<PAGE> 1
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 June 28, 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) - 61,222,248 shares outstanding at August 2,
1996.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 28, 1996
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 26
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 6 - Exhibits and Reports on Form 8-K 28
</TABLE>
<PAGE> 3
Form 10-Q
Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
<TABLE>
<CAPTION>
06/28/96
(Unaudited) 12/29/95
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash, including cash equivalents $ 489,780 $ 264,502
Accounts receivable, net 400,273 396,499
Notes and installment receivables (Note 4) 2,643 10,766
Net investment in sales-type leases (Note 4) 6,632 88,668
Inventories (Note 2) 274,815 214,553
----------- ----------
Total current assets 1,174,143 974,988
Notes and installment receivables (Note 4) 1,530 10,113
Net investment in sales-type leases (Note 4) 4,993 150,751
Equipment held for sale or lease, at cost (net) 133,022 139,629
Spare parts for field service, at cost (net) 34,837 29,468
Property, plant and equipment, at cost (net) 327,653 333,021
Deferred income tax assets, net 85,534 74,902
Other assets 157,476 175,757
----------- ----------
$1,919,188 $1,888,629
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease commitments (Note 4) $ 19,415
Current portion of other long-term debt (Note 4) $ 5,996 65,844
Accounts payable and accrued liabilities 471,826 454,415
Income taxes payable 29,141 9,963
----------- ----------
Total current liabilities 506,963 549,637
7% Convertible subordinated debentures (Note 5) 97,149 171,205
8% Convertible subordinated debentures 145,645 145,645
Nonrecourse borrowings secured by lease commitments (Note 4) 20,980
Other long-term debt 25,932 26,133
Deferred income tax liabilities 18,023 12,196
----------- ----------
Total liabilities 793,712 925,796
----------- ----------
Commitments and contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 150,000,000 shares authorized;
57,014,255 shares issued at June 28, 1996, and 53,352,087
shares issued at December 29, 1995 5,701 5,335
Capital in excess of par value 1,498,714 1,414,551
Accumulated deficit (372,777) (445,761)
Treasury stock of 61,738 shares at June 28, 1996, and
43,773 shares at December 29, 1995 (779) (777)
Unearned compensation (4,395) (6,427)
Notes receivable from stockholders (988) (4,088)
----------- ----------
Total stockholders' equity 1,125,476 962,833
----------- ----------
$1,919,188 $1,888,629
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------ ------------------
06/28/96 06/30/95 06/28/96 06/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $340,782 $330,739 $658,080 $635,831
Service and rental revenue 138,523 149,963 274,706 295,057
-------- -------- -------- --------
Total revenue 479,305 480,702 932,786 930,888
-------- -------- -------- --------
Cost of sales 198,421 210,244 385,467 401,792
Cost of service and rental revenue 74,568 96,698 147,089 193,239
-------- -------- -------- --------
Total cost of revenue 272,989 306,942 532,556 595,031
-------- -------- -------- --------
Gross profit 206,316 173,760 400,230 335,857
Research and product development costs 48,995 45,207 98,617 93,383
Marketing, general, administrative and
other income and expense, net 104,516 114,444 212,630 223,501
Merger expenses 14,352
-------- -------- -------- --------
Operating profit 52,805 14,109 88,983 4,621
Interest income 6,644 11,784 14,884 24,133
Interest expense (7,589) (9,538) (17,018) (20,313)
-------- -------- -------- --------
Income before income taxes and
extraordinary item 51,860 16,355 86,849 8,441
Provision for income taxes (14,000) (4,500) (23,400) (5,500)
-------- -------- -------- --------
Income before extraordinary item 37,860 11,855 63,449 2,941
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 (Note 4) 9,535
-------- -------- -------- --------
Net income 37,860 11,855 72,984 2,941
Preferred dividend requirement (3,019) (6,038)
-------- -------- -------- --------
Income (loss) applicable to
common shares $ 37,860 $ 8,836 $ 72,984 $ (3,097)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENTS (Note 6)
Primary:
Income (loss) before extraordinary item $ 0.70 $ 0.17 $ 1.18 $ (0.06)
Extraordinary gain, net 0.17
-------- -------- -------- --------
$ 0.70 $ 0.17 $ 1.35 $ (0.06)
======== ======== ======== ========
Fully Diluted:
Income before extraordinary item $ 0.65 $ 1.11
Extraordinary gain, net 0.15
-------- --------
$ 0.65 N/A $ 1.26 N/A
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
06/28/96 06/30/95
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Cash received from customers (Note 4) $1,194,900 $1,129,442
Cash paid to suppliers and employees (848,444) (847,435)
Interest received 14,884 33,378
Interest paid (14,855) (19,640)
Income taxes (paid) refunded, net (16,651) (3,583)
---------- ----------
Net cash from operating activities 329,834 292,162
---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (24,046) (44,526)
Short-term investments, net 5,557
Merger expenses (9,528)
Other assets, net (1,882) (21,747)
---------- ----------
Net cash used in investing activities (25,928) (70,244)
---------- ----------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 3,060
Repayments of nonrecourse borrowings (Note 4) (33,753) (138,401)
Proceeds from other debt 62 858
Repayments of other debt (Note 4) (63,190) (52,222)
Proceeds from employee stock plans 14,987 6,104
Preferred stock dividend payments (6,038)
---------- ----------
Net cash used in financing activities (81,894) (186,639)
---------- ----------
Effect of exchange rate changes on cash 3,266 938
---------- ----------
Increase in cash and cash equivalents 225,278 36,217
Cash and cash equivalents - beginning of the period 264,502 228,081
---------- ----------
Cash and cash equivalents - end of the period $ 489,780 $ 264,298
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH FROM
OPERATING ACTIVITIES
Net income $ 72,984 $ 2,941
Depreciation and amortization expense 77,936 111,571
Translation (gain) loss 2,212 (6,922)
Other adjustments to income 10,142 20,804
Decrease in accounts receivable 6,282 35,672
Decrease in notes receivable and sales-type leases (Note 4) 237,188 163,978
(Increase) decrease in inventories (60,262) 1,799
Increase in equipment held for sale or lease, net (26,799) (29,261)
Increase in spare parts, net (8,701) (7,665)
Increase in net deferred income tax asset (4,610) (1,518)
Increase (decrease) in accounts payable and accrued liabilities 3,903 (2,672)
Increase in income taxes payable 19,559 3,435
---------- ----------
Net cash from operating activities $ 329,834 $ 292,162
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 6
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Notes
Capital in Receivable
Common Excess of Accumulated Treasury Unearned From
Stock Par Value Deficit Stock Compensation Stockholders
-----------------------------------------------------------------------
<S> <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
(3,151,237 shares) (Note 5) 315 72,667
Shares issued under stock
purchase plan and for
exercises of options
(524,653 shares) 52 11,838
Net income 72,984
Other (1) (342) (2) 2,032 3,100
------ ---------- ---------- ------- ---------- ----------
Balances, June 28, 1996 $5,701 $1,498,714 $(372,777) $ (779) $ (4,395) $ (988)
====== ========== ========= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
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 affect on its
consolidated financial position or results of operations.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
06/28/96 12/29/95
-------- --------
<S> <C> <C>
Raw Materials $97,104 $75,673
Work-In-Process 128,502 92,487
Finished Goods 49,209 46,393
-------- --------
$274,815 $214,553
======== ========
</TABLE>
NOTE 3 - 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
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Form 10-Q
Page 8
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 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 set for November 1996.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and two
of its customers alleging 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 late 1996.
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
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Form 10-Q
Page 9
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.
NOTE 4 - 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 six months ending June 28, 1996, as compared to the same period of 1995, is
largely a result of cash received from the sale of lease assets.
NOTE 5 - 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 $171,000,000. During the
six months of 1996, 7% Convertible Debentures in the principal amount of
$74,056,000 were converted at a price of $23.50 per share into 3,151,237 shares
of common stock. Substantially all of the remaining outstanding 7% Convertible
Debentures were converted into 4,131,087 shares of common stock on or before
July 12, 1996. The Company redeemed all remaining outstanding 7% Convertible
Debentures on July 12, 1996, in the principal amount of $67,000.
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 June 28, 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 June 28, 1996, the
Company had issued letters of credit for approximately $22,000,000 and had
approximately $128,000,000 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 which currently expires on July 31, 1997. This
agreement allows for receivable sales of up
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Form 10-Q
Page 10
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 June 28, 1996, the Company had committed to future cumulative sales of
approximately $204,000,000. 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 6 - EARNINGS PER COMMON SHARE
Fully diluted earnings per common share for the second quarter and six months
ended June 28, 1996, reflects the assumed conversion of the Company's remaining
outstanding 7% Convertible Debentures and the 8% Convertible Subordinated
Debentures as of the end of the period, whereas these convertible securities
were either not outstanding or were not dilutive in the same periods of 1995.
NOTE 7 - 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).
The following table summarizes the activity associated with the Company's
restructuring reserves during the six 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 (19,618) (1,177) (2,847) (23,642)
Reclassifications 301 (154) 1,222 1,369
--------- ------- ------- --------
Balances, June 28, 1996 $ 23,371 $17,207 $ 8,547 $ 49,125
========= ======= ======= ========
Cash payments during the six months of 1996 are primarily the result of a
reduction in the number of employees of approximately 1,600 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
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Form 10-Q
Page 11
the Company's reported results within the Consolidated Statement of Operations
during the six 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 8 - IBM ORIGINAL EQUIPMENT MANUFACTURER (OEM) ARRANGEMENT
On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM
agreement with International Business Machines Corporation (IBM). Under the
terms of the agreement, StorageTek will develop and manufacture mainframe
online storage products for IBM. IBM will serve 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. 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 will be 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 will be estimated and
accrued at the time of revenue recognition.
<PAGE> 12
Form 10-Q
Page 12
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 28, 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 second quarter ended June 28, 1996, of $37.9 million on revenue of
$479.3 million, compared to net income for the second quarter ended June 30,
1995, of $11.9 million on revenue of $480.7 million. Net income of $73.0
million was reported for the six months of 1996 on revenue of $932.8 million,
compared to net income of $2.9 million for the six months of 1995 on revenue of
$930.9 million. The Company's reported net income for the six 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 was largely unchanged for both the second quarter and six months of
1996 as compared to the same periods in 1995; however, revenue for the second
quarter and six months of 1995 included revenue of approximately $20 million
and $48 million, respectively, associated with the Company's midrange business
which was sold during 1995. During the second quarter and six 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 and
operating profit during these periods as compared to the same periods of 1995.
As anticipated, revenue from older generation Nearline products decreased
during the second quarter and six months of 1996, compared to the same periods
of 1995. While revenue from Iceberg 9200 Virtual Storage Facility (Iceberg)
subsystems increased in the second quarter of 1996 as compared to the second
quarter of 1995, gross margin contribution decreased due to intense price
competition in the online marketplace. Revenue contribution from networking
products decreased during the second quarter and six months of 1996, compared
to the same periods of 1995, primarily due to the continued decline in revenue
from older networking products and lower than expected revenue from the
Enterprise Routing Switch (ERS); however, progress in the Company's
restructuring activities resulted in the realization of cost savings associated
with the manufacture of this product line during the second quarter and six
months of 1996.
The Company's revenue and operating results during the remainder of 1996 are
significantly dependent upon sustaining the market growth of TimberLine and
PowderHorn; gaining market acceptance for new Nearline products, including
products targeted for the open-systems market; successfully managing the
transition in the Company's business model for its
<PAGE> 13
Form 10-Q
Page 13
mainframe online products to serving primarily as an OEM supplier to
International Machines Corporation (IBM); successfully addressing distribution
issues associated with the Company's networking products; and the effective
implementation of significant business restructuring activities initiated
during the fourth quarter of 1995. Future results are also dependent upon the
Company's ability to successfully identify, expand, and capitalize on new
emerging product and service markets outside the Company's traditional
marketplace. 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 $225.3 million during the six months of
1996 primarily as a result of net cash flows generated from the sale of
substantially all of the Company's lease assets, as well as cash flows
generated from operations. See "EXTRAORDINARY GAIN," below, for further
discussion of the lease asset sale.
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.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------ ------------------
06/28/96 06/30/95 06/28/96 06/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Nearline products 67.9% 61.2% 66.7% 58.9%
Online products 17.5 16.4 18.0 18.7
Networking products 8.8 11.2 9.6 11.3
Other products 5.8 11.2 5.7 11.1
-------- -------- -------- --------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 57.0 63.9 57.1 63.9
-------- -------- -------- --------
Gross profit 43.0 36.1 42.9 36.1
Research and product development
costs 10.2 9.4 10.6 10.0
Marketing, general, administrative
and other income and expense, net 21.8 23.8 22.8 24.0
Merger expenses 1.6
-------- -------- -------- --------
Operating profit 11.0 2.9 9.5 0.5
Interest income (expense), net (0.2) 0.5 (0.2) 0.4
-------- -------- -------- --------
Income before income taxes and
extraordinary item 10.8 3.4 9.3 0.9
Provision for income taxes (2.9) (0.9) (2.5) (0.6)
-------- -------- -------- --------
Income before extraordinary item 7.9 2.5 6.8 0.3
Extraordinary gain on sale of lease
assets, net of income taxes 1.0
-------- -------- -------- --------
Net income 7.9% 2.5% 7.8% 0.3%
======== ======== ======== ========
</TABLE>
REVENUE
NEARLINE PRODUCTS
Revenue from Nearline products increased 11% and 13% in the second quarter and
six 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,
<PAGE> 14
Form 10-Q
Page 14
which was introduced in the first quarter of 1995, also increased in the second
quarter and six months of 1996, compared to the same periods in 1995; however,
market acceptance for RedWood was slower than expected. As anticipated, revenue
from older generation Nearline products, such as 4480 18-Track Tape Cartridge
Subsystem, Silverton 4490 36-Track Tape Cartridge Subsystem (Silverton), and
4410 Automated Cartridge Subsystem (ACS) library declined in the second quarter
and six months of 1996, compared to the same periods 1995.
Future results of the Nearline product line are significantly dependent upon
the continued success of TimberLine and PowderHorn, and gaining market
acceptance for other new Nearline products, including products targeted for the
open-systems market. Sales of these products are expected to offset
anticipated further declines in revenue from older generation Nearline
products. There can be no assurance that RedWood or other new Nearline products
will gain market acceptance in the future.
ONLINE PRODUCTS
Revenue from online products increased 6% in the second quarter of 1996 and
decreased 4% in the six months of 1996, as compared to the same periods in
1995. While revenue from Iceberg subsystems increased in the second quarter of
1996 as compared to the second quarter of 1995, the gross margin contribution
from Iceberg decreased due to intense price competition in the online
marketplace. The effects of price competition on Iceberg increased during June
1996 as the Company began transitioning its business model to primarily serving
as an OEM supplier of mainframe online storage products to IBM. The decrease
in revenue contribution from online products also reflects 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 the terms of the agreement, StorageTek will develop
and manufacture for IBM, mainframe online storage products that it sells under
the brand names Iceberg, Kodiak 9890 Scalable Storage Facility (Kodiak) and
Arctic Fox 9800 High-Performance Shared-Access Facility (Arctic Fox). IBM will
serve 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. IBM plans to
market these products under the names to IBM RAMAC Virtual Array Storage, IBM
RAMAC Scalable Array Storage and IBM RAMAC Electronic Array Storage. 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. 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 it will experience further online price competition
during the third quarter of 1996 as it transitions into primarily serving as an
OEM supplier of mainframe online storage products. The Company anticipates the
OEM agreement with IBM will benefit the Company in the longer term through
increased revenue contribution from the mainframe online product line, due to
increased market penetration. Additionally, the OEM arrangement with IBM is
expected to allow the Company to redirect resources to its other product lines,
as well as new, emerging products and services outside the Company's
traditional marketplace. There
<PAGE> 15
Form 10-Q
Page 15
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 21% and 14% in the second quarter
and six months of 1996, respectively, compared to the same periods in 1995.
These decreases are due primarily to the continued decline in revenue from
older networking products and lower than expected revenue from ERS 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. Progress in the Company's restructuring activities
resulted in the realization of cost savings associated with the manufacture of
this product line during the second quarter and six months of 1996.
In June 1996, StorageTek and Northern Telecom, Inc. (NORTEL) entered into a
reseller agreement whereby StorageTek will distribute Magellan Passport,
NORTEL's network switching product, which supports both Wide Area Networks
(WAN) and Local Area Networks (LAN). In connection with this agreement,
StorageTek and NORTEL terminated their pre-existing joint development agreement
for the LAN-based ERS. StorageTek does not anticipate that the termination of
this agreement or discontinuance of ERS product sales will have a material
adverse impact on the Company.
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; developing new market
distribution channels; and reducing operating expenses. 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 49% and 48% in the second quarter and six
months of 1996, respectively, compared to the same periods in 1995. This
decline is primarily the result of the Company's sale of its net investment in
sales-type leases associated with its midrange business during the second
quarter of 1995 and the sale of substantially all of the midrange service
business during the third quarter of 1995.
GROSS PROFIT
Overall gross profit increased to 43% in both the second quarter and six months
of 1996, compared to 36% in same periods of 1995, due to an increase in both
product sales margins and service margins.
Gross profit on product sales increased to 42% and 41% in the second quarter
and six months of 1996, respectively, compared to 36% and 37% in the second
quarter and six months of 1995, respectively. These increases are principally
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 during
<PAGE> 16
Form 10-Q
Page 16
1996. Product sales margins in 1996 have also benefited from reduced revenue
contribution from lower-margin midrange products as a result of the sale of the
midrange lease assets in the second quarter of 1995. Product sales margins from
Iceberg declined during the second quarter of 1996 as a result of competitive
pricing pressures as the Company transitions to a new business model of
primarily serving as an OEM supplier of mainframe online storage products to
IBM; however, this decline was more than offset by higher product sales margins
associated with Nearline products.
Gross profit on service and rental revenue increased to 46% in both the second
quarter and six months of 1996, compared to 36% and 35% for the second quarter
and six 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. In addition to costs savings
associated with the restructuring, certain organizational functions were
realigned within the Company as a result of the restructuring. This
realignment resulted in costs and expenses in the second quarter and six months
of 1996 of approximately $2.0 million and $4.0 million, respectively, being
reported as research and product development costs which were previously
associated with customer services activities. Other costs and expenses
previously associated with customer services activities, aggregated
approximately $1.4 million and $2.8 million during the second quarter and six
months of 1996, respectively, were reported as marketing, general,
administrative and other income and expense.
The Company's ability to sustain or improve product sales margins during the
remainder of 1996 is significantly dependent upon the Company's ability to
successfully manage the transition under the OEM agreement with IBM for its
mainframe online storage products. The Company anticipates that sales margins
will be pressured due to lower OEM pricing and scheduled price reductions over
the term of the OEM agreement, which will be partially offset by lower
manufacturing costs resulting from increased volumes and operating expense
savings; however, the Company must further reduce costs and expenses associated
with manufacturing these products in order to achieve expected benefits.
Product sales margins during the remainder of 1996 are also significantly
dependent upon achieving further cost savings associated with the manufacture
of its Nearline and networking products. 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 also may be affected in the future due to increased price competition.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenditures increased 8% and 6% in the second
quarter and six months of 1996, respectively, compared to the same periods of
1995, and increased as a percentage of revenue from 9.4% and 10.0% for the
second quarter and six months of 1995, respectively, to 10.2% and 10.6% for the
second quarter and six months of 1996, respectively. These increases are due
primarily to increases of approximately $2.0 million and $4.0 million in the
second quarter and six months of 1996, respectively, resulting from the
realignment of certain organizational functions under the research and
development organization which were previously associated with customer service
activities, as well as a lower level of capitalized software development costs
as products and enhancements progress through the development cycle. These
increases more than offset cost savings resulting from the 1995 restructuring.
<PAGE> 17
Form 10-Q
Page 17
Effective July 1, 1996, certain research and development activities associated
with the development of enhancements to the Company's mainframe online storage
products will be financed by IBM pursuant to the OEM agreement. Accordingly,
the Company anticipates a reduction in research and development expenses
associated with these products during the second half of 1996. The Company
anticipates that this decrease will be partially offset by increased 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) decreased 9% and 5% in the second quarter and six months of 1996,
respectively, compared to the same periods of 1995. The cost savings
associated with the 1995 restructuring were partially offset by an increase of
approximately $1.4 million and $2.8 million in the second quarter and six
months of 1996, respectively, as a result of the realignment of certain
organizational functions under the marketing organization which were previously
associated with customer service activities.
INTEREST INCOME AND EXPENSE
Interest income decreased 44% and 38% in the second quarter and six 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 20% and 16% in the second quarter and six 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 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 5 to the Notes to Consolidated Financial
Statements, the 7% Convertible Subordinated Debentures were called for
redemption on June 12, 1996. It is anticipated that interest expense during
the second half of 1996 will decline as a result of the conversion or
redemption of these debentures.
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
$85.5 million of deferred income tax assets as of June 28, 1996. The Company's
valuation allowance of approximately $165.7 million on a gross deferred tax
asset of approximately $251.2 million as of June 28, 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.
<PAGE> 18
Form 10-Q
Page 18
EXTRAORDINARY GAIN
As more fully discussed in Note 4 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 six months of 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
Employee Lease Other
Severance Abandonments Exit Costs Total
--------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Balances, December 29, 1995 $42,688 $18,538 $10,172 $71,398
Cash payments (19,618) (1,177) (2,847) (23,642)
Reclassifications 301 (154) 1,222 1,369
--------- ------------ ---------- --------
Balances, June 28, 1996 $23,371 $17,207 $8,547 $49,125
========= ============ ========== ========
</TABLE>
Cash payments during the six months of 1996 are primarily the result of a
reduction in the number of employees of approximately 1,600 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 the Company's reported results within the Consolidated Statement of
Operations during the six 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.
<PAGE> 19
Form 10-Q
Page 19
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 restructuring
during 1996 and 1997 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 balances increased $225.3 million from December 29, 1995, to
June 28, 1996. The increase in cash during the six months of 1996 primarily
resulted from cash generated from operations of $329.8 million which was
partially offset by net repayments of nonrecourse borrowings and other debt of
$96.9 million. The increase in net cash from operating activities during the
six months of 1996 is a result of cash received from the sale of lease assets
and increased cash from operations, partially offset by cash payments
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 $292.2 million during the six months of 1995 included
cash generated from the sale of midrange lease assets and collections of income
tax refunds and associated interest by Network Systems from the Internal
Revenue Service of $18.9 million.
The current ratio increased to 2.3 as of June 28, 1996, from 1.8 as of December
29, 1995. Accounts receivable increased slightly from $396.5 million as of
December 29, 1995, to $400.3 million as of June 28, 1996. Inventories
increased from $214.6 million as of December 29, 1995, to $274.8 million as of
June 28, 1996, in anticipation of higher volumes of online and Nearline product
sales.
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 June 28, 1996). Under the Revolver, the Company is required to
comply with certain financial and other covenants, including restrictions on
the
<PAGE> 20
Form 10-Q
Page 20
payment of cash dividends on its common stock. As of June 28, 1996, the Company
had issued letters of credit for approximately $22 million and had approximately
$128 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, which currently expires on July 31, 1997. This
agreement 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 June 28,
1996, the Company had committed to future cumulative sales of approximately $204
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.
TOTAL DEBT-TO-CAPITALIZATION
The Company's total debt-to-capitalization ratio decreased from 32% as of
December 29, 1995, to 20% as of June 28, 1996. The 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 $74 million into common stock during June 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 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 June 28,
<PAGE> 21
Form 10-Q
Page 21
1996, the Company held 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 $171 million. During the six months of
1996, 7% Convertible Debentures in the principal amount of $74 million were
converted at a price of $23.50 per share into 3.2 million shares of common
stock. Substantially all of the remaining outstanding 7% Convertible
Debentures were converted into 4.1 million shares of common stock on or before
July 12, 1996. The Company redeemed all remaining outstanding 7% Convertible
Debentures on July 12, 1996, in the principal amount of $67,000.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
In the second quarter and six months of 1996, approximately 43% 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 1996. 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 exposures and utilizes foreign currency options
and forward exchange contracts. 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.
To date, the Company has not experienced any material adverse effects on its
operations as a result of the foregoing factors. There can be no assurances,
however, 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.
<PAGE> 22
Form 10-Q
Page 22
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 sales 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 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 will develop and manufacture mainframe online
storage products for IBM and IBM will serve as StorageTek's primary
distribution channel for these products through the term of the agreement.
This OEM arrangement represents a significant change from the
<PAGE> 23
Form 10-Q
Page 23
Company's past business model. The Company's success in its mainframe online
storage business is now significantly dependent upon managing this transition,
IBM's continuous support for these products and its 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 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. In the networking marketplace, the Company competes with a
number of companies that have a greater market presence, including 3Com Corp.,
Cisco Systems, Inc., Cabletron Systems, Inc. and Bay Networks, Inc. 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 to be 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.
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
<PAGE> 24
Form 10-Q
Page 24
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 3 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 (which include order management, distribution, and finance) 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 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.
<PAGE> 25
Form 10-Q
Page 25
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 companiesindependent 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> 26
Form 10-Q
Page 26
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
period ended March 29, 1996, electronically filed with the Commission on May
10, 1996.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and two
of its customers alleging 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. A
trial commenced on January 22, 1996, and 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 late
1996.
On July 30, 1996, the Company received Civil Investigative Demands (CID) from
the U.S. Department of Justice Antitrust Division. The CID 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 3 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> 27
Form 10-Q
Page 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May 30, 1996. A
quorum of stockholders was represented at the meeting in person or by proxy.
There was no solicitation in opposition to management's nominees as listed in
the proxy statement and supplement to proxy statement and all nominees were
elected. The directors elected include:
<TABLE>
<CAPTION>
For Withheld
-------------- --------
<S> <C> <C>
David E. Weiss 44,384,167 23,855
Judith E.N. Albino 43,871,007 537,015
William L. Armstrong 43,921,168 486,854
Robert A. Burgin 43,921,233 486,789
Paul Friedman 43,917,693 490,329
William R. Hoover 43,936,975 471,047
Stephen J. Keane 43,929,657 478,365
Robert E. LaBlanc 43,931,847 476,175
Robert E. Lee 43,928,950 479,072
Harrison Shull 43,917,351 490,671
Richard C. Steadman 43,931,357 476,665
</TABLE>
At the annual meeting, the stockholders approved amendments to the 1987
Employee Stock Purchase Plan and the reservation of an additional 1,750,000
shares of Common Stock for issuance to employees under the Plan, by a vote of
41,539,513 in favor to 2,437,867 against, with 430,642 abstentions.
The stockholders approved amendments of the Stock Option Plan for Non-Employee
Directors and the reservation of an additional 180,000 shares of Common Stock
for issuance under the Plan, by a vote of 30,889,136 in favor to 13,109,570
against, with 409,316 abstentions.
The stockholders also ratified of the appointment of Price Waterhouse as the
Company's independent accountants for the current fiscal year, by a vote of
44,102,999 in favor to 194,332 against, with 110,691 abstentions.
There were no broker non-votes on any of the proposals.
<PAGE> 28
Form 10-Q
Page 28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1*/** Tenth Amendment and Restatement of Storage Technology
Corporation 1987 Employee Stock Purchase Plan.
10.2*/** Storage Technology Corporation Amended and Restated Stock
Option Plan for Non-Employee Directors.
10.3*/** Employment Agreement between the Company and David E. Weiss,
dated June 24, 1996.
