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 September 27, 1996
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) - 57,053,731 shares outstanding at October 28,
1996.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 27, 1996
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in
Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 6 - Exhibits and Reports on Form 8-K 26
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Form 10-Q
Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
09/27/96
(Unaudited) 12/29/95
--------- ---------
ASSETS
Current assets:
Cash, including cash equivalents $ 282,907 $ 264,502
Short-term investments 87,017
Accounts receivable, net 427,435 396,499
Notes and installment receivables (Note 3) 4,925 10,766
Net investment in sales-type leases (Note 3) 5,275 88,668
Inventories (Note 2) 263,174 214,553
--------- ---------
Total current assets 1,070,733 974,988
Notes and installment receivables (Note 3) 4,227 10,113
Net investment in sales-type leases (Note 3) 4,268 150,751
Equipment held for sale or lease, at cost (net) 117,434 139,629
Spare parts for field service, at cost (net) 30,863 29,468
Property, plant and equipment, at cost (net) 328,965 333,021
Deferred income tax assets, net 111,039 74,902
Other assets 133,594 175,757
--------- ---------
$1,801,123 $1,888,629
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease
commitments (Note 3) $ 19,415
Current portion of other long-term debt (Note 3) $ 5,628 65,844
Accounts payable and accrued liabilities 441,887 454,415
Income taxes payable 63,639 9,963
--------- ---------
Total current liabilities 511,154 549,637
7% Convertible subordinated debentures (Note 4) 171,205
8% Convertible subordinated debentures 145,620 145,645
Nonrecourse borrowings secured by lease
commitments (Note 3) 20,980
Other long-term debt 26,985 26,133
Deferred income tax liabilities 15,177 12,196
--------- ---------
Total liabilities 698,936 925,796
--------- ---------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 150,000,000 shares
authorized; 56,827,090 shares issued at
September 27, 1996, and 53,352,087 shares
issued at December 29, 1995 (Note 7) 5,683 5,335
Capital in excess of par value 1,435,490 1,414,551
Accumulated deficit (333,277) (445,761)
Treasury stock of 61,738 shares at September 27,
1996, and 43,773 shares at December 29, 1995 (779) (777)
Unearned compensation (3,942) (6,427)
Notes receivable from stockholders (988) (4,088)
--------- ---------
Total stockholders' equity 1,102,187 962,833
--------- ---------
$1,801,123 $1,888,629
========= =========
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 OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<CAPTION>
Quarter Ended Nine Months Ended
-----------------------------------------------
09/27/96 09/29/95 09/27/96 09/29/95
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Sales $348,122 $291,885 $1,006,202 $ 927,716
Service and rental revenue 137,963 147,711 412,669 442,768
------- ------- --------- ---------
Total revenue 486,085 439,596 1,418,871 1,370,484
------- ------- --------- ---------
Cost of sales 222,101 183,133 607,568 584,925
Cost of service and rental revenue 71,450 93,095 218,539 286,334
------- ------- --------- ---------
Total cost of revenue 293,551 276,228 826,107 871,259
------- ------- --------- ---------
Gross profit 192,534 163,368 592,764 499,225
Research and product development
costs 36,898 42,414 135,515 135,797
Marketing, general, administrative
and other income and expense, net 104,384 92,793 317,014 316,294
Merger expenses 30,680 45,032
------- ------- --------- ---------
Operating profit (loss) 51,252 (2,519) 140,235 2,102
Interest income 6,626 9,700 21,510 33,833
Interest expense (4,378) (6,662) (21,396) (26,975)
------- ------- --------- ---------
Income before income taxes and
extraordinary item 53,500 519 140,349 8,960
Provision for income taxes (14,000) (7,500) (37,400) (13,000)
------- ------- --------- ---------
Income (loss) before
extraordinary item 39,500 (6,981) 102,949 (4,040)
Extraordinary gain on sale of
lease assets, net of income
taxes of $8,200 (Note 3) 9,535
------- ------- --------- ---------
Net income (loss) 39,500 (6,981) 112,484 (4,040)
Preferred dividend requirement (3,018) (9,056)
------- ------- --------- ---------
Income (loss) applicable to
common shares $ 39,500 $ (9,999) $ 112,484 $ (13,096)
======= ======= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENTS (Note 9)
Primary:
Income (loss) before extraordinary
item $ 0.65 $ (0.19) $ 1.83 $ (0.25)
Extraordinary gain, net 0.17
------- ------- --------- ---------
$ 0.65 $ (0.19) $ 2.00 $ (0.25)
======= ======= ========= =========
Fully Diluted:
Income before extraordinary item $ 1.75
Extraordinary gain, net 0.15
------- ------- --------- ---------
N/A N/A $ 1.90 N/A
======= ======= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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Form 10-Q
Page 5
<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
<CAPTION>
Nine Months Ended
--------------------------
09/27/96 09/29/95
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Cash received from customers (Note 3) $ 1,657,036 $ 1,550,463
Cash paid to suppliers and employees (1,257,128) (1,283,617)
Interest received 21,450 42,553
Interest paid (16,093) (24,908)
Income taxes paid, net (24,570) (35,400)
---------- ----------
Net cash from operating activities 380,695 249,091
---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (49,320) (59,876)
Short-term investments, net (87,017) 5,530
Merger expenses (10,647)
Other assets, net 12,825 (13,506)
---------- ----------
Net cash used in investing activities (123,512) (78,499)
---------- ----------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 1,028 3,066
Repayments of nonrecourse borrowings (Note 3) (34,058) (145,711)
Proceeds from other debt 78 847
Repayments of other debt (Note 3) (64,139) (52,630)
Proceeds from employee stock plans 18,748 6,474
Payments for repurchase of common stock (Note 7) (163,350)
Preferred stock dividend payments (9,056)
---------- ----------
Net cash used in financing activities (241,693) (197,010)
---------- ----------
Effect of exchange rate changes on cash 2,915 (426)
---------- ----------
Increase (decrease) in cash and cash equivalents 18,405 (26,844)
Cash and cash equivalents - beginning
of the period 264,502 228,081
---------- ----------
Cash and cash equivalents - end of the period $ 282,907 $ 201,237
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH FROM
OPERATING ACTIVITIES
Net income $ 112,484 $ (4,040)
Depreciation and amortization expense 123,561 166,222
Translation (gain) loss 2,306 (4,035)
Other adjustments to income 16,109 24,236
(Increase) decrease in accounts receivable (15,944) 13,376
Decrease in notes receivable and sales-type
leases (Note 3) 238,607 166,355
(Increase) decrease in inventories (48,724) 2,926
Increase in equipment held for sale or lease, net (33,025) (46,491)
Increase in spare parts, net (6,085) (7,046)
Increase in net deferred income tax asset (32,942) (15,873)
Decrease in accounts payable and accrued
liabilities (29,624) (40,012)
Increase (decrease) in income taxes payable 53,972 (6,527)
---------- ----------
Net cash from operating activities $ 380,695 $ 249,091
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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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
Common Excess of Accumulated Treasury Unearned From
Stock Par Value Deficit Stock Compensation Stockholders
-------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Balances, December 29, 1995 $5,335 $1,414,551 $(445,761) $(777) $(6,427) $(4,088)
7% Convertible Subordinated
Debentures exchanged for
stock (7,282,536 shares)
(Note 4) 728 168,273
Shares issued under stock
purchase plan and for
exercises of options
(691,098 shares) 69 15,580
Repurchase of common stock
(4,500,000 shares) (Note 7) (450) (162,900)
Net income 112,484
Other 1 (14) (2) 2,485 3,100
----- --------- -------- ---- ------ ------
Balances, September 27, 1996 $5,683 $1,435,490 $(333,277) $(779) $(3,942) $ (988)
===== ========= ======== ==== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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Form 10-Q
Page 7
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION AND RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------------------------------
The accompanying consolidated financial statements of Storage Technology
Corporation and its subsidiaries (StorageTek or the Company) have been
prepared in accordance with the Securities and Exchange Commission
requirements for Form 10-Q. In the opinion of management, these statements
reflect all adjustments necessary for the fair presentation of results for
the periods presented, and such adjustments are of a normal, recurring
nature. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-
K for the year ended December 29, 1995.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125, which provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities, is
effective for transactions occurring after December 31, 1996. The Company
does not anticipate that the adoption of SFAS No. 125 will have a material
effect on its consolidated financial position or results of operations.
NOTE 2 - INVENTORIES
- --------------------
Inventories consist of the following (in thousands of dollars):
09/27/96 12/29/95
-------- --------
Raw Materials $ 97,633 $ 75,673
Work-In-Process 109,413 92,487
Finished Goods 56,128 46,393
------- -------
$263,174 $214,553
======= =======
NOTE 3 - SALE OF LEASE ASSETS
- -----------------------------
In March 1996, StorageTek sold all of the issued and outstanding stock of
its wholly owned lease financing subsidiary, StorageTek Financial Services
Corporation (SFSC), as well as the lease assets of certain of the Company's
foreign subsidiaries to Leasetec Corp. (Leasetec). These transactions
resulted in the sale of substantially all of the Company's net investment in
sales-type leases, installment receivables, and equipment held subject to
operating leases. Leasetec assumed approximately $6,000,000 of associated
nonrecourse borrowings and the Company used a portion of the cash proceeds
to retire its remaining nonrecourse borrowings and 9.53% Senior Secured
Notes. The transactions resulted in an extraordinary gain of $9,535,000,
net of applicable taxes of $8,200,000, in the first quarter of 1996. The
increase in net cash from operating activities on the Consolidated Statement
of Cash Flows during the nine months ending
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Form 10-Q
Page 8
September 27, 1996, as compared to the same period of 1995, is partially a
result of cash received from the sale of lease assets.
NOTE 4 - DEBT AND OTHER FINANCING ARRANGEMENTS
- ----------------------------------------------
On June 12, 1996, the Company called for redemption on July 12, 1996, all
outstanding 7% Convertible Subordinated Debentures due 2008 (7% Convertible
Debentures) in the principal amount of approximately $171,205,000.
Debentures in the principal amount of $171,140,000 were converted at a price
of $23.50 per share into 7,282,536 shares of common stock on or before July
12, 1996. The remaining debentures were redeemed for cash on July 12, 1996.
On March 28, 1996, the Company entered into a $150,000,000 secured credit
agreement (the Revolver) which expires in May 1998. The interest rates
available under the Revolver depend on the type of advance selected. The
current primary advance rate is the agent bank's prime lending rate plus
0.125% (8.375% as of September 27, 1996). Under the Revolver, the Company
is required to comply with certain financial and other covenants, including
restrictions on the payment of cash dividends on its common stock. As of
September 27, 1996, the Company had issued letters of credit for
approximately $35,562,000 and had approximately $114,438,000 of available
credit under the Revolver.
On January 29, 1996, the Company entered into a financing agreement with a
bank which provides for the sale of certain U.S. and foreign based accounts
receivable on a recourse basis. This agreement, which expires on January
31, 1998, allows for receivable sales of up to $40,000,000 at any one time
and the Company's obligations under the agreement are secured by a letter of
credit for the amount of the receivables sold. The selling price of the
receivables is partially determined based upon foreign currency exchange
rates and any gains or losses on the sales are recognized within marketing,
general, administrative and other income and expense, net, in the
Consolidated Statement of Operations at the time the receivables are sold.
As of September 27, 1996, the Company had committed to future cumulative
sales of approximately $259,580,000. Gains and losses associated with the
receivable sales are not expected to have a material effect on the Company's
reported financial results after taking into consideration other
transactions associated with the Company's international operations. Based
upon the Company's past credit and collection experience with respect to the
receivables that it expects to sell, the Company believes that no material
credit risk exists under the recourse provisions of the agreement.
NOTE 5 - RESTRUCTURING
- ----------------------
During the fourth quarter of 1995, the Company adopted a formal action plan
for restructuring its enterprise and networking businesses. The
restructuring was adopted in an effort to establish a more cost efficient
business structure in response to competition. Elements of the Company's
restructuring plan included focusing on its core businesses, outsourcing non-
strategic activities, rearchitecting its distribution processes and
accelerating the integration of Network Systems Corporation (Network
Systems).
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Form 10-Q
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The following table summarizes the activity associated with the Company's
restructuring reserves during the nine months of 1996 (in thousands of
dollars):
Employee Lease Other
Severance Abandonments Exit Costs Total
-----------------------------------------------
Balances, December 29,
1995 $ 42,688 $18,538 $10,172 $ 71,398
Cash payments (24,840) (1,834) (4,635) (31,309)
Reclassifications 301 (154) 1,222 1,369
------- ------ ------- -------
Balances, September 27,
1996 $ 18,149 $16,550 $ 6,759 $ 41,458
======= ====== ======= =======
Cash payments during the nine months of 1996 are primarily the result of a
reduction in the number of employees of approximately 1,700 people.
Reclassifications consist principally of reclassifying a restructuring
accrual as other exit costs of approximately $1,400,000, which was
previously recorded as a direct write-off of a fixed asset. The
reclassifications had no effect on the Company's reported results within the
Consolidated Statement of Operations during the nine months of 1996. While
the majority of these remaining accruals are expected to result in future
cash outflows, these outflows are not expected to have a material effect on
the Company's liquidity.
NOTE 6 - LITIGATION
- -------------------
On June 10, 1993, the Company filed suit against EMC Corp. in U.S. District
Court for the District of Colorado. The suit alleged infringement by EMC
Corp. of a patent pertaining to the Company's disk storage technology. The
complaint asked the court to impose injunctive relief, treble damages in an
unspecified amount, and an award of attorney fees and costs. EMC Corp.
filed an answer and counterclaim on July 20, 1993, alleging, among other
things, patent misuse by StorageTek and seeking the invalidation of the
Company's patents, damages in an unspecified amount and an award of attorney
fees, costs and interest.
