Form 10-Q
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 March 31, 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) - 52,522,670 shares outstanding at April 27,
1995.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
MARCH 31, 1995
PAGE
----
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 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 6 - Exhibits and Reports on Form 8-K 26
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Form 10-Q
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands of Dollars)
03/31/95 12/30/94
--------- ---------
ASSETS
Current assets:
Cash, including cash equivalents $ 224,565 $ 228,081
Short-term investments 6,145 5,477
Accounts receivable, net 314,929 353,455
Notes and installment receivables 10,285 9,110
Net investment in sales-type leases 158,335 155,341
Inventories (Note 3) 250,799 261,705
--------- ---------
Total current assets 965,058 1,013,169
Notes and installment receivables 9,879 11,851
Net investment in sales-type leases 233,702 231,377
Equipment held for sale or lease, at cost (net) 157,956 146,320
Spare parts for field service, at cost (net) 60,687 62,421
Property, plant and equipment, at cost (net) 396,285 380,511
Deferred income tax assets, net 53,836 51,768
Other assets 229,690 247,041
--------- ---------
$2,107,093 $2,144,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease commitments $ 74,220 $ 79,407
Current portion of other long-term debt 25,678 28,396
Accounts payable and accrued liabilities 376,023 394,842
Income taxes payable 3,058 9,459
--------- ---------
Total current liabilities 478,979 512,104
8% Convertible subordinated debentures 145,645 145,645
Nonrecourse borrowings secured by lease commitments 101,731 112,073
Other long-term debt 110,050 99,169
Deferred income tax liabilities 14,127 10,182
--------- ---------
Total liabilities 850,532 879,173
--------- ---------
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 March 31,
1995 and December 30, 1994,$172,500,000 aggregate
liquidation preference 35 35
Common stock, $.10 par value, 150,000,000
shares authorized; 52,558,386 shares issued at
March 31, 1995, and 52,517,626 shares issued at
December 30, 1994 5,256 5,252
Capital in excess of par value 1,565,529 1,562,568
Accumulated deficit (303,289) (291,356)
Treasury stock of 35,716 shares at March 31, 1995
and 35,713 shares at December 30, 1994 (773) (773)
Unearned compensation (5,906) (6,150)
Notes receivable from stockholders (4,291) (4,291)
--------- ---------
Total stockholders' equity 1,256,561 1,265,285
--------- ---------
$2,107,093 $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
------------------
03/31/95 04/01/94
-------- --------
Sales $305,092 $254,153
Service and rental revenue 145,094 144,035
-------- --------
Total revenue 450,186 398,188
-------- --------
Cost of sales 191,548 175,351
Cost of service and rental revenue 96,541 90,153
-------- --------
Total cost of revenue 288,089 265,504
-------- --------
Gross profit 162,097 132,684
Research and product development costs 48,176 48,094
Marketing, general, administrative and
other income and expense, net 109,057 105,294
Merger expenses (Note 2) 14,352
-------- --------
Operating loss (9,488) (20,704)
Interest expense 10,775 9,271
Interest income (12,349) (12,847)
-------- --------
Loss before income taxes (7,914) (17,128)
Provision (benefit) for income taxes 1,000 (100)
-------- --------
Net loss (8,914) (17,028)
Preferred dividend requirement 3,019 3,019
-------- --------
Loss applicable to common shares $ (11,933) $ (20,047)
======== ========
Loss per common share $ (0.23) $ (0.39)
======== ========
Weighted average common shares and equivalents 52,493 50,936
======== ========
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)
Quarter Ended
--------------------
03/31/95 04/01/94
-------- --------
OPERATING ACTIVITIES
Cash received from customers $490,407 $435,694
Cash paid to suppliers and employees (438,911) (418,698)
Interest received 21,594 17,129
Interest paid (7,502) (7,463)
Income taxes refunded, net 3,302 5,337
------- -------
Net cash from operating activities 68,890 31,999
------- -------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (23,154) (31,440)
Short-term investments, net (456) 20,133
Merger expenses (5,788)
Other assets, net (11,542) 578
------- -------
Net cash used in investing activities (40,940) (10,729)
------- -------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 22,670 13,979
Repayments of nonrecourse borrowings (39,182) (44,147)
Repayments of other debt (10,178) (10,253)
Proceeds from employee stock plans 295 4,171
Preferred stock dividend payments (3,019) (3,019)
------- -------
Net cash used in financing activities (29,414) (39,269)
------- -------
Effect of exchange rate changes on cash (2,052) 4,247
------- -------
Decrease in cash and cash equivalents (3,516) (13,752)
Cash and cash equivalents - beginning
of the period 228,081 280,973
------- -------
Cash and cash equivalents - end of the period $224,565 $267,221
======= =======
RECONCILIATION OF NET LOSS TO NET CASH
FROM OPERATING ACTIVITIES
Net loss $ (8,914) $(17,028)
Depreciation and amortization expense 54,963 49,675
Translation gain (3,582) (2,724)
Other non-cash adjustments to income 18,991 2,644