10.4*/** Employment Agreement between the Company and David E. Lacey,
dated June 24, 1996.
10.5* OEM Agreement between the Company and International Business
Machines Corporation ("IBM"), dated June 7, 1996.
11.0* Computation of Earnings (Loss) Per Common Share.
27.0* Financial Data Schedule.
(b) Reports on Form 8-K
On May 23, 1996, the Company filed a current report on Form 8-K
dated May 23, 1996, pursuant to Item 5, disclosing the appointment
of David E. Weiss as Chairman of the Board, President and Chief
Executive Officer to succeed Ryal Poppa who retired from his
positions as an officer and director effective on such date, and
the appointment of David E. Lacey as Executive Vice President and
Chief Financial Officer of the Company.
On June 12, 1996, the Company filed a current report on Form 8-K
dated June 10, 1996, pursuant to Item 5, disclosing that the
Company had entered into an OEM agreement with IBM, concerning the
Company's mainframe online storage products. The Agreement
provides that the Company will manufacture for IBM storage
subsystems sold by the Company under the brand names Iceberg,
Kodiak, and Arctic Fox, and, beginning July 1, 1996, intends to use
IBM as its main worldwide distribution channel for these products.
On June 13, 1996, the Company filed a current report on Form 8-K
dated June 12, 1996, pursuant to Item 5, disclosing that the
Company had called for redemption on July 12, 1996 all of its
outstanding 7% Convertible Subordinated Debentures due March 15,
2008.
- ---------------
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
** Contracts or compensation plan or arrangement in which directors an/or
officers participate.
<PAGE> 29
Form 10-Q
Page 29
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
August 12, 1996 /s/ DAVID E. WEISS
- --------------------- --------------------------------
(Date) David E. Weiss
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
August 12, 1996 /s/ DAVID E. LACEY
- --------------------- --------------------------------
(Date) David E. Lacey
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.1*/** Tenth Amendment and Restatement of Storage Technology
Corporation 1987 Employee Stock Purchase Plan.
10.2*/** Storage Technology Corporation Amended and Restated Stock
Option Plan for Non Employee Directors.
10.3*/** Employment Agreement between the Company and David E. Weiss,
dated June 24, 1996.
10.4*/** Employment Agreement between the Company and David E. Lacey,
dated June 24, 1996.
10.5* OEM Agreement between the Company and International Business
Machines Corporation ("IBM"), dated June 7, 1996.
11.0* Computation of Earnings (Loss) Per Common Share.
27.0* Financial Data Schedule.
</TABLE>
- ---------------
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
** Contracts or compensation plan or arrangement in which directors an/or
officers participate.
<PAGE> 1
EXHIBIT 10.1
TENTH AMENDMENT AND RESTATEMENT OF
STORAGE TECHNOLOGY CORPORATION
1987 EMPLOYEE STOCK PURCHASE PLAN
DECEMBER 14, 1995
1. Recitals. On February 2, 1982, Storage Technology
Corporation, a Delaware corporation (together with its Subsidiary Corporations,
hereinafter referred to, unless the context otherwise requires, as the
"Company"), established the Storage Technology Corporation 1982 Employee Stock
Purchase Plan. Such plan was subsequently amended and restated by the Board of
Directors on June 15, 1987 and renamed the Storage Technology Corporation 1987
Employee Stock Purchase Plan (the "1987 Plan" or the "Plan"). Under the
provisions of Paragraph 19 of the 1987 Plan, the Company reserved the power,
through its Board of Directors, to amend the Plan from time to time, subject in
certain instances to approval of the Company's stockholders. Pursuant to that
power, the Plan is hereby amended and restated in its entirety, effective at
the time and under the conditions set forth in Paragraph 22 below.
2. Purposes. The 1987 Plan is intended to provide a method
whereby employees of the Company will have an opportunity to acquire a
proprietary interest in the Company through the purchase of shares of the $.10
par value voting Common Stock of the Company (the "Common Stock"). It is the
intention of the Company to have the Plan qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code"). The provisions of the Plan shall,
accordingly, be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
3. Definitions.
(a) "Account" means an Employee's interest in the Segregated
Account based on the contributions made thereto and the interest earned
thereon.
(b) "Base Pay" means, at the Employee's election, either: (i)
an Employee's rate of base salary (before deduction for contributions to plans
maintained pursuant to Sections 401(k) and 125 of the Code) in effect during
the Offering Period, but EXCLUDING payments for overtime, shift premium,
incentive compensation, bonuses, and other similar payments; or (ii) Employee's
rate of base salary (before deduction for contributions to plans maintained
pursuant to Sections 401(k) and 125 of the Code) in effect during the Offering
Period, EXCLUDING payments for overtime, shift premium, incentive compensation,
bonuses, and other similar payments, but INCLUDING all payments for bonuses,
incentive compensation and various forms of commissions. Base Pay shall also
include payments for short-term disability.
(c) "Committee" means the Compensation Committee of the
Company's Board of Directors or such other committee as is designated by the
Board of Directors to administer the Plan.
(d) "Employee" means any person who is a Regular Employee (per
CP-3-3-14) customarily employed for more than 20 hours per week and more than
five months in a calendar year by Storage Technology Corporation or any
Subsidiary Corporation.
<PAGE> 2
(e) "Offering Commencement Date" shall mean January 1, 1991 and
each following November 1 and May 1 thereafter, unless otherwise specified by
the Committee.
(f) "Offering Periods" shall mean the period commencing January
1, 1991 and ending October 31, 1991 and thereafter the periods commencing each
November 1 and May 1 and ending on the next following April 30 and October 31,
respectively. The duration of Offering Periods may be changed pursuant to
Paragraphs 5 and 21 of this Plan.
(g) "Offering Termination Date" shall mean October 31, 1991 and
each following April 30 and October 31 thereafter, unless otherwise specified
by the Committee.
(h) "Segregated Accounts" shall mean the depository accounts
established by the Company and by Subsidiary Corporations for collection of
Employee contributions to the Plan.
(i) "Subsidiary Corporation" shall mean any present or future
corporation which (i) would be a subsidiary corporation with respect to the
Company as that term is defined in Section 425 of the Code, and (ii) is
designated as a participant in the Plan by the Committee described in Paragraph
14.
4. Eligibility.
(a) Participation in the Plan is completely voluntary. An
Employee will be eligible to become a participant in each Offering Period if
employed by the Company prior to the applicable Offering Commencement Date.
(b) Any provision of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan:
(i) if, immediately after the grant, such Employee
would own stock, and/or hold outstanding options to purchase
stock, possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or of any Subsidiary
Corporation (for purposes of this Paragraph the rules of Section
425(d) of the Code shall apply in determining stock ownership of
any Employee); or
(ii) if such option would permit his or her rights to
purchase stock under all employee stock purchase plans of the
Company and its Subsidiary Corporations to
-2-
<PAGE> 3
accrue at a rate that exceeds $25,000 of the fair market value of
the stock (determined at the time each option is granted) for each
calendar year in which such option is outstanding; or
(iii) for shares in excess of 25,000 in respect of any
Offering Period, provided that this limitation is subject to
increase or decrease by the Committee prior to the commencement of
any Offering Period in respect of such Offering Period.
5. Plan Offerings.
(a) The Plan is authorized to issue a total of 4,700,000 shares
of Common Stock (of which 1,750,000 shares are subject to stockholder
approval).
(b) The Plan will be implemented by consecutive Offering
Periods, with a new Offering Period commencing on each Offering Commencement
Date and ending on the next Offering Termination Date, or on such other dates
as the Committee shall determine prior to the commencement of the relevant
Offering Period, and continuing until terminated in accordance with Paragraph
19 hereof. The Committee shall have the power to change the duration of
Offering Periods (including the commencement and termination dates thereof)
with respect to future offerings without stockholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected.
(c) A maximum of 300,000 shares of Common Stock, plus any unsold
balances from earlier Offering Periods, shall be issued during any one Offering
Period. The maximum number of shares to be issued in respect of any Offering
Period may be increased or decreased by the Committee prior to the commencement
of the affected Offering Period within the limits of total shares then
available under the Plan.
(d) Participation in any Offering Period under the Plan shall
neither limit, nor require, participation in any other Offering Period (except
as set forth in paragraphs 4(b)(i) and 4(b)(ii) hereof).
6. Participation.
(a) An eligible Employee may become a participant by enrolling
and authorizing payroll deductions on an Interactive Voice Response system
("IVR") in such manner as is prescribed by the Company or, if such Employee
does not have access to IVR, by completing an authorization for payroll
deduction on the form provided by the Company and filing it with the department
designated by the Company or the designated country coordinator by the deadline
established by the Company, which must precede the first day of the Plan for
which the participant enrolls.
(b) Payroll deductions for a participant shall commence on the
applicable Offering Commencement Date when an authorization for a payroll
deduction becomes effective and shall
-3-
<PAGE> 4
end on the Offering Termination Date of the Offering Period to which such
authorization is applicable unless sooner terminated by the participant as
provided in Paragraph 11.
7. Payroll Deductions.
(a) At the time a participant enrolls and authorizes payroll
deductions, the participant shall elect to have deductions made from his or her
Base Pay and deposited in a Segregated Account during the time the Employee is
a participant in an Offering Period. Deductions can be made at the rate of 1,
2, 3, 4, 5, 6, 7, 8, 9, or 10% of Base Pay.
(b) All payroll deductions made for a participant shall be
transferred to a Segregated Account as soon as practicable. For administrative
convenience, the Company may offset amounts advanced by the Company to pay
participant withdrawals pursuant to Paragraph 11 against amounts of payroll
deductions otherwise payable into the Segregated Account. A participant may
not make any separate cash payments into the Segregated Account. The Company
shall maintain appropriate accounting records to reflect at all times the
interest and total deductions of all participants in the Segregated Account.
(c) A participant may discontinue participation in the Plan as
provided in Paragraph 11, but no other change can be made during an Offering
Period and, specifically, a participant may not alter the rate of payroll
deductions for that Offering Period.
8. Terms and Conditions of Options.
(a) On the applicable Offering Commencement Date, when a
participant's authorization for a payroll deduction becomes effective, the
participant shall be deemed to have been granted an option to purchase a
maximum number of shares of Common Stock, subject to the limitations pursuant
to Paragraph 4(b) above, equal to the lesser of: (a) the Option Price (as
defined below) divided into the Employee's total deductions under the Plan in
respect of the Offering Period or (b) the Employee's pro-rata share of all
shares available for issuance under the Plan for that Offering Period,
determined pursuant to Paragraph 13, below.
(b) The option price per share (hereinafter "Option Price") of
Common Stock purchased with payroll deductions made during each Offering Period
shall be the lesser of:
(i) 85% of the closing price per share of the Common
Stock as quoted in The Wall Street Journal for the applicable
Offering Commencement Date (or on the next business date on which
shares of the Common Stock shall be traded on the New York Stock
Exchange in the event that no shares of the Common Stock shall
have been traded on the Offering Commencement Date); or
(ii) 85% of the closing price per share of the Common
Stock as quoted in The Wall Street Journal for the applicable
Offering Termination Date (or for the next preceding business
date on which shares of the Common Stock shall be traded on the
New York
-4-
<PAGE> 5
Stock Exchange in the event that no shares of the Common Stock
shall have been traded on the Offering Termination Date).
(c) Fractional shares will not be issued under the Plan and any
accumulated payroll deductions that would have been used to purchase fractional
shares, together with any amounts that are in excess of the limitations of
Paragraph 8(a), together with any net income of the Segregated Account
allocable to each participant, shall be returned to each participant promptly
following the termination of an Offering Period.
9. Exercise of Option. Unless a participant withdraws in accordance
with Paragraph 11, his or her option to purchase Common Stock with payroll
deductions made during any Offering Period will be deemed to have been
exercised automatically on the applicable Offering Termination Date, for the
purchase of the number of full shares of Common Stock that the accumulated
payroll deductions will purchase at the applicable Option Price (but not in
excess of the number of shares for which options have been granted to the
participant pursuant to Paragraph 8(a)), and any excess in his or her Account
at that time will be returned to the participant, together with any net income
of the Segregated Account allocable to his or her Account, as provided in
Paragraph 13.
10. Delivery. As promptly as practicable after the Offering
Termination Date of each Offering Period, the Company will deliver to each
participant, as appropriate, the shares of Common Stock purchased upon the
exercise of the participant's option.
11. Withdrawal and Termination.
(a) Prior to the 15th day of the month before the applicable
Offering Termination Date, any participant may withdraw payroll deductions and
net earnings thereon credited to the participant by following the procedures
specified by the Company for effecting a withdrawal on the IVR system or, if
the participant does not have access to IVR, by giving written notice of
withdrawal to the department designated by the Company or the designated
country coordinator. As promptly as practical after the participant's
withdrawal, the payment to the participant of all the participant's payroll
deductions credited to his or her account, together with any net earnings of
the Segregated Account allocable to the participant's Account shall be made.
No further payroll deductions for such participant will be made during such
Offering Period. The Company may, for administrative convenience, elect to pay
to participants (or beneficiaries) the amount of any withdrawals and earnings
thereon and may then offset the amount of any such payments against payroll
deductions otherwise payable to the Segregated Account. The Company may, at
its option, treat any attempt to borrow by a participant on the security of the
accumulated payroll deductions allocated to the participant's Account as an
election under this Paragraph 11(a) to withdraw such amounts from the
Segregated Account.
(b) A participant's withdrawal from any Offering Period will not
have any effect upon eligibility to participate in any subsequent Offering
Period or in any similar plan that may hereafter be adopted by the Company.
-5-
<PAGE> 6
(c) Upon termination of the participant's employment with the
Company for any reason (including retirement but excluding death or, in certain
cases, disability while in the employ of the Company) prior to any Offering
Termination Date, the payroll deductions credited to the participant, together
with any net earnings of the Segregated Account allocable to his or her
Account, will be returned to the participant, or, in the case of a
participant's death subsequent to the termination of employment, to the person
or persons entitled thereto under Paragraph 15. For purposes of the Plan, a
participant shall be considered disabled if the Company determines that the
participant is unable to perform the usual and customary requirements of his or
her job with the Company and will be unable to do so for at least six months;
provided, however, that such determination is subject to review by the
Committee at its discretion.
(d) Upon termination of the participant's employment because of
death or disability prior to the Offering Termination Date, the participant or
the participant's beneficiary (as defined in Paragraph 15) shall have the right
to elect, by written notice given to the Company's General Counsel prior to the
expiration of the period of 90 days commencing on the date of death or
disability of the participant, and prior to the Offering Termination Date,
either
(i) to withdraw all of the payroll deductions credited
to the participant, together with any net earnings of the
Segregated Account allocable to his or her Account, or
(ii) to exercise the participant's option to purchase of
Common Stock for the then current Offering Period on the Offering
Termination Date for the purchase of the number of full shares of
Common Stock that the amount allocated to the participant's
Account at the date of the participant's death or disability will
purchase at the applicable Option Price, and any excess credited
to such Account will be returned to said participant or his or her
beneficiary.
In the event that no such written notice of election shall be duly received by
the office of the Company's General Counsel within the required time period,
the participant or beneficiary shall automatically be deemed to have elected to
withdraw the payroll deductions credited to the participant, together with the
net earnings of the Segregated Account allocable to his or her Account at the
date of the participant's death or disability, and the same will be paid
promptly to said participant or beneficiary. Notwithstanding the foregoing, if
a participant's employment with the Company and any Subsidiary Corporation
terminates because of disability more than three months prior to the Offering
Termination Date, the provisions of this Paragraph 11(d) shall not apply and
the provisions of Paragraph 11(c) shall apply to such participant.
12. Income and Accounting.
(a) Separate accounts shall not be established by the Company
for Employees who participate in the Plan. The Employee's payroll deductions
shall be transferred to the Segregated Account as soon as practical after each
pay period and credited to the participant.
-6-
<PAGE> 7
(b) Each participant shall share proportionately in the income
and expense of the Segregated Account and any net income shall be taxable to
the participant, who shall be responsible for paying any income or other taxes
applicable thereto.
13. Stock.
(a) The maximum number of shares of Common Stock that shall be
made available for sale under the Plan during any Offering Period under the
Plan shall be the number of shares set forth in Paragraph 5, subject to
adjustment upon changes in capitalization of the Company as provided in
Paragraph 18; provided, however, that if less than the number of shares
specified in Paragraph 5 with respect to any Offering Period are purchased
during any period, the number of shares not purchased may be carried over and
made available for sale under the Plan during any subsequent Offering Period.
(For example, if only 250,000 shares were purchased during an Offering Period
under the Plan, the shares not purchased will be carried over to the next
succeeding Offering Period so that a maximum of 350,000 shares shall be made
available for purchase during the next Offering Period.) If the total number
of shares subject to options that would otherwise be exercised on any Offering
Termination Date in accordance with Paragraph 9 exceeds the maximum number of
shares available for sale, subject to adjustment as aforesaid, the Company
shall make a pro rata allocation of the shares available for delivery and
distribution in as nearly a uniform manner as shall be practicable and as it
shall determine to be equitable, and the balance of payroll deductions credited
to each participant, together with the net earnings of the Segregated Account
allocable thereto, shall be returned to him or her as promptly as possible.
(b) A participant will have no interest in Common Stock covered
by the participant's option until such option has been exercised. Participants
in the Plan shall have no rights as stockholders with respect to any shares
covered by the Plan until the date of issue of a stock certificate to him or
her for such shares. Except as otherwise expressly provided in the Plan or in
the corporate action relating to such event, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
(c) Common Stock to be delivered to a participant under the Plan
will be registered in the name of the participant.
(d) The Board of Directors may, in its discretion, require as
conditions to the exercise of any option that the shares of Common Stock
reserved for issuance upon the exercise of the option shall have been duly
listed, upon official notice of issuance, upon the New York Stock Exchange, and
that either
(i) a Registration Statement under the Securities Act of
1933, as amended, with respect to said shares shall have become
effective, or
-7-
<PAGE> 8
(ii) the participant shall have represented in form and
substance satisfactory to the Company that it is the participant's
intention to purchase for investment the shares being purchased
under such option.
14. Administration. The Plan shall be administered by the Committee.
The interpretation and construction of any provision of the Plan or any
Segregated Account agreement and the adoption of rules and regulations for
administering the Plan shall be made by the Committee, subject, however, at all
times to the final concurrence of the Board of Directors of the Company.
Determinations made by the Committee and approved by the Board of Directors
with respect to any matter or provision contained in the Plan shall be final,
conclusive and binding upon the Company and upon all participants, their heirs
or legal representatives. Any rules, regulations or interpretations adopted by
the Committee shall remain in full force and effect unless and until altered,
amended, or repealed by the Committee or the Board of Directors.
15. Designation of Beneficiary. A participant may file with the
Company, pursuant to rules adopted by the Committee, a written designation of a
beneficiary who is to receive any Common Stock and/or cash pursuant to the
provisions of the Plan in the event of the participant's death. Such
designation of beneficiary may be changed by the participant at any time by
written notice. Upon the death of a participant and upon receipt by the
Company of proof of the identity and existence at the participant's death of a
beneficiary validly designated by him under the Plan, the Company shall deliver
such Common Stock to such beneficiary and/or pay any cash in the participant's
Account in the Segregated Account to the beneficiary, as may be required under
the provisions of Paragraph 11(d). In the event of the death of a participant
and in the absence of a beneficiary validly designated under the Plan who is
living at the time of such participant's death, the Company shall cause such
cash to be paid to the person or persons or the entity duly designated by the
participant, as shown on the Company's records, as his or her beneficiary for
the proceeds of Company paid life insurance. In the absence of such a
beneficiary who is living at the time of the participant's death, the Company
shall cause such cash to be paid to the executor or administrator of the estate
of the participant, or if no such executor or administrator of the estate has
been appointed (to the knowledge of the Company), the Company, in its
discretion, may cause such cash to be paid to the spouse or to any one or more
dependents of the participant as the Company may designate. No beneficiary
shall, prior to the death of the participant by whom he or she has been
designated, acquire any interest in the Common Stock or in amounts credited to
the participant's Account.
16. Transferability. Neither payroll deductions credited to a
participant, nor earnings thereon, nor any rights with regard to the exercise
of an option or to receive Common Stock under the Plan may be assigned,
transferred, pledged, or otherwise disposed of in any way by the participant
otherwise than by will or the laws of descent and distribution. Any such
attempted assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Paragraph 11.
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<PAGE> 9
17. Ownership of ESPP Assets. All contributions paid into Segregated
Accounts shall be the property of the respective participants in the Plan and
the Company shall have no interest in such amounts while held in the Segregated
Account.
18. Effect of Changes in Capital Structure. If the outstanding shares
of Common Stock are changed into or exchanged for a different number or kind of
shares or other securities of the Company by reason of any recapitalization,
reclassification, stock split, stock dividend, combination, or subdivision, or
if the Company takes any other action of a similar nature affecting such Common
Stock (excluding, however, any reorganization under the United States
Bankruptcy Code), then the number and class of shares of Common Stock that may
thereafter be optioned, or the rights assigned thereto (in the aggregate and to
any participant), shall be adjusted accordingly and, in the case of each option
outstanding at the time of any such action, the number and class of shares that
may thereafter be purchased pursuant to such option and the Option Price shall
be adjusted, in each case to such extent and in such manner, if at all, as may
be determined by the Board upon the recommendations of the Committee, with the
approval of independent public accountants and counsel, to be necessary to
preserve unimpaired the rights of the holder of such option.
19. Amendment or Termination. The Board of Directors of the Company
may at any time terminate or amend the Plan. No such termination can affect
options previously granted, nor may an amendment make any change in any option
theretofore granted without prior approval of the stockholders of the Company
if such approval is required under the laws or regulations administered by the
U.S. Treasury (including Section 423 of the Code), the Securities and Exchange
Commission (including Rule 16b-3), any other agency of the U.S. Government, or
the New York Stock Exchange, or any other exchange or system on which the
Company's stock is then registered or traded.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received by the General Counsel of the Company.
21. Dissolution, Merger or Asset Sale.
(a) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, the Offering Period shall
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board.
(b) Merger or Asset Sale. In the event of a proposed
sale of all or substantially all of the assets of the Company, or the merger of
the Company with or into another corporation, each option under the Plan shall
be assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, to shorten the Offering Period then in progress by
setting a new Offering Termination Date (the "New Offering Termination Date")
or to cancel each outstanding right to purchase and refund
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<PAGE> 10
all sums collected from participants during the Offering Period then in
progress. If the Board shortens the Offering Period then in progress in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Board shall notify each participant in writing, at least ten (10) business days
prior to the New Termination Date, that the Offering Termination Date for the
option held by the participant has been changed to the New Offering Termination
Date and that such option shall be exercised automatically on the New Offering
Termination Date, unless prior to such date the participant has withdrawn from
the Offering Period as provided in Paragraph 10 hereof. For purposes of this
paragraph, an option granted under the Plan shall be deemed to be assumed if,
following the sale of assets or merger, the option confers the right to
purchase, for each share of option stock subject to the option immediately
prior to the sale of assets or merger, the consideration (whether stock, cash
or other securities or property) received in the sale of assets or merger by
holders of Common Stock for each share of Common Stock held on the effective
date of the transaction (and if such holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Common Stock); provided, however, that if such
consideration received in the sale of assets or merger was not solely common
stock of the successor corporation or its parent (as defined in Section 424(e)
of the Code), the Board may, with the consent of the successor corporation,
provide for the consideration to be received upon exercise of the option 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
and the sale of assets or merger.
22. Effective Date - Approval of Stockholders. The Plan, as
amended and restated herein, has been adopted on behalf of the Board of
Directors of the Company by the Compensation Committee on December 14, 1995,
and such amendment and restatement is effective as of such date, but such
amendment and restatement to the extent stockholder approval is required under
Paragraph 19 above, is subject to the approval of the stockholders of the
Company at their next meeting. Offerings may commence under the Plan prior to
approval by the stockholders but no Common Stock requiring stockholder approval
may be purchased hereunder unless and until the requisite stockholder approval
has been received.
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<PAGE> 1
EXHIBIT 10.2
STORAGE TECHNOLOGY CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN
FOR NONEMPLOYEE DIRECTORS
RECITALS
A. Pursuant to a resolution dated June 15, 1987, the board of
directors (the "Board") of Storage Technology Corporation, a Delaware
corporation (the "Company"), adopted the Stock Option Plan for NonEmployee
Directors (the "Plan"). The Plan was approved by the stockholders of the
Company at a meeting held October 20, 1987 (the "Original Adoption Date"). The
Plan was thereafter amended (the "First Amendment") by the Board on March 29,
1989 and such amendment was approved by the stockholders of the Company at a
meeting held June 28, 1989, and again amended (the "Second Amendment") by the
Board on November 7, 1990 and such amendment was approved by the stockholders
of the Company at a meeting held May 29, 1991. This Amended and Restated Plan
incorporates the above amendments, and amendments approved by the Board on July
26, 1995 and March 6, 1996.
B. The Board reserved the right to amend the Plan from time to time
with certain restrictions and only with the approval of the stockholders with
respect to certain amendments, all as specified in the Plan. Pursuant to such
authority, the Plan is hereby amended in its entirety as set forth below (the
"Amended Plan"), provided, however, that the amendments made hereby and options
first granted hereby, pursuant to Section 3.2.1.6, are all subject to the
approval of the Company's stockholders at the Company's next annual meeting
following the Board's adoption of this Amended Plan.
C. The purposes of the Plan are to secure for the Company the benefits
arising from capital stock ownership by its current and future nonemployee
directors by providing to such directors added incentive to continue in the
service of the Company and a more direct interest in the future success of the
operations of the Company through the granting to such directors of options
("Option" or "Options") to purchase shares of the $.10 par value common stock
of the Company (the "Stock") subject to the terms and conditions described
below.
ARTICLE I
1 GENERAL
1.1 Definitions. For purposes of this Amended Plan, and as used
herein, a "nonemployee director" is an individual who (a) is a
member of the board of directors of the Company, and (b) is not an
employee of the Company. For purposes of this Amended Plan, an
employee is an individual whose wages are subject to the
withholding of federal income tax under section 3401 of the
Internal Revenue Code of 1986, as amended from time to time (the
"Code").
<PAGE> 2
1.2 Options. The Options granted hereunder shall be options that are
not qualified as incentive stock options under section 422A of the
Code.
ARTICLE II
2 ADMINISTRATION
2.1 The Stock Option Committee. The Amended Plan shall be administered
by the Compensation Committee of the Board ("the Committee"), which
shall be composed in such a manner to satisfy the requirements, if
any, of Rule 16b-3 promulgated under the Securities Exchange Act of
1934 or any successor rule ("Rule 16b-3") with respect to
committees administering formula plans that comply with Rule 16b-3
and in accordance with the General Corporation Law of Delaware.
The persons comprising the Committee shall be appointed by and
serve at the pleasure of the Board. The Committee members shall
all be members of the Board.
2.2 Quorum. A majority of the Committee shall constitute a quorum, and
the acts of a majority of the members present at any meeting at
which a quorum is present or participating by the means described
in the last sentence of this section 2.2, or acts approved in
writing by all members of the Committee, shall be the acts of the
Committee. The Committee shall keep minutes of its meetings. One
or more members of the Committee may participate in a meeting of
the Committee by means of conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other.
