FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title on which Registered
- ------------------------------------------------------------------------------
Common Stock ($.10 par value), New York Stock Exchange
including related preferred
stock purchase rights
8% Convertible Subordinated New York Stock Exchange
Debentures due 2015
7% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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
As of March 4, 1995, there were 53,316,255 shares of common stock of the
registrant outstanding. The aggregate market value of voting stock held by
nonaffiliates of the registrant was $1,319,682,809 based on the last
reported sale price of the common stock of the registrant on the New York
Stock Exchange's consolidated transactions reporting system on March 4,
1996. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding common stock and common
stock held by executive officers and directors of the registrant have been
excluded in that such persons may be deemed to be "affiliates" as that term
is defined under the rules and regulations promulgated under the Securities
Act of 1933. This determination is not necessarily conclusive for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days of
the end of its fiscal year ended December 29, 1995. Portions of the
registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 30, 1996 are incorporated by reference into
Part III of this Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
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PART I
ITEM 1. BUSINESS
GENERAL
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Storage Technology Corporation and its subsidiaries ("StorageTek" or the
"Company") design, manufacture, market and service high-performance
information storage and retrieval subsystems and networking products. The
Company's three principal product lines are serial access storage subsystems
(Nearline(R)), random access storage subsystems (online) and networking
products. Nearline products include magnetic tape storage devices and
automated library systems. Online products consist of rotating magnetic
disk devices, including products that utilize fault-tolerant array
technology (RAID), and solid-state direct access storage devices (DASD).
Networking products include routers, switches, channel extenders and
security encryption devices. The Company has commenced activities designed
to expand its professional services business emphasis in the future, in
part, through increased emphasis on new marketing channels (see "MARKETING,
DISTRIBUTION AND SERVICES," below). StorageTek maintains a worldwide
customer service organization to install, maintain and service its own and
third-party equipment.
StorageTek operates in one principal industry segment and sells its products
to end-user customers, value-added resellers and original equipment
manufacturers (OEMs) of computer systems. The Company directly markets its
products worldwide through offices located in major metropolitan areas of
the United States, Canada, Europe, Australia, Japan, Mexico, New Zealand and
Brazil, as well as through distributors in Africa, Asia, Europe and other
countries in South America. In 1995, international revenue accounted for
approximately 41% of the Company's total revenue.
StorageTek's objective is to be the preferred provider of information
storage and retrieval solutions for enterprise computer systems and
networks. The Company's strategy for achieving this objective includes:
continuing to make significant investments in research and development;
expanding hardware product offerings and distribution channels to provide
solutions that address changing customer requirements; investing in new
technologies and businesses that complement its business and product
offerings; and continuing to reduce cycle time and maintain production
quality. To this end, the Company has established and will continue to
establish alliances with other manufacturers, distributors and suppliers.
As a result of these alliances, it is possible for other companies to be at
various times collaborators, competitors and customers in different markets.
On March 7, 1995, the Company acquired Network Systems Corporation (Network
Systems). The transaction was accounted for as a pooling of interests and,
as a result, certain financial information has been restated. For a
discussion of the acquisition, see Note 2, Business Combinations -- Network
Systems Corporation, of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, of this
Form 10-K. During the second quarter and third quarter of 1995, the Company
substantially reduced the scope of its midrange business with the sale of
its midrange lease assets and substantially all of its midrange service
business, and the closing of its StorageTek Distributed Systems Division
operations. See Note 3 of NOTES TO
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CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K for further
information. During the fourth quarter of 1995, the Company announced that
it was implementing actions designed to restructure its business operations,
and had incurred restructuring charges and other one-time charges of $180.9
million. The restructuring charges, totalling $167.2 million, cover the
cost of work force reductions, facility closings and consolidations, and
asset writedowns. For a discussion of the restructuring charges, see
"RESTRUCTURING PLAN", below, and Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, of this Form 10-K. On February 9, 1996, the Company announced
that it intends to sell its lease assets and enter into a worldwide lease
financing alliance during the first quarter of 1996. For a discussion, see
Note 19, Subsequent Events -- Sale of Lease Assets, of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS. As part of its 1995 restructuring plan, the Company
entered into a letter of intent on February 28, 1996, to sell its 500,000
square foot research and manufacturing facility in Longmont, Colorado.
Storage Technology Corporation was incorporated in Delaware in 1969. Its
principal executive offices are located at 2270 South 88th Street,
Louisville, Colorado 80028-0001, telephone (303) 673-5151.
THE STATEMENTS IN THE FOLLOWING DESCRIPTION THAT REGARD THE COMPANY'S FUTURE
PRODUCT 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 DETAILED IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RISK FACTORS
THAT MAY AFFECT FUTURE RESULTS," OF THIS FORM 10-K.
PRINCIPAL PRODUCTS
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StorageTek has three principal product lines: Nearline products (serial
access subsystems, including magnetic tape storage devices and automated
library systems); online products (random access subsystems, including
rotating and solid-state DASD) and networking products.
Product sales, including related software revenue, accounted for
approximately 70% of total revenue in 1995, while service and rental income
accounted for the balance. The following table presents revenue by product
line, which includes product sales, service and rental and software revenue.
This information has been restated to reflect the Company's acquisition of
Network Systems Corporation in March 1995, which was accounted for as a
pooling of interests:
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REVENUE BY PRODUCT LINE
FISCAL YEAR ENDED DECEMBER
------------------------------------------------------
1995 1994 1993
---------------- --------------- ----------------
$ million % $ million % $ million %
---------------- ---------------- ----------------
Nearline Products $1,197.7 62.1 $1,033.0 55.2 $ 875.5 54.1
Online Products 375.9 19.5 254.2 13.6 126.0 7.8
Networking Products 208.9 10.8 249.8 13.3 213.3 13.2
Midrange and Other
Products 147.0 7.6 334.4 17.9 402.9 24.9
---------------- ---------------- ----------------
Total $1,929.5 100.0 $1,871.4 100.0 $1,617.7 100.0
================ ================ ================
During 1995, the Company introduced RedWood SD-3 (RedWood(TM)), a high-capacity
tape drive, and the Arctic Fox 9800 (Arctic Fox) and Kodiak 9890 Scaleable
Storage Facility (Kodiak(TM)) online products. On March 7, 1995, the Company
completed a merger with Network Systems. The acquisition of Network Systems
provided the Company with significant new networking products. Network
Systems products currently include the BorderGuard(TM), Security Router(TM), the
Enterprise Routing Switch (ERS(TM)) and Central Archive Management (CAM(TM)).
The ERS has been developed in conjunction with Northern Telecom, Inc. The
Company anticipates that an increasing portion of its future revenue will
come from these products, enhancements to these products and other new
products currently under development. There can be no assurance, however,
that these products will provide significant revenue contribution, or that
new products will be developed in a timely manner, address technological
advances, gain market acceptance or withstand aggressive pricing practices
in the marketplace.
Additional information concerning revenue from each of the Company's product
lines is found in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and geographic information
is found in Part IV, Item 14, Note 17 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, of this Form 10-K.
NEARLINE PRODUCTS
- -----------------
StorageTek's current line of Nearline subsystems includes its Automated
Cartridge System (ACS) library and associated magnetic tape cartridge
storage products. The Company's current library products include: the
PowderHorn 9310 (PowderHorn(R)), the Company's second-generation ACS
library, which became available in the second quarter of 1993; the Company's
first generation 4410 ACS library, which has been available since 1988; and
WolfCreek 9360 (WolfCreek(R)), a smaller, high-performance lower-cost
library, which became available in the fourth quarter of 1993. The
Company's tape cartridge products include: the Timberline 9490
(Timberline(R)), a high-performance 36-track cartridge subsystem, available
since the fourth quarter of 1994; the high capacity (up to 50 gigabytes per
cartridge) RedWood, which currently provides Small Computer System Interface
(SCSI) support, available since the first quarter of 1995; the Silverton
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4490 (Silverton), a 36-track cartridge subsystem, which became available
in the third quarter of 1993; and the 4480 18-track cartridge subsystem,
which has been available since 1987. The Company also develops and licenses
software programs designed to expand the range of applications for its ACS
libraries.
The Company recently completed the development of the 9710 library, a
reduced cost, smaller capacity library designed for the midrange
marketplace, and the Twin Peaks 4890 36-track cartridge subsystem (Twin
Peaks), which is also designed for the midrange marketplace. Both the 9710
library and Twin Peaks are currently in limited availability production. In
addition, the Company is developing other new library and tape products, all
of which are in the preliminary engineering phase and for which no firm
availability dates have been set. See Part II, Item 7, "Management's
Discussion And Analysis of Financial Condition and Results of Operations,"
of this Form 10-K, which is incorporated by reference into Item 1 of Part I,
for a discussion of operating results and certain risks associated with the
development and introduction of new products that may affect future results.
ONLINE PRODUCTS
- ---------------
StorageTek's current OnlinePlus(TM) product line consists of a number of online
random access DASD products, featuring RAID rotating magnetic disk
subsystems and solid-state disk (SSD) subsystems. The characteristics of
these products differ principally in information storage capacity, transfer
rate, access time and cost. The Company's Iceberg 9200 Virtual Storage
Facility (Iceberg(R)) is a key part of the Company's online strategy.
Iceberg, available since the second quarter of 1994, is an advanced RAID
subsystem for the IBM and IBM-compatible mainframe environment. Iceberg
Extended Facilities Product and Iceberg Extended Operator Facility are
software products designed to enhance the capabilities of Iceberg, and have
been available since the second half of 1994. The Company's online products
also include Arctic Fox, a high-performance solid-state device, and Kodiak,
a high-performance, high-capacity online product. Both Arctic Fox and
Kodiak became available in 1995. These online products are expected to
serve as an increasing source of revenue for the Company in 1996. See Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," of this Form 10-K for a discussion of operating
results and certain risks that may affect future results.
NETWORKING PRODUCTS
- -------------------
The Company's network product offerings were significantly expanded through
the acquisition of Network Systems, which was completed on March 7, 1995.
Currently, the Company's network products include: unlimited distance
channel extension and CPU networking devices, which have been available
since 1976; the CAM product, a software application designed to provide
backup and recovery to a variety of network client systems, available since
the first half of 1995; interconnect controllers that connect LANs to
mainframes, available since 1991; multiprotocol bridge routers for LAN, WAN
and MAN connections, available since 1988; intelligent port switching hubs,
available since 1993; the ERS, available since the first half of 1995; and
the Security Router and BorderGuard products lines, which became available in
1995. The Company currently is developing new products designed to support
network attached storage for the client-server environment.
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MIDRANGE AND OTHER PRODUCTS
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In the second and third quarters of 1995, the Company substantially reduced
the scope of its midrange business with the sale of its midrange lease
assets and substantially all of its midrange service business and the
closing of its StorageTek Distributed Systems Division operations. The
Company continues to offer library, tape and networking products that are
designed for the midrange computer market. For a discussion of the sale of
the midrange assets and service business, see Note 3 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.
MARKETING, DISTRIBUTION AND SERVICES
- ------------------------------------
StorageTek is committed to a worldwide marketing and product maintenance
strategy. StorageTek has established a network of sales and service offices
located in major metropolitan areas in the United States, Canada, Europe,
Australia, Japan, Mexico, New Zealand and Brazil to market its products, in
addition to its corporate headquarters in Louisville, Colorado. The Company
also sells its products through international distributors in Africa, Asia,
Europe and in other countries in South America. In 1995, international
revenue accounted for 41% of total revenue, compared to 39% in 1994, and 38%
in 1993. Because of its focus on worldwide operations, the Company is
subject to the risks of conducting business outside the United States. See
Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors that May Affect Future
Results -- International Sales and Operations," of this Form 10-K for a
discussion of factors associated with the Company's international business.
As of December 29, 1995, the order backlog was approximately $57 million,
compared to approximately $60 million as of December 30, 1994.
Approximately 37% in 1995 and 85% in 1994 of the backlog amount is
attributable to the Company's library and tape products. In addition to
these backlog amounts, the Company also had approximately $88 million of
equipment shipped awaiting revenue recognition as of December 29, 1995,
compared to approximately $94 million as of December 30, 1994. Backlog
amounts are calculated on an "if sold" basis and include orders from
end-users, OEM customers and distributors for products that StorageTek
expects to deliver during the following 12 months. Units being evaluated or
covered by letters of intent or awaiting customer acceptance are not
included in backlog amounts. Unfilled orders and orders with respect to
equipment shipped awaiting revenue recognition may be canceled by the
customer. Accordingly, there can be no assurance that orders in the
Company's backlog or equipment shipped awaiting revenue recognition amounts
will ultimately be recognized as revenue.
In 1996, the Company intends to expand the distribution of certain products
through original equipment manufacturers, value-added distributors and
telephone sales. The Company believes that increased use of these
distribution channels will be important to achieving cost improvements and
gaining market penetration for its lower end products. The Company also has
consolidated its professional service groups and intends to expand its
service offerings in 1996 with five major categories of service to be
provided, including: data center, educational, media management, network
management and system services. Historically, the Company has not generated
a
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significant portion of its revenue from these sources, and there can be no
assurance that the Company's efforts to expand its distribution channels and
service offerings will be successful.
The installed service base of products and the expertise of the Company's
customer service engineers are considered to be valuable assets of the
Company. These assets are expected to continue to be important competitive
elements of the Company's business. The Company has a worldwide customer
support organization to install, maintain and service StorageTek equipment,
as well as the equipment of others. The Company generally warrants the
performance of products for a specified period of time, after which it
services those products under maintenance agreements. In response to
competitive pressures, many of the products include extended warranty
periods. Such extended warranties may adversely affect profit margins. In
1995, service and rental revenue accounted for 30% of total revenue,
compared to 31% in 1994 and 35% in 1993.
MANUFACTURING AND MATERIALS
- ---------------------------
The Company currently operates manufacturing facilities in Colorado,
Minnesota, Puerto Rico, Florida, France and England. A significant portion
of the Company's European requirements for Timberline are manufactured at
its Toulouse, France, facility. In connection with the restructuring
activities announced in the fourth quarter of 1995, the Company expects to
cease manufacturing operations in Florida in the second half of 1996, and
also has announced plans to sell its manufacturing operations in England in
July 1996, see "RESTRUCTURING PLAN", below. Currently, all the Company's
manufacturing facilities are in compliance with the ISO 9001 international
quality standard.
While the Company manufactures several significant subassemblies, the
substantial majority of its production costs are subassemblies, parts and
components purchased from outside vendors. The balance of the Company's
production costs relate to in-house assembly and testing. Certain of the
parts and components included in the Company's products are obtained from a
single source or a limited group of suppliers. The Company has long-term
supply contracts with certain vendors and suppliers; the remaining parts and
components are obtained by delivering purchase orders specifying the
particular components. These vendors are not obligated to supply products
for an extended period at specific quantities and prices. See Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Risk Factors that May Affect Future Results," of this Form
10-K for a discussion of factors that may affect the Company's ability to
obtain materials, which information is incorporated by reference into Part
I, Item 1 of this Form 10-K.
COMPETITION
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The Company competes with a number of large multinational companies that
have substantially greater resources, including, IBM, Fujitsu Limited and
Hitachi Ltd., as well as similarly sized companies, including Amdahl Corp.
and EMC Corp.
The markets for the Company's products are highly competitive and are
characterized by rapid technological change and intense price competition.
The Company believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control,
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including the quality, performance, and price of the Company's and its
competitors' products, the timing and success of new product introductions
by the Company and its competitors, and general economic conditions within
and outside the U.S. In the network products arena, the Company faces
strong competition in several key product areas, including hubs, switches,
Asynchronous Transfer Mode (ATM) routers and channel extension products,
from a number of companies with significant market share and financial
resources. Further, because of the significance of IBM in mainframe
operating environments, many of the Company's products are designed to be
compatible with certain IBM operating systems and many of its products
function like IBM equipment. As a result, the Company's business in the
past has been, and in the future may be, adversely affected by a number of
factors outside the control of the Company, including among others,
modifications in the design or configuration of IBM computer systems, the
announcement and introduction of new products by IBM, as well as the
announcement of competing products by IBM and other competitors, and
reductions in the pricing of such comparable systems, equipment or service.
The Company is adapting its product offerings for the client-server, and
intensifying its activities in this arena in response to the migration
toward shared data storage. The Company anticipates that its ability to
compete in the client-server systems market will depend on a number of
factors within and outside its control, including the timely introduction
and performance of products for the client-server market introduced by the
Company and its competitors. For further discussion of competitive
conditions, see Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors that May
Affect Future Results," of this Form 10-K.
NEW PRODUCT DEVELOPMENT
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The Company currently invests substantial resources in its product
development efforts in order to maintain and enhance the competitiveness of
its products. In 1995, 1994 and 1993, the Company devoted approximately
10%, 11%, and 12%, respectively, of its revenue to develop new products and
enhance the performance of existing products. In an attempt to expand the
Company's access to new technologies and reduce the amount of time necessary
to bring new products to the market, the Company in the past has acquired
other companies and has entered into joint development and other similar
relationships with other companies. For example, the Company acquired
Amperif Corporation in 1993 and Network Systems in 1995.
The Company spent approximately $187 million on research and product
development activities in 1995, as compared to approximately $206 million in
1994 and approximately $191 million in 1993. Current research and
development projects include: the development of enhancements for Iceberg
and Kodiak; the completion of development activities related to RedWood and
other Nearline tape products; the development of networking product
enhancements. As of December 29, 1995, approximately 1,500 employees were
engaged on a full-time basis in engineering and product development
activities.
In the future, there can be no assurance that new products and product
enhancements will be successfully developed or developed in a timely manner,
or if introduced, that the products will achieve market acceptance. The
Company has experienced delays from time to time in completing development
activities and introducing new products and product enhancements and there
can be no assurance that the Company will not encounter delays in the
future. For further discussion of factors concerning product development,
see Part II, Item 7, "Management's
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Discussion and Analysis of Financial Condition and Results of Operations --
Risk Factors that May Affect Future Results," of this Form 10-K.
INTELLECTUAL PROPERTY
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StorageTek's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its intellectual property
rights through a combination of patents, trademarks, copyrights,
confidentiality procedures, trade secret laws and licensing arrangements.
The Company's policy is to apply for patents, or other appropriate
proprietary or statutory protection, when it develops new or improved
technology that is important to its business. StorageTek currently holds
over 270 U.S. patents, as well as foreign counterparts to many of these
patents in relevant markets, covering various aspects of its products. Four
of these patents expire in 1996 and the remainder will expire from 1997
through 2015. The Company also has pending approximately 130 U.S. patent
applications, including approximately 22 that have been allowed and are
expected to be formally issued soon, as well as pending foreign counterparts
to many of these applications. StorageTek also has licenses to use patents
held by others. StorageTek owns, has license rights to, and/or has applied
to register, over 40 trademarks, as well as copyrights. Taken as a whole,
these assets are material to StorageTek's business. However, no individual
patent, trademark, license or other item of proprietary information is
singularly material to StorageTek's business.
The Company operates in an industry characterized by vigorous pursuit and
protection of intellectual property rights, which has resulted in
significant and sometimes protracted and expensive litigation. From time to
time, StorageTek has commenced actions against other companies to protect or
enforce its intellectual property rights. Similarly, StorageTek from time
to time has been notified that it may be infringing certain patent or other
intellectual property rights of others. Although licenses or royalty
agreements are generally offered in such situations, there can be no
assurance that litigation will not be commenced in the future regarding
patents, copyrights, trademarks or trade secrets or that any license,
royalty or other rights can be obtained on acceptable terms, or at all.
StorageTek is currently engaged in certain proceedings relating to its
intellectual property and alleged patent infringement. See Part I, Item 3,
"Legal Proceedings" of this Form 10-K. For a discussion of factors
concerning intellectual property see Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Risk Factors that May Affect Future Results," of this Form 10-K.
ENVIRONMENT
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Compliance by StorageTek with provisions of federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material
adverse affect on StorageTek. For 1995, StorageTek did not have any
material expenditures for environmental control facilities. To date in
1996, StorageTek does not have pending and has not budgeted any material
estimated expenditures for environmental control facilities. However,
potential liability under environmental legislation is ongoing, regardless
of whether or not StorageTek has complied with existing governmental
guidelines.
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Government regulation of the environment and related compliance costs have
increased in recent years. StorageTek cannot predict the nature or scope of
future environmental laws or regulations or how they will be administered or
whether compliance will require substantial expenditures. Based upon
currently available information, StorageTek does not expect that future
compliance with environmental regulations will have a material affect on
StorageTek.
RESTRUCTURING PLAN
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In the fourth quarter of 1995, the Company disclosed that it was evaluating
its current operations and manner of conducting business and was
implementing actions designed to restructure its business operations. On
January 25, 1996, the Company disclosed that during the fourth quarter of
1995, it incurred restructuring charges of $167.2 million, to cover the cost
of work force reductions of approximately 1,700 employees, facility closings
and consolidations affecting its facilities located in Colorado, and other
facilities located both within and outside the U.S., and asset writedowns.
This restructuring was adopted in an effort to establish a more competitive
cost structure in response to slower revenue growth and increasing price
competition particularly in the online marketplace. In connection with the
restructuring, the Company plans to focus on core businesses and outsource
non-strategic activities, re-architect its distribution processes within and
outside the U.S., and accelerate the integration of its Network Systems
unit. Additional information concerning the 1995 restructuring plan is
found in Part II, Item 7, "Management's Discussion and Analysis of Financial
Results and Operations, " and Part IV, Item 14, Note 16 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.
OTHER MATTERS
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The Company employed approximately 10,000 persons on a full-time basis
worldwide as of December 29, 1995.
The Company does not consider its business to be highly seasonal, although
it historically has experienced increased sales revenue in the fourth
quarter compared to other quarters due to customers' tendencies to make
purchase decisions near the end of the calendar year. There can be no
assurance that this historical trend will continue in 1996 and that fourth
quarter results will be higher than any other quarter.
For the year ended December 29, 1995, no single customer accounted for 10%
or more of the Company's consolidated total revenue.
No material portion of the Company's business is subject to contract
termination at the election of the U.S. government.
Reference is made to the following NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS set forth in Part IV, Item 14, of this Form 10-K for certain
additional information, which information is incorporated by reference
herein:
Note 2 Description of the Company's business combinations with
Network Systems Corporation, Bytex Corporation, Amperif
Corporation and Bus-Tech, Inc.
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Note 3 Description of the Company's sale of its midrange lease
assets in June 1995, and substantially all of its midrange service
business in September 1995.
Note 16 Description of the Company's restructuring and other charges
in 1995 and prior years.
Note 17 Information on the geographic operations of the Company's
single business segment, which has been restated in connection
with the Network Systems Corporation merger on March 7, 1995. See
also Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- International
Operations and Hedging Activities" and "Risk Factors that May
Affect Future Results -- International Sales and Operations" for
further discussion of the risks attendant to foreign operations.
Reference is also made to Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of this Form
10-K, for information regarding liquidity, including working capital,
restructuring plans and risk factors that may affect future results.
ITEM 2. PROPERTIES
StorageTek occupies facilities in 15 separate buildings in Boulder County,
Colorado, comprising approximately 2.5 million square feet. Of these,
approximately 2.2 million square feet are owned by StorageTek and the
remaining space is leased. Currently, substantially all of this space is
occupied. These facilities include StorageTek's executive offices, as well
as manufacturing, research and development, and spare parts storage
facilities.
StorageTek owns approximately 199,000 square feet of manufacturing
facilities in the Palm Bay/Melbourne, Florida, area, and approximately
200,000 square feet of manufacturing, research and development, and
administrative facilities in the Minneapolis, Minnesota, area. These
facilities are approximately 50% and 100% utilized, respectively.
StorageTek occupies approximately 180,000 square feet of leased engineering,
manufacturing and marketing facilities in Toulouse, France; 128,000 square
feet of manufacturing facilities in Puerto Rico, of which approximately
78,000 square feet is owned and 50,000 square feet is leased; and
approximately 38,000 square feet of leased manufacturing facilities in
England. The facilities in France, Puerto Rico and England are
approximately 55%, 80% and 100% utilized, respectively.
StorageTek also leases facilities at approximately 348 locations throughout
the world, primarily for sales, customer services, and spare parts storage,
as well as for limited research and product development purposes.
Approximately 237 of these leased field offices are located in North
America, with combined office and warehouse facilities totaling
approximately 1,275,000 square feet in the United States and 100,000 square
feet in Canada. As part of the restructuring activities in the fourth
quarter of 1995, a number of the leased field office facilities have been
fully or partially vacated and the Company is currently in the process of
consolidating a number of facilities into other StorageTek facilities. The
Company maintains approximately 95 field offices
PAGE
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Page 12
in Europe comprising approximately 540,000 square feet, and 15 offices in
the Asia/Pacific region comprising approximately 75,000 square feet.
As part of the 1995 restructuring plan, the Company is in the process of
consolidating its foreign field offices and entered into a letter of intent
on February 28, 1996, to sell its 500,000 square foot research and
manufacturing facility in Longmont, Colorado. Many of the Company's leases
throughout the world contain renewal rights, cancellation rights and rights
of first refusal on contiguous expansion space. At the present time, such
facilities are adequate for the Company's purposes.
ITEM 3. LEGAL PROCEEDINGS
In the second quarter of 1992, seven purported class actions were filed in
the U.S. District Court for the District of Colorado against the Company and
certain of its officers and directors. These actions were subsequently
consolidated into a single action, and a consolidated amended complaint was
filed on July 7, 1992, seeking an unspecified amount of damages. The
complaint alleged that the defendants failed to properly disclose the status
of development of a new product and the Company's business prospects. The
complaint further alleged that the individual defendants sold shares of the
Company's common stock based on material inside information, in violation of
federal securities and common law. The court certified a class consisting
(with certain exceptions) of those who purchased StorageTek's common stock
and related securities from December 23, 1991, to August 7, 1992. A
shareholder derivative action was also filed in the second quarter of 1992
based on substantially similar factual allegations was consolidated with the
class action. On July 27, 1995, the Company and the plaintiffs in the
shareholder class action and derivative litigation announced an agreement to
settle the litigation. The settlement provided that, without admitting any
wrongdoing, the Company would pay $30,680,000 for its portion of the
settlement. The Company's insurance policies paid $24,320,000 as part of
the total settlement of $55,000,000. As a result of the settlement, a
one-time charge of $30,680,000 was recognized during the third quarter of
1995. The court gave final approval to the settlement in December 1995.
On June 10, 1993, the Company filed suit against EMC Corp. in U.S. District
Court for the District of Colorado. The suit currently alleges infringement
by EMC Corp. of a patent pertaining to the Company's disk storage
technology. The complaint seeks an injunction prohibiting further
infringement, 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. The case is in
the discovery phase.
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 seeks an injunction, treble damages in an
unspecified amount and an award of attorney fees and costs. On December 22,
1994, the Company filed a counterclaim for infringement of one of its
patents and, in November 1995, added a second patent to its counterclaim.
The case is in the discovery phase. A trial date has been set for May 1996.
PAGE
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Page 13
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. The Company is currently proceeding with a
counterclaim against Stuff for breach of its covenant not to sue, which was
part of the 1990 settlement agreement.
On January 21, 1994, Bell Atlantic Business Systems Services, Inc. (BABSS)
filed suit in Federal District Court for the Northern District of
California, alleging that a number of the Company's service business
policies were illegal, including price increases and parts and maintenance
software availability. On January 4, 1996, the parties settled this suit.
The settlement of this litigation did not involve any admission of wrongdoing
by the Company, and had no material affect on the Company's financial
position or results of operations.
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 either to 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 "passthrough" 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 attorney 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 is due
March 29, 1996. A notice of appeal to the U.S. Court of Appeals for the
Federal Circuit was filed by Odetics, Inc. on March 8, 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 infringe the 151 Patent. The
complaint seeks injunctive relief, treble damages in an unspecified amount,
and an award of attorney 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. in June 1995.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that
PAGE
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Page 14
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 affect 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.
Information concerning certain of these legal proceedings is also contained
in Note 14 of NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS identified in
Part IV, Item 14, of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of StorageTek security holders during the
fourth quarter of the fiscal year ended December 29, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company
as of March 11, 1996.
NAME POSITION WITH COMPANY AGE
- --------------------------------------------------------------------
Ryal R. Poppa Chairman of the Board, 62
President and Chief
Executive Officer
David E. Weiss Executive Vice President 51
and Chief Operating Officer
Lowell Thomas Gooch Executive Vice President 51
and General Manager of
Network Systems
John V. Williams Executive Vice President of 52
Worldwide Field Operations
David E. Lacey Corporate Vice President 49
and Interim Chief Financial
Officer
W. Russell Wayman Corporate Vice President, 51
General Counsel and
Secretary
Mr. Poppa became Chairman of the Board, Chief Executive Officer and a
director of the Company in January 1985, and President of the Company in
January 1988. He is also a director of SemiTool Inc.
Mr. Weiss was appointed Chief Operating Officer on March 10, 1995. Mr.
Weiss served as Executive Vice President of Systems Development from January
1993 to March 1995. He was a Senior Vice President of Marketing and Program
Management Process from June 1992 to January 1993 and Corporate Vice
President of Market Planning from August 1991 to June 1992.
PAGE
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Page 15
From March 1991 through August 1991, he was a staff vice president reporting
to the Chief Executive Officer.
On November 20, 1995, Mr. Gooch was appointed as Executive Vice President
and General Manager of the Company's Network Systems Corporation unit. From
January 1989 to November 1995, Mr. Gooch was Executive Vice President of
Operations of the Company. Mr. Gooch has been employed by the Company in
various capacities since 1972.
Mr. Williams was appointed Executive Vice President of Worldwide Field
Operations on January 1, 1995. Prior to that time, he served as Senior
Corporate Vice President, Americas, from August 1993 through December 1994.
He was Corporate Vice President from February 1992 through August 1993 and
Vice President of North America from September 1990 through February 1992.
Mr. Lacey was appointed Interim Chief Financial Officer on February 1, 1995,
in addition to his position as Corporate Vice President. Mr. Lacey became a
Corporate Vice President in December 1990. He served as Corporate
Controller of the Company from October 1989 to February 1995.
Mr. Wayman has served as Corporate Vice President since March 1991, General
Counsel since January 1990 and Corporate Secretary of the Company since
February 1990.
PAGE
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Page 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The common stock of Storage Technology Corporation is traded on the New York
Stock Exchange under the symbol STK. The table below reflects the high and
low closing sales prices of the common stock on the New York Stock Exchange
composite tape as reported by The Wall Street Journal for 1995 and 1994. On
December 29, 1995, there were 17,431 record holders of common stock of
StorageTek.
1995 High Low
----------------------------------------------------
First Quarter $32.625 $18.625
Second Quarter 26.750 17.875
Third Quarter 29.500 23.750
Fourth Quarter 27.625 22.250
1994 High Low
----------------------------------------------------
First Quarter $40.625 $31.250
Second Quarter 34.125 25.125
Third Quarter 39.000 28.750
Fourth Quarter 31.000 26.625
Dividends
- ---------
StorageTek has never paid cash dividends on its common stock. The Company
currently plans to continue to retain future earnings for use in its
business. Furthermore, the Company's existing multicurrency credit
agreement and 9.53% Senior Secured Notes contain certain restrictions that
limit the payment of cash dividends based primarily upon the Company's
consolidated net income. As of December 29, 1995, under the terms of the
multicurrency credit agreement, the Company did not have sufficient
cumulative consolidated net income to permit the payment of cash dividends
on its common stock.
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Page 17
ITEM 6.SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1993
through 1995 (except for the 1993 Balance Sheet Data), has been derived from
the consolidated financial statements appearing elsewhere herein, including
the Consolidated Balance Sheet as of December 29, 1995, and December 30,
1994, and the related Consolidated Statement of Operations for each of the
three years in the period ended December 29, 1995, and notes thereto. The
data, insofar as it relates to the Balance Sheet Data as of December 31,
1993, December 25, 1992, and December 27, 1991, and the Statement of
Operations Data for the fiscal years 1992 and 1991, has been derived from
the historical financial statements of the Company for such periods,
restated as appropriate to reflect mergers accounted for as poolings of
interests.
The following table data (in thousands of dollars, except per share amounts)
should be read in conjunction with the consolidated financial statements and
notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $1,929,485 $1,871,350 $1,617,691 $1,774,325 $1,807,541
Cost of revenue 1,217,622 1,186,942 1,072,784 1,179,756 1,197,798
--------- --------- --------- --------- ---------
Gross profit 711,863 684,408 544,907 594,569 609,743
Research and product development costs 187,275 206,083 191,048 177,699 144,686
Marketing, general, administrative and
other income and expense, net 445,889 425,490 393,991 388,496 363,356
Restructuring and other charges (Note 16) 212,207 8,000 90,414 60,310(a) 9,078(b)
--------- --------- --------- --------- ---------
Operating profit (loss) (133,508) 44,835 (130,546) (31,936) 92,623
Interest income 43,325 46,935 62,438 75,885 80,339
Interest expense (34,347) (40,832) (43,853) (49,991) (53,398)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and accounting change (124,530) 50,938 (111,961) (6,042) 119,564
Provision for income taxes (17,800) (18,900) (9,500) (27,200) (21,200)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of accounting change (142,330) 32,038 (121,461) (33,242) 98,364
Cumulative effect of accounting
change (Note 10) 40,000
--------- --------- --------- --------- ---------
Net income (loss) $ (142,330) $ 32,038 $ (81,461) $ (33,242) $ 98,364
========= ========= ========= ========= =========
Earnings (loss) per common share:
Income (loss) before cumulative effect
of accounting change $ (2.91) $ 0.38 $ (2.59) $ (0.66) $ 1.99
Net income (loss) (2.91) 0.38 (1.80) (0.66) 1.99
BALANCE SHEET DATA
Working capital $ 425,351 $ 501,065 $ 492,576 $ 402,876 $ 503,052
Total assets 1,888,629 2,144,458 2,064,851 2,011,007 2,055,897
Long-term debt 363,963 356,887 362,718 370,988 375,847
Stockholders' equity 962,833 1,265,285 1,215,877 1,138,927 1,157,681
(a) In 1992, the Company recognized restructuring charges of $60,310,000.
(b) In 1991, the Company recognized merger expenses of $9,078,000.
</TABLE>
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Page 18
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in the following discussions regarding the Company's
future product 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 detailed below in "RISK FACTORS THAT MAY
AFFECT FUTURE RESULTS."
GENERAL
- -------
The Company reported a net loss for the year ended December 29, 1995, of
$142.3 million on revenue of $1.93 billion, compared to net income for the
year ended December 30, 1994, of $32.0 million on revenue of $1.87 billion
and a net loss for the year ended December 31, 1993, of $81.5 million on
revenue of $1.62 billion. The Company's results include restructuring and
other charges of $212.2 million in 1995, $8.0 million in 1994, and $90.4
million in 1993. A $40.0 million benefit was also recognized in 1993 from
the cumulative effect of a change in the method of accounting for income
taxes.
As more fully discussed in Note 2 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, the Company, through a wholly owned subsidiary, completed a
merger with Network Systems Corporation (Network Systems) on March 7, 1995.
The merger was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements were restated for all periods prior to the
merger to include the operations of Network Systems, adjusted to conform
with StorageTek's accounting policies and presentation.
Revenue increased 3% in 1995 compared to 1994, primarily due to incremental
sales revenue from the TimberLine 9490 (TimberLine(R)) 36-track cartridge
subsystem and the Iceberg 9200 Virtual Storage Facility (Iceberg(R)). These
increases were largely offset by a significant decline in revenue from
midrange products, as well as lesser declines in revenue from older
generation library and tape products and networking products. The
significant decline in revenue from midrange products was primarily due to
the sale of substantially all of the Company's midrange lease assets and
midrange service business in the second and third quarter of 1995,
respectively. As anticipated, revenue from older generation Nearline(R)
products, including the 4480 18-track tape cartridge subsystem, Silverton
4490 36-track tape cartridge subsystem (Silverton), and 4410 Automated
Cartridge System (ACS) library, decreased in 1995. The decline in revenue
from networking products reflects slower than expected market acceptance of
the Enterprise Routing Switch (ERS(TM)) and other new internetworking products,
coupled with declines in older mainframe channel extension networking
products. While revenue from Iceberg increased 73% for 1995 compared to
1994, the rate of growth fell short of the Company's expectations primarily
due to continued price competition in the online marketplace, and slower
than expected market acceptance.
Revenue increased 16% in 1994 compared to 1993, primarily due to increased
sales of Silverton, Iceberg, and the PowderHorn 9310 (PowderHorn(R)), an ACS
library. Sales of the Company's first-generation 4410 ACS library and 4480
18-track tape cartridge system declined in 1994, as did sales of midrange
products.
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Page 19
Improvements in revenue and operating results during 1996 are significantly
dependent upon successfully addressing development and distribution issues
associated with the Company's networking products, as well as the effective
implementation of significant business restructuring activities initiated
during the fourth quarter of 1995 in all parts of the Company's business.
Risk factors that may affect future results also include the continuing
success of TimberLine, Iceberg, Silverton and PowderHorn; successfully
gaining market acceptance for the RedWood SD-3 (RedWood(TM)) and the Kodiak
9890 Scalable Storage Facility (Kodiak(TM)); the successful introduction of
planned technological improvements to these products; intense competition
and pricing pressure in the online marketplace; and the introduction of new
products by competitors; among others. See "RISK FACTORS THAT MAY AFFECT
FUTURE RESULTS," below.
The Company's cash balances increased $36.4 million during 1995 as cash
generated from operations of $306.0 was partially offset by net repayments
of debt of $201.9 million, and investments in property, plant and equipment
of $58.0 million. The Company's cash balances decreased $52.9 million
during 1994 primarily as a result of significant investments associated with
new products and increased $124.9 million during 1993 primarily as a result
of proceeds from a preferred stock offering.
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.
Year Ended December
-------------------------------------
1995 1994 1993
-------------------------------------
Revenue:
Nearline Products 62.1% 55.2% 54.1%
Online Products 19.5 13.6 7.8
Networking Products 10.8 13.3 13.2
Midrange and Other Products 7.6 17.9 24.9
---- ---- ----
Total revenue 100.0 100.0 100.0
Cost of revenue 63.1 63.4 66.3
---- ---- ----
Gross profit 36.9 36.6 33.7
Research and product development costs 9.7 11.0 11.8
Marketing, general, administrative
and other income and expense, net 23.1 22.8 24.4
Restructuring and other charges 11.0 0.4 5.6
---- ---- ----
Operating profit (loss) (6.9) 2.4 (8.1)
Interest income (expense), net 0.4 0.3 1.2
---- ---- ----
Income (loss) before income
taxes and cumulative effect
of accounting change (6.5) 2.7 (6.9)
Provision for income taxes (0.9) (1.0) (0.6)
---- ---- ----
Income (loss) before cumulative
effect of accounting change (7.4) 1.7 (7.5)
Cumulative effect on prior years of
change in method of accounting for
income taxes 2.5
---- ---- ----
Net income (loss) (7.4)% 1.7% (5.0)%
==== ==== ====
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<PAGE>
Page 20
REVENUE
- -------
NEARLINE PRODUCTS
Revenue from Nearline products increased 16% in 1995 compared to 1994,
primarily due to incremental sales of TimberLine, which became available in
the fourth quarter of 1994. Revenue from PowderHorn also increased in 1995
compared to 1994. As anticipated, revenue from the 4480 18-track tape
cartridge subsystem and Silverton, which represent earlier generation tape
subsystems, declined in 1995. Revenue from the first generation 4410 ACS
library also declined slightly in 1995. RedWood, a high-capacity tape
drive, was introduced in the first quarter of 1995; however, the Company
received no significant revenue contribution from RedWood in 1995.
Revenue from Nearline products increased 18% in 1994 compared to 1993,
primarily due to increased sales of PowderHorn and Silverton. The Company
also recognized incremental sales from TimberLine during the fourth quarter
of 1994. Sales of the 4410 ACS library and 4480 18-track cartridge
subsystem declined during 1994.
Incremental sales associated with TimberLine and RedWood are expected to
offset future declines in revenue from earlier generation Nearline products.
RedWood currently provides Small Computer System Interface (SCSI) support
for multiple computing platforms. Future revenue contribution from RedWood
is significantly dependent upon the Company's ability to deliver a version
of the product which allows for the use of higher capacity tape cartridges.
While the Company believes issues associated with the design and manufacture
of higher capacity tape cartridges for RedWood were resolved during the
fourth quarter of 1995, there can be no assurance that all RedWood
development issues have been successfully addressed or that the product will
gain market acceptance in the future.
ONLINE PRODUCTS
Revenue from online products increased 48% in 1995 compared to 1994,
primarily due to incremental sales of Iceberg, which became available during
the second quarter of 1994. While Iceberg sales revenue increased during
1995, the rate of revenue growth fell short of the Company's expectations,
primarily due to the rapid rate of price erosion in the online marketplace,
and slower than expected customer acceptance of Iceberg. The Company
announced the commencement of initial shipments of Kodiak in the third
quarter of 1995; however, the Company received no significant revenue
contribution from Kodiak in 1995.
Revenue from online products increased 102% in 1994 compared to 1993, due to
incremental sales of Iceberg. Iceberg sales fell short of the Company's
expectations in 1994, primarily as a result of lower than anticipated unit
sales volume, smaller configuration sizes, price competition, as well as
longer than anticipated customer evaluation and acceptance periods.
Future revenue contribution from online products is significantly dependent
upon successfully increasing production volumes of Kodiak without
significant engineering, design or manufacturing difficulties, as well as
the timely introduction of additional functions and features for both
Iceberg and Kodiak in the highly competitive online marketplace. While the
Company believes the introduction and production schedules for these
additional functions and features are achievable, there can be no assurance
that the schedules will be met, or that these
PAGE
<PAGE>
Page 21
functions and features will result in additional market acceptance for Iceberg
and Kodiak. Future revenue contribution from online products is also
significantly dependent upon the rate of future price declines in the
marketplace. While worldwide demand for online storage capacity in the
enterprise marketplace increased significantly in 1995, this increase was
largely offset by declines in the price per megabyte for storage.
NETWORKING PRODUCTS
Revenue from networking products decreased 16% in 1995 compared to 1994.
This decrease reflects anticipated declines in older mainframe channel
extension networking products, coupled with slower than expected market
acceptance of ERS and other internetworking products which support
communication between networks. Revenue and operating results associated
with networking products were adversely affected by difficulties encountered
with the integration of Network Systems, and delays in the development of
Asynchronous Transfer Mode (ATM) support for ERS.
Revenue from networking products increased 17% in 1994 compared to 1993, due
to incremental revenue contribution from purchase acquisitions made during
1993 by Network Systems.
As part of its restructuring, the Company initiated efforts during the
fourth quarter of 1995 to accelerate the integration of Network Systems,
increase focus on core networking products for the information storage and
retrieval marketplace, discontinue the development of future network hub
products, modify the distribution structure for networking products, and
reduce operating expenses. Improvements in revenue and operating results
with respect to networking products are significantly dependent upon the
successful implementation of these restructuring actions, the introduction
of ATM support for ERS, and the introduction of enhancements for other
networking products. The development of ATM support for ERS is completely
dependent upon the success of the Company's joint development agreement with
Northern Telecom, Inc. The Company does not anticipate ATM support for ERS
will become available until 1997. There can be no assurance that the
Company's joint development agreement with Northern Telecom, Inc. will be
successful, or that the Company's networking product line will generate any
significant future profits.
MIDRANGE AND OTHER PRODUCTS
Revenue from midrange and other products decreased 56% in 1995 compared to
1994. 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. No material gain or loss
resulted from the sale of the midrange lease assets as the gain on the lease
asset sale was largely offset by transaction and integration costs. A one-
time gain of approximately $8.8 million was recognized in connection with
the sale of the midrange service business. As a result of the sale of the
midrange lease assets and midrange service business, revenue from the
midrange product line is expected to be significantly reduced in future
periods.
Revenue from midrange subsystems and other products decreased 17% in 1994
compared to 1993. Midrange revenue and operating results during 1994 were
adversely affected by a steep price erosion in the midrange online
marketplace. A restructuring plan adopted by the
PAGE
<PAGE>
Page 22
Company in the third quarter of 1993 resulted in further reductions in
midrange revenue as the Company redirected its marketing efforts to a segment
of the midrange marketplace.
GROSS PROFIT
- ------------
Gross profit on product sales of 37% in 1995 was unchanged, compared to
1994. Gross profit improvements were obtained from product cost
improvements, principally from Iceberg, and cost savings associated with the
increased manufacturing volumes during 1995 for online and Nearline
products. Product sales margins also benefited from reduced sales revenue
contribution from lower margin midrange products as a result of the sale of
the midrange lease assets. These improvements were offset by the
continuation of price declines in the online marketplace, and a significant
decrease in margin contribution from networking products.
Gross profit on product sales increased to 37% in 1994, compared to 33% in
1993, primarily as a result of a favorable product mix which included
increased revenue contribution from higher margin products sold during 1994,
such as Iceberg, Silverton, and PowderHorn; and reduced revenue contribution
from lower margin midrange products.
Gross profit on service and rental revenue was unchanged at 36% in 1995, as
compared to 1994. Gross profit on service and rental revenue increased
slightly to 36% in 1994, compared to 35% in 1993.
The Company's ability to sustain or improve product sales margins during
1996 is significantly dependent upon the rate of the price declines in the
online marketplace, achieving satisfactory manufacturing volumes associated
with networking products to offset fixed costs, and achieving cost savings
associated with the manufacture of its online and networking products.