Decrease in accounts receivable 42,844 15,726
(Increase) decrease in notes receivable
and sales-type leases (1,829) 24,109
(Increase) decrease in inventories 13,361 (28,492)
Increase in equipment held for sale or
lease, net (26,530) (6,772)
Increase in spare parts, net (3,330) (6,547)
(Increase) decrease in net deferred income
tax asset 862 (1,769)
Decrease in accounts payable and accrued
liabilities (21,386) (3,829)
Increase in income taxes payable 3,440 7,006
------- -------
Net cash from operating activities $ 68,890 $ 31,999
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
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<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands of Dollars)
<CAPTION>
Notes
Capital in Receivable
Preferred Excess of Accumulated Treasury Unearned From
Stock Common 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
(44,798 shares) 4 1,400
Cash dividends paid on
preferred stock
($0.88 per share) (3,019)
Restricted stock
amortization 194
Net loss (8,914)
Other 1,561 50
-- ----- --------- -------- ---- ------ ------
Balances, March 31, 1995 $35 $5,256 $1,565,529 $(303,289) $(773) $(5,906) $(4,291)
== ===== ========= ======== ==== ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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Form 10-Q
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
- -----------------------------
The accompanying consolidated financial statements of Storage Technology
Corporation and its subsidiaries (StorageTek or the Company) have been
prepared in accordance with the Securities and Exchange Commission
requirements for Form 10-Q. As further discussed in Note 2, the consolidated
financial statements have been restated for all periods presented to reflect
the merger with Network Systems Corporation (Network Systems) as a pooling of
interests. 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. 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 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. In connection with the merger, the
Company assumed Network Systems' notes receivable from shareholders of
$4,291,000. These notes relate to loans made by Network Systems to its
officers prior to the merger to fund the exercise price of employee stock
options pursuant to a restricted stock purchase program and are secured by
the shares purchased and any other collateral required to maintain 100%
collateralization at the time of each loan.
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Form 10-Q
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Network Systems designs, manufactures, markets and services computer
networking products worldwide. Separate pre-merger revenue and net income of
StorageTek and Network Systems, assuming the merger was consummated on March
31, 1995, were as follows (in thousands of dollars):
Quarter Ended
------------------------
03/31/95 04/01/94
-------- --------
Revenue:
StorageTek $400,013 $335,623
Network Systems 46,424 58,314
Merger adjustments 3,749 4,251
------- -------
$450,186 $398,188
======= =======
Net income (loss):
StorageTek $ 3,208 $(19,588)
Network Systems (15,686) 1,199
Merger adjustments 3,564 1,361
------- -------
$ (8,914) $(17,028)
======= =======
Net income (loss) for the quarter ended March 31, 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 accrued liability with respect to merger
expenses remaining to be paid as of March 31, 1995, was $6,510,000. The
majority of this accrued liability relates to change in control payments and
is expected to be paid by the end of the second quarter of 1995.
The merger adjustments relate to revenue recognition and income tax effects.
Adjustments have been 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 have
also been 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.
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following (in thousands of dollars):
03/31/95 12/30/94
-------- --------
Raw Materials $ 54,495 $ 51,938
Work-In-Process 108,437 105,605
Finished Goods 87,867 104,162
------- -------
$250,799 $261,705
======= =======
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Form 10-Q
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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 8,
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. Discovery and depositions of the
Company's employees and other potential witnesses commenced in August 1993,
and are substantially complete. A trial has been set for October 1995. The
Company believes the suits are without merit and intends to vigorously defend
against them. There can be no guarantee, however, that the cases will result
in an outcome favorable to the Company. In the event of an adverse outcome,
neither the amount nor the likelihood of any potential liability which might
result is reasonably estimable; however, the Company currently believes that
the amount of the ultimate potential loss, after considering available
insurance recoveries, would not be material to the Company's financial
position. However, an adverse outcome could have a material effect on the
Company's reported results of operations in a future period. In the
derivative action, any recovery would be the property of the Company.