2.3 Authority of the Committee. The Committee shall have no authority
or discretion or power to select the participants who will receive
Options, to set the number of shares to be covered by each Option,
or to set the exercise price or the period within which the Options
may be exercised or to alter any other terms or conditions
specified herein, except in the sense of administering the Amended
Plan subject to the provisions of the Amended Plan. Subject to the
foregoing limitations, the Committee shall have authority and power
to adopt such rules and regulations and to take such action as it
shall consider necessary or advisable for the administration of the
Amended Plan and to construe, interpret and administer the Amended
Plan and the decisions of the Committee shall be final and binding
upon the Company, the Holders (as defined below) and all other
persons. No member of the Committee shall incur any liability by
reason of any action or determination made in good faith with
respect to the Amended Plan or any stock option agreement.
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<PAGE> 3
ARTICLE III
3 OPTIONS
3.1 Participation. Each individual who was a nonemployee director of
the Company on the Original Adoption Date or who becomes such
thereafter shall receive Options to purchase Stock under the Plan
on the terms and conditions described herein.
3.2 Stock Option Agreements. Each Option granted under the Amended
Plan shall be evidenced by a written stock option agreement in
substantially the form attached hereto, which shall be entered into
by the Company and the nonemployee director to whom the Options
are granted (the "Holder"), and which shall include or conform to
the following terms and conditions, and which may include such
other terms and conditions, if any, not inconsistent therewith or
with the terms and conditions of this Amended Plan as the Committee
considers appropriate:
3.2.1 Number of Options and Grant Dates. Each nonemployee
director is entitled to receive, under the Plan, Options to
purchase shares of Stock as described below and subject to
adjustment from and after the Original Adoption Date as
provided in section 4.2 hereof.
3.2.1.1 Each nonemployee director who was such on
October 20, 1987, has received an Option,
granted as of October 20, 1987, to purchase
2,500 shares of Stock (after adjustment for the
one-for-ten reverse stock split effected on May
19, 1989) pursuant to the Plan.
3.2.1.2 Each individual who became a nonemployee
director of the Company after March 29, 1989,
and prior to November 7, 1990, has received an
Option, granted as of his or her election date,
to purchase 2,500 shares of Stock pursuant to
the First Amendment.
3.2.1.3 Between October 20, 1987 and November 7, 1990,
each nonemployee director holding an Option
granted under 3.2.1.1 or 3.2.1.2 above who had,
after such grant, been elected to serve on the
Board at two consecutive annual meetings of
stockholders as a nonemployee director after
receipt of the Option granted under 3.2.1.1 or
3.2.1.2 above, has received an additional
Option, granted as of such election date, to
purchase 2,500 shares of Stock.
3.2.1.4 Options granted under 3.2.1.1, 3.2.1.2 and
3.2.1.3 above will hereinafter be collectively
referred to as "Initial Options". All Initial
Options shall continue to be held pursuant to
the terms and conditions of this Amended Plan.
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<PAGE> 4
3.2.1.5 Each nonemployee director who was such on
November 7, 1990, or who first becomes such
after November 7, 1990, shall receive an Option
(the "New Option"), granted as of the later to
occur of November 7, 1990, or his or her first
election or appointment as a nonemployee
director, to purchase a number of shares of
Stock equal to 25,000 less any shares subject to
the Initial Options granted to such director.
3.2.1.6 Each nonemployee director who was such on July
26, 1995 or is thereafter elected or appointed
shall receive an additional option (the
"Additional Option") granted as of the later to
occur of July 26, 1995 or the third anniversary
of his or her first election or appointment as a
nonemployee director, to purchase 18,000 shares
of Stock.
3.2.1.7 In the event that any grant hereunder would
exceed the number of shares of Stock available
for issuance under the Amended Plan, or is
otherwise subject to stockholder approval, then
each such grant shall be conditioned on and
subject to subsequent stockholder approval to
the extent it exceeds that number of shares
determined by dividing the total number of
shares remaining available for grant under the
Amended Plan on such grant date by the number of
eligible nonemployee directors, or to the
extent that stockholder approval is otherwise
required.
3.2.2 Price. The price at which each share of Stock covered by
an Option may be purchased shall be the greater of 100
percent of the fair market value of such share on the date
of grant of the Option or the par value per share. For
purposes of this determination, "fair market value" means
the closing price of a share of Stock as reported in the
Wall Street Journal for the last business day prior to the
date of the grant. If no such closing price is reported,
then fair market value shall mean the average of the high
and low sale prices (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.
3.2.3 Service Required for Exercise.
3.2.3.1 Each Initial Option shall be exercisable in full
six months after the date of grant, or at any
time after November 7, 1990, whichever shall
occur last.
3.2.3.2 Subject to 3.2.3.5 below, for each nonemployee
director who is such on November 7, 1990, such
director's New Option shall become exercisable
as follows: a number of shares equal to 5,000
less any shares subject to Initial Options
granted to such director, shall become
exercisable six months after the grant date, and
the balance shall become exercisable in
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<PAGE> 5
four equal amounts on the first through fourth
anniversaries of such grant date.
3.2.3.3 Subject to 3.2.3.5 below, for each nonemployee
director who becomes such after November 7,
1990, such director's New Option shall become
exercisable as follows: 5,000 shares shall
become exercisable six months after the grant
date and the balance shall become exercisable in
six equal amounts on the first through the sixth
anniversaries of such grant date (with the first
four years rounded down to the nearest whole
share, and the last two years rounded up).
3.2.3.4 Subject to 3.2.3.5 below, each Additional Option
shall become exercisable as follows: 6,000
shares on each of the first, second, and third
anniversaries of the first date by which all
shares that are subject to New Options held by
such directors have become exercisable.
3.2.3.5 Except as set forth in this Article III, the
Options shall not be exercisable as to any
shares as to which the continuous service
requirement shall not be satisfied, regardless
of the circumstances under which the Holder's
service to the Company shall be terminated. The
number of shares as to which an Option may be
exercised shall be cumulative, so that once an
Option shall become exercisable as to any shares
it shall continue to be exercisable as to such
shares, until expiration or termination of the
Options as provided in the Amended Plan.
3.2.4 Option Period. The period within which each Option may be
exercised shall expire, in all cases, ten years from the
date of grant of the Option (the "Option Period"), unless
terminated sooner pursuant to subsection 3.2.5 below or
fully exercised prior to the end of such period.
3.2.5 Termination of Service. With respect to the exercise of
such Option in the event that the Holder ceases to be a
nonemployee director of the Company for the reasons
described in this 3.2.5:
3.2.5.1 As to all options granted before July 20, 1995,
and as to options granted on or after July 20,
1995, if the option has not been outstanding, as
of the date of the director ceasing to be a
nonemployee director, for at least six years and
such director has not been an outside director
for at least ten years, the vesting of and
expiration of the right to exercise such options
shall occur as follows:
3.2.5.1.1 Disability. If the Holder
terminates his or her service as a
director due to becoming disabled
(within the meaning of section
22(e)(3) of the Code) while in a
directorship of the
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<PAGE> 6
Company or becomes disabled during
the six-month period after his or
her termination, Options vested as
of the date of termination may be
exercised within twelve months
following the disability (if
otherwise within the Option Period)
but will expire at the end of such
period to the extent they are not
exercised; or
3.2.5.1.2 Death. If the Holder shall die
while in a directorship of the
Company or during the six-month
period after his or her termination
of service as a director, all
Options, including, but not limited
to, Options not otherwise vested
may be exercised within twelve
months following such death (if
otherwise within the Option
Period), but not thereafter, by the
Holder's legal representative or
representatives, or by the person
or persons entitled to do so under
the Holder's last will and
testament, or if the Holder shall
fail to make testamentary
disposition of his or her Options
or shall die intestate, by the
person or persons entitled to
receive said Options under the laws
of descent and distribution; or
3.2.5.1.3 Other. If the directorship of a
Holder is terminated for any reason
prior to such director reaching age
70 (other than the circumstances
specified in 3.2.5.1.1 and
3.2.5.1.2 of this 3.2.5.1) within
the Option Period, the Options
vested as of the date of
termination may be exercised within
six months following the date of
such termination (if otherwise
within the Option Period), but not
thereafter, or
3.2.5.1.4 Retirement. If the directorship of
a Holder is terminated for any
reason after such director reaches
age 70 (other than the
circumstances specified in
3.2.5.1.1 and 3.2.5.1.2) within the
Option Period, all Options,
including, but not limited to,
Options not otherwise vested may be
exercised within six months
following the date of such
termination (if otherwise within
the Option Period), but not
thereafter.
3.2.5.2 As to all Options granted on or after July 20,
1995, if the Option has been outstanding, as of
the date of the director's ceasing to be a
nonemployee director, for at least six years or
such director has been an outside director for
at least ten years, the vesting of and
expiration of the right to exercise such options
shall occur as follows:
3.2.5.2.1 Disability. If the Holder
terminates his or her service as a
director due to becoming disabled
(within the meaning of
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<PAGE> 7
section 22(e)(3) of the Code) while
in a directorship of the Company,
Options vested as of the date of
termination may be exercised within
the Option Period but will expire
at the end of such period to the
extent they are not exercised; or
3.2.5.2.2 Death. If the Holder shall die
while in a directorship of the
Company all Options, including, but
not limited to, Options not
otherwise vested may be exercised
within the Option Period but not
thereafter, by the Holder's legal
representative or representatives,
or by the person or persons
entitled to do so under the
Holder's last will and testament,
or if the Holder shall fail to make
testamentary disposition of his or
her Options or shall die intestate,
by the person or persons entitled
to receive said Options under the
laws of descent and distribution;
or
3.2.5.2.3 Other. If the directorship of the
Holder is terminated for any reason
prior to such director reaching age
70 (other than the circumstances
specified in 3.2.5.2.1 and
3.2.5.2.2 of this 3.2.5.2) within
the Option Period, the Options
vested as of the date of
termination may be exercised within
the Option Period, but not
thereafter; or
3.2.5.2.4 Retirement. If the directorship of
the Holder is terminated for any
reason after such director reaches
age 70 (other than the
circumstances specified in
3.2.5.2.1 and 3.2.5.2.2) within the
Option Period, all Options,
including, but not limited to,
Options not otherwise vested may be
exercised within the Option Period,
but not thereafter.
3.2.6 Transferability. Each Option granted under the Plan or the
Amended Plan shall not be transferable by the Holder except
(i) by will or pursuant to the laws of descent and
distribution, or (ii) pursuant to a qualified domestic
relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules
thereunder, or (iii) as may otherwise be permitted by
applicable law, including the version of Rule 16b-3 that is
applicable to this Amended Plan at the time of the
transfer. Each Option shall be exercisable during the
Holder's lifetime only by the Holder or by his or her
permitted transferee(s) pursuant to clause (ii) or (iii)
hereof.
3.2.7 Exercise of Option. The method for exercising each Option
granted pursuant to the Plan or the Amended Plan shall be
by delivery to the Company of written notice specifying the
number of shares with respect to which the Options are
being exercised. If requested by the Company, such notice
shall contain the Holder's
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<PAGE> 8
representation that he or she is purchasing the Stock for
investment purposes only and his or her agreement not to
sell any Stock so purchased in any manner that is in
violation of the Securities Act of 1933, as amended, or
applicable state law. Such restrictions, or notice
thereof, shall be placed on the certificates representing
the Stock so purchased. The purchase of such Stock shall
take place at the principal offices of the Company within
twenty days following delivery of such notice, at which
time the purchase price of the Stock shall be paid in full
in cash, by check payable to the Company's order, by
delivery to the Company of certificates representing the
number of shares of Stock then owned by the exercising
Holder, the fair market value of which, on the date of
exercise, equals the purchase price of the Stock purchased
pursuant to exercise of the Options, properly endorsed for
transfer to the Company, or by a combination of such
methods of payment. A properly executed certificate or
certificates representing the Stock shall be delivered to
the Holder upon payment therefor.
ARTICLE IV
4 AUTHORIZED STOCK
4.1 The Stock. The total number of shares of Stock as to which Options
may be granted pursuant to the Amended Plan shall not exceed
530,000 in the aggregate, except as such number of shares shall be
adjusted from and after July 26, 1995 in accordance with the
provisions of 4.2 hereof. If any outstanding Option granted under
the Plan or the Amended Plan shall expire or be terminated for any
reason before the end of the Option Period, the shares of Stock
allocable to the unexercised portion of such Option shall be
available for grants pursuant to 3.2.1.5 and 3.2.1.6 above.
Fractional shares shall not be distributed and shall remain
unallocated. The Company shall at all times during the life of any
outstanding Options retain as authorized and unissued shares or
treasury shares at least the number of shares from time to time
included in the outstanding Options, or otherwise assure itself of
its ability to perform its obligations under the Amended Plan.
4.2 Adjustment by Stock Split, Stock Dividend, Etc. In the event that
the outstanding shares of Stock of the Company are changed into or
exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization,
reclassification, stock split, reverse stock split, stock dividend,
combination or subdivision, appropriate adjustment shall be made in
the number and kind of shares available for grant under the Amended
Plan and reserved for issuance under any Options granted under the
Plan or the Amended Plan. Such adjustment to outstanding Options
shall be made without change in the total price applicable to the
unexercised portion of such Options, and a corresponding adjustment
in the applicable exercise price per share shall be made.
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<PAGE> 9
4.3 Rights as a Stockholder. The holder of an Option shall have no
rights as a stockholder with respect to any shares covered by an
Option until the date of issue of a stock certificate to him or her
for such shares. Except as otherwise expressly provided in the
Amended Plan, no adjustment shall be made for dividends or other
rights for which the record date is prior to the date such stock
certificate is issued.
4.4 General Adjustment Rules. No adjustment or substitution provided
for in this Article IV shall require the Company to sell a
fractional share under any stock option agreement and the total
substitution or adjustment with respect to each stock option
agreement shall be limited by deleting any fractional share. In
the case of any such substitution or adjustment, the exercise price
per share in each such stock option agreement shall be equitably
adjusted by the Committee to reflect the greater or lesser number
of shares of Stock or other securities into which the Stock subject
to an Option may have been changed. Adjustments under this Article
IV shall be made by the Committee, whose determination with regard
thereto shall be final and binding.
ARTICLE V
5 REORGANIZATION OR LIQUIDATION
In case the Company is merged or consolidated with another entity and the
stockholders of the Company as of immediately prior to such merger or
consolidation own 50% or less of the voting power of the surviving entity,
or in case all or substantially all of the assets or more than 50% of the
outstanding voting stock of the Company is acquired by any other person or
entity, or in case of a reorganization (other than a reorganization under
federal bankruptcy statutes) or liquidation of the Company that is
approved by the stockholders of the Company (i) any outstanding Options
shall be assumed or substituted on an equitable basis by the merged,
consolidated or otherwise reorganized corporation, person or entity,
provided that no additional benefits shall be conferred upon the Holders
as a result of such assumption or substitution, and the excess of the
aggregate fair market value of the shares subject to the Options
immediately after such assumption or substitution over the purchase price
thereof is not more than the excess of the aggregate fair market value of
the shares subject to the Options immediately before such assumption or
substitution over the purchase price thereof, and (ii) the exercisability
of all outstanding Options shall automatically be accelerated such that
the Options shall become exercisable in full regardless of whether all
conditions of exercise relating to vesting period or length of service of
a director have been satisfied. In the event that the triggering event is
an event that requires approval of the stockholders of the Company prior
to its consummation, then the acceleration of exercisability shall be
effective upon stockholder approval of such triggering event. If the
triggering event does not require stockholder approval (such as the
acquisition by a third party of more than 50% of the outstanding stock of
the Company), then the acceleration of exercisability shall be effective
upon the occurrence of such event.
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<PAGE> 10
ARTICLE VI
6 GENERAL PROVISIONS
6.1 Expiration. The Amended Plan shall terminate whenever the Board
adopts a resolution to that effect. If not sooner terminated under
the preceding sentence, the Amended Plan shall wholly cease and
expire on March 29, 2010. After termination, no Option shall be
granted under this Amended Plan, but the Company shall continue to
recognize Options previously granted.
6.2 Amendments. The Board may from time to time amend, modify, suspend
or terminate the Amended Plan; provided, however, that the
provisions of the Amended Plan that determine which directors may
be granted Options, the timing of the Option grants and the number
of shares of Stock subject to Options granted hereunder may not be
amended more frequently than is permitted for formula plans by Rule
16b-3. Nevertheless, no such amendment, modification, suspension
or termination shall (a) impair any Option earlier granted under
the Plan or the Amended Plan or deprive any Holder of any shares of
Stock that he or she may have acquired through or as a result of
the Plan or the Amended Plan or (b) be made without the approval of
the stockholders of the Company if such approval is required to
retain the exemption provided by Rule 16b-3 with respect to Options
granted under the Plan or the Amended Plan.
6.3 Treatment of Proceeds. Proceeds from the sale of Stock pursuant to
Options granted under the Plan or the Amended Plan shall constitute
general funds of the Company.
6.4 Effectiveness. The effective date of the Plan was October 20,
1987. The "Effective Date" of this Amended Plan shall be July 26,
1995.
6.5 Paragraph Headings. The paragraph headings are included herein
only for convenience, and they shall have no effect on the
interpretation of the Plan.
ADOPTED by the authority of the Board on March 6, 1996, effective as of
the Effective Date of the Amended Plan.
STORAGE TECHNOLOGY CORPORATION
10
<PAGE> 1
EXHIBIT 10.3
June 24, 1996
David E. Weiss
6900 Pawnee Way
Longmont, CO 80503
Dear David:
This letter (the "Agreement") sets forth the terms and conditions of your
employment with Storage Technology Corporation (the "Company"). It is
intended to replace all prior agreements, including but not limited to the
letter agreements of February 17, 1995, December 6, 1995 and May 22, 1996.
In consideration of your employment by the Company on the terms and
conditions set forth below, and the mutual covenants and agreements
contained herein, you and the Company agree as follows:
1. Position: You will be employed full-time by the Company as
Chairman of the Board of Directors, President and Chief Executive Officer.
You will report to the Board of Directors of the Company and perform such
duties as may be assigned you from time to time. During the Employment Term
(as herein defined), you shall devote your entire working time, attention
and energies to the business of the Company. Except for personal
investments, which shall not conflict with the business of the Company, you
shall not engage in any other business activity or activities that require
personal services by you that may conflict with the proper performance of
your duties hereunder.
2. Employment. The term of your employment pursuant to this
agreement (the "Employment Term") is effective as of May 22, 1996 and shall
thereafter continue through May 21, 1999 at the salary and terms contained
herein unless otherwise modified by the Board of Directors.
3. Base Compensation. For your services during the Employment Term,
the Company will pay you an annual base salary, effective May 22, 1996, of
$550,000.00 per year. Such salary shall be payable in installments in
accordance with the regular payroll policies of
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StorageTek Top Security
<PAGE> 2
David E. Weiss
June 24, 1996
Page 2
the Company in effect from time to time during the Employment Term. The amount
of your base salary may be adjusted either upward or downward by the Company
from time to time during the Employment Term.
4. Stock Options: In addition to stock options earlier granted to
you, you have received a grant for an additional 250,000 shares, 40% of
which vest over the next three years in equal installments on the
anniversary of the grant date and 60% of which vest eight years from the
date of grant, unless vesting is accelerated to the first, second or third
year anniversaries of the grant date, in one-third increments, based on
performance against goals to be established by the Board. You continue to
be eligible for future grants in accordance with the policies of the Company
in effect from time to time.
5. Bonuses.
(a) MBO Bonus Program. The Company currently maintains a
Management By Objective Bonus Program (the "MBO Program"). During the
Employment Term, you shall be eligible for such bonuses as may be
established from time to time in accordance with the MBO Program by the
Company's Board of Directors (the "Board"). For 1996, the Board has
established for you an On Plan Bonus potential percentage of 70%. Such
percentage may be adjusted either upward or downward for subsequent years
during the Employment Term. Any payments under the MBO Program shall be
made in accordance with the provisions of, and under the conditions
contained in, the MBO Program and the terms of any bonus award authorized
for you by the Board.
6. Termination of Employment.
(a) Termination Without Cause. If, during the Employment Term,
the Company elects to terminate your employment without "Cause" (as that
term is defined in paragraph 6(d)), except for terminations covered by the
provisions of 6(b), or if you should die without Cause existing at such
time, you shall be entitled to receive, as a severance payment, a payment
equal to the greater of (i) your base salary through the end of the
Employment Term, or (ii) one year's base salary plus 100% of your On Plan
Bonus potential percentage under the MBO Program, for the year of
termination (whether or not such bonus would be otherwise payable). Such
amount shall be paid to you in a cash lump sum within thirty days after your
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StorageTek Top Security
<PAGE> 3
David E. Weiss
June 24, 1996
Page 3
termination of employment pursuant to this paragraph 6(a). In addition, you
shall be entitled to exercise any vested stock options then held to acquire
shares of Common Stock in accordance with the Option Agreement.
(b) Termination in the Event of Sale, Merger or Change of
Control. If, during the Employment Term, the Company is sold, or merged
with or into another company (in a transaction in which the Company is not
the surviving entity), or in which the stockholders of the Company
immediately prior to the merger own 50% or less of the Company after the
merger, or all or substantially all of the assets of the Company are sold,
or more than 25% of the outstanding voting capital stock of the Company is
acquired by another person or persons (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934) acting as a
group, (any of which events is referred to hereinafter as a "Change in
Control"), and your employment is terminated either by you for any reason or
by the Company without Cause and such termination occurs within 24 months
after the date of any such Change in Control, then, upon such termination,
and subject to the provisions of section 6(c) below, (i) the Company will
pay you an amount equal to the greater of the amount due pursuant to
paragraph 6(a), above, or two times your annual base salary then in effect,
plus two times 100% of your On Plan Bonus under the MBO Program based on
your annual salary and On Plan Bonus potential percentage in effect
immediately prior to the Change in Control (which shall be calculated as if
the Company meets its plan for such year and which shall be payable whether
or not the Company does in fact meet its plan), (ii) all outstanding stock
options shall fully vest and become exercisable in full, and (iii) the
Company's right to repurchase shall terminate with respect to any stock
earlier purchased by you under the Company's 1987 Equity Participation Plan,
and all such stock shall become fully vested. In addition, after such
termination of employment, you shall be entitled to exercise all stock
options in accordance with the terms of the Option Agreements. To the
extent you would be entitled to payments or your rights to restricted stock
or stock options would vest not only pursuant to the terms of this section
6(b), but also pursuant to the provisions of other section(s) of this
agreement, or other agreements with the Company, then such payments shall be
deemed made and such vesting shall be deemed
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<PAGE> 4
David E. Weiss
June 24, 1996
Page 4
to occur pursuant to the terms of such other section(s) or other agreements,
and not under the terms of this section 6(b).
(c) Limitation on Payments. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to you
(i) would constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but
for this section (c), would be subject to the excise tax imposed by Section
4999 of the Code, then such severance benefits shall be either (i) delivered
in full, or (ii) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account
the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by you on an after-tax
basis, of the greatest amount of severance benefits, notwithstanding that
all or some portion of such severance benefits may be taxable under Section
4999 of the Code. Unless you and the Company agree otherwise in writing,
any determination required under this section 6(c) shall be made in writing
by the Company's independent public accountants (the "Accountants")
immediately prior to Change of Control or, if the termination is pursuant to
section 6(a), immediately after such termination. Such determination shall
be conclusive and binding upon you and the Company for all purposes. For
purposes of making the calculations required by this section 6(c), the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. You and
the Company shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination
under this section. The Company shall bear all costs the Accountants may
reasonably incur in connection with any calculations contemplated by this
section 6(c).
(d) Termination for Cause. If the Company, during the Employment
Term, elects to terminate your employment for Cause, your employment will
terminate on the date fixed for termination by the Company (provided,
however, that if the Company so elects during the 24-month period following
a Change in Control, you shall be given prior notice and shall
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StorageTek Top Security
<PAGE> 5
David E. Weiss
June 24, 1996
Page 5
be permitted to voluntarily terminate your employment pursuant to section 6(b)
hereof, in which case this section 6(d) shall be inapplicable). Following a
Termination for Cause under this section, the Company will not be obligated to
pay you any additional compensation, whether in the way of base compensation,
bonus or otherwise, other than the compensation due and owing through the date
of termination. "Cause," for purposes of this Agreement, shall mean any of the
following: (i) willful breach by you of any provision of this Agreement or any
other written agreement between you and the Company; (ii) gross negligence or
dishonesty in the performance of your duties hereunder; (iii) engaging in
conduct or activities or holding any position that materially conflicts with
the interest of, or materially interferes with your duties owed to, the
Company; (iv) engaging in conduct that is materially detrimental to the
business of the Company; or (v) any intentional violation of Company policies
applicable to employees of your position with the Company.
7. Benefit Programs. You shall also be entitled to such benefits and
benefit programs that apply to you and your position as the Company and the
Board may adopt from time to time, in accordance with the provisions of such
programs then in effect. Certain presently existing benefit programs (which
may or may not remain in effect) are outlined below:
a. Life Insurance: Your life insurance coverage will be three
times your base salary.
b. Medical Coverage: You will have executive medical coverage.
This insurance covers 100% of your family's medical expenses up to $5,000
over our group insurance coverage annually.
8. Compensation Deferral: You will be able to defer your
compensation in accordance with the terms of our Executive Deferred
Compensation Plan.
9. Automobile: You will receive Auto allowance reimbursement on
leased automobile payments and reimbursement for regular maintenance and
automobile insurance on your leased automobile, to the limit approved by the
Board of Directors.
10. Miscellaneous Executive Perquisites: During your Employment Term,
you shall be eligible for the following:
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<PAGE> 6
David E. Weiss
June 24, 1996
Page 6
- First class air travel as long as StorageTek is profitable.
- Membership in an airline VIP club.
- Financial and tax counseling in an amount per yearequal to
1% of annual base salary.
- Company-paid physical examination.
11. Miscellaneous Provisions.
(a) Withholding. All payments to you pursuant to this Agreement
shall be subject to withholding of all amounts required to be withheld by
applicable Internal Revenue Service and State tax authorities by the Company
and shall be conditioned upon your submission of all information or
execution of all instruments necessary to enable the Company to comply with
such withholding requirements.
(b) Confidentiality Agreement. As a condition of your
employment, you have executed the Company's standard form of confidential
inventions and trade secrets agreement. You reaffirm that during the
Employment Term you will comply with all provisions of said agreement and
agree that you will enter into such modifications or amendments thereof as
the Company may reasonably request from time to time.
(c) Notice. Any notice required to be given in accordance with
the provisions of this Agreement shall be given in writing, either by
personal delivery or by causing such written notice to be mailed, first
class postage prepaid, in the United States mail to you at the address set
forth above or to the Company at its principal business address, or at such
other address for a party as shall be specified by like notice, provided
that notices of change of address shall be effective only upon receipt
thereof.
(d) Governing Law. This Agreement is entered into in accordance
with, and shall be interpreted pursuant to the provisions of, the internal
laws of the State of Colorado (without regard to conflict of law
principles).
(e) Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability
shall not affect or impair the validity or
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<PAGE> 7
David E. Weiss
June 24, 1996
Page 7
enforceability of the remaining provisions of this Agreement, which shall
remain in full force and effect in accordance with their terms.
(f) Entire Agreement. This Agreement embodies the entire
agreement between the parties relating to the subject matter hereof, and
supersede all previous agreements or understandings, whether oral or
written.
(g) Amendment of Agreement. This Agreement may not be modified
or amended, and no provision of this Agreement may be waived, except by a
writing signed by the parties hereto.