Product sales margins also may be adversely affected by inventory writedowns
as a result of more rapid than anticipated technological changes. Service
margins also may be affected in the future due to increased price
competition.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures decreased 9% in 1995 compared
to 1994, and declined as a percentage of revenue from 11.0% in 1994 to 9.7%
in 1995. While the Company continued to invest in the development of new
products and enhancements to existing products, these decreases reflect the
completion of several major product development programs in 1994 and the
implementation of cost-control measures directed at achieving targeted
expense ratios. Research and product development increased 8% in 1994
compared to 1993, primarily due to costs incurred in connection with the
continued development of TimberLine, RedWood, Iceberg and networking
products.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A and
Other) increased 5% in 1995 compared to 1994 and remained relatively
unchanged as a percent of revenue at 23% for both 1995 and 1994. The
increase in MG&A and Other in 1995 is due primarily to increased marketing
expenses resulting from higher sales volumes, and a charge of $13.7 million
incurred as a result of activities indirectly related to the Company's 1995
restructuring. Also included within MG&A and Other for 1995 is a one-time
gain of $8.8 million realized on the
PAGE
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Page 23
sale of substantially all of the Company's midrange service business. Gains
and losses associated with foreign currency transactions and translation
adjustments, net of associated hedging results, are included in MG&A and Other
and aggregated a net loss of $4.3 million for 1995, compared to a net loss of
$1.2 million in 1994.
MG&A and Other increased 8% in 1994 compared to 1993, primarily due to an
increase in operating expenses as a result of higher sales volumes and costs
incurred in connection with the introduction of new products. These
increases were partially offset by lower marketing expenses related to the
midrange business and reduced foreign currency losses in 1994, compared to
1993. Gains and losses associated with foreign currency transactions and
translation adjustments, net of associated hedging results, aggregated a net
loss of $1.2 million for 1994, compared to a net loss of $9.0 million in
1993.
See "INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES," below, for further
discussion of the foreign exchange risks associated with the Company's
international operations and the related foreign currency hedging
activities.
RESTRUCTURING AND OTHER CHARGES
- -------------------------------
Restructuring and other charges consist of the following (in thousands of
dollars):
Year Ended
----------------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
----------------------------------------------------
Restructuring charges $167,175 $8,000 $77,832
Litigation settlement 30,680
Merger and consolidation
charges 14,352 5,522
Acquired research and
development 7,060
------- ----- ------
$212,207 $8,000 $90,414
======= ===== ======
See Note 14 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for a discussion
of the $30.7 million charge associated with the settlement of litigation in
1995. See Note 2 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for a
discussion of the $14.4 million charge associated with the merger with
Network Systems in 1995 and the $5.5 million charge associated with the
merger with Amperif Corporation in 1993. See Note 2 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, also, for a discussion of the $7.1
million charge incurred in connection with Network Systems' acquisition of
Bytex Corporation in 1993.
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The following table summarizes the activity in the Company's restructuring
reserves during the last three years (in thousands of dollars):
<TABLE>
<CAPTION>
Employee Asset Lease Other
Severance Writedowns Abandonments Exit Costs Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 25, 1992 $ 2,794 $ 2,536 $ 4,866 $ 10,196
Restructuring charges 12,636 $ 59,178 3,490 2,528 77,832
Cash payments (7,955) (769) (3,598) (12,322)
Asset writedowns (59,178) (59,178)
Reclassifications to other
restructuring charges (1,236) (1,236)
------ ------- ------ ------ -------
Balances, December 31, 1993 6,239 0 5,257 3,796 15,292
Restructuring charges 3,000 2,200 2,300 500 8,000
Cash payments (6,203) (1,775) (684) (8,662)
Asset writedowns (2,200) (2,200)
------ ------- ------ ------ -------
Balances, December 30, 1994 3,036 0 5,782 3,612 12,430
Restructuring charges 49,265 91,609 16,660 9,641 167,175
Cash payments (9,613) (3,904) (3,081) (16,598)
Asset writedowns (91,609) (91,609)
------ ------- ------ ------ -------
Balances, December 29, 1995 $42,688 $ 0 $18,538 $10,172 $ 71,398
====== ======= ====== ====== =======
</TABLE>
1995 RESTRUCTURING
As more fully discussed in Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the fourth quarter of 1995, the Company recorded a
restructuring charge of $167.2 million related to the adoption by the
Company of a formal action plan for restructuring its enterprise and
networking businesses. The restructuring was adopted in an effort to
establish a more competitive cost structure in response to slower revenue
growth and increasing price competition, particularly in the online
marketplace. In connection with the restructuring, the Company plans to
focus on core businesses and outsource non-strategic activities, rearchitect
its distribution processes and accelerate the integration of Network
Systems, which was acquired in March 1995.
The majority of the Company's restructuring actions were either completed in
the fourth quarter of 1995 or are expected to be completed during 1996. As
of December 29, 1995, the remaining accrual associated with this
restructuring was approximately $67.6 million. This accrual consisted of
estimated future employee severance obligations of approximately $42.5
million; estimated future rent obligations associated with excess lease
space of approximately $16.0 million; and accruals for other exit costs
associated with the restructuring of approximately $9.1 million. While the
majority of these remaining accruals are expected to result in future cash
outflows, these outflows are not expected to have a material affect on the
Company's liquidity.
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The 1995 restructuring is expected to yield expense reductions on an annual
basis through the elimination of recurring costs as follows (in thousands of
dollars):
Employee cost savings $ 90,000
Depreciation and amortization savings 20,000
Lease abandonments and other cost savings 15,000
-------
Total estimated annual savings $125,000
=======
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 currently
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 described above.
The Company believes that its restructuring programs over the past several
years have eliminated certain non-essential functions and excess costs.
Based on current short and long-term forecasts, the Company believes that
such cost reductions will benefit future operations. While the Company does
not currently foresee any significant additional restructuring charges in
the near future, the successful implementation of the action plans
associated with the Company's 1995 restructuring 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.
1994 RESTRUCTURING
As more fully discussed in Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the fourth quarter of 1994, Network Systems recorded a
restructuring charge of $8.0 million in connection with an expense reduction
plan.
As of December 29, 1995, substantially all actions associated with the 1994
restructuring have been completed and the remaining accrual associated with
this restructuring of approximately $0.5 million related principally to
future rent obligations associated with excess lease space. No material
cash outflows are anticipated to result from this restructuring in the
future.
1993 RESTRUCTURINGS
As more fully discussed in Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the third quarter of 1993, StorageTek recorded a
restructuring charge of $69.2 million and, during the fourth quarter of
1993, Network Systems recorded a restructuring charge of $8.6 million for an
aggregate 1993 restructuring charge of $77.8 million for the combined
companies.
As of December 29, 1995, substantially all actions associated with the 1993
restructurings have been completed and the remaining accrual associated with
these restructurings of
PAGE
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Page 26
approximately $3.3 million related principally to future rent obligations
associated with excess lease space. No material cash outflows are anticipated
to result from these restructurings in the future.
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income decreased 8% in 1995 compared to 1994, primarily due to a
reduction in the Company's net investment in sales-type lease balance.
Despite an increase in market interest rates, interest income decreased 25%
during 1994 compared to 1993, due to a reduction in net investment in sales-
type leases and a decrease in the Company's cash balances available for
investment.
Interest expense decreased 16% in 1995 compared to 1994, due primarily to a
reduction of nonrecourse borrowings and other long-term debt in the second
half of 1995. Interest expense decreased 7% in 1994 compared to 1993,
primarily as a result of reduced levels of nonrecourse borrowings in the
first half of 1994.
The reductions in the balances of net investment in sales-type leases and
nonrecourse borrowings during 1995 reflect the sale of the Company's
midrange lease assets and the repayment of the associated lease borrowings
during 1995. As further discussed in Note 9 of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, on December 15, 1995, the Company exercised its right
to exchange 7% convertible subordinated debentures for all of its
outstanding shares of preferred stock. As a result of the exchange,
interest expense will increase and the obligation to pay preferred stock
dividends will be eliminated. As more fully discussed in Note 19 of NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, the Company announced on February 9,
1996, that it intends to sell substantially all of its net investment in
sales-type leases. In connection with this sale, the Company intends to
repay its outstanding nonrecourse borrowings and 9.53% Senior Secured Notes.
The completion of this proposed transaction would result in further
reductions in interest income and expense during 1996.
INCOME TAXES
- ------------
As further discussed in Note 10 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, effective as of the beginning of the fiscal year 1993, the
Company was required to change its method of accounting for income taxes
from Statement of Financial Accounting Standards (SFAS) No. 96 to SFAS No.
109. A one-time benefit of $40 million was recognized in the first quarter
of 1993 as a result of the adoption of the new income tax accounting
standard on a prospective basis. The adoption of SFAS No. 109 had no cash
flow impact.
SFAS No. 109 requires that deferred income tax assets be recognized to the
extent realization of such assets is more likely than not. The Company
evaluates a variety of factors in determining the amount of the deferred
income tax assets to be recognized pursuant to SFAS No. 109, including the
number of years the Company's operating losses and tax credits can be
carried forward, the existence of taxable temporary differences, the
Company's earnings history, and the Company's near-term earnings
expectations. Based on the currently available information, management has
determined that the Company will more likely than not realize $74.9 million
of net deferred income tax assets as of December 29, 1995.
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Page 27
The Company's provision for income taxes relates primarily to U.S. state
taxes and taxable earnings associated with its international operations in
certain foreign countries. The Company's effective tax rate can be subject
to significant fluctuations due to dynamics associated with the mix of its
U.S. and international taxable earnings. See Note 10 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS for information with respect to the
current status of the Internal Revenue Service examinations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balances increased $36.4 million and short-term
investments decreased $5.5 million from December 30, 1994, to December 29,
1995. The increase in cash during 1995 primarily resulted from cash
generated from operations of $306.0 million; offset by net repayments of
debt of $201.9 million and investments in property, plant and equipment of
$58.0 million. Net cash provided by operations was $306.0 million for 1995
compared to $75.2 million for 1994 and $84.0 million for 1993. Net cash
provided by operations for 1995 includes cash generated from the sale of
midrange lease assets and midrange service business of approximately $193.0
million and refunds from the Internal Revenue Service of $17.8 million,
offset by a one-time payment associated with the settlement of shareholder
litigation of approximately $30.7 million. The net repayment of debt for
1995 of $201.9 million was primarily due to the repayment of borrowings
associated with the sale of midrange lease assets.
The decrease of $52.9 million in cash balances during 1994 primarily
resulted from investments in equipment held for sale or lease of $93.3
million, and in property, plant and equipment of $120.1 million; offset by
income tax refunds received by Network Systems of $23.9 million. The
increase of $124.9 million in cash balances during 1993 reflects the net
proceeds of $166.5 million from the preferred stock offering, coupled with
the net cash generated by operating activities of $84.0 million, partially
offset by investments in property, plant and equipment of $83.4 million, and
net repayments of debt of $24.5 million.
The current ratio decreased to 1.8 as of December 29, 1995, from 2.0 as of
December 30, 1994. Accounts receivable increased from $353.5 million as of
December 30, 1994, to $396.5 million as of December 29, 1995, primarily due
to an increase in end-user sales in relation to sales-type leases.
Inventories decreased from $261.7 million as of December 30, 1994, to $214.6
million as of December 29, 1995, principally as a result of the sale of
substantially all of the Company's midrange business, as well as strong year-
end demand for Nearline products in 1995.
AVAILABLE FINANCING LINES
The Company has a $200 million secured multicurrency credit agreement with a
group of U.S. and international banks (the Revolver) which expires on March
29, 1996. The interest rates available under the Revolver depend on the
type of advance selected; however, the primary advance rate is the agent
bank's prime lending rate (8.5% at December 29, 1995). The total amount
available under the Revolver is limited to a monthly borrowing base
determined as a percentage of the Company's eligible accounts receivable,
lease assets (primarily net investments in sales-type leases not previously
utilized for other secured borrowings), and equipment awaiting revenue
recognition. To obtain funds under the Revolver, the Company is
PAGE
<PAGE>
Page 28
required to comply with certain financial and other covenants, including
restrictions on the payment of cash dividends on its common stock. As of
December 29, 1995, the Company had no outstanding advances under the Revolver
and had approximately $116 million of available credit under the Revolver.
The Company expects to negotiate a new multicurrency credit agreement prior to
the expiration of the Revolver on March 29, 1996. There can be no
assurances, however, that the Company will be able to complete a new credit
agreement on terms acceptable to the Company.
The Company has historically provided lease financing to its customers and,
to the extent not funded with nonrecourse or other borrowings, utilized its
lease assets as a source of liquidity. As more fully discussed in Note 19
of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, the Company announced on
February 9, 1996, that it intends to sell its net investment in sales-type
leases and enter into a worldwide lease financing alliance. The Company
expects to close the proposed transaction by the end of the first quarter of
1996, and anticipates an extraordinary gain if the transaction is completed.
In connection with the sale of its net investment in sales-type leases, the
Company intends to repay its outstanding nonrecourse borrowings and its
9.53% Senior Secured Notes. The completion of this transaction is expected
to provide a significant one-time source of cash at the time of closing;
however, the Company would no longer have lease assets as a source of
liquidity on a going forward basis.
As more fully discussed in Note 19 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, on January 29, 1996, the Company entered into a one-year
agreement with a bank which provides for the sale of certain U.S. and
foreign based accounts receivable on a recourse basis. This agreement
allows for receivable sales of up to $40 million at any one time and
StorageTek's obligations under the agreement will be secured by a letter of
credit for the amount of the receivables sold. The selling price of the
receivables will be partially determined based upon foreign currency
exchange rates and any gains or losses on the sales will be recognized
within MG&A and Other in the Consolidated Statement of Operations at the
time the receivables are sold. As of February 23, 1996, the Company had
committed to future cumulative sales of approximately $206 million. Gains
and losses associated with the receivable sales are not expected to have a
material affect on the Company's reported financial results after taking
into consideration other transactions associated with the Company's
international operations.
After consideration of the factors noted above which potentially affect the
Company's future liquidity, the Company believes it has adequate working
capital and financing capabilities to meet its anticipated operating and
capital requirements for the next 12 months, including new product
offerings. Over the longer term, the Company intends to continue to commit
substantial amounts of its resources to research and development projects
and may, from time to time, as market and business conditions warrant,
invest in or acquire complementary businesses, products or technologies.
The Company may seek to fund these activities or possible transactions
through the issuance of additional equity or debt. The issuance of equity
or convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that such additional financing, if
required, can be completed on terms acceptable to the Company.
PAGE
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Page 29
LONG-TERM DEBT-TO-TOTAL CAPITALIZATION
The Company's long-term debt-to-total capitalization ratio increased to 27%
as of December 29, 1995, from 22% as of December 30, 1994. This increase
resulted from the exchange of $171.2 million of 7% convertible subordinated
debentures for all of the Company's outstanding preferred stock on December
15, 1995, and reductions in stockholders' equity resulting from the
restructuring and other charges of $212.2 million incurred during 1995.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
Pursuant to the indenture related to 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 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 4.0%,
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 December 29, 1995, the
Company held 8% Convertible Debentures in the principal amount of $14.4
million available for sinking fund payments.
In connection with the Company's 9.53% Senior Secured Notes due August 31,
1996 (the Notes), the Company is required to make semiannual interest
payments on the $55 million principal amount outstanding. All principal
amounts are due and payable on August 31, 1996. The Notes are redeemable at
the option of the Company, in whole or in part, at a premium which is
determined based on current interest rates and the time remaining until
maturity. As further discussed in Note 19 of the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, the Company intends to prepay the Notes in March 1996
in connection with the sale of its net investment in sales-type leases.
On December 15, 1995, the Company exercised its right to exchange 7%
Convertible Subordinated Debentures due 2008 (7% Convertible Debentures) for
all of its outstanding shares of $3.50 Convertible Exchangeable Preferred
Stock, $.01 par value (Preferred Stock). The Preferred Stock was exchanged
at a rate of $50 principal amount of 7% Convertible Debentures for each
share of Preferred Stock. The exchange resulted in the Company issuing 7%
Convertible Debentures in the aggregate principal amount of $171.2 million.
Pursuant to the indenture related to the Company's 7% Convertible
Debentures, the Company is required to make semiannual interest payments on
the $171.2 million principal amount of the 7% Convertible Debentures
outstanding. The first interest payment is due March 15, 1996, for the
three-month period from the date of the exchange. The 7% Convertible
Debentures are unsecured, subordinated obligations of the Company and are
currently convertible into common stock at a price of $23.50 per share. The
7% Convertible Debentures are pari parsu with the Company's 8% Convertible
Debentures. The 7% Convertible Debentures are redeemable for cash at any
time on and after March 15, 1996, in whole or in part, at the option of the
Company, initially at a premium of 4.9%, and are redeemable at decreasing
premiums thereafter through
PAGE
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Page 30
March 15, 2003. The Company is required to make annual payments into a
sinking fund beginning March 15, 2003, in the amount of $17.1 million to
provide for the retirement of 50% of the 7% Convertible Debentures prior to
their maturity on March 15, 2008. 7% Convertible Debentures purchased by
the Company in the open market and 7% Convertible Debentures converted to
common stock may be applied to the sinking fund requirements. As of
December 29, 1995, the Company held no 7% Convertible Debentures available
for sinking fund payments.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
In 1995, approximately 41% of the Company's revenue was generated by its
international operations. The majority of the Company's international
operations involve transactions denominated in the local currencies of
countries within Western Europe, principally Germany, France and the United
Kingdom; 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.
See Note 15 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for additional
information with respect to the Company's foreign currency hedging
activities, including an assessment of the market and credit risks
associated with these activities. See "RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS - INTERNATIONAL SALES AND OPERATIONS," below, for further discussion
of other factors which may affect the Company's international operations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The Company believes that the successful and timely development of new
products, software applications and enhancements will play a key role in
determining its results of operations and competitive strength in the
future. During the past several years, the Company has introduced many key
products including Iceberg, Kodiak, TimberLine, RedWood, and PowderHorn, and
has plans to introduce new products and enhancements that it believes will
be key to its financial strength and competitiveness. In the past, the
Company has encountered defects which have delayed the introduction of new
products and product enhancements, and the manufacture of existing products.
These delays have, from time to time, adversely affected the Company's
financial results and competitive position in the market. There can be no
assurances that the
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Page 31
Company will not encounter product delays in the future, or that despite
intensive testing by the Company, flaws in design or production will not
occur, which could result in the Company experiencing a rate of failure in
its products that delay the 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 affect upon the Company's financial
results.
The market for the Company's products is characterized by rapid
technological advances which necessitate frequent product introductions and
enhancements, and can result in unpredictable product transitions,
significant price erosion, and shortened product life cycles. To be
successful in this market, the Company must make significant investments in
research and product development and introduce competitive new products and
enhancements to existing products on a timely basis. Delays associated with
development and introduction of new products have resulted, from time to
time, in the Company incurring significant accounting charges to reflect the
impaired values of associated business acquisitions, inventory, and other
product-line specific assets. There can be no assurance that new products
developed by the Company will be accepted in the marketplace. Moreover,
certain components of the Company's products operate near the present limits
of electronic and physical performance capabilities and are designed and
manufactured with relatively small tolerances.
DEPENDENCE ON IBM SYSTEMS
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. While the Company believes that customers will continue
to use, and IBM will continue to support, these operating systems and
products, there can be no assurances of such continued use and support. A
significant shift away from the mainframe environment or modifications in
the design or configuration of IBM computers may have a material adverse
affect on the Company's business. The Company is adapting its product
offerings to address the client-server market through the development of
network attached storage products; however, most of these products are only
in the engineering phase of development. There can be no assurances that
the Company will be successful in timely developing and marketing products
to address the rapidly expanding client-server market.
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 Corporation and EMC Corporation. Industry estimates
currently show that while demand for online storage capacity in the
enterprise marketplace is expected to increase in 1996, price erosion is
expected to more than offset this growth in demand. Competition could be
affected by cooperative alliances and relationships with competitors and
prospective customers that may emerge and rapidly acquire market share,
which may have a material adverse affect on the Company's business and
financial results.
The Company competes with a number of networking companies that have a
greater presence in the networking marketplace, including 3Com, Cisco
Systems, Inc., Cabletron Systems, Inc. and Bay Networks, Inc. The
operating results of the Company's networking product line did not meet its
expectations in 1995 due to difficulties encountered with the integration of
Network Systems, and delays in the development of ATM support for ERS. The
development of ATM support for
PAGE
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Page 32
ERS is completely dependent upon the success of the Company's joint
development agreement with Northern Telecom, Inc. The Company does not
anticipate ATM support for ERS will become available until 1997. There
can be no assurance that the Company's joint development agreement with
Northern Telecom, Inc. will be successful, or that the Company's networking
product line will generate any significant future profits. The Company's
inability to successfully and timely develop and introduce new network
products and product enhancements, expand its market penetration through
new distribution channels and improve the margins on its network products
through effective cost controls could have a material adverse affect on
the Company's future business and financial results.
The Company is adapting its product offerings for, and intensifying its
activities in, the client-server arena in response to the migration toward
shared data storage. The Company anticipates that its ability to compete in
the client-server systems market will depend on a number of factors within
and outside its control, including the timely introduction and performance
of products for the client-server market introduced by the Company and its
competitors.
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. The failure to successfully protect its
intellectual property rights or obtain licenses from others as needed could
have a material adverse affect 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 and is often protracted and
expensive. Litigation by or against the Company could result in significant
expense and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in any determination
unfavorable to the Company. In the event of an adverse result in any such
litigation, the Company could be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology, discontinue the use of
certain processes, enter into royalty arrangements, or obtain licenses to
the infringing technology. There can be no assurances that the Company
would be successful in such development or that such license or royalty
arrangements would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of
substantial time and other resources. The Company has, from time to time,
commenced actions against other companies to protect or enforce its
intellectual property rights. Similarly, the Company has, from time to
time, been notified that it may be infringing certain patent or other
intellectual property rights of others. Currently, the Company is involved
in a number of proceedings relating to its intellectual property
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Page 33
and patent infringement. See Part III, Item 3, "Legal Proceedings" and
Note 14 of NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for additional
information with respect to the Company's legal proceedings.
INTERNATIONAL SALES AND OPERATIONS
During 1995, approximately 41% of the Company's revenue was derived from
sales in markets outside the United States, primarily in Europe. The
Company expects that international sales will continue to account for a
significant portion of its revenue for the foreseeable future. During 1995,
the Company commenced manufacturing operations in Toulouse, France and plans
to expand the volume of its production at the Toulouse facility in 1996.
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 fluctuations in foreign
currency exchange rates, changes in or impositions of legislative or
regulatory requirements, tariffs, quotas, difficulty in obtaining export
licenses, potentially adverse taxes, the burdens of complying with a variety
of foreign laws and other factors outside the Company's control. In
addition, the laws of certain foreign countries in which the Company's
products are or may be manufactured or sold may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. To date, the Company has not experienced any material adverse
affects 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 affect on the Company's business or financial
results in the future.
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 affect 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.
RESTRUCTURING PLAN
During the fourth quarter of 1995, the Company recorded a restructuring
charge of $167.2 million to cover the costs of work force reductions of
approximately 1,700 employees, facility closings and consolidations, and
asset writedowns. This restructuring was adopted in an effort to establish
a more competitive cost structure in response to slower revenue growth and
increasing price competition in the marketplace. In connection with the
restructuring, the Company plans to focus
PAGE
<PAGE>
Page 34
on core businesses and outsource non-strategic activities, rearchitect its
distribution processes and accelerate the integration of Network Systems,
which was acquired in March 1995. There can be no assurance that the Company
will achieve anticipated expense reductions, 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. See
Item 1, Part 1, "Restructuring Plan," "Restructuring and Other Charges,"
above, and Note 16 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
additional information regarding the Company's restructuring plan.
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) longer than anticipated customer acceptance
periods for the Company's products, and (v) changes in the mix of products
sold.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock has fluctuated and in the
future may fluctuate substantially in response to reported earnings,
industry conditions, new product or product development announcements by the
Company or its competitors, announced acquisitions and joint ventures by the
Company or its competitors, general market and economic conditions,
international currency fluctuations and other events or factors. Further,
the volatility of the stock markets in recent years has caused wide
fluctuations in trading prices of stocks of high technology companies
independent of their individual operating results. In the future, the
Company's reported earnings may be below the expectations of stock market
analysts and investors, and in such events, there could be an immediate and
significant adverse affect on the trading price of the Company's common
stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the Index to
Consolidated Financial Statements at Item 14 of this Form 10-K are
incorporated by reference into this Item 8 of Part II of this Form 10-K.
PAGE
<PAGE>
Page 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements with the Company's independent accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
As described in the Company's current report on Form 8-K dated as of April
3, 1995, and amended by Forms 8-K/A dated April 7, 1995 and April 12, 1995,
at a meeting of the Company's Audit Committee held on March 16, 1995, the
Committee determined to engage the accounting firm of Price Waterhouse LLP
(Price Waterhouse) as independent accountants for all subsidiaries of the
Company for 1995, subject to approval of shareholders. The shareholders
ratified the appointment on May 24, 1995, at the Annual Meeting of
Shareholders. As a result, the Company's subsidiary, Network Systems,
disengaged the accounting firm of Ernst & Young LLP (Ernst & Young) and
retained the accounting firm of Price Waterhouse, who had been auditing the
Company and all subsidiaries except Network Systems. Price Waterhouse has
expressed reliance upon Ernst & Young's report in their report on the
consolidated financial statements of the Company for the years ended
December 30, 1994, and December 31, 1993. Ernst & Young's report on the
financial statements for 1994 and 1993 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty or
audit scope. Additionally, there were no report modifications for accounting
principles in the years ended December 30, 1994, and December 31, 1993.
PAGE
<PAGE>
Page 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the identity, background and experience of the
Company's directors is set forth under the caption "Election of Directors"
in the Company's definitive Proxy Statement concerning the Annual Meeting of
Stockholders to be held May 30, 1996 (the "Proxy Statement"), which
information is incorporated herein by reference. Also, the information
concerning executive officers set forth under the caption "Executive
Officers of the Registrant," in Part I of this Form 10-K is incorporated
herein by reference.
The information concerning Forms 3, 4, and 5 filed by Section 16 reporting
persons set forth under the caption "Compensation of Executive Officers --
Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning compensation of executive officers and directors
required under this item is contained in the Proxy Statement under the
captions "Compensation of Executive Officers" and "Standard Arrangements for
Compensation of Directors," and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information concerning certain principal holders of securities and
security ownership of executive officers and directors required under this
item is contained in the Proxy Statement under the captions "Voting
Securities of the Company -- Security Ownership," which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
required under this item is contained in the Proxy Statement under the
captions "Standard Arrangements for Compensation of Directors" and
"Compensation of Executive Officers," which is incorporated herein by
reference.
PAGE
<PAGE>
Page 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements:
--------------------- PAGE
Consolidated Balance Sheet at December 29, 1995,
and December 30, 1994 F-1
Consolidated Statement of Operations for the
Years Ended December 29, 1995, December 30, 1994
and December 31, 1993 F-2
Consolidated Statement of Cash Flows for the
Years Ended December 29, 1995, December 30, 1994
and December 31, 1993 F-3
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended December 29, 1995,
December 30, 1994, and December 31, 1993 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants for Storage
Technology Corporation F-31
Report of Independent Accountants for
Network Systems Corporation F-32
2. Financial Statement Schedules:
------------------------------
II - Valuation and Qualifying
Accounts and Reserves F-33
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
PAGE
<PAGE>
Page 38
3. Exhibits:
---------
The exhibits listed below are filed as part of this Annual Report on Form
10-K or are incorporated into this Annual Report on Form 10-K by
reference:
2.1 Restated Agreement and Plan of Merger by and among the
Registrant, StorageTek Eagle Corporation and Network Systems
Corporation dated as of August 8, 1994, as amended as of
August 25, 1994 and September 9, 1994, and Restated on
November 15, 1994 (filed November 16, 1994, as Exhibit 2.1 to
the Registrant's Registration Statement on Form S-4, File No.
33-55343, and incorporated herein by reference).
2.2 Amendment to Restated Agreement and Plan of Merger among
Storage Technology Corporation, StorageTek Eagle Corporation
and Network Systems Corporation dated as of February 8, 1995
(filed February 8, 1995 on Form 8-K, and incorporated herein
by reference).
3.1 Restated Certificate of Incorporation and Restated Bylaws
of Storage Technology Corporation dated July 28, 1987 (filed
as Exhibit 3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 25, 1987, and as Exhibit
3.1(ii) to the Company's Quarterly Report on Form 10-Q, for
the quarter ended September 29, 1995, filed on November 13,
1995, and incorporated herein by reference).
3.2 Certificate of Amendment dated May 22, 1989 to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit (c)(1) to the Registrant's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by
reference).
3.3 Certificate of Second Amendment dated June 2, 1992, to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 26, 1992, and incorporated
herein by reference).
3.4 First Amendment dated February 2, 1988, to the Restated
Bylaws of Storage Technology Corporation, amending Section IV
(filed as Exhibit 3(c) to the Company's Annual Report on Form
10-K for the fiscal year ended December 25, 1987, and
incorporated herein by reference).
3.5 Second Amendment dated May 25, 1995, to the Restated
Bylaws of Storage Technology Corporation, amending Article II
(filed as Exhibit 3.3(ii) to the Company's Quarterly Report
on Form 10-Q, for the quarter ended September 29, 1995, filed
on November 13, 1995, File No. 1-7534, and incorporated
herein by reference).
PAGE
<PAGE>
Page 39
4.1 Specimen Certificate of Common Stock, $0.10 par value of
Registrant (filed as Exhibit (c)(2) as to the Registrant's
Current Report on Form 8-K dated June 2, 1989, and
incorporated herein by reference).
4.2 Indenture dated as of May 31, 1990, between Storage
Technology Corporation and Manufacturers Hanover Trust
Company of California, Trustee, relating to the Company's 8%
Convertible Subordinated Debentures due May 31, 2015 (filed
as Exhibit 4.6 to the Company's Registration Statement on
Form S-3 filed May 11, 1990, File No. 33-34876, and
incorporated herein by reference).
4.3 Registration Statement of the Registrant on Form 8-A dated
August 13, 1981 (filed as Exhibit 4.7 to the Registrant's
Registration Statement on Form S-3 filed January 29, 1993,
File No. 33-57678, and incorporated herein by reference).
4.4 Registration Statement of the Registrant on Form 8-A dated
August 23, 1990 (filed as Exhibit 4.8 to the Registrant's
Registration Statement on Form S-3 filed January 29, 1993,
File No. 33-57678, and incorporated herein by reference).
4.5 Rights Agreement dated as of August 20, 1990, between
Storage Technology Corporation and First Fidelity Bank, N.A.,
New Jersey, Rights Agent, (filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K on August 20, 1990, and
incorporated herein by reference).
4.6 Certificate of Designations of Series B Junior
Participating Preferred Stock (filed as Exhibit A to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed with
the Commission on August 8, 1990, and incorporated herein by
reference).
4.7 Certificate of Designations of $3.50 Convertible
Exchangeable Preferred Stock (filed as Exhibit 4.12 to the
Registrants Registration Statement on Form S-3 filed
January 29, 1993, File No. 33-57678, and incorporated herein
by reference).
4.8 Indenture between the Registrant and American Stock
Transfer and Trust Company, as Trustee, relating to the
Registrant's 7% Convertible Subordinated Debentures due 2008,
(filed as Exhibit 4.13 to the Registrants Registration
Statement on Form S-3 filed January 29, 1993, File No.
33-57678, and incorporated herein by reference).
4.9 Form of 7% Convertible Subordinated Debentures due 2008
(filed as Exhibit 4.13 to the Registrant's Registration
Statement on Form S-3 filed January 29, 1993, File No.
33-57678, and incorporated herein by reference).
PAGE
<PAGE>
Page 40
4.10 Registration Statement on Form 8-A dated December 4, 1995
(filed on December 4, 1995, File No. 1-7534, and incorporated
herein by reference).
4.11 Form of Note Agreement dated as of August 30, 1991,
relating to Registrant's 9.53% Senior Secured Notes due
August 31, 1996 (filed as Exhibit 4(e) to the Registrant's
Registration Statement on Form S-4 filed October 25, 1991,
File No. 33-43536, and incorporated herein by reference).
4.12 Amendment No. 1 and Waiver to Note Agreement dated as
of April 1, 1994, relating to the Registrant's 9.53% Senior
Secured Notes due August 31, 1996 (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 1, 1994, and incorporated herein by
reference).
4.13 Amendment No. 2 and Waiver to Note Agreement dated as
of April 2, 1994, relating to the Registrant's 9.53% Senior
Secured Notes due August 31, 1996 (filed as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 1, 1994, and incorporated herein by
reference).
4.14(1) Amendment No. 1 dated as of January 25, 1996, to
Amended and Restated Security Agreement dated as of April 2,
1994, relating to Registrant's 9.53% Senior Secured Notes due
August 30, 1996.
4.15(1) Amendment No. 3 dated as of January 25, 1996, to Note
Agreement dated as of April 2, 1994, relating to Registrant's
9.53% Senior Secured Notes due August 30, 1996.
10.2(2) 1987 Employee Stock Purchase Plan, as amended (filed
as part of the Registrant's Registration Statement on Form
S-8 filed September 8, 1994, File No. 33-42818, and
incorporated herein by reference).
10.3(2) 1987 Equity Participation Plan (filed as part of the
Company's Registration Statement on Form S-8, filed
December 28, 1987, File No. 33-19426, and incorporated herein
by reference).
10.4(2) Amendment to the 1987 Equity Participation Plan (filed
as Exhibit 10(h) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 28, 1990, File No. 1-7534,
and incorporated herein by reference).
10.5(2) 1995 Equity Participation Plan (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q, for the
quarter ended June 30, 1995, filed on August 11, 1995, File
No. 1-7534, and incorporated herein by reference).
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
PAGE
<PAGE>
Page 41
10.6(2) Storage Technology Corporation MBO Plan (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 1, 1994, filed on August 12, 1994,
and incorporated herein by reference).
10.7(2) Storage Technology Corporation Amended and Restated
Stock Option Plan for Non-Employee Directors (filed as part
of the Registrant's Registration Statement on Form S-8, filed
September 18, 1991, File No. 33-42817, and incorporated
herein by reference).
10.8(2) Employment Agreement between the Company and David E.
Lacey, dated February 17, 1995 (filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K, filed on March 17,
1995, File No. 1-7534, and incorporated herein by reference).
10.9(2) Employment Agreement between the Company and Ryal
Poppa dated December 13, 1989, as amended on March 8, 1995
and July 27, 1995, (filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, and as Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, respectively, File
No. 1-7534, and incorporated herein by reference).
10.10(2) Employment Agreement between the Company and L.
Thomas Gooch, dated February 17, 1995 (filed as Exhibit 10.9
to the Company's Annual Report on Form 10-K, filed on
March 17, 1995, File No. 1-7534, and incorporated herein by
reference).
10.11(1/2) Amendment to Employment Agreement between the
Company and L. Thomas Gooch, dated December 1, 1995.
10.12(2) Employment Agreement between the Company and W.
Russell Wayman, dated February 17, 1995 (filed as Exhibit
10.11 to the Company's Annual Report on Form 10-K, filed on
March 17, 1995, File No. 1-7534, and incorporated herein by
reference).
10.13(1/2) Employment Agreement between the Company and David
E. Weiss, dated December 6, 1995.
10.14(2) Employment Agreement between the Company and John V.
Williams, dated February 17, 1995 (filed as Exhibit 10.13 to
the Company's Annual Report on Form 10-K, filed on March 17,
1995, File No. 1-7534, and incorporated herein by reference).
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
PAGE
<PAGE>
Page 42
10.15 Multicurrency Credit Agreement dated as of March 31,
1993, among the Registrant, Storage Technology De Puerto
Rico, Inc., XL/Datacomp, Inc. and StorageTek Financial
Services Corporation as Borrowers and Bank of America
National Trust and Savings Association as Agent, Swing Line
Bank and Issuing Bank, and the other banks and financial
institutions parties thereto (the "Credit Agreement") (filed
as Exhibit 10.15 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 26, 1993, and incorporated
herein by reference).
10.16 Amended and Restated Multicurrency Credit Agreement
dated as of September 28, 1994 (filed as Exhibit 10.0 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994, filed on November 14, 1994 and
incorporated herein by reference).
10.17 First Amendment and Waiver dated as of April 20, 1995,
to Amended and Restated Multicurrency Credit Agreement dated
as of September 28, 1994 (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, filed on August 11, 1995, File No. 1-7534, and
incorporated herein by reference).
10.18 Second Amendment and Waiver dated as of June 27, 1995,
to Amended and Restated Multicurrency Credit Agreement (filed
as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, filed on August 11,
1995, File No. 1-7534, and incorporated herein by reference).
10.19 Third Amendment and Waiver dated September 28, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995, filed on November 13, 1995, File No.
1-7534, and incorporated herein by reference).
10.20(1) Fourth Amendment dated as of December 22, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994.
10.21(1) Multicurrency Receivables Transfer Agreement dated as
of January 29, 1996.
11.0(1) Computation of Earnings (Loss) per Common Share.
21.0(1) Subsidiaries of Registrant.
23.1(1) Consent of Price Waterhouse LLP.
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which
directors and/or officers participate.
PAGE
<PAGE>
Page 43
23.2(1) Consent of Ernst & Young LLP.
24.1 Power-of-Attorney.
27.0(1) Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
On November 21, 1995, the Company filed a Current Report on Form 8-K
dated November 24, 1995, pursuant to Item 5 concerning the Company's
announcement that the Board of Directors had approved a restructuring
plan. Subsequent to 1995 fiscal year end, the Company filed a Current
Report on Form 8-K on January 29, 1996, pursuant to Item 5 concerning
its 1995 financial results as reported in a press release dated
January 25, 1996.
(c) Exhibits.
---------
The Exhibits listed in Item 14(a)(3) hereof are filed as part of this
Annual Report on Form 10-K.
(d) Financial Statement Schedules.
------------------------------
See Item 14(a)(3) above.
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
PAGE
<PAGE>
Page 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 11, 1996 STORAGE TECHNOLOGY CORPORATION
By: /s/ Ryal R. Poppa
-------------------------------------
Ryal R. Poppa
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Ryal R. Poppa Chairman of the Board March 11, 1996
- ---------------------- (Director), President and
Ryal Poppa Chief Executive Officer
(Principal Executive Officer)
/s/ David E. Lacey Corporate Vice President and March 11, 1996
- --------------------- Interim Chief Financial Officer
David E. Lacey (Principal Financial Officer
and Principal Accounting
Officer)
PAGE
<PAGE>
Page 45
SIGNATURE TITLE DATE
/s/ Judith E.N. Albino Director March 11, 1996
- ---------------------------
Judith E.N. Albino
/s/ William L. Armstrong Director March 11, 1996
- ---------------------------
William L. Armstrong
/s/ Robert A. Burgin Director March 11, 1996
- ---------------------------
Robert A. Burgin
/s/ Paul Friedman Director March 11, 1996
- ---------------------------
Paul Friedman
/s/ William R. Hoover Director March 11, 1996
- ---------------------------
William R. Hoover
/s/ Stephen J. Keane Director March 11, 1996
- ---------------------------
Stephen J. Keane
/s/ Robert E. LaBlanc Director March 11, 1996
- ---------------------------
Robert E. LaBlanc
/s/ Robert E. Lee Director March 11, 1996
- ---------------------------
Robert E. Lee
/s/ Harrison Shull Director March 11, 1996
- ---------------------------
Harrison Shull
/s/ Richard C. Steadman Director March 11, 1996
- ---------------------------
Richard C. Steadman
/s/ Robert C. Wilson Director March 11, 1996
- ---------------------------
Robert C. Wilson
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 29, December 30,
1995 1994
--------------------------
ASSETS
Current assets:
Cash, including cash equivalents of
$190,451 in 1995 and $128,257 in 1994 $ 264,502 $ 228,081
Short-term investments 5,477
Accounts receivable, net of allowance for
doubtful accounts of $14,665 in 1995 and
$13,387 in 1994 396,499 353,455
Notes and installment receivables 10,766 9,110
Net investment in sales-type leases (Note 4) 88,668 155,341
Inventories (Note 5) 214,553 261,705
--------- ---------
Total current assets 974,988 1,013,169
Notes and installment receivables 10,113 11,851
Net investment in sales-type leases (Note 4) 150,751 231,377
Equipment held for sale or lease, at cost net
of accumulated depreciation of $117,377
in 1995 and $98,649 in 1994 (Note 6) 139,629 146,320
Spare parts for field service, at cost net of
accumulated amortization of $87,980 in 1995
and $74,685 in 1994 29,468 62,421
Property, plant and equipment, at cost net of
accumulated depreciation (Note 7) 333,021 380,511
Deferred income tax assets, net of valuation
allowance (Note 10) 74,902 51,768
Other assets 175,757 247,041
--------- ---------
$1,888,629 $2,144,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease
commitments (Note 9) $ 19,415 $ 79,407
Current portion of other long-term debt (Note 9) 65,844 28,396
Accounts payable 93,129 123,464
Accrued liabilities (Note 8) 361,286 271,378
Income taxes payable (Note 10) 9,963 9,459
--------- ---------
Total current liabilities 549,637 512,104
Nonrecourse borrowings secured by lease
commitments (Note 9) 20,980 112,073
Other long-term debt (Note 9) 342,983 244,814
Deferred income tax liabilities (Note 10) 12,196 10,182
--------- ---------
Total liabilities 925,796 879,173
--------- ---------
Commitments and contingencies (Notes 9 and 14)
STOCKHOLDERS' EQUITY
$3.50 Convertible Exchangeable Preferred Stock,
$.01 par value, 40,000,000 shares
authorized; none issued in 1995, and
3,450,000 shares issued in 1994 (Note 11) 35
Common stock, $.10 par value, 150,000,000 shares
authorized; 53,352,087 shares issued in
1995, and 52,517,626 shares issued in 1994 5,335 5,252
Capital in excess of par value 1,414,551 1,562,568
Accumulated deficit (445,761) (291,356)
Treasury stock of 43,773 shares in 1995 and
35,713 shares in 1994 (777) (773)
Unearned compensation (6,427) (6,150)
Notes receivable from stockholders (4,088) (4,291)
--------- ---------
Total stockholders' equity 962,833 1,265,285
--------- ---------
$1,888,629 $2,144,458
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
-------------------------------------------
Sales $1,345,260 $1,289,271 $1,050,143
Service and rental revenue 584,225 582,079 567,548
--------- --------- ---------
Total revenue 1,929,485 1,871,350 1,617,691
--------- --------- ---------
Cost of sales 841,583 812,228 705,962
Cost of service and rental revenue 376,039 374,714 366,822
--------- --------- ---------
Total cost of revenue 1,217,622 1,186,942 1,072,784
--------- --------- ---------
Gross profit 711,863 684,408 544,907
Research and product development costs 187,275 206,083 191,048
Marketing, general, administrative
and other income and expense, net 445,889 425,490 393,991
Restructuring and other charges
(Note 16) 212,207 8,000 90,414
--------- --------- ---------
Operating profit (loss) (133,508) 44,835 (130,546)
Interest income 43,325 46,935 62,438
Interest expense (34,347) (40,832) (43,853)
--------- --------- ---------
Income (loss) before income taxes
and cumulative effect of
accounting change (124,530) 50,938 (111,961)
Provision for income taxes (Note 10) (17,800) (18,900) (9,500)
--------- --------- ---------
Income (loss) before cumulative
effect of accounting change (142,330) 32,038 (121,461)
Cumulative effect on prior years of
change in method of accounting
for income taxes (Note 10) 40,000
--------- --------- ---------
Net income (loss) (142,330) 32,038 (81,461)
Preferred dividend requirement
(Note 11) (11,544) (12,075) (9,805)
--------- --------- ---------
Income (loss) applicable to
common shares $ (153,874) $ 19,963 $ (91,266)
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative
effect of accounting change $ (2.91) $ 0.38 $ (2.59)
Cumulative effect on prior years
of change in method of
accounting for income taxes 0.79
--------- --------- ---------
$ (2.91) $ 0.38 $ (1.80)
========= ========= =========
Weighted average common shares
and equivalents 52,798 52,410 50,652
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash received from customers (Note 3) $ 2,036,789 $ 1,820,260 $ 1,750,457
Cash paid to suppliers and employees (1,715,669) (1,760,344) (1,646,853)
Interest received 53,362 55,484 59,609
Interest paid (30,401) (38,480) (40,702)
Income taxes paid, net (38,056) (1,675) (38,468)
---------- ---------- ----------
Net cash from operating activities 306,025 75,245 84,043
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (58,003) (120,057) (83,350)
Short-term investments, net 5,508 18,804 73,480
Business acquisitions, net of cash acquired (11,165) (11,161) (64,365)
Other assets, net (8,842) (37,246) (16,179)
---------- ---------- ----------
Net cash used in investing activities (72,502) (149,660) (90,414)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 2,593 167,237 87,508
Repayments of nonrecourse borrowings (150,818) (147,632) (147,647)
Proceeds from other debt 847 17,839 79,740
Repayments of other debt (54,536) (46,977) (44,144)
Proceeds from employee stock plans and
warrants 12,443 24,394 14,934
Proceeds from preferred stock offering,
net (Note 11) 166,479
Preferred stock dividend payments (Note 11) (12,075) (12,075) (9,459)
Repurchase of common stock (442) (10,976)
---------- ---------- ----------
Net cash from (used in) financing
activities (201,546) 2,344 136,435
---------- ---------- ----------
Effect of exchange rate changes on cash 4,444 19,179 (5,120)
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 36,421 (52,892) 124,944
Cash and cash equivalents - beginning
of the year 228,081 280,973 156,029
---------- ---------- ----------
Cash and cash equivalents - end of the
year $ 264,502 $ 228,081 $ 280,973
========== ========== ==========
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (142,330) $ 32,038 $ (81,461)
Depreciation and amortization expense 208,991 203,372 166,752
Translation (gain) loss (2,910) (10,424) 8,475
Cumulative effect of accounting change
(Note 10) (40,000)
Restructuring and other charges (Note 16) 91,609 2,200 59,178
Other non-cash adjustments to income 40,975 10,191 7,032
(Increase) decrease in accounts receivable (41,351) (92,165) 87,540
Decrease in notes receivable and
sales-type leases 149,158 49,232 57,836
(Increase) decrease in inventories 36,615 (44,210) (62,161)
Increase in equipment held for sale or
lease, net (59,773) (93,263) (48,462)
Increase in spare parts, net (7,243) (32,143) (19,161)
(Increase) decrease in net deferred
income tax asset (22,750) 7,914 (7,893)
Increase (decrease) in accounts payable (31,699) 22,872 (34,381)
Increase in accrued liabilities 85,102 10,320 11,824
Increase (decrease) in income taxes
payable 1,631 9,311 (21,075)
---------- ---------- ----------
Net cash from operating activities $ 306,025 $ 75,245 $ 84,043
========== ========== ==========
The accompanying notes are an integral part of the consolidated
Financial statements.