On September 23, 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 asked the court to impose injunctive
relief, treble damages in an unspecified amount and an award of attorney
fees and costs. On December 22, 1994, the Company filed a counterclaim for
infringement of one of its patents and, in November 1995, added a second
patent to its counterclaim.
On April 16, 1996, the Company and EMC Corp. settled the above suits filed
on June 10, 1993, and September 23, 1994, and each of the related
counterclaims. The settlement includes a cross-licensing agreement limited
to patents covering rotating and solid-state direct access storage device
technologies.
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
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Form 10-Q
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alleged that the Company breached a 1990 settlement agreement that had
resolved earlier litigation between the parties. The suit sought injunctive
relief and damages in the amount of $2,400,000,000. On December 28, 1995,
the court dismissed the complaint. Stuff has appealed the dismissal to the
Colorado Court of Appeals. In April 1996, the trial court stayed discovery
on the Company's counterclaim for breach of the covenant not to sue pending
resolution of the appeal.
On February 15, 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array
and Tandem to either support certain disk drives purchased from them or
provide the Company with technical data necessary for StorageTek to provide
such customer support. In March 1994, Array and Tandem filed their answer
and also filed counterclaims against the Company alleging breach of contract
and claiming damages. On June 10, 1994, the court ordered Array and Tandem
to continue to provide support for these products and to maintain, in an
independent escrow account, the materials necessary to enable the Company to
support the products in the event Array and Tandem failed to provide such
services. On May 30, 1995, the Company filed an amended complaint seeking
damages. The case is in the discovery phase. A trial date has been reset
for October 1997.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging that the "pass-through" port in certain of the
Company's tape library products infringed U.S. Patent No. 4,779,151 (the
"151 Patent"). The complaint asked the court to impose injunctive relief,
treble damages in an unspecified amount, and an award of attorneys fees and
costs. On February 1, 1996, a jury found that the Company's products did
not infringe the 151 Patent. A notice of appeal to the U.S. Court of
Appeals for the Federal Circuit was filed by Odetics, Inc. on March 8, 1996.
Oral argument on the appeal of this suit is expected in January 1997.
On December 8, 1995, Odetics, Inc. filed a second patent infringement suit
in the U.S. District Court for the Eastern District of Virginia against the
Company. The complaint alleges that the "cartridge access port" in certain
of the Company's tape library products also infringe the 151 Patent. The
complaint seeks injunctive relief, treble damages in an unspecified amount,
and an award of attorneys fees and costs. This case has been stayed pending
the outcome of any appeal to the U.S. Court of Appeals for the Federal
Circuit with respect to the case filed by Odetics, Inc. on June 29, 1995.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that these cases
could result in outcomes unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of litigation
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material effect on the Company's
financial position or reported results of operations in a particular
quarter. An adverse decision, particularly in patent litigation, could
require material changes in production processes and products or result in
the Company's inability to ship products or components found to have
violated third-party patent rights.
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NOTE 7 - REPURCHASE OF COMMON STOCK
- ------------------------------------
On September 20, 1996, the Company repurchased and retired 4,500,000 shares
of its common stock for an initial purchase price of $163,350,000 through a
privately negotiated stock repurchase agreement. The final purchase price
of the common stock is subject to adjustment, within certain limits, based
on the trading price of the stock during a defined period commencing
September 23, 1996. Any price adjustment will be reflected as an adjustment
to capital in excess of par value on the Consolidated Statement of Changes
in Stockholders' Equity in the fourth quarter of 1996.
NOTE 8 - IBM ORIGINAL EQUIPMENT MANUFACTURER (OEM) AGREEMENT
- ------------------------------------------------------------
On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM
agreement with International Business Machines Corporation (IBM) under which
the Company develops and manufactures mainframe online storage products for
IBM. IBM serves as StorageTek's primary distribution channel for this
technology and StorageTek does not anticipate that it will continue to sell
this technology directly to end-user customers during the term of the
agreement. The agreement, which expires in 1999, contains certain minimum
purchase commitments on behalf of IBM. The agreement also contains
provisions including, among others, product quality, availability, supply,
delivery, and development milestones. The Company's failure to achieve
these milestones may result in reduced purchase commitments, the imposition
of penalties and, under certain circumstances, IBM may terminate the
agreement. StorageTek is required to perform, and IBM will fund, certain
research and development activities associated with the development of
enhancements to these products. The technology which is developed will be
owned by IBM, subject to licensing rights by StorageTek.
Revenue on sales to IBM are recognized at the time of shipment in accordance
with the Company's revenue recognition policy for OEM sales. Costs
associated with post-installation warranty obligations are estimated and
accrued at the time of revenue recognition.
NOTE 9 - EARNINGS PER COMMON SHARE
- ----------------------------------
Fully diluted earnings per common share for the nine months ended September
27, 1996, reflect the assumed conversion of the Company's remaining
outstanding 7% Convertible Debentures and the 8% Convertible Subordinated
Debentures, whereas these convertible securities were either not outstanding
or were not dilutive in all other periods presented.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 27, 1996
CERTAIN STATEMENTS IN THE FOLLOWING DISCUSSION REGARDING THE COMPANY'S
FUTURE PRODUCTS AND BUSINESS PLANS, FINANCIAL RESULTS, PERFORMANCE AND
EVENTS ARE FORWARD-LOOKING STATEMENTS AND ARE BASED ON CURRENT EXPECTATIONS.
ACTUAL RESULTS MAY DIFFER MATERIALLY DUE TO A NUMBER OF RISKS AND
UNCERTAINTIES, INCLUDING THE RISKS DISCUSSED UNDER THE HEADING "OTHER RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS REPORT.
GENERAL
- -------
Storage Technology Corporation (StorageTek or the Company) reported net
income for the third quarter ended September 27, 1996, of $39.5 million on
revenue of $486.1 million, compared to a net loss for the third quarter
ended September 29, 1995, of $7.0 million on revenue of $439.6 million. Net
income of $112.5 million was reported for the nine months of 1996 on revenue
of $1,418.9 million, compared to a net loss of $4.0 million for the nine
months of 1995 on revenue of $1,370.5 million. The Company's reported net
income for the nine months of 1996 includes an extraordinary gain of $9.5
million, net of taxes, associated with the sale of substantially all of the
Company's lease assets.
Revenue increased 11% and 4% during the third quarter and nine months of
1996, respectively, as compared to the same periods in 1995. During the
third quarter and nine months of 1996, the Company received significantly
increased revenue and gross profit contribution from TimberLine 9490
(TimberLine), a 36-track tape cartridge subsystem, over the same periods of
1995. PowderHorn 9310 (PowderHorn), an Automated Cartridge System (ACS)
Library; and RedWood SD-3 (RedWood), a high-capacity cartridge subsystem,
also contributed to increased revenue during these periods as compared to
the same periods of 1995. As anticipated, revenue from older generation
Nearline products decreased during the third quarter and nine months of
1996, compared to the same periods of 1995. Revenue from mainframe online
products increased in the third quarter and nine months of 1996 as compared
to the same periods of 1995, as a result of initial sales under the OEM
agreement with International Business Machines Corporation (IBM), coupled
with strong end-user sales of the Company's Iceberg 9200 Virtual Storage
Facility (Iceberg) in the third quarter of 1996. While the gross margin
percentage associated with mainframe online products decreased during the
third quarter of 1996 due to lower OEM pricing and intense price
competition, the gross margin contribution associated with these products
increased due to the higher volume of sales. Revenue contribution from
networking products decreased during the third quarter and nine months of
1996, compared to the same periods of 1995, primarily due to the continued
decline in revenue from a number of older networking products and the sale of
a non-strategic network business during the third quarter of 1996.
The Company's future revenue and operating results are significantly
dependent upon sustained demand for TimberLine and PowderHorn; successfully
identifying and capitalizing on new emerging product and service markets
outside the Company's traditional marketplace, including solutions targeted
for the open-systems market; achieving the milestones and
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Form 10-Q
Page 13
reducing the operating expenses associated with the Company's manufacture of
mainframe online products pursuant to the OEM agreement with IBM; and the
effective implementation of significant business restructuring activities
initiated during the fourth quarter of 1995. For discussion of these
factors and other risk factors, see "OTHER RISK FACTORS THAT MAY AFFECT
FUTURE RESULTS," below.
The Company's cash balances increased $18.4 million during the nine months
of 1996. Net cash flows generated from the sale of substantially all of the
Company's lease assets, as well as cash flows generated from operations,
were partially offset by the repurchase of 4.5 million shares of the
Company's common stock for an initial purchase price of $163.4 million and
purchases of short-term investments of $87.0 million during the third
quarter of 1996.
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by product line
which includes product sales, service and rental, and software revenue.
Quarter Ended Nine Months Ended
---------------------------------------
09/27/96 09/29/95 09/27/96 09/29/95
-------- -------- -------- --------
Revenue:
Nearline products 61.7% 62.8% 65.0% 60.2%
Online products 25.1 19.5 20.4 19.0
Networking products 9.2 12.0 9.5 11.5
Other products 4.0 5.7 5.1 9.3
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 60.4 62.8 58.2 63.6
----- ----- ----- -----
Gross profit 39.6 37.2 41.8 36.4
Research and product
development costs 7.6 9.7 9.6 9.9
Marketing, general,
administrative and other
income and expense, net 21.5 21.1 22.3 23.1
Merger expenses 7.0 3.2
----- ----- ----- -----
Operating profit (loss) 10.5 (0.6) 9.9 0.2
Interest income, net 0.5 0.7 0.0 0.5
----- ----- ----- -----
Income before income taxes
and extraordinary item 11.0 0.1 9.9 0.7
Provision for income taxes (2.9) (1.7) (2.6) (1.0)
----- ----- ----- -----
Income (loss) before
extraordinary item 8.1 (1.6) 7.3 (0.3)
Extraordinary gain on sale
of lease assets, net of
income taxes 0.6
----- ----- ----- -----
Net income (loss) 8.1% (1.6)% 7.9% (0.3)%
===== ===== ===== =====
REVENUE
- -------
NEARLINE PRODUCTS
Revenue from Nearline products increased 9% and 11% in the third quarter and
nine months of 1996, respectively, compared to the same periods in 1995,
primarily due to a significant increase in revenue from TimberLine. Revenue
contribution from PowderHorn and RedWood,
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Form 10-Q
Page 14
also increased in the third quarter and nine months of 1996, compared to the
same periods in 1995. As anticipated, revenue from older generation
Nearline products, such as 4480 18-Track Tape Cartridge Subsystem, and
Silverton 4490 36-Track Tape Cartridge Subsystem (Silverton), declined in
the third quarter and nine months of 1996, compared to the same periods in
1995.
Future results of the Nearline product line are significantly dependent upon
the continued demand for TimberLine and PowderHorn, and gaining market
acceptance for other new Nearline products, including products targeted for
the open-systems market. During the third quarter of 1996 the Company
announced an OEM agreement with NCR Corporation for its open-systems
TimberWolf 9710 Automated Cartridge System. Sales of TimberLine, PowderHorn
and other new Nearline products are expected to offset anticipated further
declines in revenue from older generation Nearline products. There can be no
assurance that TimberLine and PowderHorn will continue to sustain their
historical market growth or that other new Nearline products will gain
market acceptance in the future.
ONLINE PRODUCTS
Revenue from online products increased 42% and 11% in the third quarter and
nine months of 1996, respectively, as compared to the same periods in 1995.
This online revenue increase is primarily due to initial sales under the
OEM agreement with IBM, coupled with strong end-user sales of Iceberg the
third quarter of 1996. The end-user sales of Iceberg are anticipated to
significantly decline in the fourth quarter of 1996 as the Company completes
its transition to its role as serving primarily as an OEM supplier for
online mainframe products. The increase in sales revenue contribution from
online products was partially offset by a decrease in service revenue
contribution from older online products.
On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM
agreement with IBM under which the Company develops and manufactures
mainframe online storage products for IBM. IBM serves as StorageTek's
primary distribution channel for this technology and StorageTek does not
anticipate that it will continue to sell this technology directly to end-
user customers during the term of the agreement. The agreement, which
expires in 1999, contains certain minimum purchase commitments on behalf of
IBM. The agreement also contains provisions including, among others,
product quality, availability, supply, delivery, and development milestones.
The Company's failure to achieve these milestones may result in reduced
purchase commitments, the imposition of penalties and, under certain
circumstances, IBM may terminate the agreement.
The Company anticipates the OEM agreement with IBM will benefit the Company
through increased sales revenue contribution from the mainframe online
product line, due to increased market penetration. Additionally, the OEM
arrangement is expected to allow the Company to redirect resources to other
products, as well as new, emerging products and services outside the
Company's traditional marketplace. There can be no assurance that the
Company will achieve the milestones provided for in the OEM agreement or
that the Company will realize the anticipated benefits.
NETWORKING PRODUCTS
Revenue from networking products decreased 15% in the third quarter and nine
months of 1996, compared to the same periods in 1995. These decreases are
due primarily to the
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Form 10-Q
Page 15
continued decline in revenue from a number of older networking products and the
sale of a non-strategic network business in the third quarter of 1996 as the
Company continued the implementation of restructuring actions aimed at
increasing the focus on core networking products for the information storage
and retrieval marketplace. The Company's 1995 restructuring activities
resulted in the realization of cost savings associated with the manufacture
of networking products during the nine months of 1996.
Future revenue and operating results from the Company's networking products
are significantly dependent upon increasing the market penetration for
network security, channel extension, backup, retrieval, and migration
products; successfully expanding the networking product line; and developing
new market distribution channels. There can be no assurance the Company's
networking products will generate any significant profits in the future or
that new products will be successfully and timely developed or gain market
acceptance.
OTHER PRODUCTS
Revenue from other products decreased 22% and 42% in the third quarter and
nine months of 1996, respectively, compared to the same periods in 1995.
These decreases are primarily the result of the Company's sale of its
midrange business during 1995.