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 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. The
suit is now in the discovery phase as to the claims made by Array and Tandem.
A trial has been set for
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August 1995. The Company believes the counterclaims filed by Array and
Tandem are without merit and intends to vigorously defend against them.
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 November 1994, the defendants filed a motion for
summary judgment. Discovery has been stayed pending a ruling on that motion.
No trial date has been established. The Company believes that the claims in
the suit are barred by the 1990 settlement between the Company and Stuff and
are without merit, and the Company intends to vigorously defend against them.
In September 1994, EMC Corp. 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 motion to transfer the case to
the U.S. District Court for Colorado and has filed a counterclaim for
infringement of one of its patents. Discovery has been stayed pending a
decision on the motion to transfer. The Company believes the suit is without
merit and intends to vigorously defend against the suit.
In addition, the Company is involved in various other less significant legal
proceedings. The outcomes of these legal proceedings are not expected
individually or in the aggregate to have a material adverse effect on the
financial condition or operations of the Company based on the Company's
current understanding of the relevant facts and law.
NOTE 5 - SUBSEQUENT EVENT - INCOME TAXES
- ----------------------------------------
On May 11, 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 will not have a material
effect on the Company's financial position or results of operations.
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Form 10-Q
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1995
GENERAL
- -------
Storage Technology Corporation (StorageTek or the Company) reported a loss
for the first quarter ended March 31, 1995, of $8.9 million on revenue of
$450.2 million, compared to a net loss for the first quarter ended April 1,
1994, of $17.0 million on revenue of $398.2 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 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 merger.
Revenue increased 13% in the first quarter of 1995 compared to the first
quarter of 1994. Operating results also improved. These improvements were
primarily as a result of incremental sales revenue from the Iceberg 9200
Virtual Storage Facility (Iceberg) and TimberLine 9490 (TimberLine), a 36-
track cartridge subsystem. Revenue from networking products and midrange
systems decreased during the quarter. Intense price competition in the direct
access storage device (DASD) marketplace was partially offset by progress
made by the Company in lowering manufacturing costs and a favorable sales mix
of larger capacity Icebergs. Operating results in the first quarter of 1995
were also affected by merger expenses of $14.4 million; employee severance
costs unrelated to the merger of $6.3 million; losses associated with the
Company's networking and midrange product lines; and the discontinuance of
austerity measures, including salary reductions, which were in place during
the first quarter of 1994.
Improvements in revenue and operating results for 1995 are significantly
dependent upon the continuing success of recently introduced products, the
timely and successful introduction of additional functions and features for
these products, and achieving cost savings associated with the manufacture of
these products. The successful introduction of new products, in particular,
networking products planned by Network Systems, is also key to the Company's
future results. Network Systems' operating results, together with merger
expenses, are expected to be dilutive to the Company's reported earnings at
least through 1995. Nonetheless, StorageTek believes Network Systems'
current and anticipated future products will provide the Company with the
opportunity to accelerate its plans for introducing storage management
solutions for the enterprisewide network environment. Future revenue and
operating results may be significantly affected by the extent of future DASD
price declines and the Company's ability to react to these price declines.
The Company plans to continue the
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Form 10-Q
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implementation of cost-control measures in order to attain targeted expense
ratios, including further redeployments or reductions in workforce. Other
factors that may affect future results include the introduction of new
products by competitors, technological advances within the computer industry,
and changes in the worldwide economy, among others. See "OTHER FACTORS THAT
MAY AFFECT FUTURE RESULTS," below.
The Company's cash balances decreased $3.5 million during the first quarter
of 1995 as cash generated by the Company's operating activities, including
the receipt of a refund by Network Systems from the Internal Revenue Service
of $18.9 million, were offset by net payments of debt of $26.7 million and
investments in property, plant and equipment of $23.2 million.
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
---------------------
03/31/95 04/01/94
-------- --------
Revenue:
Serial Access Subsystems 56.5% 52.1%
Random Access Subsystems 21.1 5.3
Networking Products 11.4 15.9
Midrange Systems and Other 11.0 26.7
----- -----
Total revenue 100.0 100.0
Cost of revenue 64.0 66.7
----- -----
Gross profit 36.0 33.3
Research and product development costs 10.7 12.1
Marketing, general, administrative and
other income and expense, net 24.2 26.4
Merger expenses 3.2
----- -----
Operating loss (2.1) (5.2)
Interest (income) expense, net (0.3) (0.9)
----- -----
Loss before income taxes (1.8) (4.3)
Provision for income taxes 0.2 0.0
----- -----
Net loss (2.0)% (4.3)%
===== =====
REVENUE
- -------
Total revenue increased 13% in the first quarter of 1995 compared to the
first quarter of 1994, principally as a result of an increase in product
sales of 20%, while service and rental revenue was largely unchanged.