</TABLE>
F-3
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Notes
Capital in Cumulative Receivable
Preferred Common Excess of Accumulated Treasury Translation Unearned From
Stock Stock Par Value Deficit Stock Adjustment Compensation Stockholders
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 25, 1992,
as previously reported $4,261 $1,244,471 $(314,368) $(729) $ 2,872 $(8,594)
Pooling of interests with
Network Systems Corp. (Note 2) 796 116,249 93,969
----- --------- -------- ---- ------ ------
Balances, December 25, 1992,
as restated 5,057 1,360,720 (220,399) (729) 2,872 (8,594)
Preferred stock issuance
(3,450,000 shares) (Note 11) $35 166,444
Shares issued under stock
purchase plan, and for
exercises of options and
warrants (682,534 shares) 68 16,058
Shares purchased and retired
(299,761 shares) (30) (10,946)
Cash dividends paid on preferred
stock ($2.74 per share) (9,459)
Net loss (81,461)
Other (7) (2,924) (6) (2,872) 2,050
-- ----- --------- -------- ---- ------ ------
Balances, December 31, 1993 35 5,088 1,529,352 (311,319) (735) 0 (6,544)
Shares issued under stock
purchase plan, and for
exercises of options
(1,684,570 shares) 168 32,037 (33)
Shares purchased and retired
(11,574 shares) (1) (441)
Cash dividends paid on preferred
stock ($3.50 per share) (12,075)
Notes receivable from
stockholders for the
purchase of shares (Note 12) $(4,291)
Net income 32,038
Other (3) 1,620 (5) 394
-- ----- --------- -------- ---- ------ ------ ------
Balances, December 30, 1994 35 5,252 1,562,568 (291,356) (773) 0 (6,150) (4,291)
Preferred stock exchanged and
retired (3,450,000) (Note 11) (35) (165,194)
Shares issued under stock
purchase plan, and for
exercises of options
(743,432 shares) 74 14,620
Cash dividends paid on preferred
stock ($3.50 per share) (12,075)
Net loss (142,330)
Other 9 2,557 (4) (277) 203
-- ----- --------- -------- ---- ------ ------ ------
Balances, December 29, 1995 $ 0 $5,335 $1,414,551 $(445,761) $(777) $ 0 $(6,427) $(4,088)
== ===== ========= ======== ==== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-4
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Storage Technology Corporation and its wholly owned subsidiaries
(collectively hereinafter referred to as StorageTek or the Company). All
intercompany accounts and transactions have been eliminated in
consolidation. As further discussed in Note 2, the consolidated financial
statements have been restated for all periods presented to reflect the
merger with Network Systems Corporation (Network Systems).
NATURE OF OPERATIONS
StorageTek designs, manufactures, markets and services high-performance
information storage and retrieval subsystems and networking products.
StorageTek sells its products to end-user customers, value-added resellers
and original equipment manufacturers (OEMs) of computer systems. The
Company directly markets its products worldwide through offices located in
major metropolitan areas of the United States, Canada, Europe, Brazil,
Mexico, Japan, New Zealand and Australia, as well as through distributors in
Africa, Asia, Europe, and other countries in South America.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses during
the periods. Significant estimates have been made by management with
respect to the realizability of the Company's deferred tax assets, the
possible outcome of outstanding litigation, and future obligations
associated with the Company's 1995 restructuring. Actual results could
differ from these estimates making it reasonably possible that a change in
these estimates could occur in the near term. See Notes 10, 14 and 16,
respectively, for additional information with respect to these estimates.
REVENUE RECOGNITION
Revenue from the majority of the Company's end-user equipment sales,
including sales-type leases, and associated software licenses is recognized
at the time of acceptance by the customer, generally after installation at a
customer site. Revenue from certain customer-installable products, as well
as revenue from OEMs and distributors, is recognized at the time of
shipment. Costs associated with post-installation warranty obligations are
estimated and accrued at the time of revenue recognition. Rental revenue
associated with operating leases is recorded ratably over the rental period.
End users of equipment sold or leased by StorageTek generally contract with
the Company for equipment service and software support, which includes
normal maintenance and repair or
F-5
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<PAGE>
replacement of product components. Revenue from these service and support
contracts is recognized as earned and the costs associated with these
activities are expensed as incurred.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are short-term, highly liquid investments that are both
readily convertible to cash and have remaining maturities of three months or
less at the time of acquisition. The carrying value of the Company's cash
equivalents approximates fair value. Investments that do not qualify as
cash equivalents are classified as short-term investments.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs of $25,463,000 in 1995, $30,607,000 in 1994,
and $25,592,000 in 1993 associated with acquiring and developing software
products to be marketed to customers. Other assets as shown on the
Consolidated Balance Sheet include unamortized software costs of $54,034,000
as of December 29, 1995, and $55,198,000 as of December 30, 1994.
Amortization expense is calculated based on the greater of straight-line
amortization over estimated useful lives, generally three to four years, or
the percentage of actual revenue versus total anticipated revenue.
Amortization expense and write-offs associated with capitalized software
costs were $26,627,000 in 1995, $15,671,000 in 1994, and $10,741,000 in 1993.
The Company evaluates the realizability of the carrying value of the
capitalized software each quarter based upon estimates of the associated
future revenue.
DEPRECIATION AND AMORTIZATION
Equipment held for sale or lease, and property, plant and equipment are
stated at cost. Depreciation and amortization, which include the
amortization of assets recorded under capital leases, are computed using the
straight-line method over the related assets estimated useful lives or
remaining lease term. Manufactured spare parts are recorded at cost and
amortized over their estimated useful service lives. Other assets as shown
on the Consolidated Balance Sheet include unamortized goodwill of
$52,298,000 as of December 29, 1995, and $81,167,000 as of December 30,
1994. Amortization expense of goodwill is calculated on a straight-line
basis over a period not exceeding 10 years. The Company evaluates the
realizability of the carrying value of goodwill each quarter based upon
estimated future cash flows calculated on an undiscounted basis.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency for StorageTek's foreign subsidiaries is the U.S.
dollar, reflecting the significant volume of intercompany transactions and
associated cash flows which result from the fact that the majority of the
Company's products sold worldwide are manufactured in the United States.
Accordingly, monetary assets and liabilities are translated at year-end
exchange rates while non-monetary items are translated at historical rates.
Revenue and expenses are translated at the average rates in effect during
the year, except for cost of sales and depreciation, which are translated at
historical rates. See Note 15 for information with respect to the Company's
accounting policies for financial instruments utilized in its foreign
currency hedging program.
F-6
PAGE
<PAGE>
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed under the treasury stock method
using the weighted average number of common shares and dilutive common stock
equivalent shares outstanding during the year. The Company's preferred
stock (see Note 11) and convertible subordinated debentures (see Note 9) are
not common stock equivalents and, therefore, have been excluded from the
computation of earnings (loss) per common share. The preferred stock and
convertible subordinated debentures were anti-dilutive to the annual
computation of fully diluted earnings per common share for all periods
presented.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation." SFAS 123, which is effective for fiscal years
beginning after December 15, 1995, encourages, but does not require,
companies to recognize compensation expense for the theoretical fair value
of grants to employees of equity instruments based on mathematical formulas.
Companies that choose not to adopt the new accounting rules will continue to
apply the existing accounting contained in Accounting Principles Board
Opinion (APBO) No. 25, "Accounting for Stock Issued to Employees." SFAS 123
requires companies that choose not to adopt the new fair value accounting
rules to disclose the pro forma net income and earnings per share as if the
fair value rules had been adopted.
The Company will adopt SFAS 123 in 1996 and anticipates it will elect to
continue accounting for stock-based compensation in accordance with APBO 25
and provide the disclosures required by SFAS 123. Accordingly, the adoption
of SFAS 123 will not have any affect on the Company's consolidated financial
position or results of operations.
NOTE 2 - BUSINESS COMBINATIONS
NETWORK SYSTEMS CORPORATION
On March 7, 1995, the Company issued approximately 8,000,000 shares of
StorageTek common stock in exchange for all of the outstanding common stock
of Network Systems. The Company also reserved approximately 500,000 shares
for issuance in connection with Network Systems' outstanding employee stock
purchase and option plans. The transaction, which was accounted for as a
pooling of interests, involved a merger between a wholly owned subsidiary of
StorageTek and Network Systems. StorageTek's consolidated financial
statements were restated for all periods prior to the merger to include the
operations of Network Systems, adjusted to conform with StorageTek's
accounting policies and presentation.
F-7
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<PAGE>
Network Systems designs, manufactures, markets and services computer
networking products worldwide. Separate pre-merger revenue and net income
of StorageTek and Network Systems as if the merger was consummated on March
31, 1995, were as follows (in thousands of dollars):
Year Ended
-----------------------------------------
December 29, December 30, December 31,
1995 1994 1993
-----------------------------------------
Revenue:
Pre-merger
StorageTek $ 400,013 $1,624,959 $1,404,752
Network Systems 46,424 231,756 215,558
Merger adjustments 3,749 14,635 (2,619)
--------- --------- ---------
450,186 1,871,350 1,617,691
Post-merger 1,479,299
--------- --------- ---------
$1,929,485 $1,871,350 $1,617,691
========= ========= =========
Net income (loss):
Pre-merger
StorageTek $ 3,208 $ 41,437 $ (77,796)
Network Systems (15,686) (23,820) 2,207
Merger adjustments 3,564 14,421 (5,872)
--------- --------- ---------
(8,914) 32,038 (81,461)
Post-merger (133,416)
--------- --------- ---------
$ (142,330) $ 32,038 $ (81,461)
========= ========= =========
Pre-merger net income for the year ended December 29, 1995, includes merger
expenses of $4,143,000 and $10,209,000 recognized by StorageTek and Network
Systems, respectively. These expenses, which aggregate $14,352,000, are
included within restructuring and other charges on the Consolidated
Statement of Operations and consist principally of change in control
payments, financial advisor fees, legal fees, and accounting fees.
The merger adjustments relate to revenue recognition and income tax effects.
Adjustments were made to revenue and the associated costs and expenses to
reflect revenue recognition for certain Network Systems' product sales to
end-user customers at the time of customer acceptance, consistent with
StorageTek's policy, rather than at the time of shipment. Adjustments were
made to the combined tax position of StorageTek and Network Systems as if
the merger had occurred as of the beginning of the earliest period
presented.
BYTEX CORPORATION
In November 1993, Network Systems acquired all the outstanding shares of
Bytex Corporation (Bytex) for approximately $47,100,000. The transaction
was accounted for as a purchase acquisition. In connection with the
acquisition, Network Systems recognized a charge of $7,060,000 associated
with Bytex assets to be used in research and development activities, for
which there existed no alternative future uses. This charge is included
within restructuring and other charges on the Consolidated Statement of
Operations. The accompanying financial statements include Bytex's results
of operations since November 1993.
F-8
PAGE
<PAGE>
AMPERIF CORPORATION
In October 1993, the Company issued approximately 1,300,000 shares of
StorageTek common stock in exchange for all of the outstanding common and
preferred stock of Amperif Corporation (Amperif). The Company also reserved
approximately 600,000 shares for issuance in connection with Amperif's
outstanding warrants and employee stock options. The merger was accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements for 1993 include the operations of Amperif, adjusted to conform
with StorageTek's accounting policies and presentation. Merger and
consolidation expenses in the amount of $5,522,000, included within
restructuring and other charges on the Consolidated Statement of Operations,
were recognized in 1993 in connection with the merger.
BUS-TECH, INC.
In May 1993, Network Systems acquired all the assets and assumed certain
liabilities of Bus-Tech, Inc. (BTI) for approximately $24,700,000. The
transaction was accounted for as a purchase acquisition. The accompanying
consolidated financial statements include BTI's results of operations since
May 1993.
NOTE 3 - MIDRANGE LEASE ASSETS AND MIDRANGE SERVICE BUSINESS SALE
In September 1995, the Company completed the sale of substantially all of
its midrange service business. A gain of approximately $8,800,000 was
recognized in 1995 in connection with this transaction and has been included
within marketing, general, administrative and other income and expense on
the Consolidated Statement of Operations.
In June 1995, the Company completed the sale of substantially all of its net
investment in sales-type leases associated with its midrange business.
During the second quarter of 1995, the Company also announced plans to fully
integrate StorageTek Distributed Systems Division, Inc., the Company's
wholly owned midrange subsidiary, into StorageTek. The gain associated with
the lease asset sale was largely offset by transaction and integration
costs. The sale of the midrange lease assets and midrange service business
generated cash of approximately $193,000,000 during 1995 and has been
included within operating activities on the Consolidated Statement of Cash
Flows. The majority of this cash was utilized for repayments of borrowings
associated with the assets.
NOTE 4 - SALES-TYPE AND OPERATING LEASES
The Company offers lease financing to its customers to support the
acquisition of StorageTek products. Lease financings are made under both
sales-type leases and, to a lesser extent, operating leases. These leases
typically provide for a lease term of up to five years and the retention of
title to the equipment by StorageTek. The majority of StorageTek's lease
financings are currently made within the United States.
F-9
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<PAGE>
The components of net investment in sales-type leases are as follows (in
thousands of dollars):
December 29, December 30,
1995 1994
----------------------------
Total minimum lease and
maintenance payments $324,678 $482,958
Less: Executory costs
(maintenance payments) (61,860) (61,197)
------- -------
Net minimum lease payments 262,818 421,761
Estimated unguaranteed residual
values 5,070 13,870
Less: Unearned interest income (28,469) (48,913)
------- -------
239,419 386,718
Less: Current portion (88,668) (155,341)
------- -------
$150,751 $231,377
======= =======
Future minimum lease payments due from customers under sales-type leases and
noncancellable operating leases as of December 29, 1995, are as follows (in
thousands of dollars):
Sales-Type Operating
Leases Leases
-----------------------------
1996 $127,297 $ 7,214
1997 103,525 2,647
1998 62,818 1,139
1999 24,152 25
2000 6,688
Thereafter 198
------- ------
$324,678 $11,025
======= ======
Of the future minimum lease payments due from customers under sales-type
leases, the following amounts will be remitted under nonrecourse borrowing
arrangements (see Note 9): $21,606,000 in 1996; $13,269,000 in 1997;
$7,417,000 in 1998; $1,735,000 in 1999; and $51,000 in 2000. As further
discussed in Note 19, the Company announced on February 9, 1996, that it
intends to sell substantially all of its net investment in sales-type leases
and enter into a worldwide lease financing alliance.
NOTE 5 - INVENTORIES
Inventories include material, labor and factory overhead and are accounted
for at the lower of cost (first-in, first-out method) or market. The
Company evaluates the need for reserves associated with obsolete, slow-
moving, and nonsalable inventory by reviewing net realizable values on a
quarterly basis. The components of inventories are as follows (in thousands
of dollars):
December 29, December 30,
1995 1994
------------------------------
Raw materials $ 75,673 $ 51,938
Work-in-process 92,487 105,605
Finished goods 46,393 104,162
------- -------
$214,553 $261,705
======= =======
F-10
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<PAGE>
NOTE 6 - EQUIPMENT HELD FOR SALE OR LEASE
Equipment held for sale or lease to customers consists of the following (in
thousands of dollars):
December 29, December 30,
1995 1994
-----------------------------
Equipment shipped awaiting
revenue recognition $ 88,337 $ 93,768
Equipment off-rent 40,143 35,632
Equipment on-rent 11,149 16,920
------- -------
$139,629 $146,320
======= =======
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 29, December 30,
1995 1994
-------------------------------
Machinery and equipment $ 667,425 $ 674,261
Buildings and building
improvements 174,742 150,067
Land and land improvements 18,701 16,464
-------- --------
860,868 840,792
Less: Accumulated depreciation (527,847) (460,281)
-------- --------
$ 333,021 $ 380,511
======= =======
Machinery and equipment includes capitalized leases of $51,039,000 as of
December 29, 1995, and $39,000,000 as of December 30, 1994. Accumulated
depreciation includes accumulated amortization on such capitalized leases of
$24,653,000 as of December 29, 1995, and $19,966,000 as of December 30,
1994.
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 29, December 30,
1995 1994
------------------------------
Restructuring costs (see Note 16) $ 71,398 $ 12,430
Deferred revenue 44,549 25,833
Other 245,339 233,115
------- -------
$361,286 $271,378
======= =======
Other accrued liabilities consists of items which are individually
immaterial.
F-11
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<PAGE>
NOTE 9 - DEBT, BANKING ARRANGEMENTS AND LEASE OBLIGATIONS
Long-term debt, including capitalized lease obligations, but excluding
nonrecourse borrowings, consists of the following (in thousands of dollars):
December 29, December 30,
1995 1994
------------------------------
7% Convertible Subordinated
Debentures due 2008 $171,205
8% Convertible Subordinated
Debentures due 2015 145,645 $145,645
9.53% Senior Secured Notes
due 1996 55,000 55,000
Recourse borrowings secured
by lease commitments 43,872
Capitalized lease obligations 32,659 21,275
Other 4,318 7,418
------- -------
408,827 273,210
Less: Current portion (65,844) (28,396)
------- -------
$342,983 $244,814
======= =======
7% CONVERTIBLE DEBENTURES
On December 15, 1995, the Company exercised its right to exchange 7%
Convertible Subordinated Debentures due 2008 (7% Convertible Debentures) for
all of its outstanding shares of $3.50 Convertible Exchangeable Preferred
Stock, $.01 par value (Preferred Stock). The Preferred Stock was exchanged
at a rate of $50 principal amount of 7% Convertible Debentures for each
share of Preferred Stock. The exchange resulted in the Company issuing 7%
Convertible Debentures in the aggregate principal amount of $171,205,000.
The 7% Convertible Debentures are unsecured, subordinated obligations of the
Company and are currently convertible into common stock at a price of $23.50
per share. The 7% Convertible Debentures are pari parsu with the Company's
8% Convertible Subordinated Debentures due 2015. Interest on the 7%
Convertible Debentures is payable semiannually in arrears on March 15 and
September 15. The first interest payment is due on March 15, 1996, for the
three-month period from the date of the exchange. The 7% Convertible
Debentures are redeemable for cash at any time on and after March 15, 1996,
in whole or in part, at the option of the Company, initially at a premium of
4.9%, and are redeemable at decreasing premiums thereafter through March 15,
2003. The Company is required to make annual payments of $17,121,000 into a
sinking fund beginning March 15, 2003, to provide for the retirement of 50%
of the 7% Convertible Debentures prior to their maturity on March 15, 2008.
7% Convertible Debentures purchased by the Company in the open market and 7%
Convertible Debentures converted to common stock may be applied to the
sinking fund requirements. The Company has reserved 7,285,000 shares of
common stock for issuance upon conversion of the 7% Convertible Debentures.
8% CONVERTIBLE DEBENTURES
In May 1990, the Company issued $160,000,000 of 8% Convertible Subordinated
Debentures due 2015 (8% Convertible Debentures), of which $145,645,000 were
remaining outstanding as of December 29, 1995. The 8% Convertible
Debentures are unsecured subordinated obligations of the Company and are
convertible into common stock at a price of $35.25 per share. Interest on
the 8% Convertible Debentures is payable semiannually in arrears on
F-12
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<PAGE>
November 30 and May 31. The 8% Convertible Debentures are currently
redeemable at the option of StorageTek for cash at a premium of 4.0%, and
are redeemable at decreasing premiums through May 30, 2000. The Company is
required to make annual principal payments of $8,000,000, 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 December 29, 1995, the
Company held 8% Convertible Debentures in the principal amount of
$14,355,000 available for sinking fund payments. The Company has reserved
4,132,000 shares of common stock for issuance upon conversion of the 8%
Convertible Debentures.
9.53% SENIOR SECURED NOTES
In September 1991, the Company completed a $55,000,000 private placement of
9.53% Senior Secured Notes due August 31, 1996 (the Notes), collateralized
by U.S. lease and installment purchase receivables. Interest on the Notes
is payable semiannually in arrears on February 28 and August 31. The Notes
are redeemable at the option of the Company, in whole or in part, from time
to time, at a premium which is determined based on current interest rates
and the time remaining until maturity of the Notes. Under the terms of the
Note agreement, the Company is required to comply with certain financial and
other covenants, including restrictions on the payment of cash dividends on
its common and preferred stock. As further discussed in Note 19, the Company
intends to prepay all of the Notes in the first quarter of 1996.
RECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
The Company's recourse borrowings, which were secured by customer lease
commitments and by the underlying equipment, were repaid during 1995 in
connection with the sale of the Company's midrange lease assets (see Note
3). The borrowings provided for recourse to the Company in the event of a
default by a customer with respect to the lease commitments.
BANKING AND CREDIT ARRANGEMENTS
The Company has a secured multicurrency credit agreement with a group of
U.S. and international banks (the Revolver) which has a maximum borrowing
limit of $200,000,000 and expires on March 29, 1996. The interest rates
available under the Revolver depend on the type of advance selected;
however, the primary advance rate is the agent bank's prime lending rate
(8.5% at December 29, 1995). The total amount available under the Revolver
is limited to a monthly borrowing base determined as a percentage of the
Company's eligible accounts receivable, lease assets (primarily net
investments in sales-type leases not previously utilized for other secured
borrowings), and equipment awaiting revenue recognition. To obtain funds
under the Revolver, the Company is required to comply with certain financial
and other covenants, including restrictions on the payment of cash dividends
on its common stock. As of December 29, 1995, the Company had no
outstanding advances under the Revolver and had approximately $116,000,000
of available credit under the Revolver.
F-13
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<PAGE>
SCHEDULED DEBT MATURITIES
Scheduled maturities of long-term debt, including future minimum lease
payments under capitalized lease obligations, but excluding nonrecourse
borrowings, as of December 29, 1995, are as follows (in thousands of
dollars):
Total Long-
Capitalized Other Term Debt
Leases Debt Commitments
-------------------------------------
1996 $ 8,937 $ 57,682 $ 66,619
1997 5,622 1,260 6,882
1998 5,233 107 5,340
1999 3,769 116 3,885
2000 2,868 153 3,021
Thereafter 23,933 316,850 340,783
------- ------- -------
50,362 $376,168 $426,530
======= =======
Less: Amount representing
interest (17,703)
-------
Present value of capitalized
lease obligations
(including $8,162
classified as current) $ 32,659
=======
NONRECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
Nonrecourse borrowings incurred in connection with the financing of certain
of the Company's customer lease obligations are generally secured by lease
commitments and equipment. The related lease receivables are reflected on
the Consolidated Balance Sheet as accounts receivable to the extent they
represent amounts due on or prior to the balance sheet date, and as part of
net investment in sales-type leases for any amounts due thereafter (see Note
4). The weighted average interest rate related to the Company's nonrecourse
borrowings was approximately 8% as of December 29, 1995. The Company
announced on February 9, 1996, that it intends to sell its net investment in
sales-type leases. In connection with this sale, the Company intends to
repay all of its outstanding nonrecourse borrowings.
OPERATING LEASE OBLIGATIONS
StorageTek has various operating leases in effect for certain buildings,
sales offices, and machinery and equipment. Rent expense was $50,643,000 in
1995; $50,095,000 in 1994; and $43,752,000 in 1993. Future minimum rental
commitments required under all noncancellable operating leases with terms of
one year or more are as follows: $43,676,000 in 1996; $30,595,000 in 1997;
$22,878,000 in 1998; $15,268,000 in 1999; $11,606,000 in 2000; and
$19,211,000 thereafter.
NOTE 10 - INCOME TAXES
Effective as of the beginning of fiscal 1993, the Company changed its method
of accounting for income taxes to comply with the provisions of SFAS No.
109. A one-time benefit of $40,000,000 was recognized in 1993 as a result
of the adoption of the new income tax accounting standard on a prospective
basis. This benefit resulted largely from the requirement under SFAS No.
109 to recognize the tax benefits associated with net operating loss and tax
credit carryforwards to the extent their future realization is determined,
based on the weight of
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the available evidence, to be more likely than not. The adoption of SFAS
No. 109 had no cash flow impact.
Income (loss) before income taxes and cumulative effect of accounting change
consists of the following (in thousands of dollars):
Year Ended
--------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
--------------------------------------------
United States $ (98,450) $ 69,949 $(113,414)
International (26,080) (19,011) 1,453
-------- ------- --------
$(124,530) $ 50,938 $(111,961)
======== ======= ========
The provision for income taxes attributable to the amounts shown above
consists of the following (in thousands of dollars):
December 29, December 30, December 31,
1995 1994 1993
--------------------------------------------
Current tax provision
(benefit):
U.S. federal $ 11,900 $ 3,300 $(1,200)
International 14,200 11,600 12,000
State 11,900 3,100 2,200
------- ------ ------
38,000 18,000 13,000
------- ------ ------
Deferred tax provision
(benefit):
U.S. federal (12,100) 2,300 2,600
International (7,300) (100) (4,700)
State (800) (1,300) (1,400)
------- ------ ------
(20,200) 900 (3,500)
------- ------ ------
$ 17,800 $18,900 $ 9,500
======= ====== ======
The provision for income taxes attributable to income (loss) before income
taxes and cumulative effect of accounting change includes benefits of
$4,098,000 in 1995; $34,325,000 in 1994; and $1,422,000 in 1993 from the
utilization of net operating loss carryforwards as well as net benefits of
$8,558,000 in 1995; $7,236,000 in 1994; and $7,432,000 in 1993 as a result
of the Company's Grant of Industrial Tax Exemption issued by the
Commonwealth of Puerto Rico (the Tax Grant). On a per common share basis,
the net benefit of the Tax Grant was $0.16 in 1995; $0.14 in 1994; and $0.15
in 1993. The benefits from the Tax Grant include reduced tax rates and,
through 1995, included the ability to utilize U.S. net operating losses to
further reduce Puerto Rico tax liabilities. To the extent U.S. net
operating losses used to reduce Puerto Rico taxable income are subsequently
used to also reduce U.S. taxable income, the Puerto Rico benefit from the
utilization of these operating losses must be repaid to Puerto Rico. The
cumulative net benefit of the grant provision relating to the use of net
operating losses and subject to potential repayment in the future was
$14,256,000 as of December 29, 1995. The Tax Grant provision allowing
reduced tax rates expires in 2007.
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The Company reported the following deferred income tax balances on its
Consolidated Balance Sheet (in thousands of dollars)
December 29, December 30,
1995 1994
-----------------------------
Deferred income tax assets, net
of valuation allowance $ 74,902 $ 51,768
Deferred income tax liabilities (12,196) (10,182)
------- -------
Net deferred income tax asset $ 62,706 $ 41,586
======= =======
The Company's net deferred income tax asset consists of the following (in
thousands of dollars):
December 29, December 30,
1995 1994
-----------------------------
Gross deferred income tax assets:
Capitalized rental equipment $ 86,886 $ 120,747
Net operating loss carryforwards 57,617 89,026
Tax credit carryforwards 86,231 84,695
Restructuring accruals 36,226 3,820
Other accrued liabilities and reserves 63,410 64,518
Capitalized inventory costs 9,383 14,228
Deferred intercompany profit 18,099 14,895
Other 32,895 33,324
-------- --------
390,747 425,253
Less: Valuation allowance (189,483) (156,778)
-------- --------
201,264 268,475
-------- --------
Gross deferred income tax liabilities:
Deferred income from sales-type leases (80,518) (164,531)
Depreciation (34,609) (33,154)
Other (23,431) (29,204)
-------- --------
(138,558) (226,889)
-------- --------
Net deferred income tax asset $ 62,706 $ 41,586
======== ========
The net change in the valuation allowance for deferred income tax assets was
an increase of $32,705,000 in 1995 and a decrease of $24,819,000 in 1994.
The valuation allowance relates primarily to net operating loss
carryforwards, tax credit carryforwards, and net deductible temporary
differences. The Company evaluates a variety of factors in determining the
amount of the deferred income tax assets to be recognized pursuant to SFAS
No. 109, including the number of years the Company's operating loss and tax
credits can be carried forward, the existence of taxable temporary
differences, the Company's earnings history and the Company's near-term
earnings expectations. Although realization is not assured, management
believes it is more likely than not that all of the net deferred income tax
asset will be realized.
StorageTek has not provided for income taxes on the cumulative undistributed
earnings of its foreign subsidiaries to the extent they are considered to be
reinvested indefinitely (approximately $58,000,000 as of December 29, 1995).
The amount of the unrecognized deferred tax liability for these unremitted
earnings was $13,100,000 as of December 29, 1995.
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The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 35% to income (loss) before income taxes
and cumulative effect of accounting change for the following reasons (in
thousands of dollars):
Year Ended
----------------------------------------
December 29, December 30, December 31,
1995 1994 1993
-----------------------------------------
U.S. federal income tax at
statutory rate $(43,586) $ 17,828 $(39,186)
Increase (decrease) in income
taxes resulting from:
Increase (decrease) in
unrecognized net operating
losses and future deductions 39,209 (22,254) 42,437
Foreign tax rate and exchange
rate differentials 9,989 14,605 739
Nondeductible items 13,362 7,567 10,021
State income taxes, net of
federal benefits 2,467 6,158 673
Effect of Puerto Rico
operations (4,075) (3,634) (4,936)
Other, net 434 (1,370) (248)
------- ------- -------
Income tax expense attributable
to income (loss) before
cumulative effect of
accounting change $ 17,800 $ 18,900 $ 9,500
======= ======= =======
As of December 29, 1995, StorageTek had U.S. net operating loss
carryforwards of approximately $150,000,000 which expire in the years 2001
through 2009. Approximately $20,000,000 of the Company's net operating loss
carryforwards relate to losses associated with acquired companies which are
subject to substantial limitations. Approximately $46,000,000 of the
Company's net operating loss carryforwards relate to tax deductions
associated with stock option plans and, accordingly, the related benefit
will be credited to stockholders' equity when realized. StorageTek is also
subject to alternative minimum tax and had approximately $30,000,000 of
alternative minimum tax credit carryforwards available as of December 29,
1995.
In May 1995, the Company reached a settlement agreement with the Internal
Revenue Service with respect to proposed adjustments of approximately
$400,000,000 to the Company's federal income tax returns for the years 1985
through 1990. As a result of the settlements, all proposed adjustments were
resolved and the Company's U.S. net operating loss carryforwards have been
reduced by approximately $200,000,000. The settlement did not have a
material affect on the Company's financial position or results of operations
for 1995.
The Internal Revenue Service proposed the imposition of an accumulated
earnings tax on Network Systems as a result of its examination of Network
Systems' consolidated tax returns for the years 1983 through 1988. In 1991
and 1993, Network Systems paid the imposed tax plus interest on the tax and
filed suit in Federal District Court against the Internal Revenue Service
for the refund of the imposed tax plus interest. These suits were settled
in favor of Network Systems. In 1994, Network Systems received refunds of
$23,904,000 for the imposed tax plus interest for the tax years 1983 through
1986. In 1995, Network Systems received a refund of $17,835,000 for the
imposed tax plus interest for the tax years 1987 and 1988. The
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<PAGE>
receipt of these tax refunds had no affect on the Company's Consolidated
Statement of Operations for 1994 and 1995, as Network Systems had previously
recognized these amounts within other assets on the Consolidated Balance
Sheet in anticipation of a full refund.
The Internal Revenue Service is currently auditing the Company's federal
income tax returns for 1991 and 1992. In addition, the Internal Revenue
Service is currently auditing Network Systems' federal income tax returns
for 1992 and 1993.
NOTE 11 - PREFERRED STOCK
In March 1993, the Company completed a public offering of 3,450,000 shares
of $3.50 Convertible Exchangeable Preferred Stock, $.01 par value (Preferred
Stock), at a price of $50.00 per share. The proceeds of the Preferred Stock
offering, after deducting all associated costs, were $166,479,000.
Dividends on the Preferred Stock were cumulative and payable quarterly in
arrears at an annual rate of $3.50 per share, when and as declared by the
Company's Board of Directors. The liquidation value of each share of
Preferred Stock was $50.00, plus unpaid dividends. As further discussed in
Note 9, on December 15, 1995, the Company exercised its right to exchange 7%
Convertible Debentures for all of its outstanding shares of the Preferred
Stock.
NOTE 12 - EMPLOYEE BENEFIT PLANS, OPTIONS AND WARRANTS
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1987 Employee Stock Purchase Plan (Purchase Plan), as
amended, employees may be offered the right to collectively purchase a
maximum of 300,000 shares of StorageTek's common stock, plus any remaining
shares from earlier offering periods, in six-month consecutive offering
periods through April 30, 1996. Offering periods after April 30, 1996, are
subject to stockholder approval. Eligible employees may contribute up to
10% of their pay toward purchase of StorageTek common stock at a price equal
to 85% of the lower of the market price on the first or the last day of each
offering period. Proceeds received from the issuance of shares are credited
to stockholders' equity in the fiscal year the shares are issued. The
Company issued 662,810, 503,179 and 454,736 shares of StorageTek common
stock under the Purchase Plan in 1995, 1994 and 1993, respectively.
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 29, 1995, the Company had an aggregate of 4,482,533 common
shares reserved for issuance under its employee equity plans (Employee
Plans). These plans provide for the issuance of common shares pursuant to
stock option exercises, restricted stock awards and other equity awards.
There were 1,504,442 shares available for grant under the Employee Plans as
of December 29, 1995.
Employee stock options are granted under the Employee Plans at the fair
market value of the common stock on the date of grant and generally vest
over a period of between three and six years. Options granted under the
Employee Plans must be exercised no later than 10 years from the date of
grant.
F-18
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<PAGE>
The Company has made restricted stock awards of its common stock pursuant to
its Employee Plans, at a purchase price per share equal to par value.
Unearned compensation, which is determined as the difference between par
value and market value on the date of the award, is charged to stockholders'
equity and amortized to expense over the vesting period of the stock. A
total of 339,990 shares of restricted stock were outstanding as of December
29, 1995.
On July 26, 1995, the Board of Directors approved the tender of certain
outstanding employee stock options with exercise prices in excess of $28.99
per share, excluding all options held by officers of the Company, in
exchange for an equal number of stock options with an exercise price equal
to the then-current market price of $24.875 per share. Options to purchase
a total of 578,453 shares of common stock were tendered pursuant to this
offer. The terms of the options dated July 26, 1995, are the same as the
options which were exchanged, but are subject to a one-year restriction on
exercise from the grant date.
The Company also has a Nonemployee Director Stock Option Plan (Director
Plan) under which the Company grants stock options to nonemployee directors
for the purchase of an aggregate maximum of 530,000 shares of common stock
(including 180,000 shares which are subject to approval by the
shareholders). All Director Plan stock options are granted at the fair
market value of the common stock on the date of grant. There were 75,000
shares available for grant under the Director Plan as of December 29, 1995.
The following summarizes information with respect to options granted under
the Company's Employee and Director Plans:
Exercise Price
Number of Shares Per Share
----------------------------------------
Outstanding, December 31, 1993 3,984,671 $ 3.43 - $75.50
Granted 570,873 24.15 - 36.25
Exercised (1,146,888) 3.43 - 34.75
Canceled or expired (496,637) 12.50 - 64.25
---------- --------------
Outstanding, December 30, 1994 2,912,019 3.63 - 75.50
Granted 1,665,591 20.25 - 30.00
Exercised (162,363) 3.63 - 29.88
Canceled or expired (1,004,204) 15.88 - 75.50
---------- --------------
Outstanding, December 29, 1995 3,411,043 $ 6.67 - $75.50
========== ==============
Exercisable, December 29, 1995 1,406,838 $ 6.67 - $75.50
========== ==============
NOTES RECEIVABLE FROM STOCKHOLDERS
In connection with the Network Systems merger (see Note 2), the Company
assumed Network Systems' notes receivable from stockholders ($4,088,000 as
of December 29, 1995). These notes relate to loans made by Network Systems
to its officers prior to the merger to fund the exercise price of employee
stock options pursuant to a restricted stock purchase program and are
secured by the shares purchased and any other collateral required to
maintain 100% collateralization at the time of each loan.
F-19
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WARRANTS
In connection with the Amperif merger (see Note 2), the Company assumed
Amperif's obligations with respect to warrants for the purchase of 324,000
shares of common stock at a price of $30.86 per share which expire in 1996.
All of these warrants remained outstanding as of December 29, 1995.
EMPLOYEE PROFIT SHARING AND THRIFT PLAN
Under StorageTek's Profit Sharing and Thrift Plan, StorageTek contributions
are contingent upon realization of profits by the Company which, at the sole
discretion of the Board of Directors, are adequate to justify a corporate
contribution. Contributions from StorageTek of $3,000,000 were authorized
for 1995. No contributions from StorageTek were authorized for 1994 and
1993.
NOTE 13 - STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors adopted a new Stockholder Rights Plan
(Rights Plan). The Rights Plan is designed to deter coercive or unfair
takeover tactics and to prevent an acquiring entity from gaining control of
the Company without offering a fair price to all of the Company's
shareholders.
Each right would entitle the holder of the Company's common stock to
purchase one one-hundredth of a share of Series B Junior Participating
Preferred Stock at an exercise price of $150, subject to adjustment to
prevent dilution. The rights are evidenced by the common stock certificates
and will not separate from the common stock until the earlier of (i) 20 days
following the date on which any person or entity acquires beneficial
ownership of 15% or more of the common stock (an Acquiring Person) and the
right of redemption has not been reinstated; or (ii) 10 days after a public
announcement of a tender or exchange offer by any person or entity if upon
consummation such person would be an Acquiring Person. Further, upon the
occurrence of certain events described below, the rights generally entitle
each right holder (except the Acquiring Person) to purchase that number of
shares of the Company's common stock which equals the $150 exercise price of
the right divided by one-half of the current market price of the common
stock. Those events generally include (i) 20 days after any person or
entity becomes an Acquiring Person; and (ii) if any person or entity becomes
an Acquiring Person and thereafter, (a) the Company is merged with or into
an Acquiring Person and the Company's common stock is changed, converted or
exchanged; or (b) 50% or more of the Company's assets or earning power is
sold; or (c) an Acquiring Person engages in one or more "self-dealing"
transactions as described in the Rights Agreement.
The Company is generally entitled to redeem the rights for $.01 per right at
any time prior to the earlier of the date on which any person or entity
becomes an Acquiring Person or August 31, 2000. The rights will expire on
August 31, 2000, unless redeemed or exchanged earlier by the Company
pursuant to the Rights Plan.
NOTE 14 - LITIGATION
In the second quarter of 1992, seven purported class actions were filed in
the U.S. District Court for the District of Colorado against the Company and
certain of its officers and directors. These
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actions were subsequently consolidated into a single action, and a
consolidated amended complaint was filed on July 7, 1992, seeking an
unspecified amount of damages. The complaint alleged that the defendants
failed to properly disclose the status of development of a new product and
the Company's business prospects. The complaint further alleged that the
individual defendants sold shares of the Company's common stock based on
material inside information, in violation of federal securities and common
law. The court certified a class consisting (with certain exceptions) of
those who purchased StorageTek's common stock and related securities from
December 23, 1991, to August 7, 1992. A shareholder derivative action was
also filed in the second quarter of 1992 based on substantially similar
factual allegations and was consolidated with the class action. On July 27,
1995, the Company and the plaintiffs in the shareholder class action and
derivative litigation announced an agreement to settle the litigation.
The settlement provided that, without admitting any wrongdoing, the company
would pay $30,680,000 for its portion of the settlement. The Company's
insurance policies paid $24,320,000 as part of the total settlement of
$55,000,000. As a result of the settlement, a one-time charge of $30,680,000
was recognized during the third quarter of 1995. The court gave final
approval to the settlement in December 1995.
On June 10, 1993, the Company filed suit against EMC Corp. in U.S. District
Court for the District of Colorado. The suit currently alleges infringement
by EMC Corp. of a patent pertaining to the Company's disk storage
technology. The complaint seeks an injunction prohibiting further
infringement, 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. The case is in
the discovery phase.
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 seeks an injunction, treble damages in an
unspecified amount and an award of attorney fees and costs. On December 22,
1994, the Company filed a counterclaim for infringement of one of its
patents and, in November 1995, added a second patent to its counterclaim.
The case is in the discovery phase. A trial date has been set for May 1996.
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. The Company is currently proceeding with a
counterclaim against Stuff for breach of its covenant not to sue, which was
part of the 1990 settlement agreement.
On January 21, 1994, Bell Atlantic Business Systems Services, Inc. (BABSS)
filed suit in Federal District Court for the Northern District of
California, alleging that a number of the Company's service business
policies were illegal, including price increases and parts and maintenance
software availability. On January 4, 1996, the parties settled this suit.
The settlement of this litigation did not involve any admission of wrongdoing
by the Company, and had no material affect on the Company's financial position
or results of operations.
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
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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 filedcounterclaims 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. 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.
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. in June 1995.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that these cases
could result in outcomes unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of litigation
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material affect 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 15 - FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS
FOREIGN CURRENCY OPTIONS AND FORWARD EXCHANGE CONTRACTS
A significant portion of the Company's revenue is generated by its
international operations. As a result, the Company's operations and
financial results can be materially affected by changes in foreign currency
exchange rates. In an attempt to mitigate the impact of foreign currency
fluctuations, the Company employs a hedging program which utilizes foreign
currency options and forward exchange contracts. The Company does not hold
or issue foreign currency options or forward exchange contracts for trading
purposes.
F-22
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The Company utilizes foreign currency options, generally with maturities of
less than one year, to hedge its exposure to exchange-rate fluctuations in
connection with anticipated revenue from its international operations. The
Company held foreign currency options with a face value of approximately
$168,997,000 as of December 29, 1995, and $334,100,000 as of December 30,
1994. Deferred realized and unrealized losses associated with the Company's
foreign currency options, including costs associated with option premiums
paid, aggregated approximately $2,498,000 as of December 29, 1995, compared to
deferred realized and unrealized losses of approximately $3,920,000 as of
December 30, 1994. The deferred losses on the options as of December 29,
1995, will be recognized as an adjustment to the associated revenue during
1996 in the Consolidated Statement of Operations.
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 monetary assets and liabilities held in
foreign currencies. The carrying amounts of these forward foreign exchange
contracts equal their fair value as the contracts are adjusted at each
balance sheet date for changes in exchange rates. Realized and unrealized
gains and losses on the forward contracts are recognized currently within
marketing, general, administrative and other income and expense, net, on the
Consolidated Statement of Operations as adjustments to the foreign exchange
gains and losses on the translation of net monetary assets. The Company
held forward foreign exchange contracts with a face value of approximately
$114,644,000 as of December 29, 1995, and $99,200,000 as of December 30,
1994.
The forward exchange contracts and foreign currency options do not subject
the Company to risk due to exchange rate movements as gains and losses on
the contracts offset gains and losses on the transactions being hedged. The
foreign currency hedging instruments utilized by StorageTek are generally
traded over the counter. The Company does not believe there is significant
credit risk associated with these contracts as the counterparties consist of
major international financial institutions, and the Company monitors the
amount of the contracts it enters into with any one party. The credit
exposure associated with the Company's foreign currency option contracts is
represented by the fair value of the contracts as disclosed below
($3,202,000 as of December 29, 1995). There was no credit exposure with
respect to the Company's foreign currency forward contracts as of December
29, 1995, as the fair value of these contracts was approximately zero.
Losses associated with foreign currency translation adjustments and foreign
currency transactions, net of associated hedging results, aggregated
$4,303,000 in 1995, $1,178,000 in 1994, and $9,042,000 in 1993.
OTHER FINANCIAL INSTRUMENTS
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, trade receivables, and net investment in sales-type leases.
The Company has a cash investment policy which restricts investments to
ensure preservation of principal and maintenance of liquidity.
Concentrations of credit risk with respect to the Company's trade
receivables and net investment in sales-type leases are limited due to the
large number of customers comprising the Company's customer base, and their
dispersion across many different industries and geographic areas. As of
December 29, 1995, the Company had no significant concentrations of credit
risk.
F-23
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments as of December 29, 1995, are as follows (in thousands of
dollars):
Carrying Estimated
Amount Fair Value
-------------------------
Assets:
Notes and installment receivables $ 20,879 $ 20,937
Foreign currency option contracts 5,700 3,202
Liabilities:
Nonrecourse borrowings secured by
lease commitments 40,395 41,198
7% Convertible Subordinated
Debentures due 2008 171,205 191,750
8% Convertible Subordinated
Debentures due 2015 145,645 142,004
9.53% Senior Secured Notes due 1996 55,000 55,815
Other:
Foreign currency forward contracts 0 0
The fair value of notes and installment receivables was estimated based on
expected discounted future cash flows. The carrying value of the Company's
foreign currency options reflects premiums paid to purchase the contracts.
The fair value of the foreign currency options was estimated based upon
quotes obtained from the respective banks. The fair value of nonrecourse
borrowings secured by lease commitments was estimated based upon interest
rates currently available for borrowings of similar terms and maturities.
The fair value of the 7% and 8% Convertible Subordinated Debentures were
based upon the closing sales prices on the New York Stock Exchange as of
December 29, 1995. The fair value of the Company's 9.53% Senior Secured
Notes were estimated based upon interest rates currently available for
borrowings of similar terms and maturities. The carrying amounts of the
Company's cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities are either equal to or approximate their fair value.
The Company's foreign currency forward contracts, which are an off-balance-
sheet financial instrument, were entered into on December 29, 1995, and
accordingly, had a carrying value and fair value approximating zero.
NOTE 16 - RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges consists of the following (in thousands of
dollars):
Year Ended
----------------------------------------
December 29, December 30, December 31,
1995 1994 1993
----------------------------------------
Restructuring charges $167,175 $8,000 $77,832
Litigation settlement 30,680
Merger and consolidation charges 14,352 5,522
Acquired research and development 7,060
------- ----- ------
$212,207 $8,000 $90,414
======= ===== ======
F-24
PAGE
<PAGE>
See Note 14 for a discussion of the $30,680,000 charge associated with the
settlement of litigation in 1995. See Note 2 for a discussion of the
$14,352,000 charge associated with the merger with Network Systems in 1995
and the $5,522,000 charge associated with the merger with Amperif
Corporation in 1993. See Note 2, also, for a discussion of the $7,060,000
charge incurred in connection with Network Systems' acquisition of Bytex
Corporation in 1993.