GROSS PROFIT
- ------------
Overall gross profit increased to 40% and 42% in the third quarter and nine
months of 1996, respectively, compared to 37% and 36% in the third quarter
and nine months of 1995.
Gross profit on product sales decreased to 36% in the third quarter of 1996,
compared to 37% in the third quarter of 1995. The decrease in gross profit
percentage during the third quarter of 1996 is principally the result of the
increased volume of sales of lower margin mainframe online products. While
the gross margin percentage associated with the mainframe online products
decreased, the gross margin contribution associated with these products
increased due to the higher volume of sales.
Gross profit on product sales increased to 40% for the nine months of 1996,
compared to 37% for the same period in 1995, principally as a result of cost
savings achieved in connection with the Company's 1995 restructuring,
increased manufacturing volumes, and lower purchase costs associated with
components for online and Nearline products. This increase was partially
offset by the increased volume of sales of lower margin mainframe online
products.
Gross profit on service and rental revenue increased to 48% and 47% in the
third quarter and nine months of 1996, respectively, compared to 37% and 35%
for the third quarter and nine months of 1995. These increases are
primarily due to cost savings associated with the 1995 restructuring and
reduced service revenue contribution from lower-margin midrange service as a
result of the sale of the midrange service business in the third quarter of
1995.
The Company's ability to sustain or improve product sales margins in the
fourth quarter of 1996 and during 1997 is significantly dependent upon the
Company's continued success in reducing manufacturing costs in all of its
product lines. The Company anticipates that sales margins for its mainframe
online products will be pressured due to lower OEM pricing and scheduled
price reductions over the term of the OEM agreement with IBM. While pricing
pressures are expected to
PAGE
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Form 10-Q
Page 16
partially offset by lower manufacturing costs resulting from increased
volumes and operating expense savings, the Company must further reduce costs
and expenses associated with manufacturing these products in order to achieve
expected benefits. Product sales margins also may be adversely affected by
inventory writedowns resulting from rapid technological changes and delays in
gaining market acceptance for new products. Service margins may be adversely
affected in the future by increased price competition.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures decreased 13% in the third
quarter and were unchanged during the nine months of 1996, compared to the
same periods of 1995. The decrease in expenditures during the third quarter
of 1996 reflects IBM's agreement to finance the development of enhancements
to mainframe online products effective July 1, 1996, pursuant to the OEM
agreement. The Company anticipates that in future periods it will increase
the amount of investment in research and development activities associated
with new products outside its traditional markets.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A and
Other) increased 12% in the third quarter and was unchanged for the nine
months of 1996, compared to the same periods of 1995. MG&A and Other during
the third quarter of 1996 increased 3%, compared to the third quarter of
1995, after excluding the effects of a one-time gain of $8.8 million
realized on the sale of the IBM AS/400 and System 3X midrange service
business in the third quarter of 1995.
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income decreased 32% and 36% in the third quarter and nine months
of 1996, respectively, compared to the same periods of 1995, due primarily
to a reduction in the Company's net investment in sales-type lease balances.
Interest expense decreased 34% and 21% in the third quarter and nine months
of 1996, respectively, as compared to the same periods of 1995, due
primarily to a reduction in nonrecourse borrowings and other long-term debt.
These decreases were partially offset during the first six months of 1996 by
incremental interest expense associated with the exchange of the Company's
7% Convertible Subordinated Debentures for its $3.50 Convertible
Exchangeable Preferred Stock in the fourth quarter of 1995. As further
discussed in Note 4 to the Notes to Consolidated Financial Statements, the
7% Convertible Subordinated Debentures were called for redemption on June
12, 1996, and were either converted into shares of the Company's common
stock or redeemed for cash as of July 12, 1996.
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. Based on the currently available
information, management has determined that the Company will more likely
than not realize $111.0 million of deferred income tax assets as of
September 27, 1996. The Company's valuation allowance of approximately
$137.8 million on a gross deferred tax
PAGE
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Form 10-Q
Page 17
asset of approximately $248.8 million as of September 27, 1996, was
established based upon the consideration of a variety of factors, including
the fact that the Company has a cumulative net loss in recent years, as well
as uncertainties associated with the successful completion of its recent
restructuring activities and the possible impact of adjustments by the
Internal Revenue Service to the Company's previously filed federal income
tax returns. 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.
EXTRAORDINARY GAIN
- ------------------
As more fully discussed in Note 3 of Notes to Consolidated Financial
Statements, in March 1996, StorageTek sold substantially all of the
Company's net investment in sales-type leases, installment receivables, and
equipment held subject to operating leases to Leasetec Corporation
(Leasetec). The sale was a result of the Company's efforts to focus on the
core businesses and outsource its capital intensive lease financing
business. Leasetec assumed approximately $6.0 million of associated
nonrecourse borrowings and the Company used a portion of the cash proceeds
to retire its remaining nonrecourse borrowings and 9.53% Senior Secured
Notes. The transactions resulted in an extraordinary gain of $9.5 million,
net of applicable taxes of $8.2 million, in the first quarter of 1996.
RESTRUCTURINGS
- --------------
During the fourth quarter of 1995, the Company adopted a formal action plan
for restructuring its enterprise and networking businesses. The
restructuring was adopted in an effort to establish a more cost efficient
business structure in response to competition. Elements of the Company's
restructuring plan included focusing on core businesses, outsourcing non-
strategic activities, rearchitecting its distribution processes and
accelerating the integration of Network Systems.
The following table summarizes the activity associated with the Company's
restructuring reserves during the nine months of 1996 (in thousands of
dollars):
Employee Lease Other
Severance Abandonments Exit Costs Total
-----------------------------------------------
Balances, December 29,
1995 $ 42,688 $18,538 $10,172 $ 71,398
Cash payments (24,840) (1,834) (4,635) (31,309)
Reclassifications 301 (154) 1,222 1,369
------- ------ ------- -------
Balances, September 27,
1996 $ 18,149 $16,550 $ 6,759 $ 41,458
======= ====== ======= =======
Cash payments during the nine months of 1996 are primarily the result of a
reduction in the number of employees of approximately 1,700 people.
Reclassifications consist principally of reclassifying a restructuring
accrual as other exit costs of approximately $1.4 million, which was
previously recorded as a direct write-off of a fixed asset. The
reclassifications had no effect on
PAGE
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Form 10-Q
Page 18
the Company's reported results within the Consolidated Statement of
Operations during the nine months of 1996. While the majority of these
remaining accruals are expected to result in future cash outflows, these
outflows are not expected to have a material effect on the Company's
liquidity.
The elimination of recurring costs associated with the restructuring was
expected to yield expense reductions on an annual basis of approximately
$125 million at the time of the restructuring. Based upon all currently
available information, the Company anticipates that it is on track with this
estimate. The Company does not expect to realize the full benefit of the
expense reductions until the second half of 1997 when all associated
restructuring activities are expected to be completed. While the Company is
evaluating various outsourcing and automation projects in order to gain
further improvements in operating efficiencies, the Company does not
anticipate that any material incremental costs have been or will be incurred
as part of the restructuring which would offset the anticipated expense
reductions.
The Company believes that its restructuring programs have eliminated certain
non-essential functions and excess costs. Based on current short- and long-
term forecasts, the Company believes that such cost reductions will benefit
future operations. While the Company does not currently foresee any
significant additional restructuring charges in the near future, the
successful implementation of the action plans associated with the Company's
1995 restructuring is critical to achieving improved operating results in
future periods. There can be no assurance that the anticipated expense
reductions will be achieved, or that the Company's restructuring activities
will otherwise be successful or sufficient to allow the Company to generate
improved operating results in future periods. It is possible that changes
in the Company's business or in its industry may necessitate future
restructuring charges, which may be significant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash and cash equivalents balance increased $18.4 million from
December 29, 1995, to September 27, 1996. The increase in cash and cash
equivalents during the nine months of 1996 primarily resulted from cash
generated from operations of $380.7 million which was offset by net
repayments of nonrecourse borrowings and other debt of $98.2 million, the
Company's repurchase of 4.5 million shares of common stock for an initial
purchase price of approximately $163.4 million, and an increase of short-
term investments of $87.0 million. The cash from operating activities
during the nine months of 1996 includes cash received from the sale of lease
assets and cash payments of approximately $31.3 million associated with the
1995 restructuring. In connection with the sale of lease assets, the
Company used a portion of the cash proceeds to retire its remaining
nonrecourse borrowings and its 9.53% Senior Secured Notes. Net cash from
operating activities of $249.1 million during the nine months of 1995
included cash generated from the sale of midrange lease assets,
collections of income tax refunds and associated interest by Network Systems
from the Internal Revenue Service of $17.8 million, and a one-time payment
associated with the settlement of shareholder litigation of approximately
$30.7 million.
The current ratio increased to 2.1 as of September 27, 1996, from 1.8 as of
December 29, 1995. Accounts receivable increased from $396.5 million as of
December 29, 1995, to $427.4 million as of September 27, 1996. Inventories
increased from $214.6 million as of December
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<PAGE>
Form 10-Q
Page 19
29, 1995, to $263.2 million as of September 27, 1996, in anticipation of
higher sales volumes of online and Nearline products.
COMMON STOCK REPURCHASE
On September 20, 1996, the Company repurchased and retired 4.5 million
shares of its common stock for an initial purchase price of $163.4 million
through a privately negotiated stock repurchase agreement. The final
purchase price of the common stock is subject to adjustment, within certain
limits, based on the trading price of the common stock during a defined
period commencing September 23, 1996. Any price adjustment will be
reflected as an adjustment to capital in excess of par value on the
Consolidated Statement of Changes in Stockholders' Equity in the fourth
quarter of 1996. The Company does not anticipate that the price adjustment
will have a material adverse effect on the Company's liquidity or financial
position.
AVAILABLE FINANCING LINES
On March 28, 1996, the Company entered into a $150 million secured credit
agreement (the Revolver) which expires in May 1998. The interest rates
available under the Revolver depend on the type of advance selected. The
current primary advance rate is the agent bank's prime lending rate plus
0.125% (8.375% as of September 27, 1996). Under the Revolver, the Company
is required to comply with certain financial and other covenants, including
restrictions on the payment of cash dividends on its common stock. As of
September 27, 1996, the Company had issued letters of credit for
approximately $35.6 million and had approximately $114.4 million of
available credit under the Revolver.
On January 29, 1996, the Company entered into a financing agreement with a
bank which provides for the sale of certain U.S. and foreign based accounts
receivable on a recourse basis. This agreement, which expires on January
31, 1998, allows for receivable sales of up to $40 million at any one time
and StorageTek's obligations under the agreement are secured by a letter of
credit for the amount of the receivables sold. The selling price of the
receivables is partially determined based upon foreign currency exchange
rates and any gains or losses on the sales are recognized within MG&A and
Other in the Consolidated Statement of Operations at the time the
receivables are sold. As of September 27, 1996, the Company had committed
to future cumulative sales of approximately $259.6 million. Gains and
losses associated with the receivable sales are not expected to have a
material effect on the Company's reported financial results after taking
into consideration other transactions associated with the Company's
international operations.
The Company believes it has adequate working capital and financing
capabilities to meet its anticipated operating and capital requirements for
the next 12 months. Over the longer term, the Company 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 such
additional financing, if required, can be completed on terms acceptable to
the Company.
PAGE
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Form 10-Q
Page 20
TOTAL DEBT-TO-CAPITALIZATION
The Company's total debt-to-capitalization ratio decreased from 32% as of
December 29, 1995, to 14% as of September 27, 1996. This decrease resulted
from the repayment of nonrecourse borrowings and certain other debt
associated with the sale of lease assets to Leasetec during the first
quarter of 1996, as well as the conversion of 7% Convertible Subordinated
Debentures in the principal amount of $171 million into 7.3 million shares
of the Company's common stock during the nine months of 1996. This decrease
in the debt-to-capitalization ratio was partially offset by the Company's
repurchase of 4.5 million shares of its common stock during the third
quarter of 1996.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
Pursuant to the indenture for the Company's 8% Convertible Subordinated
Debentures due 2015 (8% Convertible Debentures), the Company is required to
make semiannual interest payments on November 30 and May 31 on the $145.6
million principal amount of the 8% Convertible Debentures outstanding. The
8% Convertible Debentures are unsecured, subordinated obligations of the
Company and are currently convertible at the option of the holder into
common stock at a price of $35.25 per share. The 8% Convertible Debentures
are currently redeemable at the option of the Company at a premium of 3.2%,
and are redeemable at decreasing premiums through May 30, 2000. The Company
is required to make annual principal payments of $8 million, plus accrued
interest, into a sinking fund beginning May 31, 2000, to provide for the
retirement of 75% of the 8% Convertible Debentures prior to their maturity
on May 31, 2015. 8% Convertible Debentures purchased by the Company in the
open market and 8% Convertible Debentures converted to common stock may be
applied to the sinking fund requirements. As of September 27, 1996, the
Company has repurchased 8% Convertible Debentures in the principal amount of
$14.4 million available for sinking fund payments.
On June 12, 1996, the Company called for redemption on July 12, 1996, all
outstanding 7% Convertible Subordinated Debentures due 2008 (7% Convertible
Debentures) in the principal amount of approximately $171 million.
Debentures in the principal amount of $171 million were converted at a price
of $23.50 per share into 7.3 million shares of common stock on or before
July 12, 1996. The remaining debentures were redeemed for cash on July 12,
1996.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
During the third quarter and nine months of 1996, approximately 39% and 42%,
respectively, of the Company's revenue was generated by its international
operations, and the Company expects that it will generate a significant
portion of its revenue from international operations in the future. The
majority of the Company's international operations involve transactions
denominated in the local currencies of countries within Western Europe,
principally Germany, France and the United Kingdom; Japan; Canada and
Australia. An increase in the exchange value of the U.S. dollar reduces the
value of revenue and profits generated by the Company's international
operations. As a result, the Company's 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 takes into account operating and
financing activities to reduce
PAGE
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Form 10-Q
Page 21
exposures and utilizes foreign currency options and forward exchange
contracts to further reduce exposures. The Company utilizes foreign
currency options, generally with maturities of less than one year, to hedge
a portion of 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 and Other as an adjustment to the
foreign exchange gains and losses on the translation of net monetary assets.