SERIAL ACCESS SUBSYSTEMS
Revenue from serial access subsystem products increased 23% in the first
quarter of 1995 compared to the first quarter of 1994, primarily due to
incremental sales of
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Form 10-Q
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TimberLine, which became available in the fourth quarter of 1994. Revenue
from the PowderHorn 9310, the second generation automated tape cartridge
system, increased while revenue from the Silverton 4490 36-track tape
cartridge system and first generation 4400 ACS library were largely unchanged.
As expected, sales of the Company's first-generation 4480 18-track tape
cartridge system declined during the first quarter of 1995.
During 1995, increased sales associated with TimberLine and the new RedWood
SD-3 Helical Cartridge Subsystem (RedWood), which became available in the
first quarter, are expected to offset anticipated declines in revenue from
the Company's first-generation tape and library products. Revenue
contribution from RedWood during 1995 is significantly dependent upon the
Company's ability to develop and introduce additional functions and features
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 352% in the first
quarter of 1995 compared to the first quarter of 1994, due to incremental
sales of Iceberg. Iceberg became generally available during the second
quarter of 1994. Iceberg sales continued to experience aggressive price
competition during the quarter. These price declines were partially offset
by a favorable mix of larger capacity Icebergs sold. The Company recognized
initial revenue from its Arctic Fox 9800 High-Performance Shared Access
Facility which became available during the first quarter.
Sales of Iceberg during 1995 are dependent upon continued customer acceptance
of Iceberg in light of existing and anticipated competitive offerings in the
DASD marketplace, the timely introduction of additional Iceberg functions and
features, and further cost savings associated with the manufacture of
Iceberg. The Company is committing substantial resources to develop
additional functions and features for Iceberg, including the addition of
ESCON support. The ability to offer ESCON support, a high-speed fiber optic
data transmission method, is key to expanding the marketplace for Iceberg.
While the Company believes the introduction schedules for new Iceberg
features and other DASD products currently being developed are achievable;
there can be no assurances that they will be met, or that they will gain
market acceptance.
NETWORKING PRODUCTS
Revenue from networking products decreased 19% in the first quarter of 1995
compared to the first quarter of 1994, as a result of declining product sales
as the Company transitions to a new line of internetworking products planned
for introduction later in 1995.
Network Systems and Northern Telecom are jointly developing the Enterprise
Routing Switch (ERS), a product which is designed to combine local-area
network and wide-area network packet switching with cell switching technology
that supports
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Form 10-Q
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Asynchronous Transfer Mode (ATM). Revenue and operating results from the
Company's networking products during 1995 are significantly dependent upon the
timely and successful introduction of ERS and other planned new products in
this rapidly evolving marketplace. There can be no assurances that the
development schedules will be met, or that these products will gain market
acceptance.
MIDRANGE SYSTEMS AND OTHER
Revenue from midrange systems and other products decreased 54% in first
quarter of 1995 compared to the first quarter of 1994. Midrange revenue and
operating profits continued to be adversely affected by steep price erosion
in the midrange DASD marketplace. During 1993, the Company restructured its
midrange organization and, during 1994, redirected its midrange marketing
efforts to focus on open systems and value-added AS/400 tape products and
service. Midrange operating results have, however, continued to fall short
of the Company's expectations. The Company's midrange systems business is
not expected to serve as a significant source of revenue in the future.
Revenue from printer products declined during the first quarter of 1995 as
the Company continues to wind down these operations.
GROSS PROFIT
- ------------
Overall gross profit increased to 36% for the first quarter of 1995, compared
to 33% for the first quarter of 1994, due to an increase in product sales
margins, which was partially offset by a decrease in service and rental
margins.
Gross profit on product sales increased to 37% in the first quarter of 1995,
compared to 31% in the first quarter of 1994, primarily as a result of a
favorable product mix which included greater revenue contribution from
Iceberg and TimberLine, which have high margins; and significantly reduced
revenue contribution from midrange products, which generally have low
margins. While Iceberg continues to experience intense price competition in
the large systems DASD marketplace, price declines were partially offset
during the first quarter of 1995 by lower manufacturing costs and a favorable
sales mix of larger capacity Icebergs. Product sales margins in the first
quarter of 1995 compared to the first quarter of 1994 were also affected by
increased operating expenses associated with the discontinuance of salary
reductions and other austerity measures which were in place during the first
quarter of 1994.