The following table summarizes the activity in the Company's restructuring
reserves during the last three years (in thousands of dollars):
<TABLE>
<CAPTION>
Employee Asset Lease Other
Severance Writedowns Abandonments Exit Costs Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 25, 1992 $ 2,794 $ 2,536 $ 4,866 $ 10,196
Restructuring charges 12,636 $ 59,178 3,490 2,528 77,832
Cash payments (7,955) (769) (3,598) (12,322)
Asset writedowns (59,178) (59,178)
Reclassifications to other
restructuring charges (1,236) (1,236)
------ ------- ------ ------ --------
Balances, December 31, 1993 6,239 0 5,257 3,796 15,292
Restructuring charges 3,000 2,200 2,300 500 8,000
Cash payments (6,203) (1,775) (684) (8,662)
Asset writedowns (2,200) (2,200)
------ ------- ------ ------ --------
Balances, December 30, 1994 3,036 0 5,782 3,612 12,430
Restructuring charges 49,265 91,609 16,660 9,641 167,175
Cash payments (9,613) (3,904) (3,081) (16,598)
Asset writedowns (91,609) (91,609)
------ ------- ------ ------ --------
Balances, December 29, 1995 $42,688 $ 0 $18,538 $10,172 $ 71,398
====== ======= ====== ====== ========
</TABLE>
1995 RESTRUCTURING
During the fourth quarter of 1995, the Company recorded a restructuring
charge of $167,175,000 related to the adoption by the Company of a formal
action plan for restructuring its enterprise and networking businesses.
This restructuring was adopted in an effort to establish a more
competitive cost structure in response to slower revenue growth and
increasing price competition, particularly in the online marketplace. In
connection with the restructuring, the Company plans to focus on core
businesses and outsource non-strategic activities, rearchitect its
distribution processes and accelerate the integration of Network Systems,
which was acquired in March 1995.
In connection with the plan, the Company incurred employee severance costs
of approximately $49,265,000. The Company anticipates its worldwide work
force will be reduced by approximately 1,700 employees with the majority of
the terminations expected to occur during 1996.
F-25
PAGE
<PAGE>
Asset writedowns incurred in connection with the restructuring included a
charge of approximately $21,310,000 associated with the planned disposal of
excess spare parts in connection with the consolidation of field service
depots; a charge of approximately $19,600,000 primarily associated with the
writedown of manufacturing equipment which will be scrapped or sold; a
charge of approximately $18,484,000 associated with goodwill and other
investment writedowns on business activities which are being discontinued; a
charge of approximately $16,361,000 associated with the shutdown of
manufacturing and research facilities; a charge of approximately $10,758,000
associated with excess and obsolete inventories resulting from the decision
to discontinue various product lines; and a charge of approximately
$5,096,000 associated with other asset writedowns resulting from
discontinued business activities.
Charges of approximately $16,660,000 were incurred in connection with the
abandonment of real estate leases. Other exit costs of approximately
$9,641,000 were incurred principally related to equipment lease terminations
and the discontinuation of engineering support agreements.
As of December 29, 1995, the remaining accrual associated with this
restructuring was approximately $67,607,000. This accrual consisted of
estimated future employee severance obligations of approximately
$42,485,000; estimated future rent obligations associated with excess lease
space of approximately $16,028,000; and accruals for other exit costs
associated with the restructuring of approximately $9,094,000.
1994 RESTRUCTURING
During the fourth quarter of 1994, Network Systems recorded a restructuring
charge of $8,000,000 in connection with an expense reduction plan. The plan
included a charge for employee severances of approximately $3,000,000; a
charge associated with lease abandonments of approximately $2,300,000;
charges associated with the write-off of abandoned and non-productive
equipment of approximately $2,200,000; and a charge of approximately
$500,000 associated with other exit costs.
As of December 29, 1995, substantially all actions associated with the 1994
restructuring have been completed and the remaining accrual associated with
this restructuring of approximately $471,000 related principally to future
rent obligations associated with excess lease space.
1993 RESTRUCTURINGS
During the third quarter of 1993, StorageTek recorded a restructuring charge
of $69,250,000 and, during the fourth quarter of 1993, Network Systems
recorded a restructuring charge of $8,582,000 for an aggregate 1993
restructuring charge of $77,832,000 for the combined companies on a pooled
basis.
The StorageTek restructuring principally related to the adoption of a formal
plan that provided for the reorganization of the Company's midrange business
and included asset writedowns of approximately $57,251,000; employee
severance accruals of approximately $8,509,000; and lease termination costs
of approximately $3,490,000. Most of the actions covered by the
restructuring were implemented during the fourth quarter of 1993.
F-26
PAGE
<PAGE>
The significant components of the Network Systems restructuring included
employee severance and other employee-related costs of approximately
$4,127,000; a charge of approximately $2,528,000 associated with other exit
costs; and a charge of $1,927,000 associated with the write-off of abandoned
facilities, manufacturing assets, and inventory.
As of December 29, 1995, substantially all actions associated with the 1993
restructuring have been completed and the remaining accrual associated with
this restructuring of approximately $3,320,000 related principally to future
rent obligations associated with excess lease space.
NOTE 17 - OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS
BUSINESS SEGMENTS
StorageTek operates in one principal business segment - the design,
manufacturing, marketing, and servicing of high-performance information
storage and retrieval subsystems and networking products.
GEOGRAPHIC AREAS
StorageTek operates principally in the United States, Europe, Canada,
Australia and Japan. Operations in Canada, Australia and Japan individually
account for less than 10% of the consolidated revenue and identifiable
assets, and have been combined and shown in the table below as "Other."
Information regarding each geographic area on an unconsolidated basis for
each of the last three years is shown below (in thousands of dollars):
<TABLE>
<CAPTION>
Consolidated
1995 United States Europe Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers $1,227,509(1) $553,064 $148,912 $1,929,485
Transfers between areas 380,194 $(380,194)
--------- ------- ------- -------- ---------
Total revenue $1,607,703 $553,064 $148,912 $(380,194) $1,929,485
========= ======= ======= ======== =========
Operating loss $ (22,769) $(27,296) $ (7,047) $ (7,631) $ (64,743)
========= ======= ======= ========
Interest income (expense), net 8,978
General corporate expenses (68,765)(2)
---------
Loss before income taxes $ (124,530)
=========
Identifiable assets $1,304,606 $494,499 $122,149 $(233,300) $1,687,954
========= ======= ======= ========
General corporate assets 200,675
---------
Total assets $1,888,629
=========
</TABLE>
F-27
PAGE
<PAGE>
<TABLE>
<CAPTION>
Consolidated
1994 United States Europe Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers $1,242,166(1) $499,939 $129,245 $1,871,350
Transfers between areas 308,978 $(308,978)
--------- ------- ------- -------- ---------
Total revenue $1,551,144 $499,939 $129,245 $(308,978) $1,871,350
========= ======= ======= ======== =========
Operating profit (loss) $ 90,529 $(17,640) $ 4,321 $ (11,604) $ 65,606
========= ======= ======= ========
Interest income (expense), net 6,103
General corporate expenses (20,771)
---------
Income before income taxes $ 50,938
=========
Identifiable assets $1,764,903 $380,999 $ 79,917 $(216,858) $2,008,961
========= ======= ======= ========
General corporate assets 135,497
---------
Total assets $2,144,458
=========
</TABLE>
<TABLE>
<CAPTION>
Consolidated
1993 United States Europe Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers $1,097,644(1) $406,054 $113,993 $1,617,691
Transfers between areas 211,342 623 $(211,965)
--------- ------- ------- -------- ---------
Total revenue $1,308,986 $406,677 $113,993 $(211,965) $1,617,691
========= ======= ======= ======== =========
Operating profit (loss) $ (70,371) $(39,894) $ 3,780 $ (2,879) $ (109,364)
========= ======= ======= ========
Interest income (expense), net 18,585
General corporate expenses (21,182)(2)
---------
Loss before income taxes $ (111,961)
=========
Identifiable assets $1,600,964 $337,541 $ 74,695 $(157,218) $1,855,982
========= ======= ======= ========
General corporate assets 208,869
---------
Total assets $2,064,851
=========
(1) U.S. revenue from unaffiliated customers includes international
export sales to customers (principally in Europe) of $79,714,000 in
1995; $94,959,000 in 1994; and $88,795,000 in 1993.
(2) General corporate expenses include a charge of $30,680,000
associated with the settlement of litigation in 1995, as well as
merger and consolidation expenses of $14,352,000 in 1995 and
$5,522,000 in 1993.
</TABLE>
Sales between geographic areas are generally priced to reflect market value
and to provide an appropriate gross margin to the affiliate. Operating
profit, for the purpose of this footnote, consists of total revenue less
operating expenses, and excludes interest income, interest expense and
general corporate expenses for all years presented, and the cumulative
effect of the accounting change in 1993. U.S. operating profit includes
profit recognized in the United States on transfers to other geographic
areas. Identifiable assets are those assets that are associated with the
operations in each geographic area. General corporate assets are primarily
cash and short-term investments not used in the operations of the individual
geographic regions.
F-28
PAGE
<PAGE>
NOTE 18 - QUARTERLY INFORMATION (UNAUDITED)
The following consolidated quarterly results of operations for 1995 and
1994, have been restated to account for the merger with Network Systems (see
Note 2) as a pooling of interest (in thousands of dollars, except per share
amounts):
<TABLE>
<CAPTION>
Quarter Ended 1995
---------------------------------------------------------------
March 31 June 30 September 29 December 29
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $450,186 $480,702 $439,596 $ 559,001
Cost of revenue 288,089 306,942 276,228 346,363
------- ------- ------- --------
Gross profit 162,097 173,760 163,368 212,638
Operating expenses 157,233 159,651 135,207 181,073
Restructuring and other charges 14,352 30,680 167,175
------- ------- ------- --------
Operating profit (loss) (9,488) 14,109 (2,519) (135,610)
Interest income (expense), net 1,574 2,246 3,038 2,120
------- ------- ------- --------
Income (loss) before income taxes (7,914) 16,355 519 (133,490)
Provision for income taxes (1,000) (4,500) (7,500) (4,800)
------- ------- ------- --------
Net income (loss) $ (8,914) $ 11,855 $ (6,981) $(138,290)
======= ======= ======= ========
Income (loss) per common share $ (0.23) $ 0.17 $ (0.19) $ (2.65)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended 1994
---------------------------------------------------------------
April 1 July 1 September 30 December 30
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $398,188 $421,104 $469,562 $582,496
Cost of revenue 265,504 259,559 292,330 369,549
------- ------- ------- --------
Gross profit 132,684 161,545 177,232 212,947
Operating expenses 153,388 142,496 155,460 180,229
Restructuring charges 8,000
------- ------- ------- --------
Operating profit (loss) (20,704) 19,049 21,772 24,718
Interest income (expense), net 3,576 1,071 1,672 (216)
------- ------- ------- --------
Income (loss) before income taxes (17,128) 20,120 23,444 24,502
(Provision) benefit for income taxes 100 (4,400) (4,800) (9,800)
------- ------- ------- --------
Net income (loss) $(17,028) $ 15,720 $ 18,644 $ 14,702
======= ======= ======= ========
Income (loss) per common share $ (0.39) $ 0.24 $ 0.30 $ 0.22
======= ======= ======= ========
</TABLE>
NOTE 19 - SUBSEQUENT EVENTS
SALE OF LEASE ASSETS
The Company announced on February 9, 1996, that it intends to sell its net
investment in sales-type leases and enter into a worldwide lease financing
alliance. The Company expects to close the proposed transaction by the end
of the first quarter of 1996, and anticipates an extraordinary gain if the
transaction is completed. In connection with the sale of its net investment
in sales-type leases, the Company intends to repay its outstanding
nonrecourse borrowings and 9.53% Senior Secured Notes in the first quarter
of 1996.
F-29
PAGE
<PAGE>
SALE OF RECEIVABLES
On January 29, 1996, the Company entered into a one-year financing agreement
with a bank which provides for the sale of certain U.S. and foreign based
accounts receivable on a recourse basis. This agreement allows for
receivable sales of up to $40 million at any one time and StorageTek's
obligations under the agreement will be secured by a letter of credit for
the amount of the receivables sold. The selling price of the receivables
will be partially determined based upon foreign currency exchange rates and
any gains or losses on the sales will be 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 February 23, 1996, the Company had committed to future cumulative
sales of approximately $206 million. Gains and losses associated with the
receivable sales are not expected to have a material affect 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.
LITIGATION
As further discussed in Note 14, on February 1, 1996, a jury found that the
Company's "passthrough" port in certain of its tape library products did not
infringe the 151 Patent held by Odetics, Inc. On March 8, 1996, Odetics, Inc.
filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit.
F-30
PAGE
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
FOR STORAGE TECHNOLOGY CORPORATION
To the Stockholders and
Board of Directors of
Storage Technology Corporation
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14.(a) 1. and 2. on page 37 present fairly, in all material respects, the
financial position of Storage Technology Corporation and its subsidiaries at
December 29, 1995 and December 30, 1994, and the results of their operations
and their cash flows for each of the three years in the period ended
December 29, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Network Systems Corporation, a wholly-owned
subsidiary, which statements reflect total assets of $265,147,000 at
December 31, 1994, and total revenue of $231,756,000 and $215,558,000 for
the years ended December 31, 1994 and 1993, respectively. Those statements
were audited by other auditors whose report thereon has been furnished to
us, and our opinion expressed herein, insofar as it relates to the amounts
included for Network Systems Corporation, is based solely on the report of
the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report
of the other auditors provide a reasonable basis for the opinion expressed
above.
As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes to adopt Statement
of Financial Accounting Standards No. 109 in 1993. We concur with this
change in accounting.
PRICE WATERHOUSE LLP
Denver, Colorado
February 23, 1996, except for Note 19,
as to which the date is March 8, 1996
F-31
PAGE
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
FOR NETWORK SYSTEMS CORPORATION
Board of Directors and Stockholders
Network Systems Corporation
We have audited the consolidated balance sheet of Network Systems Corporation
as of December 31, 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1994 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Network
Systems Corporation at December 31, 1994, and the consolidated results of
its operations and its cash flows for each of the two years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 10, 1995
F-32
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Additions -
Balance Charged to Deductions -
Beginning of Cost of Service Spare Parts Balance End
Year and Rental Written Off of Year
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amortization of spare parts for
customer services:
For the year ended:
December 29, 1995 $74,685 $43,378 $30,083 $87,980
====== ====== ====== ======
December 30, 1994 $65,350 $27,526 $18,191 $74,685
====== ====== ====== ======
December 31, 1993 $58,356 $23,829 $16,835 $65,350
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Balance Additions -
Beginning Charged to Reductions - Balance End
of Year Cost of Sales Write-offs of Year
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory reserves:
For the year ended:
December 29, 1995 $51,803 $37,353 $43,866 $45,290
====== ====== ====== ======
December 30, 1994 $40,208 $44,852 $33,257 $51,803
====== ====== ====== ======
December 31, 1993 $27,521 $38,659 $25,972 $40,208
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Deductions -
Accounts
Balance Additions - Receivable
Beginning of Charged to Written Off Balance End
Year Cost and Expenses Net of Recoveries of Year
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts on
accounts receivable:
For the year ended:
December 29, 1995 $13,387 $ 8,198 $ 6,920 $14,665
====== ====== ====== ======
December 30, 1994 $13,196 $ 6,678 $ 6,487 $13,387
====== ====== ====== ======
December 31, 1993 $12,224 $ 7,723 $ 6,751 $13,196
====== ====== ====== ======
</TABLE>
F-33
PAGE
<PAGE>
Exhibits Index:
---------------------
4.14 Amendment No. 1 dated as of January 25, 1996, to Amended
and Restated Security Agreement dated as of April 2, 1994,
relating to Registrant's 9.53% Senior Secured Notes due
August 30, 1996.
4.15 Amendment No. 3 dated as of January 25, 1996, to Note
Agreement dated as of April 2, 1994, relating to Registrant's
9.53% Senior Secured Notes due August 30, 1996.
10.11 Amendment to Employment Agreement between the Company and
L. Thomas Gooch, dated December 1, 1995.
10.13 Employment Agreement between the Company and David E.
Weiss, dated December 6, 1995.
10.20 Fourth Amendment dated as of December 22, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994.
10.21 Multicurrency Receivables Transfer Agreement dated as of
January 29, 1996.
11.0 Computation of Earnings (Loss) per Common Share.
21.0 Subsidiaries of Registrant.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Ernst & Young LLP.
27.0 Financial Data Schedule.
<PAGE>
Exhibit 4.14
AMENDMENT NO. 1
TO
AMENDED AND RESTATED SECURITY AGREEMENT
This Amendment No. 1 (the "Amendment") to that certain Amended and
Restated Security Agreement, dated as of April 2, 1994, among Storage
Technology Corporation, a Delaware corporation (the "Company"), StorageTek
Financial Services Corporation, a Delaware corporation ("SFSC") and
Continental Bank, National Association ("Continental"), acting as collateral
agent (the "Security Agreement") is entered into as of January 25, 1996 by
and between the Company, StorageTek Financial Services Corporation ("SFSC")
and First Trust of Illinois, National Association, Successor to Bank of
America Illinois, fka Continental Bank, National Association ("Collateral
Agent"). Capitalized terms defined in the Security Agreement which are used
herein shall have the meanings set forth in the Security Agreement unless
otherwise specified herein.
WITNESSETH:
-----------
WHEREAS, pursuant to Section 10.1(a) of the Security Agreement, the
Company and SFSC have requested an amendment to Section 8.2(b) of the
Security Agreement regarding the conditions to the release of all Collateral
and the Collateral Agent, with the consent of each of the holders of the
Notes, has agreed, subject to the terms and conditions contained herein, to
amend such provision as set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above, the
mutual covenants contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
the parties hereto agree as follows:
1. AMENDMENT TO SECURITY AGREEMENT. Subject to the terms and
conditions specified herein, the Security Agreement is amended as of
January 25, 1996 as follows:
1.1 Section 8.2(b) of the Security Agreement is hereby amended by
deleting the phrase "thirty (30) days" from the first line and inserting in
lieu thereof "five (5) Business Days."
2. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment
is subject to satisfaction of the following conditions on or before January
25, 1996 (the date upon which such conditions are satisfied being called the
"Effective Date"):
2.1 EXECUTION AND DELIVERY OF AMENDMENT BY SECURED PARTIES. This
Amendment shall have been executed and delivered by the Company, SFSC and
the Collateral Agent and consented to by each of the holders of the Notes.
2.2 REPRESENTATIONS AND WARRANTIES BY THE COMPANY; NO DEFAULT. The
representations and warranties contained in Section 3 hereof shall be true
on and as of the Effective Date, both before and after giving effect to the
effectiveness of this Amendment. There shall exist on the Effective Date no
Event of Default or Default, both before and after giving effect to the
effectiveness of this Amendment; and the Company and SFSC shall have
delivered to the Holders an Officer's Certificate, dated the Effective Date,
to both such effects.
2.3 CERTAIN PAYMENTS. The Company and SFSC shall have paid all
expenses payable by the Company and SFSC pursuant to Section 10.1 of the
Security Agreement relating to the fees and expenses of the Collateral Agent
and Secured Parties associated with the preparation and execution of this
Amendment to the extent the Company and SFSC have received an invoice
therefor.
2.4 PROCEEDINGS. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to
the Collateral Agent and the Secured Parties which are signatories hereto,
and such parties shall have received all such counterpart originals or
certified or other copies of such documents as such parties may reasonably
request.
2.5 AMENDMENT PERMITTED BY APPLICABLE LAWS. The transactions
contemplated by this Amendment shall not violate any applicable law or
governmental regulation and shall not subject the Holders to any tax,
penalty, liability or other onerous condition under or pursuant to any
applicable law or governmental regulation, and the Holders shall have
received such certificates or other evidence as you may request to establish
compliance with this condition.
3. REPRESENTATIONS AND WARRANTIES. Each of the Company and SFSC
represents, covenants and warrants:
3.1 POWER AND AUTHORITY. Each of the Company and SFSC is a
corporation duly organized and existing in good standing under the laws of
the state of its incorporation. Each of the Company and SFSC has all
requisite corporate power to conduct its business as currently conducted and
as currently proposed to be conducted. Each of the Company and SFSC has all
requisite corporate power to execute, deliver and perform its obligations
under this Amendment. The execution, delivery and performance by the
Company and SFSC of this Amendment has been duly authorized by all requisite
corporate action on the part of the Company and SFSC. Each of the Company
and SFSC has duly executed and delivered this Amendment, and this Amendment
constitutes the legal, valid and binding obligation of the Company and SFSC,
enforceable against the Company and SFSC in accordance with its terms.
3.2 NO CONFLICTS. Neither the execution and delivery of this
Amendment by the Company and SFSC, nor the consummation of the transactions
contemplated hereby, nor fulfillment of nor compliance with the terms and
provisions hereof will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in any
violation of, or result in the creation of any Lien upon any of the
properties or assets of the Company, SFSC or any Subsidiary pursuant to, the
charter or by-laws of the Company or SFSC, or any such Subsidiary, any award
of any arbitrator or any agreement (including any Assigned Contract and
agreement with stockholders), instrument, order, judgment, decree, statute,
law, rule or regulation to which the Company, SFSC or any such Subsidiary is
subject.
3.3 GOVERNMENTAL CONSENT. No circumstance in connection with this
Amendment is such as to require any authorization, consent, approval,
exemption or other action by or notice to or filing with any court or
administrative or governmental body in connection with the execution and
delivery of this Amendment or fulfillment of or compliance with the terms
and provisions hereof or thereof.
4. REFERENCE TO THE EFFECT ON THE SECURITY AGREEMENT.
(a) Upon the effectiveness of this Amendment, (i) each reference, if
any, in the Security Agreement to "this Agreement," "hereunder," "hereof,"
or words of like import shall mean and be a reference to the Security
Agreement as amended hereby and (ii) each reference to the Security
Agreement in the other Transaction Documents shall mean and be a reference
to the Security Agreement, as amended hereby.
(b) Except as specifically amended above, the Security Agreement shall
remain in full force and effect, and is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to any
provision of the Security Agreement nor a waiver of any right, power or
remedy of the Collateral Agent, nor constitute a waiver of any provision of
the Security Agreement or any other document, instrument or agreement
executed and delivered in connection with the Security Agreement.
5. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Amendment are inserted for convenience only and do not
constitute a part of this Amendment.
6. GOVERNING LAW. This Amendment has been delivered in and shall be
construed and enforced in accordance with, and the rights of the parties
shall be governed by, the law of the State of Illinois.
7. COUNTERPARTS. This Amendment may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and it
shall not be necessary in making proof of this Amendment to produce or
account for more than on such counterpart.
[Signature pages to follow]
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
as of the day and year first written above.
STORAGE TECHNOLOGY CORPORATION
By: /s/ Mark D. McGregor
--------------------------
Mark D. McGregor
Title: Treasurer
STORAGETEK FINANCIAL SERVICES CORPORATION
By: /s/ Robert J. Kali
---------------------------
Robert J. Kali
Title: Vice President and Chief Operating Officer
FIRST TRUST OF ILLINOIS, NATIONAL ASSOCIATION,
SUCCESSOR TO BANK OF AMERICA ILLINOIS, FKA
CONTINENTAL BANK, NATIONAL ASSOCIATION,
AS COLLATERAL AGENT
By: /s/ Patricia M. Trlak
---------------------------
Patricia M. Trlak
Title: Assistant Vice President
CONSENTED TO BY: AGGREGATE PRINCIPAL
AMOUNT OF NOTES HELD
THE TRAVELERS INSURANCE COMPANY
By: /s/ John W. Petchler $ 19,000,000
---------------------------
John W. Petchler
Title: Second Vice President
THE TRAVELERS INDEMNITY COMPANY
By: /s/ John W. Petchler $ 2,000,000
---------------------------
John W. Petchler
Title: Second Vice President
THE PHOENIX INSURANCE COMPANY
By: /s/ John W. Petchler $ 7,000,000
---------------------------
John W. Petchler
Title: Second Vice President
THE TRAVELERS INDEMNITY COMPANY OF
CONNECTICUT, SUCCESSOR OF THE TRAVELERS
INDEMNITY COMPANY OF RHODE ISLAND
By: /s/ John W. Petchler $ 1,000,000
---------------------------
John W. Petcher
Title: Second Vice President
THE TRAVELERS LIFE AND ANNUITY COMPANY
By: /s/ John W. Petchler $ 1,000,000
---------------------------
John W. Petchler
Title: Seconed Vice President
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY
By: /s/ James C. Fifield $ 20,000,000
---------------------------
James C. Fifield
Title: Counsel
By: /s/ Christopher J. Henderson
------------------------------
Christopher J. Henderson
Title: Counsel
CUMMINGS & CO.
FOR THE TRUSTEED ASSETS OF
CANADA LIFE INSURANCE COMPANY
OF AMERICA
By: /s/ Robert A. Hendley $ 500,000
Robert A. Hendley
---------------------------
Title: Vice President
INCE & CO.
FOR THE TRUSTEED ASSETS OF
CANADA LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ Henry Von Saspe $ 500,000
---------------------------
Henry Von Saspe
Title: Partner
INCE & CO.
FOR THE TRUSTEED ASSETS OF
THE CANADA LIFE ASSURANCE COMPANY
By: /s/ Henry Von Saspe $ 4,000,000
---------------------------
Henry Von Saspe
Title: Partner
Exhibit 4.15
AMENDMENT NO. 3 AND WAIVER
TO
NOTE AGREEMENT
This Amendment No. 3 and Waiver (the "Amendment") to that certain Note
Agreement, dated as of August 30, 1991, between Storage Technology
Corporation, a Delaware corporation (the "Company"), and the purchasers
listed in the Purchaser Schedule attached thereto, as amended by Amendment
No. 1, and dated as of April 1, 1994, and Amendment No. 2, dated as of April
2, 1994 (the "Note Agreement") is entered into as of January 25, 1996 by and
between the Company, StorageTek Financial Services Corporation, a Delaware
corporation ("SFSC") and the holders of the Company's 9.53% Senior Secured
Notes due August 31, 1996 ("Notes") which are signatories hereto.
Capitalized terms defined in the Note Agreement which are used herein shall
have the meanings set forth in the Note Agreement unless otherwise specified
herein.
WITNESSETH:
-----------
WHEREAS, pursuant to paragraph 11C of the Note Agreement, the Company
and SFSC have requested certain amendments to the prepayment provisions set
forth in paragraphs 4A and 4B and the covenants contained in paragraphs 5P
and 6B of the Note Agreement and the holders of the Notes ("Holders") which
are signatories hereto have agreed, subject to the terms and conditions
contained herein, to amend such provisions as set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above, the
mutual covenants contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
the parties hereto agree as follows:
1. AMENDMENTS TO NOTE AGREEMENT. Subject to the terms and conditions
specified herein, the Agreement is amended as of January 25, 1996 as
follows:
1.1 Certain subparagraphs set forth in paragraph 4 of the Note
Agreement are hereby amended as follows:
(a) Paragraph 4A of the Note Agreement is hereby amended and restated
in its entirety as set forth below:
"4A. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE
PREMIUM. The Notes shall be subject to prepayment, in
whole or in part (in multiples of $5,000,000), upon
delivery of written notice pursuant to paragraph 4B
given no later than the fifth Business Day prior to the
proposed prepayment date, at the option of the Obligors,
at 100% of the principal amount so prepaid plus interest
thereon to the prepayment date and the Yield-Maintenance
Premium, if any, with respect to each Note."
(b) Paragraph 4B of the Note Agreement is hereby amended and restated
in its entirety as set forth below:
"4B. NOTICE OF OPTIONAL PREPAYMENT. The Obligors
making any prepayment under this paragraph 4 shall give
the Holder of each Note irrevocable written notice of
any prepayment pursuant to paragraph 4A not less than 5
Business Days prior to the prepayment date, specifying
such prepayment date and the principal amount of the
Notes, and of the Notes held by such Holder, to be
prepaid on such date and stating that such prepayment is
to be made pursuant to paragraph 4A and setting forth in
reasonable detail such Obligor's calculation of the
Yield-Maintenance Premium, if any, which is required to
be paid to such Holder on such prepayment date. Notice
of prepayment having been given as aforesaid, the
principal amount of the Notes specified in such notice,
together with interest thereon to the prepayment date
and together with the Yield-Maintenance Premium, if any,
herein provided, shall become due and payable on such
prepayment date.
1.2 Paragraph 6B of the Note Agreement is hereby amended by amending
the definition of "Consolidated Net Income Available for Restricted
Payments" by inserting the parenthetical "(excluding restructuring charges
of up to $150,000,000 taken by the Company during the fiscal quarter ended
December 29, 1995)" at the end of clause (i) thereof.
2. WAIVER. Subject to the terms and conditions specified herein, the
Holders which are signatories hereto hereby waive the Obligor's compliance
with paragraph 5P of the Note Agreement solely with respect to the scheduled
termination of the Revolving Loan Agreement, and the Obligors entering into
another revolving credit agreement in lieu thereof on or before March 31,
1996, secured by certain assets of the Obligors, including but not limited
to sales agreements and the related equipment, with Bank of America,
National Trust and Savings Association, and certain other parties; provided,
however, that this waiver shall be effective only if (i) such revolving
credit agreement contains substantially the same terms as those in the
Revolving Loan Agreement relating to the release of property from the
security interest of the Bank Agent in order to permit the Company or SFSC
to grant a security interest in such property to the Collateral Agent and
(ii) a copy of such revolving credit agreement is delivered to the holders
of the Notes promptly after its execution.
3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment
is subject to satisfaction of the following conditions on or before January
25, 1996 (the date upon which such conditions are satisfied being called the
"Effective Date"):
3.1 EXECUTION AND DELIVERY OF AMENDMENT BY HOLDERS. This Amendment
shall have been executed and delivered by the Company, SFSC and holders of
all of the outstanding Notes.
3.2 REPRESENTATIONS AND WARRANTIES BY THE COMPANY; NO DEFAULT. The
representations and warranties contained in Section 4 hereof and in
paragraph 8 of the Note Agreement shall be true on and as of the Effective
Date (and for purposes of this Amendment all references in such
representations and warranties to "date of closing" or "closing" shall mean
the Effective Date), both before and after giving effect to the
effectiveness of this Amendment; there shall exist on the Effective Date no
Event of Default or Default, both before and after giving effect to the
effectiveness of this Amendment; and the Company and SFSC shall have
delivered to the Holders an Officer's Certificate, dated the Effective Date,
to both such effects and demonstrating (with computations in reasonable
detail) compliance as of the last fiscal month or quarter as the case may be
with Paragraphs 6E, 6F, 6G, 6H and 6I (after taking into effect this
Amendment) of the Note Agreement.
3.3 CERTAIN PAYMENTS. The Obligors shall have paid all expenses
payable by the Obligors pursuant to paragraph 11B of the Agreement relating
to the fees and expenses of the Holders to the extent the Obligors have
received an invoice therefor.
3.4 AMENDMENT PERMITTED BY APPLICABLE LAWS. The transactions
contemplated by this Amendment shall not violate any applicable law or
governmental regulation and shall not subject the Holders to any tax,
penalty, liability or other onerous condition under or pursuant to any
applicable law or governmental regulation, and the Holders shall have
received such certificates or other evidence as you may request to establish
compliance with this condition.
3.5 PROCEEDINGS. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to
the Holders which are signatories hereto, and the Holders shall have
received all such counterpart originals or certified or other copies of such
documents as the Holders which are signatories hereto may reasonably
request.
4. REPRESENTATIONS AND WARRANTIES. Each of the Company and SFSC
represents, covenants and warrants:
4.1 POWER AND AUTHORITY. Each of the Company and SFSC is a
corporation duly organized and existing in good standing under the laws of
the state of its incorporation. Each of the Company and SFSC has all
requisite corporate power to conduct its business as currently conducted and
as currently proposed to be conducted. Each of the Company and SFSC has all
requisite corporate power to execute, deliver and perform its obligations
under this Amendment. The execution, delivery and performance by the
Company and SFSC of this Amendment has been duly authorized by all requisite
corporate action on the part of the Company and SFSC. Each of the Company
and SFSC has duly executed and delivered this Amendment, and this Amendment
constitutes the legal, valid and binding obligation of the Company and SFSC,
enforceable against the Company and SFSC in accordance with its terms.
4.2 NO CONFLICTS. Neither the execution and delivery of this
Amendment by the Company and SFSC, nor the consummation of the transactions
contemplated hereby, nor fulfillment of nor compliance with the terms and
provisions hereof will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in any
violation of, or result in the creation of any Lien upon any of the
properties or assets of the Company, SFSC or any Subsidiary pursuant to, the
charter or by-laws of the Company or SFSC, or any such Subsidiary, any award
of any arbitrator or any agreement (including any Assigned Contract and
agreement with stockholders), instrument, order, judgment, decree, statute,
law, rule or regulation to which the Company, SFSC or any such Subsidiary is
subject.
4.3 GOVERNMENTAL CONSENT. No circumstance in connection with this
Amendment is such as to require any authorization, consent, approval,
exemption or other action by or notice to or filing with any court or
administrative or governmental body in connection with the execution and
delivery of this Amendment or fulfillment of or compliance with the terms
and provisions hereof or thereof.
5. REFERENCE TO THE EFFECT ON THE AGREEMENT.
(a) Upon the effectiveness of this Amendment, (i) each reference, if
any, in the Note Agreement to "this Agreement," "hereunder," "hereof," or
words of like import shall mean and be a reference to the Note Agreement as
amended hereby and (ii) each reference to the Note Agreement in the other
Transaction Documents shall mean and be a reference to the Note Agreement,
as amended hereby.
(b) Except as specifically amended above, the Agreement shall remain
in full force and effect, and is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to any
provision of the Note Agreement nor a waiver of any right, power or remedy
of the Holders, nor constitute a waiver of any provision of the Note
Agreement or any other document, instrument or agreement executed and
delivered in connection with the Note Agreement.
6. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Amendment are inserted for convenience only and do not
constitute a part of this Amendment.
7. GOVERNING LAW. This Amendment has been delivered in and shall be
construed and enforced in accordance with, and the rights of the parties
shall be governed by, the law of the State of Illinois.
8. COUNTERPARTS. This Amendment may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and it
shall not be necessary in making proof of this Amendment to produce or
account for more than one such counterpart.
[Signature pages to follow]
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
as of the day and year first written above.
STORAGE TECHNOLOGY CORPORATION
By: /s/ Mark D. McGregor
-----------------------------
Mark D. McGregor
Title: Treasurer
STORAGETEK FINANCIAL SERVICES CORPORATION
By: /s/ Robert J. Kali
-----------------------------
Robert J. Kali
Title: Vice President and Chief Operating Officer
AGGREGATE PRINCIPAL
AMOUNT OF NOTES HELD
THE TRAVELERS INSURANCE COMPANY
By: /s/ John W. Petchler $ 19,000,000
-----------------------------
John W. Petchler
Title: Second Vice President
THE TRAVELERS INDEMNITY COMPANY
By: /s/ John W. Petchler $ 2,000,000
-----------------------------
John W. Petchler
Title: Second Vice President
THE PHOENIX INSURANCE COMPANY
By: /s/ John W. Petchler $ 7,000,000
-----------------------------
John W. Petchler
Title: Second Vice President
THE TRAVELERS INDEMNITY COMPANY OF
CONNECTICUT, SUCCESSOR OF THE TRAVELERS
INDEMNITY COMPANY OF RHODE ISLAND
By: /s/ John W. Petchler $ 1,000,000
-----------------------------
John W. Petchler
Title: Second Vice President
THE TRAVELERS LIFE AND ANNUITY COMPANY
By: /s/ John W. Petchler $ 1,000,000
-----------------------------
John W. Petchler
Title: Second Vice President
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY
By: /s/ James C. Fifield $ 20,000,000
-----------------------------
James C. Fifield
Title: Counsel
By: /s/ Christopher J. Henderson
-----------------------------
Christopher J. Henderson
Title: Counsel
CUMMINGS & CO.
FOR THE TRUSTEED ASSETS OF
CANADA LIFE INSURANCE COMPANY
OF AMERICA
By: /s/ Wilfredo Cuevas $ 500,000
-----------------------------
Wilfredo Cuevas
Title: Partner
INCE & CO.
FOR THE TRUSTEED ASSETS OF
CANADA LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ Henry Von Saspe $ 500,000
-----------------------------
Henry Von Saspe
Title: Partner
INCE & CO.
FOR THE TRUSTEED ASSETS OF
THE CANADA LIFE ASSURANCE COMPANY
By: /s/ Henry Von Saspe $ 4,000,000
-----------------------------
Henry Von Saspe
Title: Partner
Exhibit 10.11
[Storage Technology Corporation Letterhead Appears Here]
December 1, 1995
Mr. Lowell T. Gooch
7152 Old Post Road
Boulder, CO 80301
Dear Tom:
This will confirm the term of your assignment to Network Systems Corporation
("NSC") on a full time basis. Your assignment will commence November 20,
1995 and end November 10, 1997. Your title, compensation, and on-plan bonus
target will remain the same. In return, you agree to accept the position
as the principal executive in charge of NSC, to work full time out of its
headquarters in Minneapolis, and use your best efforts to cause NSC to meet
or exceed its committed business plans. You will continue to be covered by
the terms of the provisions of our letter agreement dated February 17, 1995
(the "February Agreement") with respect to termination of your employment
and other matters covered therein, except to the extent modified hereby.
In addition to your rights under the February Agreement, if your employment
is terminated by the Company prior to January 1, 1998, and termination
payments are due you under the February agreement, Storage Technology would
pay you an additional one year's salary.
If your assignment is not terminated prior to December 1, 1997, on that date
the company will pay you a one-time cash bonus equivalent to one year's
salary, plus your on-plan bonus percentage (both based on your salary and
bonus percentage in effect at that time), provided that you meet the
targeted goals agreed to by you and David Weiss. These objectives are to be
set by the end of 1Q96.
During the period of your assignment to NSC, the company will pay you, in
lieu of any moving or other transfer expense, a business travel allowance of
$20,000 per year, payable on the first day of each quarter at the rate of
$5,000 per quarter ($4,000 for the balance of the fourth quarter, 1995) for
each of the two years of your assignment, and will pay reasonable housing and
rental expenses for a dwelling in Minnesota.
At the conclusion of your two-year assignment, our intention would be to
locate a suitable job for you within Storage Technology. In the event that
we were not able to find a position which was acceptable to both the company
and yourself at that time, and your employment were terminated as a result,
the severance compensation provisions of our February Agreement would be
payable.
You will be included in the company's officer equity retention plan upon and
subject to approval of that plan by the Board of Directors, and your 1996
and 1997 MBOs will, of course, be revised to reflect your new assignment.
If the foregoing is in accordance with your understanding, please sign below
so indicating.
Very truly yours,
/s/David E. Weiss
- --------------------
David E. Weiss
Accepted and agreed:
/s/Lowell T. Gooch
- ---------------------
Lowell T. Gooch
/mdj
k:\v027256\dodd\tgcont.doc
Exhibit 10.13
[Storage Technology Corporation Letterhead Appears Here]
December 6, 1995
David E. Weiss
6900 Pawnee Way
Longmont, Colorado 80503
Dear Dave:
This letter (the "Agreement") sets forth the terms and conditions of your
continued employment with Storage Technology Corporation (the "Company")
from and after November 15, 1995, and supersedes and replaces prior
employment agreements, including, but not limited to, the agreement dated
February 17, 1995. In consideration of your continued employment by the
Company 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 Chief
Operating Officer of the Company. You will report to the Chief Executive
Officer ("CEO") and perform such duties as may be assigned you from time to
time by the CEO. During the employment term, 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 which, in the judgment of
the CEO, in his sole discretion, may conflict with the proper performance of
your duties hereunder.
2. Employment. The term of your employment (the "Employment Term") shall
continue and end (unless extended as provided herein) on December 31, 1997.
The Employment Term may be extended by mutual written agreement between you
and the Company.
3. Base Compensation. For your services during the Employment Term, the
Company will pay you an annual base salary, effective December 2, 1995, of
$425,000 per year. 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
shall be reviewed, and adjusted as appropriate, from time to time (but at
least annually) during the Employment Term. Any adjustment to your salary
will be based on an analysis of competitive salaries developed by a
professional third party as well as upon an assessment of the performance
and condition of the Company.
4. Bonuses.
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 in accordance with the MBO Program as
may be established from time to time by the Company's Board of Directors
(the "Board"). During the Employment Term, your On Plan Bonus potential
percentage shall be 60%. Any such payments under the MBO Program shall be
made in accordance with the provisions, and under the conditions contained
in, the MBO Program and the terms of any bonus award authorized for you by
the Board; provided; however, that your bonus entitlement shall be based on
reasonable forecasts related to the Company's status at the beginning of
each year, taking into account industry norms.
5. Termination of Employment.
(a) Termination Without Cause. If, during the Employment Term,
(i) the Company elects to terminate your employment without "Cause" (as that
term is defined in subparagraph 5(d)); (ii) you should elect to terminate
your employment for any reason, within six months after the appointment of a
person other than you as the new chief executive officer of the company; or
(iii) you should die, without Cause existing at such time, you shall be
entitled to receive, as a severance payment a payment equal to two times the
sum of (a) your then current rate of annual base compensation and (b) 100%
of your then current bonus percentage under the MBO Program (whether or not
such bonus would have been otherwise payable). Payment of such amount shall
be expressly subject to execution by you of a release and covenant not to
compete, effective as of your termination date, in the form attached hereto
as Exhibit A. Such amount shall be paid to you in a cash lump sum within
thirty days after your termination of employment, pursuant to this
subparagraph 5(a).
(b) Termination in the Event of Sale, Merger or Change of Control. If
the Company is sold, or merged with or into another company (in a
transaction in which the Company is not the surviving entity), or in which
the stockholders of the Company immediately prior to the merger own 50% or
less of the Company after the merger, or all or substantially all of the
assets of the Company are sold, or more than 25% of the outstanding voting
capital stock of the Company is acquired by another person or persons (as
such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934) acting as a group (any of which events is referred to
hereinafter as a "Change in Control"), and your employment is terminated
either by you for any reason or by the Company without Cause, and such
termination occurs within 24 months after the date of any such Change in
Control, then, upon such termination, and subject to the provisions of the
following paragraph, the Company will pay you an amount equal to two times
your annual base salary then in effect, plus two times 100% of your On Plan
Bonus under the MBO Program based on your annual salary and On Plan Bonus
potential percentage in effect immediately prior to the Change in Control
(which shall be calculated as if the Company meets its plan for such year
and which shall be payable whether or not the Company does in fact meet its
plan); (ii) all outstanding stock options shall fully vest and become
exercisable in full; and (iii) the Company's right to repurchase shall
terminate with respect to any stock earlier purchased by you under the
Company's 1987 Equity Participation Plan, and all such stock shall become
fully vested. In addition, after such termination of employment, you shall
be entitled to exercise all stock options in accordance with the terms of
the Option Agreements. To the extent you would be entitled to payments or
your rights to restricted stock or stock options would vest not only
pursuant to the terms of this Agreement, but also pursuant to the
provisions of other agreements with the Company, then such payments shall be
deemed made and such vesting shall be deemed to occur pursuant to the terms
of such other agreements, and not under the terms of this Agreement.
(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 paragraph, would be subject to the excise tax imposed by Section 4999
of the Code, then such severance benefits shall be either (i) delivered in
full, or (ii) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account
the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by you on an after-tax
basis, of the greatest amount of severance benefits, notwithstanding that
all or some portion of such severance benefits may be taxable under Section
4999 of the Code. Unless you and the Company agree otherwise in writing,
any determination required under this paragraph shall be made in writing by
the Company's independent public accountants immediately prior to Change of
Control (the "Accountants"), whose determination shall be conclusive and
binding upon you and the Company for all purposes. For purposes of making
the calculations required by this paragraph, the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and
may rely on reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. You and the Company
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under
this section. The Company shall bear all costs the Accountants may
reasonably incur in connection with any calculations contemplated by this
paragraph.
(d) Termination for Cause. If the Company, during the Employment
Term, elects to terminate your employment for cause (as that term is defined
below), your employment will terminate on the date fixed for termination by
the Company, and thereafter 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: (1) willful breach by you of any provision of this
Agreement; (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; or (iv) engaging in
conduct which 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.
6. Benefit Programs. During the Employment Term, you shall be entitled
to such benefits and benefits 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, including by way of example, but not
limitation, medical benefits, vacation, Company-provided car, and tax
preparation advice.
7. Travel and Entertainment. During the Employment Term, you shall be
entitled to the payment of, or reimbursement for, your reasonable travel and
entertainment expenses incurred in furthering the business of the Company,
in accordance with the provisions of Company policies governing the payment
or reimbursement of such amounts in existence from time to time.
8 . 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 agency authorities by the
Company and shall be conditioned upon your submission of all information or
execution of all instruments necessary to enable the Company to comply with
such withholding requirements.
(b) Confidentiality Agreement. You and the Company previously entered
into the Company's standard form of confidential inventions and trade
secrets agreement. You agree that, during the Employment Term, you will
comply with all provisions of said agreement and 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
notice 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 laws of the
State of Colorado.
(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.
(f) Entire Agreement. This Agreement embodies the entire agreement
between the parties relating to the subject matter hereof, except as
expressly stated to the contrary herein, and supersedes all previous
agreements or understandings, whether oral or written, except as may be
expressly stated herein.
(g) Amendment of Agreement. This Agreement may not be modified or
amended, and no provisions 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 from and after November 14, 1995, please sign the enclosed
copy of this letter in the space provided below and return it to the
Company.