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 the United States, including 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 outside the
Company's control. There can be no assurances that one or more of the
foregoing factors will not have a material adverse effect on the Company's
business or financial results in the future.
OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------------
NEW PRODUCTS, SERVICES AND DISTRIBUTION CHANNELS
The successful and timely development of new products, software applications
and enhancements play a key role in determining the Company's results of
operations and competitive strength. The market for the Company's products
is characterized by rapid technological advances and changes in customer
demand which necessitate frequent product introductions and enhancements.
These factors can result in unpredictable product transitions, shortened
product life cycles, and can render existing products obsolete or
unmarketable. The Company must make significant investments in research and
product development and successfully introduce competitive new products and
enhancements on a timely basis. The success of new product introductions is
dependent on a number of factors including market acceptance and effectively
managing the risks associated with product transitions. The development of
new technology, products, and enhancements is complex and involves
uncertainties, which may result in delays in the introduction of new
products and enhancements, and the manufacture of existing products. From
time to time the Company has encountered delays that have adversely affected
the Company's financial results and competitive position in the market.
There can be no assurances that the Company will not encounter development
or production delays, or that despite intensive testing by the Company,
flaws in design or production will not occur in the future. Design flaws
could result in the Company experiencing a rate of failure in its products
that delay the shipment or sale of its products, trigger substantial repair
or replacement costs, excessive warranty claims and damage to the Company's
reputation and have a material adverse effect upon the Company's financial
results.
The Company has historically generated a significant portion of its revenue
and operating profits from the sale and service of information storage and
retrieval products in the mainframe marketplace. The Company is currently
engaged in a variety of initiatives targeted at growing
PAGE
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Form 10-Q
Page 22
revenue outside its traditional marketplace and is committing substantial
resources to these initiatives. These initiatives include developing new
products for the open-systems marketplace; developing network-attached
storage solutions; establishing a consulting services business to capitalize
on the Company's expertise in computer data storage; and developing new
channels for the distribution of products. There can be no assurances that
the Company will be successful in expanding into these new marketplaces.
DEPENDENCE ON IBM
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
due to the significance of the IBM computer operating environments. Future
revenue from products and services is therefore dependent on the
marketplace's continued widespread acceptance of, and IBM's continued
support of, these products.
OEM SUPPLIER
In June 1996, the Company entered into a worldwide non-exclusive OEM
agreement with IBM under which StorageTek develops and manufactures
mainframe online storage products for IBM. IBM serves as StorageTek's
primary distribution channel for these products. This OEM arrangement
represents a significant change from the Company's past business model. The
Company's success in its mainframe online storage business is now
significantly dependent upon managing this transition and IBM's continuous
support for and success in marketing these products to end-user customers.
Because of lower OEM pricing and scheduled price reductions, the Company
must achieve cost-savings associated with the manufacture of these online
products in order to maintain its profit margins. In addition, subject to
required lead times and minimum purchase commitment terms, the OEM business
model arrangement may cause the Company to incur additional costs associated
with unanticipated increases or decreases in manufacturing volumes.
INTENSE COMPETITION; PRICING PRESSURES
The Company competes with a number of large multinational companies in the
mainframe information storage and retrieval marketplace that have
substantially greater resources than the Company's, including IBM, Fujitsu
Ltd., and Hitachi, Ltd., as well as similarly sized companies, including
Amdahl Corp. and EMC Corp. The Company also competes with a number of
companies in the networking marketplace that have a greater market presence,
including 3Com Corp., Cisco Systems, Inc., Cabletron Systems, Inc. and Bay
Networks, Inc. In addition, the Company may encounter competition from a
variety of companies with greater market presence as it enters into new
emerging product and service markets outside the Company's traditional
marketplace; such as the market for open-systems storage solutions, network-
attached storage solutions, and consulting services. The Company's
competitiveness could be affected by cooperative alliances and other
relationships that may emerge and rapidly acquire market share. These
alliances may result in other companies being at various times,
collaborators, competitors and customers in different markets. Increased
competition may result in price reductions, reduced margins and declining
market share, which may have a material adverse effect on the Company's
business and financial results.
PAGE
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Form 10-Q
Page 23
INTELLECTUAL PROPERTY
The Company's competitive strength 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 may 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 is
unable to predict whether these license arrangements can be renewed on terms
acceptable to the Company. The Company's intellectual property rights are
material to the Company's business, and the failure to successfully protect
its intellectual property rights or obtain licenses from others as needed
could have a material adverse effect on the Company's business and financial
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 that 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 any
determination unfavorable to 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; enter into royalty arrangements; 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 or
royalty arrangements would be available on reasonable terms, or at all, and
any such development or license could require expenditures by the Company of
substantial time and other resources. The Company has, from time to time,
commenced actions against other companies to protect or enforce its
intellectual property rights. Similarly, the Company has, from time to
time, been notified that it may be infringing certain patent or other
intellectual property rights of others. See Note 6 of Notes to Consolidated
Financial Statements for additional information with respect to the
Company's legal proceedings.
INFORMATION SYSTEMS
The Company is currently in the process of replacing its existing
transaction systems (including order management, distribution, and finance
systems) with integrated systems as part of its ongoing effort to increase
operational efficiencies. The Company's future operating results and
financial condition could be adversely affected if the Company is unable to
implement and effectively manage the transition to this new integrated
system.
MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS
The Company generally uses standard parts and components for its products
and believes that, in most cases, there are a number of alternative,
competent vendors for most of those parts and
PAGE
<PAGE>
Form 10-Q
Page 24
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 of the Company's suppliers have experienced
occasional technical, financial or other problems that have delayed
deliveries, without significant effect on the Company. An unanticipated
failure of any sole source supplier to meet the Company's requirements for
an extended period, or an interruption of the Company's ability to secure
comparable components, could have a material adverse effect on its revenue
and results of operations. In the event a sole source supplier was unable
or unwilling to continue to supply components, the Company would have to
identify and qualify other acceptable suppliers. This process could take an
extended period and no assurance can be given that any additional source
would become available or would be able to satisfy the Company's production
requirements on a timely basis.
EARNINGS FLUCTUATIONS
The Company's reported earnings have fluctuated significantly and may
continue to 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) changes in the mix of products sold, and (v)
variations in customer acceptance periods for the Company's products.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock has fluctuated and in the
future may fluctuate substantially 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. In the future, the
Company's reported earnings may be below the expectations of stock market
analysts and investors, and in such events, there could be an immediate and
significant adverse effect on the trading price of the Company's common
stock.
PAGE
<PAGE>
Form 10-Q
Page 25
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
See Part II, Item 1 - Legal Proceedings, of the Company's Form 10-Q for the
periods ended March 29, 1996, and June 28, 1996, electronically filed with
the Commission on May 10, 1996, and August 12, 1996, respectively.
On February 15, 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array
and Tandem to either support certain disk drives purchased from them or
provide the Company with technical data necessary for StorageTek to provide
such customer support. In March 1994, Array and Tandem filed their answer
and also filed counterclaims against the Company alleging breach of contract
and claiming damages. On June 10, 1994, the court ordered Array and Tandem
to continue to provide support for these products and to maintain, in an
independent escrow account, the materials necessary to enable the Company to
support the products in the event Array and Tandem failed to provide such
services. On May 30, 1995, the Company filed an amended complaint seeking
damages. The case is in the discovery phase. A trial date has been reset
for October 1997.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging that the "pass-through" port in certain of the
Company's tape library products infringed U.S. Patent No. 4,779,151 (the
"151 Patent"). The complaint asked the court to impose injunctive relief,
treble damages in an unspecified amount, and an award of attorneys fees and
costs. On February 1, 1996, a jury found that the Company's products did
not infringe the 151 Patent. A notice of appeal to the U.S. Court of
Appeals for the Federal Circuit was filed by Odetics, Inc. on March 8, 1996.
Oral argument on the appeal of this suit is expected in January 1997.
On July 30, 1996, the Company received Civil Investigative Demands (CID)
from the U.S. Department of Justice Antitrust Division. The Company
received two additional CIDs in October 1996. The CIDs requested production
of documents and testimony in connection with a review, for compliance with
the Sherman Act, of the OEM Agreement with International Business Machines
Corporation concerning storage subsystems.
Information concerning legal proceedings is also contained in Note 6 to the
consolidated financial statements identified in Part I of this Form 10-Q.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that these cases
could result in outcomes unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of litigation
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material effect on the Company's
financial position or reported results of operations in a particular
quarter. An adverse decision, particularly in patent litigation, could
require material changes in production processes and products or result in
the Company's inability to ship products or components found to have
violated third-party patent rights.
PAGE
<PAGE>
Form 10-Q
Page 26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
10.1* Amendment dated July 26, 1996, to Multicurrency
Receivables Transfer Agreement dated January 29, 1996.
10.2* Amendment dated August 26, 1996, to Multicurrency
Receivables Transfer Agreement dated January 29, 1996.
10.3*/** Storage Technology Corporation 1995 Equity Participation
Plan as amended September 1996.
11.0* Computation of Earnings (Loss) Per Common Share.
27.0* Financial Data Schedule.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter
ended September 27, 1996.
- ------------------
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
** Contract or compensation plan or arrangement in which directors
and/or officers participate.
PAGE
<PAGE>
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)
November 8, 1996 /s/ DAVID E. WEISS
- ---------------- ------------------------------------
(Date) David E. Weiss
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
November 8, 1996 /s/ DAVID E. LACEY
- ---------------- ------------------------------------
(Date) David E. Lacey
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
PAGE
<PAGE>
EXHIBITS INDEX
--------------
(a) Exhibits
10.1 Amendment dated July 26, 1996, to Multicurrency
Receivables Transfer Agreement dated January 29, 1996.
10.2 Amendment dated August 26, 1996, to Multicurrency
Receivables Transfer Agreement dated January 29, 1996.
10.3 Storage Technology Corporation 1995 Equity Participation
Plan as amended September 1996.
11.0 Computation of Earnings (Loss) Per Common Share.
27.0 Financial Data Schedule.
<PAGE> 1
AMENDMENT TO MULTICURRENCY RECEIVABLES TRANSFER AGREEMENT
---------------------------------------------------------
THIS AMENDMENT (this "Amendment"), dated as of July 26, 1996, is made
to the Multicurrency Receivables Transfer Agreement, dated as of January 29,
1996 (as heretofore or hereafter amended, modified or supplemented from time
to time and in effect, the "Transfer Agreement"), between Storage Technology
Corporation (the "Transferor") and Bank of America National Trust and
Savings Association (the "Transferee"). Capitalized terms used but not
otherwise defined herein shall have the meanings assigned to such terms by
the Transfer Agreement.
WHEREAS, the Transferor and the Transferee desire to amend and
supplement the Transfer Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO TRANSFER AGREEMENT
SECTION 1.1 Amendment to Definition of "Scheduled Termination Date".
Section 1.07(a) of the Transfer Agreement is hereby amended to change the
Scheduled Termination Date set forth therein to be January 31, 1998.
SECTION 1.2 Amendment to Schedule. Schedule II to the Transfer
Agreement is hereby deleted in its entirety and is replaced by the Schedule
II that is appended hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties. Transferor hereby
represents and warrants to Transferee that:
(a) Representations and Warranties. The representations and
warranties contained in the Transfer Agreement are true and correct on
and as of the date of this Amendment as though made on and as of such
date; and
(b) No Termination Event. Both before and after giving effect to
this Amendment, no event shall have occurred and be continuing that
constitutes a Termination Event or an Unmatured Event.
<PAGE>
<PAGE> 2
ARTICLE III
MISCELLANEOUS
SECTION 3.1 Agreement Document Pursuant to Transfer Agreement. This
Amendment is an Agreement Document executed pursuant to the Transfer
Agreement and shall be construed, administered and applied in accordance
with all of the terms and provisions of the Transfer Agreement.
SECTION 3.2 Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 3.3 Execution in Counterparts. This Amendment may be
executed by the parties hereto in several counterparts, each of which shall
be deemed to be an original and all of which shall be taken together as one
agreement.
SECTION 3.4 Governing Law. THIS AMENDMENT SHALL BE A CONTRACT MADE
UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 3.5 Reaffirmation of Transfer Agreement. As amended, waived
and supplemented by this Amendment, the Transfer Agreement remains in full
force and effect and is hereby reaffirmed, ratified and confirmed in all
respects. From and after the date hereof, all references to the Transfer
Agreement in any agreement, instrument or document shall be references to
the Transfer Agreement as amended and supplemented hereby.
SECTION 3.6 Headings. The various captions in this Amendment are
provided solely for convenience of reference and shall not affect the
meaning or interpretation of any provision of this Amendment.
SECTION 3.7 Complete Agreement. The Transfer Agreement (including
this Amendment and the Exhibits and Schedules to the Transfer Agreement and
this Amendment) and the other Agreement Documents contains the entire
understanding of the parties with respect to the transactions contemplated
hereby and thereby and supersedes all prior arrangements or understandings
with respect thereto.
SECTION 3.8 Severability. Whenever possible, each provision of this
Amendment will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Amendment is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Amendment, except to the extent that such
prohibition or invalidity would constitute a material change in the terms of
this Amendment taken as a whole.
<PAGE>
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the
day and year first above written.