If this letter accurately sets forth the terms of our agreement relating to
your employment, please sign the enclosed copy of this letter in the space
provided below and return it to the Company.
Very truly yours,
/s/ STEPHEN J. KEANE
Stephen J. Keane
Chairman, Human Resources and
Compensation Committee
Board of Directors
/s/ DAVID E. WEISS
--------------------------
Name
6 Aug 96
--------------------------
Date
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StorageTek Top Security
<PAGE> 1
EXHIBIT 10.4
June 24, 1996
David E. Lacey
1860 East Cedar Avenue
Denver, CO 80209
Dear David:
This letter (the "Agreement") sets forth the terms and conditions of your
employment with Storage Technology Corporation (the "Company"). It is
intended to replace all prior agreements, including but not limited to the
letter agreements of February 17, 1995 and May 22, 1996. In consideration
of your employment by the Company on the terms and conditions set forth
below, and the mutual covenants and agreements contained herein, you and the
Company agree as follows:
1. Position: You will be employed full-time by the Company as
Executive Vice President and Chief Financial Officer. You will report to
the Chief Executive Officer of the Company, or such other officer as he or
she may designate from time to time, and perform such duties as may be
assigned you from time to time. During the Employment Term (as herein
defined), you shall devote your entire working time, attention and energies
to the business of the Company. Except for personal investments, which
shall not conflict with the business of the Company, you shall not engage in
any other business activity or activities that require personal services by
you that may conflict with the proper performance of your duties hereunder.
2. Employment. The term of your employment pursuant to this
agreement (the "Employment Term") is effective as of May 22, 1996 and shall
thereafter continue on an "at will" basis at the salary and terms contained
herein unless otherwise modified by the chief executive officer ("CEO") or
his or her designee.
3. Base Compensation. For your services during the Employment Term,
the Company will pay you an annual base salary, effective May 22, 1996, of
$255,000.00 per year.
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<PAGE> 2
David E. Lacey
June 24, 1996
Page 2
Such salary shall be payable in installments in accordance with the regular
payroll policies of the Company in effect from time to time during the
Employment Term. The amount of your base salary may be adjusted either upward
or downward by the Company from time to time during the Employment Term.
4. Stock Options: In addition to stock options earlier granted to
you, you have received a grant for an additional 35,000 shares, 40% of which
vest over the next three years in equal installments on the anniversary of
the grant date and 60% of which vest eight years from the date of grant,
unless vesting is accelerated to the first, second or third year
anniversaries of the grant date, in one-third increments, based on
performance against goals to be established by the Board. You continue to
be eligible for future grants in accordance with the policies of the Company
in effect from time to time.
5. Bonuses.
(a) MBO Bonus Program. The Company currently maintains a
Management By Objective Bonus Program (the "MBO Program"). During the
Employment Term, you shall be eligible for such bonuses as may be
established from time to time in accordance with the MBO Program by the
Company's Board of Directors (the "Board"). For 1996, the Board has
established for you an On Plan Bonus potential percentage of 50%. Such
percentage may be adjusted either upward or downward for subsequent years
during the Employment Term. Any payments under the MBO Program shall be
made in accordance with the provisions of, and under the conditions
contained in, the MBO Program and the terms of any bonus award authorized
for you by the Board.
6. Termination of Employment.
(a) Termination Without Cause. If, during the Employment Term,
the Company elects to terminate your employment without "Cause" (as that
term is defined in paragraph 6(d)), except for terminations covered by the
provisions of paragraph 6(b), or if you should die without Cause existing at
such time, you shall be entitled to receive, as a severance payment, a
payment equal to the sum of (i) your then current rate of annual base salary
and (ii) 100% of your On Plan Bonus potential percentage under the MBO
Program for the year of termination (whether or not such bonus would be
otherwise payable). Such amount shall be
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StorageTek Top Security
<PAGE> 3
David E. Lacey
June 24, 1996
Page 3
paid to you in a cash lump sum within thirty days after your termination of
employment pursuant to this paragraph 6(a). In addition, you shall be entitled
to exercise any vested stock options then held to acquire shares of Common
Stock in accordance with the Option Agreement.
(b) Termination in the Event of Sale, Merger or Change of
Control. If, during the Employment Term, the Company is sold, or merged
with or into another company (in a transaction in which the Company is not
the surviving entity), or in which the stockholders of the Company
immediately prior to the merger own 50% or less of the Company after the
merger, or all or substantially all of the assets of the Company are sold,
or more than 25% of the outstanding voting capital stock of the Company is
acquired by another person or persons (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934) acting as a
group, (any of which events is referred to hereinafter as a "Change in
Control"), and your employment is terminated either by you for any reason or
by the Company without Cause and such termination occurs within 24 months
after the date of any such Change in Control, then, upon such termination,
and subject to the provisions of paragraphc 6(c) below, (i) the Company will
pay you an amount equal to two times your annual base salary then in effect,
plus two times 100% of your On Plan Bonus under the MBO Program based on
your annual salary and On Plan Bonus potential percentage in effect
immediately prior to the Change in Control (which shall be calculated as if
the Company meets its plan for such year and which shall be payable whether
or not the Company does in fact meet its plan), (ii) all outstanding stock
options shall fully vest and become exercisable in full, and (iii) the
Company's right to repurchase shall terminate with respect to any stock
earlier purchased by you under the Company's 1987 Equity Participation Plan,
and all such stock shall become fully vested. In addition, after such
termination of employment, you shall be entitled to exercise all stock
options in accordance with the terms of the Option Agreements. To the
extent you would be entitled to payments or your rights to restricted stock
or stock options would vest not only pursuant to the terms of this
section 6(b), but also pursuant to the provisions of other section(s) of
this agreement, or other agreements with the Company, then such payments
shall be deemed
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StorageTek Top Security
<PAGE> 4
David E. Lacey
June 24, 1996
Page 4
made and such vesting shall be deemed to occur pursuant to the terms of such
other section(s) or other agreements, and not under the terms of this section
6(b).
(c) Limitation on Payments. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to you
(i) would constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but
for this section (c), would be subject to the excise tax imposed by Section
4999 of the Code, then such severance benefits shall be either (i) delivered
in full, or (ii) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account
the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by you on an after-tax
basis, of the greatest amount of severance benefits, notwithstanding that
all or some portion of such severance benefits may be taxable under Section
4999 of the Code. Unless you and the Company agree otherwise in writing,
any determination required under this section 6(c) shall be made in writing
by the Company's independent public accountants immediately prior to Change
of Control (the "Accountants"), whose determination shall be conclusive and
binding upon you and the Company for all purposes. For purposes of making
the calculations required by this section 6(c), the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and
may rely on reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. You and the Company
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under
this section. The Company shall bear all costs the Accountants may
reasonably incur in connection with any calculations contemplated by this
section 6(c).
(d) Termination for Cause. If the Company, during the Employment
Term, elects to terminate your employment for Cause, your employment will
terminate on the date fixed for termination by the Company (provided,
however, that if the Company so elects during the 24-month period following
a Change in Control, you shall be given prior notice and shall be permitted
to voluntarily terminate your employment pursuant to section 6(b) hereof, in
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<PAGE> 5
David E. Lacey
June 24, 1996
Page 5
which case this section 6(d) shall be inapplicable). Following a
Termination for Cause under this section, the Company will not be obligated
to pay you any additional compensation, whether in the way of base
compensation, bonus or otherwise, other than the compensation due and owing
through the date of termination. "Cause," for purposes of this Agreement,
shall mean any of the following: (i) willful breach by you of any provision
of this Agreement or any other written agreement between you and the
Company; (ii) gross negligence or dishonesty in the performance of your
duties hereunder; (iii) engaging in conduct or activities or holding any
position that materially conflicts with the interest of, or materially
interferes with your duties owed to, the Company; (iv) engaging in conduct
that is materially detrimental to the business of the Company; or (v) any
intentional violation of Company policies applicable to employees of your
position with the Company.
7. Benefit Programs. You shall also be entitled to such benefits and
benefit programs that apply to you and your position as the Company and the
Board may adopt from time to time, in accordance with the provisions of such
programs then in effect. Certain presently existing benefit programs (which
may or may not remain in effect) are outlined below:
a. Life Insurance: Your life insurance coverage will be three
times your base salary.
b. Medical Coverage: You will have executive medical coverage.
This insurance covers 100% of your family's medical expenses up to $5,000
over our group insurance coverage annually.
8. Compensation Deferral: You will be able to defer your
compensation in accordance with the terms of our Executive Deferred
Compensation Plan.
9. Automobile: You will receive up to $700.00 Auto allowance per
month reimbursement on leased automobile payments and reimbursement for
regular maintenance and automobile insurance on your leased automobile.
Contact Marti Jordan (x33977) for more information on this program.
10. Miscellaneous Executive Perquisites: During your Employment Term,
you shall be eligible for the following:
- First class air travel as long as StorageTek is profitable.
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<PAGE> 6
David E. Lacey
June 24, 1996
Page 6
- Membership in an airline VIP club.
- Financial and tax counseling in an amount per year equal to 1%
of annual base salary.
- Company-paid physical examination.
10. Miscellaneous Provisions.
(a) Withholding. All payments to you pursuant to this Agreement
shall be subject to withholding of all amounts required to be withheld by
applicable Internal Revenue Service and State tax authorities by the Company
and shall be conditioned upon your submission of all information or
execution of all instruments necessary to enable the Company to comply with
such withholding requirements.
(b) Confidentiality Agreement. As a condition of your
employment, you have executed the Company's standard form of confidential
inventions and trade secrets agreement. You reaffirm that during the
Employment Term you will comply with all provisions of said agreement and
agree that you will enter into such modifications or amendments thereof as
the Company may reasonably request from time to time.
(c) Notice. Any notice required to be given in accordance with
the provisions of this Agreement shall be given in writing, either by
personal delivery or by causing such written notice to be mailed, first
class postage prepaid, in the United States mail to you at the address set
forth above or to the Company at its principal business address, or at such
other address for a party as shall be specified by like notice, provided
that notices of change of address shall be effective only upon receipt
thereof.
(d) Governing Law. This Agreement is entered into in accordance
with, and shall be interpreted pursuant to the provisions of, the internal
laws of the State of Colorado (without regard to conflict of law
principles).
(e) Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability
shall not affect or impair the validity or enforceability of the remaining
provisions of this Agreement, which shall remain in full force and effect in
accordance with their terms.
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<PAGE> 7
David E. Lacey
June 24, 1996
Page 7
(f) Entire Agreement. This Agreement, together with the other
agreements referenced herein, embody the entire agreement between the
parties relating to the subject matter hereof, and supersede all previous
agreements or understandings, whether oral or written.
(g) Amendment of Agreement. This Agreement may not be modified
or amended, and no provision of this Agreement may be waived, except by a
writing signed by the parties hereto.
If this letter accurately sets forth the terms of our agreement relating to
your employment, please sign the enclosed copy of this letter in the space
provided below and return it to the Company.
Very truly yours,
/s/ DAVID E. WEISS
David E. Weiss
Chairman, President and
Chief Executive Officer
/s/ DAVID E. LACEY
--------------------------
Name
7/08/96
--------------------------
Date
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StorageTek Top Security
<PAGE> 1
EXHIBIT 10.5
CONFIDENTIAL TREATMENT
THE FOLLOWING IS A REDACTED VERSION OF THE
OEM AGREEMENT DATED AS OF JUNE 7, 1996
BY AND BETWEEN STORAGE TECHNOLOGY CORPORATION
AND INTERNATIONAL BUSINESS MACHINES CORPORATION
THIS MATERIAL IS BEING SUBMITTED IN CONNECTION
WITH A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24b-2 UNDER
THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE> 2
OEM AGREEMENT
BETWEEN
INTERNATIONAL BUSINESS MACHINES
CORPORATION
AND
STORAGE TECHNOLOGY CORPORATION
JUNE 7, 1996
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. SCOPE OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. COMPONENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5. AGREEMENT ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . 9
6. PURCHASE COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . 10
6.1 1996-1998 ** Volumes . . . . . . . . . . . . . . . . . . . 10
6.2 1999 ** Volumes/Pricing . . . . . . . . . . . . . . . . 10
6.3 Qualified Upgrades . . . . . . . . . . . . . . . . . . . . . 12
6.4 Credits . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Liquidated Damages/ ** Payments . . . . . . . . . . . . . 12
6.6 Other StorageTek Distribution . . . . . . . . . . . . . . . 14
6.7 Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.8 Additional StorageTek Sales . . . . . . . . . . . . . . . . 16
7. PRICING & PAYMENT TERMS . . . . . . . . . . . . . . . . . . . . . . 17
7.5 ** Price . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.6 ** Payments . . . . . . . . . . . . . . . . . . . . . . . . 17
7.7 FRU Prices . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.8 Lowest Cost Sourcing . . . . . . . . . . . . . . . . . . . . 19
7.9 Taxes/Duties . . . . . . . . . . . . . . . . . . . . . . . . 19
7.10 Payment Terms . . . . . . . . . . . . . . . . . . . . . . . 19
7.11 Snapshot Feature . . . . . . . . . . . . . . . . . . . . . . 20
8. IBM SALES TO STORAGETEK . . . . . . . . . . . . . . . . . . . . . . 20
9. QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.1 Manufacturing Testing . . . . . . . . . . . . . . . . . . . 21
9.2 Engineering Changes . . . . . . . . . . . . . . . . . . . . 21
9.3 Quality Levels . . . . . . . . . . . . . . . . . . . . . . . 24
9.4 Quality Assurance . . . . . . . . . . . . . . . . . . . . . 28
9.5 ISO 9000 Certification and Use of Subcontractors . . . . . . 28
</TABLE>
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment
i
<PAGE> 4
<TABLE>
<S> <C> <C>
10. PRODUCT LEAD TIMES AND FORECAST . . . . . . . . . . . . . . . . . . . 29
10.4 Current Quarter . . . . . . . . . . . . . . . . . . . . . . 31
10.5 StorageTek's Capacity/Allocation . . . . . . . . . . . . . . 31
11. PURCHASE ORDERS, ALTERATIONS & RESCHEDULING . . . . . . . . . . . . 32
12. CONSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
13. DELIVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
13.1 On-time Delivery . . . . . . . . . . . . . . . . . . . . . . 36
13.2 Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . 37
13.3 Title/Risk of Loss . . . . . . . . . . . . . . . . . . . . 38
13.4 Packaging . . . . . . . . . . . . . . . . . . . . . . . . . 38
14. EQUIPMENT WARRANTY . . . . . . . . . . . . . . . . . . . . . . . . . 38
14.10 Licensed Programs, Microcode and Maintenance Code Warranty 40
15. FRUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.4 FRU Rework Procedures and Prices . . . . . . . . . . . . . . 42
16. FIELD SERVICE & SUPPORT . . . . . . . . . . . . . . . . . . . . . . 42
16.1 Installation Support . . . . . . . . . . . . . . . . . . . . 42
16.2 Training . . . . . . . . . . . . . . . . . . . . . . . . . . 43
16.3 Service of Equipment . . . . . . . . . . . . . . . . . . . . 44
16.4 Emergency and Expert Maintenance Coverage . . . . . . . . . 44
16.5 Labor Rate Table . . . . . . . . . . . . . . . . . . . . . . 44
16.6 New Product Development Center Support . . . . . . . . . . . 44
16.7 Maintenance and Installation Tools . . . . . . . . . . . . . 45
16.8 Maintenance and Technical Support . . . . . . . . . . . . . 45
16.9 ** Access . . . . . . . . . . . . . . . . . . . . . . . . . 47
17. MARKETING RIGHTS & SUPPORT . . . . . . . . . . . . . . . . . . . . . 47
17.2 Marketing Support Organization . . . . . . . . . . . . . . . 47
17.3 Training . . . . . . . . . . . . . . . . . . . . . . . . . 47
17.4 Additional Initial Training . . . . . . . . . . . . . . . . 47
17.5 Ongoing Training . . . . . . . . . . . . . . . . . . . . . . 47
17.6 Marketing Materials . . . . . . . . . . . . . . . . . . . . 48
17.7 Marketing Tools . . . . . . . . . . . . . . . . . . . . . . 48
17.8 Systems Engineering Support . . . . . . . . . . . . . . . . 49
</TABLE>
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment
ii
<PAGE> 5
<TABLE>
<S> <C> <C>
18. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . 49
19. TRADEMARK & ADVERTISING . . . . . . . . . . . . . . . . . . . . . . 50
19.1 Trademark and Design Rights . . . . . . . . . . . . . . . . 50
19.2 Advertising/Disclosure . . . . . . . . . . . . . . . . . . . 50
20. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . 51
21. ASSIGNMENT & CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . 51
22. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . 51
22.1 Escalation Process . . . . . . . . . . . . . . . . . . . . . 51
22.2 Mediation Process . . . . . . . . . . . . . . . . . . . . . 52
23. TERMINATION/REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . 53
23.1 Termination by Mutual Consent . . . . . . . . . . . . . . . 53
23.2 Termination by Bankruptcy . . . . . . . . . . . . . . . . . 53
23.3 Termination for Cause . . . . . . . . . . . . . . . . . . . 53
23.4 Material Breach . . . . . . . . . . . . . . . . . . . . . . 55
23.5 License . . . . . . . . . . . . . . . . . . . . . . . . . 55
23.6 Manufacturing Make or Have Made Rights . . . . . . . . . . . 55
23.7 Termination for Convenience . . . . . . . . . . . . . . . . 56
23.8 Termination for Burdensome Condition . . . . . . . . . . . . 56
23.9 Wind Down . . . . . . . . . . . . . . . . . . . . . . . . . 57
23.10 ** After Termination . . . . . . . . . . . . . . . . . . . 58
24. INDEMNIFICATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . 58
24.1 Intellectual Property Indemnity . . . . . . . . . . . . . . 58
24.2 General Indemnity . . . . . . . . . . . . . . . . . . . . . 58
24.3 Obligations of IBM . . . . . . . . . . . . . . . . . . . . . 59
25. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
25.1 New York Law . . . . . . . . . . . . . . . . . . . . . . . . 59
25.2 Limitation of Actions . . . . . . . . . . . . . . . . . . . 60
25.3 Limitation of Liability . . . . . . . . . . . . . . . . . . 60
</TABLE>
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment
iii
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
26. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
26.1 Compliance with Laws . . . . . . . . . . . . . . . . . . . . 60
26.2 Relationship of the Parties . . . . . . . . . . . . . . . . 60
26.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 61
26.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 62
26.5 Headings and Attachments . . . . . . . . . . . . . . . . . . 62
26.6 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 62
26.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
26.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . 62
26.9 Weekends and Holidays . . . . . . . . . . . . . . . . . . . 62
26.10 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . 63
26.11 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . 63
26.12 Order of Precedence . . . . . . . . . . . . . . . . . . . . 63
</TABLE>
iv
<PAGE> 7
EXHIBITS, ATTACHMENTS, APPENDICES
<TABLE>
<S> <C> <C> <C> <C> <C>
Exhibit 1 - Prices
Attachment 1 - Product Prices
Attachment 2 - Volume Recovery Tables
Appendix A - 1996 ** Payment Table
Appendix B - 1997 ** Payment Table
Appendix C - 1998 ** Payment Table
Appendix D - 1999 ** Payment Table
Attachment 3 - Upgrade Pricing
Exhibit 2 - Specifications
Attachment 1 - Manufacturing Test Specifications
Attachment 2 - Product Specifications
Exhibit 3 - IBM Developer Agreement Between IBM and StorageTek: Base Agreement
Attachment 1 - Statement of Work
Appendix A - Functional, Technical and Quality Specifications
Schedule 1 - Iceberg Items
Schedule 2 - Kodiak Items
Schedule 3 - IXFP and IXOF Items
Schedule 4 - Iceberg Performance Commitments for 7/96
Schedule 5 - Iceberg Performance Commitments for 6/97
Schedule 6 - Kodiak Performance Commitments for 10/96
Schedule 7 - Kodiak Performance Commitments for 10/1/97
Schedule 8 - Capacity Ratio Specification
Appendix B - Completion and Acceptance Criteria
Schedule 1 - Monterey System Test
Schedule 2 - Current Volume Assumptions
Appendix C - [Intentionally Left Blank]
Appendix D - Certificate of Originality
Appendix E - IBM Source Code Custody Agreement
Appendix F - Performance Assessment Workload (PAWS)
Appendix G - Product Development Plan
Attachment 2 - Description of Licensed Works
Appendix A - IBM LIC Terms
Appendix B - StorageTek LIC Terms
Exhibit 4 - Consignment Agreement
Exhibit 5 - FRU Prices/Lead Times
Exhibit 6 - Data Items
Exhibit 7 - List of Countries for IP Indemnity
Exhibit 8 - Examples of Calculations of IBM Volume Credit Due to RAS Criteria
</TABLE>
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
v
<PAGE> 8
OEM AGREEMENT
This agreement is made and entered into as of June 7, 1996, by and between
International Business Machines Corporation, having an office for the
transaction of business at 5600 Cottle Road, San Jose, California 95193
(hereinafter called "IBM" or "Monterey"), and Storage Technology Corporation,
having an office for the transaction of business at 2270 South 88th Street,
Louisville, Colorado 80028 (hereinafter called "StorageTek," "STK" or "Oahu").
StorageTek and IBM may be individually referred to herein as a "Party" and
collectively as the "Parties."
BACKGROUND
StorageTek manufactures and sells, among others, certain Equipment as more
fully described below. IBM wishes to purchase such Equipment from StorageTek
on an Original Equipment Manufacturer (OEM) basis at large volume prices in
order to resell or lease such Equipment to its customers throughout the world,
both directly and indirectly through its distributors, Subsidiaries, and other
channels. In order to secure access to IBM's distribution channels, to provide
StorageTek with the opportunity to reach more customers, to provide more
product choices for customers and also due to IBM's willingness to invest a
substantial amount in product research and development and in product
engineering, StorageTek is willing to sell such Equipment to IBM at such prices
if IBM will purchase a substantial amount of the Products and Upgrades,
advertise and market the Products and Upgrades, provide maintenance and repair
service for the Equipment sold or leased by it, maintain an inventory of spare
parts and take certain other related actions.
The provisions of this section are intended to generally explain the reasons
that StorageTek and IBM have entered into this Agreement, but do not constitute
a portion of the contractual obligations, terms or conditions agreed to by the
Parties, which are set forth in the following sections of this Agreement.
WITNESSETH THAT:
In consideration of the mutual premises and covenants herein contained, the
Parties hereto agree as follows:
1. DEFINITIONS
1.1 "Agreement" shall mean this OEM Agreement, its
Exhibits, their Attachments, their Appendices and
their Schedules.
1.2 "Agreement Administrator" shall have the meaning set
forth in Section 5.
1.3 "Annual Volumes" shall have the meaning set forth in
Section 6.1.
1.4 "APAR" shall mean a completed form entitled
"Authorized Program Analysis Report," that is used by
IBM to report suspected Code or documentation errors
in a
<PAGE> 9
Licensed Program (including updates or enhancements
thereto) and to request their investigation and
correction.
1.5 "Audit Rights" (Section 7.5c) shall mean a Party's
right to have Price Waterhouse, Arthur Andersen or
Ernst & Young, or their lawful successors, audit the
other Party's books and records on reasonable prior
notice for the purpose of making a factual
determination of whether a specified event has
occurred. The Parties shall request the firms in the
order set forth above, and shall only request the
second or third listed firm if the earlier listed
firms decline to serve. In carrying out such audit
responsibilities, said accounting firm shall use
generally accepted accounting principles (hereafter
"GAAP"), as consistently applied by the audited
party. The auditor's working papers shall not be
made available to the Party requesting the audit.
1.6 "Base Iceberg Package" shall have the meaning set
forth in the IDA.
1.7 "Burdensome Condition" (Section 23.8) shall mean: **
1.8 "Change of Control" (Section 21) shall mean: **
1.9 "Commit Date" shall have the meaning set forth in
Section 13.1i.
1.10 "Contract Coordinators" (Section 5) shall mean those
individuals described in Section 11.1 of the
Statement of Work (Attachment 1 to Exhibit 3).
1.11 "Cost Exclusions" (Section 9.3f) shall mean those
parts costs that are incurred by IBM for (i) FRUs
returned for warranty credit, (ii) FRU removals
which are not in accordance with FRU removal
procedure to the extent that such removals exceed
StorageTek's actual experience during the first six
(6) months of 1996, (iii) defective IBM Drives, and
(iv) FRUs replaced due to a confirmed IBM Drive or
any other IBM-supplied component failure (without a
defect in the associated StorageTek FRU package).
1.12 "Count Key Data Systems" (Section 6.6a) shall mean
storage subsystems or solutions which present a count
key data or extended count key data image to the
host.
1.13 "Day(s)," "month(s)," "quarter(s)" and "year(s)"
shall mean calendar days, months, quarters or years,
unless otherwise specified.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
2
<PAGE> 10
1.14 "Delivery," "Delivered," "Deliver" (Section 2.1) or
other forms of the term shall mean the physical
transfer of Equipment by StorageTek to an
IBM-specified common carrier, freight forwarder, or
IBM's agent at StorageTek's plant of manufacture.
1.15 "Devices" (Section 6.2) shall mean products which
would be **
1.16 "Disclosing Party" shall have the meaning set forth
in Section 20.
1.17 "Drives" shall have the meaning set forth in Section
12.1.
1.18 "Effective Date" shall have the meaning set forth in
Section 3.
1.19 "Emergency Engineering Change" shall have the meaning
set forth in Section 9.2b.
1.20 "Equipment" (Section 2) shall mean Products, Upgrades
and FRUs.
1.21 "Error Free Installation" (Section 9.3b) shall mean
installations of Products and Upgrades Delivered that
both (i) Plug and Play; and (ii) meet the following
criteria: (a) arrives configured according to IBM's
written instructions; (b) has all of the correct
documentation, cables and accessories included; and
(c) is Delivered in the correct packaging and with
the shipping documents. Such criteria shall
specifically not include any failures caused by IBM
or the customer, or for which IBM or the customer is
responsible, including without limitation, I/O
control program generations, shipping damage, failure
(for any reason) of Drives or other IBM-supplied
components.
1.22 "Estimated Volumes" shall have the meaning set forth
in Section 7.6a.
1.23 "FAST" shall mean Iceberg, as described in the
Specifications.
1.24 "FASTER" shall mean Kodiak, as described in the
Specifications.
1.25 "FRU" (Section 6.2) shall mean any part, assembly or
subassembly of Products, Devices or Upgrades supplied
by StorageTek that are designed to be replaceable in
the field.
1.26 "Gigabyte" or "GB" shall mean one billion bytes of
storage.
1.27 "IBM Customer Engineering" shall have the meaning set
forth in Section 16.2.
1.28 "IBM Total" shall have the meaning set forth in
Section 7.6c.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
3
<PAGE> 11
1.29 "IDA" (Section 2.2) shall refer to the IBM Developer
Agreement, which is attached hereto as Exhibit 3.
1.30 "IDC Methodology" shall have the meaning set forth in
Section 7.6b.
1.31 "Impact Error" (Section 9.3a) shall mean an incident,
as reasonably determined by IBM, that either results
in: (1) the loss of data, or (2) the loss of access
to data resulting in an application interrupt (e.g.,
an abnormal program ending or "abend" or inability to
bring up an application) or system interrupt (e.g., a
system outage or requirement to initiate an initial
program load command in order to resolve or clear an
error condition). Any Impact Error due to improper
use of the Equipment by the customer, or an IBM agent
or employee will be excluded.