Gross profit on service and rental revenue decreased to 33% in the first
quarter of 1995, compared to 37% in the first quarter 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 1995 is
significantly dependent upon the timely introduction of planned technological
improvements to existing products and achieving cost savings associated with
the manufacture of these products. Product sales margins may also be
adversely affected by inventory writedowns as a result of more rapid than
anticipated technological changes and
PAGE
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Form 10-Q
Page 15
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 first quarter of 1995 compared to the first quarter of 1994, but declined
as a percentage of revenue from 12.1% for the first quarter of 1994 to 10.7%
for the first quarter of 1995. Employee severance costs associated with
reductions in workforce during the quarter were offset by cost savings
associated with previous reductions in workforce. These reductions resulted
from 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 4% in the first quarter of 1995 compared to the first quarter of
1994, primarily due to an increase in operating expenses resulting from
higher sales volumes; the discontinuance of austerity measures which were in
place during the first quarter of 1994; and employee severance costs incurred
during the first quarter of 1995. These increases were partially offset by
lower operating expenses associated with the midrange product line, which the
Company restructured in 1993. Gains and losses associated with foreign
currency transactions and translation adjustments, net of associated hedging
results, aggregated a net loss of $0.6 million for the first quarter of 1995,
compared to a net loss of $1.4 million in the first quarter of 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 the first quarter of 1995 compared to the
first quarter of 1994, primarily due to a reduction in the Company's net
investment in sales-type lease balances.
PAGE
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Form 10-Q
Page 16
Interest expense increased 16% in the first quarter of 1995 compared to the
first quarter of 1994, primarily as a result of increased levels of
nonrecourse borrowings and other debt in the first quarter of 1995.
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 $53.8 million
of deferred income tax assets as of March 31, 1995. See Note 5 to the
consolidated financial statements for a discussion of the settlement
agreement with the Internal Revenue Service with respect to proposed
adjustments to the Company's federal income tax returns for the years 1985
through 1987.
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, 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
first quarter of 1995. The remaining restructuring accrual of $6.5 million
as of December 31, 1994, was reduced by cash payments during the first
quarter of 1995 of $2.4 million, leaving a remaining restructuring accrual of
$4.1 million as of March 31, 1995. The remaining accrual consists primarily
of anticipated future lease and employee severance payments.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balances decreased $3.5 million from December 30, 1994, to
March 31, 1995. The decrease in cash during the first quarter of 1995
primarily resulted from net payments of nonrecourse borrowings and other debt
of $26.7 million; and investments in property, plant and equipment of $23.2
million. These cash
PAGE
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Form 10-Q
Page 17
outflows were offset by cash provided by operations during the first quarter
of 1995. Net cash provided by operations was $68.9 million for the first
quarter of 1995 compared to $32.0 million for the first quarter of 1994. Net
cash provided by operations include collections of income tax refunds and
associated interest by Network Systems from the Internal Revenue Service of
$18.9 million in the first quarter of 1995 and $13.5 million in the first
quarter of 1994.
The current ratio remained largely unchanged from 2.0 at December 30, 1994 to
March 31, 1995. Accounts receivable decreased from $353.5 million at
December 30, 1994, to $314.9 million at March 31, 1995, due primarily to
lower comparable revenue. Inventories decreased from $261.7 million at
December 30, 1994, to $250.8 million at March 31, 1995, principally as a
result of a decrease in midrange inventories.
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% at March 31, 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 March 31, 1995, the Company had no outstanding
advances under the Revolver and had approximately $103 million of available
credit under the Revolver.
In addition to the Revolver, the Company had lease assets in excess of $100
million available for financing as of March 31, 1995. Subject to credit
approval, the Company believes it can develop lease discounting lines, if
needed, or fund its operating and capital requirements through other forms of
asset-backed financings. At the Company's option, a portion of these lease
assets can also be utilized for borrowings under the Revolver.
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.