STORAGE TECHNOLOGY CORPORATION
By: /s/MARK D. MCGREGOR
------------------------------
Name: Mark D. McGregor
Title: Vice President and Treasurer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/KEVIN MCMAHON
------------------------------
Name: Kevin McMahon
Title: Vice President
<PAGE>
<PAGE> 4
SCHEDULE II
to Amendment
to Multicurrency Receivables Transfer Agreement
DETERMINATION DATES
January 24, 1997
February 21, 1997
March 21, 1997
April 25, 1997
May 23, 1997
June 20, 1997
July 25, 1997
August 22, 1997
September 19, 1997
October 24, 1997
November 21, 1997
December 26, 1997
<PAGE> 1
AMENDMENT TO MULTICURRENCY RECEIVABLES TRANSFER AGREEMENT
---------------------------------------------------------
THIS AMENDMENT (this "Amendment"), dated as of August 26, 1996, is made
to the Multicurrency Receivables Transfer Agreement, dated as of January 29,
1996 (as heretofore or hereafter amended, modified or supplemented from time
to time and in effect, the "Transfer Agreement"), between Storage Technology
Corporation (the "Transferor") and Bank of America National Trust and
Savings Association (the "Transferee"). Capitalized terms used but not
otherwise defined herein shall have the meanings assigned to such terms by
the Transfer Agreement.
WHEREAS, the Transferor and the Transferee desire to amend and
supplement the Transfer Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO TRANSFER AGREEMENT
SECTION 1.1 Amendment to Definition of "Scheduled Termination Date".
Section 1.07(a) of the Transfer Agreement is hereby amended to change the
Scheduled Termination Date set forth therein to be January 31, 1998.
SECTION 1.2 Amendment to Schedule. Schedule II to the Transfer
Agreement is hereby deleted in its entirety and is replaced by the Schedule
II that is appended hereto.
SECTION 1.3 Amendment to Facility Fee. The reference to ".25%"
contained in Section 3.01(a)(ii) of the Transfer Agreement is hereby deleted
and is replaced by ".30%".
SECTION 1.4 Waiver. In connection with the amendments described in
Sections 1.1 and 1.2 above, the parties hereby waive the requirements set
forth in the first and second sentences contained in Section 1.07(b) of the
Transfer Agreement that the notice to extend the Scheduled Termination Date
be given not more than ten calendar months prior to the then current
Scheduled Termination Date, the Scheduled Termination Date fall no more than
364 days from the date such extension becomes effective, and the Transferor
not make any such request more than once in any calendar quarter.
<PAGE>
<PAGE> 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties. Transferor hereby
represents and warrants to Transferee that:
(a) Representations and Warranties. The representations and
warranties contained in the Transfer Agreement are true and correct on
and as of the date of this Amendment as though made on and as of such
date; and
(b) No Termination Event. Both before and after giving effect to
this Amendment, no event shall have occurred and be continuing that
constitutes a Termination Event or an Unmatured Event.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 Agreement Document Pursuant to Transfer Agreement. This
Amendment is an Agreement Document executed pursuant to the Transfer
Agreement and shall be construed, administered and applied in accordance
with all of the terms and provisions of the Transfer Agreement.
SECTION 3.2 Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 3.3 Execution in Counterparts. This Amendment may be
executed by the parties hereto in several counterparts, each of which shall
be deemed to be an original and all of which shall be taken together as one
agreement.
SECTION 3.4 Governing Law. THIS AMENDMENT SHALL BE A CONTRACT MADE
UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 3.5 Reaffirmation of Transfer Agreement. As amended, waived
and supplemented by this Amendment, the Transfer Agreement remains in full
force and effect and is hereby reaffirmed, ratified and confirmed in all
respects. From and after the date hereof, all references to the Transfer
Agreement in any agreement, instrument or document shall be references to
the Transfer Agreement as amended and supplemented hereby.
<PAGE>
<PAGE> 3
SECTION 3.6 Headings. The various captions in this Amendment are
provided solely for convenience of reference and shall not affect the
meaning or interpretation of any provision of this Amendment.
SECTION 3.7 Complete Agreement. The Transfer Agreement (including
this Amendment and the Exhibits and Schedules to the Transfer Agreement and
this Amendment) and the other Agreement Documents contains the entire
understanding of the parties with respect to the transactions contemplated
hereby and thereby and supersedes all prior arrangements or understandings
with respect thereto.
SECTION 3.8 Severability. Whenever possible, each provision of this
Amendment will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Amendment is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Amendment, except to the extent that such
prohibition or invalidity would constitute a material change in the terms of
this Amendment taken as a whole.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the
day and year first above written.
STORAGE TECHNOLOGY CORPORATION
By: /s/ MARK D. MCGREGOR
------------------------------
Name: Mark D. McGregor
Title: Vice President and Treasurer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ KEVIN MCMAHON
------------------------------
Name: Kevin McMahon
Title: Vice President
<PAGE>
<PAGE> 4
SCHEDULE II
to Amendment
to Multicurrency Receivables Transfer Agreement
DETERMINATION DATES
September 20, 1996
October 25, 1996
November 22, 1996
December 27, 1996
January 24, 1997
February 21, 1997
March 21, 1997
April 25, 1997
May 23, 1997
June 20, 1997
July 25, 1997
August 22, 1997
September 19, 1997
October 24, 1997
November 21, 1997
December 26, 1997
STORAGE TECHNOLOGY CORPORATION
1995 EQUITY PARTICIPATION PLAN
AS AMENDED SEPTEMBER 1996
Section 1
Introduction.
------------
1.1 Establishment. Effective as provided in Section 21, the Company
hereby establishes a plan of long-term stock-based compensation incentives for
selected employees of the Company and its affiliated corporations. The plan
shall be known as the Storage Technology Corporation 1995 Equity Participation
Plan (the "1995 Plan").
1.2 Purpose. The purpose of the 1995 Plan is to provide employees
selected for participation in the 1995 Plan with added incentives to continue
in the service of the Company and its affiliates and to create in such
employees a more direct interest in the future success of the operations of the
Company and its affiliated corporations by relating incentive compensation to
the achievement of long-term corporate economic objectives. The 1995 Plan is
also designed to attract key employees and to retain and motivate participating
employees by providing an opportunity for equity investment in the Company.
1.3 No Effect on 1987 Plan Options. Options granted pursuant to
the Storage Technology Corporation 1987 Equity Participation Plan (the "1987
Plan") shall be governed by the terms and provisions of the option
agreements covering such grants and by the provisions of the 1987 Plan.
Section 2
Definitions.
-----------
2.1 Definitions. The following terms shall have the meanings set
forth below:
(a) "Affiliated Corporation" means any corporation that is either
a parent corporation with respect to the Company or a subsidiary corporation
with respect to the Company (within the meaning of Sections 424(e) and (f),
respectively, of the Internal Revenue Code).
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means a committee designated by the Board to
administer the Plan or, if no committee is so designated, the Board.
(d) "Common Stock" means the Company's $.10 par value voting
common stock.
(e) "Effective Date" means the effective date of the 1995 Plan,
as set forth in Section 21 hereof.
(f) "Eligible Employees" means those Employees (including, without
limitation, officers and directors who are also employees) of the Company, or
any Affiliated Corporation, or any division thereof, upon whose judgment,
initiative and efforts the Company or the Affiliated Corporations are, or are
expected to become, largely dependent for the successful conduct of their
business.
(g) "Fair Market Value" means with respect to Common Stock, as of
any date, the closing price of a share of Common Stock on the New York Stock
Exchange as reported by The Wall Street Journal for the last trading day
prior to that date. If no such prices are reported, then Fair Market Value
shall mean the average of the high and low sale prices for the Common Stock
(or if no sale prices are reported, the average of the high and low bid
prices) as reported by the principal regional stock exchange, or if not so
reported, as reported by Nasdaq or a quotation system of general circulation
to brokers and dealers.
(h) "Incentive Stock Option" means the right to purchase Common
Stock granted to a participant pursuant to Sections 6 and 7, which constitutes
an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code, and which may or may not be issued with related Stock
Appreciation Rights.
(i) "Internal Revenue Code" means the Internal Revenue Code of
1986, as it may be amended from time to time.
(j) "MBO Payment" means a payment to a Participant pursuant to
the Company's MBO Equity Plan, which payment may be made either in shares of
Common Stock or in cash, or partly in Common Stock and partly in cash, as
determined in accordance with the provisions of Section 12.
(k) "MBO Equity Plan" means the Company's Management By Objective
Plan, as established by the Board or the Committee from time to time, pursuant
to which MBO Payments are made from time to time in the manner and under the
conditions established by the Board or the Committee.
(l) "Non-Qualified Option" means a right to purchase Common Stock
granted to a participant pursuant to Sections 6 and 8, which does not
qualify as an Incentive Stock Option or which is designated as a Non-
Qualified Option, and which may or may not be issued with related Stock
Appreciation Rights.
(m) "Participant" means an Eligible Employee designated by the
Committee from time to time during the term of the 1995 Plan to receive one
or more of the stock-based compensation incentives provided under the 1995
Plan.
(n) "Restricted Stock Award" means an award of Common Stock
granted to a Participant pursuant to Section 10 that is subject to certain
restrictions imposed in accordance with the provisions of such Section.
(o) "Stock Appreciation Right" means a right granted to a
Participant pursuant to Section 9 to receive a payment from the Company
equal to the difference between the Fair Market Value of one or more shares
of Common Stock subject to a Non-Qualified Option or an Incentive Stock
Option and the exercise price of such shares under the terms of such Stock
Option.
(p) "Stock Option" means an Incentive Stock Option or a Non-
Qualified Option.
2.2 Gender and Number. Except when otherwise indicated by the
context, the masculine gender shall also include the feminine gender, and
the definition of any term herein in the singular shall also include the
plural.
Section 3
Plan Administration.
-------------------
3.1 Administration Generally. The 1995 Plan shall be administered by the
Board or Committee. In accordance with the provisions of the 1995 Plan, the
Committee, in its sole discretion:
(i) shall select the Participants from Eligible Employees;
(ii) shall determine the number of shares of Common Stock to
be subject to Incentive Stock Options, Non-Qualified Options, Stock
Appreciation Rights, Restricted Stock Awards and other Common Stock awards
granted pursuant to the 1995 Plan;
(iii) shall determine the number of shares of Common Stock to
be issued as MBO Payments;
(iv) shall determine the time at which such options, rights,
awards and payments are to be granted;
(v) shall fix the exercise price, period and the manner
in which a Stock Option becomes exercisable;
(vi) shall establish the duration and nature of Restricted
Stock Award restrictions;
(vii) shall determine the Fair Market Value of the Common
Stock, in accordance with Section 2.1(g) of the 1995 Plan;
(viii) shall determine whether and under what circumstances,
if any, a Stock Option or Stock Appreciation Right may be
settled in cash instead of Common Stock;
(ix) may reduce the exercise price of any Stock Option
or Stock Appreciation Right to the then current Fair Market Value if the
Fair Market Value of the Common Stock covered by such option or right shall
have declined since the date the Stock Option was granted;
(X) may modify or amend the terms and conditions of any
Stock Option, Stock Appreciation Right, Restricted Stock Award or other
Common Stock award, subject to Section 18 of the Plan (including, but not
limited to, accelerating vesting or waiving forfeiture restrictions);
(xi) may institute an option exchange program;
(xii) may authorize any person to execute on behalf of the
Company any instrument required to effect the grant of a Stock Option, Stock
Appreciation Right, Restricted Stock Award or other Common Stock award
previously granted by the Committee; and
(xiii) shall establish such other terms and requirements
of the various compensation incentives under the 1995 Plan as the Committee
may deem necessary or desirable and consistent with the terms of the 1995
Plan.
The Committee shall determine the form or forms of the agreements with
Participants, which shall evidence the particular provisions, terms,
conditions, rights and duties of the Company and the Participants with
respect to Incentive Stock Options, Non-Qualified Options, Stock Appre
ciation Rights and Restricted Stock Awards granted pursuant to the 1995
Plan, which provisions need not be identical except as may be provided
herein. The Committee may from time to time adopt such rules and
regulations for carrying out the purposes of the 1995 Plan as it may deem
proper and in the best interests of the Company. The Committee may correct
any defect or supply any omission or reconcile any inconsistency in the 1995
Plan or in any agreement entered into hereunder in the manner and to the
extent it shall deem expedient to carry the 1995 Plan into effect, and it
shall be the sole and final judge of such expediency. No member of the
Committee shall be liable for any action or determination made in good
faith. The determinations, interpretations and other actions of the
Committee pursuant to the provisions of the 1995 Plan shall be binding and
conclusive for all purposes and on all persons, subject only to the review
and control of the Board on all Plan matters except selection of
Participants.
3.2 Multiple Administrative Bodies. If permitted by Rule 16b-3,
the 1995 Plan may be administered by different bodies with respect to
directors of the Company who are Eligible Employees, officers (within the
meaning of Rule 16a-1(f)) who are not directors, and employees who are
neither directors nor officers.
3.3 Administration With Respect to Directors and Officers. With
respect to grants of Stock Options, Stock Appreciation Rights, Restricted
Stock Awards or other Common Stock awards under the 1995 Plan to employees
who are also officers or directors, the 1995 Plan shall be administered by:
(a) the Board, if the Board may administer the 1995 Plan and
still have transactions under the 1995 Plan qualify for exemption under
Rule 16b-3, or
(b) a Committee designated by the Board to administer the 1995
Plan, which Committee shall be constituted (i) in such a manner as to permit
awards granted under the 1995 Plan to qualify for exemption under Rule 16b-3
and (ii) in such a manner as to satisfy applicable laws.
3.4 Administration With Respect to Other Persons. With respect to
grants of Stock Options, Stock Appreciation Rights, Restricted Stock Awards
or other Common Stock awards to employees who are neither directors nor
officers, the 1995 Plan shall be administered by:
(a) the Board or
(b) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy applicable laws.