1.32 "Invention" shall mean any idea, design, concept,
process, technique, invention, discovery or
improvement, whether or not patentable, either
conceived or reduced to practice solely by one or
more employees of one of the Parties or its
Subsidiaries (Inventing Party) or jointly by one or
more employees of IBM or its Subsidiaries and one or
more employees of StorageTek or its Subsidiaries
(Joint Invention) in the performance, and during the
term, of this Agreement.
1.33 "Level 1" support are those activities that assist
the user in resolving "how to" and operational-type
questions, as well as technical questions on
installation procedures.
1.34 "Level 2" support are those activities that require
additional research and analysis of a user problem.
The Problem Management System database is checked to
locate a duplicate of the problem being reported and
the previous solution applied to that problem.
1.35 "Level 3" support are those activities that require
duplication of the user problem, analysis of APAR or
PMR records and distribution of a fix to resolve the
user problem.
1.36 "Licensed Programs" shall mean IXFP, IXOF and the
Snapshot Feature (as defined in Section 1.13 of the
DLW).
1.37 "Liquidated Damages" shall mean those damages
described in Section 6.5.
1.38 "Machine Month" or "MM" (Section 9.3a) shall mean a
measurement, established at the end of such calendar
month, of the number of units of Product installed
and operational during a month at an end user's
location, prorated on a daily basis (e.g., the sum of
the total number of machine days [i.e., number of
machines installed and operational at an end user's
location on a particular day] in a calendar month,
divided by the number of days in that month).
1.39 "Maintenance Code" shall be as defined in the DLW.
4
<PAGE> 12
1.40 "Major Enhancements" shall be as defined in the IDA.
1.41 "Mandatory Engineering Changes" shall have the
meaning set forth in Section 9.2.
1.42 "Maximum Percentage" shall have the meaning set forth
in Section 10.2.
1.43 "Megabyte" or "MB" shall mean one million bytes of
storage.
1.44 "Microcode" shall have the meaning set forth in the
Description of Licensed Works.
1.45 "Minimum Percentage" shall have the meaning set forth
in Section 10.2.
1.46 "Minimum Volumes" shall have the meaning set forth in
Section 6.5.
1.47 ** Price" shall have the meaning set forth in
Section 7.5.
1.48 "New FRU Cost" (Section 7.7a) shall mean StorageTek's
price for FRUs, as specified in Section 7.7a.
StorageTek will provide IBM a schedule setting forth
this cost for each FRU (the current version set forth
in Exhibit 5 to this Agreement, FRU Prices and Lead
Times) which list will be adjusted semiannually (in
January and July).
1.49 "New Product Development Center Support" shall have
the meaning set forth in Section 16.6.
1.50 "Non-RMM Device" shall have the meaning set forth in
Section 1.11 of the DLW.
1.51 "Notification Date" shall have the meaning set forth
in Section 6.2a.
1.52 "Object Code" shall have the meaning set forth in the
SOW.
1.53 "Plug and Play" means that a unit of Product or
Upgrade, when installed following StorageTek's
recommended installation procedures, operates without
experiencing any functional failures during
installation and passes all installation verification
tests, that internal diagnostic routines execute
successfully and generally that each such unit of
Product or Upgrade is observed to operate properly
and in accordance with the Specifications (as the
same may be changed in any applicable Product
Development Plan) through the installation of such
unit. A functional failure is defined as any
repair/replacement/adjustment corrective action that
is required to install or make the subsystem
functional that is not specified as part of the
installation instructions.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
5
<PAGE> 13
1.54 "PMR" shall mean a problem management report that is
used by IBM to report machine failures.
1.55 "Product(s)" (Section 6.1) shall mean the products
purchased from StorageTek by IBM and consist of the
StorageTek-manufactured Iceberg, Kodiak and Arctic
Fox high performance storage subsystems, including
any Deliverables, Enhancements and Maintenance
Modifications hereafter made pursuant to the IDA, and
controllers, A-boxes, B-boxes, Microcode and Licensed
Works, and which are further described in Exhibit 2,
Specifications, and Appendices A and B to Attachment
1 of Exhibit 3. Products also include related
documentation and other supporting materials.
1.56 "Product Engineering Services" shall mean the support
and services as described in Section 3.7 of the SOW.
1.57 "Qualified Upgrades" shall have the meaning set forth
in Section 6.3.
1.58 "Quarterly Cost" (Section 6.2b(1) shall mean **
1.59 "Quarterly Volumes" shall have the meaning set forth
in Section 6.2.
1.60 "QUICK" shall mean Arctic Fox.
1.61 "RAS criteria" shall have the meaning set forth in
Section 9.3a.
1.62 "Receiving Party" shall have the meaning set forth in
Section 20.
1.63 "Recovery Payments" shall have the meaning set forth
in Section 7.6.
1.64 "Remainder Percentage" shall have the meaning set
forth in Section 10.2.
1.65 "Service Call" (Section 9.3a) shall mean any service
call due to a failure condition resulting from either
a subsystem hardware or Microcode error (including
the Microcode portion of Snapshot Feature) (e.g., 01,
02 and 04 service codes).
1.66 "Service Call Rate" (Section 9.3a) shall mean a rate
which is calculated as follows:
number of service 180 GB for Iceberg or
calls during month 360 GB for Kodiak
------------------ X ----------------------
number of average capacity
Machine Months in GB per machine
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
6
<PAGE> 14
1.67 "Severity Level" shall mean a designation (i.e.,
Severity 1, Severity 2, Severity 3 and Severity 4)
assigned to errors that is intended to indicate the
seriousness of the error based upon the impact that the
error has on the user's operation.
1.68 "Severity 1" is a "critical problem"; the product is
unusable or an error severely impacts a customer's
operation. Severity 1 requires maximum effort to
resolve a critical problem until an emergency fix is
developed, implemented and made generally available to
IBM's customers who experience such problem.
1.69 "Severity 2" is a "major problem"; important function is
not available resulting in operations being severely
restricted.
1.70 "Severity 3" is a "minor problem"; inability to use a
function occurs, but it does not seriously affect the
user.
1.71 "Severity 4" is a "minor problem" that is not
significant to the user's operation; the user may be
able to circumvent the problem.
1.72 "Source Code" shall have the meaning as set forth in the
SOW.
1.73 "Specifications" (Section 2.1) shall mean the
descriptions contained in Appendices A and B to
Attachment 1 of Exhibit 3 and Exhibit 2, Specifications.
1.74 "Standard Parts Cost" (Section 9.3f) shall mean the
following with respect to the following specific periods
of this Agreement:
a. First twelve months of the Agreement: ** of the
New FRU Cost plus ** of the Used FRU Cost for
each FRU, plus actual freight; and
b. Thereafter: ** of the New FRU Cost plus ** of
the Used FRU Cost for each FRU, plus actual
freight.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
7
<PAGE> 15
1.75 "StorageTek Installed Base" shall mean ** prior to the
Effective Date and ** distributed by StorageTek
pursuant to the terms of Section 6.7 and 6.8, below.
1.76 "Subsidiary" (Section 6.6) shall mean a corporation,
company, limited liability company or other entity:
a. more than fifty percent (50%) of whose outstanding
shares or securities (representing the right to
vote for the election of directors or other
managing authority) are, now or hereafter, owned or
controlled, directly or indirectly, by a party
hereto; or
b. which does not have outstanding shares or
securities, as may be the case in a partnership,
joint venture, or unincorporated association, but
more than fifty percent (50%) of whose ownership
interest representing the right to make the
decisions for such corporation, company or other
entity is, now or hereafter, owned or controlled,
directly or indirectly, by a party hereto;
but such corporation, company or other entity shall be
deemed to be a Subsidiary only so long as such ownership
or control exists.
1.77 **
1.78 "Terabyte" or "TB" (Section 6.1) shall mean one trillion
bytes of storage which is accessible to the customer.
For calculating storage capacities of purchases of **
1.79 "Upgrade(s)" (Section 6.2b) shall mean additional
features or functions, including but not limited to
Major Enhancements, which improve performance or
increase capacity of previously sold or leased Products
or Devices.
1.80 "Used FRU Cost" (Section 7.7a) shall mean the price of
rework for FRUs as determined by Section 15.4. This
cost as of the execution of this Agreement is set forth
in Exhibit 5 to this Agreement, FRU Prices and Lead
Times, which will be adjusted semiannually (in January
and July).
1.81 Capitalized terms not otherwise defined in the OEM
Agreement shall have the definitions set forth elsewhere
in the Agreement.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
8
<PAGE> 16
2. SCOPE OF AGREEMENT
2.1 StorageTek agrees to develop IBM requested enhancements to the
Equipment, to provide continuing engineering and marketing and
service support for the Equipment, and to manufacture, test,
sell and Deliver Equipment to IBM and desires that IBM supply
Drives for use in such Equipment all in accordance with the
Specifications, procedures and conditions contained in this
Agreement.
2.2 IBM (i) agrees to fund the continuing engineering on, and the
future development of, specific enhancements to the Equipment
as set forth in the IDA, (ii) intends to add value to such
Equipment by consigning IBM Drives to StorageTek for inclusion
in the Equipment, and (iii) has the right to market and sell
Equipment purchased from StorageTek, all in accordance with
the terms of this Agreement.
2.3 Changes to Specifications, procedures and conditions contained
in the Agreement, its Exhibits, their Attachments and their
Schedules may be made from time to time upon mutual written
agreement, specifically identifying this Agreement and stating
an intent to make such changes.
3. TERM OF AGREEMENT
Unless earlier terminated, the term of this Agreement shall be for a
period from the date first set forth above (hereinafter "Effective
Date"), through December 31, 1999.
4. COMPONENTS
Because the Equipment purchased by IBM from StorageTek is likely to be
associated with the IBM brand, IBM wishes to be assured that such
Equipment, when sold to its customers, will have the quality that its
customers expect from items so branded. Accordingly, IBM believes
that, to the extent that StorageTek can utilize components in such
Equipment that are manufactured by or for IBM under its high quality
standards, it would be desirable for StorageTek to obtain such
components from IBM for use in manufacturing the Equipment. **
5. AGREEMENT ADMINISTRATOR
Each Party will identify an Agreement Administrator no later than June
15, 1996, who shall have overall responsibility for managing this
Agreement for such Party. Until such time, the Agreement
Administrators are set forth below. The Agreement Administrators may
not amend the terms of this Agreement. In addition to other
responsibilities as may be agreed,
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
9
<PAGE> 17
such Administrators or any successor named by the Party designating such
Administrator, will complete as soon as possible after the Effective Date, and
will update throughout the term of this Agreement their respective entries in
Exhibit 6, "Data Items." The Administrators shall also be responsible for the
exchange of data, as provided in this Agreement.
The Agreement Administrators are:
For StorageTek: **
For IBM: **
6. PURCHASE COMMITMENTS
6.1 1996-1998 ** VOLUMES
IBM intends to purchase a specified volume of Products and
Qualified Upgrades during 1996, 1997 and 1998 from StorageTek
** (hereafter ** ). The ** Volumes, based upon the
capacity, in Terabytes, of Products and Qualified Upgrades
purchased by IBM and credited to IBM pursuant to other
provisions of this Agreement, are ** Terabytes in 1996,
** Terabytes in 1997, and ** Terabytes in 1998. If IBM's
purchases and credits do not equal or exceed the **
Volume, then IBM will make Recovery Payments as set forth in
Section 7.6, and, in certain circumstances, IBM will be
obligated to pay Liquidated Damages as set forth in Section
6.5b or 6.5c.
6.2 1999 ** VOLUMES/PRICING
IBM may continue to purchase Products and Upgrades from
StorageTek during 1999 according to the process detailed
below:
a. On or before ** the Parties will ** then IBM must
notify StorageTek according to the following schedule
**
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
10
<PAGE> 18
<TABLE>
<CAPTION>
Notification Date | For Shipment in
--------------------------------------------------
<S> <C> <C>
** | **
** | **
** | **
** | **
</TABLE>
b. Prices which StorageTek shall charge to IBM for Products
in 1999 will be based on price quotes. Thirty (30) days
prior to each Notification Date described in paragraph
6.2a, above, StorageTek shall provide a price quote to
IBM for Products to be shipped to IBM in the
corresponding ** as indicated above. Such price shall
be the greater of:
(1) **
(2) **
IBM's purchase volumes for ** (hereafter " **
Volumes") shall depend on the price determined as set
forth above.
If StorageTek provides the cost described in paragraph
6.2b(1), above, as its price, IBM's ** Volumes shall
be ** Terabytes of Products and Upgrades. If
StorageTek provides the price described in paragraph
6.2b(2), above, as its price, IBM's ** Volumes shall
be ** Terabytes of Products and Upgrades.
c. Prices provided to IBM by StorageTek pursuant to
paragraph 6.2b, above, shall be based on StorageTek's
**
d. Notwithstanding the above, if IBM fails to notify
StorageTek prior to ** of its desire to purchase
Products for ** 1999, and if, on or before **
IBM decides that it wishes to continue to purchase
Products ** 1999, then, ** 1999 only, IBM may
elect to purchase such Products at the price quoted
pursuant to paragraph 6.2b, above ** by providing a
noncancelable purchase order for such units of Products
as IBM may require.
e. If IBM does not attain its ** Volumes for any
quarter, then IBM shall pay a ** Volume Recovery
Payment computed in accordance with Exhibit 1,
Attachment 2, Appendix D. IBM's payment of these
Recovery Payments shall be the sole and exclusive remedy
to StorageTek for IBM's failure to purchase the **
Volumes pursuant to this Agreement.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
11
<PAGE> 19
f. If IBM does not attain its ** Volumes for ** then
StorageTek may use IBM Materials ** to sell or
distribute Devices and Major Enhancements therefor,
subject, however, to the applicable provisions of the
Description of Licensed Works Transaction Document.
6.3 QUALIFIED UPGRADES
** if the total of IBM's purchases and credits is more than
** then the capacity of any and all Upgrades purchased
during such year as measured in Terabytes shall be credited
toward IBM's attainment of its ** Volumes in such year.
If the total of IBM's purchases and credits is ** Terabytes
or less ** then IBM may credit a maximum of ** Terabytes
of Upgrade purchases ** in determining attainment of its
** Volumes. Such Upgrades shall be hereafter referred to as
"Qualified Upgrades." Upgrades ** will count toward
achievement of the ** Volumes to the extent that the
capacity of Upgrades purchased and credited does not exceed
** of the total capacity purchased and credited.
6.4 CREDITS
IBM's ** Volumes are subject to credits based upon
StorageTek's failure to meet agreed-to specifications relating
to quality, availability, supply, delivery, technical
milestones and other such items to the extent that such
credits are provided for elsewhere in this Agreement. As
applied herein, credits shall be additive to any actual
purchase of Equipment by IBM.
6.5 LIQUIDATED DAMAGES/ ** PAYMENTS
IBM intends, through a combination of purchases of Equipment
from StorageTek and credits to volumes as provided elsewhere
in this Agreement, to achieve a minimum of ** Terabytes
("Minimum Volumes") of its ** Volumes in **
a. If, ** IBM has not purchased its Minimum Volumes,
then, except as otherwise provided in Sections 6.6a,
6.6b and 21, StorageTek may elect to terminate this
Agreement and receive from IBM ** pursuant to
Sections 6.5b or 6.5c, below. StorageTek will provide IBM
with notice of such failure by ** in which a shortfall
occurs. IBM shall have the option to avoid such
termination and ** respectively; provided that IBM has
received at least twenty (20) days' prior written notice
of such shortfall. Such ** If IBM ** subject to
Section 23.9, StorageTek
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
12
<PAGE> 20
may terminate this Agreement effective upon notice,
which must be provided no later than ** of such year.
b. If IBM's total volume of purchases ** is less than
its Minimum Volumes, and StorageTek elects to terminate
this Agreement ** but no later than ** pursuant to
Section 6.5a above, then IBM will pay to StorageTek:
(1) ** in the amount of ** ; plus
(2) The net sum of any ** as determined in
accordance with Section 7.6d, provided, however,
that such ** shall not exceed the sum of **
; plus
(3) Any ** provided, however, that no additional
** shall be due ** and, provided further,
that ** shall not exceed the sum of ** .
c. If IBM's total volume of purchases for ** is less than
its Minimum Volumes, and StorageTek elects to terminate
this Agreement ** but no later than ** pursuant to
Section 6.5a above, then IBM will pay to StorageTek:
(1) ** in the amount of ** ; plus
(2) The net sum of any ** as determined in
accordance with Section 7.6d; provided, however,
that such ** shall not exceed the sum of ** .
d. If IBM terminates this Agreement for convenience **
then, except as otherwise provided in Sections 6.6a,
6.6b and 21, IBM will pay ** as described in
Section 7.6, below, to the extent not already paid,
** plus the sum of **
e. If IBM terminates this Agreement for convenience between
** then, except as otherwise provided in Sections 6.6a,
6.6b and 21, IBM will pay to StorageTek:
(1) ** in the amount of **
(2) The net sum of any ** provided, however, that
no additional ** shall be due ** .
f. **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
13
<PAGE> 21
g. The Parties acknowledge and agree that the foregoing
** amount is not a penalty but represents a good
faith estimate by the Parties of the amount of damages
incurred by StorageTek upon the occurrence of the
events set forth in Sections 6.5b through 6.5e. The
Parties have entered into this provision after each
Party has had the opportunity to consult counsel, and
pursuant to a mutual intent to avoid the expenses of
any dispute resolution process.
6.6 OTHER STORAGETEK DISTRIBUTION
a. StorageTek and its Subsidiaries may, at their sole
discretion, sell, lease or otherwise distribute Devices
and products competitive with Equipment to third
parties, provided, however, that neither StorageTek nor
its Subsidiaries are ** and, provided further, that,
except for situations as described in Section 6.7,
below, if StorageTek chooses to use, sell, lease or
otherwise distribute, either directly or indirectly:
(1) any ** or
(2) **
then, unless the sale is excepted pursuant to Section
6.8, below, IBM shall be ** its obligations and
liabilities related to ** as well as any obligation
to pay any ** in the year in which the sale
occurred and thereafter. StorageTek shall also have no
right to terminate this Agreement for failure of IBM to
meet its ** and shall immediately notify IBM in
writing that such use, sale, lease or other
distribution has occurred, and shall indicate that IBM
** the foregoing obligations. IBM shall also have
the right to ** . Each Party may also terminate **
b. If StorageTek licenses, transfers, sells or assigns to a
third party all or a portion of a Licensed Work ** then
IBM shall be ** its obligations and liabilities
related to ** , as well as any obligation to ** in
the year in which the sale occurred and thereafter.
StorageTek shall also have ** for failure of IBM to
meet its ** and shall immediately notify IBM in
writing that such license, transfer, sale or assignment
has occurred, and shall indicate that IBM ** the
foregoing obligations. IBM shall also have the right to
** Each Party may also terminate **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
14
<PAGE> 22
c. If IBM learns of facts that indicate that StorageTek is
selling, leasing or otherwise distributing the products
described in Section 6.6a, above, directly or
indirectly, to customers other than IBM, or has
licensed, transferred, sold or assigned the Licensed
Works described in Section 6.6b, above, then upon
written notice by IBM to StorageTek:
(1) StorageTek shall investigate the facts and
circumstances relating to the incident
thoroughly, and share the results, but not the
customer-specific details, with IBM. If both
Parties agree that no such sale, lease or other
distribution occurred or no such license was
granted, then the rights and obligations of the
Parties shall not change. If the Parties are
unable to agree on the facts relating to such
incident, then the matter will be handled
pursuant to the dispute resolution process
described in Section 22.
(2) if StorageTek or its Subsidiaries has made a
sale, lease or other distribution to third
parties, as described in Section 6.6a, above, or
has licensed, transferred, sold or assigned the
Licensed Works to a third party, as described in
Section 6.6b, above, other than IBM, then IBM's
obligations shall be modified as set forth in
such sections.
6.7 EXCEPTIONS
a. Sales, leases, or other distribution or use of Devices
by StorageTek or its Subsidiaries in the following
situations are excepted from the provisions of Section
6.6, and will be credited toward calculation of IBM's
purchase volume for the purpose of determining whether
IBM has achieved its ** Volumes:
(1) Sales, leases or other distribution of ** .
For the purpose of determining the ** which
shall be credited to IBM's ** Volumes, **
(2) Sales of Devices by StorageTek or its
Subsidiaries **
(a) **
(b) **
and further provided that, in the case of (a) or
(b), shipments made prior to ** will not be
credited to IBM's ** Volumes; and
(3) **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
15
<PAGE> 23
b. Uses, sales, leases or other distribution of Equipment
or Devices by StorageTek or its Subsidiaries in the
following situations are excepted from the provisions of
Section 6.6a, **
(1) Sales or leases by StorageTek or it Subsidiaries
of Equipment that **
(2) Use of Equipment or Devices internally by
StorageTek or its Subsidiaries **
(3) Use of Equipment or Devices internally by
StorageTek **
(4) Sales or leases of used Equipment, Devices or
Count Key Data Systems **
(5) Sales or use of FRUs for maintenance purposes
only. However, nothing in this clause 6.7b(5)
shall be interpreted as granting StorageTek an
implied license to distribute FRUs that are or
contain IBM Materials or other IBM Code not
licensed under this Agreement.
(6) Sales or leases of Arctic Fox and Arctic Fox
Upgrades, **
(7) Sales of Non-RMM Devices, **
(8) Use of Count Key Data Systems that are not
Equipment or Devices by StorageTek or its
Subsidiaries.
6.8 ADDITIONAL STORAGETEK SALES
In the event that StorageTek or its Subsidiaries makes sales
which are not within the scope of the sales enumerated in
Section 6.7, above, IBM shall nevertheless continue its
obligations for future ** and ** if the total units of
Product, Upgrades, Count Key Data Systems and Devices sold by
StorageTek and its Subsidiaries, and not included under Section
6.7, above, in any consecutive ** period, does not exceed **
units; provided that under no circumstances shall any units of
Product, Upgrades, Count Key Data Systems and Devices sold by
StorageTek and its Subsidiaries pursuant to this Section 6.8,
include ** . IBM will receive credit against the attainment
of its ** Volumes in an amount equal to two times the amount
of Terabytes sold pursuant to this Section 6.8. For the
purposes of determining the capacity that shall be so credited,
** will be used.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
16
<PAGE> 24
7. PRICING & PAYMENT TERMS
7.1 Prices charged to IBM by StorageTek for Products sold
hereunder in 1996, 1997 and 1998 shall be as set forth in
Attachment 1 to Exhibit 1 to this Agreement. These prices
include necessary cables, software, packaging, packing and
shipping materials and such other items (excluding manuals) as
StorageTek currently includes in its Product shipments.
Manuals normally included with Product shall also be included
through September 31, 1996. Prior to such date the Parties
will meet to discuss methods by which StorageTek could assist
in preparing or having such manuals prepared at IBM's expense.
7.2 Prices charged to IBM for Upgrades shall be as set forth in
Attachment 3 to Exhibit 1 to this Agreement.
7.3 In the case of Products or Upgrades manufactured by StorageTek
in Europe, an additional charge equivalent to ** will be
added by mutual agreement to the prices set forth in
Attachments 1 and 3 to Exhibit 1, which charge initially shall
be ** .
7.4 Prices charged for Products in 1999 shall be as set forth in
Section 6.2.
7.5 ** PRICE
Notwithstanding any other provisions in this Agreement, in no
event will any price charged by StorageTek to IBM exceed **
Prices, as defined below:
a. **
b. **
c. **
7.6 RECOVERY PAYMENTS
a. If IBM fails to purchase volumes from StorageTek equal
to its ** Volumes ** IBM will pay to StorageTek a
sum referred to herein as a Recovery Payment. This
amount shall be calculated, ** . The amount of such
Recovery Payments shall be calculated at least ** and
shall be based on ** (hereinafter " ** Volumes").
If the parties cannot agree on such ** Volumes, then
they shall resolve the dispute pursuant to Section 22.
No later than the last day of such quarter, IBM will pay
to StorageTek or StorageTek will pay to IBM the
estimated net sum of any Recovery Payment due to the
other Party. For ** such ** Recovery Payment
shall not be reconciled to actual volumes of
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
17
<PAGE> 25
shipments and credits. For ** such ** Recovery
Payment shall ** of the following year. Such
Recovery Payment shall not exceed the sum of ** in
any year.
b. Definition of IBM Total. As used in Appendices B and C
of Attachment 2 to Exhibit 1 hereto, "IBM Total" shall
mean (1) ** IBM volumes of all ** sold by IBM **
expressed in Terabytes, ** using the methodology that
is consistent with ** then current outlook report for
** or, if such data is not available, as otherwise
mutually agreed; and (2) for ** , subject to
StorageTek's Audit Rights, the total ** during such
year.
c. 1996. The Recovery Payment for 1996 shall be **
d. 1997-1998. The Recovery Payment for 1997 and 1998
shall be **
e. 1999. The Recovery Payments, if any, for 1999 shall be
**
f. Notwithstanding anything to the contrary in this Section
7.6, in the event that StorageTek terminates this
Agreement based on IBM's failure to purchase its **
Volumes or if IBM terminates this Agreement for
convenience, then **
7.7 FRU PRICES
Prices charged by StorageTek to IBM for new FRUs will be **
of such FRUs and the multiples set forth in Section 7.7a,
below. For the purpose of this section and Section 15.4, cost
shall be determined by using ** . The standard cost will be
reviewed ** and any differences in cost will be adjusted in
the following period. Compliance with this section shall be
subject to IBM's Audit Rights.
a. Multiples for New FRUs.
(1) During 1996 the multiple is **
(2) During the remaining term of this Agreement the
multiple is **
(3) After the termination of this Agreement the
multiple is **
b. FRU Rework. Prices for FRUs returned by IBM will be
determined in accordance with Section 15.4.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 26
7.8 LOWEST COST SOURCING.
The Parties agree that it is in their mutual interest for
StorageTek to obtain parts for new production and maintenance
purposes at the lowest practicable cost. If IBM identifies a
potential alternative source for any part, StorageTek will
make a good faith reasonable effort to qualify the
alternative. If such bid is comparable with the quality,
terms and conditions and offers a better price compared to the
then current source of such parts, and awarding such
alternative source a supply contract pursuant to such bid does
not adversely impact the terms of StorageTek's purchases of
other parts from the then current source, then the lower cost
will be used in determining prices to IBM for Equipment
whether or not StorageTek actually obtains the part or parts
from such alternative source.
7.9 TAXES/DUTIES
The prices for Equipment supplied under this Agreement are
exclusive of any customs charges and duties and sales, use,
privilege, excise and similar taxes levied by the USA, foreign
territories, or any other governmental entity on the Products,
their export, import, shipment, purchase or sale. IBM shall
pay and be responsible for the payment of any such taxes
(excluding taxes based upon StorageTek's net income) or
duties; and, to the extent legally required, StorageTek shall
collect any applicable taxes unless IBM establishes its
exemption therefrom. If StorageTek is required to pay any
such taxes or duties, IBM will reimburse StorageTek pursuant
to StorageTek's invoice.
IBM hereby represents to StorageTek that it is purchasing the
Products hereunder for the purpose of resale, rent, lease or
in-house use, and, if required by applicable law, IBM will
furnish StorageTek with pertinent and valid sales and use tax
exemption certificates.