PAGE
<PAGE>
Form 10-Q
Page 18
LONG-TERM DEBT-TO-EQUITY
The Company's long-term debt-to-equity ratio of 28% was unchanged from
December 30, 1994, to March 31, 1995. These debt-to-equity ratios include
$112.1 million and $101.7 million, respectively, of long-term nonrecourse
borrowings secured by customer lease commitments included within total assets
(primarily net investment in sales-type leases). Excluding long-term
nonrecourse borrowings, the Company's long-term debt-to-equity ratio
increased from 19% as of December 30, 1994, to 20% as of March 31, 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 4.8%, 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 March 31, 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.
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
PAGE
<PAGE>
Form 10-Q
Page 19
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 beginning March 15, 1995, 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 and the United
Kingdom; 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 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 products and
PAGE
<PAGE>
Form 10-Q
Page 20
enhancements to existing products during 1995. 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, Fujitsu
Limited and Hitachi Ltd., as well as other companies, including Amdahl
Corporation and EMC Corp. Current industry estimates show the industry's
1995 DASD manufacturing capacity and total projected output are significantly
greater than anticipated demand. This potential over-supply could put
increasing 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. The Company's ability to sustain or increase sales levels depends
to a significant extent upon acceptance of and continued demand for products
introduced in late 1993 and in 1994, and new products and enhancements to
existing products planned for introduction in the future. Future sales
levels are also dependent upon the Company's ability to successfully address
the current migration to networked computing with products currently being
developed by Network Systems. 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
PAGE
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Form 10-Q
Page 21
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 recently commenced
manufacturing operations in its Toulouse, France facilities. The Company may
experience manufacturing irregularities and adverse output fluctuations in
connection with these operations.
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.
The Company markets a number of products acquired from other manufacturers on
an original equipment manufacturer (OEM) basis. These products are often
available only from a single manufacturer. Some of these OEM suppliers are,
or may in the future be, competitors of the Company. In the event that an
OEM product is no longer available, second sourcing is not always feasible
and there could be a material adverse effect on the Company's results of
operations.
EARNINGS FLUCTUATIONS
The Company's reported earnings can fluctuate significantly from quarter to
quarter due to a variety of factors, including among others, the effects of
(i) customers' historical tendencies to make purchase decisions near the end
of the calendar year, (ii) the timing of the announcement and availability of
products and product enhancements by the Company and its competitors, (iii)
fluctuating foreign currency exchange rates, (iv) longer than anticipated
customer acceptance periods for the Company's products, and (v) changes in
PAGE
<PAGE>
Form 10-Q
Page 22
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 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
PAGE
<PAGE>
Form 10-Q
Page 23
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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<PAGE>
Form 10-Q
Page 24
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 8,
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. Discovery and depositions of the
Company's employees and other potential witnesses commenced in August 1993,
and are substantially complete. A trial has been set for October 1995. The
Company believes the suits are without merit and intends to vigorously defend
against them. There can be no guarantee, however, that the cases will result
in an outcome favorable to the Company. In the event of an adverse outcome,
neither the amount nor the likelihood of any potential liability which might
result is reasonably estimable; however, the Company currently believes that
the amount of the ultimate potential loss, after considering available
insurance recoveries, would not be material to the Company's financial
position. However, an adverse outcome could have a material effect on the
Company's reported results of operations in a future period. In the
derivative action, any recovery would be the property of the Company.
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. The
suit is now in the discovery phase as to the claims made by Array and Tandem.
A trial has been set for August 1995. The Company believes the counterclaims
filed by Array and Tandem are without merit and intends to vigorously defend
against them.
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Form 10-Q
Page 25
On January 21, 1994, Bell Atlantic Business Systems Services, Inc. (BABSS)
filed suit in Federal District Court for the Northern District of California,
alleging that a number of the Company's service business policies are
illegal, including price increases and parts and maintenance software
availability. The case is now in the discovery phase. A trial has been set
for March 1996. The Company believes the suit is without merit and intends
to vigorously defend against the suit.
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 outcomes of these legal proceedings are not expected
individually or in the aggregate to have a material adverse effect on the
financial condition or operations of the Company based on the Company's
current understanding of the relevant facts and law.
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Form 10-Q
Page 26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
*/**10.1 Amendment to Employment Agreement between the Company
and Ryal R. Poppa, dated March 8, 1995
*11.0 Computation of Loss Per Common Share.
*27.0 Financial Data Schedule
(b) Reports on Form 8-K
During the first quarter of 1995, the Company filed two
reports on Form 8-K. The first Form 8-K was filed on January 26,
1995, in connection with a publicly disseminated news release
concerning the Company's financial results for the quarter and year
ended December 30, 1994. The second Form 8-K was filed on March
17, 1995, regarding the acquisition of all outstanding equity
securities of Network Systems. This filing incorporated by
reference certain Network Systems financial statements, as well as
pro forma financial statements which reflect the combination of
StorageTek and Network Systems.