3.5 Committee Composition. Once a Committee has been appointed
pursuant to Section 3.3 or 3.4, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time
the Board may increase the size of any Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies (however caused) or remove all members of
the Committee and thereafter directly administer the Plan, all to the extent
permitted by applicable laws and, in the case of a Committee appointed under
Section 3.3, to the extent permitted by Rule 16b-3 as it applies to
transactions intended to qualify thereunder as exempt
transactions.
Section 4
Stock Subject to The Plan.
-------------------------
4.1 Number of Shares. Two million two hundred thousand (2,200,000) shares
of Common Stock are authorized for issuance under the 1995 Plan in accordance
with the provisions of the 1995 Plan and subject to such restrictions or other
provisions as the Committee may from time to time deem necessary. This
authorization may be increased from time to time by approval of the Board and
the stockholders of the Company. Shares of Common Stock that are issued upon
exercise of Incentive Stock Options, Non-Qualified Options, or Stock
Appreciation Rights or pursuant to MBO Payments, shares of Common Stock that
are issued as Restricted Stock Awards, and shares of Common Stock that are
issued pursuant to a plan adopted pursuant to Section 14, shall be applied to
reduce the number of shares of Common Stock remaining available for future
issuance under the 1995 Plan.
4.2 Unused and Forfeited Stock. Any shares of Common Stock that are
subject to an Incentive Stock Option or a Non-Qualified Option that expires or
for any reason is terminated unexercised, and with respect to which no related
Stock Appreciation Right has been exercised, any shares of Common Stock that
are subject to a Restricted Stock Award and that are forfeited (the "Forfeited
Restricted Stock"), and any shares of Common Stock that for any other reason
are not issued to an Eligible Employee (not including shares withheld pursuant
to Section 19.2) or are forfeited (if forfeited, the "Other Forfeited Stock"),
shall automatically become available for use under the 1995 Plan; provided,
however, that (i) no shares of Forfeited Restricted Stock or Other Forfeited
Stock may be subject to Incentive Stock Options and (ii) such shares shall not
be returned to the 1995 Plan if prohibited by Rule 16b-3.
4.3 Capital Adjustments.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock
covered by each outstanding Stock Option and Stock Appreciation Right (the
"Outstanding Rights"), and the number of shares of Common Stock that have
been authorized for issuance under the Plan but as to which no Stock Options
or Stock Appreciation Rights have yet been granted or that have been
returned to the Plan upon cancellation or expiration of a Stock Option or
Stock Appreciation Right (the "Shares Available for Future Grant"), as well
as the price per share of Common Stock covered by each Outstanding Right,
shall be proportionately adjusted for any increase or decrease in the number
of issued and outstanding shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification
of the Common Stock, or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such proportionate adjustment
shall be made by the Committee, whose determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into or exercisable for shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number of Shares Available for Future Grant or the number or price of
shares of Common Stock subject to Outstanding Rights.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that a Stock Option
or Stock Appreciation Right has not been previously exercised, it will
terminate immediately prior to the consummation of such proposed action.
The Committee may, in the exercise of its sole discretion in such instances,
declare that any Stock Option or Stock Appreciation Right shall terminate as
of a date fixed by the Committee and give each Participant the right to
exercise his or her Stock Option or Stock Appreciation Right in whole or in
part, including with respect to shares as to which the Stock Option or Stock
Appreciation Right would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger or
consolidation of the Company with or into another corporation, or the sale
of all or substantially all of the assets of the Company, each outstanding
Stock Option and Stock Appreciation Right may be assumed or an equivalent
Stock Option or Stock Appreciation Right may be substituted by the successor
corporation or a parent or subsidiary of the successor corporation. The
Committee may, in lieu of such assumption or substitution, provide for the
Optionee to have the right to exercise his or her Stock Option or Stock
Appreciation Right in whole or in part, including with respect to shares as
to which it would not otherwise be exercisable. If the Committee makes a
Stock Option or Stock Purchase Right exercisable in lieu of assumption or
substitution in the event of a merger, consolidation or sale of assets, the
Committee shall notify the Optionee that the Stock Option or Stock
Appreciation Right shall be fully exercisable for a period of thirty (30)
days from the date of such notice, and the Stock Option or Stock
Appreciation Right will terminate upon the expiration of such period. For
the purposes of this paragraph, the Stock Option or Stock Appreciation Right
shall be considered assumed if, following the merger, consolidation or sale
of assets, the Stock Option or Stock Appreciation Right confers the right to
purchase or receive, for each share of Common Stock subject to the Stock
Option or Stock Appreciation Right immediately prior to the merger,
consolidation or sale of assets, the consideration (whether stock, cash or
other securities or property) received in the merger, consolidation or sale
of assets by holders of Common Stock for each share held on the effective
date of the transaction (and, if holders were offered a choice of considera
tion, the type of consideration chosen by the holders of a majority of the
outstanding shares); provided, however, that if such consideration received
in the merger, consolidation or sale of assets was not solely common stock
of the successor corporation or its parent, the Committee may, with the
consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Stock Option or Stock Appreciation Right,
for each share of Common Stock subject to the Stock Option or Stock
Appreciation Right, to be solely common stock of the successor corporation
or its parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger, consolidation or sale of
assets.
Section 5
Participation.
--------------
5.1 Eligibility. Participants in the 1995 Plan shall be those Eligible
Employees who, in the judgment of the Committee, are performing, or during the
term of their incentive arrangement are expected to perform, vital services in
the management, operation and development of the Company or an Affiliated
Corporation, and significantly contribute or are expected to significantly
contribute to the achievement of long-term corporate economic objectives.
Participants may be granted from time to time one or more Incentive Stock
Options (with or without Stock Appreciation Rights), one or more Non-Qualified
Options (with or without Stock Appreciation Rights), one or more Restricted
Stock Awards, one or more MBO Payments in shares of Common Stock, and one or
more other Common Stock awards pursuant to Section 14; provided, however, that
the grant of each such option, right, award or payment shall be separately
approved by the Committee, and receipt of one such option, right, award or
payment shall not result in automatic receipt of any other option, right, award
or payment. Upon determination by the Committee that a Stock Option, Stock
Appreciation Right, Restricted Stock Award, MBO Payment or other Common Stock
award is to be granted to a Participant, written notice shall be given to such
person, specifying the terms, conditions, rights and duties related thereto.
Each Participant shall, if required by the Committee, enter into an agreement
with the Company, in such form as the Committee shall determine and as is
consistent with the provisions of the 1995 Plan, specifying such terms,
conditions, rights and duties. Stock Options, Stock Appreciation Rights,
Restricted Stock Awards, MBO Payments and other Common Stock awards shall be
deemed to be granted as of the date specified in the grant resolution of the
Committee, which date shall be the date of any related agreement with the
Participant. In the event of any inconsistency between the provisions of
the 1995 Plan and any such agreement entered into hereunder, the provisions
of the 1995 Plan shall govern.
5.2 Limitations. The following limitations shall apply to grants of
Stock Options and Stock Appreciation Rights to Participants:
(a) No Participant shall be granted, in any fiscal year of the
Company, Stock Options and Stock Appreciation Rights to purchase more than
500,000 shares.
(b) The foregoing limitation shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 4.3.
(c) If a Stock Option or Stock Appreciation Right is canceled in
the same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 4.3), the canceled Stock
Option or Stock Appreciation Right shall be counted against the limit set
forth in Section 5.2(a). For this purpose, if the exercise price of a Stock
Option or Stock Appreciation Right is reduced, the transaction will be
treated as a cancellation of the Stock Option or Stock Appreciation Right
and the grant of a new Stock Option or Stock Appreciation Right.
5.3 Rule 16b-3. Stock Options, Stock Appreciation Rights, Restricted
Stock Awards, MBO Payments and other Common Stock awards granted to
Participants who are subject to Section 16 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), must comply with the applicable
provisions of Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to 1995 Plan
transactions.
Section 6
Stock Options.
-------------
6.1 Grant of Stock Options. Coincident with or following designation for
participation in the 1995 Plan, a Participant may be granted one or more Stock
Options. The Committee in its sole discretion may designate whether a Stock
Option is to be considered an Incentive Stock Option or a Non-Qualified Option.
The Committee may grant both an Incentive Stock Option and a Non-Qualified
Option to the same Participant at the same time or at different times.
Incentive Stock Options and Non-Qualified Options, whether granted at the same
or different times, shall be deemed to have been awarded in separate grants,
shall be clearly identified, and in no event will the exercise of one Stock
Option affect the right to exercise any other Stock Option or affect the number
of shares of Common Stock for which any other Stock Option may be exercised.
6.2 Manner of Stock Option Exercise. A Stock Option may be exercised by a
Participant in whole or in part from time to time, subject to the conditions
contained herein, (i) by delivery of written notice of exercise to the Company
at its principal office in Louisville, Colorado (Attention: Corporate
Secretary), in person or through mail, facsimile or electronic mail, or by
delivery of notice of exercise in such other method as has been approved by the
Committee, and (ii) by paying in full, with the written notice of exercise or
at such other time as the Committee may establish, the total exercise price
under the Stock Option for the shares being purchased. Such notice shall be in
a form satisfactory to the Committee and shall specify the particular Stock
Option (or portion thereof) that is being exercised and the number of shares
with respect to which the Stock Option is being exercised. The exercise of the
Stock Option shall be deemed effective upon receipt of such notice by the
Corporate Secretary and payment to the Company. As soon as practicable after
the effective exercise of the Stock Option, and upon satisfaction of all
applicable withholding requirements pursuant to Section 19, the Participant
shall be recorded on the stock transfer books of the Company as the owner of
the shares purchased and the Company shall deliver to the Participant one or
more duly issued and executed stock certificates evidencing such ownership.
6.3 Payment of Stock Option Exercise Price. At the time of the exercise
of a Stock Option, payment of the total Stock Option exercise price for the
shares to be purchased shall be made in the manner specified in the option
agreement relating to such Stock Option, which may include any or allof the
following methods of payment:
(i) in cash or by check;
(ii) by transfer from the Participant to the Company of
shares of Common Stock (other than shares of Common Stock that the Committee
determines by rule may not be used to exercise Stock Options) with a then
current aggregate Fair Market Value equal to the total Stock Option exercise
price;
(iii) delivery to the Company of (A) a properly executed
exercise notice, (B) irrevocable instructions to a broker to sell a suffi
cient number of the shares being exercised to cover the exercise price and
to promptly deliver to the Company the amount of sale proceeds required to
pay the exercise price and any required tax withholding relating to the
exercise, and (C) such other documentation as the Committee and the broker
shall require to effect a same-day exercise and sale;
(iv) delivery to the Company of (A) a properly executed
exercise notice, (B) irrevocable instructions to a broker or other third
party acceptable to the Company to hold the shares being exercised as
collateral for a loan to the Optionee of an amount sufficient to cover the
exercise price and to promptly deliver to the Company the amount of loan
proceeds required to pay the exercise price and any required tax withholding
relating to the exercise and (C) such other documentation as the Committee
and the broker or other third party shall require to effect the transaction;
(v) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vi) any combination of the foregoing methods of
payment; or
(vii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by applicable laws, rules and
regulations and by the agreement relating to the Stock Option being
exercised.
In the event that the option agreement does not specify the acceptable
methods of payment of the exercise price, payment may be made by any of the
methods specified in clauses (i) through (iii), inclusive, of this
Section 6.3, or any combination of such methods of payment.
6.4 Stockholder Privileges. No Participant shall have any rights
as a stockholder with respect to any shares of Common Stock covered by a
Stock Option until the Participant becomes the holder of record of such
Common Stock, and no adjustments shall be made for dividends or other
distributions or other rights as to which there is a record date preceding
the date such Participant becomes the holder of record of such Common Stock.
Section 7
Incentive Stock Options.
-----------------------
7.1 Incentive Stock Option Exercise Price. The per share price to be paid
by a Participant at the time an Incentive Stock Option is exercised shall be
determined by the Committee at the time an Incentive Stock Option is granted
(or deemed to have been granted under applicable tax rules), but in no event
shall such exercise price be less than:
(a) one hundred percent of the Fair Market Value, on the date the
Incentive Stock Option is granted (or deemed to have been granted under
applicable tax rules), of one share of the stock to which such Stock Option
relates; or
(b) one hundred and ten percent of the Fair Market Value, on the
date the Incentive Stock Option is granted (or deemed to have been granted
under applicable tax rules), of one share of the stock to which such Stock
Option relates if, at the time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly (as determined pursuant to Section
424(d) of the Internal Revenue Code), ten percent or more of the total combined
voting power of all classes of stock of the Company or of any Affiliated
Corporation (such a Participant is referred to as a "10% Holder").
7.2 Number of Option Shares. The number of shares of Common Stock subject
to an Incentive Stock Option shall be designated by the Committee at the time
the Committee decides to grant an Incentive Stock Option.
7.3 Aggregate Limitation of Stock Exercisable Under Options.
Notwithstanding any other provision of the 1995 Plan, the aggregate Fair
Market Value, determined as of the time an Incentive Stock Option is
granted, of the shares of Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by an Option Holder in any
calendar year under the 1995 Plan or otherwise, granted by the Company and
Affiliated Corporations, shall not exceed $100,000.
7.4 Duration of Incentive Stock Options. The period during which
an Incentive Stock Option may be exercised shall be fixed by the Committee,
but in no event shall such period be more than ten years from the date the
Stock Option is granted, or, in the case of Participants who are 10% Holders
as described in Section 7.1(b), five years from the date the Stock Option is
granted. No Incentive Stock Option with respect to which Stock Appreciation
Rights have been granted may be exercised during the six-month period
following the date on which such Stock Option was granted. Upon the expira
tion of such exercise period, the Incentive Stock Option, to the extent not
then exercised, shall terminate. Except as otherwise provided in
Section 11, all Incentive Stock Options granted to a Participant hereunder
shall terminate and may no longer be exercised if the Participant ceases to
be an employee of the Company and all Affiliated Corporations.