7.10 PAYMENT TERMS
a. StorageTek will invoice IBM for Equipment on or after
the date on which such Equipment is Delivered. If any
unit of Equipment is Delivered and is not suitable to be
installed, then the Equipment shall not be considered as
Delivered until such time that such Equipment is
rendered suitable for installation. IBM or its designee
will exercise reasonable efforts to install Equipment
that it receives. IBM will promptly notify StorageTek
when such Equipment is not suitable for installation.
Subject to Section 13.1k, payment terms will be the
number of days from date of receipt of a correct invoice
by IBM as shown in the following table:
19
<PAGE> 27
<TABLE>
<CAPTION>
Invoice Date Payment Term
|
-------------------- -----------------------
<S> <C> <C>
1996 | ** days
1997 or later | ** days
</TABLE>
b. StorageTek's invoices must state the IBM purchase order
number, description of the item(s) being invoiced,
quantity shipped, ship date, unit price, total amount
due and the remit-to address. StorageTek will mail or
deliver invoices to the address indicated on the
purchase order.
c. Payment of an invoice by IBM under IBM purchase order(s)
will not be construed as and will not constitute an
acceptance of Product failing to conform to
specifications or agreed upon quality levels, nor will
any payment to StorageTek be construed as or constitute
a waiver of any of IBM's legal rights or remedies.
d. StorageTek will invoice, and IBM will pay, in US Dollars
to the address listed on StorageTek's invoice. All
payments will be made by wire transfer of immediately
available funds.
7.11 SNAPSHOT FEATURE
IBM will license the Snapshot Feature as set forth in the
Description of Licensed Works for the license fees set forth
in Attachment 3 to Exhibit 1 hereto.
8. IBM SALES TO STORAGETEK
8.1 StorageTek, in its sole discretion, may acquire Equipment from
IBM ** . The prices for the first ** units of Products
will be ** . The prices for all other units of Products will
not exceed ** . The
prices for Upgrades will not exceed ** . Such Equipment may
be sold by StorageTek ** . Sales by IBM to StorageTek will
be pursuant to ** with a one (1) day transit period, except
that all Equipment supplied pursuant to this section by IBM to
StorageTek shall be provided ** . Moreover, StorageTek
shall not be subject to ** for such units.
8.2 IBM agrees to sell StorageTek the Upgrades it reasonably
requires to meet the ongoing remarketing obligations
StorageTek has as of the ** with respect to ** . The
prices for Upgrades ** which IBM will charge Storagetek
shall be commercially reasonable and not exceed ** of IBM's
average selling price ** but under no circumstance shall
such prices be any less than ** of the price charged to IBM
by StorageTek per MB of Product as set forth in Section 7.
Any such Upgrades, when
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
20
<PAGE> 28
purchased by IBM from StorageTek, will be counted as IBM's
volumes in calculating IBM's attainment of its ** , and
will not be subject to the limitations of Section 6.3, and
will be counted in addition to the Qualified Upgrades.
9. QUALITY
9.1 MANUFACTURING TESTING
Prior to Delivery, StorageTek shall conduct a mutually
agreed-upon preshipment manufacturing test at its plant on
each unit of Equipment. Notwithstanding such preshipment
manufacturing testing, all Equipment must conform to the
Specifications. StorageTek will provide IBM on a quarterly
basis with a complete, summarized record of inspection and
tests performed on each unit of Equipment during the term of
the Agreement. Detailed records of inspection and tests (in
manual and electronic form) performed for each unit of
Equipment shall also be kept by StorageTek for three (3)
years. Upon IBM's request, StorageTek will provide IBM with
access to an electronic copy of the specific test results for
each unit of Equipment within two (2) business days after
receipt of such request.
IBM's representative may, if it so requests and at its sole
expense, witness the preshipment tests carried out by
StorageTek, provided such request is made at least three (3)
days prior to the scheduled Delivery of the items being
tested. Any such observation by IBM shall be subject to
StorageTek's reasonable safety and security rules and shall be
conducted to the extent feasible on a noninterference basis.
IBM may also conduct its own testing to the extent feasible on
a non- interference basis either at StorageTek's plant, its
own facilities or IBM's customers' facilities, at IBM's own
expense, to confirm that the Equipment meets the
Specifications. Any testing performed at StorageTek's plant
shall be subject to StorageTek's reasonable safety and
security rules.
9.2 ENGINEERING CHANGES
a. Mandatory Engineering Changes. If changes that may
affect the form, fit, function, interface, reliability
or serviceability of the Equipment (including
interchangeability with previously purchased FRUs) are
required in order to make the Equipment sold hereunder
conform to the Specifications ("Mandatory Engineering
Changes"), StorageTek shall first obtain IBM's approval.
If it is mutually agreed that the change is to be made,
StorageTek shall make the changes at no charge to IBM in
all units of Equipment which are not yet delivered to
IBM. If such changes are required to make delivered
units of Equipment conform to those Specifications, they
shall be supplied in the form of mandatory field change
kits at no charge to IBM in accordance with the
procedure set forth below.
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<PAGE> 29
IBM shall supply labor to install, subject to Section
9.3h, all Mandatory Engineering Changes in delivered
units of Equipment.
Field change kits resulting from Mandatory Engineering
Changes described above will be administered as follows:
(1) StorageTek will promptly send an engineering
change notice (ECN) to IBM prior to Delivery of
the first shipment of Equipment that contains a
Mandatory Engineering Change. IBM shall issue a
no-charge purchase order for all mandatory field
change kits that IBM desires. Such kits and any
Equipment returned which are covered by the
Mandatory ECNs shall be shipped freight prepaid
by StorageTek, at no charge to IBM.
(2) StorageTek will ship the mandatory field change
kits according to the schedule that is set forth
in clause (4), below, and issue a no-charge
invoice to IBM for all parts ordered and shipped
as a part of the mandatory field change kits.
(3) Subject to the terms of Section 15.3, IBM will
use reasonable efforts to see that repairable
parts (displaced by field change kits) from
Equipment are packaged separately from other
parts returned. IBM will send Products to
StorageTek, freight prepaid, and Upgrades and
FRUs, freight collect.
(4) For each Mandatory Engineering Change the parties
will agree upon an appropriate round- robin
process for distributing field change kits to the
field and securing the return of displaced FRUs
for rework by StorageTek.
b. Emergency Engineering Changes. Notwithstanding Section
9.2a, above, StorageTek may issue any engineering change
necessary to remedy an Equipment-down situation at a
customer of IBM or to make any unit of the Equipment
safe (an "Emergency Engineering Change") upon notice to
IBM but without any prior evaluation or approval by IBM;
provided, however, that StorageTek agrees to follow the
procedures as set forth in Section 9.2a in order to
implement a permanent solution to resolve the safety or
down situation that arose precipitating the need for the
engineering change.
As to any affected Equipment from time to time in IBM's
inventory or control, or already accepted by IBM, IBM
shall use reasonable efforts to promptly accomplish the
installation of such Emergency Engineering Change. In
the event of installation of Emergency Engineering
Changes by IBM hereunder, StorageTek shall implement a
corrective action plan, including the provision of
information, materials, tools and parts necessary to
effect the installation of such Emergency Engineering
Changes on the affected Equipment (all without cost to
IBM), subject to Section 9.3h.
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<PAGE> 30
c. Optional Engineering Changes. In addition to Mandatory
Engineering Changes, it is recognized by the Parties
that there may be optional changes requested by either
IBM or StorageTek, which are not required to make the
units of Equipment conform to the Specifications. The
cost of implementing such changes (including kits and
labor) on delivered Equipment shall be divided between
the parties as they mutually agree. StorageTek will
deliver field change kits for such changes to IBM, as
specified in IBM's purchase order, which purchase order
shall be given by IBM to StorageTek within such time
period as the Parties shall mutually agree.
d. Procedures Regarding Proposed Engineering Changes. In
connection with any engineering changes proposed
pursuant to Section 9.2a, above, StorageTek will forward
to IBM, at IBM's request, a minimum of two (2) samples
of each such proposed engineering change, as well as the
details of any proposed change, to enable IBM to
determine whether to approve such change, including:
(1) the effect of the change on the form, fit,
function, interface, reliability or
serviceability of the Equipment;
(2) StorageTek's reference number for the proposed
change;
(3) StorageTek's identification of the item to be
changed and whether any items should be returned;
(4) description of and reason for the change with
sufficient engineering detail and applicable
validation data, as endorsed by StorageTek's
quality control process, to enable the proposal
to be assessed;
(5) the date and, if available at the time,
StorageTek's serial number from which StorageTek
proposes to implement the change;
(6) whether retroactive action is proposed and, if
so, the details of any necessary field action and
the initial availability of FRUs (on Engineering
Changes, StorageTek will advise IBM about the
effect on (a) outstanding orders for Equipment;
(b) units of Equipment which are at the time of
such proposed change in for repair or
replacement; and (c) the next batch of units of
Equipment to be delivered from StorageTek's plant
on which the Engineering Change should be
implemented);
(7) intended alterations to FRUs, documentation,
tools and other relevant material supplied or to
be supplied to IBM; and
(8) whether any parts will become obsolete as a
result of the change.
23
<PAGE> 31
Except for any Emergency Engineering Changes, StorageTek
is required to obtain IBM's prior written approval for
each Engineering Change before StorageTek's
implementation of the same.
e. Revalidation. Upon implementation of each engineering
change, StorageTek agrees to perform revalidation
testing at no charge to IBM to ensure that the Equipment
so changed meets the Specifications.
f. Obsolete Upgrades and FRUs. If StorageTek makes any
Mandatory, Emergency or StorageTek-initiated Engineering
Change which renders any Upgrades and FRUs obsolete
(i.e., unusable), StorageTek shall replace the obsolete
Upgrades and FRUs at no charge to IBM in accordance with
the procedures set forth in Section 9.2a, above. No
returns are authorized for field change kits that are
requested as a result of an optional IBM- initiated
engineering change which renders any Upgrade or FRU
obsolete.
9.3 QUALITY LEVELS
a. RAS Criteria. StorageTek shall maintain (i)
throughout the term of this Agreement, and (ii)
for a period of ** after the date of last
Delivery of each type of Product (provided IBM
pays for the Product Engineering Services unless
it is not required to do so and StorageTek is
still providing Product Engineering Services for
its own distribution of Equipment or Devices);
the following reliability, availability and
service ("RAS") levels for the Products:
SERVICE CALL CALCULATION
<TABLE>
<CAPTION>
Effective
RAS Criteria Date Iceberg Kodiak
------------ ----------- ------- ------
<S> <C> <C> <C>
Service Call Rate ** ** **
Guardband ** **
</TABLE>
For measuring Service Calls, the calculation of a
Machine Month is based on the use of a 180 GB and 360 GB
machine configuration for Iceberg and Kodiak,
respectively.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
24
<PAGE> 32
IMPACT ERROR CALCULATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
IMPACT ERRORS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
** ** ** ** ** ** **
- --------------------------------------------------------------------------------------------------------
ICEBERG -- ** ** ** ** **
- --------------------------------------------------------------------------------------------------------
KODIAK -- -- ** ** ** ** **
- --------------------------------------------------------------------------------------------------------
GUARDBAND -- ** ** ** ** ** **
- --------------------------------------------------------------------------------------------------------
</TABLE>
Such rates will be calculated based on the total number
of Impact Errors that occur during a calendar quarter
divided by the total number of Machine Months during
said quarter for Iceberg and Kodiak, respectively.
EXAMPLE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OCTOBER NOVEMBER DECEMBER TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
End of Month
- --------------------------------------------------------------------------------------------------------
Install Base ** ** ** **
- --------------------------------------------------------------------------------------------------------
Impact Errors ** ** ** **
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Failure Rate **
- --------------------------------------------------------------------------------------------------------
</TABLE>
Impact Error measurements for Kodiak will not count
toward any criteria until the earlier of: (i) the first
quarter in which ** units of Kodiak have been
installed by IBM, or (ii) the second quarter of 1997,
provided that at least ** units have been installed by
IBM as of the last day of such quarter.
Impact Error measurements for Iceberg will not count
toward any criteria until ** units of Iceberg have
been installed by IBM.
The RAS measurements shall exclude impacts or failures
of Products where a microcode or engineering change is
available which, if installed, would have prevented the
impact or failure from occurring; provided, however,
that such microcode or engineering change was made
available by StorageTek for
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
25
<PAGE> 33
installation pursuant to a nonemergency (i.e., generally
distributed) engineering change at least three (3)
months prior to the date of an Impact Error or Service
Call. The RAS measurements will exclude any Impact
Errors and Service Calls that arise from ** concurrent
Drive failures in the same array, and any Service Calls
and Impact Errors for units of Iceberg and Kodiak
installed as part of the ESP, as defined in the SOW.
For the first ninety (90) days following the
availability of a Major Enhancement, IBM will exercise
reasonable efforts to install within 30 days engineering
changes that StorageTek designates as "critical."
Calculations of the actual Service Call Rate and Error
Rate will be made based on U.S. installations only.
b. Error Free Installation Criteria. StorageTek shall
maintain a ** Error Free Installation rate for
Products and Upgrades (separately calculated) until the
date on which IBM no longer markets Products and
Upgrades. These measurements will be calculated
separately for Products and Upgrades. This rate assumes
that an average IBM-customer subsystem installation is
comprised of an Iceberg subsystem, or a Kodiak control
unit and one connecting storage cabinet. If the average
IBM-customer installation for the Kodiak Product
involves more than one connecting storage cabinet, then
the ** rate for Kodiak will be reduced by ** for
each connecting storage cabinet in calculating such
average.
c. Levels for Future Functions. Features or functions
added after the initial shipment in volume of Iceberg
and Kodiak will be measured against specific
reliability, availability and service criteria that is
to be documented and addressed in each applicable
product development plan and related specification for
the future feature or function, but in any event they
must meet the Iceberg and Kodiak criterion as specified
herein.
d. Guardband. StorageTek shall not be considered to be
failing to meet the criterion unless the percentage by
which IBM's actual measurements exceeds the criterion is
at least higher than the Guardband percentage set forth
above in Section 9.3a for Service Calls or Impact
Errors.
e. Action Plan. If StorageTek fails to meet the Service
Call Rate, Impact Error Rate, or Error Free Installation
Rate, then StorageTek shall promptly investigate the
cause of the failures, and generate and provide to IBM
within ten (10) days a root cause failure analysis that
describes the cause of the failures. StorageTek will
promptly develop and implement an action plan acceptable
to IBM to resolve such failures, which plan shall
include remedies for failure to
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
26
<PAGE> 34
meet the Service Call Rate, Impact Error Rate, or Error
Free Installation Rate in such action plan.
StorageTek shall provide all support necessary to meet
an agreed upon repair turnaround time that is
established in the action plan to maintain IBM's
customers' satisfaction. StorageTek's plan may include,
but is not limited to increased repair capacity (i.e.,
labor, equipment, facilities); expedited freight; and
providing new, repaired and/or upgraded buffer stock to
IBM's stocking locations, distributors and customer
sites.
f. Price Reduction for FRU Costs. StorageTek shall provide
a price reduction to IBM ** after the date of last
Delivery of each type of Products in an amount that is
equal to ** ("Excess FRU Cost"). The calculation of
this price reduction shall specifically exclude ** .
The price reduction provided hereunder may ** . Any
claim to such price reduction will be deemed waived if
not made by IBM no later than ** days after the **
in which such Excess FRU Cost occurred.
g. Reporting of FRU Consumption. IBM will provide a
quarterly report to StorageTek that summarizes
IBM-reported fault symptom information for the
consumption of FRUs in repair actions that are
undertaken by IBM in the United States. The summarized
information in this report will be adjusted by IBM to
exclude those items which qualify as Cost Exclusions.
This information is considered to be IBM confidential,
and StorageTek agrees to keep such information
confidential under the terms of the Agreement for
Exchange of Confidential Information between the
Parties.
h. Credit for Labor Costs. The target for labor required
for repair actions (including ** during a Machine
Month. StorageTek shall provide a credit to IBM **
after the date of last Delivery of Product, upon
StorageTek's receipt of appropriate supporting
documentation, for average labor costs per Machine Month
incurred by IBM in connection with repair actions that
are in excess of ** of that ** target ("Excess Labor
Cost"). The amount of this credit will be calculated by
multiplying the number of hours in excess of ** of
that ** target by a rate of ** per hour. In the
event that IBM incurs labor costs in excess of ** of
that ** target ** . The calculation of Excess Labor
Cost will be based on ** . The credit provided
hereunder may ** . Any claim to such credit will be
deemed waived if not made by IBM no later than **
days after the ** in which such Excess Labor Cost
occurred.
i. Attainment. The RAS criteria will be separately
calculated and applied to Iceberg and Kodiak. If
StorageTek fails to meet the established RAS criteria
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
27
<PAGE> 35
for Service Calls or Impact Error rates set forth in
Section 9.3a for Iceberg and Kodiak in any calendar
quarter (after taking into consideration the applicable
Guardbands), then StorageTek shall be given until the
end of the next succeeding quarter to implement the
action plan described in Section 9.3e, above.
If the RAS criteria is missed again during such next
quarter, then **
**
9.4 QUALITY ASSURANCE
StorageTek shall maintain at its sole cost and expense an
effective quality control system to maintain under continuous
control the entire process of design, manufacture and FRU
repairs, including the packaging and shipping of Equipment.
This system shall include checks to verify that all
requirements of the Specifications are satisfied.
StorageTek is responsible to insure that workmanship,
construction and other standards specified by this system
satisfy the requirements of the Specifications. StorageTek's
quality assurance shall be applied in a manner that will
maintain a consistent level of quality. StorageTek's quality
control procedures and instructions shall be made available to
StorageTek's employees, agents, contractors and
subcontractors, and to IBM, at the place of manufacture.
Upon request, IBM may conduct inspections on a
non-interference basis at StorageTek's manufacturing and
repair plants at any time during normal working hours provided
that, within 24 hours if an emergency situation exists or at
least three (3) days under non-emergency situations, prior
written notice is given by IBM. StorageTek will use
reasonable efforts to accommodate visits on shorter notice.
Such inspection may, at IBM's option, include the witnessing
of tests and inspection of Equipment, whether completed or
not. StorageTek will promptly take appropriate corrective
action with regard to any deficiencies found by IBM and
reasonably agreed to by StorageTek.
9.5 ISO 9000 CERTIFICATION AND USE OF SUBCONTRACTORS
StorageTek shall maintain ISO 9000 certification, and use
statistical process control systems to monitor quality, for
its manufacturing and development processes for Equipment
supplied to IBM during the term of the Agreement.
StorageTek shall ensure that its subcontractors that are
involved with the manufacturing and development of Equipment
shall maintain ISO 9000 certification,
__________________________________
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
28
<PAGE> 36
and use similar statistical process control systems to monitor
quality. StorageTek shall also ensure that its suppliers who
provide parts, assemblies or subassemblies that are used in the
manufacturing and development of Equipment shall maintain ISO
9000 certification or use reasonable process control systems to
monitor quality.
It is the sole responsibility of StorageTek to select and
manage its suppliers. StorageTek will make available to IBM,
upon request, a list of all suppliers that are used to supply
parts or components in StorageTek's manufacturing process for
Equipment. StorageTek agrees to use its best efforts to
notify IBM of any additions or changes made in its suppliers.
If IBM reasonably determines that there is a supplier that may
be of concern to it, then StorageTek shall develop and
implement a mutually agreeable plan to address IBM's concerns.
StorageTek shall provide, upon written request by IBM, all
information pertaining to the measurements of quality that are
made for Equipment, and generated or derived from StorageTek's
statistical process control systems.
StorageTek is solely responsible for the quality of Equipment
supplied to IBM. Review and approval by IBM of StorageTek's
or any of its subcontractor's quality process systems does not
relieve StorageTek of this responsibility.
StorageTek agrees to notify IBM of any planned significant
changes that may adversely affect its manufacturing processes
or could adversely affect the form, fit, function, quality,
reliability, serviceability or safety of the Equipment to be
supplied to IBM no later than ninety (90) days before planned
implementation.
10. PRODUCT LEAD TIMES AND FORECAST
10.1 IBM will provide a monthly build forecast to StorageTek for a
** period (or a period equal to the remaining term of this
Agreement if less than ** ). The current quarter forecast
will be broken down by week and by Delivery location.
Volumes, specified in units of Product and Upgrades by
Delivery location, for the quarter following the then-current
quarter will be established and provided to StorageTek no
later than ** prior to the start of any given quarter. At
such time, the forecast for the upcoming quarter will be
binding, subject to the quarterly volume modifications
referred to in Sections 10.2 and 10.3. Except as otherwise
provided in the preceding sentence, volume forecasts are
provided as good faith estimates of IBM's anticipated
requirements for Products and Upgrades for the periods
indicated based on current market conditions and do not
constitute commitments to purchase any fixed quantity of
Products.
- ----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
29
<PAGE> 37
10.2 StorageTek agrees to supply, and IBM agrees to take Delivery
of, during any current quarter, and to pay in accordance with
Section 7, above, for not less than the Minimum Percentage (as
shown in the table below) of the units forecasted as of the
date the volumes became binding as provided in Section 10.1.
StorageTek agrees to use the Remainder Percentage (as shown in
the table below) to satisfy the next quarter's orders.
StorageTek will hold additional units in excess of the
Remainder Percentage provided that IBM purchases and pays for
such additional units. Any units of inventory not required
under this section to be purchased and delivered in the
then-current quarter will be applied to and delivered to
fulfill the next-following quarter's volume requirements
before any new orders for such next-following quarter are
fulfilled.
1996 1Q-3Q 1997 4Q 1997-end
---- ---------- -----------
Minimum Percentage ** ** **
Remainder Percentage ** ** **
With ** prior written notice, IBM may elect to adjust the
flexibility for ** to correspond to the other elements of
the above table, as well as the Maximum Percentage described
for the same quarters in Section 10.3, below, by changing the
payment terms set forth for those quarters in Section 7.10
from 45 to 30 days.
Initial purchases of Iceberg Product shall exclusively be **
until such time as IBM has purchased up to **
10.3 IBM may also require StorageTek to deliver during the current
quarter, for which IBM shall pay in accordance with Section 7,
above, up to the Maximum Percentage as shown in the table
below of the units forecasted as of date the volumes became
binding as provided in Section 10.1, except as adjusted as set
forth in the penultimate paragraph of Section 10.2, above.
Q4 1996 1Q-3Q 1997 4Q 1997-end
------- ---------- -----------
Maximum Percentage ** ** **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
30
<PAGE> 38
10.4 CURRENT QUARTER
Subject to Sections 10.2 and 10.3, in order to assist
StorageTek in planning its manufacturing operations, IBM will
provide modifications to the previously submitted weekly
schedules in the current forecast, as follows:
FLEXIBILITY NOTICE REQUIRED
TARGET (in days from anticipated
Delivery date)
----------- -------------------------
+/- ** within **
+/- ** within **
+/- ** within **
+/- ** within **
+/- ** within **
+/- ** beyond **
All volume increases will be allowable per the matrix above up
to StorageTek's maximum capacity. StorageTek's initial maximum
capacity is stated in the following table:
CAPACITY IN UNITS OF PRODUCT PER WEEK, FOR:
Iceberg Kodiak
------- ------
1996 ** | **
1997 ** | **
1998 ** | **
Upon mutual agreement, StorageTek will add additional capacity
if IBM increases its forecasted volumes beyond the current
maximum capacity with at least six months' prior written
notice to StorageTek. StorageTek agrees to use reasonable
efforts to accommodate variations greater than those stated
above, including but not limited to accepting assistance from
IBM.
10.5 STORAGETEK'S CAPACITY/ALLOCATION
a. StorageTek expressly represents that StorageTek has, as
of the Effective Date of this Agreement, and will
maintain throughout the term of this Agreement, adequate
product and manufacturing capacity to fulfill in a
timely fashion all its existing contractual commitments
as well as the quantities committed to in this Agreement
by IBM (when taking into account Section 10.4) and any
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
31
<PAGE> 39
commitments StorageTek subsequently enters into, without
allocation of production among its customers. However,
if StorageTek is unable to meet its Delivery commitments
and must allocate its capacity, inventory, test
equipment, resources, use of personnel, parts,
components, supplier resources and capabilities, etc.,
that are used to produce Equipment, then StorageTek
agrees to:
(1) act in good faith; and
(2) allocate its capacity, supplier resources and
capabilities, inventory, test equipment,
resources, use of personnel, parts, components,
and available supply of Equipment to fill orders
for IBM in the following order of priorities:
(i) ** ; and
(ii) **
b. StorageTek will allocate parts, components and materials
in accordance with the following priorities:
(1) Code A FRUs order/requirements are filled first;
and
(2) then a fair allocation between manufacturing
orders and nonemergency maintenance parts
order/requirements.
11. PURCHASE ORDERS, ALTERATIONS & RESCHEDULING
11.1 IBM may submit purchase orders at any time; provided, however,
that subject to Section 11.6, any order shall be binding on
both Parties if such order is within the forecast range set
forth in Sections 10.2 and 10.3, and is submitted not less
than ten (10) business days before IBM's requested date of
Delivery. IBM may request that StorageTek deliver in fewer
than ten (10) business days and StorageTek may agree to do so.
11.2 This Agreement does not constitute a purchase order. IBM may
issue purchase orders from time to time during the term of
this Agreement in either electronic (EDI) or written form.
Authorization to StorageTek to perform any work or produce any
Equipment under this Agreement will be through IBM purchase
orders only. Alterations to the quantity, delivery date,
engineering level, or other items on purchase orders may be
made by IBM from time to time, subject to StorageTek's
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
32
<PAGE> 40
agreement. Purchase orders will be considered noncancelable
within ten (10) days of the scheduled Delivery date.
11.3 IBM shall submit its purchase orders to StorageTek at the
address set forth in the Notices section of this Agreement.
IBM's purchase orders will include:
a. IBM's part, model or feature numbers, configuration and
description of Equipment;
b. quantity required;
c. unit or item price and total order price;
d. required delivery date(s);
e. delivery instructions (including a carrier who will
accept delivery at StorageTek's address); and
f. reference to this Agreement.
Unless otherwise specifically agreed to in writing, additional
terms and conditions on IBM's purchase orders or on
StorageTek's acknowledgment, whether in conflict with this
Agreement or not, are superseded hereby and are of no force
and effect.
11.4 StorageTek agrees to accept conforming IBM purchase orders and
to manufacture, supply and Deliver Equipment in accordance
with the terms and conditions of this Agreement. StorageTek
agrees to provide written acknowledgment of IBM's purchase
orders within two (2) days, for volumes within IBM's forecast,
or within five (5) days, for volumes in excess of IBM's
forecast, as measured from StorageTek's actual receipt of the
purchase order (without regard to the Notices section of this
agreement, except for EDI) which purchase order may be made
verbally and/or in advance of StorageTek's receipt of a hard
copy confirming such order. If StorageTek's acknowledgment is
not received by IBM within the two (2) or five (5) day period,
as described above, from the date of receipt of the purchase
order from IBM, then the purchase order, including the
requested delivery date(s) will be deemed to be accepted by
StorageTek. StorageTek may not reject any IBM purchase order
that conforms to the requirements of this Agreement and covers
quantities forecasted by IBM, as described in Section 10.