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
** Contract or compensatory plan or arrangement in which
directors and / or officers participate.
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Form 10-Q
Page 27
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)
May 12, 1995 /s/ DAVID E. LACEY
------------ ----------------------------
(Date) David E. Lacey
Interim Chief Financial Officer
and Corporate Vice President
(Principal Financial Officer)
May 12, 1995 /s/ MARK D. MCGREGOR
------------ ----------------------------
(Date) Mark D. McGregor
Treasurer, Interim Controller
and Corporate Vice President
(Principal Accounting Officer)
PAGE
<PAGE>
EXHIBITS INDEX
--------------
Exhibits Description
- -------- -----------
10.1 Amendment to Employment Agreement between the Company
and Ryal R. Poppa, dated March 8, 1995
11.0 Computation of Loss Per Common Share.
27.0 Financial Data Schedule
EXHIBIT 10.7
STORAGE TECHNOLOGY CORPORATION
2270 South 88th Street
Louisville, Colorado 80028-4309
(303) 673-5151
StorageTek
March 8, 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 March 8, 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"), and October 1, 1991, 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 as
follows:
Termination in the Event of Sale, Merger or Change of Control. If
the Company is sold, or merged with or into another company (in a
transaction in which the Company is not the surviving entity), or in which
the stockholders of the Company immediately prior to the merger own 50% or
less of the Company after the merger, or all or substantially all of the
assets of the Company are sold, or more than 25% of the outstanding voting
capital stock of the Company is acquired by another person or persons (as
such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934) acting as a group (any of which events is referred to
hereinafter as a "Change in Control"), and your employment is terminated
either by you for any reason or by the Company without cause as defined in
the 1989 Agreement ("Cause"), and such termination occurs within 24 months
after the date of any such Change in Control, then, upon such termination,
and subject to the provisions of the following paragraph, the Company will
pay you an amount equal to two times your annual base salary then in effect,
plus two times 100% of your On Plan Bonus under the MBO Program based on
your annual salary and On Plan Bonus potential percentage in effect
immediately prior to the Change in Control (which shall be calculated as if
the Company meets its plan for such year and which shall be payable whether
or not the Company does in fact meet its plan); (ii) all outstanding stock
options shall fully vest and become exercisable in full; and (iii) the
Company's right to repurchase shall terminate with respect to any stock
earlier purchased by you under the Company's 1987 Equity Participation Plan,
and all such stock shall become fully vested. In addition, after such
termination of employment, you shall be entitled to exercise all stock
options in accordance with the terms of the Option Agreements. To the
extent you would be entitled to payments or your rights to restricted stock
or stock options would vest not only pursuant to the terms of this
Amendment, but also pursuant to the provisions of other agreements with the
Company, then such payments shall be deemed made and such vesting shall be
deemed to occur pursuant to the terms of such other agreements, and not
under the terms of this Amendment.
Limitation on Payments. In the event that the severance and other
benefits provided for in this Amendment or otherwise payable to you (i)
would constitute "parachute payments" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this paragraph, would be subject to the excise tax imposed by Section 4999
of the Code, then such severance benefits shall be either (i) delivered in
full, or (ii) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account
the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by you on an after-tax
basis, of the greatest amount of severance benefits, notwithstanding that
all or some portion of such severance benefits may be taxable under Section
4999 of the Code. Unless you and the Company agree otherwise in writing,
any determination required under this paragraph shall be made in writing by
the Company's independent public accountants immediately prior to Change of
Control (the "Accountants"), whose determination shall be conclusive and
binding upon you and the Company for all purposes. For purposes of making
the calculations required by this paragraph, the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and
may rely on reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. You and the Company
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under
this section. The Company shall bear all costs the Accountants may
reasonably incur in connection with any calculations contemplated by this
paragraph.
All payments to you pursuant to this Amendment shall be subject to
withholding of all amounts required to be withheld by applicable Internal
Revenue Service and State tax agency authorities by the Company and shall be
conditioned upon your submission of all information or execution of all
instruments necessary to enable the Company to comply with such withholding
requirements.
If any provision of this Amendment shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect or
impair the validity or enforceability of the remaining provisions of this
Amendment, which shall remain in full force and effect in accordance with
their terms.