7.5 Restrictions on Exercise of Incentive Stock Options. Incentive Stock
Options may be granted subject to such restrictions as to the timing of
exercise of all or various portions thereof as the Committee may determine at
the time it grants Incentive Stock Options to Participants.
7.6 Disposition of Stock Acquired Pursuant to the Exercise of
Incentive Stock Options ---- Withholding. In the event that a Participant
makes a disposition (as defined in Section 424(c) of the Internal Revenue
Code) of any Common Stock acquired pursuant to the exercise of an Incentive
Stock Option prior to the expiration of two years from the date on which the
Incentive Stock Option was granted or prior to the expiration of one year
from the date on which the Stock Option was exercised, the Participant shall
send written notice to the Company at its principal office in Louisville,
Colorado (Attention: Corporate Secretary) of the date of such disposition,
the number of shares disposed of, the amount of proceeds received from such
disposition and any other information relating to such disposition as the
Company may reasonably request. The Participant shall, in the event of such
a disposition, make appropriate arrangements with the Company to provide for
the amount of additional withholding required by federal, state and local
income and other tax laws.
Section 8
Non-Qualified Options.
---------------------
8.1 Option Exercise Price. The per share price to be paid by the
Participant at the time a Non-Qualified Option is exercised shall be
determined by the Committee at the time the Stock Option is granted or
amended, but in no event shall such exercise price per share be less than
eighty-five percent of the Fair Market Value of one share of Common Stock on
the date the Stock Option is granted or amended.
8.2 Number of Option Shares. The number of shares of Common
Stock subject to a Non-Qualified Option shall be designated by the Committee
at the time the Committee decides to grant a Non-Qualified Option.
8.3 Duration of Non-Qualified Options; Restrictions on Exercise.
The period during which a Non-Qualified Option may be exercised, and the
installment restrictions on option exercise during such period, if any,
shall be fixed by the Committee, but in no event shall such period be more
than ten years from the date the Stock Option is granted, and no Non-
Qualified Option with respect to which Stock Appreciation Rights have been
granted may be exercised during the six-month period immediately following
the date on which such Stock Option was granted. Upon the expiration of
such exercise period, the Non-Qualified Option, to the extent not then
exercised, shall terminate. Except as otherwise provided in Section 11, all
Non-Qualified Options granted to a Participant hereunder shall terminate and
may no longer be exercised if the Participant ceases to be an employee of
the Company and all Affiliated Corporations.
Section 9
Stock Appreciation Rights.
-------------------------
9.1 Grant of Rights. A Stock Appreciation Right may be granted
to a Participant in conjunction with any Incentive Stock Option or Non-
Qualified Option granted to such Participant, as determined by the
Committee, (i) at the time of the grant of such Stock Option in the case of
an Incentive Stock Option or (ii) at the time of grant, or at any subsequent
time during the term of the Stock Option, in the case of a Non-Qualified
Option. Once granted, the term of a Stock Appreciation Right shall be equal
to the term of its related Stock Option. Upon exercise of a Stock
Appreciation Right by a Participant for a share of Common Stock, the related
Stock Option shall be terminated with respect to such share. Incentive
Stock Options and Non-Qualified Options shall not be exercisable with
respect to shares of Common Stock for which Stock Appreciation Rights have
been exercised. Upon such Stock Appreciation Right exercise, the
Participant shall be entitled to receive the economic value of such Stock
Appreciation Right determined in the manner prescribed in Section 9.2.
9.2 Exercise of Stock Appreciation Rights. Stock Appreciation
Rights shall be subject to such terms and conditions consistent with other
provisions of the 1995 Plan as may be determined from time to time by the
Committee and shall include the following:
(a) A Stock Appreciation Right shall be exercisable, in whole or
in part, at such time or times and only to the extent that the Stock Option
to which it relates shall be exercisable; provided, however, that, except as
otherwise provided in Section 11, no Stock Appreciation Right shall be
exercisable during the six-month period following the date of its grant. A
Stock Appreciation Right shall be exercised by the giving of notice in the
same manner as the Stock Option to which it relates may be exercised.
(b) Upon the exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive the economic value thereof, which
shall be equal to (i) the excess of the then Fair Market Value of one share
of Common Stock over the exercise price per share specified in the related
Stock Option, multiplied by (ii) the number of shares in respect of which
the Stock Appreciation Right is being exercised.
(c) The Committee shall, in the agreement relating to the Stock
Appreciation Right, either (i) specify the form in which payment of the
economic value of exercised Stock Appreciation Rights will be made to the
Participant upon exercise thereof (i.e., cash, Common Stock, or a specified
combination thereof) or (ii) grant the Participant the right to elect to
receive cash in full or partial payment of such economic value, at the
Participant's discretion. If the agreement relating to the Stock
Appreciation Right does not so specify, then the Participant shall have the
right to elect cash or Common Stock, or any combination thereof. If the
Participant is not an "officer" or "director" of the Company, as those terms
are defined in the rules under Section 16 of the Exchange Act, at the time
of grant or exercise of the Stock Appreciation Right, then the Committee may
retain the right to either consent to or disapprove of Participant's elected
method of payment.
9.3 Stockholder Privileges. No Participant shall have any rights
as a stockholder with respect to any shares of Common Stock covered by a
Stock Appreciation Right until the Participant becomes the holder of record
of such Common Stock, and no adjustments shall be made for dividends or
other distributions or other rights as to which there is a record date
preceding the date such Participant becomes the holder of record of such
Common Stock.
Section 10
Restricted Stock Awards.
-----------------------
10.1 Awards Granted by Committee. Coincident with or following
designation for participation in the 1995 Plan, a Participant may be granted
one or more Restricted Stock Awards consisting of shares of Common Stock.
The number of shares granted as a Restricted Stock Award shall be determined
by the Committee. The Committee may, in its discretion, require the payment
by the Participant of cash in an amount equal to the par value of the Common
Stock subject to the Restricted Stock Award as a condition precedent to the
issuance of Common Stock to the Participant.
10.2 Restrictions. A Participant's right to retain a Restricted
Stock Award granted to him or her under Section 10.1 shall be subject to
such restrictions, including but not limited to the Participant's continuous
employment by the Company or an Affiliated Corporation for a restriction
period specified by the Committee, or the attainment of specified
performance goals and objectives, as may be established by the Committee
with respect to such award. The Committee may in its sole discretion
require different periods of employment or different performance goals and
objectives with respect to different Participants, to different Restricted
Stock Awards or to separate, designated portions of the Common Stock shares
constituting a Restricted Stock Award. Subject to the provisions of
Sections 11 and 13, if a Participant's employment terminates prior to the
end of such restriction period or the attainment of such goals and
objectives as may be specified by the Committee, the Restricted Stock Award
shall be forfeited and all shares of Common Stock related thereto shall be
immediately returned to the Company.
10.3 Privileges of a Stockholder; Transferability. A Participant
shall have all voting, dividend, liquidation and other rights with respect
to Common Stock in accordance with its terms received by him or her as a
Restricted Stock Award under this Section 10 upon becoming the holder of
record of such Common Stock; provided, however, that the Participant's right
to sell, encumber, or otherwise transfer such Common Stock (and any other
securities issued in respect of such shares of Common Stock as a stock
dividend, stock split or the like) shall be subject to the limitations of
Section 15.2 hereof.
10.4 Enforcement of Restrictions. The Committee may in its sole
discretion require one or more of the following methods of enforcing the
restrictions referred to in Section 10.2 and 10.3:
(a) Placing a legend on the stock certificates referring to the
restrictions;
(b) Requiring the Participant to keep the stock certificates,
duly endorsed, in the custody of the Company while the restrictions remain
in effect; or
(c) Requiring that the stock certificates, duly endorsed, be held
in the custody of a third party while the restrictions remain in effect.
Section 11
Effect of Termination of Employment on Stock Options,
-----------------------------------------------------
Stock Appreciation Rights and Restricted Stock Awards
-----------------------------------------------------
11.1 Effect of Termination of Employment on Stock Options and Stock
Appreciation Rights. No Stock Option or Stock Appreciation Right may be
exercised unless, at the time of such exercise, the Participant is, and
has been continuously since the date of grant of such Stock Option or Stock
Appreciation Right, employed by the Company or an Affiliated Corporation,
except that if and to the extent the Stock Option or Stock Appreciation
Right agreement or instrument so provides:
(a) The Stock Option or Stock Appreciation Right may be exercised
within such period of time of up to one year as is specified in the Stock
Option or Stock Appreciation Right agreement or instrument, but only to the
extent that the Participant was entitled to exercise it as the date of
termination. In the absence of a specified time in the Stock Option or
Stock Appreciation Right agreement, or instrument, the Stock Option or Stock
Appreciation Right shall remain exercisable for 90 days following the
Participant's ceasing to be an employee of the Company or an Affiliated
Corporation. In the case of an Incentive Stock Option, such period of time
shall not exceed 90 days from the date of termination.
(b) If the Participate dies while in the employ of the Company or
an Affiliated Corporation, or within three months after the Participant
ceases to be such an employee, the Stock Option or Stock Appreciation Right
may be exercised by the person to whom it is transferred by will or the laws
of descent and distribution within the period of one year after the date of
death (or within such lesser period as may be specified in the agreement or
instrument); and
(c) If the Participant becomes disabled (within the meaning of
Section 22(e)(3) of the Internal Revenue Code) while in the employ of the
Company or an affiliated Corporation, the Stock Option or Stock Appreciation
Right may be exercised within the period of one year after the date the
Participant ceases to be an employee of any of the foregoing entities
because of such disability (or within such lesser period as may be specified
in the agreement or instrument); provided, however, that in no event may any
Stock Option or Stock Appreciation Right be exercised after the expiration
date thereof. For all purposes of the 1995 Plan and any Stock Option or
Stock Appreciation Right granted hereunder, "employment" shall be defined in
accordance with the provisions of Section 1.421-7(h) of the Income Tax
Regulations (or any successor regulations).
11.2 Effect of Termination of Employment on Restricted Stock Awards. In
the event of the death or disability (as defined in Section 11.1(c)) of a
Participant, all employment period and other restrictions applicable to
Restricted Stock Awards then held by such Participant shall lapse, and such
awards shall become fully vested and nonforfeitable. In the event of a
Participant's termination of employment for any other reason, any Restricted
Stock Awards as to which the employment period or other restrictions have not
been satisfied shall be forfeited.
Section 12
MBO Payments.
------------
12.1 Participant Election As to MBO Payment. At such time as the
Committee determines that a Participant has become eligible for an MBO
Payment pursuant to the MBO Equity Plan, the Committee shall notify the
Participant as to the total dollar amount of such MBO Payment and as to
whether or not the Participant may elect to, or will be required by the
Committee to, accept all or a part of such MBO Payment in the form of shares
of Common Stock. If the Participant is given the right to elect whether to
accept the MBO Payment in cash or stock, then the Participant shall have ten
(10) business days after the receipt of such notice from the Committee to
make such election. The Participant shall notify the Committee with respect
to his or her election on such form as may be provided for this purpose by
the Committee, setting forth thereon the dollar value of the portion of the
MBO Payment which he or she desires to receive in shares of Common Stock.
If a Participant fails to make an election pursuant to this Section with
respect to the mode of payment of an MBO Payment, the entire MBO Payment
shall be made in cash.
12.2 Determination of Number of Shares. The number of shares of
Common Stock that shall be issued as an MBO Payment shall be determined by
dividing the dollar value of the portion of the MBO Payment that is to be
paid in shares of Common Stock (whether as elected above or as adjusted by
the Committee pursuant to Section 12.3) by the Fair Market Value of the
Common Stock on the date the Participant delivers his or her election with
respect to such Payment to the Committee. No fractional shares of Common
Stock shall be issued as a part of an MBO Payment and the value of any such
fractional share that would otherwise be issued pursuant to the
Participant's election shall be paid in cash.
12.3 Decision of Committee. The Committee shall have the sole
discretion to either accept the Participant's election with respect to the
payment of an MBO Payment, in whole or in part, in shares of Common Stock or
to determine that a lesser portion, or none, of the MBO Payment will be made
in shares of Common Stock, and the Committee's determination in this regard
shall be final and binding on the Participant.
Section 13
Tender Offers and Acquisitions.
------------------------------
If any person or entity (other than the Company or any person or entity
that is controlled by the Company) shall make a tender offer or exchange
offer for all or any part of the Common Stock or other capital shares of the
Company and shall purchase any part of the Common Stock or other capital
shares tendered to it, and the Board opposes or does not affirmatively
recommend acceptance of such tender offer or exchange offer, then:
(a) all Stock Options with respect to which no Stock Appreciation
Rights have been granted, and all Stock Options with respect to which Stock
Appreciation Rights have been issued (and all such related Stock
Appreciation Rights) that have been outstanding for at least six months,
shall become immediately exercisable in full during the remaining term
thereof, whether or not the Participants to whom such options and rights
have been granted remain employees of the Company or an Affiliated
Corporation; provided, however, that Stock Appreciation Rights shall remain
subject to the requirements of Section 9.2(a) with respect to the exercise
thereof only within prescribed periods after public release of Company
financial information; and
(b) all restrictions with respect to outstanding Restricted Stock
Awards shall immediately lapse.
Section 14
Other Common Stock Programs.
--------------------------
From time to time during the duration of the 1995 Plan, the Board may,
in its sole discretion, adopt one or more incentive compensation
arrangements for Eligible Employees pursuant to which such Eligible
Employees may acquire shares of Common Stock, whether by purchase, outright
grant or otherwise. Any such arrangements shall be subject to the general
provisions of the 1995 Plan and all shares of Common Stock issued pursuant
to such arrangements shall be issued under the 1995 Plan if so designated by
the Committee.
Section 15
Rights of Employees; Participants.