11.5 Orders for FRUs needed on a "Code A" basis (i.e.,
emergency-customer down) will be shipped by StorageTek within
twenty-four (24) hours at a price not to exceed the lesser of
** of the price in Exhibit 5 or such price plus ** , with
IBM designating
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
33
<PAGE> 41
the carrier and being responsible for freight and insurance
costs. However, IBM will not pay any premium (i.e. pay only
100%) for Code A FRUs necessitated because StorageTek has
failed to deliver nonemergency FRU orders within the lead
times set forth in Exhibit 5.
11.6 IBM may cancel purchase order(s) or any portions thereof for
any reason by notifying StorageTek in writing at least ten
(10) days prior to the scheduled Delivery date. Cancellation
will be effective upon StorageTek's receipt of the written
cancellation notice from IBM. StorageTek will immediately
cease building such units for the affected purchase order(s)
in accordance with the cancellation notice. IBM will have no
liability for canceled purchase orders other than as set forth
in Section 10.2, and, if applicable, any Recovery Payment as
described in Section 7.6 hereof.
11.7 If for any reason StorageTek is unable to Deliver as required
by accepted IBM purchase order(s), and fails to correct such
inability within ** of such failure, IBM will have the right
to cancel such purchase order(s) or portions thereof by
notifying StorageTek in writing. If IBM cancels purchase
orders under this Section 11.7, IBM's only obligation will be
to pay for Products or Upgrades already delivered at the time
of IBM's cancellation notice ** .
11.8 Due to ongoing and unpredictable market conditions, StorageTek
agrees to permit IBM, upon written notice to StorageTek, to
require StorageTek to reconfigure units of Products and
Upgrades as follows:
a. Configuration changes that do not change a unit model
number may be made without additional cost until **
before scheduled Delivery; and
b. Any other configuration changes may be made at any time
(including Product and Upgrades that require
reconfiguration after Delivery) and such configuration
changes will be ** . StorageTek and IBM will agree in
advance on a schedule of lead times and costs that will
apply to such configurations.
11.9 Subject to Section 10, IBM may reschedule purchase order(s) or
any portions thereof for any reason by notifying StorageTek in
writing at least ** prior to the Delivery Date specified on
the purchase order(s).
11.10 For the last quarter of this Agreement, the purchase orders
submitted by IBM to StorageTek shall be noncancelable unless
StorageTek is manufacturing Devices.
11.11 Products and Upgrades that are supplied to IBM hereunder will
consist of new parts and components. FRUs that IBM returns
will be reworked by StorageTek to an equivalent-to-new
reliability level. Such reworked FRUs will not be used in any
new
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
34
<PAGE> 42
Products or Upgrades Delivered to IBM hereunder, but may
instead be returned to IBM as reworked FRUs.
12. CONSIGNMENT
12.1 IBM will consign certain disk drives ("Drives") to StorageTek
for use in Equipment. Drives supplied by IBM to StorageTek
shall only be used by StorageTek to build Equipment for IBM
and shall remain the property of IBM.
12.2 StorageTek agrees to sign and adhere to the terms and
conditions of the IBM Consignment Agreement, attached hereto
as Exhibit 4, provided, however, that the terms of this
Section 12 prevail over those of Exhibit 4.
12.3 IBM agrees to consign Drives to StorageTek in accordance with
a mutually agreed Profile based on at least a five-day buffer
ahead of StorageTek's build cycle, and including a yield
factor based upon the previous quarter's experience and
calculated using a mutually agreed formula. Any Drives, or
other IBM-supplied parts and components, that are not used by
StorageTek due to integration fall-out will be returned to IBM
within ten (10) days after such fall-out.
12.4 If IBM fails to provide consigned Drives to StorageTek in
accordance with Section 12.3, and StorageTek's manufacturing
line is down such that StorageTek cannot meet its Delivery
dates to IBM, then StorageTek will agree, per Section 10.2, to
hold up to ** , as the case may be, of such undelivered and
forecasted Products and Upgrades, without Drives, in inventory
for up to ** . If the amount of such Products and Upgrades
held in inventory exceeds ** of the forecasted volumes then
StorageTek will notify IBM, and IBM will ** .
12.5 If IBM Drives are not available for an extended period of
time, IBM may request assistance from StorageTek in securing
drives from other drive manufacturers in lieu of using IBM
Drives. StorageTek agrees, on a best effort basis, to assist
in securing the most cost effective, high quality alternative,
and with the agreement of IBM, to take the steps necessary to
integrate such drives into the Product. In such event, the
parties will agree in advance on an equitable division of
StorageTek's cost of securing, qualifying and integrating such
drives, including any cost relating to inventory or required
firm purchase commitments even if such substitution is only
temporary in nature.
12.6 StorageTek agrees to return to IBM freight collect any IBM
consigned Drives in StorageTek's inventory, within five (5)
days of receipt of IBM's written (or EDI) request.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
35
<PAGE> 43
13. DELIVERY
13.1 ON-TIME DELIVERY
a. StorageTek shall use its best efforts to ensure that
every scheduled Delivery date is met. StorageTek must
notify IBM in advance if a scheduled Delivery date will
not be met. StorageTek will make every reasonable
effort at its expense to ensure the earliest possible
Delivery date and quantities for late Equipment,
including, but not limited to, overtime and expedite
charges. "On schedule" means ** . Unless delay is
caused by IBM's delay in its supply of Drives or
IBM-supplied parts and components, StorageTek will
arrange for premium transportation and pay, at
StorageTek's sole cost and expense, for the difference
between normal transportation and such premium
transportation, including, but not limited to, air
transportation and expedited freight charges. StorageTek
also agrees to provide, at IBM's request, an action plan
to correct late shipments and to resolve any Delivery
problems.
b. If, during any ** period, StorageTek fails, on a
one-time basis only, to Deliver more than ** , but not
more than ** , of the units of Equipment that are
scheduled for Delivery in a calendar month by their
scheduled Delivery dates, then StorageTek shall be
required to expedite shipment of such units in
accordance with Section 13.1. ** .
c. If StorageTek fails to Deliver more than ** of the
units of Equipment that are scheduled for Delivery by
their scheduled Delivery dates in the next following
month, and except for Volumes subject to the one time
per ** provision defined in 13.1b, above, then ** .
d. If, in the month following any month in which a **
adjustment was credited to ** Volumes under this
Section 13.1, StorageTek fails to Deliver more than **
of the units of Equipment that are scheduled for
Delivery by their scheduled Delivery dates, then ** .
e. If, in the next following month, StorageTek fails to
Deliver more than ** of the units of Equipment that
are scheduled for Delivery by their scheduled Delivery
dates, ** .
f. If, in the next following month, and for each additional
consecutive month, StorageTek fails to Deliver more than
** of the units of Equipment that are scheduled for
Delivery by their scheduled Delivery dates, then ** .
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
36
<PAGE> 44
g. Notwithstanding anything to the contrary in this
Section, and in lieu of credits provided in other
paragraphs of this Section, if, in any calendar month,
and subject to Section 13.1b. above, StorageTek fails to
Deliver more than ** of the units of Equipment that
are scheduled for Delivery by their scheduled Delivery
dates, then ** .
h. **
i. Notwithstanding anything to the contrary in this
Section, units of Equipment which StorageTek fails to
Deliver by the Delivery date will not be counted as
failures to Deliver if StorageTek causes such units to
be delivered to IBM customers by the delivery date IBM
has committed to such customers (the "Commit Date").
IBM will notify StorageTek in writing of each unit of
Equipment which fails to arrive by the Commit Date
within ten (10) business days after StorageTek notifies
IBM that such shipment was expedited.
j. **
k. If StorageTek fails to deliver to IBM more than ** of
the units of Equipment scheduled for Delivery by the
scheduled Delivery dates in a month, for **
consecutive calendar months then the payment terms in
Section 7.10a will be immediately extended to ** days
until ** after the first month in which StorageTek
Delivers ** or more of Equipment on its scheduled
Delivery date.
l. IBM expressly reserves the right to assert that any
failure to ship Equipment on a timely basis, including,
but not limited to, failures for which volume
adjustments are provided for in this section, could
constitute a material breach of StorageTek's obligations
under this Agreement.
13.2 CARRIER
It is understood and agreed that IBM shall make all
arrangements for shipments of the Equipment. It shall be the
responsibility of IBM, at its own expense, to supply
StorageTek with detailed documentation and instructions and
all necessary export licenses, customs declarations and
certificates in properly executed form required for successful
shipment of Equipment from the Manufacturing Site and entry
into foreign territories. StorageTek shall notify IBM when
Equipment is ready for shipment from StorageTek's plant. IBM
will pay all shipping and transportation charges directly to
the carrier or freight forwarder as long as shipped in
accordance with IBM's routing instructions. If IBM requests
that StorageTek arrange shipping, IBM shall reimburse
StorageTek for the shipping charges pursuant to StorageTek's
invoice. In no event will IBM reimburse StorageTek for, or pay
any C.O.D. charges, should StorageTek
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 45
ship by another carrier without prior IBM approval. If
StorageTek ships using other than an IBM- approved carrier,
StorageTek is responsible for any incremental increase in
freight charges.
13.3 TITLE/RISK OF LOSS
Title to Equipment and risk of loss shall pass to IBM at
StorageTek's plant of manufacture loading dock. [F.O.B. by
UCC/ExWorks by INCOTERMS]; provided, however, that
notwithstanding anything to the contrary in this Agreement
title to all Licensed Works will remain with StorageTek,
except as provided in the IDA and its related Attachments. All
claims for shipping damage shall be resolved between IBM,
carriers or freight forwarders handling the Equipment and the
insurance companies and agents responsible for adjusting such
claims, and StorageTek shall have no responsibility with
respect thereto. However, at IBM's request, StorageTek agrees
to cooperate reasonably with IBM in filing and settling such
claims.
13.4 PACKAGING
StorageTek will package each unit of Equipment according to an
agreed-upon Specification for packaging. The prices for
Equipment include all packaging costs.
14. EQUIPMENT WARRANTY
14.1 StorageTek warrants that units of Equipment (excluding Drives
and nonserialized FRUs) that are to be provided to IBM
hereunder conform to the Specifications and are and shall
remain free from defects in materials and workmanship, for the
time periods specified in this Section 14.1.
a. The warranty period for each unit of Products and
Upgrades shall be ** after the earlier of:
(1) **
(2) **
b. StorageTek will serialize the FRUs identified as
serialized on Exhibit 5, and as to those FRUs the
warranty period shall be ** after the earlier of:
(1) **
(2) **
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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14.2 All warranties provided by StorageTek to IBM hereunder shall
survive any inspection, delivery, acceptance and payment and
shall not be affected by the fact that IBM has resold, rented
or leased units of Equipment to others.
14.3 IBM will maintain failure records for Products and Upgrades to
the same extent as IBM maintains such records for similar
high-end direct access storage device products marketed by it.
If IBM believes failures for a given serial number unit of
Equipment warrants replacement, IBM may request and StorageTek
may agree to replace the same at no cost to IBM. StorageTek's
agreement will not unreasonably be withheld. In order to
improve Equipment quality and minimize costs, StorageTek may
request relevant information from the data which IBM retains
regarding failure by machine serial number. IBM may agree to
provide such information to StorageTek. Such agreement will
not be unreasonably withheld.
14.4 StorageTek's liability under warranty pursuant to Section 14.1
is limited to: Delivery to the IBM regional stocking
locations specified by IBM of retrofit kits (containing FRUs)
with installation instructions (at no charge to IBM) as
necessary to make Equipment conform to the Specifications, or
otherwise be free from defects in materials and workmanship;
or repair or replacement, at StorageTek's option, without cost
to IBM, of the defective Equipment. IBM will use reasonable
efforts to resolve customer issues through use of FRUs or
retrofit kits before requesting repair or replacement of the
defective Product or Upgrade. Labor to remove defective FRUs
and install replacement FRUs under this warranty shall be
supplied by IBM at no charge to StorageTek, subject to Section
9.3h. Where warranty can be provided by replacing a FRU,
StorageTek will provide and IBM will install the replacement
FRU.
14.5 All warranty claims shall be made by IBM, regardless of any
transfer of title or possession of the Equipment by IBM to
other parties, and StorageTek agrees that IBM may make
warranty claims against StorageTek on the behalf of any
rightful user or possessor of the Equipment.
14.6 StorageTek's liability to perform warranty under this Section
14 shall not apply to failures of any unit of Equipment
caused by:
a. Physical abuse or use that is not consistent with
operating instructions for the Equipment; or
b. Modification (by other than StorageTek's personnel or
agents) in any way other than approved by StorageTek;
provided, however, that the warranty shall not be voided
by repair or replacement of FRUs or the attachment of
items in the manner described in maintenance or
installation instructions provided by StorageTek.
14.7 Claims under the terms of this warranty shall be submitted to
StorageTek in writing (including EDI) and shall clearly state
the Product or Upgrade serial number. Where
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<PAGE> 47
available, IBM shall send StorageTek its field defect report.
Defective FRUs replaced under this warranty become the
property of StorageTek.
14.8 Both Parties will ensure that FRUs returned to the other Party
are properly and adequately packaged, and IBM agrees to use
the same or equivalent packaging as StorageTek uses to package
such FRUs.
14.9 StorageTek shall use reasonable commercial efforts to complete
repairs of FRUs for in-warranty units within thirty (30)
business days after the date StorageTek receives the defective
FRUs, but in any case, it will complete repairs of the FRUs at
no charge to IBM within sixty (60) days after receipt. If,
upon receipt, StorageTek determines that such defective FRUs
are not repairable or if StorageTek has not completed its
failure analysis on any FRU within ten (10) business days
after StorageTek's receipt, then replacement FRUs will be
provided at no charge by StorageTek to IBM within ten (10)
business days. If StorageTek cannot find a defect or
assignable cause in a FRU that is returned by IBM as
defective, StorageTek will replace the received FRU and will
ensure that the FRU is not included in Equipment and cannot be
returned in the future to IBM.
14.10 LICENSED PROGRAMS, MICROCODE AND MAINTENANCE CODE WARRANTY
a. StorageTek warrants that the Licensed Programs and
Microcode will conform to the Specifications, as such
Specifications may be modified by any Product
Development Plan, and are and shall remain free from
defects in workmanship. The Maintenance Code shall
remain free from defects in workmanship. The warranties
set forth in this Section 14.10 shall not apply to:
(1) **
(2) **
(3) **
(4) **
(5) **
(6) **
StorageTek does not warrant that the functions contained
in the Licensed Program and Maintenance Code will **
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 48
b. In the event of a breach of the warranties contained in
this Section 14.10, StorageTek will exercise reasonable
commercial efforts to implement appropriate procedures
to correct such breach in accordance with Section 16.8,
for Licensed Programs and Microcode and Section 16.7 for
Maintenance Code.
14.11 StorageTek warrants that it will competently perform all work
relating to the Deliverables in a manner consistent with
ordinary Microcode programmers skilled in the art, and,
further, all Deliverables will conform to the mutually
agreed-upon Specifications.
14.12 THE WARRANTIES IN SECTIONS 14 AND 18 OF THIS OEM AGREEMENT,
AND IN PART 6 OF THE SOURCE CODE CUSTODY AGREEMENT, ARE IN
LIEU OF ALL OTHER WARRANTIES EITHER WRITTEN, ORAL OR IMPLIED
WITH RESPECT TO THE EQUIPMENT, DELIVERABLES, LICENSED PROGRAMS
AND MAINTENANCE CODE.
STORAGETEK DISCLAIMS THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT
AS OTHERWISE PROVIDED IN SECTION 18.2, STORAGETEK ALSO
DISCLAIMS THE IMPLIED WARRANTY OF NONINFRINGEMENT.
STORAGETEK'S WARRANTY OBLIGATIONS SHALL EXTEND ONLY TO IBM,
AND STORAGETEK SHALL HAVE NO LIABILITY ARISING OUT OF ANY
WARRANTIES PROVIDED BY IBM WHICH ARE BEYOND STORAGETEK'S
WARRANTY OBLIGATIONS IN THIS AGREEMENT.
IBM'S EXCLUSIVE REMEDY FOR A BREACH OF THE WARRANTY SET FORTH
IN THIS SECTION 14 IS SET FORTH IN SECTION 14.4 FOR EQUIPMENT,
AND SECTION 14.10(b); FOR LICENSED PROGRAMS, MICROCODE AND
MAINTENANCE CODE, PROVIDED, HOWEVER, THAT STORAGETEK PROMPTLY
PERFORMS ITS WARRANTY OBLIGATIONS PURSUANT TO SECTION 14.
15. FRUS
15.1 During the term of this Agreement and for ** after the last
Delivery of Product or Upgrades, or for so long as StorageTek
makes FRUs available to any other entity, whichever is later,
StorageTek agrees to provide FRUs to IBM. The list of FRUs
and their respective prices and lead times are described in
Exhibit 5, which Exhibit will be updated semiannually (in
January and July).
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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15.2 Notwithstanding anything herein to the contrary, if StorageTek
intends to discontinue producing or making available any FRU
after the ** obligation set forth above, StorageTek agrees to
provide IBM with twelve (12) months' prior written notice of
such intent and permit IBM to purchase as many FRUs as IBM
reasonably believes it will need for the Products. In the
alternative, and at IBM's option, StorageTek agrees to grant
IBM the right to manufacture such FRUs in accordance with
Section 23.6.
15.3 FRUs shall be packaged in the same or equivalent packaging as
StorageTek used to package such FRUs. Return of FRUs for
repair or replacement is subject to a reasonable material
return procedure to be mutually agreed between the Parties.
15.4 FRU REWORK PROCEDURES AND PRICES
a. StorageTek will attempt to rework/repair all FRUs
returned from IBM and return them to IBM within 30 days
of receipt. At IBM's request, StorageTek will also ship
to IBM any unrepairable FRUs.
b. Except as otherwise provided in Section 9, Quality, and
Section 14, Equipment Warranty, StorageTek will invoice
IBM, and IBM agrees to pay, ** for FRUs as described
in Section 7.7, plus normal transportation charges
unless IBM requests special handling. Such costs will be
subject to IBM's Audit Rights.
16. FIELD SERVICE & SUPPORT
16.1 INSTALLATION SUPPORT
a. Upon IBM's written request, StorageTek will, at no
charge to IBM, assist IBM in installing units purchased
under this Agreement, including on-site installation if
necessary, in accordance with the table below provided
** . IBM's written requests will specify the
installation site, date of installation, whether the
site is classified and any special installation
instructions. StorageTek may provide at IBM's request
additional installation services beyond those required
in this section at the rates described in Section 16.5.
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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PERCENTAGE OF INSTALLATIONS STORAGETEK WILL SUPPORT (BY PRODUCT)
<TABLE>
<CAPTION>
TIME PERIOD ICEBERG KODIAK
----------- ------------------------
<S> <C> <C>
3Q96 ** **
4Q96 ** **
1Q97 ** **
</TABLE>
b. The services and charges referred to in this
section ** .
16.2 TRAINING
a. ** :
(1) **
(2) **
(3) **
(4) **
(5) **
In addition, StorageTek will conduct ** training
sessions for IBM's ** personnel at StorageTek's
expense ** . The goal of this training will be to
** .
b. At IBM's request, StorageTek will provide up to **
additional initial training sessions beyond the
sessions described above at a fee of ** , plus
reasonable travel and living expenses for StorageTek
trainers if such sessions are held at a location other
than StorageTek's training facility. StorageTek also
agrees to make its training facilities available to IBM
at StorageTek's cost for IBM to provide education to its
personnel through the end of 1996.
c. StorageTek will also provide "on-the-job" training for
IBM customer engineering personnel by assisting them, at
IBM's option, in any Product and Upgrade installations
as described in Section 16.1.
d. For all new Products and Upgrades StorageTek makes
available to IBM during the term of this Agreement,
StorageTek agrees to provide IBM personnel with
assistance at no charge to develop training for IBM's
customer engineering personnel at the same level as the
training StorageTek provides to its own personnel on its
other products.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 51
16.3 SERVICE OF EQUIPMENT
To assist IBM in product transition, ** at IBM's request,
StorageTek agrees to **
a. **
b. **
At the beginning of each quarter, IBM agrees to commit to, and
to pay for as set forth in Section 16.5, and StorageTek
thereafter agrees to provide, the number of hours of such
customer engineering support IBM will require at the beginning
of each quarter. The maximum fee StorageTek will charge IBM
for each hour of such customer engineering support actually
provided (except for the no charge installation support) is
set forth in the table found in Section 16.5. To the extent
StorageTek is unable to provide service hereunder, StorageTek
will promptly refund unearned payments.
16.4 EMERGENCY AND EXPERT MAINTENANCE COVERAGE
In every country/territory where IBM installs Products and
Upgrades, StorageTek agrees to make available upon IBM's
request and on the shortest possible notice customer service
engineers to support critical customer situations. The maximum
fee StorageTek will charge IBM for each hour of such support
actually provided is set forth in the table in Section 16.5.
In addition, IBM will reimburse StorageTek for actual and
reasonable travel expenses incurred by StorageTek's personnel
in providing this support in countries where StorageTek does
not have a service organization.
16.5 LABOR RATE TABLE
<TABLE>
<CAPTION>
Calendar Quarter Maximum Hourly Rate
------------------------------------------------
<S> <C> <C>
** **
** **
** **
** **
** **
and beyond **
</TABLE>
16.6 NEW PRODUCT DEVELOPMENT CENTER SUPPORT
a. StorageTek will provide its New Product Development
Center Support ("NPDC") ** . In addition, **
StorageTek will ** . StorageTek agrees to provide IBM
** . StorageTek grants IBM a license to ** in
accordance with the Description of Licensed Works.
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 52
b. To assist IBM in transitioning to its own service
center, StorageTek agrees that ** .
c. StorageTek shall provide comparable levels of response
times for NPDC support to IBM as those that StorageTek
provides to its own customer service base (including
StorageTek's tape and service products).
16.7 MAINTENANCE AND INSTALLATION TOOLS
To assist IBM in providing optimum hardware and software
maintenance service to customers, StorageTek agrees to:
a. **
b. Promptly provide to IBM ** . StorageTek grants IBM a
license to the ** in accordance with the Description
of Licensed Works.
StorageTek also agrees to provide ** .
16.8 MAINTENANCE AND TECHNICAL SUPPORT
a. Maintenance. IBM will be responsible to provide Level
1, Level 2 and Level 3 support to its customers. IBM
agrees to use its commercially reasonable efforts to
perform the following:
(1) **
(2) **
(3) **
(4) **
(5) **
b. Technical Support. StorageTek agrees, upon IBM's
request, ** to provide technical support to IBM for
the Equipment, Licensed Programs and Microcode,
including without limitation, assistance in problem
determination, problem source identification and problem
diagnosis, in the following manner:
(1) Equipment. StorageTek will provide IBM with
reasonable assistance for the Equipment ** .
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** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
45
<PAGE> 53
In addition, if a malfunction or failure in
Equipment ** then StorageTek shall, ** .
Prior to honoring a request ** . Upon receipt
of appropriate supporting documentation, ** .
StorageTek agrees to use its commercially
reasonable efforts to assist IBM in resolving
problems within the time frames set forth below:
(a) Any Severity 1 level problem: Within **
after notification by IBM of any such
problem;
(b) Any Severity 2 level problem: Within **
after notification by IBM of any such
problem;
(c) Any Severity 3 level problem: Within **
after notification by IBM of any such
problem; and
(d) Any Severity 4 level problem: Within **
after notification by IBM of any such
problem.
For purposes of this Section 16.8b(1), ** .
(2) Licensed Programs and Microcode. The following
is a description of the support that StorageTek
shall provide to IBM:
(a) **
(b) **
(c) **
(d) **
(e) **
(f) **
(g) **
(h) **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 54
16.9 ** ACCESS
During the term of the Agreement, IBM agrees to allow
StorageTek to have access to ** solely to support ** .
StorageTek's use of and access to ** and may be terminated
if such use or access ** .
17. MARKETING RIGHTS & SUPPORT
17.1 On the Effective Date, the Parties will announce that they
have entered into an agreement under which IBM will market
Products worldwide that it purchases on an OEM basis from
StorageTek.
17.2 MARKETING SUPPORT ORGANIZATION
StorageTek agrees to establish a marketing support
organization to provide timely sales and marketing support to
IBM on a worldwide basis. This organization will **
a. **
b. **
17.3 TRAINING
StorageTek agrees to provide marketing training and support to
IBM to facilitate IBM's sales of Products and Upgrades.
a. Initial Training.
(1) Sales. During ** StorageTek will provide,
** .
(2) Systems Engineering. During ** StorageTek
will provide, ** .
17.4 ADDITIONAL INITIAL TRAINING
StorageTek will provide up to ** .
17.5 ONGOING TRAINING
StorageTek agrees to provide IBM with material, documentation,
and support from StorageTek's Engineering and Technical
Support Staff similar to that provided as of
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 55
the Effective Date on StorageTek's new products, for IBM to
provide its personnel with training for all new Products and
Upgrades.
17.6 MARKETING MATERIALS
StorageTek will promptly provide IBM with electronic and paper
copies, to the extent available, of all marketing materials
used by StorageTek within one year prior to the Effective Date
of this Agreement, to market StorageTek products similar to
Products and Upgrades, including without limitation all "white
papers," materials describing the advantages and benefits of
such StorageTek products, and materials related to
comparisons of such StorageTek products with competitive
products.
In, addition StorageTek will provide samples, artwork, and
camera ready copy (to the extent available) of all collateral
materials (e.g., brochures and product guides) and advertising
related to StorageTek products similar to Products and
Upgrades.
**
To the extent that StorageTek has the right to do so,
StorageTek hereby grants IBM ** worldwide right and license
to all of the marketing and collateral materials relating to
the Products and Upgrades it receives from StorageTek, during
the term of this Agreement, to use, reproduce, display,
distribute, create and have created Derivative Works of any
or all such materials without attribution and grant
sublicenses of equivalent scope to its Subsidiaries but not
otherwise; provided IBM does not use StorageTek's trademarks
or trade names except as specifically permitted. StorageTek
will identify portions of the materials which are subject to
third-party rights.
17.7 MARKETING TOOLS
StorageTek will provide all of its marketing tools, software
and related documentation related to the Products and
Upgrades, excluding third-party confidential materials, ** .
In addition, StorageTek will reasonably assist IBM in updating
its own tools to support Products and Upgrades. StorageTek
agrees to provide IBM such tools and software (in Source Code
form, to the extent not prevented by supplier license
transferability restrictions and if StorageTek discontinues
its support of such tools and software, and in Object Code
form). StorageTek hereby grants IBM ** worldwide right and
license to the tools, software and related documentation it
receives from StorageTek during the terms of this Agreement,
to use, reproduce, display, distribute, and create, and have
created Derivative Works of any or all such tools and software
without attribution, and grant sublicenses of equivalent scope
to its Subsidiaries but not otherwise.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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<PAGE> 56
17.8 SYSTEMS ENGINEERING SUPPORT
StorageTek agrees to provide IBM ** . To the extent
StorageTek is unable to provide hours hereunder, StorageTek
will promptly refund unearned payments.
18. REPRESENTATIONS AND WARRANTIES
18.1 Each Party represents and warrants that it has the authority
and right to enter into this Agreement, and has no existing
obligations, and shall not assume any obligations, that
conflict with its obligations or the rights granted to it in
this Agreement. Each Party also represents and warrants that
it has the authority to convey the rights granted or assigned
by it in this Agreement. Each Party will provide, upon
request, copies of agreements or other documentation necessary
to establish such rights. If a Party is unable to supply a
copy of such agreements or other documentation, then such
Party shall use its best efforts to obtain such agreements or
other documentation to sufficiently establish that it has been
granted these rights.
