the desktop. Network
Systems Corporation and Storage Technology Corporation have entered into an
agreement to merge. NSC consists of the Network Systems Corporation, Bytex(R)",
Bus-Tech(R)" and TMD(R)"; Bus-Tech and Bytex were acquired during 1993, and TMD
Software, which was acquired in 1994. Network Systems and TMD are headquartered
in Minneapolis; Bytex (with switching hub technology) and Bus-Tech (with
channel expertise) in Boston. NSC has 11 international subsidiaries and sales
and service in more than 30 countries. Network Systems, an ISO 9001-certified
company, posted 1993 revenues of $215 million.
Note to Editors: Network Systems, NSC, Bytex, and BUS-TECH are registered
trademarks of the Network Systems Corporation. ERS, Enterprise Routing Switch,
Networks-on-Demand, and Security Router are trademarks of the NSC.
(more)
B-2
<PAGE>
NETWORK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Product.............................. $ 37,007 $ 50,082 $158,834 $150,280
Services............................. 18,323 17,028 72,922 65,278
-------- -------- -------- --------
Total revenues..................... 55,330 67,110 231,756 215,558
COST OF REVENUES:
Product.............................. 23,121 23,441 77,866 66,770
Services............................. 12,202 11,409 46,447 42,320
-------- -------- -------- --------
Total cost of revenues............. 35,323 34,850 124,313 109,090
GROSS PROFIT........................... 20,007 32,260 107,443 106,468
OPERATING EXPENSES:
Research and development............. 9,957 8,388 36,272 27,762
Selling, general, and administrative. 21,871 19,349 79,749 68,499
Amortization of intangibles ......... 625 417 2,499 417
Acquisition, restructuring, and ac-
quired research and development
costs............................... 8,000 15,642 8,000 15,642
-------- -------- -------- --------
Total operating expenses........... 40,453 43,796 126,520 112,320
INCOME (LOSS) FROM OPERATIONS.......... (20,446) (11,536) (19,077) (5,852)
INTEREST INCOME, NET................... 861 1,499 3,817 7,339
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES...... (19,585) (10,037) (15,260) 1,487
PROVISION FOR (BENEFIT FROM) INCOME
TAXES................................. 6,940 (4,960) 8,560 (720)
-------- -------- -------- --------
NET INCOME (LOSS)...................... $(26,525) $ (5,077) $(23,820) $ 2,207
======== ======== ======== ========
EARNINGS PER COMMON AND COMMON EQUIVA-
LENT SHARE............................ $ (0.87) $ (0.17) $ (0.79) $ 0.07
Common and common equivalent shares
used in the calculation of earnings
per share............................. 30,366 29,707 30,120 30,118
</TABLE>
(More)
B-3
<PAGE>
NETWORK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, DECEMBER 31,
1994 1993(1)
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and short-term investments and marketable secu-
rities.............................................. $ 27,633 $ 33,813
Trade receivables, net............................... 58,778 64,495
Other receivables.................................... 1,995 5,531
Inventories.......................................... 21,686 26,599
Other current assets................................. 9,586 26,029
-------- --------
Total current assets............................. 119,678 156,467
Net property, plant, and equipment................... 53,304 43,849
Goodwill and other intangible assets, net............ 39,207 36,534
Income tax deposits, including interest.............. 17,611 39,804
Other assets......................................... 39,639 28,827
-------- --------
$269,439 $305,481
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities.................................. $ 42,761 $ 56,637
Long-term debt....................................... -- 1,000
Deferred compensation................................ 12,962 11,852
Deferred income taxes................................ -- 3,360
Other long-term liabilities.......................... 8,301 9,251
Total stockholders' equity....................... 205,415 223,381
-------- --------
$269,439 $305,481
======== ========
</TABLE>
- --------
1 The balance sheet at December 31, 1993, has been condensed from the audited
financial statements.
B-4
<PAGE>
BOSTON OFFICE: ONE INTERNATIONAL PLACE, BOSTON, MA 02110 (617) 330-8777
CALIFORNIA OFFICE: 3000 SAND HILL ROAD, BUILDING 4 . SUITE 150, MENLO PARK, CA
94025 (415) 854-9111
APPENDIX C TO SUPPLEMENT
NEEDHAM
NEEDHAM & COMPANY, INC. 400 PARK AVENUE, NEW YORK, NY 10022-4406
(212) 371-8300
February 8, 1995
Board of Directors Network Systems Corporation 7600 Boone Avenue North
Minneapolis, MN 55428
Gentlemen:
We understand that Network Systems Corporation ("NSC"), Storage Technology
Corporation ("STK") and StorageTek Eagle Corporation, a wholly owned subsidiary
of STK ("Merger Sub"), have entered into a Restated Agreement and Plan of
Merger, dated as of November 15, 1994, as amended (the "Merger Agreement"),
pursuant to which Merger Sub will be merged with and into NSC and NSC, as the
surviving corporation, will become a wholly owned subsidiary of STK (the
"Merger"). The terms of the Merger are set forth more fully in the Merger
Agreement.