---------------------------------
15.1 Employment. Nothing contained in the 1995 Plan or in any
Stock Option, Stock Appreciation Right, Restricted Stock Award or other
Common Stock award granted under the 1995 Plan shall confer upon any
Participant any right with respect to the continuation of his or her
employment by the Company or any Affiliated Corporation, or interfere in any
way with the right of the Company or any Affiliated Corporation, subject to
the terms of any separate employment agreement to the contrary, at any time
to terminate such employment or to increase or decrease the compensation of
the Participant from the rate in existence at the time of the grant of a
Stock Option, Stock Appreciation Right, Restricted Stock Award or other
Common Stock award. Whether an authorized leave of absence, or absence in
military or government service, shall constitute termination of employment
shall be determined by the Committee at the time.
15.2 Nontransferability. Except as otherwise approved by the
Committee and set forth in the agreement between the Company and the
Participant, no right or interest of any Participant in a Stock Option, a
Stock Appreciation Right, a Restricted Stock Award prior to the completion
of the restriction period applicable thereto, or other Common Stock award
granted pursuant to the 1995 Plan shall be assignable or transferable during
the lifetime of the Participant, either voluntarily or involuntarily, or
subjected to any lien, directly or indirectly, by operation of law, or
otherwise, including execution, levy, garnishment, attachment, pledge or
bankruptcy. If permitted by applicable law (including Rule 16b-3, as
amended from time to time), the Committee may (but need not) permit the
transfer of Stock Options, Stock Appreciation Rights, Restricted Stock
Awards and/or other Common Stock awards either generally, to a limited class
of persons or on a case-by-case basis. In the event of a Participant's
death, a Participant's rights and interest in Stock Options, Stock
Appreciation Rights, Restricted Stock Awards and other Common Stock awards
shall be transferable by testamentary will or the laws of descent and
distribution, and payment of any amounts due under the 1995 Plan shall be
made to, and exercise of any Stock Options or Stock Appreciation Rights may
be made by, the Participant's legal representatives, heirs or legatees. If
in the opinion of the Committee a person entitled to payments or to exercise
rights with respect to the 1995 Plan is disabled from caring for his or her
affairs because of mental condition, physical condition, or age, payment due
such person may be made to, and such rights shall be exercised by, such
person's guardian, conservator or other legal personal representative upon
furnishing the Committee with evidence satisfactory to the Committee of such
status.
<PAGE>
Section 16
General Restrictions.
--------------------
16.1 Investment Representations. The Company may require any
person to whom a Stock Option, Stock Appreciation Right, Restricted Stock
Award, MBO Payment or other Common Stock award is granted, as a condition of
exercising such Stock Option or Stock Appreciation Right, or receiving such
Restricted Stock Award, MBO Payment or other Common Stock award, to give
written assurances in substance and form satisfactory to the Company and its
counsel to the effect that such person is acquiring the Common Stock subject
to the Stock Option, Stock Appreciation Right, Restricted Stock Award, MBO
Payment or Common Stock award for his or her own account for investment and
not with any present intention of selling or otherwise distributing the
same, and to such other effects as the Company deems necessary or
appropriate in order to comply with federal and applicable state securities
laws.
16.2 Compliance with Securities Laws. Each Stock Option and Stock
Appreciation Right shall be subject to the requirement that, if at any time
counsel to the Company shall determine that the listing, registration or
qualification of the shares subject to such Stock Option or Stock
Appreciation Right upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental or regulatory
body, is necessary as a condition of, or in connection with, the issuance or
purchase of shares thereunder, such Stock Option or Stock Appreciation Right
may not be accepted or exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained on conditions acceptable to the Committee. Nothing herein shall be
deemed to require the Company to apply for or to obtain such listing,
registration or qualification.
16.2 Changes in Accounting Rules. Notwithstanding any other
provision of the 1995 Plan to the contrary, if, during the term of the 1995
Plan, any changes in the financial or tax accounting rules applicable to
Stock Options, Stock Appreciation Rights, Restricted Stock Awards, MBO
Payments or other Common Stock awards shall occur that, in the sole judgment
of the Committee, may have a material adverse effect on the reported
earnings, assets or liabilities of the Company, the Committee shall have the
right and power to modify as necessary, or cancel, any then outstanding and
unexercised Stock Options or Stock Appreciation Rights, any then outstanding
Restricted Stock Awards as to which the applicable employment restriction
has not been satisfied and any other Common Stock awards.
Section 17
Other Employee Benefits.
-----------------------
The amount of any compensation deemed to be received by an employee as
a result of the exercise of a Stock Option, a Stock Appreciation Right or
the sale of shares received upon such exercise or the vesting of any
Restricted Stock Awards or the receipt of any other Common Stock award will
not constitute "earnings" with respect to which any other employee benefits
of such employee are determined, including without limitation benefits under
any pension, profit sharing, life insurance or salary continuation plan.
Section 18
Plan Amendment, Modification and Termination.
--------------------------------------------
18.1 Stockholder Approval. The Board, upon recommendation of the
Committee or at its own initiative, at any time may terminate and at any
time and from time to time and in any respect, may amend or modify the 1995
Plan; provided, however, that no such action of the Board, without approval
of the stockholders of the Company, may:
(a) Materially increase the total amount of Common Stock that may
be awarded under the 1995 Plan, except as provided in Section 4.3 of the
1995 Plan;
(b) Materially change the classes of Eligible Employees from
which plan Participants may be selected or materially modify the
requirements as to eligibility for participation in the 1995 Plan;
(c) Materially increase the benefits accruing to Participants; or
(d) Extend the duration of the 1995 Plan.
18.2 Effect of Amendment. Any Stock Option, Stock Appreciation
Right, Restricted Stock Award or other Common Stock award granted to a
Participant prior to the date the 1995 Plan is amended, modified or
terminated will remain in effect according to its terms unless otherwise
agreed upon by the Participant; provided, however, that this sentence shall
not impair the right of the Committee to take whatever action it deems
appropriate under Section 4.3, Section 13 or Section 16.3. The termination
or any modification or amendment of the 1995 Plan shall not, without the
consent of a Participant, affect his or her rights under a Stock Option,
Stock Appreciation Right, Restricted Stock Award or other Common Stock award
previously granted to him or her. With the consent of the Participant
affected, the Committee may amend outstanding option agreements in a manner
not inconsistent with the 1995 Plan.
18.3 Preservation of Incentive Stock Options. The Board shall
have the right to amend or modify the terms and provisions of the 1995 Plan
and of any outstanding Incentive Stock Options granted under the 1995 Plan
to the extent necessary to qualify any or all such Stock Options for such
favorable treatment as may be afforded Incentive Stock
Section 19
Withholding.
-----------
19.1 Withholding Requirement. The Company's obligations to deliver shares
of Common Stock upon the exercise of any Stock Option or Stock Appreciation
Right granted under the 1995 Plan or upon any MBO Payment under the 1995 Plan
or pursuant to any other Common Stock award, shall be subject to the
Participant's satisfaction of all applicable federal, state and local income
and other tax withholding requirements.
19.2 Withholding With Common Stock. At the time the Committee grants a
Stock Option, Stock Appreciation Right, MBO Payment or any other Common Stock
award, it may, in its sole discretion, grant the Participant an election to pay
all such amounts of tax withholding, or any part thereof, by electing to
transfer to the Company, or to have the Company withhold from shares otherwise
issuable to the Participant, shares of Common Stock having a value equal to the
amount required to be withheld or such lesser amount as may be elected by the
Participant. All elections shall be subject to the approval or disapproval of
the Committee. The value of shares of Common Stock to be withheld shall be
based on the Fair Market Value of the Common Stock on the date that the amount
of tax to be withheld is to be determined (the "Tax Date"). Any such elections
by Participants to have shares of Common Stock withheld for this purpose will
be subject to the following conditions:
(a) All elections must be made prior to the Tax Date;
(b) All elections shall be irrevocable; and
(c) If the Participant is an officer of director of the Company
within the meaning of Section 16 of the Exchange Act, then the approval by the
Committee of the grant of the award shall be deemed to include approval by the
Committee of the election by such Participant to utilize this withholding
provision, unless otherwise specified in the agreement relating to the award.
Section 20
Requirements of Law.
-------------------
20.1 Requirements of Law. The issuance of stock and the payment of cash
pursuant to the 1995 Plan shall be subject to all applicable laws, rules and
regulations.
20.2 Governing Law. The 1995 Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
Section 21
Effective Date of the 1995 Plan.
-------------------------------
21.1 Effective Date. The 1995 Plan is effective as of March 8, 1995, the
date it was adopted by the Board of Directors of the Company, subject to the
approval of the stockholders of the Company prior to the one-year anniversary
of such date. Stock Options, Stock Appreciation Rights, Restricted Stock
Awards and other Common Stock awards may be granted prior to stockholder
approval if made subject to stockholder approval.
21.2 Duration of the 1995 Plan. The 1995 Plan shall terminate at midnight
on March 7, 2005, which is the day before the tenth anniversary of the
Effective Date, and may be terminated prior thereto by Board action; and no
Stock Option, Stock Appreciation Right, Restricted Stock Award or other Common
Stock award shall be granted after such termination. Stock Options, Stock
Appreciation Rights, Restricted Stock Awards and other Common Stock awards
outstanding at the time of the 1995 Plan termination may continue to be
exercised, or become free of restrictions, in accordance with their terms.
<PAGE> 1
EXHIBIT 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- ----------------------
09/27/96 09/29/95 09/27/96 09/29/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY (a)
Earnings (loss)
Income before extraordinary item $39,500 ($6,981) $102,949 ($4,040)
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
---------- ---------- ---------- ----------
Net income (loss) 39,500 (6,981) 112,484 (4,040)
Preferred dividend requirement (3,018) (9,056)
---------- ---------- ---------- ----------
Income (loss) applicable to common shares $39,500 ($9,999) $112,484 ($13,096)
========== ========== ========== ==========
Shares
Weighted average common shares outstanding 60,231 52,854 55,774 52,694
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 849 562
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents 61,080 52,854 56,336 52,694
========== ========== ========== ==========
Earnings (loss) per common share:
Income (loss) before extraordinary item 0.65 (0.19) 1.83 (0.25)
extraordinary gain, net 0.17
---------- ---------- ---------- ----------
$0.65 ($0.19) $2.00 ($0.25)
========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE> 2
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- ----------------------
09/27/96 09/29/95 09/27/96 09/29/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FULLY DILUTED
Earnings (loss)
Income before extraordinary item $39,500 ($6,981) $102,949 ($4,040)
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 216 5,329
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 2,450 2,480 7,350 7,439
---------- ---------- ---------- ----------
Income before extraordinary item 42,166 (4,501) 115,628 3,399
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
---------- ---------- ---------- ----------
Net income (loss), as adjusted $42,166 ($4,501) $125,163 $3,399
========== ========== ========== ==========
Shares
Weighted average common shares outstanding 60,231 52,854 55,774 52,694
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 932 227 984 184
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 7% and Convertible Debentures 609 5,000
Adjustment for shares issuable upon assumed
conversion of 8% and Convertible Debentures 4,131 4,132 4,132 4,132
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents, as adjusted 65,903 64,553 65,890 64,350
========== ========== ========== ==========
Earnings (loss) per common share:
Income (loss) before extraordinary item 0.64 (0.07) 1.75 0.05
extraordinary gain, net 0.15
---------- ---------- ---------- ----------
0.64 (0.07)(b) 1.90 (a) 0.05 (b)
========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE> 3
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------------------------------------
09/27/96 09/29/95 09/27/96 09/29/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SUPPLEMENTARY (c)
Earnings
Income before extraordinary item $39,500 $102,949
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 216 5,329
---------- ----------
Income before extraordinary item 39,716 108,278
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
---------- ----------
Net income, as adjusted $39,716 $117,813
========== ==========
Shares
Weighted average common shares outstanding 60,231 55,774
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 849 561
Adjustment for shares issuable assuming the
conversion of 7% Convertible Debentures
occurred at the beginning of the period 609 5,000
---------- ----------
Weighted average common shares
and equivalents, as adjusted 61,689 61,335
========== ==========
Earnings per common share:
Income before extraordinary item $0.64 $1.77
Extraordinary gain, net 0.15
---------- ---------- ---------- ----------
$0.64 N/A $1.92 N/A
========== ========== ========== ==========
</TABLE>
(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 contrary to paragraph 40 of APB Opinion No. 15,
because it produces an anti-dilutive result.
(c) On June 12, 1996, Storage Technology Corporation called for the redemption
on July 12, 1996, of all its outstanding 7% Convertible Subordinated
Debentures Due 2008. Substantially all of the 7% Convertible Subordinated
Debentures were converted into common stock on or before July 12, 1996.
The supplemental earnings per share amounts reflect the primary earnings
per share amounts as if the conversion had occurred at the beginning of
the period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q DATED
SEPTEMBER 27, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000094673
<NAME> STORAGE TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-END> SEP-27-1996
<CASH> 282,907
<SECURITIES> 87,017
<RECEIVABLES> 436,587 <F1>
<ALLOWANCES> 0
<INVENTORY> 263,174
<CURRENT-ASSETS> 1,070,733
<PP&E> 328,965 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,801,123
<CURRENT-LIABILITIES> 511,154
<BONDS> 172,605
0
0
<COMMON> 5,683
<OTHER-SE> 1,096,504
<TOTAL-LIABILITY-AND-EQUITY> 1,801,123
<SALES> 1,006,202
<TOTAL-REVENUES> 1,418,871
<CGS> 607,568
<TOTAL-COSTS> 826,107
<OTHER-EXPENSES> 135,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,396
<INCOME-PRETAX> 140,349
<INCOME-TAX> 37,400
<INCOME-CONTINUING> 102,949
<DISCONTINUED> 0
<EXTRAORDINARY> 9,535
<CHANGES> 0
<NET-INCOME> 112,484
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 1.90
<FN>
<F1> Asset values for the interim period
represent net amounts.
</FN>
</TABLE>