18.2 **
18.3 StorageTek represents and warrants that, with respect to the
Deliverables, Licensed Programs and Maintenance Code created
outside the United States, all authors have waived their moral
rights in all Deliverables, Licensed Programs and Maintenance
Code to the extent permitted by law.
18.4 StorageTek represents and warrants that the Equipment (or
Devices if manufactured by IBM pursuant to Section 23.6), when
used in accordance with the Specifications, will not present a
health or safety risk to persons or property; and the
Equipment shall comply with all applicable regulatory health
and safety standards, including UL, CSA, VDE, IEC, FCC,
European Economic Community CE-mark standards, any other
standards that are described in the Specifications or as
required by law. StorageTek agrees to provide IBM with copies
of all reports, certifications, and other relevant documents
related to such standards at StorageTek's expense.
18.5 StorageTek represents that ** .
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
49
<PAGE> 57
19. TRADEMARK & ADVERTISING
19.1 TRADEMARK AND DESIGN RIGHTS
Except as provided in Section 8, but notwithstanding any other
provisions of this Agreement, neither party hereto is granted
the right to use the trademarks, trade names, or service marks
of the other party (including those of Subsidiaries), directly
or indirectly, in connection with any product, promotion or
publication without the prior written approval of the other
party, except that IBM may use StorageTek's trademarks and
trade names for the aforementioned purposes on any Equipment
shipped by StorageTek which bears such trademarks or trade
names. Any approved use of one Party's trademark or trade
name shall enure to the benefit of the Party owning such
trademark or trade name.
19.2 ADVERTISING/DISCLOSURE
Neither party shall, without first obtaining the written
consent of the other party, in any manner disclose any details
of the work to be performed herein, the terms, conditions and
subject matter of this Agreement, or documents issued
hereunder, except as may be required by law or government rule
or regulation. To the extent that a party is compelled to
make a disclosure due to government rule or regulation, such
disclosure shall be limited to the extent required, and the
other party shall have an opportunity to review the
information prior to its release. Each party may independently
and without the consent of the other party inform customers of
the fact that an OEM distribution arrangement exists between
the Parties; however, to the extent that such communication
includes any additional information about the other party,
such party shall have an opportunity to review such
information prior to disclosure.
19.3 Upon request by IBM, StorageTek shall apply IBM's, its
Subsidiaries', its distributors' and/or its OEMs' trademarks,
logos and other information designated by IBM for the Product
and Upgrades as may be provided to StorageTek by IBM.
19.4 **
19.5 Use of a Party's trademarks by the other Party shall not
diminish the owner's right, title or interest to such
trademarks.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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20. CONFIDENTIALITY
20.1 It is anticipated that confidential information will be
exchanged between the Parties. Where confidential information
must be exchanged, it will be exchanged under an IBM Agreement
for the Exchange of Confidential Information (hereafter
"AECI").
20.2 With respect to all nonconfidential information disclosed by
one party (hereafter the "Disclosing Party") to the other
party (hereafter the "Receiving Party"), except to the extent
such information is protected by the Disclosing Party's patent
or copyright rights, the Disclosing Party grants to the
Receiving Party, to the extent, if any, of its interest
therein, a nonexclusive, royalty-free, irrevocable,
unrestricted, worldwide license to use, have used, disclose to
others, make copies in the case of documents, and dispose of,
all without limitation, such nonconfidential information in
any manner as it determines, including the use of such
nonconfidential information in the development, manufacture,
marketing and maintenance of products and services
incorporating such nonconfidential information.
21. ASSIGNMENT & CHANGE OF CONTROL
Neither Party shall assign or subcontract this Agreement, or any right
or obligation hereunder, without the prior written consent of the
other Party, except that subcontracts pursuant to StorageTek's normal
manufacturing procedures may be assigned, provided, however, that
StorageTek may not subcontract final assembly and test without IBM's
prior written consent. Any attempted assignment or subcontract not in
compliance with this paragraph shall be void.
StorageTek shall promptly notify IBM in writing of any Change of
Control **
21.1 In the event that a Change in Control occurs whereby control
of StorageTek is acquired by (i) ** .
21.2 In the event that a Change of Control occurs **
**
22. DISPUTE RESOLUTION
22.1 ESCALATION PROCESS
The Parties will attempt in good faith to promptly resolve any
controversy or claim arising out of or relating to this
Agreement by negotiations between executives of the Parties.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
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If a controversy or claim should arise, the Agreement
Administrators, or their respective successors, or their
superiors, will meet in person or phone, as they decide, at
least once and will attempt to resolve the matter. Either
Agreement Administrator may require the other to meet within
seven days at a mutually agreed upon time and location.
If the matter has not been resolved within ten days of their
first meeting, or a request for such meeting if no meeting
occurs, the Agreement Administrators shall refer the matter to
senior executives, who shall have authority to settle the
dispute (hereafter "Senior Executives"). The Senior Executive
for IBM shall be the General Manager of IBM's Storage System
business or his/her designee and the Senior Executive of
StorageTek shall be its Chief Executive Officer, or his/her
designee. Thereupon, the Agreement Administrators shall
promptly prepare and exchange memoranda stating the issues in
dispute, and their positions, summarizing the negotiations
which have taken place, and attaching relevant documents. The
Senior Executives will meet in person or by telephone within
seven (7) days of the end of the ten- (10) day period referred
to above, at a mutually agreed time.
The first meeting shall be held at the offices of the
Agreement Administrator receiving the request to meet. If more
than one meeting is held, the meetings shall be held in
rotation at the offices of IBM and StorageTek.
If the matter has not been resolved within fifteen (15) days
of the first meeting of the Senior Executives (which period
may be extended by mutual agreement), the Parties will attempt
in good faith to resolve the controversy or claim in
accordance with the following mediation process. During the
course of negotiations between the representatives, all
reasonable requests made by one party to the other for
nonprivileged information will be honored in order that each
of the parties may be fully informed of the circumstances
relevant to the dispute.
22.2 MEDIATION PROCESS
If the escalation process fails to resolve a dispute in
connection with this Agreement, any such dispute shall be
submitted to expedited mediation prior to the commencement of
any litigation with respect to such dispute. In the event
either party intends to seek recourse against the other by an
action at law or in equity, such party shall first give notice
to the other party. Within ten (10) business days of such
notice, the Parties shall attempt to agree on one mediator who
shall be a person mutually agreeable to both Parties and who
shall be experienced in the DASD industry. In the event the
Parties cannot agree on one mediator, each shall have the
right to appoint one mediator, and the two mediators shall
appoint a third. Mediation shall commence within twenty (20)
business days of the notice of request for mediation. Each
party agrees to cooperate fully with the mediator(s) in an
attempt to resolve any disputes. The mediator(s) shall use the
rules of the American Arbitration Association in conducting
the mediation. Any decision reached through mediation shall be
in writing but shall not be legally binding upon the Parties
nor admissible as evidence in any legal
52
<PAGE> 60
proceedings. If the Parties cannot resolve their differences
to their mutual satisfaction within thirty (30) business days
of the request for mediation, either Party shall be free to
pursue any and all other remedies available to such Party,
including, but not limited to, litigation. Costs of the
Mediator shall be born equally by the Parties.
23. TERMINATION/REMEDIES
23.1 TERMINATION BY MUTUAL CONSENT
This Agreement shall be subject to termination prior to the
expiration of the term at any time by mutual consent of the
parties, evidenced by a written agreement providing for
termination. Such agreement will include provisions to allow
StorageTek access to IBM disk drives of the same type as are
then being consigned to StorageTek and to provide IBM ongoing
maintenance, FRUs and Product Engineering Services if
StorageTek offers such items to any other entity.
23.2 TERMINATION BY BANKRUPTCY
This Agreement may be immediately terminated by either Party
if any of the following events ("Triggering Events") occur:
(1) the other Party files a voluntary petition under any
provision of the U.S. Bankruptcy Code or under any similar
insolvency law, makes an assignment for the benefit of its
creditors, (2) any involuntary petition in bankruptcy under
any provision of the U.S. Bankruptcy Code or under any similar
insolvency law is filed against such other Party, or (3) a
receiver is appointed for, or a levy or attachment is made
against all or substantially all of its assets, and such
involuntary petition is not dismissed or such receiver or levy
or attachment is not discharged within sixty (60) days after
the filing, appointment or making thereof.
To the extent that applicable bankruptcy law does not permit
the exercise of rights under the immediately preceding
paragraph, the bankrupt party agrees that adequate assurance
of performance by the bankrupt party of the balance of this
Agreement as a "Debtor-in-possession" or any similar entity
under successor bankruptcy laws will include assurances both
of such entity's ability to adequately produce products for
the specifically permitted Agreement and such entity's
willingness and ability to protect the other party's
proprietary rights. As a personal contract, exercise of
rights by a trustee or assignment of rights hereunder would
not be appropriate and such understanding is an essential part
of each Party's willingness to enter into this Agreement.
23.3 TERMINATION FOR CAUSE
a. If either Party is in material breach of this Agreement,
the other Party may give written notice to the
defaulting Party specifying the respects in which the
defaulting Party has failed to perform or comply with
the terms and conditions
53
<PAGE> 61
of this Agreement. In the event that any defaults so
indicated shall not be remedied by the defaulting Party
within sixty (60) days (ten (10) days as to a failure to
pay any amounts indisputably due) unless a different
period is provided for elsewhere in this Agreement after
such notice, the party not in default may, by written
notice to the defaulting Party, terminate this
Agreement.
b. Either Party may submit disputes related to the notice
of termination to the Escalation Process or Mediation
Process described in Section 22 but such termination
notice shall not be stayed by submission to escalation
or mediation and termination shall take effect as set
forth above. Failure of either Party to terminate this
Agreement due to a breach on the part of the other Party
shall not prejudice its rights to terminate for a
subsequent breach on the part of the defaulting Party.
c. The right of a Party to terminate this Agreement, and
the exercise of such right by such Party, shall be in
addition to any other remedies or rights granted in this
Agreement or which a Party would have in law or equity.
d. If IBM terminates this Agreement for cause:
(1) **
(2) **
(3) **
(4) **
(5) **
e. If StorageTek terminates this Agreement for cause:
(1) **
(2) **
(3) **
(4) **
(5) **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
54
<PAGE> 62
23.4 MATERIAL BREACH
A material breach shall include, but not be limited to, a
material failure to:
a. pay any amounts that are undisputably due;
b. deliver Equipment or to supply software, tools and
licenses in accordance with this Agreement;
c. comply with the reliability, availability, and service
levels specified in the Agreement;
d. manufacture Equipment in accordance with the Agreement;
e. supply Deliverables in accordance with Attachment 1 to
Exhibit 3; or
f. comply with Section 18, Representations and Warranties.
A Party may not be declared to be in material breach of any
provision of this Agreement if, and to the extent that its
failure to perform has been caused by the other Party's breach
of this Agreement.
23.5 ** LICENSE
StorageTek hereby grants to IBM a fully paid-up license to
** .
23.6 MANUFACTURING MAKE OR HAVE MADE RIGHTS
**
a. **
b. **
c. **
d. **
e. **
f. **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
55
<PAGE> 63
g. **
h. **
23.7 TERMINATION FOR CONVENIENCE
IBM shall also have the right to terminate this Agreement for
convenience ** by providing StorageTek with a ** of its
election to do so. In the event IBM elects to terminate this
Agreement for convenience, ** and based upon IBM's standard
OEM terms and conditions at the time of termination.
23.8 TERMINATION FOR BURDENSOME CONDITION
a. Upon the occurrence of a Burdensome Condition **
(1) **
(2) **
(3) **
(4) **
(5) **
(6) **
(7) **
b. Upon the occurrence of a Burdensome Condition **
(1) **
(2) **
c. Upon the occurrence of a Burdensome Condition **
(1) **
(2) **
(3) **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment
56
<PAGE> 64
(4) **
(5) **
(6) **
(7) **
d. For purposes of this Section 23.8, ** .
e. In no event will either Party's liability to the other
for termination pursuant to this Section 23.8 exceed (i)
the sum of ** in the event of a termination of this
Agreement only as a result of a circumstance described
in Section 1.7(ii); or (ii) the sum of ** in the event
of a termination of this Agreement as a result of a
circumstance described in Section 1.7(i). **
23.9 WIND DOWN
Upon termination of this Agreement by either Party for any
reason prior to the expiration of the term set forth in
Section 3:
a. IBM may continue, for ** following the date of notice
of such termination, to place noncancelable purchase
orders at prices for the quarter in which such notice is
effective for Equipment, and StorageTek agrees to accept
such orders and to manufacture supply and Deliver such
Equipment to IBM if ordered for Delivery within ** of
such purchase orders and within appropriate lead times;
and
b. StorageTek may continue for ** following the date of
notice of termination (unless a longer period is
otherwise provided for in this Agreement), to place
noncancelable purchase orders for disk drives of the
same type as the Drives that are being consigned, or
similar replacements therefor, at a price ** , and
based on IBM's standard terms and conditions; and IBM
agrees to accept such purchase orders and to
manufacture, supply and deliver such disk drives, if
ordered for delivery by StorageTek within appropriate
lead times.
Except for a termination of this Agreement by StorageTek
pursuant to Sections 6.5b or 6.5c, Equipment ordered by IBM
hereunder, if Delivered after termination, will be
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment
57
<PAGE> 65
credited toward IBM's attainment of its ** Volumes, as the
case may be, for the quarter in which the Agreement was
terminated.
23.10 ** AFTER TERMINATION
Subject to Sections 23.3 and 23.8, ** if either Party
terminates this Agreement, ** for Product Engineering
Services required under the SOW; or (iii) receive such Product
Engineering Services as it may request, up to the levels as
then required under the SOW, on a time and materials basis at
** .
24. INDEMNIFICATION RIGHTS
24.1 INTELLECTUAL PROPERTY INDEMNITY
a. **
b. **
c. **
d. **
(1) **
(2) **
24.2 GENERAL INDEMNITY
a. StorageTek shall indemnify, defend and hold harmless IBM
in respect to any cost, expenses, liability or damages,
including reasonable attorney's fees, for any
third-party claims arising out of or related to:
(1) **
(2) **
(3) **
(4) **
(5) **
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
58
<PAGE> 66
b. StorageTek shall, however, have no liability to
indemnify IBM if and only to the extent that:
(1) **
(2) **
(3) **
24.3 OBLIGATIONS OF IBM
The obligation of StorageTek to defend and make payments under
Sections 24.1 and 24.2 is conditioned on the following:
a. **
b. **
c. **
IBM may participate, at its sole cost and expense, in the
defense of any action on such claim and any negotiations for
its settlement or compromise.
25. GOVERNING LAW
25.1 NEW YORK LAW
The relationship between the Parties and this Agreement are
governed by the substantive laws of the state of New York. Any
action between the Parties must be brought before a court of
competent jurisdiction located in the United States Southern
District of New York. Each Party hereby waives any right to a
jury trial in any dispute between them. The Parties agree that
the United Nations convention on the international sale of
goods shall not apply to this Agreement.
It shall be a condition precedent to the filing of any such
actions that the dispute resolution procedure set forth in
Section 22 will have been followed prior to the filing of such
action, excepting only that a Party may institute an action
seeking a preliminary injunction, temporary restraining order,
or other equitable relief, if necessary in the opinion of that
Party to avoid material harm to its property, rights or other
interest, before commencing or at any time during the course
of the dispute procedure in Section 22.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment
59
<PAGE> 67
25.2 LIMITATION OF ACTIONS
Neither Party will bring a legal action in connection with
this Agreement against the other more than ** after the cause
of action arose. This limitation does not apply to actions
brought to enforce (i) indemnification rights (Section 24) or
(ii) violation of intellectual property rights.
25.3 LIMITATION OF LIABILITY
Except as may be required pursuant to Section 6.5, in no event
shall either Party hereto be liable to the other for more than
** for any and all causes of action and claims of any nature
(including, but not limited to, claims that obligations,
representations or warranties hereunder have failed of their
essential purpose) in connection with this Agreement;
provided, however, that:
(a) **
(b) **
26. GENERAL
26.1 COMPLIANCE WITH LAWS
Each Party agrees to comply at its own expense with all
applicable laws and regulations of the United States, the
European Union, and all other countries or country groups.
26.2 RELATIONSHIP OF THE PARTIES
Each Party acknowledges and agrees that it is it is
independent of the other. Neither Party is, or will claim to
be, a partner, employee, joint venturer, agent, or legal
representative of the other Party except as specifically
stated in this Agreement. Neither Party will assume or create
any obligation or responsibility, expressly or by implication,
on behalf of or in the name of the other Party. Each Party
is responsible for the direction and compensation of its
employees.
Each Party may have similar agreements with others. Each
Party may design, develop, manufacture, acquire or market its
own or competitive products and services.
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
60
<PAGE> 68
26.3 NOTICES
All notices by one party to the other in connection with this
Agreement shall be in writing and will be sent to the
following addresses:
Notices related to forecasts, orders, and shipment will be
sent to:
<TABLE>
<S> <C>
For IBM: For StorageTek:
** Agreement Administrator
Procurement Manager for IBM Agreement
IBM Corporation Storage Technology Corporation
5600 Cottle Road 2270 South 88th Street
San Jose, CA 95193 Louisville, CO 80028
</TABLE>
All other notices, including without limitation notices of
breach, default, will be sent to the following addresses:
<TABLE>
<S> <C>
For IBM: For StorageTek:
** Agreement Administrator
Vice President, Worldwide Materials for IBM Agreement
IBM Corporation Storage Technology Corporation
5600 Cottle Road 2270 South 88th Street
San Jose, CA 95193 Louisville, CO 80028
with a copy to:
For IBM: For StorageTek:
Legal Department General Counsel
IBM Corporation StorageTechnology Corporation
5600 Cottle Road 2270 South 88th Street
San Jose, CA 95193 Louisville, CO 80028
</TABLE>
Either Party may change any address at which it will receive
notices by notifying the other Party in writing.
Notices and other communications between the Parties in
connection with this Agreement shall be deemed given:
a. three days after being sent by U.S. mail, postage
prepaid, certified or registered, to the address listed
above; or
- -----------------------------------
** Confidential portions omitted and filed separately with the Securities
and Exchange Commission under an application for confidential treatment.
61
<PAGE> 69
b. on the date it is sent via facsimile transmission with
confirmation from the receiving party that the
transmission was completed successfully, with the
original document sent as described above in item a.
Notices related to order, forecast, shipment, and delivery may
also be sent via confirmed electronic mail (EDI) to the
address listed above and shall be deemed given on the date of
confirmation of delivery.
26.4 COUNTERPARTS
This Agreement may be executed simultaneously in two (2)
counterparts, each of which shall be deemed an original, but
both of which together shall constitute one and the same.
26.5 HEADINGS AND ATTACHMENTS
The headings in this Agreement are for reference only and will
not affect its meaning or interpretation. The Exhibits,
their Attachments, their Appendices and their Schedules, are
attached to and referenced in this Agreement and are
incorporated herein by reference.
26.6 AMENDMENT
For any change to this Agreement to be valid, it must be
signed by both Parties.
26.7 WAIVER
The failure by either Party at any time to enforce the
provisions of this Agreement, to exercise any option or
election, or to require at ant time the performance by the
other Party of any provisions herein will not be construed as
a waiver of such provision.
26.8 SEVERABILITY
If any provision or provisions of this Agreement shall be held
to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall
not in any way be affected or impaired provided the original
intentions of both Parties are maintained.
26.9 WEEKENDS AND HOLIDAYS
If any obligation of a party hereunder falls due on a weekend
day or a Federal holiday, then that obligation shall be due on
the next business day following such weekend day or Federal
holiday.
62
<PAGE> 70
26.10 FORCE MAJEURE
Neither StorageTek nor IBM shall be liable for any delay or
failure of performance hereunder due to any contingency beyond
its control which renders performance commercially
unreasonable including, but not limited to, an act of God,
war, mobilization, riot, strike, embargo, fire, flood,
hurricane, earthquake or power failure ("force majeure
incident").
When only part of StorageTek's or IBM's ability to perform is
excused under this section, StorageTek or IBM must allocate
production and deliveries or receipt of deliveries among
various customers or suppliers then under contract for similar
goods during the period when StorageTek or IBM is unable to
perform. The allocation must be effected in accordance with
Section 10.5 of the Agreement.
If either StorageTek or IBM claims excuse for nonperformance
under this section, it must give notice in writing to the
other party.
If StorageTek is unable to Deliver or IBM is unable to sell
Equipment, or if IBM is unable to deliver Drives, due to a
force majeure incident, any units of Equipment that were
properly ordered by IBM and not Delivered will be counted
toward IBM's attainment of its ** Volumes, Annual Volumes
and Minimum Volumes.
If a Party's inability continues for more than one hundred
twenty (120) days, the other Party may terminate this
Agreement and IBM shall have no liability hereunder for
Recovery Payments and Liquidated Damages.
26.11 SURVIVAL
The rights and obligations of Sections 1, 7.6, 7.7a, 7.8,
7.10, 9, 14, 15, 16.8, 18, 19.1, 19.2, 19.5, 20, 22, 23, 24,
25 and 26, and 11, 13.1a, 13.2, 13.3 and 13.4 (with respect
to FRUs), shall survive and continue after any expiration or
termination of this agreement and shall bind the parties and
their legal representatives, successors and assigns.
26.12 ORDER OF PRECEDENCE
In the event that there is an inconsistency or conflict
between the terms in the Specifications and other terms of
this Agreement, then such other terms in this Agreement shall
take precedence over the terms in the Specifications.
THIS AGREEMENT SUPERSEDES ALL PROPOSALS, ORAL OR WRITTEN, AND ALL NEGOTIATIONS,
CONVERSATIONS OR DISCUSSIONS HERETOFORE HAD BETWEEN THE PARTIES RELATED TO THE
SUBJECT MATTER OF THIS AGREEMENT. THE PARTIES BOTH ACKNOWLEDGE THAT THEY HAVE
NOT BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY ANY REPRESENTATIONS OR
STATEMENTS, ORAL OR
63
<PAGE> 71
WRITTEN, NOT EXPRESSLY CONTAINED HERE. THE TERMS AND CONDITIONS OF THIS
AGREEMENT SHALL PREVAIL, NOTWITHSTANDING ANY VARIANCE WITH THE TERMS AND
CONDITIONS OF ANY ORDER OR OTHER INSTRUMENT SUBMITTED BY THE PARTIES.
<TABLE>
<S> <C>
INTERNATIONAL BUSINESS MACHINES STORAGE TECHNOLOGY CORPORATION
CORPORATION
By: By:
------------------------ -------------------------
Name: Name:
------------------------ -------------------------
Title: Title:
------------------------ -------------------------
Date: Date:
------------------------ -------------------------
</TABLE>
64
<PAGE> 72
Please note: The Exhibits, Attachments and Appendices are not filed herewith
as such documents contain confidential pricing information and other
proprietary materials and are otherwise immaterial to an understanding of the
OEM Agreement between Storage Technology Corporation and International Business
Machines Corporation.
<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 SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 28, JUNE 30, JUNE 28, JUNE 30,
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
PRIMARY (a)
Earnings (loss)
Income before extraordinary item $ 37,860 $ 11,855 $ 63,449 $2,941
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
----------- ----------- ------------ -----------
Net income 37,860 11,855 72,984 2,941
Preferred dividend requirement (3,019) (6,038)
----------- ----------- ------------ -----------
Income (loss) applicable to common shares $ 37,860 $ 8,836 $ 72,984 ($3,097)
=========== =========== ============ ===========
Shares
Weighted average common shares outstanding 53,778 52,734 53,546 52,613
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 639 113 397
----------- ----------- ------------ -----------
Weighted average common shares
and equivalents 54,417 52,847 53,943 52,613
=========== =========== ============ ===========
Earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.70 $ 0.17 $ 1.18 ($0.06)
Extraordinary gain, net 0.17
----------- ----------- ------------ -----------
$ 0.70 $ 0.17 $ 1.35 ($0.06)
=========== =========== ============ ===========
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 28, JUNE 30, JUNE 28, JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FULLY DILUTED
Earnings
Income before extraordinary item $ 37,860 $ 11,855 $ 63,449 $ 2,941
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 2,525 5,113
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 2,450 2,480 4,900 4,959
----------- ----------- ----------- -----------
Income before extraordinary item 42,835 14,335 73,462 7,900
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
----------- ----------- ----------- -----------
Net income, as adjusted $ 42,835 $ 14,335 $ 82,997 $ 7,900
=========== =========== =========== ===========
Shares
Weighted average common shares outstanding 53,778 52,734 53,546 52,613
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 1,103 178 1,126 191
Adjustment for shares issuable upon assumed
conversion of 7% Convertible Debentures 7,107 7,195
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,132 4,132 4,132 4,132
Adjustment for shares issuable upon assumed
conversion of $3.50 Convertible
Exchangeable Preferred Stock 7,340 7,340
----------- ----------- ----------- -----------
Weighted average common shares
and equivalents, as adjusted 66,120 64,384 65,999 64,276
=========== =========== =========== ===========
Earnings per common share:
Income before extraordinary item $ 0.65 $ 0.22 $ 1.11 $ 0.12
Extraordinary gain, net 0.15
----------- ----------- ----------- -----------
$ 0.65(a) $ 0.22(b) $ 1.26(a) $ 0.12(b)
=========== =========== =========== ===========
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
--------------- ----------- ----------------------------
JUNE 28, JUNE 30, JUNE 28, JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SUPPLEMENTARY (c)
Earnings
Income before extraordinary item $ 37,860 $ 63,449
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 2,523 5,110
----------- -----------
Income before extraordinary item 40,383 68,559
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
----------- -----------
Net income, as adjusted $ 40,383 $ 78,094
=========== ===========
Shares
Weighted average common shares outstanding 53,778 53,546
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 639 397
Adjustment for shares issuable assuming the
conversion of 7% Convertible Debentures
occurred at the beginning of the period 7,104 7,193
----------- -----------
Weighted average common shares
and equivalents, as adjusted 61,521 61,136
=========== ===========
Earnings per common share:
Income before extraordinary item $ 0.66 $ 1.12
Extraordinary gain, net 0.16
----------- ----------- ----------- -----------
$ 0.66 N/A $ 1.28 N/A
=========== =========== =========== ===========
</TABLE>
(a) These figures agree with the related amounts in the Consolidated Statement
(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 JUNE 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-END> JUN-28-1996
<CASH> 489,780
<SECURITIES> 0
<RECEIVABLES> 404,446<F1>
<ALLOWANCES> 0
<INVENTORY> 274,815
<CURRENT-ASSETS> 1,174,143
<PP&E> 327,653<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,919,188
<CURRENT-LIABILITIES> 506,963
<BONDS> 268,726
<COMMON> 0
0
5,701
<OTHER-SE> 1,119,775
<TOTAL-LIABILITY-AND-EQUITY> 1,919,188
<SALES> 658,080
<TOTAL-REVENUES> 932,786
<CGS> 385,467
<TOTAL-COSTS> 532,556
<OTHER-EXPENSES> 98,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,018
<INCOME-PRETAX> 86,849
<INCOME-TAX> 23,400
<INCOME-CONTINUING> 63,449
<DISCONTINUED> 0
<EXTRAORDINARY> 9,535
<CHANGES> 0
<NET-INCOME> 72,984
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.26
<FN>
<F1>Asset values for the interim period represent net amounts.
</FN>
</TABLE>