This Amendment is entered into in accordance with, and shall be
interpreted pursuant to the provisions of, the internal laws of the State of
Colorado (without regard to conflict of law principles).
If any provision of this Amendment shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect or
impair the validity or enforceability of the remaining provisions of this
Amendment, which shall remain in full force and effect in accordance with
their terms.
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
<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF LOSS PER COMMON SHARE
(In thousands, except per share amounts)
<CAPTION>
Quarter Ended
--------------------------------
03/31/95 04/01/94
------------ ------------
<S> <C> <C>
PRIMARY (a)
Loss
Net loss (8,914) (17,028)
Preferred dividend requirement 3,019 3,019
------------ ------------
Loss applicable to common shares ($11,933) ($20,047)
============ ============
Shares
Weighted average common shares outstanding 52,493 50,936
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method)
------------ ------------
Weighted average common shares
and equivalents 52,493 50,936
============ ============
Loss per common share ($0.23) ($0.39)
============ ============
FULLY DILUTED (b)
Loss
Net loss ($8,914) ($17,028)
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 2,480 2,465
------------ ------------
Net loss, as adjusted ($6,434) ($14,563)
============ ============
Shares
Weighted average common shares outstanding 52,493 50,936
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 170 1,369
Adjustment for shares issuable upon assumed
conversion of $3.50 Convertible
Exchangeable Preferred Stock 7,340 7,340
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,132 4,132
------------ ------------
Weighted average common shares
and equivalents, as adjusted 64,135 63,777
============ ============
Loss per common share ($0.10) ($0.23)
============ ============
(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>
THE FOLLOWING DATA, INSOFAR AS IT RELATES TO THE 3 MONTHS ENDED MARCH
31, 1995, HAS BEEN DERIVED FROM THE COMPANY'S FORM 10-Q. THE DATA,
INSOFAR AS IT RELATES TO FISCAL YEARS 1994 AND 1993, HAS BEEN DERIVED
FROM THE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF STORAGE
TECHNOLOGY CORPORATION AND NETWORK SYSTEMS CORPORATION, AS POOLED
ENTITIES FOR SUCH PERIODS, TO REFLECT THE MARCH 7, 1995 MERGER. THIS
SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000094673
<NAME> STORAGE TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR YEAR
<FISCAL-YEAR-END> DEC-29-1995 DEC-30-1994 DEC-31-1993
<PERIOD-END> MAR-31-1995 DEC-30-1994 DEC-31-1993
<CASH> 224,565 228,081 280,973
<SECURITIES> 6,145 5,477 23,944
<RECEIVABLES> 335,093 <F1> 387,803 293,216
<ALLOWANCES> 0 13,387 13,196
<INVENTORY> 250,799 261,705 229,856
<CURRENT-ASSETS> 965,058 1,013,169 970,360
<PP&E> 396,285 <F1> 840,792 753,721
<DEPRECIATION> 0 460,281 408,740
<TOTAL-ASSETS> 2,107,093 2,144,458 2,064,851
<CURRENT-LIABILITIES> 478,979 512,104 477,784
<BONDS> 357,426 356,887 362,718
<COMMON> 5,256 5,252 5,088
0 0 0
35 35 35
<OTHER-SE> 1,251,270 1,259,998 1,210,754
<TOTAL-LIABILITY-AND-EQUITY> 2,107,093 2,144,458 2,064,851
<SALES> 305,092 1,289,271 1,050,143
<TOTAL-REVENUES> 450,186 1,871,350 1,617,691
<CGS> 191,548 812,228 705,962
<TOTAL-COSTS> 288,089 1,186,942 1,072,784
<OTHER-EXPENSES> 62,528 <F2> 214,083 <F3> 281,462 <F4>
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 10,775 40,832 43,853
<INCOME-PRETAX> (7,914) 50,938 (111,961)
<INCOME-TAX> 1,000 18,900 9,500
<INCOME-CONTINUING> (8,914) 32,038 (121,461)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 40,000
<NET-INCOME> (8,914) 32,038 (81,461)
<EPS-PRIMARY> (0.23) 0.38 (1.80)
<EPS-DILUTED> 0 0 0
<FN>
<F1> Asset values for the interim period represent net amounts.
<F2> Includes merger expenses of $14,352,000.
<F3> Includes restructuring charges of $8,000,000.
<F4> Includes restructuring, acquisition, and acquired research
and development costs of $90,414,000.
</FN>
</TABLE>