Very truly yours,
STORAGE TECHNOLOGY CORPORATION
/s/ Ryal R. Poppa
--------------------
Ryal R. Poppa
Accepted and Agreed:
/s/ David E. Weiss
- --------------------------
David E. Weiss
Exhibit 10.20
FOURTH AMENDMENT AND WAIVER
THIS FOURTH AMENDMENT AND WAIVER (this "Amendment") is
entered into as of December 22, 1995 by and among STORAGE TECHNOLOGY
CORPORATION, a Delaware corporation ("STK"), STORAGETEK FINANCIAL
SERVICES CORPORATION, a Delaware corporation ("SFSC"), STORAGE
TECHNOLOGY DE PUERTO RICO, INC., a Delaware corporation, and NETWORK
SYSTEMS CORPORATION, a Delaware corporation (collectively, the
"Borrowers"), the banks listed on the signature pages hereof and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association ("BofA"), as agent for the Lenders (the "Agent"), and as
Swing Line Bank and Issuing Bank.
WHEREAS, the Borrowers, Storagetek Distributed Systems
Division, Inc. (formerly XL/Datacomp, Inc.), a Delaware corporation
("DSD"), the Lenders, the Agent for the Lenders, the Swing Line Bank
and the Issuing Bank are parties to an Amended and Restated
Multicurrency Credit Agreement, dated as of September 28, 1994, as
amended pursuant to a First Amendment and Waiver, dated as of April 20,
1995, a Second Amendment and Waiver, dated as of June 27, 1995, and a
Third Amendment and Waiver, dated as of September 28, 1995 (as so
amended, the "Credit Agreement");
WHEREAS, pursuant to Section 3(b) of the Second Amendment and
Waiver referred to above, DSD is no longer party to the Credit
Agreement;
(i) permit the Borrowers to sell foreign, intercompany or
other Accounts that are not Eligible Accounts together with all
collections thereon and proceeds thereof (the "Transferred Accounts"),
on a recourse basis from time to time (such sales are referred to as the
"Accounts Sales") to BofA or any Affiliate thereof (each of BofA and its
Affiliates, when purchasing Transferred Accounts, is referred to as the
"Accounts Buyer") at an aggregate purchase price not to exceed at any
time outstanding $40,000,000 (with the aggregate face value of Accounts
sold by the Borrowers not to exceed at any time outstanding
$50,000,000), pursuant to a receivables transfer agreement, so long as
the proceeds of such Accounts Sales received by the Borrowers from the
Accounts Buyer are used, to the extent there are outstanding Advances,
to immediately repay outstanding Advances of such Borrowers under the
Credit Agreement and the Borrowers shall remain in compliance with the
Aggregate Borrowing Base at all times; (ii) waive the effect on certain
financial covenants in the Credit Agreement of a one-time restructuring
and related charges to earnings of STK in the Fiscal Quarter of STK
ending on December 29, 1995 in an amount not to exceed $165,000,000 (the
"1995 Restructuring Charge") so long as STK's Net Income in such Fiscal
Quarter (excluding the 1995 Restructuring Charge) is greater than or
equal to $0; and (iii) permit the sale of SFSC's stock (the "SFSC
Transferred Stock"), as well as permit SFSC to sell all or substantially
all of its Lease assets (the "SFSC Transferred Assets" and the SFSC
Transferred Stock, together with the SFSC Transferred Assets, are
referred to collectively as the "SFSC Transferred Interests"), to an
unaffiliated Person (a sale of the SFSC Transferred Stock and/or the
SFSC Transferred Assets as described herein (it being understood that
such sale of stock and/or assets may occur at separate times) is
referred to as an "SFSC Sale");
WHEREAS, the Borrowers also desire to amend the Credit
Agreement to effect certain other changes thereto as provided herein;
and
WHEREAS, the Agent and the Lenders are willing to agree to
such requests, subject to the terms and conditions hereof;
NOW, THEREFORE, the parties hereto agree as follows:
2. Terms Defined in Credit Agreement. All capitalized terms used
in this Amendment and not otherwise defined herein shall have the mean
ings assigned to them in the Credit Agreement.
3. Amendments and Waivers to the Credit Agreement.
(a) In Section 1.01 of the Credit Agreement, the definition of
"Permitted Lien" is amended by (i) deleting "and" at the end of
clause (xiv), (ii) changing the period in clause (xv) to a semi-colon,
and (iii) inserting the following new clause:
"(xv) Liens from time to time on Accounts sold from
time to time by the Borrowers to BofA or any Affiliate of
BofA pursuant to a receivables transfer agreement."
(b) Section 3.01(a) of the Credit Agreement is amended by
deleting the amount "$40,000,000" therein and by inserting in lieu thereof the
amount "$50,000,000."
(c) Section 3.02(a) of the Credit Agreement is amended by
inserting the phrase "(which beneficiary may be a Lender or an Affiliate of a
Lender)" after the word "thereof" on the eighth line.
(d) Section 6.02(c) of the Credit Agreement is amended by (i)
deleting the word "and" from the seventeenth line, and by (ii) inserting
the phrase ", (vi) L/C Obligations in favor of BofA or any Affiliate of
BofA in connection with the Borrowers' sales of receivables to BofA or
any Affiliate of BofA, and (vii) Contingent Obligations in favor of BofA
or any Affiliate of BofA including, without limitation, in the form of
recourse to the Borrowers or guaranties by the Borrowers in connection
with the Borrowers' sales of receivables to BofA or any Affiliate of
BofA".
(e) The Agent and the Lenders waive compliance by the Borrowers
with Section 6.02(g) of the Credit Agreement to permit the Borrowers
from time to time to sell with recourse the Transferred Accounts to the
Accounts Buyer at an aggregate purchase price not to exceed at any time
outstanding $40,000,000 (with the aggregate face value of Accounts sold
by the Borrowers not to exceed $50,000,000 at any time outstanding), pur
suant to a receivables transfer agreement, provided, that, (i) the
proceeds received by the Borrowers from the Accounts Buyer shall be
used, to the extent there are outstanding Advances, to immediately repay
outstanding Advances under the Credit Agreement, (ii) the Borrowers
shall remain at all times in compliance with the Aggregate Borrowing
Base and (iii) prior to the occurrence of each Accounts Sale, the
Borrowers shall have delivered to the Agent a certificate of a
Responsible Officer stating that, after giving effect to such Accounts
Sale, the Borrowers will remain in compliance with the Aggregate
Borrowing Base and no Default or Event of Default will occur as a result
of the Accounts Sale. Upon the closing of each of the Accounts Sales,
the Transferred Accounts so sold by the Borrowers shall no longer
constitute Collateral except to the extent the Accounts Buyer elects to
draw upon any Letter of Credit provided for the account of the Borrowers
by the Issuing Bank in connection with Accounts Sales in lieu of seeking
recourse to the Borrowers, in which case such Transferred Accounts shall
be reassigned by the Accounts Buyer to the Agent for the benefit of the
Banks and, upon such reassignment, such Transferred Accounts shall be
deemed (without further action required by the Agent or the Banks) to
become Collateral subject again to the Security Agreements of the
applicable Borrowers. For purposes of the terms and provisions of the
Security Agreements of the Borrowers, each of the Accounts Sales shall
be deemed to constitute a Transfer of Collateral permitted pursuant to
Section 6.02(g) of the Credit Agreement.
(f) The Agent and the Lenders waive the applicability of
Sections 6.02(f), 6.02(g) and 7.01(m) of the Credit Agreement to an SFSC
Sale so long as in any such SFSC Sale fair market value is received for
the SFSC Transferred Interests sold and such SFSC Sale does not result
in a disposition of SFSC Transferred Interests for less than their book
value existing as of the date of such SFSC Sale. Upon the closing of an
SFSC Sale, the SFSC Transferred Interests so sold shall no longer
constitute Collateral. For purposes of Section 5(i) and the other terms
and provisions of the U.S. Security Agreement of SFSC (as well as for
purposes of Section 5(i) and the other terms and provisions of the U.S.
Security Agreement of STK), an SFSC Sale shall be deemed to constitute a
Transfer of Collateral permitted pursuant to Section 6.02(g) of the
Credit Agreement.
(g) The Agent and the Lenders waive compliance by STK with
Sections 6.03(a), (b), (c), (d), (e) and (f) of the Credit Agreement for
the Fiscal Quarter of STK ending December 29, 1995 solely to the extent
necessary due to STK's incurrence of the 1995 Restructuring Charge and
so long as STK's Net Income (excluding the 1995 Restructuring Charge)
for such Fiscal Quarter ending December 29, 1995 is greater than or
equal to $0.
(h) Section 8.03 of the Credit Agreement is amended by deleting
the last sentence thereof and by inserting in lieu thereof the
following:
"BofA and its Affiliates may make loans to, issue
letters of credit for the account of, accept deposits from,
acquire equity interests in, purchase assets of, and
generally engage in any business with any Borrower and any of
their Subsidiaries as though BofA were not the Agent
hereunder and without notice to or consent of the Lenders.
The Lenders acknowledge that, pursuant to such activities,
BofA or its Affiliates may receive information regarding the
Borrowers or their Subsidiaries (including information that
may be subject to confidentiality obligations in favor of the
Borrowers or their Subsidiaries) and acknowledge that the
Agent shall be under no obligation to provide such
information to them."
4. Consents; Certain Related Agreements.
(a) Each of the Agent and the Lenders (and each of the
Borrowers in their capacities as guarantors) hereby acknowledges and consents
to the terms of Section 2 hereof and all of the other matters, terms and
provisions set forth herein.
(b) In furtherance of the foregoing, each of the parties hereto
agree that, immediately prior to or simultaneously with the closing of
the Accounts Sales, the Liens on the Transferred Accounts granted under
the Security Agreements of the Borrowers shall terminate and be released
and the Agent shall execute and deliver to STK or the other Borrowers
such documents and instruments reasonably requested by STK or the other
Borrowers as shall be necessary to evidence the termination and release
of all security interests as to the Transferred Accounts given by STK or
the other Borrowers to the Agent under the Credit Agreement and such
Security Agreements. Notwithstanding the foregoing, if the Accounts
Buyer elects to draw upon any Letter of Credit provided for the account
of the Borrowers by the Issuing Bank in connection with Accounts Sales
in lieu of seeking recourse to the Borrowers, such Transferred Accounts
shall be reassigned by the Accounts Buyer to the Agent for the benefit
of the Banks and, upon such reassignment, shall be deemed (without
further action required by the Agent or the Banks) to become Collateral
subject again to the Security Agreements of the applicable Borrowers and
the Agent may take such action as it deems appropriate in connection
therewith.
(c) In furtherance of the foregoing, each of the parties hereto
agree to the following: (i) immediately prior to or simultaneously with
the closing of an SFSC Sale and the satisfaction of the conditions noted
in Section 6, the Liens on the SFSC Transferred Interests granted under
the U.S. Security Agreements of SFSC and STK shall terminate and be
released and the Agent shall execute and deliver to SFSC or STK such
documents and instruments (including, without limitation, terminations
of security agreements and guaranties) reasonably requested by SFSC or
STK as shall be necessary to evidence (A) the termination and release of
all security interests as to the SFSC Transferred Interests given by
SFSC or STK to the Agent under the Credit Agreement and such U.S.
Security Agreements and (B) the transactions contemplated by clauses
(ii) and (iii) below; (ii) as of the termination of such Liens, SFSC
shall no longer be a Borrower under the Credit Agreement or under any of
the other Loan Documents; provided, however, that for purposes only of
Section 6.02(b) of the Credit Agreement, SFSC shall, following an SFSC
Sale, be deemed to be a Borrower and thus shall be entitled to the
rights provided by, and subject to the obligations imposed by, such
Section 6.02(b); and (iii) following the closing of an SFSC Sale, (A)
the assets (if any) remaining with SFSC may be sold or transferred by
SFSC to STK, to another Subsidiary of STK or to any other Person to the
extent permitted by the terms of the Credit Agreement, (B) the stock of
SFSC (if not sold at the time of the SFSC Sale) may be sold or
transferred to any other Person and (C) SFSC may be dissolved or merged
with and into STK or another Subsidiary of STK.
5. Conditions of Effectiveness of Sections 2(b), (c), (d), (g)
and (h). The effectiveness of Sections 2(b), (c), (d), (g) and (h) of
this Amendment shall be subject to the following conditions:
(a) The Agent has received evidence (if requested by the Agent
on behalf of a Lender), in form and substance satisfactory to the Agent,
that (i) the representations and warranties contained in Article V of
the Credit Agreement are true and correct as of the date hereof as
though made on such date and (ii) no Default or Event of Default then
exists.
(b) The Borrowers shall have paid or reimbursed the Agent for
all fees, costs and expenses (including, but not limited to, all reasonable
Attorney Costs) incurred in connection with the development,
preparation, negotiation, execution and delivery of this Amendment and
the consummation of the transactions contemplated hereby.
(c) The Agent shall have received from STK for the benefit of
the Banks a fee relating to the execution and delivery of this Amendment in
an amount equal to .075% of the total Commitments of the Banks.
(d) The Agent shall have received executed signature pages for this
Amendment from the Borrowers and the Banks.
6. Conditions of Effectiveness of Section 2(f). The
effectiveness of Section 2(f) of this Amendment shall be subject to the
following conditions:
(a) The Agent has received evidence (if requested by the Agent
on behalf of a Lender), in form and substance satisfactory to the Agent,
that all actions necessary or, in the opinion of the Agent, desirable to
continue to perfect and protect and maintain the priority of the Liens
created by the Loan Documents have been taken with respect to (i) any
Collateral of SFSC that is not sold in the SFSC Sale and (ii) the
consideration received by STK or its Affiliate in exchange for the SFSC
Transferred Interests sold in the SFSC Sale, which consideration shall
constitute Proceeds of Collateral and, as such, shall remain subject to
the terms and provisions of one of the U.S. Security Agreements.
(b) SFSC shall have delivered to the Agent a Periodic Release
Certificate and complied with the other terms of Section 6.02(b)(ii) of
the Credit Agreement, if applicable to the SFSC Sale.
(c) The Agent has received evidence (if requested by the Agent
on behalf of a Lender), in form and substance satisfactory to the Agent,
that (i) the representations and warranties contained in Article V of
the Credit Agreement are true and correct on and as of the date hereof
as though made on and as of such date and (ii) no Default or Event of
Default then exists or would result after giving effect to the SFSC Sale
and the matters set forth in Sections 2 and 3 above relating to the SFSC
Sale.
7. Miscellaneous.
(a) Loan Documents Otherwise Not Affected. Except as expressly
waived pursuant hereto, the Loan Documents shall remain unchanged and in
full force and effect and are hereby ratified and confirmed in all
respects. The Lenders' and the Agent's execution and delivery of, or
acceptance of, this Amendment and any other documents and instruments in
connection herewith shall not be deemed to create a course of dealing or
otherwise create any express or implied duty by any of them to provide
any other or further amendments, consents or waivers in the future.
(b) Successors and Assigns. The provisions of this Amendment
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
(c) Counterparts. This Amendment may be executed by one or
more of the parties to this Amendment in any number of separate counterparts,
each of which, when so executed, shall be deemed an original, and all of
said counterparts taken together shall be deemed to constitute but one
and the same instrument.
(d) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT
REFERENCE TO PRINCIPLES OF CONFLICTS OF LAWS.
(e) Fees and Expenses. The Borrowers acknowledge and agree
that they will pay or reimburse the Agent for all fees, costs and expenses
(including, but not limited to, all reasonable Attorney Costs) incurred
by the Agent in connection with the SFSC Sale and the Accounts Sales.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly
authorized officers as of the day and year first above written.
THE BORROWERS:
STORAGE TECHNOLOGY CORPORATION
By: /s/ Mark D. McGregor
-----------------------------------
Name: Mark D. McGregor
Title: Vice President &
Treasurer
STORAGETEK FINANCIAL SERVICES CORPORATION
By: /s/ Robert J. Kali
-----------------------------------
Name: Robert J. Kali
Title: Vice President and
Chief Operating Officer
STORAGE TECHNOLOGY DE PUERTO RICO, INC.
By: /s/ Mark D. McGregor
-----------------------------------
Name: Mark D. McGregor
Title: Vice President &
Treasurer
NETWORK SYSTEMS CORPORATION
By: /s/ Mark D. McGregor
-----------------------------------
Name: Mark D. McGregor
Title: Assistant Treasurer
THE AGENT:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
By: /s/ Wendy M. Young
-----------------------------------
Name: Wendy M. Young
Title: Vice President
THE LENDERS:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Kevin McMahon
-----------------------------------
Name: Kevin McMahon
Title: Vice President
BANK OF MONTREAL
By: /s/ Robert K. Strong, Jr.
-----------------------------------
Name: Robert K. Strong, Jr.
Title: Managing Director
NBD BANK (formerly NBD BANK, N.A.)
By: /s/ Thomas A. Levasseur
-----------------------------------
Name: Thomas A. Levasseur
Title: Vice President
FIRST INTERSTATE BANK OF DENVER
By: /s/ David L. Ericson
-----------------------------------
Name: David L. Ericson
Title: Senior Vice
President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Oscar Jazdowski
-----------------------------------
Name: Oscar Jazdowski
Title: Managing Director
BANQUE NATIONALE DE PARIS
By: /s/ Clive Bettles
-----------------------------------
Name: Clive Bettles
Title: Senior Vice
President & Manager
By: /s/ Mitchell M. Ozawa
-----------------------------------
Name: Mitchell M. Ozawa
Title: Vice President
THE SUMITOMO BANK LIMITED
By: /s/ Hiroshi Amano
-----------------------------------
Name: Hiroshi Amano
Title: General Manager
Exhibit 10.21
MULTICURRENCY
RECEIVABLES TRANSFER AGREEMENT
DATED AS OF JANUARY 29, 1996
BETWEEN
STORAGE TECHNOLOGY CORPORATION
AS TRANSFEROR AND INITIAL SERVICING AGENT
AND
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
AS TRANSFEREE
TABLE OF CONTENTS
Page
ARTICLE I
TRANSFERS AND PAYMENTS
1.01 Agreement to Transfer and Acquire 2
1.02 Procedures for Designation and Transfer 2
1.03 Purchase Price Calculation 10
1.04 Payment; Discount; Assignment Certificate 12
1.05 Facility Limit 13
1.06 Voluntary Termination of Facility; Reduction of
Facility Limit or Base Foreign Currency Amount 13
1.07 Termination Date; Extension of Termination Date 14
1.08 Early Termination or Reduction Payments 14
1.09 Reductions of Base Foreign Currency Amount below
Letter of Credit Amount. 17
1.10 No Assumption 17
ARTICLE II
COLLECTIONS; SETTLEMENT
2.01 Deemed Collections; Substitution of Receivables 17
2.02 Treatment of Collections and Deemed Collections;
Reconveyance 18
2.03 Settlement Procedures 19
2.04 Settlement of Forward Contracts 20
2.05 Netting of Payments on Certain Settlement Dates 20
2.06 Drawings on Letter of Credit 21
2.07 Payments and Computations, Etc 22
ARTICLE III
FEES AND YIELD PROTECTION
3.01 Fees 22
3.02 Yield Protection 22
3.03 Inability to Determine Eurodollar Rate; Failure to
Specify Settlement Date 23
3.04 Funding Losses 24
3.05 Taxes, Etc 25
3.06 Set-off 26
ARTICLE IV
CONDITIONS TO EFFECTIVENESS AND TRANSFERS
4.01 Conditions Precedent to Effectiveness 26
4.02 Conditions Precedent to each Supplement 27
4.03 Conditions Precedent to All Transfers 27
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 Representations and Warranties of Transferor 28
ARTICLE VI
GENERAL COVENANTS OF TRANSFEROR
6.01 Affirmative Covenants of Transferor 31
6.02 Negative Covenants of Transferor 35
6.03 Grant of Security Interest 35
ARTICLE VII
ADMINISTRATION AND COLLECTION
7.01 Designation of the Servicing Agent 36
7.02 Duties of the Servicing Agent 36
7.03 Rights of Transferee 37
7.04 Responsibilities of Transferor 39
ARTICLE VIII
TERMINATION EVENTS
8.01 Termination Events 40
8.02 Remedies 43
8.03 Drawing on Letter of Credit 44
ARTICLE IX
INDEMNIFICATION; EXCULPATION
9.01 Indemnities by Transferor 45
9.02 Exculpation 46
ARTICLE X
GUARANTEE
10.01 Guarantee 46
10.02 Waivers 47
10.03 No Impairment 47
10.04 Waiver of Resort 47
10.05 Reinstatement 48
10.06 Subrogation, Waivers, Etc 48
ARTICLE XI
MISCELLANEOUS
11.01 Amendments, Waivers, Etc 49
11.02 Notices, Etc 50
11.03 Binding Effect; Assignability; Survival of Provisions 50
11.04 Governing Law 50
11.05 Costs, Expenses and Taxes 51
11.06 Execution in Counterparts 51
11.07 Confidentiality 52
11.08 Release 54
11.09 Severability of Provisions 54
11.10 Conflict in Agreement Documents. 54
11.11 Legal Representation of Parties. 54
11.12 Recording. 54
11.13 Judgments 55
11.14 Submission to Jurisdiction 55
11.15 Integration 55
11.16 Waiver of Jury Trial 55
LIST OF SCHEDULES AND EXHIBITS
SCHEDULE I Definitions
SCHEDULE II Determination Dates
EXHIBIT 1.02(b) Form of Supplement
EXHIBIT 1.02(f) Form of Deficiency Certificate
EXHIBIT 1.04(d) Form of Assignment Certificate
EXHIBIT 1.07(c) Form of Amendment
EXHIBIT 2.02(b)-1 Form of Request for Reconveyance
EXHIBIT 2.02(b)-2 Form of Reconveyance by Transferee
EXHIBIT 4.01(d) Form of Opinion of Counsel for Transferor
EXHIBIT 4.03(b) Form of Letter of Credit
EXHIBIT 4.03(c) List of UCC Filing Jurisdictions
EXHIBIT 4.03(e) Form of Officer's Certificate
EXHIBIT 5.01(d) Schedule of Litigation
EXHIBIT 5.01(h) List of Names Used by Transferor
THIS MULTICURRENCY RECEIVABLES TRANSFER AGREEMENT (this "Agreement"),
dated as of January 29, 1996 is between STORAGE TECHNOLOGY CORPORATION, a
Delaware corporation, as Transferor ("Transferor") and initial Servicing
Agent, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a
national banking association ("Transferee").
RECITALS
A. Transferor now owns, or from time to time hereafter will own,
certain Receivables generated in the ordinary course of its business which
Transferor wishes to transfer to Transferee.
B. Transferee has agreed to acquire such Receivables and certain
Related Assets from Transferor on the terms and conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
DEFINITIONS AND RELATED MATTERS
In this Agreement, unless otherwise specified:
(a) capitalized terms, "currency", and "foreign currency" are
used as defined in Schedule I;
(b) accounting terms shall be interpreted, and accounting
determinations and computations made, in accordance with GAAP;
(c) terms defined in Article 9 of the California UCC and not
otherwise defined herein are used as defined in such Article 9;
(d) references to any Article, Section, Exhibit or Schedule
refer to such Article or Section of, or Exhibit or Schedule to, this
Agreement, and references in any Article, Section or definition to
any subsection or clause refer to such subsection or clause of such
Article, Section or definition;
(e) "herein", "hereof", "hereto", "hereunder" and similar terms
refer to this Agreement as a whole and not to any particular Section,
paragraph or provision of this Agreement;
(f) "including" means including without limitation, and other
forms of the verb "to include" have correlative meanings;
(g) for purposes of calculating interest, any fee, discount or
any other amount accrued over a period of time, the first day of such
period shall be included and the last day excluded;
(h) a reference to any Person includes such Person's successors
and assigns, unless such successors and assigns are not permitted by
this Agreement and reference to a Person in a particular capacity
excludes such Person in any other capacity or individually;
(i) a reference to any law, rule or regulation refers to such
law, rule or regulation as amended from time to time and includes any
successor law, rule or regulation; and
(j) captions are solely for convenience of reference and shall
not affect the meaning of this Agreement.
ARTICLE I
TRANSFERS AND PAYMENTS
SECTION 1.01 Agreement to Transfer and Acquire. On the terms and
conditions hereinafter set forth, from time to time on each Transfer Date
occurring on or prior to the Termination Date, Transferor agrees to
assign, transfer and convey to Transferee, and Transferee agrees to
acquire from Transferor: (a) all of Transferor's right, title and interest
in, to and under an aggregate amount of Eligible Receivables having a
Dollar Equivalent Balance equal to the Required Dollar Receivables Amount
for such Transfer Date; (b) all Collections with respect to such
Receivables; and (c) all proceeds of any of the foregoing. The items
listed above in clauses (b) and (c) are herein collectively called the
"Related Assets." The Receivables and the Related Assets transferred or
to be transferred on a Transfer Date are herein collectively called the
"Transferred Assets". Title to the Transferred Assets which are
transferred on any Transfer Date will pass to Transferee on such Transfer
Date.
SECTION 1.02 Procedures for Designation and Transfer.
(a) Certain Definitions. As used herein:
(i) "Determination Date" means each date set forth in
Schedule II hereto, as in effect from time to time, or, if any such
date is not a Business Day, the immediately preceding Business Day.
(ii) "Transfer Date" means each date designated in any
Supplement as a Transfer Date. No Transfer Date shall fall less than
four Eurodollar Business Days after the immediately preceding
Determination Date. Not more than twelve Transfer Dates may fall in
any twelve-month period.
(iii) "LIBOR Fixing Date" means, with respect to any
Transfer Date, the third Eurodollar Business Day preceding such
Transfer Date.
(iv) "Settlement Date" means with respect to any Transfer Date,
the Business Day specified by Transferor as the Settlement Date for
such Transfer Date in the notice delivered by Transferor pursuant to
Section 1.02(d), or, if no such notice is given, in the applicable
Assignment Certificate, provided, that no Settlement Date may fall
later than the earlier of (A) 50 days after the applicable Transfer
Date and (B) the next succeeding Transfer Date. Each Settlement Date
shall be a Eurodollar Business Day.
(b) Supplements.
(i) Each agreement by the parties to make one or more Transfers
hereunder shall be made pursuant to a supplement to this Agreement (a
"Supplement") entered into by the parties hereto from time to time
prior to the third Business Day before the last Determination Date
which falls prior to the then Scheduled Termination Date, in
substantially the form of Exhibit 1.02(b), specifying therein:
(A) each Transfer Date to occur pursuant to such
Supplement,
(B) the aggregate amount, expressed in the applicable
foreign currencies, which will be used to calculate the Required
Dollar Receivables Amount pursuant to Section 1.02(c) in order
to determine the aggregate amount of Receivables that Transferee
is to acquire on such Transfer Date (each such amount of a
particular foreign currency for a particular Transfer Date being
herein called a "Base Foreign Currency Amount"),
(C) the total Purchase Price in Dollars that
Transferee is to pay Transferor on such Transfer Date for the
Transferred Assets to be acquired on such Transfer Date, and
(D) the Dollar portion of such total Purchase Price
which is allocable to each Base Foreign Currency Amount for such
Transfer Date (each an "Allocated Purchase Price").
(ii) If the Transferor wishes to enter into a Supplement,
Transferor will deliver to Transferee by facsimile at the address
specified in Section 11.02 a proposed Supplement, showing in the
spaces provided the Transfer Dates and the applicable Base Foreign
Currency Amounts requested by Transferor. Following Transferee's
receipt of such proposed Supplement, Transferee will consult with
Transferor and will notify Transferor of the Allocated Purchase Price
which Transferee is prepared to pay on each applicable Transfer Date
in respect of each Base Foreign Currency Amount shown on such
Supplement, and the total Purchase Price in Dollars which Transferee
is prepared to pay on each such Transfer Date. Such Allocated
Purchase Prices will be determined by Transferee in good faith based
on market conditions. If Transferee and Transferor agree to each
such Allocated Purchase Price and total Purchase Price, they will
enter into a Supplement reflecting such agreement. Neither
Transferor nor Transferee will have any obligation to agree to any
proposed Allocated Purchase Price or total Purchase Price.
Transferee will have no obligation to notify Transferor of any
Allocated Purchase Price for any Base Foreign Currency Amount
proposed by Transferor if Transferee informs Transferor that such
Base Foreign Currency Amount is not freely available and commercially
transferable in the relevant amount at such time or for any other
relevant period.
(iii) Notwithstanding anything contained herein to the
contrary,
(A) Transferor shall not be obligated to enter into
any Supplement at any time prior to any agreement by Transferor
and Transferee of the terms and provisions thereof; and
(B) Transferee shall not be obligated to enter into
any Supplement:
(1) if Transferee and Transferor have not
agreed to any Allocated Purchase Price or total Purchase
Price applicable to such Supplement;
(2) if the total Purchase Price for any
Transfer Date would exceed the Facility Limit, or if the
latest Transfer Date under such Supplement would fall after
the Scheduled Termination Date;
(3) at any time when any Carryforward
Amount is outstanding; or
(4) if any of the conditions precedent to
such Supplement specified in Section 4.02 have not been
met.
(c) Determination Date - Calculation of Required Dollar Receivables
Amount. On each Determination Date, the Transferee will after
consultation with Transferor determine the Required Dollar Receivables
Amount applicable to the Transfer Date which immediately follows such
Determination Date. The "Required Dollar Receivables Amount" applicable
to any Transfer Date shall in all cases be denominated in Dollars and
equal the sum of the separate Dollar amounts which would result from the
conversion of each Base Foreign Currency Amount shown on the applicable
Supplement for such Transfer Date into Dollars at a rate of exchange for
each applicable currency, for value on such Transfer Date, which is
determined by Transferee in good faith on the Determination Date based on
market conditions (each a "Determination Date Exchange Rate"). While
Transferee will consult with Transferor in determining such rates of
exchange and the Required Dollar Receivables Amount, any determination by
Transferee of any Determination Date Exchange Rate or any Required Dollar
Receivables Amount shall be conclusive and binding on the parties for all
purposes.
(d) LIBOR Fixing Date - Specification of Settlement Date and
Discount.
(i) On each LIBOR Fixing Date, no later than 10:00 a.m.,
San Francisco time, Transferor will notify Transferee in writing of
(A) the Settlement Date which will be applicable to the Transfer Date
which immediately follows such LIBOR Fixing Date and (B) whether the
Transferred Receivables Amount on such Transfer Date will be equal to
the Required Dollar Receivables Amount, or whether it will furnish a
Deficiency Certificate to Transferee. If the Transferor notifies the
Transferee of the applicable Settlement Date and that such
Transferred Receivables Amount will be equal to the Required Dollar
Receivables Amount, the Transferee will calculate the Discount which
will be applicable to the Purchase Price which is payable by
Transferee on such Transfer Date pursuant to Section 1.04, and will
notify Transferor of such Discount. Such Discount will be calculated
in Dollars, regardless of the currencies of the Receivables which are
sold to Transferee on such Transfer Date. If Transferor indicates
that it will furnish a Deficiency Certificate, Transferor will notify
Transferee in reasonable detail what ineligible Receivables may be
available for Transfer on the Transfer Date.
(ii) In the absence of any such notification pursuant to clause
(i), (A) the Settlement Date for such Transfer Date will be the date
specified in the Assignment Certificate which is delivered on the
applicable Transfer Date, and (B) the Purchase Price or Reduced
Purchase Price shall not be discounted, but instead the Transferor
will pay the Transferee yield based on the Reference Rate, as
provided in Section 3.03.
(e) Specification of Currencies and Amounts of Receivables to be
Transferred; Forward Contracts.
(i) On any Transfer Date, Transferor may transfer Receivables
to Transferee which are denominated either in Dollars or in other
currencies listed in Annex 1 to Exhibit 1.02(b) (as in effect from
time to time), provided that the aggregate amounts of the Receivables
so transferred shall be equal to the amounts required by this
Agreement.
(ii) No later than 3:00 p.m. San Francisco time on the Business
Day immediately preceding any Transfer Date, Transferor will give
written notice to Transferee specifying (A) the aggregate amount of
Dollar denominated Receivables which will be transferred on such
Transfer Date as well as (B) the currencies and amounts of foreign
currency denominated Receivables to be transferred on such Transfer
Date. Each such currency must be either Dollars or a currency listed
in Annex 1 to Exhibit 1.02(b), but such currencies are not required
to be the same currencies as the applicable Base Foreign Currency
Amounts, provided, that no Receivables to be transferred may be
denominated in any currency which the Transferee in its discretion
has determined may not be freely available and commercially
transferable in the relevant amount and for the relevant times and
periods. If Transferor does not timely give such notice, Transferor
will be deemed on such date to have requested that all Base Foreign
Currency Amounts applicable to such Transfer Date be reduced to zero,
and the parties will be obligated to make Early Termination Payments
in respect of such reduction, calculated as provided in Section 1.08.
In addition, Transferor will be obligated to make any payments
required by Section 3.04 in respect of such reductions.
(iii) If Transferee has received timely notice from
Transferor that all or some of the Receivables to be transferred on
any Transfer Date will be denominated in currencies other than
Dollars, then, on the Business Date immediately preceding such
Transfer Date:
(A) Transferor will allocate the Required Dollar
Receivables Amount applicable to such Transfer Date between (1)
the Receivables, if any, which will be transferred on such
Transfer Date and which are denominated in Dollars, and (2) the
foreign currency Receivables which will be so transferred. The
portion of the Required Dollar Receivables Amount which is
allocable to such Dollar-denominated Receivables shall be equal
to the aggregate Unpaid Balance of such Dollar-denominated
Receivables. The remainder of the Required Dollar Receivables
Amount, which shall be denominated in Dollars (the "Required
Foreign Currency Allocation"), shall be allocated to the
Transferred Receivables denominated in foreign currencies, taken
as a whole.
(B) Transferor and Transferee will enter into forward
contracts with respect to each foreign currency in which any of
such Transferred Receivables are denominated, at rates
determined by Transferee in good faith based on market
conditions for value on the applicable Settlement Date, pursuant
to which, on such Settlement Date, (1) Transferor will deliver
to Transferee an aggregate amount of Dollars equal to the
Required Foreign Currency Allocation and (2) Transferee will
deliver to Transferor (subject to payment of such amounts by the
Obligors and/or Transferor as guarantor under Article X) amounts
in the foreign currencies in which the Transferred Receivables
are denominated.
(C) Following the entry by Transferor and Transferee
into the forward contracts described in clause (B), the
aggregate amount of the foreign-currency denominated Receivables
which the Transferor will be required to transfer to Transferee
on such Transfer Date will be adjusted (whether increased or
decreased) to be equal to the amounts of such foreign currencies
which Transferee is to deliver to Transferor on the applicable
Settlement Dates pursuant to such forward contracts. The amount
of the Dollar-denominated Receivables to be transferred on such
Transfer Date (if any), the aggregate Purchase Price (or Reduced
Purchase Price, calculated according to Section 1.03(b), as
applicable) to be paid by Transferee to Transferor, and the
Discount applicable to such Purchase Price or Reduced Purchase
Price shall all remain unchanged.
(D) If Transferor and Transferee fail for any reason
to enter into the forward contracts specified in clause (B) on
the Business Day immediately preceding any Transfer Date, they
will be deemed for all purposes hereof (without further action)
to have entered into forward contracts on such Business Day
pursuant to which, on the applicable Settlement Date:
(1) Transferee delivers to Transferor an
amount in each foreign currency in which Transferred
Receivables are denominated equal to the aggregate amount
of the Transferred Receivables denominated in such currency
which were transferred on the applicable Transfer Date,
subject to payment of such amounts to Transferee on the
applicable Settlement Date by the Obligors and/or
Transferor as guarantor under Article X; and
(2) Transferor will pay to Transferee an
aggregate amount in Dollars equal to the Required Foreign
Currency Allocation.
In the event that the parties are deemed to (but do
not actually) enter into forward contracts on any Transfer Date
pursuant to this clause (D), no adjustment will be made to the
amount of foreign currency denominated Receivables which are
required to be transferred on such Transfer Date.
(E) The exchange rates at which forward contracts are
entered into pursuant to clause (B), or are deemed to be entered
into pursuant to clause (D) are called the "Transfer Exchange
Rates".
(F) All forward contracts which are entered into
pursuant to clause (B) or deemed to be entered into pursuant to
clause (D) shall be settled as provided in Section 2.04. All
such settlements shall be subject to the terms of Section
1.02(h), so that on each Settlement Date Transferor will be
obligated to pay to Transferee in Dollars the Transferred
Receivables Amount applicable to such Settlement Date.
Following such payment, Transferor and Transferee shall have no
further obligations under such forward contracts which have
value dates falling on such Settlement Date.
(f) Delivery of Deficiency Certificate.
(i) The execution and delivery of any Supplement shall obligate
Transferor to transfer to Transferee, on each Transfer Date specified
therein, Eligible Receivables having an aggregate Dollar Equivalent
Balance equal to the Required Dollar Receivables Amount applicable to
such Transfer Date. However, if, prior to 10:00 a.m. San Francisco
time on any Transfer Date, Transferor furnishes Transferee with a
certificate of Transferor's chief financial officer, treasurer, or
assistant treasurer in the form of Exhibit 1.02(f) (a "Deficiency
Certificate"), stating that the aggregate Dollar Equivalent Balance
of all Eligible Receivables which will be owned by Transferor on such
Transfer Date (after Transferor has used its best efforts to cause
its Subsidiaries to sell their respective Receivables to Transferor)
will be less than the Required Dollar Receivables Amount for such
Transfer Date, then Transferor will only be required to transfer
Eligible Receivables on such Transfer Date to the extent of the
Eligible Receivables owned by Transferor on such Transfer Date,
provided that Transferee may in its sole discretion require
Transferor to transfer ineligible Receivables on any Transfer Date,
if owned by Transferor or any of its Subsidiaries, up to the amount
of the applicable deficiency. Transferor will cooperate in good
faith with Transferee in order to identify ineligible Receivables for
possible transfer to Transferee pursuant to the foregoing proviso.
(ii) If Transferor does not deliver a Deficiency Certificate to
Transferee prior to 10:00 a.m. San Francisco time on any Transfer
Date, Transferor will be deemed to have warranted and covenanted that
on such Transfer Date Transferor will transfer Eligible Receivables
to Transferee which have an aggregate Dollar Equivalent Balance equal
to the Required Dollar Receivables Amount.
(iii) The parties agree that the fact that Eligible
Receivables or ineligible Receivables are or may be owned by a
Subsidiary of Transferor and/or are or may be subject to an Adverse
Claim shall not relieve Transferor from its obligation to transfer
such Eligible Receivables or ineligible Receivables hereunder on any
Transfer Date. Transferor expressly agrees that it (A) will use its
best efforts to cause its Subsidiaries to sell Receivables to it, and
(B) will cause any Adverse Claim on Eligible Receivables or
ineligible Receivables to be released, in each case to the extent
necessary to enable the Transferor to transfer Eligible Receivables
(or to the extent permitted by Transferee, ineligible Receivables) on
each Transfer Date in an aggregate Dollar Equivalent Balance equal to
the Required Dollar Receivables Amount applicable thereto.
Transferor may not issue any Deficiency Certificate if it is unable
to transfer Receivables hereunder because of any Adverse Claims or
because such Receivables are owned by any Subsidiary of Transferor
(unless, in the case of Receivables owned by any such Subsidiary,
Transferor has used its best efforts to cause such Subsidiary to
transfer such Receivables to Transferor but has nevertheless been
unable to do so) and no such inability may give rise to any
Carryforward Amount.
(iv) Nothing herein shall restrict Transferor from reducing any
Base Foreign Currency Amount applicable to any Transfer Date in
accordance with Section 1.06(b), whether or not Transferor has
available Eligible Receivables or ineligible Receivables to be
transferred hereunder, provided that Transferor shall make all
payments required by Section 1.08 in connection with such reduction.
(v) Unless otherwise permitted by Transferee in its sole
discretion, no Deficiency Certificate may be delivered, and no
Carryforward Amount may be created or continue to exist, following
any Change in Control or Early Termination. On each Transfer Date
following any Change of Control, Transferor will be required to
Transfer to Transferee Eligible Receivables having an aggregate
Dollar Equivalent Balance equal to the Required Dollar Receivables
Amount for such Transfer Date. If Transferor fails for any reason to
Transfer Eligible Receivables in such Dollar Equivalent Balance on
such Transfer Date, the parties will make payments to each other, as
applicable, calculated as set forth in Section 3.04(b). In addition,
promptly following any Change in Control or Early Termination,
Transferor will on demand pay to Transferee in Dollars in immediately
available funds (x) the sum of all the amounts by which: (A) all
Carryforward Amounts then in effect exceed (B) the Reduced Purchase
Prices that would be applicable thereto (determined as set forth in
the last sentence of Section 1.04(c)), plus (y) the aggregate of the
Deferral Compensation Amounts applicable to such Carryforward Amounts
that are accrued and unpaid at the date of such payment. If the
amounts described in clause (x)(B) exceed the amounts described in
clause (x)(A), Transferee will on demand pay the excess to
Transferor.
(g) Transfer of Senior Undivided Interests in Receivables. In order
to permit Transferor to transfer Eligible Receivables with an aggregate
Dollar Equivalent Balance which precisely equals the applicable Required
Dollar Receivables Amount (or any lesser amount of Receivables permitted
pursuant to Section 1.02(f)), Transferor may transfer to Transferee senior
undivided interests in one or more Eligible Receivables (or, if permitted
by Transferee, ineligible Receivables), in each case in a specified Dollar
amount, to the extent necessary to cause the Transferred Receivables
Amount to equal precisely the Required Dollar Receivables Amount (or any
such permitted lesser amount). Each such senior undivided interest and
the related Receivable shall be described in the Assignment Certificate
which is delivered in respect of such Transfer Date. All Collections in
respect of such Receivables and the Related Assets in which Transferor
transfers such a senior undivided interest shall be applied first to
Transferee's senior undivided interests therein prior to any such
application to the residual interest of Transferor therein. Transferor
warrants and covenants to Transferee that the Unpaid Balance and Dollar
Equivalent Balance of each Receivable which (or a senior undivided
interest in which) is transferred to Transferee will equal or exceed the
Unpaid Balance and Dollar Equivalent Balance of such Receivable which is
shown on the applicable Assignment Certificate as having been transferred
to Transferee.
(h) Payment in Dollars by Transferor. Notwithstanding anything in
this Agreement, or in any forward contract which is or is deemed to be
entered into pursuant to this Agreement, and notwithstanding that all or
some of the Receivables which may be transferred hereunder may be
denominated in foreign currencies, it is of the essence under this
Agreement that all amounts payable to Transferee hereunder or in respect
of any Transferred Receivables shall be payable in Dollars, so that on
each Settlement Date, after giving effect to all Collections and deemed
Collections of Transferred Receivables, all payments by Transferor
pursuant to the guarantee set forth in Article X, and all payments by
Transferor in respect of any forward contracts which are or are deemed to
be entered into by Transferor or Transferee pursuant to this agreement,
Transferor (whether as Servicing Agent, Guarantor, forward contract
counterparty or otherwise) will pay to Transferee in Dollars in
immediately available funds the Transferred Receivables Amount applicable
to such Settlement Date.
SECTION 1.03 Purchase Price Calculation.
(a) Payment of Purchase Price. On the terms and conditions hereof,
on each Transfer Date, in consideration for the Transfer to Transferee of
Transferred Assets on such Transfer Date pursuant to Section 1.01,
Transferee shall pay to Transferor in Dollars in immediately available
funds (i) the Purchase Price which is specified for such Transfer Date in
the applicable Supplement, as such Supplement may be amended from time to
time in accordance with Section 1.06 or (ii) if applicable, the Reduced
Purchase Price calculated pursuant to Section 1.03(b), in either case,
minus any applicable Discount.
(b) Calculation of Reduced Purchase Price.
(i) The "Dollar Equivalent Balance" of (A) any Dollar
denominated Receivable shall mean the Unpaid Balance thereof, and (B)
any foreign currency denominated Receivable shall mean the Dollar
amount obtained by converting the Unpaid Balance thereof into Dollars
at the Transfer Exchange Rate.
(ii) The aggregate Dollar Equivalent Balance of Receivables
transferred to Transferee on any Transfer Date is herein called the
"Transferred Receivables Amount". If the Transferred Receivables
Amount on any Transfer Date is less than the Required Dollar
Receivables Amount applicable thereto, the total Purchase Price
specified in the related Supplement that is to be paid on such
Transfer Date shall be reduced to an amount (the "Reduced Purchase
Price") equal to the product of (x) such total Purchase Price,
multiplied by (y) a fraction, the numerator of which is the
Transferred Receivables Amount on such Transfer Date and the
denominator of which is the Required Dollar Receivables Amount for
such Transfer Date.
(c) Carryforward Amount. If Transferor furnishes a proper
Deficiency Certificate to Transferee, the difference between (x) the
Required Dollar Receivables Amount for the relevant Transfer Date and (y)
the Transferred Receivables Amount for such Transfer Date (such difference
being herein called the "Carryforward Amount") shall, at the sole option
of Transferee, be added to the Required Dollar Receivables Amount for each
subsequent Transfer Date (if any) until Transferee has acquired Eligible
Receivables (or, if required by Transferee, ineligible Receivables) on
such subsequent Transfer Dates having an aggregate Dollar Equivalent
Balance that exceeds the original Required Dollar Receivables Amount for
each such subsequent Transfer Date by an aggregate amount equal to such
Carryforward Amount. The procedures described in the preceding sentence
shall be applied on each Transfer Date on which the then Transferred
Receivables Amount is less than the Required Dollar Receivables Amount.
If all Transfer Dates specified in all effective Supplements have
occurred, and any Carryforward Amount shall continue to be outstanding,
the Transferee may, in its sole option, require Transferor to designate
further Determination Dates (and related Transfer Dates), occurring at not
more than 40-day intervals, until Receivables having aggregate Dollar
Equivalent Balances equal to each outstanding Carryforward Amount have
been transferred to Transferee. In the absence of such designation by
Transferor, Transferee may specify such Determination Dates and Transfer
Dates. Transferee may in its sole discretion at any time cancel or reduce
any Carryforward Amount which may then be in effect. Each Carryforward
Amount shall be calculated separately, and the Transfer Exchange Rates
applicable to any Receivables which are transferred to reduce such
Carryforward Amount shall be calculated in the same manner as for other
Receivables which are transferred on any Transfer Date. The Reduced
Purchase Price paid for Receivables which are transferred to reduce any
Carryforward Amount shall be calculated as set forth in clause (b) based
on the original Purchase Price which was payable on the original Transfer
Date from which such Carryforward Amount arose, and the original Required
Receivables Amount applicable thereto.