Pursuant to the Merger Agreement, we understand that (i) each issued and
outstanding share of common stock, par value $.02 per share, of NSC ("NSC
Common Stock") will be converted into and exchanged for 0.2618 of a share
(subject to adjustment as set forth in the Merger Agreement) of common stock,
$0.10 par value per share, of STK ("STK Common Stock"); and (ii) rights issued
pursuant to NSC's Amended and Restated Rights Agreement will be redeemed
pursuant to the terms thereof at a redemption price of $0.05 per right.
You have asked us to advise you as to the fairness, from a financial point of
view, to the stockholders of NSC of the consideration to be received by the
stockholders of NSC in the Merger. Needham & Company, Inc. as part of its
investment banking business is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
other purposes. We have acted as financial advisor to NSC in connection with
the Merger and may receive a fee for our services that is contingent on the
consummation of the Merger. In addition, NSC has agreed to indemnify us for
certain liabilities arising out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed the
Merger Agreement; (ii) reviewed certain other documents related to the Merger,
including the Proxy Statement/Prospectus; (iii) reviewed certain publicly
available information concerning NSC and STK and certain other relevant
financial and operating data of NSC and STK made available from the internal
records of NSC and STK; (iv) visited the principal facilities of both NSC and
STK and held discussions with members of senior management of NSC and STK
concerning their current and future business prospects; (v) reviewed certain
financial forecasts and projections prepared by NSC's and STK's respective
managements; (vi) reviewed the historical stock prices and trading volumes of
the Common Stocks of NSC and STK; (vii) compared publicly available financial
data of public companies, which we deemed generally comparable to NSC, to
similar data for NSC; (viii) reviewed the financial terms of certain other
recent business combinations that we deemed generally relevant; and (ix)
performed and/or considered such other studies, analyses, inquiries and
investigations as we deemed appropriate.
C-1
<PAGE>
- --------------------------------------------------------------------------------
NETWORK SYSTEMS CORPORATION
FEBRUARY 8, 1995
PAGE 2
- ------------------------------------- -------------------------------------
NEEDHAM & COMPANY, INC.
In connection with our review, we have not independently verified any of the
foregoing information, have relied on such information, and have assumed that
all such information is complete and accurate in all material respects. With
respect to NSC's and STK's financial forecasts provided to us by their
respective managements, we have assumed for purposes of our opinion that such
forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of such managements, at the time of
preparation, of the future operating and financial performance of NSC and STK.
We have not made an independent evaluation, appraisal or physical inspection of
the assets or liabilities of NSC and STK. Further, our opinion is based on
economic, monetary and market conditions existing as of the date hereof, and in
rendering this opinion, we have relied without independent verification on the
accuracy, completeness and fairness of all historical financial and other
information which was either publicly available or furnished to us by NSC and
STK.
This opinion is solely for the benefit of the Board of Directors of NSC and
may not be quoted or referred to or used for any other purpose without prior
written consent, except that this letter may be disclosed in connection with
any registration statement or proxy statement used in connection with the
Merger so long as the opinion is quoted in full in such registration statement
or proxy statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be offered to the stockholders of NSC in the
Merger is fair to the stockholders of NSC from a financial point of view.
Sincerely,
/s/ Needham & Company, Inc.
Needham & Company, Inc.
C-2
<PAGE>
APPENDIX D TO SUPPLEMENT
AMENDMENT TO RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO RESTATED AGREEMENT AND PLAN OF MERGER (this "Amendment"),
dated as of February 8, 1995, is among Storage Technology Corporation, a
Delaware corporation (the "Parent"), StorageTek Eagle Corporation, a Delaware
corporation (the "Subsidiary"), and Network Systems Corporation, a Delaware
corporation (the "Company").
A. The Parent, the Subsidiary and the Company have entered into an Agreement
and Plan of Merger, dated as of August 8, 1994, as amended on August 25, 1994
and September 9, 1994 and as restated on November 15, 1994 (the "Agreement").
B. Section 8.01(a) of the Agreement provides that either the Parent or the
Company may terminate the Agreement after February 28, 1995 if the Closing (as
defined in the Agreement) has not then occurred for any reason other than a
breach of the Agreement by the terminating party.
C. The Parent, the Subsidiary and the Company desire to amend Section 8.01(a)
to allow additional time for the Closing.
Accordingly, the Parent, the Subsidiary and the Company agree as follows:
1. Amendment of Section 8.01(a). Section 8.01(a) is amended by replacing
"February 28, 1995" with "March 17, 1995".
2. No Other Changes. Except as specifically amended by this Amendment,
all other provisions of the Agreement shall remain in full force and
effect. This Amendment shall not constitute or operate as a waiver of, or
estoppel with respect to, any provision of the Agreement by any party
hereto.
3. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
The Parent, the Subsidiary and the Company have caused this Amendment to be
duly executed on their behalf by their respective duly authorized
representatives as of the date first above written.
Storage Technology Corporation Network Systems Corporation
/s/ RYAL POPPA /s/ MALCOLM D. REID
By: _________________________________ By: _________________________________
Vice President, General Counsel
Chairman, CEO and President and Secretary
Its: ________________________________ Its: ________________________________
Storagetek Eagle Corporation
/s/ W. RUSSELL WAYMAN
By: _________________________________
Vice President and Secretary
Its: ________________________________
D-1