(d) Deferral Compensation Amount. For each day during the period
from the Transfer Date on which a Carryforward Amount is created until the
Transfer Date on which Receivables having an aggregate Dollar Equivalent
Balance equal to such Carryforward Amount have been transferred to
Transferee pursuant to Section 1.03(c), Transferor shall pay to Transferee
on the last Business Day of each calendar month an additional amount in
respect of each then-outstanding Carryforward Amount (such additional
amount being herein called the "Deferral Compensation Amount") equal to
the product of (x) the amount of such outstanding Carryforward Amount on
such day, multiplied by (y) a percentage equal to the sum of the Reference
Rate in effect on such day plus 2.0% per annum.
SECTION 1.04 Payment; Discount; Assignment Certificate. On each
Transfer Date, Transferee shall, upon satisfaction of the applicable
conditions set forth in Article IV, make available to Transferor the
amount of the Purchase Price or Reduced Purchase Price (as applicable) to
be paid to Transferor on such Transfer Date, discounted and adjusted as
follows:
(a) On each Transfer Date, Transferee will determine the Transferred
Receivables Amount.
(b) Transferee will calculate the discount (the "Discount") on such
Transferred Receivables Amount for the period from such Transfer Date to
the corresponding Settlement Date (the "Discount Period") as follows:
Discount = TRA x (ERRA + .50%) x DP
------------------------
360
WHERE:
TRA = such Transferred Receivables Amount;
ERRA = the Eurodollar Rate (Reserve Adjusted)
for the applicable Discount Period; and
DP = the number of days in such Discount
Period.
(c) On such Transfer Date, (A) Transferee will pay to Transferor by
11:30 a.m. (San Francisco time) the Purchase Price or Reduced Purchase
Price, as applicable, in each case in Dollars, minus in each case the
amount of the Discount calculated pursuant to clause (b), and (B)
concurrently with such payment, Transferor will transfer the Transferred
Assets applicable to such Transfer Date to Transferee.
(d) Prior to 10:00 a.m. (San Francisco time) on such Transfer Date,
Transferor will deliver to Transferee a duly completed Assignment
Certificate in the form of Exhibit 1.04(d) hereto (an "Assignment
Certificate"). Such Assignment Certificate may be delivered by facsimile,
followed promptly by an original, provided, that such facsimile shall be
binding and effective for all purposes. No Assignment Certificate shall
be required to specify the invoice numbers or dates or maturities of
Transferred Receivables, but may instead show such Transferred Receivables
in aggregate by Obligor, currency and Dollar Equivalent Balance for each
currency. Transferor will make available to Transferee on request the
precise details of each Transferred Receivable. Transferor warrants that
the aggregate amounts of Transferred Receivables (by Obligor, currency and
Dollar Equivalent Balance) will be as shown on the applicable Assignment
Certificate. Each Transferred Receivables Amount will be based on such
aggregate amounts, and Transferee may draw on the Letter of Credit as
provided in Section 2.06(a) if it is not paid the Transferred Receivables
Amount which is due on any Settlement Date, regardless of whether such
aggregate amounts correctly reflect any Transferred Receivables.
SECTION 1.05 Facility Limit. Transferee shall not be obligated to
acquire any Transferred Assets on any Transfer Date to the extent that,
after giving effect to such Transfer, the Aggregate Net Investment at such
date would exceed the Facility Limit. Any outstanding Carryforward Amount
shall continue to be carried forward to the extent that transfer of
Receivables in respect thereof would result in such excess.
SECTION 1.06 Voluntary Termination of Facility; Reduction of
Facility Limit or Base Foreign Currency Amount. (a) Transferor may, upon
at least five days' (or ten days' in the case of a reduction to zero)
prior irrevocable written notice to Transferee, reduce (including to zero)
the Facility Limit, provided that the Facility Limit may not at any time
be reduced to an amount that is less than the sum of the Aggregate Net
Investment plus any outstanding Carryforward Amount at such time. If
Transferor requests any reduction in the Facility Limit below the
aggregate Purchase Price then in effect for any Transfer Date which has
not yet occurred, Transferor will specify those Base Foreign Currency
Amounts applicable to such Transfer Date which Transferor wishes to reduce
in connection with such reduction in the Facility Limit.
(b) In addition, Transferor may by irrevocable written notice which
is received by Transferee no later than 10:00 a.m. San Francisco time on
any Transfer Date, reduce (including to zero) any Base Foreign Currency
Amount applicable to such Transfer Date, without reducing the Facility
Limit.
(c) Any reduction in any Base Foreign Currency Amount for any
Transfer Date, whether in connection with a permanent reduction in the
Facility Limit or pursuant to Section 1.06(b), shall correspondingly
reduce the Required Dollar Receivables Amount applicable to such Transfer
Date, as calculated pursuant to Section 1.02(c). The parties will
promptly amend the applicable Supplement to reflect any such reduction.
(d) Each partial reduction of the Facility Limit pursuant to
Section 1.06(a) shall be in an amount equal to $1,000,000 or an integral
multiple thereof.
(e) In the event of any termination of the Facility, or any
reduction of the Facility Limit or of any Base Foreign Currency Amount
applicable to any Transfer Date, the parties shall make the Early
Termination Payments specified in Section 1.08.
SECTION 1.07 Termination Date; Extension of Termination Date.
(a) The "Termination Date" shall be the earliest to occur of
(i) January 24, 1997 (the "Scheduled Termination Date"), (ii) the
Settlement Date immediately following the date of a termination of the
Facility in whole pursuant to Section 1.06(a), (iii) the date so declared
pursuant to Section 8.02, and (iv) the date that occurs automatically
pursuant to Section 8.02.
(b) On any date which is not more than ten calendar months prior to
the then current Scheduled Termination Date, Transferor, by written notice
to Transferee, may request that the Scheduled Termination Date be extended
to a date which falls no more than 364 days from the date such extension
becomes effective. Transferor may not make any such request more than
once in any calendar quarter. Any such request shall be accompanied or
preceded by a proposed revised Schedule II hereto, showing the proposed
additional Determination Dates which Transferor desires to make applicable
during the period of the requested extension. No such proposal shall
modify the Transfer Dates or Base Foreign Currency Amounts which are shown
on any Supplement which is then in effect. Transferee will use reasonable
efforts to notify Transferor in writing, on or before the date which is 30
days after the receipt by Transferee of such request from Transferor, as
to whether Transferee will consent to such extension and, if Transferee
does consent to such extension in writing, the conditions of such consent
(including conditions relating to legal documentation). If Transferee
shall notify Transferor that it does not consent to such extension or if
Transferee fails to notify the Transferor in writing of its consent to
such request within such 30 day period, Transferee shall be deemed to have
not consented to such request and the Scheduled Termination Date shall not
be so extended. Transferor acknowledges and agrees that the granting of
any such request shall be in the sole and absolute discretion of
Transferee.
(c) If Transferee is willing, in its sole discretion, to extend the
Scheduled Termination Date as so requested by Transferor, the parties will
enter into an amendment hereto in the form of Exhibit 1.07(c), including
an amendment to Schedule II (collectively, an "Amendment"), to effect such
extension.
SECTION 1.08 Early Termination or Reduction Payments. (a) If the
Termination Date occurs prior to the Scheduled Termination Date (such
occurrence being herein called an "Early Termination"), then the rights
and obligations of Transferor to transfer, and the rights and obligations
of Transferee to acquire, Transferred Assets shall terminate and be
discharged in full with respect to all Transfer Dates that have not
occurred prior to the Termination Date, provided that Transferee may still
require Transferor to transfer Receivables to Transferee after any
Termination Date in respect of any Carryforward Amount, as provided in
Section 1.03(c).
(b) Upon the occurrence of (x) an Early Termination, (y) reduction
(in whole or in part) of the Facility Limit pursuant to Section 1.06(a),
or (z) reduction (in whole or in part) of any Base Foreign Currency Amount
applicable to any Transfer Date pursuant to Section 1.06(b), Transferor
shall pay to Transferee or Transferee shall pay to Transferor (as
applicable) at the times provided below amounts calculated as follows
(each an "Early Termination Payment"):
(i) The date on which an Early Termination occurs and the
effective date of any such reduction of the Facility Limit or of any
applicable Base Foreign Currency Amount are herein each called an
"Early Termination Date".
(ii) In the case of a reduction (in part) of the Facility Limit
pursuant to Section 1.06(a), or a reduction (in whole or in part) of
any Base Foreign Currency Amount pursuant to Section 1.06(b),
Transferor will notify Transferee in writing, no later than
10:00 a.m. San Francisco time on the effective date of any such
reduction, of the amounts, Base Foreign Currency Amounts and Transfer
Dates to which Transferor wishes such reduction to apply.
(iii) In the case of any Early Termination or any reduction
of the Facility Limit or any Base Foreign Currency Amount, for each
Base Foreign Currency Amount applicable to any Transfer Date which is
to be reduced, Transferee will determine a fraction (the "Reduction
Fraction"), (A) the numerator of which is the amount of such
reduction expressed in the applicable currency, and (B) the
denominator of which is the applicable Base Foreign Currency Amount
immediately prior to such reduction. In the case of a reduction to
zero of any Base Foreign Currency Amount for any Transfer Date, or if
an Early Termination shall occur, the applicable Reduction Fraction
shall be one.
(iv) As used in this Section 1.08, for any Base Foreign Currency
Amount which is to be reduced, including as a result of an Early
Termination,
(A) the term "Pro-Rata Base Foreign Currency Amount"
means such Base Foreign Currency Amount, multiplied by the
applicable Reduction Fraction; and
(B) the term "Pro-Rata Purchase Price" means (1) the
Allocated Purchase Price applicable to such Base Foreign
Currency Amount and Transfer Date as set forth in the related
Supplement, multiplied by (2) the Reduction Fraction.
(v) Transferee will calculate the gross Dollar amount which it
would pay if it entered into forward contracts on the Early
Termination Date for purchase by Transferee for Dollars of all the
Pro-Rata Base Foreign Currency Amounts for each Transfer Date, in
each case with value dates which are the same as such Transfer Date
and using rates determined by Transferee in good faith based on
market conditions, provided, that if such Early Termination or
reduction of the Facility Limit or any Base Foreign Currency Amount
falls after the Determination Date which is applicable to any
Transfer Date, the rates used by Transferee shall be the
Determination Date Exchange Rates applicable to such Determination
Date.
(vi) Transferee will calculate the sum of all the Dollar amounts
calculated in clause (v) which would be payable with respect to each
Transfer Date.
(vii) If such aggregate Dollar amounts are greater than the
sum of the applicable Pro-Rata Purchase Prices applicable to such
Transfer Dates, (A) in the case of any Early Termination, or if any
Termination Event or Unmatured Termination Event shall be continuing,
Transferor will pay to Transferee, within two Business Days after any
demand therefor, the discounted present value of the excess,
discounted from the applicable Transfer Dates described in
clause (v), to the date on which such amount is paid at the
Eurodollar Rate, and (B) in the case of any other reduction of the
Facility Limit or any Base Foreign Currency Amount, Transferor will
pay to Transferee the excess in cash, undiscounted, on the applicable
Transfer Dates.
(viii) If such aggregate Dollar amounts are less than the sum
of the applicable Pro-Rata Purchase Prices applicable to such
Transfer Dates, (A) in the case of any Early Termination, Transferee
will pay to Transferor, within two Business Days after any demand
therefor, the discounted present value of the absolute value of the
deficiency, discounted from the applicable Transfer Dates described
in clause (v), to the date on which such amount is paid at the
Eurodollar Rate (Reserve Adjusted), and (B) in the case of any other
reduction of the Facility Limit or any Base Foreign Currency Amount,
Transferee will pay to Transferor the absolute value of the
deficiency in cash, undiscounted, on the applicable Transfer Dates.
To the extent that payments are to be made by both Transferor and
Transferee on any day pursuant to this Section 1.08 or Section 3.04(b),
such payments will be netted against each other and only the net amount
will be paid by the appropriate party. If any Termination Event or
Unmatured Termination Event shall have occurred, or if the Termination
Date shall have occurred, Transferee will not be obligated to make any
payment to Transferor pursuant to this Section 1.08 or Section 3.04(b)
until all Transferred Receivables then outstanding, and all other
Obligations then due and owing, have been paid in full and any
Carryforward Amount has been reduced to zero or cancelled by Transferee.
Transferee agrees to pay Transferor interest on any amounts owing by
Transferee to Transferor which are not paid pursuant to the preceding
sentence, for the period from (A) the applicable Transfer Dates from which
such amounts are discounted or on which such amounts are payable, as the
case may be, to (B) the dates such amounts are paid, at the Federal Funds
Rate from time to time in effect.
SECTION 1.09 Reductions of Base Foreign Currency Amount below
Letter of Credit Amount. In the event that, for any reason the amount
available to be drawn under the Letter of Credit on any Transfer Date is
less than the Required L/C Amount applicable to such Transfer Date,
Transferor will specify in writing Base Foreign Currency Amounts
applicable to such Transfer Date which Transferor wishes to reduce, so
that, following such reduction, the amount available to be drawn under the
Letter of Credit will be equal to or greater than the Required L/C Amount
applicable to such Transfer Date. If the Transferee has not received any
such notice from Transferor prior to 10:00 a.m. San Francisco time on such
Transfer Date, Transferee may select such Base Foreign Currency Amounts,
which selection shall be conclusive and binding on Transferor for all
purposes. Following any such selection, such Base Foreign Currency
Amounts shall be so reduced, and the parties will make the payments
required by Section 1.08 in respect of such reduction.
SECTION 1.10 No Assumption. Transferee shall not have any
obligation or liability with respect to any Transferred Assets or any
agreements, Contracts, Records, or other documents related to any
Transferred Receivable, nor shall Transferee have any obligation or
liability to any Obligor or other customer or client of Transferor
(including any obligation to perform any of the obligations of Transferor
or any of its Subsidiaries under any such Transferred Assets or related
agreements or other documents). No such obligation or liability is
intended to be assumed, and any such assumption is expressly disclaimed.
<PAGE>
ARTICLE II
COLLECTIONS; SETTLEMENT
SECTION 2.01 Deemed Collections; Substitution of Receivables. (a)
Deemed Collections. If on any day the Unpaid Balance of any Transferred
Receivable (i) is reduced as a result of any defective, rejected or
returned services or goods, any cash discount, or any adjustment by
Transferor or any Affiliate of Transferor, (ii) is reduced on account of
any offsetting account payable of Transferor or any of its Affiliates to
an Obligor (whether such offsetting account payable arises out of the same
or a related or an unrelated transaction), (iii) is reduced or cancelled
as a result of a setoff in respect of any claim by, or defense or credit
of, the Obligor thereof against Transferor or any Affiliate of Transferor
(whether such claim, defense or credit arises out of the same or a related
or an unrelated transaction), or (iv) is reduced on account of the
obligation of Transferor to pay to the related Obligor any rebate or
refund, then Transferor shall be deemed to have received on such day a
Collection of such Transferred Receivable in the amount of such reduction
or cancellation. If on any day (x) any of the representations or
warranties of Transferor set forth in Section 5.01(f) is no longer true
with respect to a Transferred Receivable, or (y) any Transferred
Receivable shall become a Defaulted Receivable or is not paid in full on
the due date thereof, Transferor shall be deemed to have received on such
day a Collection of such Transferred Receivable in the full amount of such
Transferred Receivable.
(b) Substitution of Receivables. If any Transferred Receivable
shall prove to be an ineligible Receivable as of the applicable Transfer
Date, or shall prove to be subject to any Adverse Claim, then, on or
before the applicable Settlement Date, on written notice to the Transferee
describing the circumstances thereof in reasonable detail, Transferor may
substitute for such Transferred Receivables other Eligible Receivables
which have an aggregate Dollar Equivalent Balance equal to such
Transferred Receivables. If Transferor wishes to substitute any such
Eligible Receivables it will, prior to the applicable Settlement Date,
deliver to Transferee a duly completed Assignment Certificate listing such
substitute Receivables. On receipt of such Assignment Certificate,
Transferee shall reassign to Transferor without recourse, representation
or warranty of any kind, and free and clear of any Adverse Claim created
by Transferee, the Receivables for which such new Receivables are
substituted. Any new Receivables so substituted must be Eligible
Receivables. Notwithstanding anything else contained herein, no such
substitution shall relieve the Transferor from its obligations hereunder
and under any forward contracts entered into or deemed entered into
pursuant to Section 1.03 to ensure that on the applicable Settlement Date
the Transferee receives payment in cash in Dollars of the Transferred
Receivables Amount.
SECTION 2.02 Treatment of Collections and Deemed Collections;
Reconveyance.
(a) Treatment. Transferor shall, after Transferor's receipt or
deemed receipt of any Collections in respect of Transferred Assets,
deliver to the Servicing Agent an amount equal to all such Collections on
or before the applicable Settlement Date. The Servicing Agent shall hold
or distribute all deemed Collections in respect of Transferred Assets to
the same extent as if Collections in such amount had actually been
received on such day. Prior to the occurrence of a Termination Event or
an Unmatured Termination Event, Transferor may commingle Collections in
respect of Transferred Assets with other funds of Transferor. Following
the occurrence, and during the continuance, of a Termination Event or an
Unmatured Termination Event, so long as Transferor shall hold any
Collections or deemed Collections required to be paid to Transferee or to
the Servicing Agent (to be held by the Servicing Agent in trust for
Transferee), it shall hold such Collections in trust and, if there shall
also exist a Termination Event or Unmatured Termination Event under
Section 8.01(f) or 8.01(m), separate and apart from its own funds, and
shall clearly mark its records to reflect such trust.
(b) Reconveyance. Upon payment by Transferor or the Servicing Agent
to Transferee of the Transferred Receivables Amount which is payable to
Transferee on any Settlement Date, together with all yield payable thereon
pursuant to Section 3.03 and all interest payable thereon pursuant to
Section 2.07 (or following receipt by Transferee of all such amounts as a
result of any drawing by Transferee on the Letter of Credit) Transferee
may, and shall promptly, upon receipt of a request from Transferor in the
form of Exhibit 2.02(b)-1, reconvey Transferee's right, title and
interest, if any, in, to and under the Transferred Receivables (and any
proceeds thereof that have not been paid to Transferee) to which such
Settlement Date applies to Transferor by means of an instrument or other
document of reconveyance in the form of Exhibit 2.02(b)-2, which
reconveyance by Transferee shall be without recourse, representation or
warranty, and free and clear of any Adverse Claim created by Transferee.
SECTION 2.03 Settlement Procedures. (a) Prior to the occurrence of
a Termination Event or an Unmatured Termination Event, the Servicing Agent
may commingle Collections in respect of the Transferred Assets with other
funds of the Servicing Agent. Following the occurrence, and during the
continuance, of a Termination Event or an Unmatured Termination Event, on
each Business Day, the Servicing Agent shall hold in trust for Transferee
all Collections received or deemed received on such day in respect of the
Transferred Assets and, if there shall also exist a Termination Event or
Unmatured Termination Event under Section 8.01(f) or 8.01(m), shall set
aside and deposit all such Collections, within one Business Day after the
Servicing Agent's receipt thereof, to the Transferee Account. No funds
other than Collections of Transferred Assets shall be deposited into the
Transferee Account and only Transferee or the Servicing Agent, as the
agent of Transferee, shall be entitled to make withdrawals from the
Transferee Account.
(b) At the opening of business on each Settlement Date, the
Servicing Agent shall determine the amount of Collections received or
deemed received in respect of the Transferred Assets acquired by
Transferee from the immediately preceding Transfer Date to such Settlement
Date and shall pay such amount to Transferee (less any such amount
Servicing Agent has already paid to Transferee). If the aggregate amount
of such Collections is less than the aggregate Transferred Receivables
Amount specified in the Assignment Certificate relating to such
Transferred Assets, then on such Settlement Date Transferor shall pay the
amount of such difference to Transferee by wire transfer of immediately
available funds to the Transferee Account, together with all yield, if
any, payable pursuant to Section 3.03.
(c) Notwithstanding anything herein to the contrary, the obligations
of Transferor hereunder shall not be considered reduced by any
distribution of any portion of Collections or other payment to Transferee
if at any time such distribution or other payment is rescinded or must
otherwise be returned for any reason.
(d) Transferee is entitled to 100% of all Collections and other
proceeds in respect of the Transferred Assets until Transferee shall have
recovered the Transferred Receivables Amount specified in the Assignment
Certificate relating to such Transferred Assets and shall have received
all other amounts then payable to Transferee pursuant to the Agreement
Documents. Transferor is entitled on each Settlement Date to be paid, by
the Servicing Agent, any residual Collections of Receivables (as well as
earnings on Collections of Transferred Assets which accrued prior to such
Settlement Dates) after all amounts payable to Transferee pursuant to the
first sentence of this Section 2.03(d) have been paid. On the first
Business Day following the Termination Date on which all Obligations have
been finally and fully paid in Dollars and performed, and Transferee has
received payment in full in Dollars of all Transferred Receivables Amounts
in respect of all Transferred Assets, the Servicing Agent shall pay to
Transferor any remaining Collections and other proceeds of Transferred
Assets then held by the Servicing Agent, and thereafter, except to the
extent provided otherwise in Section 2.03(c), Transferee shall cease to
have any interest in any Transferred Assets. If Transferee is paid any
amounts in excess of the amounts owed to it under this Agreement, it will
promptly refund such excess to Transferor at Transferor's written request,
accompanied by supporting calculations in reasonable detail, together with
interest on such excess, from the date of the excess payment to the date
such excess payment is refunded to Transferor, at the Federal Funds Rate.
SECTION 2.04 Settlement of Forward Contracts. On each Settlement
Date, if any of the Transferred Receivables relating to such Settlement
Date are denominated in foreign currencies, the Servicing Agent shall:
(a) hold all Collections and deemed Collections on such foreign
currency Receivables in trust for Transferee;
(b) demand payment from Transferor (and Transferor agrees that it
will pay to Servicing Agent on such demand) the amount of any such foreign
currency Receivables which have not been paid by the Obligor thereof prior
to such Settlement Date, and hold any such payment in trust for
Transferee;
(c) deliver all such foreign currency amounts to Transferor against
payment of the Required Foreign Currency Allocation which is payable by
Transferor pursuant to all forward contracts which were entered into or
deemed entered into pursuant to Section 1.02(e); and
(d) pay such Required Foreign Currency Allocation to Transferee in
Dollars in immediately available funds.
SECTION 2.05 Netting of Payments on Certain Settlement Dates. If
any Settlement Date is also a Transfer Date, then, provided that all
conditions precedent to any Transfer to be made on such date have been
fulfilled prior to 10:00 a.m. (San Francisco time) on such date, (a)
Transferee will calculate the total amounts payable by Transferor and
Servicing Agent in respect of such Settlement Date and by Transferee in
respect of such Transfer Date, (b) such payments will be netted against
each other, and (c) only the net amount will be paid by the appropriate
party on such date. However, if by such time on such date any condition
precedent to the Transfer and payment of the Purchase Price or Reduced
Purchase Price applicable thereto has not been fulfilled (including non-
receipt by Transferee of any properly completed and executed Assignment
Certificate or other document required hereby) then no such netting will
be permitted and Transferor and Servicing Agent will be required to pay
Transferee on such Settlement Date the full amount payable by Transferor
and Servicing Agent in respect of such Settlement Date. Failure to pay
such full amount within three Business Days after such Settlement Date
shall constitute a Termination Event under Section 8.01(a)(i)(A) of this
Agreement.
SECTION 2.06 Drawings on Letter of Credit. (a) If for any reason
Transferee has not been paid in cash in Dollars on any Settlement Date, by
Servicing Agent or Transferor, the entire Transferred Receivables Amount
applicable to such Settlement Date together with yield, if any, payable
pursuant to Section 3.03, then, on the fourth Business Day following such
Settlement Date and at any time thereafter, Transferee may (but shall not
be required to) draw on the Letter of Credit for the full amount due on
such Settlement Date which remains unpaid, together with interest thereon
at the rate specified in Section 2.07.
(b) If on the Termination Date any Carryforward Amount is
outstanding, the Transferee may draw on the Letter of Credit for the full
undrawn amount thereof or any lesser amount determined by Transferee in
its discretion. Transferee shall deposit the proceeds of any such drawing
in an account of and in the name of Transferee. Transferee will pay
interest on the amount in such account from time to time at the Federal
Funds Rate, which interest shall be payable in arrears on the last
Business Day of each calendar month and shall be deposited in such
account. Transferee may from time to time withdraw funds from such
account (including accrued interest deposited therein) to pay (A) any
Deferral Compensation Amount which has not been paid when due hereunder,
(B) any amounts due on any Settlement Date in respect of Transferred
Receivables which are from time to time transferred to reduce any
outstanding Carryforward Amount, (C) yield, if any, payable pursuant to
Section 3.03, and (D) any interest payable pursuant to Section 2.07. When
all Obligations have been paid in full in cash and all Carryforward
Amounts have been reduced to zero or cancelled, Transferee will transfer
the balance remaining in such account to Transferor.
(c) If any Termination Event or Unmatured Termination Event under
Section 8.01(f) shall occur with respect to Transferor at any time prior
to the expiration of the Letter of Credit, Transferee may draw on the
Letter of Credit for the full undrawn amount thereof or any lesser amount
determined by Transferee in its discretion. Transferee shall deposit the
proceeds of any such drawing in an account of and in the name of
Transferee. Transferee will pay interest on the amount in such account
from time to time at the Federal Funds Rate, which interest shall be
payable in arrears on the last Business Day of each calendar month and
shall be deposited in such account. Transferee may from time to time
withdraw funds from such account (including accrued interest deposited
therein) and apply such funds to reimburse Transferee for any payment
which previously was made to Transferee hereunder or under any Agreement
Document or under any forward contract which is entered into or deemed
entered into pursuant to Section 1.02(e), if such payment is rescinded or
must otherwise be returned by Transferee as a consequence of any
Bankruptcy Event relating to the Transferor. Transferee will transfer the
balance remaining in such account to Transferor upon receipt of a final,
non-appealable order of a court of competent jurisdiction that no such
payments are rescinded or must otherwise be returned by Transferee.
(d) Each drawing under the Letter of Credit shall specify whether
such drawing is made pursuant to Section 2.06(a), 2.06(b) or 2.06(c).
However, notwithstanding any such specification, Transferee may in its
discretion retain and use the proceeds of a drawing made pursuant to any
of said Sections for a purpose specified in any other such Section.
SECTION 2.07 Payments and Computations, Etc. All amounts to be
paid or deposited (A) to or for the account of Transferee by Transferor or
the Servicing Agent hereunder or (B) to or for the account of Transferor
by Transferee hereunder, shall in each case be paid or deposited in
accordance with the terms hereof no later than 11:30 a.m. (San Francisco
time) on the day when due in Dollars in immediately available funds (i) if
to Transferee, at Account No. 1233183980 at Bank of America National Trust
and Savings Association, Concord, California and (ii) if to Transferor, at
Account No. 4191706 at Harris Trust and Savings Bank, Chicago, Illinois.
Transferor or the Servicing Agent, as applicable, shall pay to Transferee
interest on all amounts not paid or deposited when due (without giving
effect to any grace period) until paid or deposited in full at 2% per
annum above the Reference Rate from time to time in effect, payable on
demand; provided, that such interest rate shall not at any time exceed the
maximum rate permitted by applicable law. Interest, Discount and all fees
hereunder shall be made on the basis of a year of 360 days for the actual
number of days elapsed.
ARTICLE III
FEES AND YIELD PROTECTION
SECTION 3.01 Fees. (a) Facility Fee. From the Initial Closing Date
until the Termination Date, Transferor shall pay to Transferee a facility
fee ("Facility Fee") for each day in such period equal to the excess of
(i) the Facility Limit over (ii) the Aggregate Net Investment on such day
times .25% divided by 360. Such Facility Fee shall be paid quarterly in
arrears, on the last Business Day of each calendar quarter and on the
Termination Date.
(b) Structuring Fee. Transferor shall pay to Transferee a
structuring fee of $150,000 payable prior to or on the Initial Closing
Date.
SECTION 3.02 Yield Protection. If (a) Regulation D of the Board of
Governors of the Federal Reserve System or (b) any Regulatory Change
occurring after the date hereof:
(i) shall subject any Affected Party to any tax, duty or other
charge with respect to its exercise of its rights or performance of
its obligations under any Agreement Document, or shall change the
basis of taxation of payments to any Affected Party of any amounts
payable to it under any Agreement Document (except for changes in the
rate of tax on the overall net income of such Affected Party imposed
by the jurisdiction in which such Affected Party's principal
executive office is located); or
(ii) shall impose, modify or deem applicable any reserve,
special deposit or similar requirement against assets of, or deposits
or obligations with or for the account of (or with or for the account
of any affiliate of), or credit extended by, any Affected Party; or
(iii) shall change the amount of capital maintained or
required or requested or directed to be maintained by any Affected
Party; or
(iv) shall impose any other condition affecting any Affected
Party in connection with any Agreement Document;
and the result of any of the foregoing is:
(x) to increase the cost to (or to impose a cost on) such
Affected Party's participating in the transactions contemplated in
any Agreement Document,
(y) to reduce the amount of any sum received or receivable by
such Affected Party under any Agreement Document, or
(z) in the sole determination of such Affected Party, to reduce
the rate of return on the capital of such Affected Party as a
consequence of its obligations arising in connection herewith to a
level below that which such Affected Party could otherwise have
achieved,
then upon written notice by the applicable Affected Party to Transferor,
Transferor shall pay directly to such Affected Party such additional
amount or amounts as will compensate it for such increased cost or such
reduction. Such written notice shall include calculations thereof in
reasonable detail and, in the absence of manifest error, be conclusive and
binding upon Transferor.
SECTION 3.03 Inability to Determine Eurodollar Rate; Failure to
Specify Settlement Date. (a) If Transferee shall have determined in good
faith, that: (i) Dollar deposits are not available to banks such as
Transferee in the London interbank eurodollar market, or (ii) by reason of
circumstances affecting the London interbank eurodollar market, adequate
means do not exist for ascertaining the applicable Eurodollar Rate, then,
Transferee shall promptly so notify Transferor, which determination shall
be conclusive and binding on Transferor, and, so long as such
circumstances shall continue, no Discount shall be determined or deducted
from the Purchase Price or Reduced Purchase Price of any Transferred
Assets, pursuant to Section 1.04, but instead the Transferor shall pay
yield to the Transferee as provided in clause (c) below.
(b) In addition, if Transferor shall fail for any reason to notify
Transferee prior to 10:00 a.m (San Francisco time) on any LIBOR Fixing
Date of the precise Transferred Receivables Amount and Settlement Date
which will apply to the Receivables to be transferred to Transferee on the
applicable Transfer Date, the Transferor will be obligated to pay yield on
the Transferred Receivables Amount, calculated as provided in clause (c).
(c) If any of the circumstances described in clause (a) or (b) above
are applicable on any Transfer Date, no Discount shall be deducted from
the Purchase Price or Reduced Purchase Price payable for the Transferred
Receivables on such Transfer Date, but instead the Transferor shall pay to
Transferee on the applicable Settlement Date yield on such Transferred
Receivables, calculated for each day during the period from such Transfer
Date to such Settlement Date at a rate per annum equal to the Reference
Rate in effect on such day, multiplied by the Transferred Receivables
Amount applicable to such Transfer Date.
SECTION 3.04 Funding Losses. (a) In the event Transferee shall
incur any loss or expense (including any loss or expense incurred by
reason of the liquidation or reemployment of deposits or other funds
obtained by Transferee in order to fund its acquisition of Transferred
Assets) as a result of:
(i) any termination of the Facility or any reduction of the
Facility Limit pursuant to Section 1.06 or the occurrence of an Early
Termination or the reduction of any Base Foreign Currency Amount
applicable to any Transfer Date pursuant to Section 1.06 or the
payment by Transferee of a Reduced Purchase Price pursuant to
Section 1.03(c), (in the case of each of the foregoing, to the extent
not included in the Early Termination Payments paid pursuant to
Section 1.08);
(ii) any retransfer of Transferred Receivables by Transferee to
Transferor made at the request of Transferor prior to the Termination
Date, other than pursuant to Section 2.02(b) following any applicable
Settlement Date; or
(iii) any Transfer not occurring on the applicable Transfer
Date specified in the related Supplement in the full amount required
hereby as a result of any act or omission of Transferor;
then, upon written notice by Transferee to Transferor, Transferor shall
pay directly to Transferee such amount as will reimburse Transferee for
such loss or expense. Such written notice shall include calculations
thereof in reasonable detail and shall, in the absence of manifest error,
be conclusive and binding on Transferor.
(b) Without limiting the foregoing, if for any reason Transferor
fails on any Transfer Date to transfer to Transferee Eligible Receivables
(or if permitted by Transferee ineligible Receivables) having an aggregate
Dollar Equivalent Balance which is at least equal to the Required Dollar
Receivables Amount applicable to such Transfer Date (or, but only if
Transferor has timely delivered to Transferee a Deficiency Certificate in
accordance with Section 1.02(f), such lesser amount permitted by
Section 1.02(f)), after giving effect to all reductions in any Base
Foreign Currency Amounts applicable to such Transfer Date which are made
by Transferor in accordance with Section 1.06, then on such Transfer Date,
Transferor will pay to Transferee as liquidated damages for Transferee's
loss of profit on such sale, an amount equal to the excess, if any, of (i)
the Required Dollar Receivables Amount (or lesser Dollar Equivalent Amount
permitted by Section 1.02(f) applicable to such Transfer Date), over (ii)
the Purchase Price (or, if a lesser Dollar Equivalent Amount of
Receivables is permitted to be transferred by Section 1.02(f), the Reduced
Purchase Price) applicable to such Transfer Date. Such amounts of damages
are payable in addition to, but without duplication of, any other amounts
payable by Transferor hereunder. If the amount described in clause (ii)
exceeds the amount described in clause (i), Transferee will pay such
excess to Transferor, subject to the last paragraph of Section 1.08(b).
SECTION 3.05 Taxes, Etc. Transferor hereby covenants that all
payments by Transferor to Transferee in respect of any Obligation, and all
payments by any Obligor in respect of any Transferred Assets, shall be
made without any set-off or counterclaim, and free and clear of and
without deduction or withholding for or on account of, any present or
future Taxes now or hereafter imposed on Transferor, Transferee or such
Obligor (as applicable) with respect to such payments by any governmental
or other authority, except to the extent that such deduction or
withholding is compelled by applicable laws, rules or regulations. As
used herein, the term "Taxes" shall include all excise and other taxes of
whatever nature imposed on Transferor, Transferee or such Obligor (as
applicable) with respect to such payments (other than taxes generally
assessed on the overall net income of Transferee imposed by the
jurisdiction in which Transferee's principal executive office is located),
as well as all levies, imposts, duties, charges or fees of whatever
nature.
If Transferor or any Obligor is compelled by applicable laws, rules
or regulations to make any such deduction or withholding, Transferor will:
(a) pay (or cause such Obligor to pay) to the relevant authorities
the full amount required to be so withheld or deducted;
(b) pay to Transferee such additional amounts as may be necessary in
order that the net amount received by Transferee, after such deduction or
withholding (including any required deduction or withholding on such
additional amounts) shall equal the amount Transferee would have received
had no such deduction or withholding been made; and
(c) promptly forward to Transferee an official receipt or other
documentation satisfactory to Transferee evidencing such payment to such
authorities.
Moreover, if any Taxes are directly asserted against Transferee with
respect to any payment made in respect of any Obligation or Transferred
Asset, Transferee may pay such Taxes, and Transferor agrees promptly to
pay such additional amount (including, without limitation, any penalties,
interest or expenses) as may be necessary in order that the net amount
received by Transferee after the payment of such taxes (including any
Taxes on such additional amount) shall equal the amount Transferee would
have received had no such Taxes been asserted.
SECTION 3.06 Set-off. Transferee is hereby authorized upon the
occurrence of any Termination Event, to appropriate and apply to the
payment of the Obligations owing to it (whether or not then due), any and
all balances, credits, deposits, accounts, or moneys of Transferor then or
thereafter maintained with Transferee.
ARTICLE IV
CONDITIONS TO EFFECTIVENESS AND TRANSFERS
SECTION 4.01 Conditions Precedent to Effectiveness. The
effectiveness of this Agreement is subject to the condition precedent that
Transferee shall have received the following, each in form and substance
satisfactory to Transferee:
(a) Original executed copies of this Agreement;
(b) A certificate of the Secretary or an Assistant Secretary of
Transferor, certifying as to (i) resolutions of Transferor's Board of
Directors approving the Agreement Documents and the transactions
contemplated therein, and authorizing Transferor to act as initial
Servicing Agent, (ii) the names and true signatures of the officers
authorized on its behalf to sign the Agreement Documents to be delivered
by it hereunder (on which certificate Transferee may conclusively rely
until such time as Transferee shall receive from Transferor a revised
certificate), (iii) a true, correct and complete copy of the Certificate
of Incorporation of Transferor duly filed with the Secretary of State of
its state of incorporation as in effect on the date of delivery of such
certificate, and (iv) a true, correct and complete copy of the Bylaws of
Transferor as in effect on the date of delivery of such certificate;
(c) A good standing certificate for Transferor issued by the
Secretary of State of its state of incorporation;
(d) An opinion of counsel for Transferor, substantially in the form
of Exhibit 4.01(d);
(e) The fees payable to Transferee pursuant to Section 3.01(b),
together with all costs and expenses due and payable pursuant to
Section 11.05, if then invoiced; and
(f) Such other approvals, opinions or documents as Transferee may
reasonably request.
SECTION 4.02 Conditions Precedent to each Supplement. The
obligation of Transferee to enter into any Supplement shall be subject to
the further conditions precedent that on the date of such Supplement the
following statements shall be true (and Transferor by entering into any
Supplement, as the case may be, shall be deemed to have certified that):
(a) The representations and warranties contained in Section 5.01 are
correct on and as of such day as though made on and as of such day,
(b) No Termination Event or Unmatured Termination Event exists or
would result from entering into such Supplement,
(c) The conditions set forth in Section 1.02(b)(iii) shall be fully
complied with after giving effect to such Supplement, and
(d) The Termination Date shall not have occurred.
SECTION 4.03 Conditions Precedent to All Transfers. The obligation
of Transferee to accept any Transfer and pay the Purchase Price or Reduced
Purchase Price therefor on any Transfer Date shall be subject to the
further conditions precedent that:
(a) Transferee shall have received the Assignment Certificate
specified in Section 1.04(d), duly completed and executed on behalf of
Transferor and satisfactory in form and substance to Transferee, from
Transferor;
(b) Transferee shall have received a Letter of Credit, issued by
BofA for the benefit of Transferee, and otherwise being in the form set
forth in Exhibit 4.03(b), with insertions in form and substance
satisfactory to Transferee (as it may be amended, modified, extended or
replaced from time to time with the consent of Transferee, the "Letter of
Credit"), which Letter of Credit (A) shall be in full force and effect,
(B) shall have an amount available for drawing thereunder of not less than
the Required L/C Amount applicable to such Transfer Date, and (C) shall
have an expiry date which is not earlier than the 120th day following the
Settlement Date applicable to such Transfer Date;
(c) In the case of the initial Transfer, Transferee shall have
received executed financing statements (Form UCC-1), naming Transferor as
the assignor of Receivables and Related Assets and Transferee as assignee
thereof, or other similar instruments or documents, as may be necessary or
desirable to perfect Transferee's interests in all Transferred Assets in
form suitable for filing in the jurisdictions set forth in Exhibit
4.03(c);
(d) In the case of the initial Transfer, Transferee shall have
received search reports listing (i) all effective financing statements
that name Transferor as debtor or assignor and that are filed in the
jurisdictions in Exhibit 4.03(c), together with (A) copies of any
financing statements which cover any Transferred Assets, and (B) executed
UCC termination statements, in form suitable for filing, releasing any
Transferred Assets from such financing statements, and (ii) tax and
judgment lien searches showing no such liens filed against Transferor in
such jurisdictions;
(e) Transferee shall have received a certificate from the chief
financial officer, treasurer or assistant treasurer of Transferor in the
form of Exhibit 4.03(e) attaching thereto true copies of all certificates
delivered to the agent under the Bank Credit Agreement in connection with
such Transfer; and
(f) On the date of such Transfer the following statements shall be
true (and Transferor by accepting each payment of Purchase Price or the
Reduced Purchase Price on each Transfer Date, shall be deemed to have
certified that):
(i) The representations and warranties contained in
Section 5.01 are correct on and as of such day as though made on and
as of such day,
(ii) No Termination Event or Unmatured Termination Event
(except, if permitted by Section 8.02(e), a Change of Control
Termination Event) exists or would result from such Transfer,
(iii) After giving effect to such Transfer the Aggregate Net
Investment at such time will not exceed the Facility Limit, and
(iv) The Termination Date shall not have occurred.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01 Representations and Warranties of Transferor.
Transferor represents and warrants as follows:
(a) Organization and Good Standing. Transferor is validly existing
as a corporation in good standing under the laws of its state of
incorporation and possesses all necessary licenses and approvals, and is
duly qualified to do business in each jurisdiction in which the nature of
its business requires such licenses and approvals to own its properties
and to conduct its business or in which the failure so to qualify would
have a Material Adverse Effect.
(b) Power, Authorization and Non-Contravention. The execution,
delivery and performance by Transferor of the Agreement Documents to which
it is a party (a) are within Transferor's corporate powers, (b) have been
duly authorized by all necessary corporate action, (c) do not contravene
(i) Transferor's charter or by-laws, (ii) any contractual restriction
binding on or affecting Transferor or any of its property, (except where
such contravention would not give rise to any Material Adverse Effect or
render any Agreement Document or the Letter of Credit unenforceable
against the Transferor or its creditors), or (iii) any law, rule,
regulation, order, judgment, injunction, decree, determination or award
binding on or affecting Transferor or its property, (d) do not result in
the imposition of any Adverse Claim on any Transferred Assets or any of
Transferor's other material properties and (e) do not require any
authorization, approval or other action by, or notice to or filing with,
any Governmental Authority or regulatory body or any other Person, except
for the filing of the financing statements referred to in Article IV.
Without limiting the generality of the foregoing, (A) Transferor had
at all relevant times, and now has, all necessary power, authority and
legal right to own Receivables, to transfer, convey and assign Receivables
and Related Assets, and to incur obligations hereunder, (B) the use of
funds obtained by Transferor under this Agreement will not violate any of
Regulations G, T, U and X of the Federal Reserve Board, (C) Transferor is
not an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940 and (D)
no transaction contemplated by any Agreement Document requires compliance
with, or will be subject to avoidance under, any bulk sales act or similar
law.
(c) Valid Transfer; Binding Obligations. Each Transfer made
pursuant to this Agreement shall constitute a valid conveyance, transfer,
and assignment of the relevant Receivables and Related Assets with respect
thereto to Transferee, or (as provided in Section 6.03) the assignment of
a security interest therein (which, to the extent that such property
constitutes Receivables or proceeds thereof and the laws of the United
States or any political subdivision thereof may be applicable, is a
perfected first priority security interest), enforceable against creditors
of, and purchasers from, Transferor; and this Agreement constitutes, and
each other Agreement Document to which Transferor is a party when duly
executed and delivered will constitute, a legal, valid and binding
obligation of Transferor enforceable against Transferor in accordance with
its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and
general principles of equity.
(d) Litigation. There is no action, suit or proceeding pending or,
to the best of Transferor's knowledge, threatened in any court or a
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (i) except as set forth on Exhibit
5.01(d) that relates to Transferor or any of its Subsidiaries or any of
the properties of Transferor or any of its Subsidiaries and that, if
adversely determined, could create a Material Adverse Effect, or (ii) that
relates to any aspect of the transactions contemplated by this Agreement.
(e) No Material Adverse Effect. Since September 29, 1995, no event
or occurrence that individually or in the aggregate is reasonably likely
to have a Material Adverse Effect has occurred, other than as disclosed on
Transferor's quarterly report on Form 10-Q dated as of September 29, 1995
and press releases disseminated by Transferor and made available to
Transferee prior to the date hereof.
(f) Quality of Title. No Transferred Asset is subject to any
Adverse Claim except for a security interest in favor of BofA as Agent
under the Bank Credit Agreement. Before each Transfer, each Transferred
Asset which is or was then to be transferred to Transferee hereunder shall
be and has been released from such security interest, so that at the time
of such Transfer such Transferred Assets shall be and were owned by
Transferor free and clear of any Adverse Claim. Whenever Transferee
acquires or acquired Transferred Assets hereunder, it shall have and has
acquired and shall continue to have maintained a valid ownership or
security interest (which, to the extent that such property constitutes
Receivables or proceeds thereof and the laws of the United States or any
political subdivision thereof may be applicable, is a perfected first
priority interest) in such Transferred Assets, free and clear of any
Adverse Claim. No financing statement or other similar instrument
covering any of such Transferred Assets is on file in any recording office
listed in Exhibit 4.03(c) hereto except (A) those filed in favor of
Transferor in accordance with the Contracts (B) any filed in favor of
Transferee pursuant to this Agreement and (C) any filed in favor of BofA,
as agent under the Bank Credit Agreement, which financing statements in
favor of BofA, as agent, will, prior to any Transfer, provide for the
release of any Transferred Assets. No Transfer constitutes a fraudulent
transfer or fraudulent conveyance under the United States Bankruptcy Code
or applicable state bankruptcy or insolvency laws or is otherwise void or
voidable or subject to subordination under similar laws or principles or
for any other reason.
(g) Accuracy of Information. All written information supplied by or
on behalf of Transferor to Transferee for purposes of or in connection
with any Agreement Document or any transaction contemplated herein or
therein is true, complete and accurate in all material respects and such
information is not incomplete by omitting to state a material fact or any
fact necessary to make the statements contained therein not misleading in
any material respect on the date as of which such information is dated.
(h) UCC Information. The chief executive office of Transferor is
located at its address referred to in Section 11.02. Transferor uses no
name other than its actual corporate name and the trade names set forth in
Exhibit 5.01(h). Since January 1, 1989, Transferor has not been known by
any legal name other than its corporate name as of the date hereof, nor
has Transferor been the subject of any merger or other corporate
reorganization that resulted in a change in its name, identity or
corporate structure. The jurisdictions listed on Exhibit 4.03(c) are the
only jurisdictions in the United States or any political subdivision
thereof where filing of a UCC-1 financing statement or any other document
is necessary to perfect the interest of the Transferee in the Transferred
Receivables and other Transferred Assets.
(i) Eligible Receivables; Identification of Transferred Receivables.
Each Receivable transferred on a Transfer Date shall be and was an
Eligible Receivable on such date unless otherwise specifically agreed by
Transferee. Transferor has no knowledge of any fact that should have led
it to expect at the time of the applicable Transfer Date that any
Transferred Receivable then being transferred to Transferee would not be
paid in full when due.
(j) Taxes. Transferor has filed or caused to be filed all tax
returns and reports required by applicable laws, rules and regulations to
have been filed by it and has paid all taxes, assessments and governmental
charges thereby shown to be owing, except any such taxes, assessments or
charges which are being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP shall
have been set aside on its books.
(k) Compliance with Applicable Laws. Transferor is in compliance
with the requirements of all applicable laws, rules, regulations, and
orders of all Governmental Authorities (federal, state, local or foreign,
and including Environmental Laws, tax laws and laws with respect to ERISA
and laws, rules and regulations applicable to the Contracts), a violation
of any of which, individually or in the aggregate for all such violations,
would be reasonably likely to have a Material Adverse Effect.
(l) ERISA. Transferor and its ERISA Affiliates have not incurred
and are not reasonably expected to incur any material liability in
connection with any Plan, other than ordinary liabilities for benefits;
neither Transferor nor any ERISA Affiliate has incurred or is reasonably
expected to incur any material Withdrawal Liability to any Plan; and no
Plan of Transferor or any ERISA Affiliate is reasonably expected to be in
reorganization or to be terminated, within the meaning of Title IV of
ERISA.
ARTICLE VI
GENERAL COVENANTS OF TRANSFEROR
SECTION 6.01 Affirmative Covenants of Transferor. Until the first
day following the Termination Date on which all Carryforward Amounts have
been reduced to zero or cancelled by Transferee, and all Transferred
Receivables and all Obligations are paid in full in cash, Transferor will:
(a) Compliance with Laws, Etc. Comply, and cause each of its
Subsidiaries to comply, in all material respects with all applicable laws
(including Environmental Laws), rules, regulations, permits, orders,
consent decrees and judgments binding on Transferor and its Subsidiaries,
except where failure to so comply could not reasonably be expected to have
a Material Adverse Effect.
(b) Preservation of Corporate Existence and Name. (i) Preserve and
maintain, and cause its Material Subsidiaries to preserve and maintain,
its corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation; (ii) qualify and remain qualified in
good standing as a foreign corporation in each jurisdiction except where
the failure to maintain a franchise or privilege or to remain qualified
would not have a Material Adverse Effect; and (iii) not change its
corporate name or the name under or by which it does business except upon
30 days' prior written notice to Transferee and the Servicing Agent and
after taking all action required by Section 6.03(b).
(c) Audits. At the expense of Transferor, upon reasonable prior
notice at any time and from time to time during regular business hours,
permit, and cause its Subsidiaries to permit, Transferee or its agents or
representatives (i) to examine and make copies of and abstracts from the
records of, and (ii) to visit the offices and properties of, Transferor,
or to the extent that Transferor is serving in the capacity of Servicing
Agent, the Servicing Agent, and to discuss matters relating to Transferred
Assets or Transferor's or the Servicing Agent's performance hereunder with
any of the officers or employees of Transferor or the Servicing Agent,
provided, that unless a Termination Event or Unmatured Termination Event
shall have occurred and be continuing, only one such audit in any calendar
year shall be at the expense of Transferor.
(d) Keeping of Records and Books of Account. Maintain (or cause the
Servicing Agent to maintain) at all times accurate and complete books,
records and accounts relating to the Receivables, Related Assets and
Contracts and all Collections thereon in which timely entries shall be
made. Transferor will, or will cause the Servicing Agent to, maintain
operating procedures (including an ability to recreate records) evidencing
the Transferred Assets and documents, books, records and other information
reasonably necessary or advisable for the collection of all Transferred
Assets.
(e) Performance and Compliance with Receivables and Contracts.
Timely and fully perform and comply and cause its Subsidiaries to timely
and fully perform and comply, with all of its obligations under the
Contracts and all purchase orders and other agreements related to the
Transferred Assets in all material respects.
(f) Location of Records. Keep its principal place of business and
chief executive office at the address(es) referred to in Section 5.01(h)
or, upon 30 days' prior written notice to Transferee, at other locations
in jurisdictions in the United States where all action required by
Section 6.03(b) shall have been taken and completed.
(g) Taxes. Pay and discharge, and cause its Subsidiaries to pay and
discharge, all taxes and governmental charges imposed upon it or its
properties, prior to the date on which penalties attach thereto, if
failure to pay such taxes or governmental charges could reasonably be
expected to have a Material Adverse Effect; except any such tax or charge
which is being contested in good faith and by appropriate proceedings if
such contest shall operate to stay the Material Adverse Effect of any such
nonpayment.
(h) Availability of Eligible Receivables. Use commercially
reasonable efforts to manage its Receivables so that it will have
available for transfer to Transferee on each Transfer Date Eligible
Receivables that have an aggregate Dollar Equivalent Balance of not less
than the Required Dollar Receivables Amount specified for such Transfer
Date and that are free of any Adverse Claims.
(i) Letter of Credit. At all times from any Transfer Date to the
day which falls 120 days after the applicable Settlement Date cause the
Letter of Credit to be in full force and effect in favor of the Transferee
in a face amount of not less than the Required L/C Amount applicable to
such Transfer Date.
(j) Reporting Requirements of Transferor. Furnish to Transferee:
(i) Quarterly Financials. As soon as available and in any
event within 55 days after the end of each fiscal quarter (except the
fourth fiscal quarter of any fiscal year), consolidated balance
sheets of Transferor and its Subsidiaries as of the end of such
fiscal quarter and consolidated statements of operations and cash
flows of Transferor and its Subsidiaries for such fiscal quarter and
for the period commencing at the end of the previous fiscal year and
ending with the end of such fiscal quarter, in each case in
reasonable detail and duly certified (subject to year-end audit
adjustments and without footnotes) by the chief financial officer,
treasurer or assistant treasurer of Transferor as having been
prepared in accordance with GAAP (applied on a consistent basis).
(ii) Annual Financials. As soon as available and in any event
within 120 days after the end of each fiscal year, a copy of
Transferor's annual report on Form 10-K (or any successor form in
substantially the same format) for such fiscal year of Transferor and
its Subsidiaries, including therein a consolidated balance sheet of
Transferor and its Subsidiaries as of the end of such fiscal year and
consolidated statements of operations and cash flows of Transferor
and its Subsidiaries for such fiscal year, certified in a manner
acceptable to the Transferee by independent public accountants of
nationally recognized standing acceptable to Transferee. The
Transferor acknowledges that (without limitation) Transferee is
relying upon the financial statements delivered from time to time
pursuant to this Agreement, including the annual audited financials
referenced in this Section;
(iii) Termination Events. Within five Business Days after
Transferor discovers the occurrence of any Termination Event or
Unmatured Termination Event continuing on the date of such statement,
a statement of a Responsible Officer setting forth details of such
Termination Event or Unmatured Termination Event and the action that
Transferor proposes to take with respect thereto;
(iv) ERISA Event. Promptly and in any event within ten days
after a Responsible Officer of Transferor or any ERISA Affiliate
knows or has reason to know that any material ERISA Event has
occurred, a statement of a Responsible Officer of Transferor
describing such ERISA Event and the action, if any, that Transferor
or such ERISA Affiliate proposes to take with respect thereto;
(v) Proceedings. Promptly after a Responsible Officer of
Transferor becomes aware of the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, affecting Transferor or any of its Subsidiaries
of the type described in Section 5.01(d);
(vi) SEC Reports. Promptly after the sending or filing thereof,
copies of all reports on Form 10-K, 10-Q or 8-K that Transferor files
with the Securities and Exchange Commission or any governmental
authority that may be substituted therefor;
(vii) Adverse Claim. As soon as possible after the
occurrence thereof, written notice that describes in reasonable
detail the creation or existence of any Adverse Claim (other than any
Adverse Claim arising solely as a result of any action taken by
Transferee hereunder) on or with respect to Transferred Assets, other
than the security interest in favor of BofA as Agent under the Bank
Credit Agreement; and
(viii) Other Information. Such other information respecting
the business or properties or the condition, financial or otherwise,
or operations of Transferor or any of its Subsidiaries as Transferee
may from time to time reasonably request.
Transferee agrees that delivery to BofA under the Bank Credit Agreement of
any of the documents required by this clause (j) (other than clauses
(j)(iii) and (j)(vii)) shall satisfy Transferor's obligation to deliver
such documents hereunder.
Notwithstanding the foregoing, upon the occurrence and during the
continuance of a Termination Event or a Unmatured Termination Event,
Transferor will, and will cause its Subsidiaries to, provide to the
Transferee additional information and any and all of the above information
more frequently to the extent requested by the Transferee.
SECTION 6.02 Negative Covenants of Transferor. Until the first day
following the Termination Date on which all Carryforward Amounts have been
reduced to zero or cancelled and all Transferred Receivables and all
Obligations are paid in full and in cash, Transferor will not:
(a) Sales, Adverse Claims, Etc. Sell, assign (by operation of law
or otherwise) or otherwise dispose of (with or without recourse) or suffer
to exist any Adverse Claim upon, any Transferred Assets.
(b) Extension or Amendment of Receivables or Contracts. Except to
the extent permitted in Section 7.02, extend, amend or otherwise modify or
waive the terms of any Transferred Receivable, or of any Contract related
thereto, which extension, amendment, modification or waiver would,
individually or in the aggregate for all such extensions, amendments,
modifications and waivers, be reasonably likely to have a Material Adverse
Effect, it being understood that no extension, amendment, modification or
waiver shall relieve the Transferor of its obligations under Article X.
SECTION 6.03 Grant of Security Interest. (a) To secure the prompt
payment and performance of all Obligations, whether now or hereafter
existing, due or to become due, direct or indirect, or absolute or
contingent, Transferor grants to Transferee and the other Indemnified
Parties a security interest (which, to the extent that such property
constitutes Receivables and proceeds thereof and the laws of the United
States or any political subdivision thereof may be applicable, is a first
priority security interest) in all of Transferor's right, title and
interest now or hereafter existing in, to and under all Transferred
Receivables and Related Assets. This Agreement shall constitute a
security agreement under the UCC.
(b) Further Assurances. Transferor agrees that from time to time,
at Transferor's expense, it will promptly execute and deliver all further
instruments and documents, and take all further action that Transferee may
reasonably request, in order to protect, perfect or more fully evidence
the security interest granted to Transferee pursuant to Section 6.03(a) or
to enable Transferee to enforce such security interest or to exercise any
rights or remedies under any Agreement Document. Without limiting the
generality of the foregoing, Transferor will execute and file such
financing or continuation statements, or amendments thereto or assignments
thereof, and such other instruments or notices, as Transferee may
determine is necessary or appropriate.
Transferor hereby authorizes Transferee to file one or more financing or
continuation statements, and amendments thereto and assignments thereof,
relative to all or any of the Transferred Assets now existing or hereafter
arising in the name of Transferor. If Transferor or the Servicing Agent
fails to perform any of its agreements or obligations under any Agreement
Document, Transferee may (but shall not be required to) itself perform, or
cause performance of, such agreement or obligation, and the expenses of
Transferee incurred in connection therewith shall be payable by Transferor
as provided in Section 11.05.
(c) Remedies. Upon the occurrence of a Termination Event,
Transferee shall have, with respect to the security interest granted
pursuant to subsection (a) above, and in addition to all other rights and
remedies available to Transferee under any Agreement Documents or
applicable law, all the rights and remedies of a secured party under the
UCC.
<PAGE>
ARTICLE VII
ADMINISTRATION AND COLLECTION
SECTION 7.01 Designation of the Servicing Agent. (a) The
servicing, administering and collection of the Transferred Assets shall be
conducted by the Person (the "Servicing Agent") so designated from time to
time in accordance with this Section 7.01. Until Transferee gives notice
(a "Successor Notice") to Transferor of the designation of a new Servicing
Agent, Transferee hereby designates Transferor as, and Transferor hereby
agrees to perform the duties and obligations of, the Servicing Agent
pursuant to the terms hereof and in accordance with all applicable laws.
Transferee, in its discretion, may provide Transferor with a Successor
Notice at any time after the occurrence and during the continuance of a
Termination Event described in Section 8.01(a)(i), Section 8.01(f) or
Section 8.01(m).
(b) Upon Transferor's receipt of a Successor Notice, Transferor will
terminate its activities as the Servicing Agent hereunder in a manner
which Transferee indicates will facilitate the transition of the
performance of such activities to the new Servicing Agent. Transferee (or
its designee) shall assume each and all of Transferor's obligations to
service and administer the Transferred Assets, on the terms and subject to
the conditions set forth herein, and Transferor shall use its best efforts
to assist Transferee (or its designee) in assuming such obligations.
(c) The Servicing Agent may, with the prior consent of Transferee,
subcontract with any third party to service, administer or collect the
Transferred Assets, provided that the Servicing Agent shall remain liable
for the performance of the duties and obligations of the Servicing Agent
pursuant to the terms hereof. Transferee hereby consents to the
Transferor, as the Servicing Agent, subcontracting servicing,
administrative and collection responsibilities to any of its Subsidiaries.
SECTION 7.02 Duties of the Servicing Agent. (a) Transferee hereby
appoints as its agent the Servicing Agent, to enforce Transferee's rights
and interests in, to and under the Transferred Assets and the related
Contracts on the terms and conditions hereof. The Servicing Agent shall
take or cause to be taken all such actions as may be necessary or
advisable to collect each Transferred Asset in accordance with applicable
laws, rules and regulations with the same degree of care and diligence as
the Servicing Agent uses to collect Receivables that it owns; provided
that without the express written consent of Transferee, the Servicing
Agent shall not bring suit or commence other enforcement actions or
proceedings in the name or on behalf of Transferee to collect any
Transferred Assets. The Servicing Agent shall set aside for the account
of Transferee Collections of Transferred Assets in accordance with
Section 2.03. The Servicing Agent may adjust the Unpaid Balance of any
Transferred Receivable to reflect the reductions or cancellations
described in the first sentence of Section 2.01(a). So long as Transferor
is Servicing Agent, it shall write off Transferred Receivables from time
to time in accordance with the Transferor's historical credit and
collection policies and practices as in effect on the date hereof and as
from time to time amended.
(b) Following delivery of a Successor Notice, Transferor shall
deliver to the Servicing Agent, and the Servicing Agent shall hold in
trust for Transferor and Transferee in accordance with their respective
interests, the Records, provided, that if Transferor shall not be the
Servicing Agent, Transferor shall only be required, at Transferor's
expense, to provide the Servicing Agent with copies thereof and access
thereto to the extent necessary to enable the Servicing Agent to collect
the Transferred Receivables. The Servicing Agent shall promptly after
demand, at Transferor's expense, deliver to Transferor any Records that do
not relate to Transferred Assets.
(c) The Servicing Agent's authorization under this Agreement shall
terminate on the first day after the Termination Date on which any
Carryforward Amount has been reduced to zero or cancelled, and all
Transferred Receivables and all Obligations shall have been finally and
fully paid and performed.
(d) Transferor acknowledges that Transferee has relied on
Transferor's agreement to act as the Servicing Agent hereunder in its
decisions to execute and deliver the Agreement Documents. In recognition
of the foregoing, Transferor agrees not to resign as the Servicing Agent
with respect to Transferred Receivables, unless Transferor has received an
opinion of counsel, in form and substance satisfactory to Transferee, to
the effect that Transferor is not permitted by applicable law to serve in
such capacity.
SECTION 7.03 Rights of Transferee. (a) At any time when any
Termination Event described in Section 8.01(a)(i), Section 8.01(f) or
Section 8.01(m) exists:
(i) Transferee may direct the Obligors of Transferred
Receivables, or any of them, to pay all amounts payable under any
Transferred Assets directly to Transferee or its designee.
(ii) Transferee may, and Transferor shall, at Transferee's
request and at Transferor's expense, give notice of Transferee's
interest in the Transferred Assets to each said Obligor and direct
that payments be made directly to Transferee or its designee, which
notice shall be acceptable in form and substance to Transferee.
(iii) Transferor will, at Transferee's request and at
Transferor's expense, cause each Obligor in respect of Transferred
Receivables to make payment thereof directly to a blocked account of
Transferor at Transferee.
(iv) Transferor shall, at Transferee's request, (A) assemble and
make available to Transferee at a place selected by Transferee,
copies of all of the Records which evidence Transferred Assets, or
which are otherwise necessary or desirable to collect Transferred
Assets, and (B) segregate all cash, checks and other instruments
received by it from time to time constituting Collections or other
proceeds from any Transferred Asset in a manner acceptable to
Transferee and promptly remit all such cash, checks and instruments,
duly endorsed or with duly executed instruments of transfer, to
Transferee or its designee.
(v) Transferor hereby authorizes Transferee or its designee to
take any action in the name and on behalf of Transferor (except to
the extent expressly provided otherwise in Section 7.03(a)) which is
necessary or desirable, in the reasonable determination of
Transferee, to collect all amounts due under any and all Transferred
Assets.
(b) Transferor hereby grants to Transferee an irrevocable power of
attorney, with full power of substitution, coupled with an interest, from
time to time after the occurrence and during the continuance of a
Termination Event described in Section 8.01(a)(i), 8.01(f) or 8.01(m), to
take any action and to execute any instrument that Transferee, in its
reasonable determination, may deem necessary to accomplish the purposes of
the Agreement Documents, including (i) to ask, demand, collect, sue for,
recover, compromise, receive and give acquittance and receipts for moneys
due and to become due under or in respect of any Transferred Asset; (ii)
to receive, endorse, negotiate, transfer, deposit, collect and otherwise
deal with any such drafts or other instruments, documents and chattel
paper with respect to Transferred Assets; (iii) to file any claims or take
any action or institute any proceedings which Transferee, in its
reasonable determination, may deem necessary for the collection of or
enforcement of rights with respect to any Transferred Assets; and (iv) to
perform the affirmative obligations of Transferor under any Agreement
Document. If and to the extent Transferee shall collect or receive any
amounts hereunder in excess of the Obligations, Transferee shall, at the
request of Transferor showing calculation of such excess in reasonable
detail, promptly remit such excess to Transferor.
SECTION 7.04 Responsibilities of Transferor. Anything herein to
the contrary notwithstanding:
(a) Transferor shall perform and comply with all of its obligations
under the Contracts related to the Transferred Assets and under the
related purchase orders and other agreements to the same extent as if
Transferred Assets with respect thereto had not been transferred hereunder
to Transferee, and the exercise by Transferee of its rights hereunder or
in connection herewith shall not relieve Transferor from such obligations.
(b) Transferee shall not have any obligation (other than its
obligations to Transferor which are expressly set forth in this Agreement)
or liability with respect to any Transferred Receivables, any Contracts
related thereto or any other related purchase orders or other agreements,
or any other Transferred Assets, nor shall it be obligated to perform any
of the obligations of Transferor or any of its Subsidiaries thereunder.
(c) Transferor hereby grants to the Servicing Agent (if the
Servicing Agent is not Transferor) an irrevocable power of attorney, with
full power of substitution, coupled with an interest, to take in the name
of Transferor all steps necessary or advisable to endorse, negotiate or
otherwise realize on any writing or other right of any kind held or
transmitted by Transferor or transmitted or received by Transferee
(whether or not from Transferor) in connection with any Transferred Asset;
provided that the Servicing Agent shall exercise such power of attorney in
a manner which will not conflict with the power of attorney that
Transferor has granted to Transferee pursuant to Section 7.03(b).
(d) Notwithstanding anything contained in Section 2.01 to the
contrary, if at any time Transferor shall not be the Servicing Agent,
Transferor shall deliver all Collections received or deemed received by it
in respect of the Transferred Assets to Transferee prior to the applicable
Settlement Date relating to such Transferred Assets, and Transferee shall
deal with such Collections as if such Collections had actually been
received from the related Obligor on the applicable dates. So long as
Transferor shall hold any Collections or deemed Collections required to be
paid to Transferee hereunder, it shall hold such Collections in trust and,
if a Termination Event under Section 8.01(f) or (m) shall be continuing,
separate and apart from its own funds, and shall clearly mark its records
to reflect such trust.
(e) Transferor hereby irrevocably agrees that if at any time it
shall cease to be Servicing Agent hereunder, it shall act (if the then
current Servicing Agent so requests) as the data processing agent of the
Servicing Agent and, in such capacity, Transferor shall conduct (and shall
cause each of its Affiliates whose participation is necessary to enable
Transferor to conduct) the data processing functions relating to the
servicing, collection and administration of the Transferred Assets in
substantially the same way that Transferor (or its subcontractors)
conducted such data processing functions while Transferor acted as the
Servicing Agent. Without in any way limiting the effect of the first
sentence of this Section 7.04(e), upon the request of Transferee,
Transferor will license (to the extent it may lawfully do so) to
Transferee or the Successor Servicing Agent all computer software used by
Transferor and necessary or desirable to service the Transferred Assets
effectively in accordance with the terms of this Agreement, provided that
such license shall not take effect unless a Successor Notice has been
delivered to Transferor. Once a Successor Notice has been delivered to
Transferor, Transferor shall at its own expense use its best efforts to
obtain for Transferee and any Successor Servicing Agent sublicenses of all
third-party computer software used by Transferor and necessary or
desirable to service the Transferred Assets effectively in accordance with
the terms of this Agreement.
(f) If at any time a Person is appointed to replace Transferor as
the Servicing Agent pursuant to Section 7.01 (herein such Person being
called a "Successor Servicing Agent"), such Successor Servicing Agent
shall receive a reasonable and customary fee as compensation for the
services to be performed by it hereunder as the Servicing Agent. The
servicing fee shall be paid by Transferor to the Successor Servicing Agent
monthly in arrears.
ARTICLE VIII
TERMINATION EVENTS
SECTION 8.01 Termination Events. Each of the following events
shall be a "Termination Event" hereunder:
(a) (i) Any amount payable by Transferor or the Servicing Agent
under any Agreement Document is not paid when due or any deposit for the
benefit of Transferee is not made when required hereunder, which failure
continues for (A) three Business Days, in the case of any payment or
deposit which is required to be made on any Settlement Date, (B) five
Business Days, in the case of any payment or deposit which is required to
be made on any Transfer Date, or (C) ten Business Days, in the case of any
other payment or deposit hereunder, or (ii) the Servicing Agent shall fail
to perform or observe any term, covenant or agreement hereunder (other
than as referred to in clause (i) next above) and such failure shall
remain unremedied for ten Business Days;
(b) Any representation or warranty made or deemed to be made by
Transferor under or in connection with any Agreement Document, or any
other information or report delivered pursuant hereto or thereto shall
prove to have been incorrect in any material respect when made, and, in
the case of any incorrectness of any warranty with respect to any
Transferred Asset which was made or deemed made in Section 5.01(i),
Transferor shall not have (A) substituted new Transferred Assets for the
Transferred Assets as to which such warranty is incorrect, as provided in
Section 2.01(b), within the time required by such Section, and (B) made
all payments required by such Section;
(c) Transferor (A) shall fail on any Transfer Date to either (i)
transfer to Transferee Eligible Receivables having an aggregate Dollar
Equivalent Balance of not less than the Required Dollar Receivables Amount
applicable to such Transfer Date, after giving effect to all reductions in
Base Foreign Currency Amounts applicable to such Transfer Date pursuant to
Section 1.06(b), or (ii) deliver to Transferee a Deficiency Certificate
pursuant to Section 1.02(f), and (B) shall thereafter fail to make any
payment required by Section 3.04, and such failure to make such payment
shall continue for five Business Days.
(d) Transferor shall fail to perform or observe any term, covenant
or agreement contained in any Agreement Document (excluding the terms,
covenants and agreements described above in Sections 8.01(a) and (c),
which failure continues unremedied for thirty days after written notice by
Transferee to Transferor;
(e) (i) Transferor or any of its Subsidiaries shall fail to pay any
principal of, premium or interest on, or any other amount payable in
respect of, (A) any Debt outstanding under the Bank Credit Agreement, or
(B) any other Debt outstanding in a principal or notional amount of at
least $25,000,000 in the aggregate (but excluding Debt arising hereunder)
when the same becomes due and payable (whether by scheduled maturity,
required prepayment, redemption, purchase, defeasance, cash
collateralization, acceleration, demand or otherwise), and such failure
shall continue (x) after the applicable grace period, if any, in the case
of a non-payment of principal or (y) for five Business Days after the
applicable grace period, if any, in the case of non-payment of any other
amount, in each case specified in the agreement or instrument relating to
such Debt and shall not have been cured or waived; (ii) any failure to
make any payment or any other event shall occur or condition shall exist
under any agreement or instrument relating to any such Debt (including the
Bank Credit Agreement), if the effect of such failure, event or condition
is to accelerate, or to permit the acceleration of, the maturity of such
Debt or otherwise to cause, or to permit the holder thereof to cause, such
Debt to become due and payable (whether by required prepayment (other than
by a regularly scheduled required prepayment), purchase, redemption,
defeasance, cash collateralization, acceleration, demand or otherwise) or
an offer to prepay, redeem, purchase or defease such Debt shall be
required to be made, prior to its scheduled maturity, and, unless such
Debt has been accelerated or otherwise has become due and payable prior to
its scheduled maturity, such failure, event or condition continues for ten
Business Days after any grace period specified in the applicable agreement
or instrument relating to such Debt; or (iii) any default, termination
event, repurchase event or like event by or relating to Transferor or any
of its Affiliates shall have occurred under any agreement (other than an
Agreement Document) that involves a commitment of $25,000,000 or more and
provides for (x) the sale, assignment or factoring of accounts receivables
or (y) any other structured financing or off-balance sheet financing and,
in the case of any such default, termination event or like event, shall
have continued for the grace period, if any, applicable thereto, and as a
result (A) in the case of clause (x) next above, the obligation to
purchase, take by assignment or factor such receivables shall have been
terminated or the transferee of receivables shall have the right (with or
without the passage of time or the giving of notice, or both) to terminate
such obligation or (B) in the case of clause (y) next above, the
obligations of the other party or parties to such other structured
financing or off-balance sheet financing shall terminate or such other
party or parties shall have the right to terminate such obligations.
(f) A Bankruptcy Event with respect to Transferor or any of its
Material Subsidiaries shall occur;
(g) There shall occur any event which materially and adversely
affects the collectibility of the Transferred Assets taken as a whole or
the ability of Transferor or the Servicing Agent to either collect
Transferred Assets or perform its obligations under any Agreement
Document;
(h) The Internal Revenue Service shall file notice of a lien
pursuant to Section 6323 of the Internal Revenue Code with regard to any
of the assets of Transferor and such lien shall not have been released
within 30 days, or the PBGC shall, or shall indicate its intention to,
file notice of a lien pursuant to Section 4068 of ERISA with regard to any
of the assets of Transferor or any of its Affiliates.
(i) Any Change in Control shall occur;
(j) Any judgments, decrees, or orders shall be rendered against
Transferor or any of its Material Subsidiaries in excess of $15,000,000 in
the aggregate and which are not, within a period of 30 days, either
satisfied or stayed pending appeal;
(k) Any Agreement Document, or any security interest granted
thereunder shall (except in accordance with its terms), in whole or in
part, cease to be in full force and effect or shall be declared to be null
and void, or the validity or enforceability thereof shall be contested by
Transferor, any of its Affiliates or the Servicing Agent or any such
Person shall deny that it has any obligation thereunder, provided, that
the failure of any security interest granted under any Agreement Document
with respect to any Transferred Receivable to be in full force and effect
shall not be a Termination Event hereunder if the Transferor shall have
substituted new Receivables for such Transferred Receivable as provided by
Section 2.01(ii), within the time limits provided thereby, and shall have
made all payments provided by such Section;
(l) Any security interest granted hereunder in the Transferred
Assets and proceeds thereof shall, except as otherwise permitted by this
Agreement, fail to or be alleged by Transferor or an Affiliate not to
create, a valid security interest (which, insofar as the laws of the
United States or any of its political subdivisions may apply, shall be a
first priority perfected security interest) in favor of Transferee;
(m) The Letter of Credit shall not at any time be (or shall at any
time be alleged by Transferor, any Affiliate of Transferor, or any trustee
or other representative of any thereof, or the issuer of the Letter of
Credit not to be) in full force and effect in the amount and with an
expiry date as required by Section 6.01(i) or the Transferor, any
Affiliate thereof or any trustee or other representative of any thereof
shall seek any injunction, order or other legal process to delay or
prevent any drawing on the Letter of Credit; or
(n) Transferee shall have made any drawing under the Letter of
Credit in accordance with this Agreement.
SECTION 8.02 Remedies. (a) Upon the occurrence of a Termination
Event (other than a Termination Event described in Section 8.01(f) with
respect to Transferor, Transferee may by notice to Transferor declare the
Termination Date to have occurred. The Termination Date shall be deemed
to have occurred automatically upon the occurrence of a Termination Event
described in Section 8.01(f) with respect to Transferor.
(b) Upon the occurrence of the Termination Date as a result of the
occurrence of any Termination Event, Transferee shall compute, as
liquidated damages, the Early Termination Payment to be paid in connection
therewith pursuant to Section 1.08, together with any amounts payable to
Transferee pursuant to Section 3.04(a) arising as a consequence of
Transferor's not selling Transferred Receivables to Transferee on any
scheduled Transfer Date in accordance with any outstanding Supplement, and
any amounts payable by Transferor pursuant to Section 3.04(b); provided
that no Early Termination Payment shall be paid to Transferor that results
from the occurrence of the Termination Date until all Carryforward Amounts
have been reduced to zero and all Transferred Receivables and all
Obligations shall have been finally and fully paid and performed in full
and in cash. Upon termination of the Facility pursuant to this
Section 8.02, Transferee shall have, in addition to all other rights and
remedies under this Agreement or otherwise, all other rights and remedies
provided under the UCC of each applicable jurisdiction and under all other
applicable laws, which rights shall be cumulative.
(c) Transferor acknowledges and agrees that the obligation of
Transferee to purchase Receivables on any Transfer Date is a "Financial
Accommodation", within the meaning of 11 U.S.C. 365(c)(2), but any
termination of Transferee's obligation to purchase Receivables hereunder
shall not relieve Transferor of any obligation to make any Early
Termination Payment or other payment due hereunder.
(d) No Termination Date or Termination Event shall have the effect
of accelerating any Settlement Date or otherwise causing any Transferred
Receivable or Transferred Receivables Amount to become due and payable
prior to the Settlement Date specified therefor in the applicable
Assignment Certificate.
(e) (i) Notwithstanding the foregoing, if (A) a Termination Event
under Section 8.01(i) or (B) a Termination Event under Section 8.01(d)
resulting from a breach of Section 6.01(b)(i) that is caused only by a
Change in Control (each a "Change in Control Termination Event") shall
have occurred, then, (but only if and so long as no other Termination
Event shall occur or be continuing) Transferee's remedies with respect to
such Change in Control Termination Event shall be limited as set forth in
this clause (e).
(ii) If, following such Change in Control Termination Event,
each Surviving Entity shall have ratified and agreed to be bound by
this Agreement and the Agreement Documents to the same extent as
Transferor, by documents in form and substance satisfactory to
Transferee, then Transferee (A) will not specify an Early Termination
pursuant to Section 1.08(b) and (B) will continue to accept and pay
the Purchase Price for Transfers on each Transfer Date as provided in
this Agreement and any Agreement Document, provided, that (1) all
conditions precedent to such Transfers and such payments that are set
forth in Section 4.03 (other than the absence of a Change in Control
Termination Event) have been met, (2) the credit rating (or implied
credit rating) given by S&P to the senior unsecured and uncredit-
enhanced long term debt of each Surviving Entity is not lower than
the credit rating or implied credit rating that S&P gave to such debt
of Transferor immediately prior to such Change in Control, and (3) if
S&P does not issue a credit rating or implied credit rating for any
such debt of any Surviving Entity, then, in the reasonable opinion of
Transferee, the combined financial condition of the Surviving
Entities is not materially worse than that of Transferor prior to
such Change in Control.
(iii) The term "Surviving Entity" means, with respect to any
Change in Control, (A) Transferor, if Transferor survives such Change
in Control, (B) any Person with or into which Transferor is merged or
consolidated, if Transferor does not survive such Change in Control,
(C) any Person that, following such Change in Control, owns
beneficially, directly or indirectly, securities (or securities which
are convertible into such securities) representing more than 50% of
the combined voting power of all securities entitled to vote in the
election of directors of Transferor or any Person with or into which
Transferor is merged or consolidated, and (D) any Person or Persons
to which all or substantially all of Transferor's assets have been
transferred.
(iv) Nothing herein shall obligate Transferee to enter into any
Supplement following any Change in Control Termination Event.
SECTION 8.03 Drawing on Letter of Credit. Without limiting any of
Transferee's other rights and remedies hereunder, and irrespective of
whether the Termination Date shall have occurred, if within three Business
Days after any Settlement Date the Transferee shall not have been paid in
immediately available funds (whether by Transferor, Servicing Agent or any
applicable Obligor) the entire Transferred Receivable Amount due on such
Settlement Date, together with any yield (if any) payable on such
Settlement Date pursuant to Section 3.03 and any interest accrued from
such Settlement Date to the date of payment pursuant to Section 2.07,
Transferee may, without notice to Transferor, draw on the Letter of Credit
(in one or more drawings) for all or any portion of any such amount which
has not been paid as of the date of such drawing. No drawing under the
Letter of Credit, and no application of any proceeds of any such drawing,
shall cure any Termination Event or Unmatured Termination Event.
ARTICLE IX
INDEMNIFICATION; EXCULPATION
SECTION 9.01 Indemnities by Transferor. Without limiting any other
rights which any Indemnified Party may have hereunder or under applicable
law, Transferor hereby agrees to indemnify each of Transferee and each of
its Affiliates, each of its and their respective successors, transferees
and assigns and all of its and their officers, directors, shareholders,
controlling persons, employees and agents (each an "Indemnified Party"),
forthwith on demand, from and against any and all damages, losses, claims
(whether on account of settlements or otherwise), judgments, liabilities
and related costs and expenses, including reasonable attorneys' fees and
disbursements and the allocated costs of in-house counsel, if any (all of
the foregoing being collectively called "Indemnified Amounts") that may be
incurred by or asserted against any Indemnified Party in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or proceeding
(whether or not an Indemnified Party is a party thereto) arising out of,
related to or in connection with, any Contract or Agreement Document, any
Letter of Credit, or the transactions contemplated herein or therein or
the acquisition of any Receivable or any other Transferred Asset or the
use of proceeds herefrom or therefrom; provided that no Indemnified Party
shall be indemnified under this Section 9.01 with respect to (i) matters
for which such Indemnified Party has been compensated pursuant to any
other provision of this Agreement or (ii) Indemnified Amounts caused by or
resulting from the gross negligence or willful misconduct of such
Indemnified Party as finally determined by a court of competent
jurisdiction. If any action is brought against any Indemnified Party with
respect to any Contract, such Indemnified Party shall promptly notify
Transferor in writing of the institution of such action and Transferor
shall thereupon have the right, at its option, to elect to assume the
defense of such action. If Transferor so elects, it shall promptly assume
the defense of such action, including the employment of counsel
(reasonably satisfactory to such Indemnified Party) and payment of
expenses. Such Indemnified Party shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party unless (i) the
employment of such counsel shall have been authorized in writing by
Transferor in connection with the defense of such action or (ii)
Transferor shall not have properly employed counsel reasonably
satisfactory to such Indemnified Party to have charge of the defense of
such action, in which case such fees and expenses shall be paid by
Transferor. If such Indemnified Party shall have reasonably concluded
(based upon the advice of counsel) that the representation by one counsel
of the Indemnified Party and Transferor creates a conflict of interest for
such counsel, the reasonable fees and expenses of such counsel shall be
borne by Transferor and Transferor shall not have the right to direct the
defense of such action on behalf of the Indemnified Party (but shall
retain the right to direct the defense of such action on behalf of
Transferor). Anything in this Section 9.01 to the contrary
notwithstanding, Transferor shall not be liable for the fees and expense
of more than one counsel for any Indemnified Party in any jurisdiction as
to any Indemnified Amounts or for any settlement of any Indemnified
Amounts effected without its written consent. All Obligations of
Transferor under this Section 9.01 shall survive the making and repayment
of the Obligations and the termination of this Agreement.
If for any reason the indemnification provided in this Section 9.01
is unavailable to an Indemnified Party or is insufficient to hold an
Indemnified Party harmless, then Transferor shall contribute to such
Indemnified Party the maximum amount that can be paid to such Indemnified
Party as a result of such loss, claim, damage or liability.
SECTION 9.02 Exculpation. Notwithstanding anything contained
herein to the contrary, no Indemnified Party shall be liable to Transferor
or any other Person in any manner in respect of any Indemnified Amounts
awarded against or incurred by Transferor, any of its Affiliates, any of
its and their respective successors, transferees and assigns or any of its
and their officers, directors, shareholders, controlling persons,
employees and agents (each a "Transferor Party"), in each case arising out
of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or proceeding
(whether or not a Transferor Party is a party thereto) arising out of,
related to or in connection with, any Contract or Agreement Document or
the transactions contemplated herein or therein or the acquisition of any
Receivable or any other Transferred Asset or the use of proceeds herefrom
or therefrom (collectively a "Transferor Matter") except to the extent
that a court of competent jurisdiction finally determines that such
Indemnified Amounts were caused by or resulted from the gross negligence
or willful misconduct of such Indemnified Party. In no event, however,
shall the Indemnified Parties be liable for any indirect, special,
punitive, exemplary or consequential damages that may be incurred by or
asserted against any Indemnified Party in each case arising out of or in
connection with or by reason of, or in connection with the preparation for
a defense of, any Transferor Matter.
ARTICLE X
GUARANTEE
SECTION 10.01 Guarantee. In order to induce Transferee to agree to
acquire Receivables and to perform its obligations under this Agreement,
Transferor hereby unconditionally and irrevocably guarantees (as primary
obligor and not merely as surety) to and for the benefit of Transferee the
due and punctual payment, on or prior to the applicable Settlement Date,
of each Transferred Asset (collectively, the "Guaranteed Obligations").
Transferor agrees that it shall pay, or shall cause to be paid, to
Transferee on the applicable Settlement Date the entire amount which was
owed on the related Transfer Date by the applicable Obligor with respect
to each Transferred Asset or, if greater, the Transferred Receivables
Amount applicable to such Transfer Date, in each case without any demand
by or notice from Transferee, and Transferor hereby waives all notice and
demand with respect to the making of such payment. Time is of the essence
under this guarantee.
SECTION 10.02 Waivers. Transferor agrees that the Guaranteed
Obligations may be extended or renewed, in whole or in part, without
notice to or further assent from it and without impairing its obligations
under this Article X. Transferor hereby waives (a) presentation to,
demand of payment from, and protest and notice of protest to it concerning
the Guaranteed Obligations, (b) protest for nonpayment of any amount owed
in respect of the Guaranteed Obligations and (c) all other notices to
which it might otherwise be entitled as guarantor of the Guaranteed
Obligations.
SECTION 10.03 No Impairment. The obligations of Transferor under
this Article X shall not be subject to any defense or set-off by reason of
any lack of validity or enforceability, in whole or in part, of the
Guaranteed Obligations. The obligations of Transferor hereunder with
respect to its guaranty of the Guaranteed Obligations shall not be
impaired by (a) any lack of validity or enforceability of or any Agreement
Document, (b) the failure of Transferee to assert any claim or demand or
to enforce any right or remedy against any Person under any Agreement
Document or with respect to any Agreement Document or any Guaranteed
Obligation, (c) any extension or renewal, in whole or in part, of any
Agreement Document or any Guaranteed Obligation, (d) any rescission,
waiver, release, compromise, amendment or modification of, or any consent
to departure from, any of the terms or provisions of any Agreement
Document or any Guaranteed Obligation, (e) any failure by any Person in
the performance of any obligation with respect to any Agreement Document
or any Guaranteed Obligation, (f) any act by Transferee to obtain or
retain an Adverse Claim upon or a security interest in any property to
secure any Guaranteed Obligations, or to release any security for any of
the Guaranteed Obligations, (g) any exchange, release or nonperfection of
any Adverse Claim or of Transferee's security interest or other rights in
the Transferred Assets, (h) any bankruptcy of any Person, or (i) any other
act or omission which may or might in any manner vary the risk of
Transferor, or which would otherwise operate as a discharge of or other
defense available to Transferor, as a matter of applicable law.
SECTION 10.04 Waiver of Resort. Transferor agrees that this
Article X constitutes a guaranty of payment and not merely of collection
and waives any right to require that any resort be had by Transferee to
any security held by it for the payment of the Guaranteed Obligations or
to any balance or any deposit account or credit on the books of Transferee
in favor of Transferor or any of its Subsidiaries.
SECTION 10.05 Reinstatement. Transferor agrees that this Article X
shall continue to be effective or be reinstated, as the case may be, if at
any time any part of any payment in respect of any Guaranteed Obligation
is stayed, rescinded or must otherwise be returned by Transferee upon the
bankruptcy or reorganization of Transferor or any other Person or for any
other reason.
SECTION 10.06 Subrogation, Waivers, Etc. (a) Transferor hereby
agrees that, until such time as all of the Obligations shall have been
finally paid in full and in cash, the Facility shall have terminated, and
this guarantee shall have been discontinued, any claim or other rights
which Transferor may now or hereafter acquire against any Obligor that
arise from the existence, payment, performance or enforcement of the
guarantee under this Article X (collectively, "Subrogation Rights", which
term shall include any right of subrogation, reimbursement, exoneration,
contribution, indemnification, any right to participate in any claim or
remedy of Transferee against any Transferred Asset or any such Obligor or
any collateral now or hereafter pledged to Transferee or any other Person
acting on behalf of Transferee by such Obligor, whether or not such claim,
remedy or right arises in equity, at law or under contract, directly or
indirectly, is for cash or other property or arises by set-off or in any
other manner (as payment or security on account of such claim or other
rights)) shall be subordinate to the rights and claims of Transferee
against such Obligor. If any amount shall be paid to Transferor in
respect of any Subrogation Right at a time when the Obligations shall not
have been paid in full and in cash, the Facility shall not have been
terminated or this guarantee shall not have been discontinued, such amount
shall be deemed to have been paid to Transferor for the benefit of, and
held in trust for the benefit of, Transferee, and shall forthwith be paid
to Transferee. Transferor acknowledges that it will receive direct and
indirect benefits from the transactions contemplated by the Agreement
Documents and that the forbearance set forth in this Section 10.06 is
knowingly granted in contemplation of such benefits.
(b) Transferor understands and acknowledges that if Transferee
forecloses, either by judicial foreclosure or by exercise of power of
sale, any deed of trust (if any) securing the Guaranteed Obligations, that
such foreclosure could impair or destroy any ability that Transferor may
have to seek reimbursement, contribution, or indemnification from any
Obligors or others based on any right Transferor may have of subrogation,
reimbursement, contribution, or indemnification for any amounts paid by
Transferor under this guarantee. Transferor further understands and
acknowledges that in the absence of this paragraph, such potential
impairment or destruction of Transferor's rights, if any, may entitle
Transferor to assert a defense to this guarantee based on Section 580d of
the California Code of Civil Procedures as interpreted in Union Bank v.
Gradsky, 265 Cal. App.2d. 40 (1968). By executing this guarantee,
Transferor freely, irrevocably, and unconditionally: (i) waives and
relinquishes that defense and agrees that Transferor will be fully liable
under this guarantee even though Transferee may foreclose, either by
judicial foreclosure or by exercise of power of sale, any deed of trust
securing the Guaranteed Obligations; (ii) agrees that Transferor will not
assert that defense in any action or proceeding which Transferee may
commence to enforce this guarantee; (iii) acknowledges and agrees that the
rights and defenses waived by Transferor in this guarantee include any
right or defense that Transferor may have or be entitled to assert based
upon or arising out of any one or more of Sections 580a, 580b, 580d, or
726 of the California Code of Civil Procedure or Section 2848 of the
California Civil Code; and (iv) acknowledges and agrees that Transferee is
relying on this waiver in entering into and performing its obligations
under this Agreement, and that this waiver is a material part of the
consideration which Transferee is receiving for entering into and
performing its obligations under this Agreement.
(c) Transferor waives any rights and defenses available to
Transferor by reason of Sections 2787 to 2855, inclusive, of the
California Civil Code including, without limitation, (1) any defenses
Transferor may have to its obligations under this guarantee by reason of
an election of remedies by Transferee and (2) any rights or defenses
Transferor may have by reason of protection afforded to any Obligor with
respect to any of the Guaranteed Obligations pursuant to the
antideficiency or other laws of California limiting or discharging any of
the Guaranteed Obligations, including, without limitation, Sections 580a,
580b, 580d, or 726 of the California Code of Civil Procedure.
(d) Transferor waives all rights and defenses arising out of an
election of remedies by Transferee, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a
guaranteed obligation, has destroyed Transferor's rights of subrogation
and reimbursement against any Obligor by the operation of Section 580d of
the California Code of Civil Procedure or otherwise.
(e) No provision or waiver in this guarantee shall be construed as
limiting the generality of any other waiver contained in this guarantee.
<PAGE>
ARTICLE XI
MISCELLANEOUS
SECTION 11.01 Amendments, Waivers, Etc. No amendment, modification
or waiver of any provision of this Agreement nor consent to any departure
therefrom shall in any event be effective unless the same shall be in
writing and signed by (a) Transferor and Transferee (with respect to an
amendment or modification) or (b) Transferee (with respect to a waiver or
consent by it) or Transferor (with respect to a waiver or consent by it),
as the case may be, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which
given. Schedule II hereto and Annex I to Exhibit 1.02(b) may be modified
at any time by mutual written consent of the parties. No failure or delay
on the part of Transferee or any Indemnified Party to exercise, and no
delay in exercising, any right hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any
other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by applicable law.
SECTION 11.02 Notices, Etc. All notices and other communications
provided for hereunder shall, unless otherwise stated herein, be in
writing (including facsimile communication) and shall be personally
delivered or sent by certified mail, postage prepaid, by facsimile or by
overnight courier, to the intended party at the address or facsimile
number of such party set forth under its name on the signature pages
hereof or at such other address or facsimile number as shall be designated
by such party in a written notice to the other parties hereto given in
accordance with this Section 11.02. All such notices and communications
shall be effective, (a) if personally delivered, when received, (b) if
sent by certified mail, five Business Days after having been deposited in
the mail, postage prepaid and properly addressed, (c) if transmitted by
facsimile, when sent, receipt confirmed by telephone or electronic means,
and (d) if sent by overnight courier, two Business Days after having been
given to such courier unless sooner received by the addressee; provided
that notwithstanding the foregoing, notices and communications pursuant to
Article I shall not be effective until received.
SECTION 11.03 Binding Effect; Assignability; Survival of
Provisions. This Agreement shall be binding upon and inure to the benefit
of Transferor, Transferee and the Servicing Agent and their respective
successors and assigns, and the provisions of Sections 3.02 and 6.03 and
Article IX shall inure to the benefit of Transferee and the Indemnified
Parties, respectively, and their respective successors and assigns.
Transferor shall not assign any of its rights hereunder or any interest
herein without the prior written consent of Transferee. Transferee may
not, without the prior written consent of Transferor (which consent may
not be unreasonably withheld or delayed), assign its rights and
obligations hereunder at any time to any Person, except that Transferee
may, without such consent, assign any of such rights or obligations (i) to
any present or future Affiliate of Transferee, and also (ii) at any time
when any Termination Event or any Unmatured Termination Event described in
Section 8.01(f) shall have occurred and be continuing, to any Person
selected by Transferee. This Agreement shall create and constitute the
continuing obligations of the parties hereto in accordance with its terms,
and shall remain in full force and effect until the date following the
Termination Date on which any Carryforward Amount shall have been reduced
to zero and all Transferred Receivables and all Obligations that have ever
been outstanding hereunder have been finally and fully paid and performed.
The rights and remedies with respect to any breach of any representation
and warranty made by Transferor pursuant to Article V and the
indemnification and payment provisions of Article IX and Sections 3.02,
3.05 and 11.07 shall be continuing and shall survive any termination of
this Agreement.
SECTION 11.04 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, EXCEPT TO THE EXTENT THAT THE PERFECTION OF THE INTERESTS OF
TRANSFEREE IN THE TRANSFERRED ASSETS IS GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
SECTION 11.05 Costs, Expenses and Taxes. In addition to its
obligations under Article IX, Transferor agrees to pay to Transferee and
the other Indemnified Parties on demand:
(a) all reasonable out-of-pocket and other costs and expenses in
connection with the preparation, execution, delivery and administration of
the Agreement Documents and each Letter of Credit, including the
reasonable fees and expenses of counsel (including local counsel and the
allocated costs of in-house counsel, if any) for Transferee and the other
Indemnified Parties with respect thereto, and all costs and expenses, if
any (including reasonable counsel fees and expenses (including local
counsel and the allocated costs of in-house counsel, if any)), in
connection with the enforcement of the Agreement Documents and each Letter
of Credit, or any claim of breach of contract, breach of warranty or any
other breach of any Agreement Document and each Letter of Credit or any
tort claim relating to any of the foregoing;
(b) all present and future stamp and other taxes and governmental
fees and charges payable or determined to be payable in connection with
the execution, delivery, filing, recording or performance of the Agreement
Documents (other than taxes on the overall net income of the Person that
is requesting payment under this Section 11.05), and agrees to indemnify
each such Person against all penalties and interest with respect to or
resulting from such taxes, charges and fees and against all other
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes, charges and fees;
(c) all reasonable costs and expenses of Transferee in connection
with performing any of the obligations of Transferor or the Servicing
Agent under or in connection with the Agreement Documents; and
(d) all other reasonable costs and expenses and all taxes incurred
by Transferee in connection with the auditing of Transferor's books
relating to the Receivables by certified public accountants at any time,
provided, that unless a Termination Event or Unmatured Termination Event
shall have occurred and be continuing, Transferor shall only be required
to reimburse Transferee for the cost of one such audit in each calendar
year.
SECTION 11.06 Execution in Counterparts. This Agreement may be
executed in separate counterparts, each of which shall be deemed to be an
original and all of which shall constitute one and the same Agreement.
SECTION 11.07 Confidentiality. (a) Transferor acknowledges that
Transferee regards the structure of the transactions contemplated by this
Agreement to be proprietary, and Transferor agrees that:
(i) it will not disclose without the prior consent of
Transferee (other than to Transferor's directors, employees,
auditors, counsel or affiliates (collectively, "Transferor
Representatives"), each of whom shall be informed by Transferor of
the confidential nature of the Information (as defined below) and of
the terms of this Section 11.07), (A) detailed information regarding,
or copies of, the Agreement Documents and the attachments thereto or
any transaction specifically contemplated herein or therein, except
to other financial institutions providing services or funds to
Transferor who enter into a confidentiality agreement with respect to
the Agreement Documents and the above-described attachments and the
transactions specifically contemplated herein and therein (which
agreement shall be satisfactory in form and substance to Transferee)
and who agree not to copy or duplicate the structure of the
transactions contemplated by this Agreement or otherwise to use the
information described above that is so disclosed to them for any
purpose other than their credit evaluations of Transferor or (B) any
information regarding Transferee, which information is furnished by
Transferee to Transferor and which is designated by Transferee to
Transferor in writing as confidential or as not otherwise available
to the general public (the information referred to in clauses (A) and
(B) is collectively called the "Information"); provided that
Transferor may disclose any such Information as may be required or
requested by or to any municipal, state, federal or other regulatory
body having or claiming to have jurisdiction over Transferor or in
order to comply with any law, order, regulation, regulatory request
or ruling applicable to Transferor;
(ii) except as provided above, it will use the Information
solely to evaluate, administer and enforce the transactions
contemplated by the Agreement Documents and to make any necessary
business judgments with respect thereto; and
(iii) upon reduction of each Carryforward Amount to zero or
cancellation thereof and final payment in full of all Transferred
Receivables and all Obligations, it will, upon demand, return (and
cause each of the Transferor Representatives to return) to Transferee
all documents or other written material received from Transferee and
all copies thereof made by Transferor which contain the Information.
(b) Transferee acknowledges that Transferor regards certain
information with respect to Transferor and the Receivables to be
confidential, and Transferee agrees that:
(i) it will not disclose without the prior consent of
Transferor (other than to the assignees, participants, proposed
assignees, proposed participants, directors, employees, auditors,
counsel, agents or affiliates (collectively, the "Transferee
Representatives") of Transferee, each of whom shall be informed by
Transferee of the confidential nature of Transferor Information (as
defined below) and of the terms of this Section 11.07), (A) any
financial, business, marketing or strategic information with respect
to Transferor which is not otherwise available to the general public
and which has been designated in writing by Transferor as "secret" or
"confidential" or which has been orally designated by Transferor as
confidential which designation is confirmed in writing by Transferor
within seven days, (B) the identity of the Obligors of the
Receivables and the Unpaid Balances thereof, or (C) any other
information regarding Transferor or the Receivables which is
furnished by Transferor to Transferee and which is designated by
Transferor to Transferee in writing (or orally, confirmed in writing
within seven days) as "secret", "confidential" or as not otherwise
available to the general public (the information referred to in
clauses (A), (B) and (C) is collectively called the "Transferor
Information"); provided that Transferee may disclose any such
Transferor Information as may be required or requested by or to any
municipal, state, federal or other regulatory body having or claiming
to have jurisdiction over Transferee or in order to comply with any
law, order, regulation or ruling applicable to Transferee;
(ii) except as set forth above, it will use Transferor
Information solely for the purpose of evaluating, administering and
enforcing the transactions contemplated by the Agreement Documents
and making any necessary business judgments with respect thereto; and
(iii) upon reduction of each Carryforward Amount to zero or
cancellation thereof and final payment in full of all the Transferred
Receivables and all Obligations, it will, upon demand, return (and
cause each of the Transferee Representatives to return) to Transferor
all documents or other written material received from Transferor in
connection with clause (b)(i) above and all copies thereof made by
Transferee which contain Transferor Information, provided, that
Transferee may keep such materials, subject to the confidentiality
provisions hereof, as required by applicable law or regulation.
(c) This Section 11.07 shall be inoperative as to such portions of
the Information or Transferor Information (as applicable) which are or
become generally available to the public or to a party to this Agreement
on a nonconfidential basis or were known to a party to this Agreement on a
nonconfidential basis prior to its disclosure by a party to this
Agreement.
(d) In the event that Transferor or anyone to whom Transferor or any
of Transferor Representatives transmits the Information is requested or
becomes legally compelled (by interrogatories, requests for information or
documents, subpoena, civil investigation demand or similar process) to
disclose any of the Information, Transferor will provide Transferee with
prompt written notice so that Transferee may seek a protective order or
other appropriate remedy and/or waive compliance with the provisions of
this Section 11.07. In the event that such protective order or other
remedy is not obtained, or Transferee waives compliance with the
provisions of this Section 11.07, Transferor will furnish only that
portion of the Information which is legally required to be furnished and
will exercise its best efforts to obtain reliable assurance that
confidential treatment will be accorded the Information.
(e) This Section 11.07 shall survive termination of this Agreement.
SECTION 11.08 Release. At such time as each Carryforward Amount
shall have been reduced to zero or cancelled by Transferee, all
Transferred Receivables and all Obligations that have ever been
outstanding hereunder shall have been finally and fully paid and performed
and the Facility shall have been terminated, Transferee shall promptly
execute and deliver, at Transferor's request and expense, all UCC
termination statements and other documents that Transferor may reasonably
request to evidence the termination of Transferee's interest in the
Transferred Assets.
SECTION 11.09 Severability of Provisions. If any covenants,
agreements, provisions or terms of any Agreement Document shall for any
reason whatsoever be held invalid, then such covenants, agreements,
provisions or terms shall be deemed severable and shall in no way affect
the validity or enforceability of the other provisions of or any Agreement
Document.
SECTION 11.10 Conflict in Agreement Documents. If there is any
conflict between this Agreement and any other Agreement Document, this
Agreement and such other Agreement Document shall be interpreted, if
possible, so as to avoid or minimize such conflict but, to the extent (and
only to the extent) of such conflict, this Agreement shall prevail and
control.
SECTION 11.11 Legal Representation of Parties. This Agreement and
the other Agreement Documents were negotiated by the parties with the
benefit of legal representation and any rule of construction or
interpretation otherwise requiring this Agreement or any other Agreement
Document to be construed or interpreted against any party shall not apply
to any construction or interpretation hereof or thereof. Without limiting
the generality of the foregoing, Transferor acknowledges that it has made
an independent determination to enter into the transactions contemplated
by the Agreement Documents and has not relied on any representation or
other assurance by or on behalf of Transferee regarding any legal, tax,
accounting or other treatment or effect of such transactions.
SECTION 11.12 Recording. Transferor understands and agrees that
Transferee in its sole discretion may record, on tape or otherwise, any
telephone conversation between Transferor and Transferee. Transferor
hereby agrees and consents to such tape recording and waives any right
Transferor may have to object to the admissibility into evidence of such
recording in any legal proceeding between Transferor and Transferee or in
any other proceeding to which Transferor is a party or in which
Transferee's records are subpoenaed. Transferee shall not be required to
transcribe such recordings or maintain such recordings or any transcripts
thereof.
SECTION 11.13 Judgments. To the extent permitted by applicable
law, if any judgment or order expressed in any currency other than Dollars
is rendered (i) for the payment of any amount owing in respect of this
Agreement, or (ii) in respect of a judgment or order of another court for
the payment of any such amount, the party seeking recovery, after recovery
in full of the aggregate amount to which such party is entitled pursuant
to the judgment or order, will be entitled to receive immediately from the
other party the amount of any shortfall of the Dollars received by such
party as a consequence of sums paid in such other currency and will refund
promptly to the other party any excess of the Dollars received by such
party as a consequence of sums paid in such other currency if such
shortfall or such excess arises or results from any variation between the
rate of exchange at which Dollars are converted into the currency of the
judgment or order for the purposes of such judgment or order and the rate
of exchange at which such party is able, acting in a reasonable manner and
in good faith in converting the currency received into Dollars, to
purchase Dollars with the amount of the currency of the judgment or order
actually received by such party. The term "rate of exchange" includes,
without limitation, any premiums and costs of exchange payable in
connection with the purchase of or conversion into Dollars.
SECTION 11.14 Submission to Jurisdiction. TRANSFEROR (IN ITS
CAPACITIES AS TRANSFEROR AND AS INITIAL SERVICING AGENT) HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CALIFORNIA STATE OR FEDERAL
COURT SITTING IN SAN FRANCISCO, CALIFORNIA OVER ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO ANY AGREEMENT DOCUMENT, AND HEREBY (A)
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING
MAY BE HEARD AND DETERMINED IN SUCH CALIFORNIA STATE OR FEDERAL COURT; AND
(B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO,
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR
PROCEEDING.
SECTION 11.15 Integration. The Agreement Documents contain a final
and complete integration of all prior expressions by the parties hereto
with respect to the subject matter hereof and thereof and shall together
constitute the entire agreement among the parties hereto with respect to
the subject matter hereof and thereof, superseding all prior oral or
written understandings.
SECTION 11.16 Waiver of Jury Trial. TRANSFEROR (IN ITS CAPACITIES
AS TRANSFEROR AND AS INITIAL SERVICING AGENT) AND TRANSFEREE EACH HEREBY
EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING
TO ENFORCE OR DEFEND ANY RIGHTS UNDER ANY AGREEMENT DOCUMENT OR UNDER ANY
AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY BE DELIVERED IN
THE FUTURE IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM OR RELATING
TO ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN), ACTIONS OF EITHER OF THE PARTIES HERETO OR ANY RELATIONSHIP
EXISTING IN CONNECTION WITH ANY AGREEMENT DOCUMENT, AND EACH OF THEM
AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT
AND NOT BEFORE A JURY.
IN WITNESS WHEREOF, Transferor and Transferee have caused this
Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
STORAGE TECHNOLOGY CORPORATION
as Transferor and as initial Servicing Agent
By /s/ Mark D. McGregor
---------------------------------------
Title: Vice President and Treasurer
2270 South 88th Street
Louisville, Colorado 80028-4308
Facsimile No.: (303) 673-2837
Attention: Treasurer
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION,
as Transferee
By /s/ Kevin McMahon
---------------------------------------
Title: Vice President
555 California Street, 41st Floor
San Francisco, California 94104
Attention: Kevin McMahon
Facsimile No.: (415) 622-2514
EURODOLLAR OFFICE
Global Payment Operations
Domestic Account Administration, #5693
1850 Gateway Boulevard, 4th Floor
Concord, California 94520
Attention: Denise Robertson
Facsimile No.: (510) 675-7531
All Notices pursuant to the Agreement other
than notices pursuant to Sections 1.02(b),
1.02(c), and 1.02(e), will be sent to
Transferee at both of the above addresses.
NOTICES PURSUANT TO SECTIONS 1.02(B),
1.02(C), 1.02(E), 1.06 AND 1.08 WILL BE SENT
TO TRANSFEREE AT:
555 California Street, 10th Floor
San Francisco, California 94104
Attention: Mike Bernal
Facsimile No.: (415) 622-0361
<PAGE>
SCHEDULE I
DEFINITIONS
"Adverse Claim" means any lien, security interest, charge,
encumbrance or right or claim of any Person, or any contractual provision
restricting the transfer of any Receivables hereunder, but excluding any
of the foregoing that arise under any Agreement Document in favor of
Transferee or any other Indemnified Party.
"Affected Party" means Transferee and any Person to whom Transferee
has assigned an interest in Transferee's rights under the Agreement.
"Affiliate" means, as to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with, such
Person.
"Agreement" is defined in the Preamble.
"Agreement Documents" means this Agreement, each Supplement, each
Assignment Certificate, each Deficiency Certificate, each Amendment and
all agreements, instruments, certificates, reports and documents executed
and delivered or to be executed and delivered under or in connection with
any of the foregoing.
"Aggregate Net Investment" means at any time an amount equal to the
aggregate amounts paid by Transferee to Transferor in respect of Purchase
Prices (calculated without giving effect to any discount) for Transferred
Receivables which as of such date have not been paid in full.
"Allocated Purchase Price" is defined in Section 1.02(b)(i)(D).
"Amendment" is defined in Section 1.07(c).
"Assignment Certificate" is defined in Section 1.04(d).
"Bank Credit Agreement" means the Amended and Restated Multicurrency
Credit Agreement dated as of September 28, 1994 among Transferor, certain
of its Subsidiaries, the banks and financial institutions parties thereto,
and Bank of America National Trust and Savings Association, as Agent,
Swing Line Bank and Issuing Bank, as amended and supplemented from time to
time.
"BofA" means Bank of America National Trust and Savings Association.
"Bankruptcy Event" shall be deemed to have occurred with respect to a
Person if either:
(a) a case or other proceeding shall be commenced, without the
application or consent of such Person, under any law relating to
bankruptcy, insolvency, reorganization, dissolution, winding up or
composition or adjustment of debts (each, an "Insolvency Law"), and
such case or proceeding shall continue undismissed, or unstayed and
in effect, for a period of 60 days; or an order for relief in respect
of such Person shall be entered in an involuntary case under an
Insolvency Law; or
(b) such Person shall commence a voluntary case or other
proceeding under any Insolvency Law, or shall consent to the
appointment of or taking possession by a receiver, liquidator or
other similar official for such Person or for any substantial part of
its property, or shall make any general assignment for the benefit of
creditors.
"Base Foreign Currency Amount" is defined in Section 1.02(i)(B).
"Business Day" means a day (a) that is not Saturday or Sunday and on
which commercial banks in San Francisco are not authorized or required to
be closed for business and (b) that is also a Eurodollar Business Day, if
the applicable Business Day relates to the determination of the Eurodollar
Rate.
"Carryforward Amount" is defined in Section 1.03(c).
"Change in Control" means the occurrence, after the date of this
Agreement, of any of the following: (a) any Person or two or more Persons
acting in concert acquiring beneficial ownership (within the meaning of
Rule 13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934), directly or indirectly, of securities of Transferor
(or other securities convertible into such securities) representing 50% or
more of the combined voting power of all securities of Transferor entitled
to vote in the election of directors; (b) during any period of up to 12
consecutive months, commencing after the Initial Closing Date, individuals
who at the beginning of such 12-month period were directors of Transferor
ceasing for any reason to constitute a majority of the Board of Directors
of Transferor unless the Persons replacing such individuals were nominated
by the Board of Directors of Transferor; (c) any Person or two or more
Persons acting in concert acquiring by contract or otherwise, or entering
into a contract or arrangement that upon consummation will result in its
or their acquisition of, or control over, securities of Transferor (or
other securities convertible into such securities) representing 50% or
more of the combined voting power of all securities of STK entitled to
vote in the election of directors; (d) Transferor shall be a party to any
merger or consolidation in which Transferor is not a surviving entity or
(e) Transferor shall directly or indirectly transfer, assign, convey or
lease, whether in one transaction or in a series of transactions, all or
substantially all of its assets, (whether now owned or hereafter acquired)
to any other Person or Persons.
"Change in Control Termination Event" is defined in Section
8.02(e)(i).
"Collections" means, as to any Receivable, all cash collections and
other cash proceeds of such Receivable and all other funds which are
deemed to have been received as a Collection pursuant to Section 2.01.
"Contract" means an agreement or arrangement between Transferor and
any Person, pursuant to or under which such Person shall be obligated to
make payments to Transferor from time to time.
"currency" means any currency which is authorized by the laws of any
nation to circulate as a medium of exchange in such nation.
"Debt" of any Person at any date means (a) all obligations,
contingent or otherwise, of such Person for borrowed money (whether or not
the recourse of the lender is to the whole of the property of such Person
or only to a portion thereof), (b) all obligations of such Person
evidenced by bonds, notes or other similar instruments, (c) all
obligations of such Person in respect of letters of credit or other
similar instruments (or reimbursement obligations with respect thereto),
(d) all obligations of such Person to pay the unpaid purchase price of any
property or services, (e) all obligations of such Person as lessee under
leases which under generally accepted accounting principles would be
capitalized, (f) all Debt secured by an Adverse Claim on any property of
such Person, whether or not such Debt is assumed by such Person, (g) all
Guaranties by such Person, and (h) all net obligations in respect of Hedge
Contracts.
"Defaulted Receivable" means a Receivable which (A) has been written
off in whole or in part as a result of non-payment for credit reasons or
(B) the Obligor of which is the subject of a Bankruptcy Event, in each
case (i) as of the close of business on the Business Day immediately
preceding the Transfer Date for the related Transfer or (ii) at any time
thereafter.
"Deferral Compensation Amount" is defined in Section 1.03(d).
"Deficiency Certificate" is defined in Section 1.02(f).
"Determination Date" is defined in Section 1.02(f).
"Determination Date Exchange Rate" is defined in Section 1.02(c).
"Discount" is defined in Section 1.04(b).
"Discount Period" is defined in Section 1.04(b).
"Dollars" means lawful money of the United States of America.
"Dollar Equivalent Balance" is defined in Section 1.03(b)(i).
"Early Termination" is defined in Section 1.08(a).
"Early Termination Date" is defined in Section 1.08(b)(i).
"Early Termination Payment" is defined in Section 1.08(b).
"Eligible Receivable" means, at any time, a Receivable:
(a) which has been fully earned by performance by Transferor of
all of its obligations giving rise thereto and is due and payable no
later than the 90th day after the Transfer Date applicable to such
Receivable (it being understood that Transferor shall be obligated to
pay Transferee the Dollar Equivalent Balance of Transferred
Receivables on the applicable Settlement Date whether or not such
Transferred Receivable is then due and payable by the Obligor
thereof;
(b) which constitutes an "account" or, if permitted under the
Bank Credit Agreement to be transferred hereunder, a "general
intangible", both as defined in the California UCC;
(c) the Obligor of which, unless waived in writing by
Transferee, is not the Obligor of any Defaulted Receivables;
(d) which is not a Defaulted Receivable;
(e) with regard to which the warranty in Section 5.01(f) is
true and correct;
(f) the assignment of which (including the transfer of which to
Transferee) does not contravene or conflict with (A) any law, rule or
regulation or (B) any contractual or other restriction, limitation or
encumbrance which has not been waived by all necessary parties;
(g) which, together with the Contract related thereto,
conforms in all material respects with all applicable laws, rules and
regulations and with respect to which no party to the Contract
related thereto is in violation of any such law, rule or regulation;
and
(h) with respect to which applicable laws, rules and
regulations would not require the withholding of taxes from any
amounts received by Transferor from Transferee as proceeds of the
transfer of such Receivable or from any amounts received by
Transferor or Transferee as Collections in respect of such
Receivable.
Receivables that are owed to Transferor, or that have been sold to
Transferor, by United States or foreign Subsidiaries of Transferor are
Eligible Receivables if they meet all the foregoing criteria.
"Environmental Law" means any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, duly promulgated policy
or rule of common law now or hereafter in effect and in each case as
amended, and any judicial or administrative interpretation thereof,
including any order, consent decree or judgment, relating to the
environment, health, safety or any Hazardous Material.
"ERISA" means the Employee Retirement Income Security Act of 1974,
and any regulations thereunder.
"ERISA Affiliate" means any Person who for purposes of Title IV of
ERISA is a member of Transferor's controlled group, or under common
control with Transferor, within the meaning of Section 414 of the Internal
Revenue Code.
"ERISA Event" means (i) the occurrence of a reportable event, within
the meaning of Section 4043 of ERISA, unless the 30-day notice requirement
with respect thereto has been waived by the PBGC; (ii) the provision by
the administrator of any Plan of a notice of intent to terminate such
Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice
with respect to a plan amendment referred to in Section 4041(e) of ERISA);
(iii) the cessation of operations at a facility in the circumstances
described in Section 4068(f) of ERISA; (iv) the withdrawal by Transferor
or an ERISA Affiliate from a Multiple Employer Plan during a plan year for
which it was a substantial employer, as defined in Section 4001(a)(2) of
ERISA; (v) the failure by Transferor or any ERISA Affiliate to make a
payment to a Plan required under Section 302(f)(1) of ERISA; (vi) the
adoption of an amendment to a Plan requiring the provision of initial or
additional security to such Plan, pursuant to Section 307 of ERISA; or
(vii) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or
condition which might constitute grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee to administer, a Plan.
"Eurodollar Business Day" means a Business Day on which dealings in
Dollars are carried on in the London eurodollar interbank market.
"Eurodollar Office" means the office of Transferee designated as such
on the signature page of the Agreement, or such other office or Affiliate
of Transferee as Transferee may from time to time specify to Transferor.
"Eurodollar Rate" means, for any period, a rate of interest per annum
equal to the rate per annum (rounded upwards to the nearest whole multiple
of 1/16 of 1% per annum, if such percentage is not a multiple,) determined
by Transferee, at which deposits in Dollars are offered by the Eurodollar
Office in London to prime banks in the London interbank market:
(a) for purposes of calculating the Discount applicable to the
Purchase Price or Reduced Purchase Price pursuant to Section 1.04,
two Eurodollar Business Days prior to the first day of the Discount
Period specified in Section 1.04, for delivery on such first day, for
the number of days in the applicable Discount Period or as otherwise
specified in Section 1.04, and in an amount equal to the Transferred
Receivables Amount; and
(b) for purposes of calculating the discount on Early
Termination Payments pursuant to Section 1.08, on the date on which
such payment is made, for a period equal to the number of days until
the value date on which such payment is based, as specified in
Section 1.08, in an amount as specified in such Section.
"Eurodollar Rate (Reserve Adjusted)" means, for any period, a rate
per annum (expressed as a decimal, rounded upward to the nearest whole
multiple of 1/100 of 1%, if such percentage is not a multiple) equal to
the quotient of:
(a) the applicable Eurodollar Rate; divided by
(b) a percentage equal to 100% minus the maximum reserve
percentage (expressed as a decimal, rounded upward to the nearest
whole multiple of 1/100 of 1%, if such percentage is not such a
multiple) determined by Transferee as applicable on the first
Business Day of such period under regulations issued from time to
time by the Board of Governors of the Federal Reserve System or any
successor.
"Facility" means Transferee's commitment to acquire Eligible
Receivables and Related Assets on each Transfer Date.
"Facility Fee" is defined in Section 3.01(a).
"Facility Limit" means $40,000,000, as such amount may be reduced
pursuant to Section 1.06.
"Federal Funds Rate" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including
any such successor, "H.15 (519)") on the preceding Business Day opposite
the caption "Federal Funds (Effective)"; or, if for any relevant day such
rate is not so published on any such preceding Business Day, the rate for
such day will be the arithmetic mean as determined by the Transferee of
the rates for the last transaction in overnight Federal funds arranged
prior to 9:00 a.m. (New York City time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by
the Transferee.
"foreign currency" means any currency other than Dollars.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies
with similar functions of comparable stature and authority within the
accounting profession), or in such other statements by such other entity
as may be in general use by significant segments of the U.S. accounting
profession, which are applicable to the circumstances.
"Governmental Authority" means the United States of America, any
state or other political subdivision thereof and any entity in the United
States of America or any applicable foreign jurisdiction that exercises
executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government.
"Group" is defined in the definition of "Change of Control".
"Guaranteed Obligations" is defined in Section 10.01.
"Guaranty" means any agreement, undertaking or arrangement by which
any Person guarantees, endorses, agrees to purchase or otherwise becomes
or is contingently liable upon (by direct or indirect agreement,
contingent or otherwise, to provide funds for payment, to supply funds to,
or otherwise to invest in, a debtor, or otherwise to assure a creditor
against loss) the indebtedness, obligation or any other liability of any
other Person (other than by endorsements of instruments in the course of
collection), or guarantees the payment of dividends or other distributions
upon the shares of any other Person.
"Hazardous Material" means (a) any hazardous substance and toxic
substance as such terms are presently defined or used in Section101(14) of
the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 (42 U.S.C. Section9601(14)), in 33 U.S.C. Section1251 et seq.
(Clean Water Act), or 15 U.S.C. Section 2601 et seq. (Toxic Substances
Control Act), (b) any additional substances or materials that are now or
hereafter hazardous or toxic substances under any applicable laws relating
to any real property owned or occupied by Transferor or any of its
Subsidiaries, and (c) as of any date of determination, any additional
substances or materials that are hereafter incorporated in or added to the
definition of "hazardous substance" or "toxic substance" for purposes of
any Environmental Law.
"Hedge Contract" means an interest rate swap, cap, floor or collar
agreement, currency exchange agreement or similar transaction entered into
by Transferor.
"Indemnified Amounts" is defined in Section 9.01.
"Indemnified Party" is defined in Section 9.01.
"Information" is defined in Section 11.07(a)(i).
"Initial Closing Date" means January 31, 1996.
"Insolvency Law" is defined in the definition of "Bankruptcy Event".
"Internal Revenue Code" means the Internal Revenue Code of 1986.
"Letter of Credit" is defined in Section 4.03(b).
"LIBOR Fixing Date" is defined in Section 1.02(a)(iii).
"Material Adverse Effect" means a materially adverse effect on (a)
the financial condition, business, assets, operations or prospects of
Transferor and its Subsidiaries, taken as a whole; (b) the ability of
Transferor or the Servicing Agent to perform its obligations under any
Agreement Document; (c) the validity or enforceability of, or
collectibility of amounts payable under, any Agreement Document; (d) the
status, existence, perfection or priority of Transferee's interest in the
Transferred Assets, free of any Adverse Claim; or (e) the performance or
value of the Transferred Receivables taken as a whole.
"Material Subsidiary" means any Subsidiary of the Transferor that at
any time either: (a) owns or holds title to 5% or more of the consolidated
assets of the Transferor and its consolidated Subsidiaries, or (b)
accounts for 5% or more of the consolidated revenue of the Transferor and
its consolidated Subsidiaries, in each case as determined in accordance
with GAAP.
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which Transferor or any ERISA Affiliate is
making or accruing an obligation to make contributions, or has within any
of the preceding five plan years made or accrued an obligation to make
contributions.
"Multiple Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (i) is maintained for employees of
Transferor of any ERISA Affiliate and at least one Person other than
Transferor and its ERISA Affiliates or (ii) was so maintained and in
respect of which Transferor or an ERISA Affiliate could have liability
under Section 4064 or 4069 of ERISA in the event such plan has been or
were to be terminated.
"Obligations" means all obligations of Transferor and the Servicing
Agent to Transferee, any assignee of Transferee, any Indemnified Party and
their respective successors, permitted transferees and assigns, that arise
under or in connection with the Agreement Documents (including under any
forward contract entered into or deemed entered into pursuant to Section
1.02(e)), howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent, now or hereafter existing, or due or to
become due.
"Obligor" means a Person obligated to make payments on a Receivable.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association,
limited liability company, joint venture, government or any agency or
political subdivision thereof or any other entity.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Pro-Rata Base Foreign Currency Amount" is defined in
Section 1.08(b)(iv)(A).
"Pro-Rata Purchase Price" is defined in Section 1.08(b)(iv)(B).
"Purchase Price" means, with respect to each Transfer, the amount
designated as the "Purchase Price" to be paid by Transferee on a Transfer
Date as specified in the related Supplement.
"Receivable" means any right to payment from an Obligor, arising from
the sale of goods or services or the licensing of intellectual property
rights by Transferor in the ordinary course of its business.
"Records" means all Contracts, purchase orders, invoices and other
agreements, documents, books, records and other media for the storage of
information (including computer programs, disks and tapes) maintained by
Transferor or, if applicable, the Servicing Agent with respect to the
Transferred Assets, the related Contracts and/or the related Obligors or
that are otherwise necessary or desirable to collect Transferred Assets.
"Reduced Purchase Price" is defined in Section 1.03(b)(ii).
"Reduction Fraction" is defined in Section 1.08(b)(iii).
"Reference Rate" means a fluctuating of interest per annum as shall
be in effect from time to time, which rate per annum shall at all times be
equal to the higher of:
(a) the rate of interest most recently announced from time to
time by Transferee in San Francisco, California, as its "reference
rate." It is a rate set by Transferee based upon various factors
including Transferee's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans that may be priced at, above or below such
announced rate; and
(b) 0.50% per annum above the latest Federal Funds Rate.
"Regulatory Change" means, relative to any Affected Party, (a) any
change in (or the adoption, implementation, phase-in or commencement of
effectiveness of) any (i) United States federal or state law or foreign
law applicable to such Affected Party; (ii) regulation, interpretation,
directive, requirement or request (whether or not having the force of law)
applicable to such Affected Party of (A) any court or Governmental
Authority charged with the interpretation or administration of any law
referred to in clause (a)(i) or of (B) any fiscal, monetary or other
authority having jurisdiction over such Affected Party; or (iii) GAAP or
regulatory accounting principles applicable to such Affected Party and
affecting the application to such Affected Party of any law, regulation,
interpretation, directive, requirement or request referred to in
clause (a)(i) or (a)(ii) above; or (b) any change in the application to
such Affected Party of any existing law, regulation, interpretation,
directive, requirement, request or accounting principles referred to in
clause (a) above.
"Related Assets" is defined in Section 1.01.
"Required Dollar Receivables Amount" is defined in Section 1.02(c).
"Required Foreign Currency Allocation" is defined in Section
1.02(e)(iii)(A).
"Required L/C Amount" means (A) with respect to any Transfer of
Transferred Receivables where Discount is deducted from the Purchase Price
or Reduced Purchase Price thereof pursuant to Section 1.04, 100% of the
Transferred Receivables Amount thereof, and (B) with respect to any
Transfer of Transferred Receivables where the Transferor is obligated to
pay yield based on the Reference Rate pursuant to Section 3.03, 102% of
the Transferred Receivables Amount thereof.
"Responsible Officer" means, with respect to any certificate, report
or notice to be delivered or given hereunder, unless the context otherwise
requires, the president, chief executive officer, chief financial officer,
treasurer or assistant treasurer of any Person, and, in addition, in
respect of Transferor, the Director of Treasury Operations of Transferor.
"S&P" means Standard & Poor's Ratings Services.
"Scheduled Termination Date" is defined in Section 1.07(a).
"Servicing Agent" is defined in Section 7.01(a).
"Settlement Date" is defined in Section 1.02(a)(iv).
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (i) is maintained for employees of
Transferor or an ERISA Affiliate and no Person other than Transferor and
its ERISA Affiliates or (ii) was so maintained and in respect of which
Transferor or an ERISA Affiliate could have liability under Section 4069
of ERISA in the event such plan has been or were to be terminated.
"Subrogation Rights" is defined in Section 10.06.
"Subsidiary" means, with respect to any Person, any other
corporation, partnership or other entity which owns, directly or
indirectly, more than 50% of the outstanding capital stock or other equity
interests (as applicable) having ordinary voting power for the election of
directors or equivalent management personnel.
"Successor Notice" is defined in Section 7.01(a).
"Successor Servicing Agent" is defined in Section 7.04(f).
"Supplement" is defined in Section 1.02(b)(i).
"Surviving Entity" is defined in Section 8.02(e).
"Taxes" is defined in Section 3.05.
"Termination Date" is defined in Section 1.07(a).
"Termination Event" is defined in Section 8.01.
"Transfer" means Transferee's acquisition of Transferred Assets from
Transferor pursuant to Section 1.01.
"Transfer Date" is defined in Section 1.02(a)(ii).
"Transfer Exchange Rate" is defined in Section 1.02(e)(iii)(E).
"Transferee" is defined in the Preamble.
"Transferee Account" means the segregated account maintained by
Transferee in the name of Transferee at Bank of America National Trust and
Savings Association specified in Section 2.07.
"Transferee Representatives" is defined in Section 11.07(b)(i).
"Transferor" is defined in the Preamble.
"Transferor Information" is defined in Section 11.07(b)(i).
"Transferor Matter" is defined in Section 9.02.
"Transferor Party" is defined in Section 9.02.
"Transferor Representatives" is defined in Section 11.07(a)(i).
"Transferred Assets" is defined in Section 1.01.
"Transferred Receivable" means a Receivable acquired by Transferee
from Transferor on a Transfer Date.
"Transferred Receivables Amount" is defined in Section 1.03(b)(ii).
"UCC" means the Uniform Commercial Code as from time to time in
effect in the applicable jurisdiction or jurisdictions.
"Unmatured Termination Event" means any event which, with the giving
of notice or lapse of time, or both, would become a Termination Event.
"Unpaid Balance" of any Receivable means at any time the unpaid
amount thereof as shown on the books and records of (a) prior to any
Transfer of such Receivable, Transferor, and (b) thereafter, Transferee,
or, if applicable, the Servicing Agent, in each case calculated in
accordance with GAAP and net of any applicable reserves on Transferor or
the applicable Person's books and records.
"Withdrawal Liability" has the meaning given to such term under Part
I of Subtitle E of Title IV of ERISA.
EXHIBIT 11.0
<TABLE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In thousands, except per share amounts)
<CAPTION>
December 29, December 30, December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY (a)
Earnings (loss)
Income (loss) before cumulative
effect of accounting change ($142,330) $32,038 ($121,461)
Cumulative effect on prior years of change
in method of accounting for income taxes 40,000
------------ ------------ ------------
Net income (loss) (142,330) 32,038 (81,461)
Preferred dividend requirement (11,544) (12,075) (9,805)
------------ ------------ ------------
Income (loss) applicable to common shares ($153,874) $19,963 ($91,266)
============ ============ ============
Shares
Weighted average common shares outstanding 52,798 51,656 50,652
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 754
------------ ------------ ------------
Weighted average common shares
and equivalents 52,798 52,410 50,652
============ ============ ============
Earnings (loss) per common share:
Income (loss) before cumulative
effect of accounting change ($2.91) $0.38 ($2.59)
Cumulative effect on prior years of change
in method of accounting for income taxes 0.79
------------ ------------ ------------
($2.91) $0.38 ($1.80)
============ ============ ============
<PAGE>
FULLY DILUTED (b)
Earnings (loss)
Income (loss) before cumulative
effect of accounting change ($142,330) $32,038 ($121,461)
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 9,919 10,273 10,627
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 431
------------ ------------ ------------
Income (loss) before cumulative effect
of accounting change, as adjusted (131,980) 42,311 (110,834)
Cumulative effect on prior years of change
in method of accounting for income taxes 40,000
------------ ------------ ------------
Net income (loss), as adjusted ($131,980) $42,311 ($70,834)
============ ============ ============
Shares
Weighted average common shares outstanding 52,798 51,656 50,652
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 163 754 1,062
Adjustment for shares issuable upon assumed
conversion of $3.50 Convertible
Exchangeable Preferred Stock 7,038 7,340 5,995
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,132 4,132 4,132
Adjustment for shares issuable upon assumed
conversion of 7% Convertible Debentures 300
------------ ------------ ------------
Weighted average common shares
and equivalents, as adjusted 64,431 63,882 61,841
============ ============ ============
Earnings (loss) per common share:
Income (loss) before cumulative
effect of accounting change ($2.05) $0.66 ($1.79)
Cumulative effect on prior years of change
in method of accounting for income taxes 0.64
------------ ------------ ------------
($2.05) $0.66 ($1.15)
============ ============ ============
(a) These figures agree with the related amounts in the Consolidated Statement of Operations.
(b) This calculation is submitted in accordance with Regulation S-K, Item 601(b)(11) although
it is contary to paragraph 40 of APB Opinion No. 15, because it produces an anti-dilutive
result.
</TABLE>
Exhibit 21
STORAGE TECHNOLOGY CORPORATION
-------------------------------
U.S. SUBSIDIARIES INCORPORATION
- ----------------- -------------
Amperif Corporation Delaware
Bus-Tech, Inc. Minnesota
Bytex Corporation Delaware
Bytex Securities Corporation Delaware
Network Systems Credit Corporation Delaware
NSC European Operations Company Minnesota
Prime Solutions, Inc. Colorado
SFSC Receivables Trust 1994-1 Delaware (1)
Storage Technology de Puerto Rico, Inc. Delaware
Storage Technology Optical Disk Development Corporation Delaware
StorageTek Computer Finance Corporation Delaware
StorageTek Computer Research Corporation Delaware
StorageTek Financial Services Corporation Delaware
StorageTek Foundation Colorado
StorageTek Holding Corporation Nevada
StorageTek Integrated Systems, Inc. Delaware
StorageTek International Corporation Delaware
StorageTek International Services Corporation Delaware
StorageTek Leeward Corporation Delaware
StorageTek Relocation Operations, Inc. Delaware
TMD Acquisition Company Delaware
Vitalink Communications Corporation Delaware
NON-U.S. SUBSIDIARIES
- ---------------------
Storage Technology of Australia Pty. Limited Australia
Network Systems Australasia Pty. Limited Australia
Storage Technology of New Zealand Pty. Limited Australia
Network Systems Austria Gesellschaft m.b.h. Austria
Storage Technology Computerhandelsgesellschaft m.b.H. Austria
Network Systems Foreign Sales Corp. Barbados
Storage Technology (Belgium) N.V./S.A. Belgium
Network Systems Belgium S.A. Belgium
StorageTek Brasil Ltda. Brazil
Amperif Canada, Ltd. Canada
Bytex DataCom Limited Canada
StorageTek Canada, Inc. Canada
StorageTek A/S Denmark
Documation S.A.R.L. France
Network Systems France S.A. France
Storage Technology Formation S.A.R.L. France
Storage Technology European Operations S.A. France
Storage Technology Holding France, S.A. France
Storage Technology France, S.A. France
Bytex GmbH Germany
Network Systems GmbH I Germany
Storage Technology Network Systems GmbH Germany
Storage Technology GmbH Germany
Storage Technology Holding GmbH Germany
Storage Technology OEM Vertrieb GmbH Germany
Network Systems Italia S.r.l. Italy
Storage Technology Italia S.p.A. Italy
Network Systems Japan K.K. Japan
Storage Technology Asia/Pacific K.K. Japan
Storage Technology of Japan, Ltd. Japan
XL/Datacomp Japan, Ltd. Japan
StorageTek de Mexico, S.A. de C.V. Mexico
Network Systems Nederland b.v. Netherlands
Storage Technology Finance B.V. Netherlands
Storage Technology (The Netherlands) B.V. Netherlands
Storage Technology (The Netherlands) B.V. (Irish Branch) Netherlands
StorageTek III B.V. Netherlands
Edata International B.V. Netherlands
Network Systems Norge A/S Norway
StorageTek A/S Norway
D.M.L. StorageTek Ltd. Scotland
StorageTek Espana, S.A. Spain
NSC Network Systems AB Sweden
Storage Technology I Sollentuna AB Sweden
Storage Technology Sweden AB Sweden
Network Systems (Schweiz) AG Switzerland
StorageTek AG Switzerland
Bytex DataCom Ltd. United Kingdom
Bytex Europe United Kingdom
Network Systems Limited United Kingdom
Storage Technology Manufacturing Limited United Kingdom
Storage Technology Holding Limited United Kingdom
Storage Technology Limited United Kingdom
XL/Datacomp, Limited United Kingdom
___________________________________
(1) A Delaware business trust.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-19426, 33-32235, 33-32243, 33-37464, 33-
42817, 33-42818, 33-51764, 33-51756, 2-60117, 2-80183, 2-61333, 2-76167,
2-89417, 33-50777, 33-52197, 33-59165, 33-42818, and 33-61777) of Storage
Technology Corporation of our report dated February 23, 1996 appearing on
Page F-31 of this Form 10-K.
PRICE WATERHOUSE LLP
Denver, Colorado
March 8, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-19426, 33-32235, 33-32243, 33-37464, 33-
42817, 33-42818, 33-51764, 33-51756, 2-60117, 2-80183, 2-61333, 2-76167,
2-89417, 33-50777, 33-52197, 33-59165, 33-42818, and 33-61777) of Storage
Technology Corporation of our report dated March 10, 1995, with respect to
the financial statements of Network Systems Corporation appearing on Page
F-32 of this Form 10-K.
Ernst & Young LLP
Minneapolis, Minnesota
March 7, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-K DATED
DECEMBER 29, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000094673
<NAME> STORAGE TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-END> DEC-29-1995
<CASH> 264,502
<SECURITIES> 0
<RECEIVABLES> 432,043
<ALLOWANCES> 14,665
<INVENTORY> 214,553
<CURRENT-ASSETS> 974,988
<PP&E> 860,868
<DEPRECIATION> 527,847
<TOTAL-ASSETS> 1,888,629
<CURRENT-LIABILITIES> 549,637
<BONDS> 363,963
0
0
<COMMON> 5,335
<OTHER-SE> 957,498
<TOTAL-LIABILITY-AND-EQUITY> 1,888,629
<SALES> 1,345,260
<TOTAL-REVENUES> 1,929,485
<CGS> 841,583
<TOTAL-COSTS> 1,217,622
<OTHER-EXPENSES> 399,482 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,347
<INCOME-PRETAX> (124,530)
<INCOME-TAX> 17,800
<INCOME-CONTINUING> (142,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (142,330)
<EPS-PRIMARY> (2.91)
<EPS-DILUTED> 0
<FN>
<F1> Includes restructuring charges of $167,175,000,
litigation settlement of $30,680,000 and
merger expense of $14,352,000.
</FN>
</TABLE>
